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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1994
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-16588
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OCTEL COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0029449
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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1001 Murphy Ranch Road
Milpitas, California 95035-7912
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code, is (408) 321-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Common Share Purchase Rights
(TITLE OF CLASS)
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 twelve (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 ninety (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 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 nonaffiliates of the
registrant as of September 19, 1994 was $513,629,121 based upon the last sale
price reported for such date on The Nasdaq National Market. For purposes of this
disclosure, shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers and directors of
the registrant have been excluded because such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
The number of shares of the registrant's Common Stock outstanding as of
September 19, 1994 was 24,115,011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders of
Octel Communications Corporation tentatively scheduled to be held on November
17, 1994 are incorporated by reference in Part III of this Report on Form 10-K.
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TABLE OF CONTENTS
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Markets and Product Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Product Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Sales and Customer Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Research and Product Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Patents, Copyrights, Trademarks and Technology Licenses . . . . . . . . . . . . . . . . . 16
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 18
EXECUTIVE OFFICERS OF OCTEL COMMUNICATIONS CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . 20
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . 21
Basis of Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Annual Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Net Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Cost of Systems and Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Selling, General and Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Interest and Other Income (Expense), Net . . . . . . . . . . . . . . . . . . . . . . . . . 25
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Factors that May Affect Future Results of Operations . . . . . . . . . . . . . . . . . . . 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . 29
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 29
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TABLE OF CONTENTS
(CONTINUED)
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . 49
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . 49
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 49
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
(a) 1. Consolidated Financial Statements and Financial Statement Schedules . . . . . . 49
2. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
(c) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
(d) Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
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PART I
ITEM 1. BUSINESS
Octel Communications Corporation ("Octel" or the "Company") designs,
manufactures and markets voice information processing systems and services that
use the touch-tone telephone as the terminal and the fax machine as the
printer. These multi-functional, specialized computers and personal
computer-based systems allow users to access, manage and integrate multiple
forms of information--voice, image and data--across the telephone network in a
single call from any touch-tone telephone in the world. Users with a mailbox
on a voice information processing system, referred to as "subscribers," can
send or retrieve voice messages, receive and forward faxes, and send or
retrieve data stored in computers at any time from any touch-tone telephone.
The Company sells its systems to organizations of all sizes and to providers of
voice information services. Through Octel Network Services ("ONS," formerly
Tigon Corporation), the Company also provides voice information
processing-related services to telephone companies and large corporations.
The Company was incorporated in Delaware in December 1989 as the
successor to a California corporation and a related corporation and research
and development limited partnership first formed in 1982.
INTRODUCTION
During the last several years, technologies such as personal
computers, electronic mail, fax machines, local area networks and the expansion
of the client/server computing environment have gained widespread acceptance.
Recently, newer technologies such as hand-held computing devices and multimedia
computer workstations have also emerged. In spite of these developments,
significant improvement in employee productivity have proven to be elusive,
particularly for knowledge workers. These technologies historically have been
offered by different groups of vendors as single-purpose systems that typically
do not work together and must be supported and managed separately. Voice
information processing enhances knowledge worker productivity by enhancing the
user's ability to access and manage information through, and by improving
integration among, these technologies. Productivity is improved in a number of
ways, including nonsimultaneous verbal communication via digitized voice
messages, storage and retrieval of computer-based data over telephone lines,
convenient access to pre-recorded audio information, and convenient and secure
retrieval and distribution of written documents via fax.
The Company's customers use voice information processing technology as
an information resource to address a number of objectives, including enhanced
business competitiveness, improved customer service, increased operating
flexibility, greater employee productivity, higher revenues and reduced
operating costs. Organizations can realize specific hard-dollar savings from
the technology because voice messages tend to be shorter than normal telephone
conversations and the need for callbacks is reduced by the ability of callers
to leave detailed messages. Further, users may now retrieve data and documents
without human intervention, 24 hours per day. In addition, the staff required
for telephone answering and message taking may be reduced, routine inquiries
and requests can be handled automatically and callers may route their own calls
to desired extensions, even after-hours, rather than relying on a company
operator to handle calls. Finally, with fax processing capabilities,
subscribers can efficiently store, retrieve and redirect fax documents using
any touch-tone telephone.
Voice information service ("VIS") providers purchase voice information
processing systems and provide services to their customers, including
residential customers, small businesses, Centrex customers and users of
wireless telephones. These services are generally available for a monthly
charge for rental of a voice mailbox. Service providers gain direct revenue
through rental income as well as indirect revenue such as increased wireless
telephone connect time and message unit fees.
MARKETS AND PRODUCT STRATEGY
The Company focuses on two principal customer markets: Customer
Premise Equipment ("CPE") customers and VIS providers. Octel addresses these
markets both in the United States and internationally. Although Octel's voice
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information processing technologies address both the CPE and VIS markets, there
are some differences between these markets in terms of product characteristics,
services requirements, distribution channels and competition.
Octel was founded to develop and market voice processing products and
services and introduced its first system in mid-1984. The Company initially
focused its product development, sales and marketing efforts on providing voice
processing products to large corporate customers. In the ensuing years, the
Company has expanded its markets to include telephone companies, wireless
telephone operators and service bureaus; small and medium-sized businesses;
federal, state, and local governments; medical organizations; and universities
and other nonprofit organizations. Geographically, the Company has expanded
its sales activities from the United States throughout North America and to
countries on all four other continents. Product enhancements have included the
expansion of the product line to include a broad range of sizes of systems and
a broad set of features and applications.
In March 1994, the Company acquired VMX, Inc., a designer,
manufacturer and marketer of integrated voice processing systems and software
products that permit the creation of customer-specific communications
solutions. This acquisition both enables the Company to provide a broader
range of voice processing applications to a larger installed base of customers
and strengthens the Company's efforts to develop two new fast-growing product
markets: PC-based voice processing and departmental solutions for
voice-integrated e-mail. As part of the acquisition, the Company also acquired
VMX's Rhetorex subsidiary, a designer and manufacturer of high-performance
voice processing components (board-level hardware and operating system
software) for PCs.
Customer Premise Equipment
A significant market opportunity in the voice information processing
market is in selling voice information processing systems to large and
medium-size organizations and their branch locations and small, single-site
organizations. In this customer market, the system is installed on the
customer's premise and connected to a company's PBX, Centrex or other telephone
system. Some of the Company's voice information processing systems may also
interface with the customer's computer systems to access various forms of
information, such as databases. Octel has been particularly successful in
penetrating the CPE markets in the U.S. and Canada, and believes that this
market continues to offer a significant opportunity for future sales of
products, applications and services. The Company is also participating in the
small business market, which is among the fastest growing areas of voice
information processing, through its VMX 100 and PC-based products. The Company
believes that, in addition to sales to new customers, its continued success in
the U.S. and Canadian CPE markets will be increasingly dependent upon several
factors: purchases by large organizations with voicemail technology switching
to the Company's products or expanding the capacity of their networks;
purchases by large organizations of new applications such as fax and
interactive voice response ("IVR") access to computer databases; and sales to
smaller entities of less expensive voice information processing equipment.
Most other countries are behind the United States in the development
of their CPE market. The sale of voice information processing systems and
services in most international countries is subject to various regulatory
requirements. These regulatory requirements generally deal with electrical
equipment safety requirements, telephone network connection regulations and
integration with PBXs. Meeting these regulatory requirements can require
modifications to system hardware and software. Additional software and
documentation changes, such as conversion of voice prompts to foreign
languages, are required in non-English-speaking countries. The process of
making necessary system modifications and obtaining government approvals in
countries outside of the United States is often complex and time-consuming.
Subject to such regulations and required product changes, as well as to
differences in culture and business practices and the availability of
touch-tone telephones, the Company believes that the international CPE market
may experience growth similar to or more rapid than that of North America. The
speed and extent of this eventual development is difficult to predict, although
the Company believes that organizations and individuals in many countries
outside of North America generally face communication problems similar to those
which the Company is addressing in its North American CPE market.
Large and medium-size organizations typically place great importance
on employee productivity and on rapid and facile communication of information
within and across complex organizational structures, disparate geographic
locations and different time zones. These customers may have multiple
locations and may use PBX systems from a variety of vendors as well as Centrex
services supplied by local telephone companies, and they want their voice
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information processing systems to integrate with the PBX or Centrex at each
location. Multi-site customers also require that their systems support needs
ranging from as few as 20 to 100 subscribers in smaller offices to as many as
several thousand subscribers in large headquarters installations. These
customers typically require systems that can be connected in a large voice
processing network, permitting the efficient exchange of voice messages among
subscribers using systems in different locations.
Small-size organizations, especially single-site businesses, require
voice information processing capabilities that are simple to use and
cost-effective. As with large organizations, improved employee productivity
and the ability to cut costs by automating activities are important. Systems
for these customers must support from 10 to 100 subscribers and must be
compatible with small PBX and hybrid telephone systems.
The Company's voice information processing system product line has a
number of characteristics that the Company believes are important to
organizations of all sizes:
. Integration of Multiple Technologies: With recently developed
products, Octel provides customers with integrated access to
the communications technologies of various media types
including voice, fax and data in a single telephone call using
the telephone as a terminal.
. Broad Range of Features: Octel provides a broad range of
features that have been designed to enhance business
competitiveness, improve customer service, increase operating
flexibility, increase employee productivity and reduce
communications costs.
. Broad Product Line: Octel offers systems for CPE customer
locations from small offices with as few as 20 subscribers to
very large sites with thousands of subscribers.
. Upgradability: Octel's products are capable of being upgraded
in both port capacity and disk drive (memory) capacity as an
organization becomes larger or makes greater use of voice
information processing.
. Investment Protection: Octel operates with a philosophy of
protecting the investment that the customer has made in voice
information processing. Octel provides a smooth product
upgrade from a financial, system administration and end-user
perspective.
. Reliability and Maintenance: Octel's products are designed and
manufactured to be highly reliable and to require minimal
maintenance.
. Broad Range of PBX and Centrex Integration: Octel's voice
information processing systems can be integrated with
virtually all major PBX brands, key telephone systems and
Centrex systems.
. Networking: A large number of Octel systems can be connected
in a network to permit subscribers to record, respond to,
forward and distribute messages to individuals with mailboxes
throughout the network.
. Simple System Management: Octel systems are available with a
variety of management reporting packages to simplify
administration and increase system usage and effectiveness.
The Company works closely with its CPE customers to understand product
requirements. Octel may be required to incur significant expenditures to
develop new or enhance existing products or features, especially within the
area of multiple technology applications, which is new to the Company's
customers. Although there is evidence of market acceptance of the integration
of voice, fax and data, and the Company believes that its applications are
competitive with offerings by other companies, there can be no assurance of a
high level of customer demand for these applications.
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Voice Information Services
VIS providers generally purchase voice information processing systems
and resell services to their customers, including residential customers, small
businesses and users of wireless telephones. These services are generally
available for a monthly charge for rental of a voice mailbox. Service
providers gain direct revenue through rental income as well as indirect revenue
such as increased wireless telephone connect time.
The worldwide VIS market has recently grown more rapidly than the CPE
market and represents a significant opportunity for future sales of products,
applications and services. The major customer types in this market include
independent service bureaus, regional Bell operating companies ("RBOCs"),
independent telephone companies in the United States, governmentally or
privately owned telephone systems in other countries and wireless service
providers located throughout the world. The rate of market development varies
substantially among VIS providers, depending upon regulatory, competitive and
other factors. Some providers, especially those in the United States, are in
full scale deployment, while others are still in the trial stage.
Telephone companies in the U.S. and Canada, including both RBOCs and
independent telephone companies, are offering voice processing services, such
as telephone answering and voicemail, as "enhanced" or "information" services
to their residential, small business and Centrex customers. All of the RBOCs
and many of the independent telephone companies in the United States have begun
the deployment of certain of these services. Some of these telephone companies
have limited the availability of these services to more densely populated
areas, while others have made the services available to a large portion of
their customer base. Although the deployment of voice services in countries
outside the United States has been limited, the Company has had some successes
in penetrating the international VIS market. The Company believes that an
important factor in continuing its success will be its ability to increase
sales to customers in the international market. As in the international CPE
market, the sale of voice information processing systems to international VIS
customers is subject to various regulatory requirements and the development of
hardware and software components compatible with local specifications in areas
such as language support and telephone network connectivity.
Wireless telephone operators view voice processing as an attractive
source of new revenue in the form of increased air time as well as monthly
service charges, and users of wireless telephones find that voice information
processing services help others communicate with them. Wireless telephone
companies that have purchased Octel equipment include all of the RBOCs, McCaw,
Bell Mobility, Cantel and other wireline and nonwireline wireless providers in
the U.S., Bahrain, Bolivia, Brazil, Canada, Ecuador, Finland, France, Germany,
Hong Kong, Italy, Japan, Malaysia, Mexico, New Zealand, Portugal and the United
Kingdom.
The Company's primary product for the VIS market is Sierra(R), a
multi-application voice information processing system specifically designed to
meet the special needs of telephone companies and other VIS customers.
Sierra's key characteristics, which the Company believes make it a suitable
platform for most customers in the VIS market, are as follows:
. Expandable to 432 Ports: Single Sierra systems are expandable
from 48 ports to 144 ports. A high speed fiber optic backbone
enables clustering of up to 3 Sierra systems for a total of
432 ports and 2,016 hours of message storage. The
expandability of this system allows for cost-effective system
growth to serve up to 60,000 users.
. High Reliability and Maximum System Availability: The Sierra
system was designed by Octel with specific telephone company
central office standards in mind. The product meets
Bellcore's Network Equipment Building Systems (NEBS)
standards. Backup processor cards within the system minimize
downtime caused by failure of a primary component. Line cards
and telephone interface cards as well as power supplies are
replaceable without a service interruption (hot plugability).
Disk drives will be hot pluggable in a future product release.
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. Supports Multiple Markets and Applications: A single Sierra
system will support residential, small business and large
business voice processing applications. The Sierra platform
will also support the multiple technology applications
available on other Octel systems.
. Architecturally Designed for High Performance: A distributed
architecture, using as many as 18 general purpose
microprocessors and 72 specialized digital signal processors
(DSPs) per 144-port system and a real-time operating system,
minimizes processing bottlenecks and maintains rapid response
time for end users. A dual-bus architecture quickly moves
information throughout the Sierra system.
In February 1994, the Company launched its Total Service Solutions
("TSS") strategy for the VIS market. Built on the Sierra platform, TSS
includes applications tool kits for the development of revenue-generating
services, turnkey applications and system integration services. For example,
the Call Message Delivery Tool Kit allows for the recording and subsequent
delivery of messages--such as reminder calls and wake-up calls--via outcalling
to a designated telephone number. The TSS products and services are designed
to help VIS providers worldwide develop and introduce enhanced services as
quickly and efficiently as possible. The Company intends to continue to work
closely with VIS customers to understand their product and services
requirements. Octel may be required to incur significant expenditures to
develop new products or features, including customized features to meet the
market needs of particular customers.
Through ONS, the Company is the world's largest supplier of network
management services for companies choosing to outsource all or part of their
voice processing network. ONS provides complete network management solutions,
including voice processing services, operations management, systems
administration and project management; network monitoring services;
communications contingency services; and administrative services, including
end-user support.
In fiscal 1993, the Company made its first sales in the international
market for "virtual telephone" applications. Such applications use the voice
mailbox as a substitute for simultaneous communication in those countries in
which basic telephone service is difficult or costly to obtain. Since
widescale deployment of virtual telephone has not yet occurred, there is no
assurance that a market for such applications will develop. However, the
Company believes that virtual telephone applications may represent a
significant opportunity in the international VIS market segment in the future.
PRODUCTS
The Company provides a variety of products, applications and service
offerings to address the voice information processing needs of organizations of
all sizes. The Company's voice information processing system technology
addresses the needs of both of the Company's customer markets. The Company's
voice information processing software for PC-based systems addresses the needs
of small organizations and smaller branch sites of large organizations.
Service products offered by the Company are made available to both business
organizations and VIS providers.
Voice Information Processing Systems
Octel's voice information processing systems are specialized computers
that support the Company's extensive set of applications. These systems
include a real-time operating software system, input/output and storage
technology, telephone network and PBX integration capability, and computer
system connectivity hardware and software. These systems also include standard
system features and optional applications.
The Company provides a broad family of voice information processing
systems, with extensive features, telephone switch integrations and networking
capabilities. Products range from two-port systems for as few as 20
subscribers to 432-port systems for up to 60,000 subscribers in certain VIS
applications. The number of ports determines the number of simultaneous
telephone calls a system can handle. Octel's products provide customers the
flexibility to configure a voice information processing system to meet their
particular needs for ports and message storage capacity. The applications
solutions that are available to the user include the following:
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. Voice Mail enables any subscriber to send a message to any
other subscriber 24 hours per day without calling the
subscriber directly.
. Telephone Answering answers any busy or unanswered telephone
day or night and takes a detailed voice message.
. Outcalling initiates a call to a user-specified number to
notify him that a message has been received.
. Automated Attendant answers incoming calls to a PBX or Centrex
and allows callers to direct calls to telephone extensions
without the use of a human operator.
. Call Processing uses an interactive customized menu function
to provide sophisticated call routing. Companies and
departments that receive a heavy volume of calls can use call
processing to create menus that are presented to callers.
Call processing menus are easily custom-built by the customer
to meet a customer's specific requirements.
. Voice Forms provide a way to collect detailed information from
callers by presenting a "form" in voice and enabling callers
to fill out the form using verbal responses or touch-tone
inputs. This feature makes the form completion application
feasible 24 hours a day and can eliminate the need for extra
call staffing to handle large call volumes at peak calling
times.
. IVR Development Tools permit the development of applications
that access data within a host computer or from a locally
stored database via a touch-tone phone.
. Fax-On-Demand allows callers to use traditional voice
processing features to access the pre-stored text or graphic
information that the caller desires and to have that
information delivered to them via fax to any caller-selected
location. Fax-on-demand can store thousands of fax documents
for fax publishing retrieval 24 hours a day, seven days a
week.
. Audiotex collects, processes and distributes information via
the telephone. Information may be down-loaded by satellite
feed or through dial-up telephone lines using pre-recorded
audiotapes or live recordings. Contributors of information to
an audiotex application could include other employees within a
caller's company, a local business or radio station, or
national providers of news such as a Dow Jones or Ciscorp
Voice Information. Public access applications include
cellular gateway services and "talking Yellow Pages," while
subscriber-specific applications include personalized audio
clipping services in which information is tailored to the
needs of an individual subscriber.
. Fax Mail allows fax images to be received and managed within a
standard mailbox in the same manner as voice messages. Once
in the mailbox, subscribers can print the fax with a
personalized cover sheet, archive it, delete it, distribute it
or redirect it. When faxes are sent to other mailbox
subscribers, a voice message can be attached providing
introductory or clarifying remarks.
. Fax Broadcast allows a fax to be sent automatically to many
fax machines. Instead of manually sending a fax to several
individuals, fax broadcast schedules automatic distribution of
a fax using one simple set of instructions. Individualized
cover sheets with the recipients' names are also automatically
created and sent.
. Fax Overflow Capability allows incoming faxes to be redirected
when a fax machine is busy or out of service.
. Mixed Media Applications. Various combinations of the above
capabilities may be integrated with computer databases and
other information systems to provide customer-specific
communications solutions.
6
<PAGE> 10
. Applications Software. The merger with VMX added a powerful
family of application development tools to the Company's
product line. VMXworks(TM) forms the application and
development environment for Worksolutions applications such as
prepackaged off-the-shelf software products, template software
products that can be easily modified to meet customer-specific
needs and completely customized applications designed to the
unique specifications of individual customers.
. Voice-Integrated E-Mail. VMXmail(TM) is a product that
integrates voice mail into an organization's existing
LAN-based e-mail system. With VMXmail, users have visual
access to voice, fax and e-mail messages from their networked
PCs and full integration of voice and fax with cc:Mail and
Microsoft Mail. Significant resources have been spent and are
planned for the future in the areas of research and
development, distribution channel development and support and
training relating to this emerging opportunity.
Identification of and relationships with distributors of these
products are in their initial stages. There can be no
assurance that the demand for client/server based voice
messaging capabilities will develop at the rate anticipated by
the Company. Furthermore, there can be no assurance that the
Company will be successful in developing the specialized
distribution channel it believes is required to achieve its
revenue and profit objectives in this area.
. Networking. Octel networking is a powerful software feature
that can link a large number of the Company's systems over
standard telephone lines. These systems can be geographically
dispersed and can include any of Octel's server product
offerings. With networking, an Octel subscriber can record a
voice message on a local system and request that it be sent to
one or more subscribers on other Octel systems included in the
network. The message is automatically routed between systems
over analog or digital telephone lines, taking advantage of
the telephone switch's low cost routing alternatives. In
addition, normal priority inter-location messages can be
transmitted overnight at lower long distance rates while
urgent messages can be given priority and transmitted
immediately. The Company provides network access security
using a proprietary encryption system. Networked systems have
been installed by customers throughout the United States and
in international markets.
System-related Service Products
The Company sells service products for use with the Company's voice
information processing systems. Customers may purchase these service products
at the time they purchase a system or thereafter. These service products
include hardware spares, installation services, maintenance contracts, training
classes, technical documentation and application consulting services.
Octel Network Services
ONS offers its voice information processing services primarily to
corporate customers in the United States. These services include mailbox
services, support services, networking services, carrier services and
communications contingency services.
To support its voice information processing service offerings, ONS
owns and maintains an expanding network of voice information processing
systems. This network of systems has grown as demand for voice mailbox rentals
has increased. To support its network of voice information processing systems,
ONS also owns and maintains other types of equipment, including switches, data
communications devices, emergency power generators and monitoring and
troubleshooting hardware and software.
PRODUCT TECHNOLOGY
The Company utilizes two main product technologies, the voice
information processing system and personal computer-based software.
Voice Information Processing System
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<PAGE> 11
System Architecture. Octel's voice information processing systems
have flexible system architectures specifically designed to handle the
requirements of voice information processing applications. The systems are
specialized computers that handle information differently than do conventional
data processing systems. Commands and verbal messages enter the voice
information processing system as sounds and are converted to a digital format.
A digitized voice message contains vast quantities of raw data. Storage of a
200-word message in text form requires approximately 1,500 bytes of disk space,
while the same 200-word voice message requires almost 250,000 bytes of disk
space, even when digitized at a compressed rate. The systems are optimized to
process and store voice and other high-bandwidth media.
Octel's voice information processing systems are designed to provide
the benefits of an open architecture without sacrificing the advantages of
Octel's optimized hardware and software. The system's application programming
interfaces and application development tools allow the Company's customers
control over the application software and help ensure rapid implementation of
their customized applications.
The Company's system architecture uses distributed processors, each of
which handles a particular part of the total processing task, rather than one
large central processor. This allows the Company significant flexibility to
configure systems with larger or smaller numbers of ports and hours of message
storage to meet a specific customer's capacity and price requirements.
Distributed processors also make it easier to implement new technology and
achieve high system performance. A single Sierra system can have over 60
distributed processors. This architecture has also facilitated the Company's
development of additional product capabilities, including telephone switch
integrations, networking and connectivity to computer systems.
The Company's Sierra product is a platform designed to meet the
special needs of telephone companies and other VIS providers. Sierra is
designed to be expandable to suit market growth and eventually to be capable of
handling a very large number of subscribers. For example, Sierra can be linked
into three-node clusters, which triples the maximum number of ports and hours
of message storage. This platform is designed to support multiple voice
processing applications from a single platform. Sierra is also designed to
meet Bellcore's Network Equipment Building Systems (NEBS) standards. A
derivative of Sierra, the Octel XC1000, supports up to 144 ports and 672 hours
of message storage and is designed for CPE customers who have large messaging
communities, high-traffic applications, or both.
System models and specifications include the following:
<TABLE>
<CAPTION>
Number of Hours of
Model Subscribers Served(1) Number of Ports Message Storage
------------- ----------------------- ----------------- -----------------
<S> <C> <C> <C>
Sierra S up to 7,500 24 to 144 48 to 672
Sierra up to 30,000 24 to 144 48 to 672
Sierra Cluster up to 60,000 72 to 432 144 to 2,016
Octel XC1000 up to 30,000 24 to 144 48 to 672
Branch up to 150 4 or 8 5 to 28
Branch XP up to 275 4 to 16 5 to 28
Aspen up to 2,000 4 to 24 5 to 142
Maxum SE up to 10,000 12 to 72 19 to 304
Maxum up to 10,000 16 to 72 19 to 304
VMX 100 up to 500 2 to 8 4 to 12
VMX 200 up to 5,000 4 to 32 3.5 to 102.5
VMX 300 up to 10,000 16 to 96 8 to 550
</TABLE>
- - -----------------
(1) The number of users actually supported will depend upon the specific
customer application.
Telephone Switch Integrations. Octel has developed integrations which
permit its systems to be compatible with, and to communicate directly with,
virtually all major brands of PBX telephone systems, Centrex systems, Central
Office
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<PAGE> 12
switches and cellular telephone switches. Integration enables the customer's
voice information processing systems to exchange data with telephone switches
from different manufacturers. Integration is necessary to permit several
important voice processing features. It allows the caller to reach a
subscriber's mailbox directly without dialing the subscriber's extension or
mailbox number and allows message notification at the subscriber's telephone.
The Company believes its ability to integrate with a broad range of
telephone systems is an important competitive factor, particularly when selling
to large corporate customers. Some of the Company's competitors sell voice
information processing systems which integrate with a smaller number of PBXs.
The development time for an integration is frequently long and in-depth
knowledge of the telephone system is often required.
Personal Computer-Based Software
The Company's specialized voice processing software is integrated into
standard personal computer platforms which utilize the DOS and Windows
operating system with either '386SX, '386 or '486 CPUs.
System models and specifications for the Company's PC-based products
include the following:
<TABLE>
<CAPTION>
PC Operating PC Platform
Model Number of Ports System Included
------------------ ------------------- ---------------- ---------------
<S> <C> <C> <C>
Smooth Operator(R) 4 to 24 DOS No
RTG (Ready-To-Go)(TM) 4 to 24 DOS Yes
Co-Operator(TM) 4 to 8 DOS Yes
Call Performer Plus(TM) 4 to 16 O/S 2 Optional
Compass Enhanced Office (CEO) 4 to 32 O/S 2 Optional
</TABLE>
The Smooth Operator software is sold to dealers and distributors in a
"kit" which includes standard voice boards from third-party vendors. Dealers
and distributors then integrate these kits with standard personal computers for
sale to their end-users. The RTG and Co-Operator products are sold to dealers
and distributors as "turnkey" systems which include the PC platform as well as
the specialized software and standard voice boards. A significant portion of
these PC voice processing components are designed and manufactured by the
Company's Rhetorex subsidiary. The Call Performer Plus product, sold either as
a turnkey system or as a kit, was developed to address the specific needs of
small branch locations of major corporations and is sold to the Company's
larger distributors and directly to larger CPE customers. The Call Performer
Plus product, which requires a '486 PC-compatible platform, is currently in
Beta test, and therefore sales to date have not been significant.
The Company's PC-based software products have the capability to be
compatible with, and to communicate directly with, a wide range of small PBX
systems, Centrex systems and hybrid telephone key systems. These products also
support the AMIS networking standard, and may support Octel networking in the
future.
SALES AND CUSTOMER SUPPORT
The Company sells and supports its voice information processing
systems through both independent distributors and direct sales. This strategy
reduces Octel's dependence on any single sales channel or distributor and
improves market coverage for the Company's products. The Company's domestic
CPE sales force is structured into five geographic areas, with each group
responsible for sales--distributor, direct, and national account--within its
area. A separate sales force is focused on opportunities in the domestic VIS
market segment. Sales outside the United States are structured into three
world territories--Canada, Europe, and Intercontinental, which includes the
remainder of the globe.
Independent distributors are major contributors to the Company's sales
in the United States as well as in foreign markets. These distributors include
Adam Net (Japan), ATS/Avtex, BC Tel (Canada), Bell Atlantic Meridian Systems,
Bell Canada, Callpro (Canada), Cincinnati Bell, CSK Corporation (Japan),
Dictronics, Enhanced Communications Group
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<PAGE> 13
(Puerto Rico), Exicom (Australia), Folec Communications (Singapore), GTE Contel
Material Management Company, Intercom Inc., KLF Business Communications,
Jardine Metrolink (Hong Kong), Maritime Telephones and Telegraph (Canada), NEC
America, Norstan Inc., Puerto Rico Telephone Company, Mitel Telecommunications
Systems, Inc., SNET Systems, Southwestern Bell Telecom, Telesis (Brazil),
Univendor (Mexico), WilTel Communications Systems and US West. Distributors
are responsible for sales, installation, support, service and maintaining an
inventory of spare parts. The Company enters into contracts with each of its
distributors, and these contracts grant a distributor the nonexclusive right to
sell the Company's products in a designated territory. The Company invests
heavily in training its distributors and in providing support. The Company
maintains sales, customer support and technical service personnel around the
United States and in Canada for the sole purpose of supporting the distributor
organizations, including training, making joint sales calls and assisting in
servicing and customer support.
In the United States and Canada, VMX systems are sold both directly to
customers and through a two-tiered distributor network consisting of
D.I.A.L.PRO Systems Companies and Authorized Distributors. Both tiers receive
extensive training and represent the VMX platform exclusively as their voice
processing product. D.I.A.L.PRO Systems Companies benefit from additional
programs but make a greater commitment than Authorized Distributors. Teamworks
partners, third-party software developers, assist customers and distributors in
implementing Worksolutions applications.
VMX systems are sold outside the United States and Canada both
directly and through distributors in the United Kingdom and by distributors in
Europe, Japan, Australia, New Zealand, Hong Kong, Singapore and by original
equipment manufacturers (OEMs) in Europe and Japan. Internationally, VMX has
sales offices in London, Paris, Milan, Munich, Mexico City, Sydney, Tokyo and
Toronto. Additionally, VMX has distribution alliances with nearly 20
organizations, including Siemens, Italtel, Mercury, J.S. Telecom, Bull S.A.,
Ericsson, Toshiba and Hitachi.
The Company believes that its network of distributors represents an
important part of its overall sales strategy and that the loss of, or changes
in the relationship with or performance by, one or more distributors could have
an adverse effect on the Company's revenues and operating results.
The Company offers a leasing alternative to its customers through its
leasing division, Octel Capital. Customers who wish to lease the Company's
products may do so using financing options available through the Company's
sales organization.
Sales outside the United States were in the aggregate approximately
24%, 24% and 22% of net revenues for fiscal 1994, 1993 and 1992, respectively.
Prior to fiscal 1992, the majority of international sales in each year were
made in Canada. In fiscal 1992 and 1993, the Company had substantial sales in
Italy and the U.K., as well as Canada. In fiscal 1994, the majority of
international sales were made in Canada and the U.K.
In December 1993, the Company and Alcatel Austria AG signed a joint
product development and distribution agreement, pursuant to which Alcatel will
distribute and support the Company's voice information processing products
outside the United States and Canada. The Company has formed wholly owned
subsidiaries in Japan and Hong Kong to sell directly to those countries.
The Company's Customer Support Group includes field engineers and
applications specialists who provide installation and implementation assistance
to both end-user customers and distributors. This organization also
administers technical software courses, system maintenance courses, and
customer support courses. The Company provides a warranty for parts and labor
on its products which is generally for 12 months from date of shipment (or, if
the Company installs the product, generally for 12 months from the date of
installation). The Company maintains and services its products on a
contractual basis after the initial product warranty has expired. Warranty and
post-warranty service is provided directly to customers from Octel's district
sales offices and through distributors, supplemented by major Octel support
centers in California, Pennsylvania and Ontario, Canada. The Company maintains
inventories of spare parts at a number of locations in the U.S. and
internationally, including all Octel facilities and distributor locations, in
order to provide prompt service. The Company operates a telephone support
center 24 hours per day at its headquarters and in Plymouth Meeting,
Pennsylvania to respond to requests for problem definition and resolution.
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<PAGE> 14
Distributors purchase products at discounts and, accordingly, the
Company's operating margins can vary depending upon the mix between distributor
and direct sales in any particular operating period. The Company anticipates
this mix will fluctuate in future operating periods.
ONS provides network management solutions throughout the United States
to large corporate customers; federal, state and local governments; and
not-for-profit organizations. ONS also provides services to Ameritech, the
RBOC in the midwestern section of the United States. Through international
marketing partners, ONS provides access from Australia, Europe and Japan to its
voice processing network. ONS also provides complete voice processing services
on a private-label basis for resale by VIS providers.
The Company's PC-based products are distributed through a network
separate from that used for the rest of the Company's products, consisting of a
large number of independent dealers typically focused on the telecommunications
needs of smaller businesses. These dealers provide both first-level technical
support and training for end-user customers. Recently, the Company has begun
to offer its PC-based products directly to large, existing customers and to
traditional distributors.
CUSTOMERS
The Company has sold and installed over 35,000 systems to over 20,000
different customers, primarily in North America, but also in many countries
around the world. Customers include approximately 35 companies in the Fortune
50 industrial group, all seven of the RBOCs and all of the major telephone
companies in Canada. In addition, the Company's customers include cellular
telephone companies, voice processing service bureaus, industrial manufacturing
concerns, technology and computer companies, financial and life insurance
companies and government, medical, education and nonprofit organizations. Many
customers have purchased multiple systems. Among the Company's larger end-user
customers are US West, General Electric, Hewlett-Packard, Prudential,
Coldwell-Banker, BellSouth, McCaw, New York Life, McDonalds, NYNEX, Aetna
Insurance, Corning, Coca-Cola and Honeywell. The Company's top five end-user
customers through June 30, 1994 averaged 232 systems each and the top 25
end-user customers averaged 111 systems each.
BACKLOG
The Company's backlog at June 30, 1994 was $50.5 million, compared to
$33.8 million at June 30, 1993. The Company includes in backlog only purchase
orders for products and services to be shipped or provided within 180 days.
Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of actual revenues for any future period. The Company believes
that its backlog on a quarterly basis will not generally be large enough to
assure that its revenue targets for a particular quarter will be met.
Furthermore, a large percentage of any quarter's shipments are booked in the
last month of the quarter. Consequently, quarterly revenues and operating
results will depend on the volume and timing of new orders received during a
quarter, which are difficult to forecast. This is particularly true in the VIS
marketplace, where sales orders are generally larger. Fourth quarter revenues
are typically enhanced by sales incentives to employees and promotion programs
for customers, while first quarter sales are traditionally not as strong.
COMPETITION
The voice information processing industry is highly competitive and
the Company believes that competition from new and existing competitors will
continue to intensify. The Company competes with different companies in the
different customer markets it serves and the principal competitive factors vary
depending on the customer market. The Company believes that competition to
date for the sale of voice information processing systems in its principal
customer markets has been based on product features, system performance,
product quality and reliability, price, service and post-sales support, and
marketing and distribution capabilities. The Company believes that it competes
favorably with respect to these competitive factors.
Current competitors or new market entrants in each customer market may
introduce and commercially deliver new products with features and expanded
capabilities that could adversely affect the competitive position of the
11
<PAGE> 15
Company's systems in some or all of its markets. In order to maintain its
competitive position, the Company must continue to enhance its existing
products and develop and market new products successfully, and there is no
assurance that the Company will be able to do so. Increased competitive
pressures could result in intensified price competition in the Company's
markets, which would adversely affect the Company's net revenues and net
income.
The Company also believes its ability to integrate its systems with
many different PBX and other telephone switching systems is an important
competitive factor. Consequently, the Company could be adversely affected if
PBX manufacturers take steps such as the redesign of their switches to limit
current methods of integration or if Octel's voice processing competitors
expand their switch integration capabilities.
CPE Market. In the CPE market, the primary competition to date has
been from two kinds of competitors: the PBX manufacturers and the independent
manufacturers of voice information processing systems. PBX manufacturers
include AT&T, Northern Telecom and ROLM Systems, each of which sell voice
processing products that integrate principally with their own PBXs. These
companies have considerably greater financial, technical, marketing and sales
resources than the Company, and may have a competitive advantage when customers
are purchasing a voice processing system at the same time they are purchasing a
new PBX. They also benefit from the large installed base of their own brands
of PBXs. PBX manufacturers have intensified their competition by focusing on
low prices and single source procurement and selling voice processing equipment
as a PBX peripheral device with limited, core voice processing functionality
such as telephone answering and voice mail. The Company believes that it
competes favorably with these PBX manufacturers because of its
multi-application voice information processing systems, the broad set of
features incorporated into the Company's products, including its multiple
technology applications such as fax processing, a more friendly user interface,
the ability to integrate with the PBXs of multiple manufacturers and
networking. The Company also believes that development and delivery of
customer applications will increase in importance as a competitive factor as
customers demand not only core voice processing functionality, such as
telephone answering and voice mail, but also IVR, fax, audiotex and integration
with computer networks.
Independent voice processing manufacturers include Centigram
Communications Corporation and PC-based providers, who also offer multiple
integrations with PBXs. The Company believes that it competes favorably with
these companies because of its strong balance sheet, substantial cumulative
investment in research and development, large installed base, strong support
organization and broad set of features, including its multiple technology
applications. The Company also believes that the Company's direct and
distributor channels of distribution allow it to compete favorably with
companies with only one channel of distribution. Further, the Company believes
that its application generators and application development specialists
represent an opportunity to provide applications tailored to meet the needs of
vertical and horizontal markets and unique solutions for individual customers.
Indirect competitors, by increasing system capacities and adding new
system capabilities and applications, may be able to compete more directly with
the Company in selling to larger corporate customers and VIS providers. To the
extent the Company markets additional applications that enable interaction with
host computers, suppliers of such other systems as interactive voice response
systems will become more direct competitors.
The Company expects that new or enhanced products will be offered by
its principal existing competitors and possibly new competitors, including
large domestic and international telecommunications and computer companies.
The Company also expects that computer software vendors such as Novell, Inc.,
Lotus Development Corporation and Microsoft Corporation will continue to
develop enhanced messaging and networking software with voice and data
information processing applications.
A large number of voice processing companies compete primarily in the
market for smaller capacity systems (fewer than 16 ports) that are typically
sold to smaller customers but also to small offices of larger companies. Some
of these competitors emphasize primarily their automated attendant and call
processing capabilities, while others focus on voice messaging applications.
In addition, a number of companies produce personal computer add-on cards and
software primarily aimed at specialized applications or small user groups. The
primary competitors for the Company's VMX 100 and PC products include other
PC-based system suppliers including Active Voice and Applied Voice Technology
(AVT). Certain PBX manufacturers, including AT&T and Northern Telecom, also
offer competitive products to small businesses which are generally tailored to
a specific brand of PBX. The market for smaller capacity
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<PAGE> 16
systems is characterized by intense competition on price and sales coverage.
The Company believes that, as smaller businesses become more familiar with
voice processing and its benefits, enhanced feature content will increasingly
become important to small capacity systems. The Company believes that its
PC-based products compete favorably against products from other PC-based
vendors and PBX manufacturers because of their feature set and the Company's
extensive dealer network.
In 1993, Dialogic Corp., the leading manufacturer of voice processing
boards for use in microcomputers and the chief competitor of Rhetorex,
announced Signal Computing System Architecture (SCSA) for building call
processing systems with multiple technologies and standard interfaces. Over
one hundred firms, including IBM, Northern Telecom, Siemens, Active Voice and
Boston Technology, have publicly announced their support for SCSA. Octel
expects adoption of SCSA to intensify existing competition from open-system
microcomputer-based voice processing systems.
Competitors in the international CPE market segment vary by country
and include both U.S. and foreign companies. Octel believes that the markets
outside of North America are less developed than those in North America, and
that competitors that are expected to be strategically important in the long
run may not have yet finalized their business strategy or established a market
position. The Company believes that factors in its favor in international
markets are the broad set of features in its existing products, including its
multiple technology applications, its large installed base of multinational
companies and its strong balance sheet. The Company's international
competitive position will also benefit from the distribution alliances that VMX
has established with nearly 20 organizations, including Siemens, Italtel,
Mercury, J.S. Telecom, Bull S.A., Ericsson, Toshiba and Hitachi.
ONS competes both with other voice information processing services
companies and with equipment manufacturers. Other services suppliers include
independent companies such as VoiceCom and VoiceTel. In some cases, ONS
competes with equipment manufacturers if the customer is uncertain whether to
outsource their voice information processing through a service provider such as
ONS or purchase equipment from a manufacturer. In situations where a
customer's capital budget is constrained or resources to manage systems are not
present, ONS' service solutions become attractive as compared to equipment
purchases.
VIS Market. In the VIS market, the Company's principal competitors
include Boston Technology, Comverse, Centigram, Digital Sound and Unisys, each
of which has announced contracts with VIS providers. Other telecommunications
and computer companies, including some large companies that currently supply
equipment to the RBOCs and some companies with greater financial and technical
resources than the Company, are expected to enter this market. In addition,
although currently barred from such activities by governmental regulations
stemming from the breakup of AT&T in 1984, the RBOCs may be allowed to
manufacture their own voice processing equipment at some time in the future.
The Company believes that specific product requirements are becoming clearer as
the RBOCs and other telephone companies are gaining more experience with VIS.
The Company continues to develop enhancements to its Sierra product to address
what the Company believes are the emerging requirements of the telephone
companies and other VIS providers. However, there can be no assurance that
product requirements will not change as this market develops. As is consistent
with past practice, each telephone company is expected to use at least two
suppliers.
The Company believes that the key competitive factors in the VIS
market are likely to depend on the method of implementing voice information
services used by the specific VIS provider. The Company believes it competes
favorably in this market by virtue of its greater experience in providing voice
processing systems, its installed base and the reliability, capacity and broad
feature functionality of its products. In addition, against certain
competitors, the Company competes favorably on the basis of its strong balance
sheet and its limited reliance on any single customer for its viability.
Competition in the international VIS market segment has primarily come
from those companies based in and currently competing in the United States. As
in the international CPE market, the primary competitors in international
markets may change as the market for voice information services develops and
additional vendors are attracted. The Company believes that its strengths in
the domestic VIS market will be valuable to the Company in international
markets.
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<PAGE> 17
MANUFACTURING
The Company's manufacturing operations consist primarily of final
assembly and extensive test and quality control of materials, components,
subassemblies and systems. Most of the Company's hardware and software product
designs are proprietary, except for some peripheral products. The Company
currently manufactures its products (except for the VMX 100) in two locations:
San Jose, California, and Dallas, Texas. It expects to consolidate these
operations into one location in the first quarter of fiscal 1996.
The Company presently uses other third parties to perform printed
circuit board assembly and sheet metal fabrication. Although the Company
generally uses standard parts and components for its products, certain
components, including power supplies, disk drives and certain semiconductors,
are presently available only 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. There can be no assurance, however, that such supplies will
be available in the future or, if such supplies are available, that they will
be available at reasonable prices. 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 adversely affect the Company's net
revenues and net income.
The VMX 100 system is manufactured for the Company exclusively by
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") in Japan. The
Company's agreement with MKE for the manufacture of the VMX 100 expires on
January 27, 1995. The Company retains manufacturing rights in the event MKE is
unable to supply the Company's requirements of VMX 100 systems. The Company
has not experienced nor does it expect any significant delays in the delivery
of VMX 100 systems from MKE. However, there can be no assurance that
interruption in the supply will not occur in the future, and any such delays
could adversely affect the business of the Company.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that the continued timely development of new
products and enhancements to its existing products is essential to maintaining
the Company's market position, and this effort requires a high level of
expenditures by the Company for research and development. The Company has
continued to improve the features, capabilities, capacity and price/performance
of its product line while maintaining compatibility with its customers'
existing installations. The Company is currently involved in the development
of further enhancements to its products to increase performance, reliability
and manufacturability. The Company must continue to hire additional skilled
research and development personnel, particularly software and hardware
engineers who are generally in short supply. The Company, from time to time,
has purchased and anticipates it will continue to purchase technology from
third parties.
The Company releases performance enhancements and new features for its
products on an ongoing basis. As the functionality of the Company's systems
increases, the complexity of the software will also increase. Although the
Company performs rigorous testing prior to releasing its product designs,
products as complex as the Company's often contain undetected errors or "bugs"
when first released, and these errors are discovered only after the product has
been used by many different customers and in varying applications. Because of
the importance the Company places on product reliability, the Company has from
time to time temporarily delayed product shipments to complete "debugging"
efforts. In addition, the Company has been required, in a few instances and
primarily for VIS customers, to write custom software and to make design
modifications to satisfy customer application requirements. Identifying and
correcting errors and making required design modifications typically is
expensive and time-consuming and the Company expects such modifications to
increase in complexity with the increasing sophistication of the Company's
products. Despite extensive testing, there can be no assurance that errors
will not cause delays in product introductions and shipments, require design
modifications or impair customer satisfaction, which could adversely affect
operating results.
During fiscal 1994, 1993 and 1992, the Company spent $58.3 million,
$44.4 million and $32.3 million, respectively, on research and development.
The Company expects that these expenditures will continue to increase. In the
future, certain research and development expenses will be borne by value-added
software suppliers who can write software and market it for their own account
as an additional application of the Company's voice information processing
system. To date most of the Company's research and development costs,
including costs of software development, have
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<PAGE> 18
been charged to operations as incurred, except for externally-funded research
and development arrangements. Prior to being acquired by the Company, VMX had
capitalized certain software development costs and incurred annual amortization
expense. In March 1994, in connection with the VMX merger, the Company
incurred a one-time pre-tax charge of $1.1 million to write off certain
capitalized software development costs to conform accounting practices. See
Note 4 to the Consolidated Financial Statements.
GOVERNMENT REGULATION
The seven RBOCs are subject to ongoing regulation by the United States
District Court under the terms of the consent decree governing the breakup of
AT&T in 1984. The consent decree imposed certain "line of business"
restrictions which, among other things, barred the RBOCs from providing
"information services" such as voice messaging. On March 7, 1988, in its first
triennial review of the continued need for the line of business restrictions,
the Court ruled that the RBOCs could offer some information services, including
voice messaging services, to their customers. In 1991, the Court removed the
remaining restrictions on the RBOCs' ability to provide "information services,"
creating additional potential uses of the Company's products. This decision
was affirmed in May 1993 by the United States Court of Appeals for the District
of Columbia Circuit, and the Supreme Court of the United States has denied
review.
The RBOCs have applied to the District Court for waivers of the
consent decree's remaining restriction on the provision of interLATA (i.e.,
interexchange or long distance) information services, and four RBOCs have filed
to vacate the entire consent decree. In June 1994, the United States House of
Representatives passed legislation that would permit the RBOCs to offer
information services such as voice messaging on an interexchange basis subject
to certain conditions and which could otherwise affect the regulatory
conditions under which RBOCs offer such services. It is uncertain whether the
United States Senate will act on similar legislation or whether this or other
legislation on these topics will become law.
The consent decree also prohibited the RBOCs, as a line of business
restriction, from manufacturing telecommunications equipment. As a result, the
RBOCs may only offer these information services through voice information
processing equipment purchased from companies such as Octel. In July 1994,
four RBOCs filed with the District Court to vacate the consent decree,
including this restriction. In June 1994, the United States House of
Representatives passed legislation that would lift the consent decree's
manufacturing restriction subject to certain conditions. It remains uncertain
whether the United States Senate will pass similar legislation or whether such
legislation, or other legislation on this topic, will become law.
The consent decree does not restrict the activities of the non-RBOC
telephone and cellular companies, which may also offer voice processing
services directly to their subscribers.
In offering voice messaging and other information or "enhanced"
services, the RBOCs are subject to various regulatory requirements of the
Federal Communications Commission ("FCC"). On June 6, 1990, the U.S. Court of
Appeals for the Ninth Circuit vacated and remanded to the FCC for further
proceedings an FCC order eliminating the requirement that the RBOCs provide
enhanced services such as voice messaging through separate subsidiaries and
preempting nearly all state regulation of sale of voice processing services by
the RBOCs. The FCC then granted an interim waiver of its separate subsidiary
requirement for existing enhanced services during the pendency of the FCC's
proceedings to re-examine structural separation requirements. On November 21,
1991 the FCC concluded that the RBOCs should be allowed to offer enhanced
services on an integrated basis provided they adhere to a comprehensive set of
safeguards to prevent cross-subsidization and discrimination. The FCC agreed
to review the effectiveness of the nonstructural safeguards after three years.
It also acted to preempt certain state regulations, but more narrowly than in
prior FCC decisions. Petitions for review of these FCC actions are currently
pending before the United States Court of Appeals for the Ninth Circuit. In
June 1994, the United States House of Representatives passed legislation that
would require the FCC to revisit its safeguards requirements for information
services. It is uncertain whether the United States Senate will pass similar
legislation or whether such legislation, or other legislation addressing this
issue, will become law.
15
<PAGE> 19
Through ONS, the Company is also a provider of telephone answering and
voice messaging services. State regulatory authorities have sought to regulate
some aspects of telephone answering and voice messaging services offered by
telephone companies and may seek in the future to regulate such services
offered by independent service providers such as the Company. The United
States Congress is considering legislation that would affect states' ability to
regulate such services.
The Company believes that the RBOCs and other telephone companies
represent a substantial market for Octel's products. However, there can be no
assurance that a substantial market will continue, that the telephone companies
will purchase the Company's products, or that the RBOCs will not at some point
in the future be allowed to manufacture their own voice information processing
systems or fund the Company's competitors and thereby compete with the Company.
Moreover, any substantial lifting of the interexchange service restriction
would enhance the RBOCs' ability to compete with the Company's service
offerings.
PATENTS, COPYRIGHTS, TRADEMARKS AND TECHNOLOGY LICENSES
The Company relies on a combination of patent, copyright, trade secret
and trademark law, licensing and technical measures to protect its intellectual
property. There can be no assurance that the Company's efforts to protect its
intellectual property will be successful.
The Company holds 31 United States patents and has 13 patent
applications pending in the United States. The Company's issued patents expire
on dates ranging from 2002 to 2010. The Company also has patent applications
pending in foreign countries throughout the world. 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. 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. 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 spite of the possible strength of the Company's
existing and future patents, the Company believes that patents are of less
significance in its industry than such factors as innovation, technological
expertise and distribution strength.
The Company licenses technology from Northern Telecom, Mitel
Corporation and ROLM to facilitate integration of Octel's products with those
manufacturers' PBXs. The Northern Telecom license is perpetual, the Mitel
license expires in 1998 and the ROLM license expires in 2004. Royalty payments
on these licenses are not material.
A number of companies, including competitors of the Company, hold
patents in the same general area as the technology used by the Company. The
Company has from time to time been notified and may be notified in the future
that its products may be infringing certain patents and other intellectual
property rights of others.
In April 1992, the Company filed suit, in California, against Theis
Research, Inc. ("Theis") for declaratory judgment that the Company's products
do not infringe three patents of Theis and that those patents are invalid. In
November 1992, Theis filed a counterclaim against the Company alleging
infringement of seven of Theis' patents. Subsequently, Theis dismissed with
prejudice the claims as to all but four of the patents. In May 1993, two other
manufacturers of voice mail equipment, Boston Technology and Northern Telecom,
filed suit in California for declaratory judgment that their products do not
infringe the same Theis patents at issue in the Company suit. In June 1993,
the California court consolidated the action filed by these two other
manufacturers with the Company suit and Theis filed a counterclaim for
infringement against, among others, one of the Company's telephone company
customers, Pacific Telesis. This customer tendered defense of this action to
various of its vendors, including the Company. As a result of these actions,
the California case involved counterclaims by Theis against the Company, Boston
Technology, Northern Telecom, AT&T, Digital Sound and possibly other vendors of
voice mail products and Pacific Telesis, a customer of the Company, and most of
the other manufacturers of voice mail products. In August 1993, the court
severed trial of the counterclaims against all defendants except the Company,
Northern Telecom and Boston Technology. In December 1993, the court granted
the Company's motion for summary judgment of noninfringement of one of the four
remaining patents asserted against the Company. Theis subsequently dismissed
its counterclaim against Boston Technology in exchange for a license of its
patents. The Company and Northern Telecom tried the equitable issues of
16
<PAGE> 20
laches and inequitable conduct to the court in February 1994. The court has
not yet ruled on the laches issue. In August 1994, the court issued a
tentative ruling that the Company and Northern Telecom had not established
inequitable conduct by clear and convincing evidence. The court has scheduled
further briefing and argument on this issue. Trial of the remaining issues,
including infringement of the three remaining patents asserted against the
Company and the defense of patent invalidity, commenced on August 22, 1994.
In March 1993, Theis filed a complaint in Virginia for infringement of
the four Theis patents, and two other Theis patents, against one of the
Company's customers, Bell Atlantic. Bell Atlantic tendered defense of this
action to various of its vendors including the Company. The Virginia court
stayed the Virginia action pending resolution of the pending consolidated suit
in California.
In January 1994, Gilbarco, Inc. ("Gilbarco") filed suit in the U.S.
District Court for the District of Colorado against the Company and one of the
Company's telephone company customers, U.S. West, alleging infringement of a
Gilbarco patent and seeking unspecified damages. The Company filed an answer
to the complaint denying any infringement of the patent and raising several
affirmative defenses, including an assertion that the patent is invalid and
unenforceable.
The Company believes, based upon information currently available,
including consultations with patent counsel, that the Company is not infringing
any valid patents of Theis or Gilbarco. The Company will vigorously defend the
patent infringement claims and any related claims for compensatory damages.
While litigation is inherently uncertain, the Company believes that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position.
The Company is currently evaluating several additional claims of third
parties. Based in part on industry practice and in part on discussions with
certain of such third parties, the Company believes that in most cases any
necessary licenses or rights could be obtained on commercially reasonable
terms. However, no assurance can be given that future licenses will be
obtained on acceptable terms or that litigation will not occur. The failure to
obtain necessary licenses or other rights, or litigation arising out of such
claims, could have a material adverse affect on the Company's operations.
Octel, Octel Communications, the Octel logo, Aspen, Branch, D.I.A.L.,
Maxum, Sierra, Tigon and VMX are registered trademarks of the Company.
EMPLOYEES
The Company's success depends upon the continued contribution of its
officers and key personnel, many of whom would be difficult to replace. If
certain of these people were to leave the Company, the Company's operating
results could be adversely affected. At June 30, 1994, the Company employed
2,393 people full-time. During fiscal 1995 the Company intends to hire
additional personnel, especially in the international arena. Many of the
Company's employees are highly skilled, and the Company's continued growth and
success will depend in part upon its ability to attract and retain such
employees, who are in great demand, and on the ability of the Company's
officers and key employees to manage successfully the growth of the Company
through use of appropriate management information systems and controls. The
Company has never had a work stoppage, no employees are represented by a labor
organization, and the Company considers its employee relations to be good.
ITEM 2. PROPERTIES
Until June 1994, the Company's corporate offices, research and
development facilities, Milpitas sales office and manufacturing facilities were
located in seven leased buildings in the Milpitas, California area, totaling
approximately 317,000 square feet, under leases expiring at various times in
1994 with certain options to renew. In the summer of 1994, the Company moved
all operations except manufacturing and customer service into five buildings,
totaling approximately 368,000 square feet, owned by the Company in Milpitas.
The Company also leases 40 sales and support offices throughout the United
States and in Canada comprising approximately 150,000 square feet of additional
space. The aggregate monthly rental expense for the Company's office
facilities in June 1994 was approximately $950,000,
17
<PAGE> 21
approximately 32% of which is for facilities at or near the Company's Milpitas,
California headquarters. Compass' offices are located in two leased buildings
in Sarasota, Florida totaling approximately 18,711 square feet for which the
aggregate monthly rental expense in June 1994 was approximately $16,310. ONS'
principal offices are located in three buildings in Dallas, Texas consisting of
approximately 45,000 square feet under leases which expire in 1996 and 1997.
ONS also leases an additional 50,000 square feet of space for 30 operations
centers and sales offices throughout the United States. The aggregate monthly
rental expense for all of ONS' facilities in June 1994 was approximately
$120,000, of which approximately 37% was for facilities at or near the Dallas
offices. VMX's corporate offices and research and development facilities are
located in one leased building in Orchard Bayshore Industrial Park in San Jose,
California, totaling approximately 94,000 square feet, under a five-year lease
expiring in December 1995. VMX expects to begin moving these operations to the
Company-owned buildings in Milpitas in October 1994 and to complete the move in
December 1994. VMX's manufacturing and warehousing facilities are located in
one leased building in Dallas, Texas, totaling approximately 96,000 square
feet. VMX also leases an additional 50,000 square feet of space for 12
operations centers and sales offices throughout the United States. The
aggregate monthly rental expense for all of VMX's facilities in June 1994 was
approximately $350,000, of which approximately 33% was for facilities at or
near the San Jose offices.
The Company currently leases 38,000 square feet of space in Paris and
London and is currently planning to increase its occupancy of rented office
space in Europe during fiscal 1995. The Company also leases 2,400 square feet
of office space in Tokyo, Japan. Although the Company believes that it will
not require additional space during fiscal 1995, it believes that suitable
additional or substitute space will be available as needed on commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
See "Patents, Copyrights, Trademarks and Technology Licenses" in Item
1 above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 1994.
18
<PAGE> 22
EXECUTIVE OFFICERS OF OCTEL COMMUNICATIONS CORPORATION
The executive officers of the Company and their respective ages as of
July 31, 1994 are as follows:
<TABLE>
<CAPTION>
Name Position
Age
--------------------------------------- ----- --------------------------------------------------------------
<S> <C> <C>
Robert Cohn 45 Chairman of the Board, President and Chief Executive Officer
David Ladd 47 Executive Vice President
W. Michael West 44 Executive Vice President
Gary Wetsel 48 Executive Vice President and Chief Financial Officer
Donald L. Campodonico 49 Vice President
Derek S. Daley 39 Vice President, General Counsel and Secretary
Michael Gilbert 50 Vice President
Margaret Norton 40 Vice President
Carol Snell 44 Vice President
John Viera 45 Vice President
</TABLE>
Mr. Cohn, a founder of the Company, served as its President and Chief
Executive Officer from the Company's inception in 1982 until October 1990, and
then resumed those positions in November 1993. Mr. Cohn has served as a
director from the Company's inception and, in June 1990, the Board of Directors
appointed Mr. Cohn Chairman of the Board. Prior to founding the Company, he
was employed by Acurex Corporation, a manufacturer of microprocessor-based
measurement and control systems, from 1979 to 1982. From 1976 to 1979, he was
employed by McKinsey & Co., Inc., a management consulting company. Mr. Cohn
holds a B.S. in Mathematics and Computer Science from the University of Florida
and an M.B.A. from Stanford University. Mr. Cohn is also a director of
Electronic Arts, a publisher of entertainment software, and Global Village
Communication, Inc., a manufacturer of hardware and software for personal
computers.
Mr. Ladd joined the Company in March 1994 as Executive Vice President
following the Company's merger with VMX, Inc. and is responsible for research
and development. At VMX, Mr. Ladd served as Executive Vice President and a
director from July 1988 until March 1994. Prior to joining VMX, Mr. Ladd
served as President and Executive Vice President of OPCOM, a manufacturer of
call processing systems that was merged into a wholly owned subsidiary of VMX
in July 1988. Mr. Ladd holds a B.A. in Engineering Physics from the University
of California-Berkeley and an M.A. in Mathematics from the Stevens Institute of
Technology.
Mr. West joined the Company in September 1986 as Executive Vice
President and is responsible for sales and customer service. From 1979 to
September 1986, Mr. West was employed by ROLM, serving for three years during
this period as President of an operating subsidiary of ROLM and most recently
as General Manager of its National Sales Division. Mr. West attended Southern
Illinois University.
Mr. Wetsel joined the Company in October 1990 as Vice President and
Chief Financial Officer and is responsible for finance, treasury, investor
relations, business development, corporate information services, the Octel
capital leasing division and real estate. He was elected Executive Vice
President in August 1993. Mr. Wetsel joined Octel from American President
Companies, a shipping and transportation company, where he served as Vice
President, Financial Plans and Controls from 1989 to October 1990. From 1986
to 1989, he was Vice President, Finance and Chief Financial and Administrative
Officer at Ungermann-Bass, Inc. In 1981 he was Vice President of Finance for
ROLM, Texas (a ROLM subsidiary) and advanced from this role in 1982 to serve
for five years as Group Controller for the Business Communications Group in
ROLM Corporation. Prior to 1978, Mr. Wetsel worked in public accounting,
including seven years with KPMG Peat Marwick. Mr. Wetsel holds a B.S. in
Accounting from Bentley College and is a Certified Public Accountant.
Mr. Campodonico joined the Company in July 1987 as its Director of
Manufacturing and was promoted to Vice President, Manufacturing in March 1989.
He is responsible for manufacturing and human resources. Prior to joining
19
<PAGE> 23
the Company, he was employed by ROLM, serving for two years during this period
as Vice President of Operations. Mr. Campodonico holds a B.S. in Business
Administration and an M.B.A. from San Francisco State University.
Mr. Daley joined the Company in August 1988 as its General Counsel,
was elected Vice President in September 1989 and became Secretary of the
Company in October 1990. He is responsible for internal legal matters, legal
compliance and supervision of outside law firms employed by the Company. Prior
to joining the Company, Mr. Daley was an associate and then a partner in the
law firm of Wilson, Sonsini, Goodrich & Rosati from September 1985 to September
1988, and an associate with the law firm of Brobeck, Phleger & Harrison from
September 1980 to September 1985. Mr. Daley holds a B.S. in History and a J.D.
from Stanford University.
Dr. Gilbert joined the Company in April 1994 as Vice President,
Engineering and is responsible for all engineering other than ONS and Compass.
Prior to joining the Company, he served five years at Echelon Corporation as
chief technical officer and Vice President of Engineering. Dr. Gilbert holds a
B.S. in Chemistry and a Ph.D. in Chemistry and Computer Science from Oregon
State University.
Ms. Norton joined the Company in February 1988 as a Group Product
Manager in CPE Marketing and was subsequently promoted to Director of CPE
Marketing, Director of VIS Marketing and Vice President, VIS Marketing, the
position she now holds. She holds a B.A. in Economics from the University of
Arizona and an M.B.A. from the University of Connecticut.
Ms. Snell joined the Company in August 1994 as Vice President, CPE
Marketing, and is responsible for all CPE marketing activities. Prior to
joining the Company, Ms. Snell was President and Chief Executive Officer of
Aristacom International, Inc. from August 1993 to April 1994 and prior to that
was Senior Vice President, Worldwide Operations for Aspect Telecommunications
Corporation for eight years. Ms. Snell holds a B.S. in Business from the
University of North Carolina.
Mr. Viera joined the Company in February 1989 as Director of
Organizational Planning and was subsequently promoted to Director of
Compensation, Director of Human Resources and Vice President, Human Resources,
the position he now holds. He holds a B.S. in Business Administration from
Golden Gate University and an M.S. in Counseling Psychology from California
State University, Hayward.
All officers serve at the discretion of the Board of Directors. There
are no family relationships between directors or executive officers of the
Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Octel Communications Corporation Common Stock is traded on the
over-the-counter market and is quoted on The Nasdaq National Market under the
symbol OCTL. As of June 30, 1994, there were approximately 2,700 stockholders
of record. The following table sets forth for the periods indicated the high
and low closing prices for Octel's Common Stock as reported by The Nasdaq
National Market.
<TABLE>
<CAPTION>
Fiscal Year 1994 High Low
-------------------------------------------------------------- ---- ---
<S> <C> <C>
Fourth quarter ended June 30, 1994 $26 1/4 $16 1/2
Third quarter ended March 31, 1994 30 23
Second quarter ended December 31, 1993 28 1/2 23 1/4
First quarter ended September 30, 1993 24 3/4 19 1/4
</TABLE>
20
<PAGE> 24
<TABLE>
<CAPTION>
Fiscal Year 1993 High Low
-------------------------------------------------------------- ---- ---
<S> <C> <C>
Fourth quarter ended June 30, 1993 $25 1/4 $19
Third quarter ended March 31, 1993 30 20
Second quarter ended December 31, 1992 24 14 1/2
First quarter ended September 30, 1992 27 1/2 18 3/4
</TABLE>
The Company has not paid cash dividends on its Common Stock to date
and does not plan to pay cash dividends to its stockholders in the near future.
The Company believes factors such as quarter-to-quarter variances in
financial results and announcements of new products and new orders by the
Company or its competitors could cause the market price of the Company's Common
Stock to fluctuate substantially. In addition, the stock prices for many high
technology companies typically experience extreme price fluctuations, which
often are not related to changes in the operating performance of the specific
companies. Broad market fluctuations as well as general economic conditions
such as a recessionary period or high interest rates may adversely affect the
market price of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
(In thousands, except per share amounts) 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Total net revenues . . . . . . . . . . . $ 406,225 $ 338,478 $ 262,732 $ 218,494 $ 187,404
Operating income . . . . . . . . . . . . 18,813(1) 37,122 29,526 16,573 22,613
Net income . . . . . . . . . . . . . . 13,543(1) 29,567 26,383 13,482 19,807
Net income per common and equivalent
share . . . . . . . . . . . . . . . . $ 0.54(1) $ 1.19 $ 1.08 $ 0.58 $ 0.90
Weighted average common shares and
equivalent shares outstanding . . . . 25,096 24,869 24,424 23,204 21,975
BALANCE SHEET DATA
Working capital . . . . . . . . . . . . . $ 132,773 146,978 162,171 135,086 124,781
Total assets . . . . . . . . . . . . . . 346,128 297,383 251,955 204,780 182,808
Long-term debt . . . . . . . . . . . . . 1,400 1,985 409 538 404
Stockholders' equity . . . . . . . . . . 256,192 229,681 202,386 167,903 150,461
</TABLE>
- - ----------------------
(1) Includes total nonrecurring charges for the VMX merger and integration
costs of $24.1 million ($18.8 million net of taxes). Excluding these
charges, operating income, net income and net income per common and
equivalent share would have been $39.3 million, $32.3 million and
$1.27, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
Effective March 31, 1994, Octel consummated a business combination
with VMX, Inc. ("VMX") which was accounted for as a pooling of interest. VMX
provides integrated messaging and call processing systems, software and
services that combine voice, data and image for business communications
internationally. To effect the combination, approximately 5.4 million shares
of Octel's Common Stock were issued in exchange for all of the outstanding
Common Stock of VMX. The net assets of VMX amounted to approximately $45.1
million at March 31, 1994. The annual and interim financial statements have
been restated to include the accounts and operations of VMX for all periods
presented.
21
<PAGE> 25
RESULTS OF OPERATIONS
The following table summarizes the changes in selected operating
indicators. The percentages on the left show the relationships of various
income and expense items to net revenues. The percentages on the right measure
year-to-year increases and decreases.
<TABLE>
<CAPTION>
Percent
Percentage of Total Net Revenues Increase (Decrease)
Year Ended June 30, From Prior Year
------------------------------------ -----------------------
1994 1993 1992 1994 1993
-------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues:
72% 75% 82% Systems 15% 19%
28 25 18 Service and license 36 75
--- --- --- --- ---
100 100 100 Total net revenues 20 29
--- --- --- --- ---
22 22 22 Cost of systems 19 31
17 16 14 Cost of service 34 47
14 13 12 Research and development 31 38
37 38 41 Selling, general and 17 20
administrative
4 -- -- Integration costs N/A --
--- --- --- --- ---
5 11 11 Operating income (49) 26
Interest and other income
-- 1 3 (expense), net (134) (35)
--- --- --- --- ---
4 12 14 Income before income taxes (58) 15
1 3 4 Provision for income taxes (68) 20
--- --- --- --- ---
3% 9% 10% Net income (54)% (12)%
--- --- --- --- ---
</TABLE>
Percentage amounts may not total due to rounding.
ANNUAL RESULTS
Net Revenues
Net revenues increased to $406.2 million in fiscal 1994, a 20%
increase from net revenues in fiscal 1993 of $338.5 million. Fiscal 1992 net
revenues were $262.7 million. The growth in net revenues resulted primarily
from the sale of systems to new and existing customers and the sale of
upgrades, expansions and new features in the CPE and VIS markets and an
increase in the volume of service revenues. The inclusion of the Company's
subsidiary acquired in October 1992, ONS, also contributed to the growth in net
revenues. In fiscal 1994, CPE revenues grew as a result of both international
and domestic growth. VIS revenues grew as a result of a significant increase
in domestic sales, offset by a small decrease in international revenues. A
portion of the increase in total net systems revenues is attributable
principally to CPE sales made into international markets in fiscal 1994, which
in total increased by 21% to $97.4 million from $80.7 million in fiscal 1993.
International net revenues were $58.7 million in fiscal 1992. Domestic net
revenues of $308.8 million grew 20% over the prior year domestic net revenues
of $257.8 million. Domestic net revenues were $204.0 million in fiscal 1992.
Growth in net systems revenues in the domestic CPE market over the
prior year reflects success in the sale of systems to new and existing
customers and the sale of upgrades and expansions to existing customers. The
domestic CPE market continues to be dependent upon the following: purchases by
large organizations that have already adopted competitive voice processing
technology switching to the Company's products; purchases by existing customers
of expansions and upgrades to support expanding corporate voice messaging
networks; purchases of new, integrated applications such as fax processing by
large organizations; and sales to smaller entities or branch offices of large
22
<PAGE> 26
companies of less expensive voice messaging equipment. The Company's range of
new fax processing products was released to the market in August of 1993 and
has generated an increase in CPE revenues in fiscal 1994.
Domestic VIS net systems revenues increased in fiscal 1994 as compared
to fiscal 1993 due to an increase in the volume of units sold. The VIS
customers' overcapacity and budget restrictions evident in fiscal 1993 did not
have as great an impact on fiscal 1994 revenues. Additionally, the Company
delivered software features during fiscal 1994 that the VIS customers were
anticipating. The Company continues to believe that the residential and
cellular voice messaging markets, which were growth areas in fiscal 1994 and
1993, and expanded usage of voice processing, are large market opportunities
that the Company and its VIS customers, including the cellular companies, are
jointly working to develop. International VIS net systems revenues decreased
slightly in fiscal 1994 as compared to fiscal 1993 due principally to large
system sales to Italy in fiscal 1993 which were not repeated in fiscal 1994.
International sales were to customers primarily in Canada and Europe
and to a lesser extent Japan, South America, Australia, New Zealand and China.
During fiscal 1994 international CPE sales were generally made through the
Company's direct sales force and distributors, principally in the United
Kingdom and Canada. International VIS sales were primarily made through the
Company's direct sales force. In particular, the Company's Canadian subsidiary
made a significant contribution to international revenues as a result of strong
VIS sales to large customers. The Company may establish additional
subsidiaries or joint ventures in the future in those countries where it
believes significant sales opportunities exist. Extensive effort is required
in the local government approval processes before the Company's products can be
sold and installed in each country. This work has been completed in several
countries and local government approvals for other selected countries worldwide
are in process.
The Company has an extensive service and support organization that
supports both its end user customers and its independent distributors' service
groups. This service and support organization generates an ongoing revenue
stream from service offerings, including service contracts, applications
development products, the sale of spares and licenses. The addition of ONS
since October 1992 has extended the range of voice processing and network
services the Company offers to customers, in particular, to customers in the
residential and small business voice services market. Net service and license
revenues grew 36% in fiscal 1994 as compared to the prior fiscal year,
increasing from $83.6 million to $114.1 million (license revenue increased from
$3.5 million to $5.1 million). The consolidation of ONS' revenues since the
date of acquisition (October 1992) and the increase in ONS' revenues since the
acquisition made a significant contribution to the increase. In fiscal 1992,
net service and license revenues were $47.8 million (license revenues were $2.9
million).
Systems sales orders from VIS customers are considerably larger than
CPE sales and VIS customers do not follow consistent buying patterns;
therefore, net revenue volume and mix in future periods could be affected by
the extent and timing of new orders from VIS customers. In addition, the
Company continues to monitor trends in the general economy that have previously
adversely affected the ordering process of customers. The Company cannot
predict how future domestic and international economic trends may affect sales
orders.
Cost of Systems and Service
As a percentage of total net revenues, cost of systems and service was
39% in fiscal 1994, 38% in fiscal 1993 and 35% in fiscal 1992. Cost of systems
sales was 31% in fiscal 1994, 29% in fiscal 1993, and 27% in fiscal 1992. In
fiscal 1994, the increase was primarily due to nonrecurring costs incurred to
conform VMX's accounting practices to the Company's. This negative effect was
partially offset by the effects of revenue transactions for which costs were
previously expensed due to uncertainty of revenue recognition and favorable mix
in the configuration of the high-end products. Cost of service and license
revenues was 62% in fiscal 1994, 63% in fiscal 1993 and 74% in fiscal 1992. In
fiscal 1994 and 1993, the decrease as compared to fiscal 1992 is primarily
attributable to the higher margin structure of ONS, consolidated since its
acquisition in October 1992, and also to the mix of service and support sales
over the three-year period.
During fiscal 1994, 1993 and 1992, as mentioned above, the Company
used sales promotions, pricing programs, including price reductions and
discounts, to stimulate demand for the Company's products. If the Company is
required
23
<PAGE> 27
to respond to economic or competitive pressures through similar programs in the
future, cost of systems and service could increase as a percentage of net
revenues.
Research and Development
Research and development expenses increased to $58.3 million in fiscal
1994 compared to $44.4 million in fiscal 1993 and $32.3 million in fiscal 1992.
Research and development expenses represented 14% of net revenues in fiscal
1994, 13% in fiscal 1993 and 12% in fiscal 1992. The increase in research and
development expenses in absolute dollars is due to the Company's increased
spending on projects to meet customer commitments such as clustering and the
adaptation of existing products and technology for international markets, as
well as the continued commitment to the development of new products and
enhancements to existing products. Also contributing to the increase were
development costs associated with the Company's Client/Server Software
Division, which began operations in April 1993 with no significant revenues
expected until 1995. In addition, the inclusion of research and development
costs of the ONS subsidiary acquired during fiscal 1993 contributed to the
increase in absolute research and development expenses in fiscal 1994 and 1993.
In fiscal 1994, the Company began Beta test of the Call Performer Plus(TM)
system (PC-based voice processing equipment) and several software releases that
introduced new administration and reporting features.
During fiscal 1994, 1993 and 1992, the Company entered into
development contracts with certain customers whereby the Company performed
development work on applications software using customer funds. As of June 30,
1994, $2.9 million of costs and revenues related to these contracts were
deferred ($2.0 million as of June 30, 1993). During fiscal 1994, $0.8 million
($0.3 million in fiscal 1993 and $0.2 million in fiscal 1992) was recognized as
revenue and $0.8 million ($0.3 million in fiscal 1993 and $0.2 million in
fiscal 1992) was charged to cost of sales for projects completed. See Note 2
to Consolidated Financial Statements. These costs were deferred under the
provisions of Statement of Financial Accounting Standards No. 68. No internal
software development costs have been capitalized to date under the provisions
of Statement of Financial Accounting Standards No. 86. See Note 2 to
Consolidated Financial Statements. During fiscal years 1990 and 1991 the
Company purchased IVR technology for approximately $2.6 million which was
amortized over the estimated useful life of the related product. The cost was
fully amortized as of June 30, 1994.
The Company expects to continue to increase expenditures on research
and development in fiscal 1995 in absolute terms and these expenses could
increase as a percentage of net revenues.
Selling, General and Administrative
Selling, general and administrative expenses were 37% of net revenues
in fiscal 1994, a decrease from 38% of net revenues in fiscal 1993 and 41% in
fiscal 1992. These expenses increased in absolute dollars to $151.2 million in
fiscal 1994, from $129.6 million in fiscal 1993 and $108.2 million in fiscal
1992. The increases in spending resulted from the Company's continuing efforts
to develop and manage its organization and train new and existing sales and
support personnel. Increased expenditures were also incurred due to legal
expenses related to ongoing patent litigation. The Company expects to continue
to incur legal expenses in fiscal 1995 related to ongoing patent litigation.
In addition, the inclusion of ONS' selling, general and administrative costs
during fiscal 1993 contributed to the absolute dollar increase over fiscal
1992. Selling, general and administrative expenses declined as a percentage of
revenue due to the Company's continued monitoring of expenses and employment of
cost control measures in conjunction with revenue growth. During fiscal 1994
the Company has continued to move resources to support the faster growing
business segments, including the movement of employees to support new
international subsidiaries and international sales opportunities. Since the
merger with VMX, the Company continues to analyze organizational and
operational synergies that can be achieved and anticipates the reflection of
any benefits from those synergies in fiscal 1995. The Company believes that
additional selling, general and administrative expenses will be required to
maintain its competitive position, including expanded international sales
activities, and expects that these expenses will increase in absolute terms and
could increase as a percentage of net revenues.
24
<PAGE> 28
Integration Costs
In the third quarter of fiscal 1994, in connection with the VMX
merger, the Company recorded $18.3 million for certain integration costs
related to the consolidation of facilities and personnel.
Interest and Other Income (Expense), Net
Net interest and other income (expense) for fiscal 1994 decreased $5.8
million from fiscal 1993. The decrease was due primarily to merger related
expenses of $3.6 million incurred in fiscal 1994, smaller net gains on sales of
short-term investments, lower interest income due to lower interest rates on
lower average cash and cash equivalent balances held during fiscal 1994 and
greater foreign exchange losses, offset in part by the absence of expenses of
the Compass acquisition which were incurred in fiscal 1993. There were net
foreign exchange losses of $0.4 million in fiscal 1994. There were net foreign
exchange gains of $0.2 million in fiscal 1993 and net losses of $0.2 million in
fiscal 1992. Other expenses in fiscal 1994 included one-time costs related to
the merger with VMX, as mentioned above. Other expenses in fiscal 1993
included one-time costs associated with the acquisition of one of the Company's
subsidiaries and costs of the Company's hedging program. Other expenses in
each fiscal year included fees paid to the Company's investment advisors. The
Company continues to utilize the hedging program it implemented to mitigate the
foreign exchange financial exposure of foreign currency transactions.
Income Taxes
The effective tax rate for fiscal 1994 was 22% compared to 28% in
fiscal 1993 and 27% in fiscal 1992. The lower effective tax rate in fiscal
1994 was attributable to a combination of factors. First, subsequent to the
merger of the Company and VMX, various tax assets of VMX that had been fully
reserved were recognized as a tax benefit. Additionally, the retroactive
reinstatement of the U.S. research and development credit for the fiscal year
ended June 30, 1993 had a favorable impact on the effective tax rate in fiscal
1994. The higher effective tax rate in fiscal 1993 compared to fiscal 1992 was
primarily attributable to the expiration of the U.S. research and development
tax credit as of June 30, 1992. The Company expects the effective tax rate to
be higher in fiscal 1995 than it was in fiscal 1994.
During the third quarter of fiscal 1993, but effective July 1, 1992,
the Company changed its method of accounting for income taxes to the liability
method required by Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Prior to this date the Company used the deferred
method of accounting for income taxes under APB No. 11. As permitted by SFAS
No. 109, no financial statements for periods prior to July 1, 1992 were
restated. Results for the first quarter of fiscal 1993 were previously
restated to include a charge of $115,000, representing the cumulative effect,
as of July 1, 1992, of this change in accounting for income taxes. Other
immaterial adjustments (netting to $115,000) were made to the tax provision in
the first quarter of fiscal 1993 to reflect the change to SFAS No. 109. No
adjustments to the second quarter results of fiscal 1993 were necessary. See
Note 13 to the Consolidated Financial Statements.
Dividends
The Company has not paid cash dividends on its common stock to date
and does not plan to pay cash dividends to its stockholders in the foreseeable
future. The Company presently intends to retain any earnings to finance its
business and to repurchase shares of its Common Stock. See "Liquidity and
Capital Resources."
QUARTERLY RESULTS
The following table presents unaudited quarterly operating results and
certain items as a percentage of net revenues for the Company's four quarters
in fiscal 1994. The Company believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the selected quarterly information.
This information should be read in conjunction with the consolidated financial
statements included elsewhere herein. The operating results for any quarter
are not necessarily indicative of results for any subsequent period.
25
<PAGE> 29
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-----------------------------------------------------------------------------
Sept. 30, 1993 Dec. 31, 1993 March 31, 1994 June 30, 1994
-------------- ------------- -------------- -------------
(In thousands, except per share data - unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Systems . . . . . . . . . . . . $ 66,302 72% $ 73,330 73% $ 68,256 70% $ 84,202 72%
Service and license . . . . . . 25,321 28 27,549 27 28,941 30 32,324 28
--------- -------- --------- --------
Total net revenues . . . . . 91,623 100 100,879 100 97,197 100 116,526 100
Costs and expenses:
Cost of systems . . . . . . . . 21,419 23 23,575 23 20,906 22 23,523 20
Cost of service and license . . 14,867 16 15,673 16 19,223 20 20,470 18
Research and development . . . . 13,737 15 13,951 14 13,975 14 16,662 14
Selling, general and
administrative . . . . . . . . 35,238 38 36,918 37 36,799 38 42,218 36
Integration costs . . . . . . . -- -- -- -- 18,258 19 -- --
-------- -------- --------- --------
Total costs and expenses . . 85,261 93 90,117 89 109,161 112 102,873 88
-------- -------- --------- --------
Operating income (expense) . . . . 6,362 7 10,762 11 (11,964) (12) 13,653 12
Interest and other income
(expense), net . . . . . . . . . 848 1 626 1 (3,011) (3) 67 --
-------- -------- --------- --------
Income (loss) before income taxes . 7,210 8 11,388 11 (14,975) (15) 13,720 12
Provision (benefit) for
income taxes . . . . . . . . . . 1,250 1 2,921 3 (3,371) (3) 3,000 3
-------- -------- --------- --------
Net income (loss) . . . . . . . . . 5,960 7% 8,467 8% (11,604) (12)% 10,720 9%
======== ======== ========= ========
Net income per common and
equivalent share . . . . . . . . $ .24 $ .34 $ (.49) $ .43
-------- -------- --------- --------
Number of shares used
in calculation . . . . . . . . . 24,542 24,947 23,509 24,792
======== ======== ========= ========
Percentage amounts may not total due to rounding.
</TABLE>
As a percentage of total net revenues, operating income decreased in
the first quarter compared to the prior quarter. This was the result of a
decrease in net revenues from the prior period due to a historically slow
summer domestically and slightly offset by an increase internationally, and the
protraction of the sales cycle as a result of sluggishness in the domestic
economy. Total cost of sales increased as a percentage of total net revenues
due to fluctuations in the customer and product mix of sales and lower system
sales volume. Operating income increased as a percentage of total net revenues
in the second quarter in fiscal 1994 due to an increase in revenues
quarter-over-quarter and a decrease in operating expenses as a percentage of
total net revenues. Cost of systems and service decreased from 40% of total
net revenues in the first quarter to 39% in the second quarter primarily due to
variations in product mix. As a percentage of total net revenues, operating
income decreased in the third quarter primarily due to lower revenue and to
integration charges associated with consolidating facilities and personnel
related to the VMX merger. Cost of systems and service increased from 39% of
total net revenues in the second quarter to 41% in the third quarter primarily
due to nonrecurring costs incurred to conform VMX's accounting practices to
Octel's and variations in product mix. In the fourth quarter operating income
increased significantly from the third quarter due to the absence of
integration charges in the fourth quarter as compared to the third quarter.
Operating income and cost of systems and service as a percentage of total net
revenues in the fourth quarter were relatively flat when compared to the second
quarter. Cost of systems as a percentage of systems revenue remained
relatively flat from the first quarter through the third quarter and decreased
in the fourth quarter due to an increase in unit volume with flat fixed
manufacturing costs and a favorable change in the mix of systems sold. Service
and license revenues as a percentage of total net revenues increased in the
third quarter due to slower growth in system sales in the third quarter. Cost
of service sales as a percentage of service and license revenues increased
significantly in the third quarter due to a strategic decision to increase the
size of the service organizations in order to initiate growth in service
revenue in future quarters. On a quarter-to-quarter basis, the customer and
product mix of sales can fluctuate significantly. Such fluctuations can have a
positive or negative impact on operating margins and are difficult to predict.
The Company believes that its backlog on a quarterly basis will not
generally be large enough to assure that its revenue targets for a particular
quarter will be met. Furthermore, a large percentage of any quarter's
shipments have
26
<PAGE> 30
historically been booked in the last month of the quarter. Consequently,
quarterly revenues and operating results will depend on the volume and timing
of new orders received during a quarter, which is difficult to forecast. This
is particularly true in the VIS market, where sales orders are generally
larger. The Company offers products with base system list prices from $5,000
to over $1,250,000 depending on customer configurations and requirements, and
generally has a higher gross margin on its fully configured products. The
Company provides discounts to distributors and generally has a higher gross
margin on direct sales. In addition, the Company's expanding service and
license revenues generally have lower gross margins. As a result, the
Company's revenues and gross margins will be affected by the product, service
and channel mix and timing of orders it receives. In addition, because the
Company recognizes revenues on sales to distributors and customers which have
previously installed the Company's product at the time of shipment and on
certain direct sales to end users at the time of installation, quarterly
revenues can also fluctuate depending on the customer installation schedules
for direct sales at the end of a quarter. Installation on direct sales
typically occurs within five weeks of shipment. The Company has not
experienced any significant returns by customers of any of its products.
Fourth quarter total net revenues are typically enhanced by sales
incentives to employees and promotion programs for customers; as a result,
first quarter sales are typically less than fourth quarter sales. The Company
anticipates that this trend will continue in the first quarter of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and equivalents and short-term investments
decreased to $86.4 million at June 30, 1994 from $100.4 million at June 30,
1993. Cash flows from operations resulted in net cash provided of $49.4
million in fiscal 1994 and $39.8 million in fiscal 1993. The primary uses of
cash during fiscal 1994 were investment in property and equipment of $58.6
million and the repurchase of Common Stock for approximately $5.8 million under
the Company's stock repurchase plan, both of which aim to increase return to
investors as compared to the return which would be made by investing the cash
and generating interest at the low rates available during fiscal 1994. In July
1994, the Company's Board of Directors approved the repurchase of up to an
additional 3.5 million shares of its Common Stock over a period of
approximately two years.
As of June 30, 1994, the Company had invested $41.0 million in the
purchase of land and the development of the Company's new corporate offices on
that land. The Company expects to spend approximately an additional $5.0
million during fiscal 1995 in connection with the final construction of the
Company's new corporate offices. The Company also expects to purchase
additional equipment and make certain leasehold improvements during fiscal
1995. The Company anticipates that its property and equipment investments will
eventually result in reduced operating expenses, greater efficiencies and
increased flexibility for the Company.
In connection with the VMX business combination, approximately $3.6
million of merger expenses were incurred and have been charged to interest and
other income (expense) during the third quarter of fiscal 1994. In addition,
the Company recorded integration costs of $18.3 million in connection with the
merger. The charges were recorded based on decisions made by management to
consolidate certain facilities and personnel. Lease termination fees and
moving costs associated with facilities consolidation comprise approximately
$7.0 million of total integration costs, while $5.3 million relates to employee
severance and relocation expenses. The Company estimates that approximately
240 employees will either relocate or terminate employment. Certain assets
were written down to their net realizable value due to impairment as a result
of the merger, which totaled approximately $4.5 million. The majority of the
remaining charges are associated with the consolidation of Octel's and VMX's
benefit and compensation plans and Director's and Officer's run-off liability
insurance. The integration charges are the primary reason for the decrease in
working capital from fiscal 1993 to fiscal 1994.
Of the $18.3 million of total integration charges recorded in the
third quarter of fiscal 1994, approximately $4.5 million related to noncash
writeoffs of recorded assets and $13.8 million related to expected cash
expenditures. As of June 30, 1994, there was a balance of $12.5 million of
expected future cash expenditures. The majority of this amount will be spent
in fiscal 1995. In addition to the integration costs recorded in the third
quarter of fiscal 1994, the Company may incur additional merger-related
integration costs, which will be charged to operations, over the next several
quarters. Such integration charges are expected to be cash expenditures
estimated at approximately $4.1 million
27
<PAGE> 31
for literature design for name change and other modifications to literature for
the merged Company, for consolidating processes and computer systems of the
merged Company and for personnel related expenses.
In August 1994, the Company purchased certain intellectual and
personal property from another company for $5.1 million. Of the total purchase
price, $4.7 million was allocated to in-process technology and $0.4 million was
allocated to property and equipment. The in-process technology will be
expensed as of the date acquired. In addition, the Company agreed to hire
certain employees of the seller.
The Company anticipates that cash flows from operations, existing cash
and equivalents and short-term investment balances, and its existing bank line
will be adequate to meet the Company's cash requirements through the end of
fiscal 1995.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations
could be affected by factors such as delays in shipments of the Company's new
products, market acceptance of new products and upgrades, growth in the
worldwide voice processing market, expansion of services by its VIS customers,
the outcome of litigation and changes in general economic conditions in any of
the countries in which the Company does business.
The Company believes that the successful introduction of new and
enhanced products and services will be essential for it to maintain its
competitive position. The integration of certain operations as a result of the
VMX merger continues to require the dedication of management resources which
may temporarily distract attention from the day-to-day business of the Company.
The Company intends to reduce expenses by consolidating operations, eliminating
duplicate facilities, employees, marketing programs and other expenses. There
can be no assurance that Octel will be able to reduce expenses in this fashion,
that there will not be high costs associated with such activities, that such
reductions will not result in a decrease in revenues or that there will not be
other material adverse effects of such activities. The Company cannot
determine the ultimate effect that new products and services and the continued
integration of Octel and VMX will have on revenues, earnings or stock price.
Due to the factors noted above and elsewhere in management's
discussion and analysis of financial condition and results of operations, the
Company's future earnings and Common Stock price may be subject to significant
volatility, particularly on a quarterly basis. Past financial performance
should not be considered a reliable indicator of future performance and
investors should not use historical trends to anticipate results or trends in
future periods. Any shortfall in revenue or earnings from the levels
anticipated by securities analysts could have an immediate and significant
effect on the trading price of the Company's Common Stock in any given period.
Additionally, the Company may not learn of such shortfalls until late in a
fiscal quarter, which could result in an even more immediate and adverse effect
on the trading price of the Company's Common Stock. Finally, the Company
participates in a highly dynamic industry which often results in volatility of
the Company's Common Stock price.
The Company has been and may in the future continue to be required to
litigate enforcement of its intellectual property or commercial rights or to
defend itself in litigation arising out of claims of third parties. Such
litigation, even if the Company is ultimately victorious, can be extremely
expensive and may have a material adverse effect on the Company's results of
operations in any particular period. For example, the Company has recently
paid as much as $1.0 million per quarter in legal fees and related expenses in
connection with the Theis litigation, and expects such fees and expenses to
exceed that figure in the first quarter of fiscal 1995 because trial has
commenced. Litigation may also occupy management resources that would
otherwise be available to address other aspects of the Company's business. See
"Patents, Copyrights, Trademarks and Technology Licenses" in Item 1 above.
28
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . 32
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 34
Financial Statement Schedules:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Schedule I - Marketable Securities and Investments . . . . . . . . . . . . . . . 53
Schedule II - Amounts Receivable From Related Parties, Underwriters,
Promoters and Employees other than Related Parties . . . . . . . . . 54
Schedule V - Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . 55
Schedule VI - Accumulated Depreciation and Amortization of Property, Plant and
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . 57
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included in the
Consolidated Financial Statements or notes thereto.
29
<PAGE> 33
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
June 30,
-----------------------------
1994 1993
<C> <S> ------------- --------------
Current assets: <C> <C>
Cash and equivalents $ 17,889 $ 26,576
Short-term investments 68,463 73,781
Accounts receivable, net of allowance for doubtful
accounts of $2,665 and $2,365 90,013 70,556
Accounts receivable from related parties 2,159 8,577
Inventories 28,920 28,399
Prepaid expenses and other 13,865 4,806
------------ -------------
Total current assets 221,309 212,695
Property, plant and equipment 95,076 53,933
Deposits and other assets 29,743 30,755
------------ -------------
Total $ 346,128 $ 297,383
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 16,250 $ 16,370
Accrued compensation and employee benefits 25,010 20,257
Income taxes payable 2,616 1,401
Accrued and other liabilities 44,660 27,689
------------ ------------
Total current liabilities 88,536 65,717
Long-term obligations 1,400 1,985
Commitments and contingencies (Notes 2, 9, 14 and 16) -- --
Stockholders' equity:
Preferred stock, $.001 par value--authorized 5,000,000 shares; none
outstanding -- --
Common stock, $.001 par value--authorized, 50,000,000 shares; outstanding:
1994, 24,170,344 shares, 1993, 23,257,563 shares 174,356 156,870
Notes receivable from sale of stock -- (56)
Deferred compensation -- (55)
Retained earnings 82,736 73,322
Unrealized loss on marketable securities (net of deferred taxes of $330) (540) --
Accumulated translation adjustments (360) (400)
------------ ------------
Total stockholders' equity 256,192 229,681
------------ ------------
Total $ 346,128 $ 297,383
============ ============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 34
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------
1994 1993 1992
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net revenues:
Systems $ 292,090 $ 254,860 $ 214,883
Service and license 114,135 83,618 47,849
----------- ----------- -----------
Total net revenues 406,225 338,478 262,732
Cost and expenses:
Cost of systems 89,423 74,856 57,132
Cost of service 70,233 52,524 35,621
Research and development 58,325 44,420 32,285
Selling, general and administrative 151,173 129,556 108,168
Integration costs 18,258 -- --
----------- ----------- -----------
Total costs and expenses 387,412 301,356 233,206
----------- ----------- -----------
Operating income 18,813 37,122 29,526
Interest and other income (expense), net (1,470) 4,294 6,596
----------- ----------- -----------
Income before income taxes and cumulative effect of
accounting change 17,343 41,416 36,122
Provision for income taxes 3,800 11,734 9,739
----------- ----------- -----------
Income before cumulative effect of accounting change 13,543 29,682 26,383
Cumulative effect of accounting change -- 115 --
----------- ----------- -----------
Net income $ 13,543 $ 29,567 $ 26,383
=========== =========== ===========
Income per common and equivalent share before
cumulative effect of accounting change 0.54 1.19 1.08
Cumulative effect of accounting change -- -- --
----------- ----------- -----------
Net income per common and equivalent share $ 0.54 $ 1.19 $ 1.08
=========== =========== ===========
Weighted average number of common shares and
equivalents used in computation 25,096 24,869 24,424
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION> Notes Unrealized
Common Stock Receivable Loss on Accumulated
-------------- From Sale Deferred Retained Marketable Translation
Shares Amount of Stock Compensation Earnings Securities Adjustment Total
------ ------ ---------- ------------ -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1991 as
previously reported 17,173,34 $ 94,724 $ (68) $ (489) $ 48,543 -- -- $ 142,718
---------- -------- --------- -------- ---------- ----- ----- ----------
Pooling of interests
adjustments 5,079,689 45,114 (196) -- (19,616) -- (117) 25,185
Balances as of June 30,
1991 as restated 22,253,032 139,838 (256) (489) 28,927 -- (117) 167,903
Sale of common stock under
Employee Stock Purchase
Plan 197,606 3,376 -- -- -- -- -- 3,376
Sale of common stock, net
of repurchases 432,811 3,976 -- -- (61) -- -- 3,915
Repurchases of common stock (110,000) (610) -- -- (2,018) -- -- (2,628)
Issuance of common stock 4,107 100 -- -- -- -- -- 100
Deferred compensation
amortization -- -- -- 218 -- -- -- 218
Payment on notes receivable -- -- 94 -- -- -- -- 94
Tax benefit of stock option
transactions -- 2,749 -- -- -- -- -- 2,749
Translation adjustments -- -- -- -- -- -- 276 276
Net income -- -- -- -- 26,383 -- -- 26,383
---------- -------- --------- -------- ---------- ----- ----- -----------
Balances, June 30, 1992 22,777,556 149,429 (162) (271) 53,231 -- 159 202,386
Pooling of interests
adjustments 456,320 353 -- -- 37 -- -- 390
Sale of common stock under
Employee Stock Purchase
Plan 251,645 4,037 -- -- -- -- -- 4,037
Sale of common stock, net
of stock surrendered 375,993 3,524 -- -- (35) -- -- 3,489
Proceeds from sale of put
warrants -- 977 -- -- -- -- -- 977
Repurchases of common stock (603,951) (3,625) -- -- (9,478) -- -- (13,103)
Deferred compensation
amortization -- -- -- 216 -- -- -- 216
Tax benefit of stock option
transactions -- 2,175 -- -- -- -- -- 2,175
Payment on notes receivable -- -- 106 -- -- -- -- 106
Translation adjustments -- -- -- -- -- -- (559) (559)
Net income -- -- -- -- 29,567 -- -- 29,567
---------- -------- --------- -------- ---------- ----- ----- -----------
Balances, June 30, 1993 23,257,563 156,870 (56) (55) 73,322 0 (400) 229,681
Sale of common stock under
Employee Stock Purchase
Plan 326,860 5,224 -- -- -- -- -- 5,224
Sale of common stock, net
of stock surrendered 817,921 11,256 -- -- (121) -- -- 11,135
Repurchases of common stock (232,000) (1,759) -- -- (4,008) -- -- (5,767)
Deferred compensation
amortization -- -- -- 55 -- -- -- 55
Tax benefit of stock option
transactions -- 2,765 -- -- -- -- -- 2,765
Payment on notes receivable -- -- 56 -- -- -- -- 56
Unrealized loss on
marketable securities -- -- -- -- -- (540) -- (540)
Translation adjustments -- -- -- -- -- -- 40 40
Net income -- -- -- -- 13,543 -- -- 13,543
---------- -------- --------- -------- ---------- ----- ----- ----------
Balances, June 30, 1994 24,170,344 $174,356 -- -- $ 82,736 $ (540) $ (360) $ 256,192
========== ======== ========= ========= ========== ======== ======= ==========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1994 1993 1992
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,543 $ 29,567 $ 26,383
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 34,219 22,287 15,206
Amortization of premium of marketable securities 294 -- --
Deferred income taxes (13,909) 1,948 (3,185)
Deferred compensation 55 216 218
Changes in assets and liabilities:
Accounts receivable (13,572) (20,891) (9,635)
Inventories (449) 1,438 (8,231)
Prepaid expenses and other (1,633) (239) (995)
Trade payables 46 (1,441) 3,513
Accrued compensation and employee benefits 4,860 3,507 3,848
Accrued and other liabilities 25,964 3,451 9,235
----------- ----------- -----------
Net cash provided by operating activities 49,418 39,843 36,357
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock under employee stock plans, net 16,480 7,543 7,352
Repurchases of common stock (5,767) (13,103) (2,628)
Proceeds from sale of financial instruments-put warrants -- 977 --
Issuance of common stock -- 18 100
Payment on notes receivable 56 106 --
Repayment of long-term obligations (605) (1,257) (46)
----------- ----------- -----------
Net cash provided (used) by financing activities 10,164 (5,716) 4,778
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (128,869) (256,016) (213,254)
Sales and maturities of short-term investments 133,115 250,965 210,699
Property and equipment additions, net (58,648) (30,775) (14,550)
Deposits and other assets (13,970) (15,576) (6,443)
Net cash received from (used in) business acquisitions -- (9,391) 1,098
----------- ----------- -----------
Net cash used for investing activities (68,372) (60,793) (22,450)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 103 214 354
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (8,687) (26,452) 19,039
----------- ----------- -----------
CASH AND EQUIVALENTS:
Beginning of year 26,576 53,028 33,989
----------- ----------- -----------
End of year $ 17,889 $ 26,576 $ 53,028
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The Company designs, manufactures and markets voice information
processing systems. The Company also provides voice processing and networking
services. The consolidated financial statements include the Company and its
wholly owned subsidiaries. Intercompany balances and transactions are
eliminated in consolidation. Reclassifications have been made to fiscal 1993
and fiscal 1992 consolidated financial statements to conform to the fiscal 1994
presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash equivalents
Cash equivalents consist of all highly liquid debt instruments
purchased with a maturity of three months or less.
Short-term investments
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). The Company adopted the
provisions of SFAS 115 for investments held as of June 30, 1994. Under the
provisions of SFAS 115, the Company has classified its investments in certain
debt securities as "available-for-sale." Such investments are recorded at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity. Interest income is recorded using an effective interest
rate, with the associated premium or discount amortized to "Interest and other
income (expense), net." The cost of securities sold is based upon the specific
identification method. In accordance with the provisions of SFAS 115, prior
period financial statements have not been restated to reflect the change in
accounting principle. The cumulative effect as of June 30, 1994 of adopting
SFAS 115 was to decrease the balance of stockholders' equity by $0.5 million to
reflect the net unrealized loss on investments classified as
"available-for-sale" and previously recorded at cost. See Note 3.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are
translated at the exchange rate on the balance sheet date. Revenues, costs and
expenses are translated at average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are accumulated as a
separate component of stockholders' equity. Realized and unrealized gains and
losses on foreign currency transactions and hedge contracts are included in
interest and other income (expense), net. At June 30, 1994, the Company had
approximately $17.9 million of forward hedge contracts outstanding ($4.0
million in 1993).
Financial Instruments and Risk Concentration
The forward hedge contracts discussed above require the Company to
exchange foreign currencies for U.S. dollars at rates agreed at the inception
of the contracts. Although the gross amounts are used to express the volume of
these transactions, the amounts potentially subject to credit risk are limited
to the difference between the counterparty's obligation and the obligation of
the Company. The contracts do not subject the Company to significant market
risk from exchange rate movements because the contracts offset foreign currency
balances and transactions being hedged. The Company maintains policies for
entering into foreign exchange contracts similar to those for its investments.
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash investments and accounts
receivable. The Company's cash investments are in U.S. government obligations
and municipal notes and bonds that have maturities ranging from 1994 through
2019. The Company believes no
34
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
significant concentration of credit risk exists with respect to these cash
investments. Balances due from international customers account for 35 percent
of the total accounts receivable (21 percent in 1993). Additionally,
distributors and VIS customers comprise 18 percent and 40 percent of total
accounts receivable, respectively (29 percent and 22 percent in 1993,
respectively). Generally, the Company requires no collateral from customers.
The Company believes that any credit risks are substantially mitigated by the
Company's credit evaluation process.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Development costs
Development costs incurred in the research and 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 would be
capitalized in accordance with Statement of Financial Accounting Standards No.
86. The Company has not capitalized any software development costs, as the
Company's current process for developing this software is essentially completed
concurrently with the establishment of technological feasibility. In
connection with the VMX merger, certain costs formerly capitalized by VMX were
written off to conform accounting practices.
In fiscal 1994, 1993 and 1992, the Company entered into contracts for
funded software development projects. These contracts are contractual services
as defined by Statement of Financial Accounting Standards No. 68. The Company
defers development costs and revenue for these projects and such deferred costs
are expensed to cost of sales when the related revenue is recognized.
Significant terms of these development contracts include specified completion
dates. The Company maintains all rights related to the funded projects. As of
June 30, 1994, all projects are expected to be completed substantially in
accordance with the related contract.
As of June 30, 1994, $2.9 million of costs related to these contracts
were deferred ($1.9 million in 1993 and $1.1 million in 1992) and $1.0 million
of prepayments were recorded as a liability ($0.1 million in 1993 and $1.2
million in 1992). In fiscal year 1994, $0.8 million was expensed to cost of
sales and $0.8 million recognized as revenue for contracts ($0.3 million was
expensed to cost of sales and recognized as revenue in 1993 and $0.2 million
was expensed to cost of sales and recognized as revenue in 1992).
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over estimated useful lives of two to
ten years. Leasehold improvements are amortized over the lives of the leases.
Intangible assets
Goodwill represents the excess of acquisition cost, including reserves
for certain acquisition related expenses, over the fair value of the net assets
acquired and is being amortized on a straight-line basis over ten years.
Goodwill of $1.7 million is included in the balance sheet caption "Deposits and
other assets."
The Company has acquired various technology licenses and other
agreements. The cost of the licenses and other agreements is amortized from
the date that the related product is commercially available over periods based
on anticipated future revenue streams from the related products not exceeding
36 months. As of June 30, 1994 and 1993, $3.3 million and $9.3 million,
respectively, were included in the balance sheet caption "Deposits and other
assets," for such assets.
35
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
Revenue is recognized upon shipment to distributors and upon
installation for end users. Revenue is also recognized upon shipment to end
users for orders from businesses which have previously installed the Company's
products, and upon shipment of upgrades and expansions to larger capacity
systems.
Revenues on service contracts are primarily recognized ratably over
the contract period.
Returns and allowances
The Company does not generally reserve for returns because,
historically, the Company has not experienced any significant returns of any of
its products by customers.
Warranty costs
The Company warrants its products for one year after delivery to the
purchaser or installation when the Company performs the installation.
Provision for estimated warranty costs is recorded at the time of sale.
Income taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. SFAS No. 109 requires a change from the deferred method of
accounting for income taxes to the asset and liability method of accounting for
income taxes. The Company adopted SFAS No. 109 effective July 1, 1992. The
effect of the adoption is discussed in Note 13.
Net income per common and equivalent share
Net income per common and equivalent share is computed based upon the
weighted average number of common and equivalent shares from stock options and
put warrants (using the treasury stock method) and shares issued under the
Employee Stock Purchase Plan.
3. INVESTMENTS
At the date of adoption of SFAS 115, June 30, 1994, all short-term
investments were considered available-for-sale securities and consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized Accrued Estimated
Cost Gains Losses Interest Fair Value
------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
U.S. Government securities 9,803 9 (455) (103) 9,256
$ $ $ $ $
Municipal notes/bonds 60,598 17 (441) (891) 59,281
----------- ------- ------- ------- -----------
$ 70,401 $ 26 $ (896) $ (994) $ 68,537
=========== ======= ======= ======= ===========
</TABLE>
At June 30, 1994, these securities were classified on the balance
sheet as follows (in thousands):
<TABLE>
<S> <C>
Cash equivalents $ 1,068
Short-term investments 68,463
-----------
$ 69,531
===========
</TABLE>
36
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost and estimated fair value of available-for-sale debt
securities as of June 30, 1994, by contractual maturity, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
----------- --------------
<S> <C> <C>
Due in one year or less $ 30,991 $ 30,525
Due in one to three years 24,087 23,436
Due thereafter 15,323 14,576
---------- ----------
$ 70,401 $ 68,537
========== ==========
</TABLE>
4. BUSINESS COMBINATIONS -- POOLING OF INTERESTS METHOD
VMX, Inc.
On March 31, 1994, Octel Acquisition Corporation, a wholly owned
subsidiary of Octel, was merged with and into VMX, Inc. (VMX), with VMX being
the surviving corporation and a wholly owned subsidiary of Octel. In the
transaction, approximately 5.4 million shares of Octel's common stock were
issued in exchange for all of the outstanding common stock of VMX. The merger
was accounted for as a pooling of interests, and accordingly, the accompanying
financial statements have been restated to include the accounts and operations
of VMX for all periods prior to the merger. Effective in the quarter ended
March 31, 1994, VMX recorded $2.2 million in charges to operations to conform
certain changes in estimates and accounting policies to those of Octel.
VMX provides integrated messaging and call processing systems,
software and services that combine voice, data and image for business
communications, internationally.
Separate results of the combining entities for the periods prior to
the merger were as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended Year ended
March 31, 1994 June 30, 1993 June 30, 1992
----------------------- -------------------- --------------------
<S> <C> <C> <C>
Net Revenues:
Octel $ 216,662 $ 249,549 $ 188,848
VMX 74,270 90,463 75,214
Less intercompany sales (1,233) (1,534) (1,330)
------------ ----------- -----------
$ 289,699 $ 338,478 $ 262,732
============ =========== ===========
Net Income:
Octel $ 16,724 $ 22,553 $ 21,356
VMX 4,844 7,036 5,051
Intercompany transactions 10 (22) (24)
Merger related costs and adjustments (18,755) -- --
(net of tax benefits)
------------ ----------- -----------
$ 2,823 $ 29,567 $ 26,383
============ =========== ===========
</TABLE>
In connection with the merger, approximately $3.6 million of merger
expenses were incurred and have been charged to interest and other income
(expense) during the third quarter of fiscal 1994. These nonrecurring expenses
include investment banking fees of $2.6 million, legal and accounting fees of
$0.6 million and other miscellaneous expenses of $0.4 million.
Also in connection with the merger, the Company recorded integration
costs in the third quarter of fiscal 1994 of $18.3 million related to costs
associated with consolidating facilities and personnel. Included in such
integration costs are building lease termination fees and moving costs in
connection with redundant facilities,
37
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employee severance, relocation expenses, and the write-off of leasehold
improvements and assets impaired as a direct result of the merger. The balance
in these reserves of $12.5 million is included in Accrued and other liabilities
on the balance sheet at June 30, 1994.
Rhetorex, Inc.
In March 1993, the Company issued the equivalent of 346,218 shares of
its Common Stock in exchange for all of the outstanding capital stock of
Rhetorex, Incorporated (Rhetorex), which has been accounted for as a pooling of
interests. In addition the Company assumed Rhetorex stock options which
represent options to purchase 3,779 shares of the Company's Common Stock
subsequent to the transaction. Rhetorex designs and manufactures high
performance voice processing components and software for personal computers.
The acquisition was accounted for under the pooling of interests method and,
accordingly, the Company's consolidated financial statements and financial data
have been restated to include the accounts and operations of Rhetorex for all
periods presented.
Compass Technology, Inc.
Effective August 12, 1992, the Company consummated a business
combination with Compass Technology, Inc. which has been accounted for as a
pooling of interests. Compass develops and markets voice processing
applications software for PC-based systems. To effect the combination,
approximately 460,000 shares of common stock were issued in exchange for
substantially all equity securities of Compass. The net assets of Compass
amounted to $0.5 million at June 30, 1992. The effect of this pooling was
immaterial to the operations of the Company and accordingly, prior years'
financial statements were not restated.
5. BUSINESS COMBINATION -- PURCHASE METHOD
On October 21, 1992, the Company acquired Tigon Corporation (now Octel
Network Services ("ONS")) from Ameritech. ONS is an independent provider of
voice processing and networking services primarily in the U.S. The purchase
price of $12 million was paid in cash. The acquisition was accounted for as a
purchase and the results of ONS' operations were combined with those of the
Company from the date of acquisition. Goodwill of $7.5 million, representing
the excess of acquisition cost, including reserves for certain acquisition
related expenses, over the $10.3 million estimated fair value of the net assets
acquired, was recorded at the date of acquisition, prior to the adoption of
SFAS No. 109. As discussed in Note 13 below, the assets and liabilities
assumed in the acquisition of ONS were remeasured in connection with the
adoption of SFAS No. 109 by the Company. The gross balance of goodwill at June
30, 1994 was $2.1 million, which reflects the change for the SFAS No. 109
remeasurement and the final purchase price allocation adjustment of $1.3
million made prior to the end of the one year anniversary date of the
acquisition. Amortization expense for fiscal 1994 and 1993 was $0.3 million
and $0.1 million respectively. Accumulated amortization at June 30, 1994 and
1993, was $0.4 million and $0.1 million, respectively.
6. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1994 1993
--------------- ---------------
- --
<S> <C> <C>
Finished goods $ 5,864 $ 6,407
Work-in-process 12,248 11,625
Raw materials 10,808 10,367
---------- ----------
Total inventories $ 28,920 $ 28,399
========== ==========
</TABLE>
38
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1994 1993
----------- --------------
<S> <C> <C>
Computers and electronic equipment $ 85,545 $ 60,192
Land and buildings 40,871 15,678
Other machinery and equipment 11,780 9,604
Furniture and fixtures 14,317 11,693
Leasehold improvements 6,867 5,554
----------- -----------
Total 159,380 102,721
Accumulated depreciation and amortization (64,304) (48,788)
----------- -----------
Property, plant and equipment, net $ 95,076 $ 53,933
=========== ===========
</TABLE>
8. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1994 1993
----------- --------------
<S> <C> <C>
Integration reserves $ 12,516 $ --
Unearned revenue and deposits 9,240 5,508
Amounts due to distributors 3,595 4,144
Warranty reserve 2,956 2,538
Reserves for acquisition related expenses 4,817 5,729
Other 11,536 9,770
----------- -----------
Accrued and other liabilities $ 44,660 $ 27,689
=========== ===========
</TABLE>
Other liabilities primarily consist of property and sales taxes,
deferred taxes, amounts due to direct customers and other liabilities.
9. LINE OF CREDIT
Effective June 1994, the Company obtained a $30 million bank revolving
line of credit which also allows the Company to obtain standby letters of
credit. Borrowings under the line are unsecured and bear interest at an
adjusted LIBOR rate plus one and one-quarter percent. Borrowings under the
line are subject to certain financial covenants and restrictions on
indebtedness, financial guarantees, business combinations and other related
items. The Company was in compliance with these covenants and had no
borrowings under this line as of June 30, 1994. The line expires in June 1996.
10. STOCKHOLDERS' EQUITY
In July 1990, the Company's Board of Directors approved a common
shares rights agreement and declared a dividend distribution, payable to
stockholders of record on August 15, 1990, of one Common Stock purchase right
for each outstanding share of its Common Stock. Initially, each right entitles
the stockholder to buy one newly issued share of the Company's Common Stock at
an exercise price of $80. The rights become exercisable (unless postponed by
action of the disinterested directors) on the earlier of: (1) ten days
following a public announcement that a person or group has acquired, or
obtained the right to acquire, beneficial ownership of 21% or more of the
outstanding Common Stock or (2) ten days following the commencement or
announcement of a tender offer or
39
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 21% or more of the Company's outstanding
Common Stock.
If the Company is acquired in a merger or other business combination
transaction without approval by the Company's Board of Directors, each right
not held by the acquiring person would entitle its holder to purchase $160
worth of the common stock of the acquiring company for $80. If any person or
group acquires 21% or more of the Company's Common Stock without approval by
the Company's Board of Directors, each right not held by the acquiring person
would entitle its holder to purchase $160 worth of the Company's Common Stock
for $80.
The rights are redeemable at the Company's option for $0.01 per right.
Additionally, the exercise price, number of rights and number of common shares
that may be acquired are subject to adjustment from time to time to prevent
dilution. The rights expire on July 31, 2000. At June 30, 1994 substantially
all shares of Common Stock are subject to this agreement.
Common Stock
During the second quarter of fiscal 1992, a stock repurchase plan was
approved by the Board of Directors whereby the Company may repurchase such
shares of its Common Stock on the open market as may reasonably be required for
exercises under the 1985 Incentive Stock Option Plan and issuances under the
1987 Employee Stock Purchase Plan. During fiscal 1994, fiscal 1993 and fiscal
1992, the Company repurchased 232,000 shares, 603,951 shares and 110,000
shares, respectively. Average prices paid during these periods (exclusive of
any put warrant proceeds) were $25 per share, $22 per share and $24 per share,
respectively. As of June 30, 1994, all of the repurchased shares have been
reissued under employee stock plans.
During fiscal 1993, in connection with its stock repurchase plan, the
Company sold put warrants in a series of private placements, with the intention
of reducing the cost of the stock repurchase plan. The put warrants entitle
the holder to sell one share of common stock to the Company for each warrant
held, at a specified price, if the holder exercises the warrant. The activity
for fiscal 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
Put Warrants Outstanding
--------------------------------------------------------------
Cumulative Number of Potential
Proceeds Received Warrants Obligation
-------------------- --------------- -----------------
<S> <C> <C> <C>
June 30, 1992 -- -- --
Sales $ 977,000 500,000 $ 11,043,000
Expirations -- (200,000) (3,750,000)
------------ ----------- ----------------
June 30, 1993 977,000 300,000 7,293,000
Exercises -- (200,000) (5,143,000)
Expirations -- (100,000) (2,150,000)
------------ ----------- ----------------
June 30, 1994 $ 977,000 -- --
============ =========== ================
</TABLE>
In July 1994, the Company's Board of Directors approved the repurchase
of up to an additional 3.5 million shares of its Common Stock over a period of
approximately two years. As of September 10, 1994, the Company repurchased
125,000 shares of its Common Stock at an average price of $21 (unaudited). In
connection with the repurchase program, in August 1994 the Company sold 683,000
put warrants for total proceeds of $1,143,000 (unaudited). If all of the put
warrants are exercised the obligation will be $16,253,000 (unaudited).
In November 1993, the Company increased the number of shares of Common
Stock reserved for issuance under its 1987 Employee Stock Purchase Plan from
1,000,000 to 1,250,000. Eligible employees may authorize payroll deductions of
up to 10% of their compensation to purchase shares at the lower of 85% of the
fair market
40
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value of the Common Stock as of the date of grant (first day of an offering
period, or for newly hired employees, the date their participation begins) or
the last day of the six-month offering period. In fiscal 1994, 327,000 shares
were purchased at an average price of $15.98 (252,000 in fiscal 1993 at an
average price of $16.04 and 198,000 in fiscal 1992 at an average price of
$17.08).
In November 1993, the Company increased the number of shares of Common
Stock reserved for issuance under its 1985 Incentive Stock Plan from 6,300,000
to 7,300,000, and increased the number again in March 1994 from 7,300,000 to
9,600,000. In addition, the Company has reserved 200,000 shares of Common
Stock for issuance under the Directors' Stock Option Plan. Under the plans,
stock options may be granted to employees, consultants and directors to
purchase Common Stock at not less than fair market value at the date of grant.
Options become exercisable as determined by the Board of Directors, generally
over five years. However, options granted after June 1, 1994 become
exercisable over four years. Options granted before November 1988 expire ten
years from date of grant, while those granted after that date expire five and
one-half years from date of grant, or within six months after becoming fully
exercisable, whichever is sooner. At June 30, 1994, a total of 5,840,239
shares were subject to outstanding options and 1,393,720 shares were available
for future grant under the plans.
In June 1994, the Board of Directors approved a repricing of stock
options for certain employees, excluding senior management and officers. The
employees have the option of either maintaining their existing options or
canceling any options with exercise prices greater than $17.25 and receiving
new options representing 90% of the options being cancelled. The new options'
vesting commencement date will be reset to June 22, 1994 and the new options
will vest at the rate of 25% each year over four years. The options expire in
five and one-half years. The vested options may only be exercised when the
fair market value of the Company's Common Stock equals or exceeds the original
option exercise price; however, after five years and three months from June 22,
1994, the options may be exercised regardless of the fair market value of the
Company's Common Stock for up to three months. Options for up to 1,574,717
shares were qualified for the repricing. Under this repricing, options for
approximately 1,348,000 shares were cancelled and options for approximately
1,209,000 shares were granted. Activity under the repricing is not reflected
in the table below.
In October 1990, the Board of Directors authorized a restricted stock
purchase of 60,000 shares for $.001 per share by an individual who was an
officer of the Company. Deferred compensation, representing the difference
between $.001 per share and the fair market value of the shares at the date of
issuance, was amortized over the three-year vesting period. In fiscal 1994,
1993 and 1992, $55,000, $216,000, and $218,000 of deferred compensation was
amortized, respectively.
In conjunction with the VMX merger, the Company assumed two VMX stock
option plans: the 1989 VMX, Inc. Incentive Stock Option Plan and the OPCOM
1982 Incentive Stock Option Plan. Information with respect to these two plans
has been included in the stock option table below. VMX's Nonstatutory Stock
Option Plan was terminated upon consummation of the merger.
41
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information regarding outstanding stock options is as follows:
<TABLE>
<CAPTION>
Shares Price Per Share Total
---------- ---------------- -------------
<S> <C> <C> <C>
Outstanding at June 30, 1991 3,492,222 $.05 - 28.15 $ 35,290,579
Granted 1,116,173 .75 - 36.25 22,365,414
Cancelled (169,460) .75 - 36.26 (1,857,796)
Exercised (443,127) .75 - 24.25 (4,047,162)
--------- ------------ -------------
Outstanding at June 30, 1992 3,995,808 $.05 - 36.25 51,751,035
Granted 2,022,418 11.25 - 27.25 43,628,690
Cancelled (314,800) .75 - 36.25 (4,964,760)
Exercised (377,163) .50 - 22.88 (3,577,452)
---------- ------------ -------------
Outstanding at June 30, 1993 5,326,263 $.05 - 36.25 86,837,513
Granted 3,535,440 17.20 - 50.00 93,087,356
Cancelled (897,690) 2.50 - 36.25 (20,987,482)
Exercised (825,595) .05 - 25.00 (11,386,983)
---------- ------------ -------------
Outstanding at June 30, 1994 7,138,418 $.05 - 50.00 $147,550,404
========== ============ ============
</TABLE>
At June 30, 1994, options to purchase 1,484,001 shares were exercisable. At
June 30, 1994, all repurchase rights under the restricted stock purchase
agreements entered into with employees had expired.
At June 30, 1994, the Company has reserved shares of Common Stock for issuance
as follows:
<TABLE>
<S> <C>
Issuance under Incentive Stock Plan and Directors' Stock Option Plan 8,356,169
Issuance under Employee Stock Purchase Plan 867
---------
8,357,036
=========
</TABLE>
11. RELATED PARTY TRANSACTIONS
During fiscal 1994, 1993 and 1992 the Company had sales of
approximately $28.4 million, $23.6 million and $21.7 million, respectively, to
companies in which certain members of the Company's Board of Directors are also
officers and to a company that owned approximately 6.5 percent of the Company's
Common Stock at June 30, 1994. Amounts due from these companies at June 30,
1994 and 1993 were $2.2 million and $8.6 million, respectively.
12. INTEREST AND OTHER INCOME (EXPENSE)
Interest and other income (expense) consist of (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- --------
<S> <C> <C> <C>
Interest and investment income $ 3,216 $ 3,915 $ 6,329
Gain (loss) on sale of short-term investments, net (11) 1,276 947
Interest expense (267) (56) (205)
Foreign exchange gains (losses), net (370) 210 (243)
Merger expenses (3,592) (439) --
Other expense, net (446) (612) (232)
-------- -------- --------
Total interest and other income (expense) $ (1,470) $ 4,294 $ 6,596
========= ======== ========
</TABLE>
42
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash payments for interest were $0.3 million, $0.1 million and $0.2
million, in fiscal 1994, 1993 and 1992, respectively.
13. INCOME TAXES
Effective July 1, 1992, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." Under SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Prior to the adoption of SFAS No. 109, income tax expense was
determined using the deferred method under APB No. 11. Deferred tax expense
was based on items of income and expense that were reported in different years
in the financial statements and tax returns, and were measured at the tax rate
in effect in the year the difference originated.
As permitted by SFAS No. 109, the Company elected to record the
cumulative effect of adopting this pronouncement as a change in accounting
principle as of July 1, 1992, the result of which was a reduction in fiscal
1993 net income of $0.1 million. This charge represents the writedown of net
deferred tax assets and liabilities from the tax rates in effect when they
arose to current statutory tax rates.
In accordance with the provisions of SFAS No. 109, the assets acquired
and liabilities assumed in the purchase of ONS in October 1992 were remeasured.
The result of applying SFAS No. 109 to the purchase of ONS was to recognize
deferred tax assets and deferred tax liabilities for the future tax
consequences of the deductible and taxable temporary differences between the
assigned fair values of the assets and liabilities and the tax bases. In
addition, a deferred tax asset has been recognized for the tax benefit of ONS'
net operating loss carryforwards existing at the date of acquisition. A
valuation allowance was recognized to reduce the deferred tax asset to the
amount more likely than not to be realized. Goodwill, originally recorded, was
reduced by $6.8 million to the difference between the purchase price and the
values assigned to identifiable assets and liabilities, including deferred tax
assets (net of valuation allowance) and deferred tax liabilities. In fiscal
1994, the final purchase price allocation adjustment was made (see Note 5)
which had the effect of increasing deferred tax assets by approximately $0.9
million.
As of June 30, 1994, the Company had net operating loss carryforwards
of $11.8 million, resulting from the acquisition of ONS, that expire beginning
in fiscal 1997 and ending in fiscal 2001. As mentioned above, a valuation
allowance of $3.6 million has been recognized to offset the deferred tax assets
related to those carryforwards by the tax effect of the amount of the net
operating loss carryforwards which are not likely to be utilized. If realized,
the tax benefit for those reserved items will be applied first to reduce the
remaining goodwill associated with the acquisition.
43
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The major components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------
1994 1993
---------- ---------
<S> <C> <C>
Deferred Tax Assets:
Reserves and accrued liabilities $ 12,583 $ 6,643
Net operating loss carryforwards acquired in purchase
business combination 4,966 5,443
Accumulated depreciation 4,522 3,772
Accrued vacation 1,375 590
Accounts receivable allowance 1,012 812
Accrued commissions and compensation 492 153
Tax credit carryforwards 1,634 2,043
Inventory capitalization 577 418
Profit in inventory -- 241
Spare parts inventory -- 311
Other 724 262
---------- ----------
Total gross deferred tax assets 27,885 20,688
Valuation allowance (3,637) (6,947)
---------- ----------
Deferred tax assets 24,248 13,741
---------- ----------
Deferred Tax Liabilities:
Deferred revenue (3,524) (5,685)
Profit in inventory (715) --
Amortization of spare parts inventory (2,781) (158)
State taxes (523) (246)
Amortization of purchased software (752) (562)
Other (398) (444)
---------- ----------
Total gross deferred tax (8,693) (7,095)
---------- ----------
Net deferred tax asset $ 15,555 $ 6,646
========== =========
</TABLE>
At June 30, 1994, a net current deferred tax asset of $7.5 million and
a net long-term deferred tax asset of $8.1 million have been included in the
balance sheet captions "Prepaid Expenses and other" and "Deposits and other
assets," respectively. At June 30, 1993, a net current deferred tax liability
of $1.0 million and a net long-term deferred tax asset of $7.6 million have
been included in the balance sheet captions "Accrued and other liabilities" and
"Deposits and other assets," respectively.
Income before income taxes and cumulative effect of accounting change
includes the following components:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Income before income taxes and cumulative effect
of accounting change:
Domestic $ 14,375 $ 39,684 $ 34,107
Foreign 2,968 1,732 2,015
---------- ---------- ----------
Total $ 17,343 $ 41,416 $ 36,122
========== ========== ==========
</TABLE>
44
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes, attributable to income before income
taxes and cumulative effect of accounting change, consists of:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Income tax provision (benefit)
Current:
Federal $ 8,123 $ 6,210 $ 9,657
State 3,313 2,148 2,956
Foreign 1,454 1,274 692
--------- ---------- ---------
Total current 12,890 9,632 13,305
--------- ---------- ---------
Deferred:
Federal (7,980) 1,773 (3,059)
State (1,110) 329 (507)
--------- ---------- ---------
Total deferred (9,090) 2,102 (3,566)
--------- ---------- ---------
Provision for income taxes $ 3,800 $ 11,734 $ 9,739
========= ========== =========
</TABLE>
The reconciliation of the statutory federal income tax rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rates 35.0% 34.0% 34.0%
State income and franchise taxes net of federal income tax effect 8.2 4.6 5.1
Research tax credits (8.3) -- (2.8)
Tax exempt income (4.1) (1.0) (1.6)
Foreign Sales Corporation (4.7) (2.8) (2.4)
Net operating loss carryforwards (6.0) (5.7) (4.7)
Other 1.8 (0.8) (0.6)
------ ------ -------
Total effective rate 21.9% 28.3% 27.0%
====== ===== ======
</TABLE>
Cash payments for income taxes were $5.8 million, $13.1 million and
$6.7 million in fiscal 1994, 1993 and 1992, respectively.
14. LEASES
Manufacturing and administrative facilities are leased under operating
leases through 2000 with certain renewal options. At June 30, 1994, future
minimum annual payments under operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1995 $ 9,923
1996 6,611
1997 4,965
1998 4,074
1999 2,574
Thereafter 942
----------
Total minimum lease payments $ 29,089
==========
</TABLE>
Rent expense was $12.3 million, $11.2 million and $9.6 million in
fiscal 1994, 1993 and 1992, respectively.
45
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capital leases included in property and equipment and long-term
obligations in the consolidated balance sheet are not material. Future
obligations under those leases total $1.3 million.
15. EXPORT SALES
Export revenues to nonaffiliated customers primarily in Canada and
Europe, and to a lesser extent in Japan, South America, Australia, New Zealand
and China, aggregated $97.4 million in fiscal 1994. Export revenues were $80.7
million and $58.7 million in fiscal 1993 and 1992, respectively.
16. LITIGATION
In April 1992, the Company filed suit, in California, against Theis
Research, Inc. ("Theis") for declaratory judgment that the Company's products
do not infringe three patents of Theis and that those patents are invalid. In
November 1992, Theis filed a counterclaim against the Company alleging
infringement of seven of Theis' patents. Subsequently, Theis dismissed with
prejudice the claims as to all but four of the patents. In May 1993, two other
manufacturers of voice mail equipment, Boston Technology and Northern Telecom,
filed suit in California for declaratory judgment that their products do not
infringe the same Theis patents at issue in the Company suit. In June 1993,
the California court consolidated the action filed by these two other
manufacturers with the Company suit and Theis filed a counterclaim for
infringement against, among others, one of the Company's telephone company
customers, Pacific Telesis. This customer tendered defense of this action to
various of its vendors, including the Company. As a result of these actions,
the California case involved counterclaims by Theis against the Company, Boston
Technology, Northern Telecom, AT&T, Digital Sound and possibly other vendors of
voice mail products and Pacific Telesis, a customer of the Company, and most of
the other manufacturers of voice mail products. In August 1993, the court
severed trial of the counterclaims against all defendants except the Company,
Northern Telecom and Boston Technology. In December 1993, the court granted
the Company's motion for summary judgment of noninfringement of one of the four
remaining patents asserted against the Company. Theis subsequently dismissed
its counterclaim against Boston Technology in exchange for a license of its
patents. The Company and Northern Telecom tried the equitable issues of laches
and inequitable conduct to the court in February 1994. The court has not yet
ruled on the laches issue. In August 1994, the court issued a tentative ruling
that the Company and Northern Telecom had not established inequitable conduct
by clear and convincing evidence. The court has scheduled further briefing and
argument on this issue. Trial of the remaining issues, including infringement
of the three remaining patents asserted against the Company and the defense of
patent invalidity, commenced on August 22, 1994.
In January 1994, Gilbarco, Inc. ("Gilbarco") filed suit in the U.S.
District Court for the District of Colorado against the Company and one of the
Company's telephone company customers, U.S. West, alleging infringement of a
Gilbarco patent and seeking unspecified damages. The Company filed an answer
to the complaint denying any infringement of the patent and raising several
affirmative defenses, including an assertion that the patent is invalid and
unenforceable.
The Company believes, based upon information currently available,
including consultations with patent counsel, that the Company is not infringing
any valid patents of Theis or Gilbarco. The Company will vigorously defend the
patent infringement claims and any related claims for compensatory damages.
The Company estimates that legal expenses related to ongoing patent litigation
were approximately $2.0 million in fiscal 1994. While litigation is inherently
uncertain, the Company believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial position.
46
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY RESULTS (unaudited)
The following table presents unaudited quarterly operating results for
each of the Company's eight fiscal quarters in the period ended June 30, 1994.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal 1994
Net revenues $ 91,623 $ 100,879 $ 97,197 $ 116,526
Gross profit 55,337 61,631 57,068 72,533
Net income (loss) 5,960 8,467 (11,604)(1) 10,720
Net income (loss) per common and
equivalent share $ .24 $ .34 $ (.49)(1) $ .43
Fiscal 1993
Net revenues 69,116 82,965 85,383 101,014
Gross profit 44,218 51,595 52,380 62,905
Net income 4,324 7,558 7,383 10,302
Net income per common and
equivalent share $ .18 $ .31 $ .29 $ .42
</TABLE>
(1) Includes total nonrecurring charges for the VMX merger and integration
costs of $24.1 million ($18.8 million net of taxes). Excluding these
charges, net income and net income per common and equivalent share
would have been $7.2 million and $.28, respectively.
47
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Octel Communications Corporation
We have audited the accompanying consolidated balance sheets of Octel
Communications Corporation and subsidiaries as of June 30, 1994 and 1993, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1994. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying
Index at Item 8. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Octel Communications
Corporation and its subsidiaries as of June 30, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Palo Alto, California
July 27, 1994
48
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors of the Company required by this
Item is incorporated by reference to the Proxy Statement for the Company's
Annual Meeting of Stockholders, tentatively scheduled to be held on November
17, 1994, under the heading "Election of Directors--Nominees."
The information regarding executive officers required by this Item is
incorporated by reference to the section in Part I hereof entitled "Executive
Officers of Octel Communications Corporation."
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,
tentatively scheduled to be held on November 17, 1994, under the heading
"Executive 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,
tentatively scheduled to be held on November 17, 1994, 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,
tentatively scheduled to be held on November 17, 1994, under the heading
"Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
See Index to Consolidated Financial Statements at Item 8 on page 29 of
this report.
49
<PAGE> 53
2. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -------------
<S> <C>
3.0 Certificate of Incorporation of the Company. (1)
3.1 Bylaws of the Company. (1)
10.0* 1985 Incentive Stock Plan, as amended, and forms of Incentive Stock Option Agreement thereunder.
10.1* 1987 Employee Stock Purchase Plan and form of Subscription Agreement. (7)
10.2* 1988 Directors' Stock Option Plan and form of Stock Option Agreement. (7)
10.3* Fiscal Year 1994 Executive Bonus Plan.
10.10 Interface License Agreement (IMS-Link Interface) dated December 2, 1983 between Northern Telecom
Inc. and the Company. (2)
10.10A Interface License Agreement (Digital Set Interface) dated March 16, 1990 between Northern Telecom
Inc. and the Company. (6)
10.10B License Agreement dated February 1, 1989 between Mitel Corporation and the Company. (6)
10.10C License Agreement dated August 1, 1990 between ROLM Systems and the Company. (6)
10.11 Form of Indemnification Agreement as entered into by the Company with its directors and officers.
(5)
10.12 Amended and Restated Registration Rights Agreement dated March 12, 1987 between the Company and the
holders of Series A, Series B, Series C and Series D Preferred Stock, as amended by the form of
Amendment of Registration Rights Agreement with respect to Initial Public Offering. (2)
10.13 Common Stock Purchase Agreement between the Company and Hewlett-Packard Company dated as of
August 10, 1988 (including a Registration Rights Agreement between the parties attached thereto as
Exhibit A). (3)
10.14 Amendment to Common Stock Purchase Agreement dated as of October 1, 1990 between the Company and
Hewlett-Packard Company. (5)
10.15 Credit Agreement dated June 30, 1994 between The First National Bank of Boston, Bank of America
National Trust and Savings Association and the Company.
10.16 Common Shares Rights Agreement dated as of July 25, 1990 between the Company and Bank of America NT
& SA. (5)
10.17* Executive Officer Employment Letter -- David J. Ladd. (8)
11.0 Statement re computation of 1994 per share earnings.
21.0 Subsidiaries of the Company.
23.0 Consent of Independent Auditors (KPMG Peat Marwick LLP).
24.0 Power of Attorney (see page 52).
27.0 Financial Data Schedule (EDGAR version only).
</TABLE>
* Designates management contracts or compensatory plans, contracts or
arrangements required to be filed as exhibits pursuant to Item 14(c) of
Form 10-K.
(1) Incorporated by reference to the exhibit filed with the Company's Form
8-B filed with the Securities and Exchange Commission on February 12,
1990.
(2) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (No. 33-19777), as amended, which
became effective February 26, 1988.
(3) Incorporated by reference to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1988.
(4) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on August 1, 1990.
50
<PAGE> 54
(5) Incorporated by reference to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1990.
(6) Incorporated by reference to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1991.
(7) Incorporated by referenced to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1992.
(8) Incorporated by reference to the exhibit filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on April 13, 1994 to
report the merger of Octel Acquisition Corporation, a Delaware corporation and
wholly owned subsidiary of the Company, with and into VMX, Inc., a Delaware
corporation. VMX, Inc., as the surviving corporation, became a wholly owned
subsidiary of the Company.
The following financial statements of VMX, Inc. were filed with this
Report on Form 8-K:
(i) Audited consolidated balance sheets as of June 30, 1993 and 1992,
and the audited consolidated statements of operations, stockholders'
equity and cash flows for the fiscal years ended June 30, 1993, 1992
and 1991 (incorporated by reference to VMX's June 30, 1993 annual
report on Form 10-K);
(ii) Unaudited consolidated balance sheets as of December 31, 1993 and
1992 and the unaudited statements of operations, stockholders'
equity and cash flows for the three and six (6) month periods ended
December 31, 1993 and 1992 (incorporated by reference to VMX's
December 31, 1993 quarterly report on Form 10-Q).
(C) EXHIBITS
See Item 14(a) above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a) above.
51
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
OCTEL COMMUNICATIONS CORPORATION
Dated: September 27, 1994 By: /s/ GARY A. WETSEL
Gary A. Wetsel,
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert Cohn and Derek S. Daley, 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 and Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ------ ------
<S> <C> <C>
/s/ ROBERT COHN Chairman of the Board, President and Chief September 27, 1994
------------------------------------- Executive Officer (Principal Executive
(Robert Cohn) Officer)
/s/ GARY A. WETSEL Executive Vice President and Chief September 27, 1994
------------------------------------- Financial Officer
(Gary A. Wetsel (Principal Financial Officer)
/s/ HERZEL ASHKENAZI Controller September 27, 1994
------------------------------------- (Principal Accounting Officer)
(Herzel Ashkenazi
/s/ ANSON M. BEARD, JR. Director September 27, 1994
-------------------------------------
(Anson M. Beard, Jr.)
Director
-------------------------------------
(Leo J. Chamberlain)
/s/ DEBORAH A. COLEMAN Director September 27, 1994
-------------------------------------
(Deborah A. Coleman)
/s/ JOHN FREIDENRICH Director September 27, 1994
-------------------------------------
(John Freidenrich)
/s/ ROBERT C. HAWK Director September 27, 1994
-------------------------------------
(Robert C. Hawk)
/s/ NATHANIEL de ROTHSCHILD Director September 27, 1994
-------------------------------------
(Nathaniel de Rothschild)
/s/ DAG TELLEFSEN Director September 27, 1994
-------------------------------------
(Dag Tellefsen)
</TABLE>
52
<PAGE> 56
OCTEL COMMUNICATIONS CORPORATION
SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS
<TABLE>
<CAPTION>
Amount at Which
Each Portfolio of
Number of Equity Security
Shares or Units- Market Value Issues and each
Principal of Each Other Security
Name of Issuer and Amount of Bonds Cost of Issue at Issue Carried at
Title of Each Issue and Notes Each Issue June 30, 1994 June 30, 1994(1)
------------------------ ----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1994:
U.S. Treasury Bills/Notes (2) $ 9,535,000 $ 9,728,000 $ 9,222,000 $ 9,322,000
=============== --------------- --------------- ---------------
Municipal Notes/Bonds(3) 57,710,000 58,909,000 58,252,000 59,141,000
=============== --------------- --------------- ---------------
Total at June 30, 1994 $ 68,637,000 $ 67,474,000 $ 68,463,000
=============== =============== ===============
</TABLE>
(1) Includes accrued income.
(2) Includes six different issues.
(3) Includes 33 different issues, each less than 2% of total assets.
53
<PAGE> 57
OCTEL COMMUNICATIONS CORPORATION
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED
PARTIES, UNDERWRITERS, PROMOTERS, AND EMPLOYEES
OTHER THAN RELATED PARTIES
<TABLE>
<CAPTION>
Balance at
Beginning Balance at End
Name of Period Additions Collections of Period
----------- ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Year Ended June 30, 1992:
Stephen Ciesinski (1) $ 400,000 $ -- $ -- $ 400,000
Douglas Chance (2) 400,000 -- -- 400,000
----------- ----------- ----------- -----------
Total for Year Ended
June 30, 1992 $ 800,000 $ -- $ -- $ 800,000
=========== =========== =========== ===========
Year Ended June 30, 1993:
Stephen Ciesinski (1) $ 400,000 $ -- $ 400,000 $ --
Douglas Chance (2) 400,000 -- 67,000 333,000
----------- ----------- ----------- -----------
Total for Year Ended
June 30, 1993 $ 800,000 $ -- $ 467,000 $ 333,000
=========== =========== =========== ===========
Year Ended June 30, 1994:
Douglas Chance (2) $ 333,000 $ -- $ 333,000 $ --
David Ladd (3) -- 100,000 -- 100,000
Dennis McGinn (4) -- 400,000 400,000 --
----------- ----------- ----------- -----------
Total for Year Ended
June 30, 1994 $ 333,000 $ 500,000 $ 733,000 $ 100,000
=========== =========== =========== ===========
</TABLE>
(1) Consisted of two notes receivable. The first note for $40,000 was
unsecured and was due in fiscal 1993. The note bore interest at the lower
of the applicable federal rate (AFR) or California maximum rate. The note
was forgivable in fiscal 1993. The second note for $360,000 was secured
by a deed of trust, and was due in fiscal 1996. The note was forgivable
over four years beginning in fiscal 1993. Interest on both notes is
forgivable annually. Forgiveness of principal and interest for both notes
was based upon the borrower meeting certain conditions of employment.
During fiscal 1993, $100,000 of the principal of the notes was forgiven
per the terms of the notes. Mr. Ciesinski left the Company prior to the
end of fiscal 1993, at which time $300,000 in cash was collected for the
balance.
(2) Consisted of a note fully secured by a deed of trust. The note bore
interest at a rate of 8.78% and was forgivable over four years beginning
in fiscal 1993. Interest was forgivable annually. Forgiveness of
principal and interest for the note was based upon the borrower meeting
certain conditions of employment. During fiscal 1994, $33,000 of the
principal of the notes was forgiven per the terms of the note. Mr. Chance
left the Company prior to the end of fiscal 1994, at which time $300,000
of the principal of the note was forgiven.
(3) Consists of a note secured by 8,000 shares of Octel Common Stock. The
note bears interest at the prime rate plus 1 percent. Interest is payable
quarterly, with the principal due November 15, 1998. Should Mr. Ladd
leave the Company for any reason, all accrued interest and principal may
be declared immediately due.
(4) Consisted of a note fully secured by a deed of trust. The note bore
interest at the rate of 5.8 percent and was forgivable over four years
beginning in fiscal 1996. The Company agreed to grant an annual bonus
equal to the amount of interest payable under the note. Forgiveness of
principal and interest for the note was based upon the borrower meeting
certain conditions of employment. Mr. McGinn left the Company prior to
the end of fiscal 1994, at which time $400,000 of the principal of the
note was forgiven.
54
<PAGE> 58
OCTEL COMMUNICATIONS CORPORATION
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions at End
Classification of Period at Cost Retirements of Period
--------------------------------------- ----------------- ----------------- ----------------- ----------------
In Thousands
<S> <C> <C> <C> <C>
Year ended June 30, 1992
Computers and electronic equipment $ 25,759 $ 11,478 $ 312 $ 36,925
Land and buildings -- -- -- --
Other machinery and equipment 11,609 1,538 339 12,808
Furniture and fixtures 9,462 992 76 10,378
Leasehold improvements 4,651 839 -- 5,490
----------- ---------- --------- -----------
$ 51,481 $ 14,847 $ 727 $ 65,601
=========== ========== ========= ===========
Year ended June 30, 1993
Computers and electronic equipment $ 36,925 $ 24,670 $ 1,403 $ 60,192
Land and buildings -- 15,678 -- 15,678
Other machinery and equipment 12,808 1,093 4,297 9,604
Furniture and fixtures 10,378 1,435 120 11,693
Leasehold improvements 5,490 127 63 5,554
----------- ---------- --------- -----------
$ 65,601 $ 43,003 $ 5,883 $ 102,721
=========== ========== ========= ===========
Year ended June 30, 1994
Computers and electronic equipment $ 60,192 $ 28,211 $ 2,858 $ 85,545
Land and buildings 15,678 25,193 -- 40,871
Other machinery and equipment 9,604 2,940 764 11,780
Furniture and fixtures 11,693 3,214 590 14,317
Leasehold improvements 5,554 1,666 353 6,867
----------- ---------- --------- -----------
$ 102,721 $ 61,224 $ 4,565 $ 159,380
=========== ========== ========= ===========
</TABLE>
55
<PAGE> 59
OCTEL COMMUNICATIONS CORPORATION
SCHEDULE VI - ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Cost and at End
Classification of Period Expense Retirements of Period
------------------------------------------------ -------------- -------------- -------------- --------------
In Thousands
<S> <C> <C> <C> <C>
Year ended June 30, 1992
Computers and electronic equipment $ 14,797 $ 6,710 $ 235 $ 21,272
Land and buildings -- -- -- --
Other machinery and equipment 8,734 1,522 299 9,957
Furniture and fixtures 3,854 1,878 24 5,708
Leasehold improvements 1,994 975 -- 2,969
---------- ---------- ---------- ----------
$ 29,379 $ 11,085 $ 558 $ 39,906
========== ========== ========== ==========
Year ended June 30, 1993
Computers and electronic equipment $ 21,272 $ 9,881 $ 1,031 $ 30,122
Land and buildings -- -- -- --
Other machinery and equipment 9,957 1,291 4,278 6,970
Furniture and fixtures 5,708 2,145 161 7,692
Leasehold improvements 2,969 1,048 13 4,004
---------- ---------- ---------- ----------
$ 39,906 $ 14,365 $ 5,483 $ 48,788
========== ========== ========== ==========
Year ended June 30, 1994
Computers and electronic equipment $ 30,122 $ 13,120 $ 1,402 $ 41,840
Land and buildings -- -- -- --
Other machinery and equipment 6,970 1,690 780 7,880
Furniture and fixtures 7,692 1,947 201 9,438
Leasehold improvements 4,004 1,279 137 5,146
---------- ---------- ---------- ----------
$ 48,788 $ 18,036 $ 2,520 $ 64,304
========== ========== ========== ==========
</TABLE>
56
<PAGE> 60
OCTEL COMMUNICATIONS CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance
Beginning Charged to at End
Description of Period Expenses Deductions of Period
-------------------------- -------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Year ended June 30, 1992:
Allowance for doubtful accounts $ 2,079,000 $ 1,213,000 $ 615,000 $ 2,677,000
Warranty 1,882,000 3,434,000 2,940,000 2,376,000
Year ended June 30, 1993:
Allowance for doubtful accounts $ 2,677,000 $ 515,000 $ 827,000 $ 2,365,000
Warranty 2,376,000 4,119,000 3,957,000 2,538,000
Year ended June 30, 1994:
Allowance for doubtful accounts $ 2,365,000 $ 607,000 $ 307,000 $ 2,665,000
Warranty 2,538,000 3,393,000 2,975,000 2,956,000
</TABLE>
57
<PAGE> 61
Exhibit 23.0
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Octel Communications Corporation
We consent to incorporation by reference in the registration statements
Nos. 33-22121, 33-33568 and 33-38888 on Form S-3 and Nos. 33-26343, 33-49046
and 33-56510 on Form S-8 of Octel Communications Corporation and subsidiaries
of our report dated July 27, 1994, relating to the consolidated balance sheets
of Octel Communications Corporation and subsidiaries as of June 30, 1994 and
1993, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1994,
and all related schedules, which report appears in the Octel Communications
Corporation Annual Report on Form 10-K for fiscal year 1994.
KPMG PEAT MARWICK LLP
Palo Alto, California
September 26, 1994
<PAGE> 62
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Nummber Description Page
----------- ----------------------------------------------------------------------------------------- ------
<S> <C> <C>
3.0 Certificate of Incorporation of the Company. (1)
3.1 Bylaws of the Company. (1)
10.0* 1985 Incentive Stock Plan, as amended, and forms of Incentive Stock Option Agreement
thereunder.
10.1* 1987 Employee Stock Purchase Plan and form of Subscription Agreement. (7)
10.2* 1988 Director's Stock Option Plan and form of Stock Option Agreement. (7)
10.3* Fiscal Year 1994 Executive Bonus Plan.
10.10 Interface License Agreement (IMS-Link Interface) dated December 2, 1983 between Northern
Telecom Inc. and the Company. (2)
10.10A Interface License Agreement (Digital Set Interface) dated March 16, 1990 between
Northern Telecom Inc. and the Company. (6)
10.10B License Agreement dated February 1, 1989 between Mitel Corporation and the Company. (6)
10.10C License Agreement dated August 1, 1990 between ROLM Systems and the
Company. (6)
10.11 Form of Indemnification Agreement as entered into by the Company with its directors and
officers. (5)
10.12 Amended and Restated Registration Rights Agreement dated March 12, 1987 between the
Company and the holders of Series A, Series B, Series C and Series D Preferred Stock, as
amended by the form of Amendment of Registration Rights Agreement with respect to
Initial Public Offering. (2)
10.13 Common Stock Purchase Agreement between the Company and Hewlett-Packard company dated as
of August 10, 1988 (including a Registration Rights Agreement between the parties
attached thereto as Exhibit A). (3)
10.14 Amendment to Common Stock Purchase Agreement dated as of October 1, 1990 between the
Company and Hewlett-Packard Company. (5)
10.15 Credit Agreement dated June 30, 1994 between The First National Bank of Boston, Bank of
America National Trust and Savings Association and the Company.
10.16 Common Shares Rights Agreement dated as of July 25, 1990 between the Company and Bank of
America NT & SA. (4)
10.17* Executive Officer Employment Letter -- David J. Ladd. (8)
11.0 Statement re computation of 1994 per share earnings.
21.0 Subsidiaries of the Company.
23.0 Independent Auditors' Consent (KPMG Peat Marwick LLP)
24.0 Power of Attorney (see page 52).
27.0 Financial Data Schedule (EDGAR version only).
</TABLE>
__________________
* Designates management contracts or compensatory plans, contracts or
arrangements required to be filed as exhibits pursuant to Item 14(c)
of Form 10-K.
(1) Incorporated by reference to the exhibit filed with the Company's Form
8-B filed with the Securities and Exchange Commission on February 12,
1990.
(2) Incorporated by reference to the exhibit filed with the Company
Registration Statement on Form S-1 (No.33-197777), as amended, which
became effective February 26, 1988.
<PAGE> 63
(3) Incorporated by reference to the exhibit filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1988.
(4) Incorporated by reference to the exhibit filed with the Company's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on August 1, 1990.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990.
(6) Incorporated by reference to the exhibit filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991.
(7) Incorporated by reference to the exhibit filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1992.
(8) Incorporated by reference to the exhibit filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
<PAGE> 1
EXHIBIT 10.0
OCTEL COMMUNICATIONS CORPORATION
1985 INCENTIVE STOCK PLAN
As amended September 1994
1. Purposes of the Plan. The purposes of this Incentive Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and
Consultants of the Company and to promote the success of the Company's
business.
Options granted hereunder may be either "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, or "nonstatutory
stock options," at the discretion of the Board and as reflected in the terms of
the written option agreement. The Board may also grant Stock Purchase Rights
under this Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Octel Communications Corporation, a Delaware
corporation.
(e) "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is
appointed.
(f) "Consultant" shall mean any person who is engaged by the Company or
any subsidiary to render consulting services and is compensated for such
consulting services, and any director of the Company whether compensated for
such services or not; provided that if and in the event the Company registers
any class of any equity security pursuant to Section 12 of the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the
Company.
(g) "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the
<PAGE> 2
case of sick leave, military leave, or any other leave of absence
approved by the Board; provided that such leave is for a period of not more
than 90 days or reemployment upon the expiration of such leave is guaranteed by
contract or statute.
(h) "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Incentive Stock Option" shall mean an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(k) "Option" shall mean a stock option granted pursuant to the Plan.
(l) "Optioned Stock" shall mean the Common Stock subject to an Option.
(m) "Optionee" shall mean an Employee or Consultant who receives an Option.
(n) "Parent" shall mean a "parent corporation", whether now or hereafter
existing, as defined in Section 425(e) of the Code.
(o) "Plan" shall mean this 1985 Incentive Stock Plan.
(p) "Purchaser" shall mean an Employee or Consultant who exercises a
Stock Purchase Right.
(q) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(r) "Stock Purchase Right" shall mean a right, other than an Option, to
purchase Common Stock pursuant to the Plan.
(s) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 425(f) of the Code.
(t) "Tax Date" shall mean the date that the amount of tax to be withheld
by the Company is to be determined.
-2-
<PAGE> 3
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the
Plan, the maximum aggregate number of shares which may be optioned and/or sold
under the Plan is 9,600,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Repurchased shares shall not become available for
future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Administration With Respect to Directors and Officers. With respect
to grants of Options or Stock Purchase Rights to Employees who are also
officers or directors of the Company, the Plan shall be administered by (A) the
Board if the Board may administer the Plan in compliance with Rule 16b-3
promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with
respect to a plan intended to qualify thereunder as a discretionary plan, or
(B) a Committee designated by the Board to administer the Plan, which Committee
shall be constituted in such a manner as to permit the Plan to comply with Rule
16b-3 with respect to a plan intended to qualify thereunder as a discretionary
plan. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board
may increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder
as a discretionary plan.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-3, the
Plan may be administered by different bodies with respect to directors,
non-director officers and Employees who are neither directors nor officers.
(iii) Administration With Respect to Consultants and Other Employees.
With respect to grants of Options or Stock Purchase Rights to Employees or
Consultants who are neither directors nor officers of the Company, the Plan
shall be administered by (A) the Board or (B) a Committee designated by the
Board, which Committee shall be constituted in such a manner as to satisfy the
legal requirements relating to the administration of incentive stock option
plans, if any, of Delaware corporate and securities
-3-
<PAGE> 4
laws and of the Code (the "Applicable Laws"). Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the Committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies, however
caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(b) Powers of the Board. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion: (i) to grant Incentive Stock
Options, in accordance with Section 422 of the Code, "non-statutory stock
options," or Stock Purchase Rights; (ii) to determine, upon review of relevant
information and in accordance with Section 7(b) of the Plan, the fair market
value of the Common Stock; (iii) to determine the exercise price per share of
Options or Stock Purchase Rights to be granted, which exercise price shall be
determined in accordance with Section 7(a) of the Plan; (iv) to determine the
Employees or Consultants to whom, and the time or times at which, Options or
Stock Purchase Rights shall be granted and the number of shares to be
represented by each Option or Stock Purchase Right; (v) to interpret the Plan;
(vi) to prescribe, amend and rescind rules and regulations relating to the
Plan; (vii) to determine the terms and provisions of each Option or Stock
Purchase Right granted (which need not be identical) and, with the consent of
the holder thereof, modify or amend each Option or Stock Purchase Right; (viii)
to accelerate or defer (with the consent of the Optionee) the exercise date of
any Option, consistent with the provisions of Section 5 of the Plan; (ix) to
authorize any person to execute on behalf of the Company any instrument
required to effectuate the grant of an Option or Stock Purchase Right
previously granted by the Board; and (x) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
(c) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees,
Purchasers and any other holders of any Options or Stock Purchase Rights
granted under the Plan.
5. Eligibility.
(a) Options and Stock Purchase Rights may be granted only to Employees or
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option or Stock Purchase Right
may, if he is otherwise eligible, be granted an additional Option or Options or
Stock Purchase Right or Rights.
-4-
<PAGE> 5
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate fair market
value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionees during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the fair market value
of the Shares shall be determined as of the time the Option with respect to
such Shares is granted.
(d) The Plan shall not confer upon any Optionee, Purchaser or holder of a
Stock Purchase Right any right with respect to continuation of employment or
consulting relationship with the Company, nor shall it interfere in any way
with his right or the Company's right to terminate his employment or consulting
relationship at any time.
(e) The following limitations shall apply to grants of Options and Stock
Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal year of the Company,
Options and Stock Purchase Rights to purchase more than 150,000 Shares.
(ii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 11.
(iii) If an Option or Stock Purchase Right is canceled in the same
fiscal year of the Company in which it was granted (other than in connection
with a transaction described in Section 11), the canceled Option or Stock
Purchase Right will be counted against the limit set forth in Section V(e)(i).
For this purpose, if the exercise price of an Option or Stock Purchase Right is
reduced, the transaction will be treated as a cancellation of the Option or
Stock Purchase Right and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board of Directors or its approval by the stockholders
of the Company as described in Section 17 of the Plan. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 13
of the Plan.
7. Exercise Price and Consideration.
-5-
<PAGE> 6
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option or Stock Purchase Right shall be such price as is
determined by the Board, but shall be subject to the following:
(i) In the case of any Incentive Stock Option granted to any Employee,
the per Share exercise price shall be no less than 100% of the fair market
value per Share on the date of grant.
(ii) In the case of any Option, other than an Incentive Stock Option,
or any Stock Purchase Right, the per Share exercise price shall be no less than
85% of the fair market value per Share on the date of grant.
(iii) In the case of any Option granted to any person who, at the time
of the grant of such Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
fair market value per Share on the date of grant.
(iv) In the case of any Option or Stock Purchase Right granted on or
after the effective date of registration of any class of equity security of the
Company pursuant to Section 12 of the Exchange Act and prior to six months
after the termination of such registration, the per Share exercise price shall
be no less than 100% of the fair market value per Share on the date of grant.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the mean of the bid and
asked prices of the Common Stock for the date of grant of the Option or Stock
Purchase Right, as reported in The Wall Street Journal (or, if not so reported,
as otherwise reported by The Nasdaq National Market) or, in the event the
Common Stock is listed on a stock exchange, the fair market value per Share
shall be the closing price on such exchange on the date of grant of the Option
or Stock Purchase Right, as reported in The Wall Street Journal.
(c) Subject to compliance with applicable provisions of Section 16(b) of
the Exchange Act, (or other applicable law), the consideration to be paid for
the Shares to be issued upon exercise of an Option or Stock Purchase Right,
including the method of payment, shall be determined by the Board (and, in the
case of an Incentive Stock Option, shall be determined at the time of grant)
and may consist entirely of (i) cash, (ii) check, (iii) promissory note, (iv)
other Shares which (X) in the case of Shares acquired upon exercise of an
Option either have been owned by the Optionee for more than six months on the
date of surrender or were not
-6-
<PAGE> 7
acquired, directly or indirectly, from the Company, and (Y) have a fair market
value on the date of exercise equal to the aggregate exercise price of the
Shares as to which said Option or Stock Purchase Right shall be exercised, (v)
authorization for the Company to retain from the total number of Shares as to
which the Option or Stock Purchase Right is exercised that number of Shares
having a fair market value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised, (vi)
delivery of a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company the amount of sale
or loan proceeds required to pay the exercise price, (vii) by delivering an
irrevocable subscription agreement for the Shares which irrevocably obligates
the option holder to take and pay for the Shares not more than twelve months
after the date of delivery of the subscription agreement, (viii) any
combination of the foregoing methods of payment, (ix) or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable laws. In making its determination as to the type of
consideration to accept, the Board shall consider whether acceptance of such
consideration may be reasonably expected to benefit the Company (Section 153 of
the Delaware General Corporation Law).
8. Options.
(a) Term of Option. The term of each Incentive Stock Option shall be ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Stock Option Agreement. The term of each Option that is not an
Incentive Stock Option shall be ten (10) years and one (1) day from the date of
grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Option granted to an Optionee who, at the
time the Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, (i) if the Option is an Incentive Stock Option, the term of the
Option shall be five (5) years from the date of grant thereof or shorter time
as may be provided in the Stock Option Agreement, or (ii) if the Option is not
an Incentive Stock Option, the term of the Option shall be five (5) years and
one (1) day from the date of grant thereof or such shorter time as may be
provided in the Stock Option Agreement.
(b) Exercise of Option.
(i) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan; provided, however, that an Incentive Stock Option granted prior to
January 1, 1987 shall not be exercisable while there is
-7-
<PAGE> 8
outstanding any incentive stock option which was granted, before the granting
of such Incentive Stock Option, to the same Optionee to purchase stock of the
Company, any Parent or Subsidiary, or any predecessor corporation of such
corporations. For purposes of this provision, an incentive stock option shall
be treated as outstanding until such option is exercised in full or expires by
reason of lapse of time.
An Option may be exercisable over a period of time or may be immediately
exercisable as determined by the Board and may grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
Optionee's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
repurchase option shall be the original price paid by the Optionee and may be
paid by cancellation of any indebtedness of the Optionee to the Company. The
repurchase option shall lapse at such a rate as the Board may determine.
Notwithstanding any other provisions of this Plan, no Option may be
exercised after the expiration of the term of the Option as set forth in the
Stock Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 7(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the date
the stock certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the number
of Shares which thereafter shall be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option
is exercised.
(ii) Termination of Status as an Employee or
Consultant. If an Employee or Consultant ceases to serve as an Employee or as
a Consultant (as the case may be), he may exercise his Option at such times and
to such extent as determined by the
-8-
<PAGE> 9
Board at the time of grant of the Option; provided that, in the case of an
Incentive Stock Option, the Option may be exercised only within thirty (30)
days (or such other period of time not exceeding three (3) months as determined
by the Board at the time of grant of the option) after the date he ceases to be
an Employee of the Company, and only to the extent that he was entitled to
exercise it at the date of such termination. To the extent that the Employee
was not entitled to exercise such Incentive Stock Option at the date of such
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(iii) Disability. Notwithstanding the provisions of Section 8(b)(ii)
above, in the event an Employee or Consultant is unable to continue his
employment or consulting relationship (as the case may be) with the Company as
a result of his total and permanent disability (as defined in Section 22(e)(3)
of the Code), he may, but only within three (3) months (or such other period of
time not exceeding one (1) year as is determined by the Board at the time of
grant of the Option) from the date of termination, exercise his Option to the
extent he was entitled to exercise it at the date of such termination. To the
extent that he was not entitled to exercise the Option at the date of
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(iv) Death of Optionee. In the event of the death of an Optionee,
such Optionee's Option may be exercised at such times and to such extent as
determined by the Board at the time of grant of the Option; provided that, in
the case of an Incentive Stock Option, in the event of the death of an
Optionee:
(A) during the term of the Option who is at the time of his death an
Employee or Consultant of the Company and who shall have been in Continuous
Status as an Employee or Consultant since the date of grant of the Option,
the Option may be exercised, at any time within six (6) months following the
date of death, by the Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent of
the right to exercise that had accrued at the date of death; or
(B) within thirty (30) days (or such other period of time not exceeding
three (3) months as is determined by the Board at the time of grant of the
Option) after the termination of Continuous Status as an Employee, the Option
may be exercised, at any time within six (6) months following the date of
death, by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or
-9-
<PAGE> 10
inheritance, but only to the extent of the right to exercise that had accrued
at the date of termination.
(v) Rule 16b-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
9. Stock Purchase Rights.
(a) Rights to Purchase. After the Board of Directors determines that it
will offer an Employee or Consultant the right to purchase Shares under the
Plan, it shall advise the offeree in writing of the terms, conditions and
restrictions relating to the offer, including the number of Shares that such
person shall be entitled to purchase, and the time within which such person
must accept such offer, which shall in no event exceed thirty (30) days from
the date upon which the Board of Directors or its Committee made the
determination to grant the Stock Purchase Right. The offer shall be accepted
by execution of a Restricted Stock Purchase Agreement in the form determined by
the Board of Directors.
(b) Issuance of Shares. Forthwith after payment therefor, the Shares
purchased shall be duly issued; provided, however, that the Board may require
that the Purchaser make adequate provision for any Federal and State
withholding obligations of the Company as a condition to such purchase.
(c) Repurchase Option. Unless the Board of Directors or its Committee
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the Purchaser's employment with the Company for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the Purchaser and may be paid by cancellation of any indebtedness of
the Purchaser to the Company. The repurchase option shall lapse at such a rate
as the Board of Directors may determine.
(d) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Board of Directors.
(e) Rights as a Stockholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing the shares as to
which a Stock Purchase Right has been exercised, no right to vote or to receive
dividends
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<PAGE> 11
or any other rights as a stockholder shall exist with respect to shares of
Common Stock subject to a Stock Purchase Right, notwithstanding the exercise of
a Stock Purchase Right. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the stock certificate is
issued, except as provided in Section 11 of the Plan.
(f) Shares Available Under the Plan. Exercise of a Stock Purchase Right
in any manner shall result in a decrease in the number of Shares that
thereafter shall be available, both for purposes of the Plan and for sale under
the Stock Purchase Right, by the number of Shares as to which the Stock
Purchase Right is exercised. Shares repurchased by the Company pursuant to
Section 9(c) hereof shall not be available for reissuance under the Plan.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee or holder of a Stock Purchase Right, only by such Optionee or holder
of a Stock Purchase Right.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option and Stock Purchase Right, and
the number of shares of Common Stock which have been authorized for issuance
under the Plan but as to which no Options or Stock Purchase Rights have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option or Stock Purchase Right, as well as the price per share
of Common Stock covered by each such outstanding Option or Stock Purchase
Right, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.
-11-
<PAGE> 12
In the event of the proposed dissolution or liquidation of the Company, any
outstanding Options or Stock Purchase Rights shall terminate immediately prior
to the consummation of such proposed action, unless otherwise provided by the
Board. The Board may, in the exercise of its sole discretion in such
instances, declare that any Option or Stock Purchase Right shall terminate as
of a date fixed by the Board, and may give each Optionee or holder of a Stock
Purchase Right the right to exercise his Option or Stock Purchase Right as to
all or any part of the Common Stock subject to such Option or Stock Purchase
Right, including Shares as to which the Option or Stock Purchase Right would
not otherwise be exercisable.
In the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger of the Company with or into another corporation,
Options and Stock Purchase Rights shall be assumed or equivalent options or
rights shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation. In the event that such successor
corporation refuses to assume the Option or Stock Purchase Right or to
substitute an equivalent option or stock purchase right, the Board shall, in
lieu of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option or Stock Purchase Right as to all of the Common
Stock subject to such Option or Stock Purchase Right, including Shares as to
which the Option or Stock Purchase Right would not otherwise be exercisable.
If the Board makes an Option or Stock Purchase Right fully exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Board shall notify the Optionee or holder of a Stock Purchase Right that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock
Purchase Right will terminate upon the expiration of such period. The Board
may provide in individual Option Agreements for the repurchase of Options in
return for a cash payment by the Company upon the occurrence of a merger, sale
of all or substantially all assets of the Company, tender offer or other
transaction or series of related transactions resulting in a change of
ownership of more than 50% of the voting securities of the Company.
12. Time of Granting Options or Stock Purchase Rights. The date of grant of
an Option or Stock Purchase Right shall, for all purposes, be the date on which
the Board makes the determination granting such Option or Stock Purchase Right.
Notice of the determination shall be given to each Employee to whom an Option
or Stock Purchase Right is so granted within a reasonable time after the date
of such grant.
13. Amendment and Termination of the Plan.
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<PAGE> 13
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain stockholder approval of any Plan amendment in such a
manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options or Stock Purchase Rights already granted
and such Options and Stock Purchase Rights shall remain in full force and
effect as if this Plan had not been amended or terminated, unless mutually
agreed otherwise between the Board and the Optionee, Purchaser or holder of a
Stock Purchase Right, which agreement must be in writing and signed by the
Company and the Optionee, Purchaser or holder of the Stock Purchase Right.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option or Stock Purchase Right unless the exercise of
such Option or Stock Purchase Right and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option or Stock Purchase Right, the
Company may require the person exercising such Option or Stock Purchase Right
to represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to sell
or distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any
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<PAGE> 14
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
16. Option and Stock Purchase Agreements. Options shall be evidenced by
written Stock Option Agreements in such form as the Board shall approve. Upon
the exercise of Stock Purchase Rights, a Purchaser shall execute a Restricted
Stock Purchase Agreement in such form as the Board of Directors shall approve.
17. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve months before or
after the date the Plan is adopted. If such stockholder approval is obtained
at a duly held stockholders' meeting, it may be obtained by the affirmative
vote of the holders of a majority of the issued and outstanding shares of the
Company. If and in the event that the Company registers any class of any
equity security pursuant to Section 12 of the Exchange Act, the approval of
such stockholders of the Company shall be:
(a) (i) solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder, or (ii)
solicited after the Company has furnished in writing to the holders entitled to
vote substantially the same information concerning the Plan as that which would
be required by the rules and regulations in effect under Section 14(a) of the
Exchange Act at the time such information is furnished; and
(b) obtained at or prior to the first annual meeting of stockholders held
subsequent to the first registration of any class of equity securities of the
Company under Section 12 of the Exchange Act.
If such stockholder approval is obtained by written consent, it must be
obtained by the unanimous written consent of all stockholders of the Company.
18. Information to Optionees and Holders of Stock Purchase Rights. The
Company shall provide to each Optionee and each holder of a Stock Purchase
Right, during the period for which such Optionee or holder of a Stock Purchase
Right has one or more Options or Stock Purchase Rights outstanding, copies of
all annual reports and other information which are provided to all stockholders
of the Company. The Company shall not be required to provide such information
if the issuance of Options and Stock Purchase Rights under the Plan is limited
to key employees whose duties in connection with the Company assure their
access to equivalent information.
19. Stock Withholding to Satisfy Withholding Tax Obligations.
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<PAGE> 15
(a) Withholding. At the discretion of the Board, Purchasers and Optionees
may satisfy withholding obligations as provided in this Section 19. When a
Purchaser or an Optionee incurs tax liability in connection with a Stock
Purchase Right or an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Purchaser or Optionee is obligated to pay
the Company an amount required to be withheld under applicable tax laws, the
Purchaser or Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued in connection with the
Stock Purchase Right or the Shares to be issued upon exercise of the Option, if
any, that number of Shares having a fair market value equal to the amount
required to be withheld. The fair market value of the Shares to be withheld
shall be determined on the Tax Date.
(b) Form of Election. All elections by a Purchaser or an Optionee to have
Shares withheld for this purpose shall be made in writing in a form acceptable
to the Secretary of the Company and shall be subject to the following
restrictions:
(i) the election must be made on or prior to the applicable Tax Date;
(ii) once made, the election shall be irrevocable as to the particular
Shares of the Option or Right as to which the election is made;
(iii) all elections shall be subject to the consent or disapproval of
the Board;
(iv) if the Purchaser or Optionee is subject to Section 16 of the
Exchange Act, the election must comply with the applicable provisions of the
rules promulgated under Section 16(b) of the Exchange Act and shall be subject
to such additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to the Plan transactions.
(c) Section 83. In the event the election to have Shares withheld is made
by a Purchaser or Optionee and the Tax Date is deferred under Section 83 of the
Code because no election is filed under Section 83(b) of the Code, the
Purchaser or Optionee shall receive the full number of Shares with respect to
which the Stock Purchase Right or Option is exercised but such Purchaser or
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
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<PAGE> 16
OCTEL COMMUNICATIONS CORPORATION
[Key
Employee]
INCENTIVE STOCK OPTION AGREEMENT
OCTEL COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company"), has
granted to ________________________________ (the "Optionee"), an option (the
"Option") to purchase a total of _____________________________ (__________)
shares of Common Stock (the "Shares"), at the price determined as provided
herein, and in all respects subject to the terms, definitions and provisions of
the 1985 Incentive Stock Plan, as amended (the "Plan"), adopted by the Company
which is incorporated herein by reference. Unless otherwise defined herein,
the terms defined in the Plan shall have the same defined meanings herein.
1. Nature of the Option. This Option is intended to qualify as an Incentive
Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. Exercise Price. The exercise price is $______ for each share of Common
Stock, which price is not less than the fair market value per share of the
Common Stock on the date of grant.
3. Exercise of Option. This Option shall be exercisable during its term, in
accordance with the provisions of Section 8 of the Plan and subject to Section
6 hereof, as follows:
(a) Right to Exercise.
(i) Subject to (ii)-(x) of this subsection 3(a), below, this Option shall
be exercisable cumulatively over four (4) years at the rate of 25% of the
Shares annually with the first 25% to be exercisable on ______________________,
the second 25% to be exercisable on _________________ ____, the third 25% to be
exercisable on ______________________, and the fourth 25% to be exercisable on
______________________, provided, however, that in the event the Optionee is
unable to continue his employment with the Company as a result of his death or
total and permanent disability (as defined in Section 22(e)(3) of the Code),
the Option shall be exercisable cumulatively at the rate of 1/3 of the Shares
annually over three (3) years, with the first one-third to be exercisable on
_________________, the second one-third to be exercisable on _______________ _,
and the third one-third to be exercisable on _________________.
(ii) In the event of (A) a merger involving the Company in which the
Company is not the survivor (except a merger with an affiliate of the Company)
or (B) the sale of all, or substantially all, of the assets of the Company
(except a sale to an affiliate of the Company) this Option shall either be
exchanged for a substitute Option or accelerated and immediately exercisable
according to the provisions of Section 11 of the Plan.
<PAGE> 17
(iii) This Option may not be exercised for a fraction of a share.
(iv) In the event of Optionee's death, disability, or termination of
employment, the timing for exercise of the Option is governed by Sections 7, 8
or 9 of this Agreement, subject to the limitations in subsections 3(a)(vii) and
(viii).
(v) Optionee's right to exercise this Option, as described in subsection
3(a)(i) above, shall be suspended during any approved leave of absence, except
to the extent this Option is otherwise exercisable as of the commencement of
such leave. Upon an Employee's return following a leave of absence, the dates
set forth in subsection 3(a)(i) shall be adjusted to delay exercisability by
the duration of the leave of absence. In no event may the Option be exercised
later than the time specified in Section 11 of this Agreement.
(vi) Optionee's right to exercise this Option, as described in
subsection 3(a)(i) above, shall be suspended in the event that Optionee's hours
regularly worked fall below twenty (20) hours per week (the "Reduction"),
except to the extent this Option is otherwise exercisable as of the
commencement of the Reduction. When the Reduction ends, the dates set forth in
subsection 3(a)(i) shall be adjusted to delay exercisability by the duration of
the Reduction. In no event may the Option be exercised later than the time
specified in Section 11 of this Agreement.
(vii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in Section 11 below.
(viii) The exercise of this Option as an Incentive Stock Option is
limited to any time or times which, when this Option is aggregated with all
other Incentive Stock Options granted to Optionee by the Company or any Parent
or Subsidiary, results in Shares having an aggregate fair market value
(determined for each Shares as of the date of grant of the Option covering such
share) of $100,000 or less becoming first available for purchase upon exercise
of one or more Incentive Stock Options during any calendar year. In the event
that this Option becomes exercisable for Shares in excess of such $100,000
limitation, this Option shall be, at the election of the Optionee, treated as a
nonstatutory option with respect to such excess.
(ix) If at any time after a change in control (defined as any
transaction or series of related transactions resulting in a change of
ownership of more than 50% of the voting securities of the Company or a sale,
lease or transfer of all or substantially all of the Company's assets to
another entity not an affiliate of the Company), but before the expiration of
the term of
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<PAGE> 18
this Option set forth in Section 11 below, either (A) the Optionee's
employment with the Company (or any successor of the Company) is terminated by
the Company (or such successor entity), with or without cause, or (B) the
Optionee's compensation and benefits as in effect immediately before the change
in control are reduced by the Company (or such successor entity), then this
Option (or any substitute or successor option) shall be accelerated and
immediately exercisable as to all shares notwithstanding the schedule in
Section 3(a)(i) above; provided that the substitution of substantially
equivalent compensation and benefits shall not be deemed a reduction for
purposes of this paragraph. Any option substituted for this Option shall
include the rights granted pursuant to this paragraph.
(x) NOTHING IN THIS AGREEMENT SHALL EFFECT IN ANY MANNER WHATSOEVER THE
RIGHT OR POWER OF THE COMPANY TO TERMINATE THE OPTIONEE'S EMPLOYMENT OR
CONSULTING RELATIONSHIP WITH THE COMPANY FOR ANY REASON, WITH OR WITHOUT CAUSE.
NOTHING IN THIS AGREEMENT CONSTITUTES AN EXPRESS OR IMPLIED PROMISE OF
CONTINUED EMPLOYMENT OR A CONSULTING RELATIONSHIP FOR THE EXERCISE PERIOD OR
FOR ANY PERIOD AT ALL.
(b) Method of Exercise. This Option shall be exercisable by written
notice in the form attached hereto which shall state the election to exercise
the Option, the number of Shares in respect of which the Option is being
exercised, and such other representations and agreements as to the holder's
investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the exercise price. This Option shall be deemed
exercised upon receipt by the Company of such written notice accompanied by the
exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be
listed. Assuming such compliance, for income tax purposes, the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
4. Optionee's Representations. In the event the Shares purchasable pursuant
to the exercise of this Option have not been registered under the Securities
Act of 1933, as amended, at the time this Option is exercised, Optionee shall,
concurrently with the exercise of all or any portion of this Option, deliver to
the Company his Investment Representation Statement in the form
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<PAGE> 19
attached hereto as Exhibit A, and shall read the applicable rules of the
Commissioner of Corporations attached to such Investment Representation
Statement.
5. Method of Payment. Payment of the exercise price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) delivery of a promissory note (the "Note") of Optionee in the amount
of the exercise price together with the execution and delivery by the Optionee
of the Security Agreement attached hereto as Exhibit B; the Note shall be in
the form attached hereto as Exhibit C, shall contain the terms and be payable
as set forth therein, shall bear interest at a rate not less than the rate
required to insure that there will be no "unstated interest" with respect to
the purchase of shares under this Option, pursuant to Section 483 of the Code
and the regulations in effect thereunder at the time of such purchase, and
shall be secured by a pledge of the Shares purchased by the Note pursuant to
the Security Agreement;
(d) surrender of other Shares of Common Stock of the Company which have
been held for six (6) months or more and which are of a value equal to the
exercise price of the Shares as to which the Option is being exercised; or
(e) delivery of a properly executed exercise notice together with
irrevocable instructions to the Optionee's broker to deliver promptly to the
Company the amount of sale or loan proceeds required to pay the exercise price.
6. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule
under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G")
as promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
7. Termination of Continuous Status as an Employee.
(a) In the event of termination of Employee's Continuous Status as an
Employee, he may, but only within 30 days after the date he ceases to be an
Employee of the Company, exercise this
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<PAGE> 20
Option to the extent that he was entitled to exercise it at the date of such
termination as provided in paragraph 3(a). To the extent that he was not
entitled to exercise this Option at the date of such termination, or if he does
not exercise this Option within the time specified herein, the Option shall
terminate.
(b) A leave of absence for a period of 90 days or less or a reduction in
the number of hours regularly worked by Optionee to fewer than twenty (20)
hours per week will not terminate an Employee's Continuous Status, but will
suspend the exercisability of the Option as set forth in subsections 3(a)(v)
and (vi).
(c) In the event that the Optionee has paid the purchase price hereunder
by delivery of a Note, and before the Note is paid in full the Optionee ceases
to be an Employee or Consultant, the Company shall have the right to accelerate
the due date of the Note, and the whole unpaid balance of principal and
interest on the Note shall become immediately due.
8. Disability of Optionee. Notwithstanding the provisions of Section 7
above, if Optionee is unable to continue his employment with the Company as a
result of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within six (6) months from the date of termination
of employment, exercise his Option to the extent he was entitled to exercise it
at the date of such termination as provided in paragraph 3(a). To the extent
that he was not entitled to exercise the Option at the date of termination, or
if he does not exercise such Option (which he was entitled to exercise) within
the time specified herein, the Option shall terminate.
9. Death of Optionee. In the event of the death of Optionee:
(a) during the term of this Option and while an Employee of the Company
and having been in Continuous Status as an Employee since the date of grant of
the Option, the Option may be exercised, at any time within six (6) months
following the date of death, by Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of death; or
(b) within 30 days after the termination of Optionee's Continuous Status
as an Employee, the Option may be exercised, at any time within six (6) months
following the date of death, by Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of termination.
10. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of
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<PAGE> 21
descent or distribution and may be exercised during the lifetime of Optionee
only by him. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
11. Term of Option. This Option may not be exercised after the later to
occur of (a) the date six (6) months after the Option becomes fully exercisable
or (b) five (5) years and six (6) months (five (5) years if Optionee owns,
immediately before the Option is granted, stock representing more than 10
percent of the total combined voting power of all classes of stock of the
Company or of any Parent or Subsidiary) from the date of grant of this Option,
and may be exercised during such term only in accordance with the Plan and the
terms of this Option.
12. Early Disposition of Stock. Optionee understands that if he disposes of
any Shares received under this Option within two (2) years after the date of
this Agreement or within one (1) year after such Shares were transferred to
him, he will be treated for federal income tax purposes as having received
ordinary income at the time of such disposition in an amount generally measured
by the difference between the price paid for the Shares and the lower of the
fair market value of the Shares on the date of the exercise or the fair market
value on the date of disposition. The amount of such ordinary income may be
measured differently if the Optionee is an officer, director, or 10%
stockholder of the Company or if the shares are subject to a substantial risk
of forfeiture at the time they were transferred to Optionee. Optionee hereby
agrees to notify the Company in writing within 30 days after the date of any
such disposition. Optionee understands that if he disposes of such Shares at
any time after the expiration of such two-year and one-year holding periods,
any gain on such sale will be taxed at capital gain rates.
OCTEL COMMUNICATIONS CORPORATION,
a Delaware corporation
By: ___________________________
Treasurer
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<PAGE> 22
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto, a copy of which is annexed hereto, and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all of the terms and provisions thereof. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Board upon any questions arising under the Plan. Optionee further acknowledges
that he has read and is familiar with the terms of the Plan and this Agreement
and has read and understands Sections 3(a)(x) and 7(b), and has had an
opportunity to obtain the advice of counsel prior to executing this Agreement.
Dated: ______________________
__________________________
Optionee
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<PAGE> 23
NOTICE OF EXERCISE
TO: OCTEL COMMUNICATIONS CORPORATION
ATTN: Secretary of Octel Communications Corporation
SUBJECT: Notice of Intention to Exercise Stock Option
In respect of the stock option granted to the undersigned
______________________ on ______________, 19__ to purchase an aggregate of
_______________ shares of Octel Communication's Common Stock, this is official
notice that the undersigned intends to exercise such option to purchase as
follows:
Number of Shares: ______________________
Date of Purchase: ______________________
Mode of Payment: ______________________
Social Security #: ______________________
Grant Number: ______________________
The shares should be issued as follows:
Name: _____________________________
Address: _____________________________
_____________________________
_____________________________
_____________________________
Signed: _____________________________
Date: _____________________________
<PAGE> 24
OCTEL COMMUNICATIONS CORPORATION
[Usual]
INCENTIVE STOCK OPTION AGREEMENT
OCTEL COMMUNICATIONS CORPORATION, a Delaware corporation (the "Company"), has
granted to ________________________________ (the "Optionee"), an option (the
"Option") to purchase a total of _____________________________ (__________)
shares of Common Stock (the "Shares"), at the price determined as provided
herein, and in all respects subject to the terms, definitions and provisions of
the 1985 Incentive Stock Plan, as amended (the "Plan"), adopted by the Company
which is incorporated herein by reference. Unless otherwise defined herein,
the terms defined in the Plan shall have the same defined meanings herein.
1. Nature of the Option. This Option is intended to qualify as an
Incentive Stock Option as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
2. Exercise Price. The exercise price is $______ for each share of
Common Stock, which price is not less than the fair market value per share of
the Common Stock on the date of grant.
3. Exercise of Option. This Option shall be exercisable during its
term, in accordance with the provisions of Section 8 of the Plan and subject to
Section 6 hereof, as follows:
(a) Right to Exercise.
(i) Subject to (ii)-(ix) of this subsection 3(a), below,
this Option shall be exercisable cumulatively over four (4) years at the rate
of 25% of the Shares annually with the first 25% to be exercisable on
______________________, the second 25% to be exercisable on
______________________, the third 25% to be exercisable on
______________________, and the fourth 25% to be exercisable on ______
_______________,provided, however, that in the event the Optionee is unable to
continue his employment with the Company as a result of his death or total and
permanent disability (as defined in Section 22(e)(3) of the Code), the Option
shall be exercisable cumulatively at the rate of 1/3 of the Shares annually
over three (3) years, with the first one-third to be exercisable on
_________________, the second one-third to be exercisable on _________________,
and the third one-third to be exercisable on _________________.
(ii) In the event of (A) a merger involving the Company
in which the Company is not the survivor (except a merger with an affiliate of
the Company) or (B) the sale of all, or substantially all, of the assets of the
Company (except a sale to an affiliate of the Company) this Option shall either
be exchanged for a substitute Option or accelerated and immediately exercisable
according to the provisions of Section 11 of the Plan.
<PAGE> 25
(iii) This Option may not be exercised for a fraction of a
share.
(iv) In the event of Optionee's death, disability, or
termination of employment, the timing for exercise of the Option is governed by
Sections 7, 8 or 9 of this Agreement, subject to the limitations in subsections
3(a)(vii) and (viii).
(v) Optionee's right to exercise this Option, as
described in subsection 3(a)(i) above, shall be suspended during any approved
leave of absence, except to the extent this Option is otherwise exercisable as
of the commencement of such leave. Upon an Employee's return following a leave
of absence, the dates set forth in subsection 3(a)(i) shall be adjusted to
delay exercisability by the duration of the leave of absence. In no event may
the Option be exercised later than the time specified in Section 11 of this
Agreement.
(vi) Optionee's right to exercise this Option, as
described in subsection 3(a)(i) above, shall be suspended in the event that
Optionee's hours regularly worked fall below twenty (20) hours per week (the
"Reduction"), except to the extent this Option is otherwise exercisable as of
the commencement of the Reduction. When the Reduction ends, the dates set
forth in subsection 3(a)(i) shall be adjusted to delay exercisability by the
duration of the Reduction. In no event may the Option be exercised later than
the time specified in Section 11 of this Agreement.
(vii) In no event may this Option be exercised after the
date of expiration of the term of this Option as set forth in Section 11 below.
(viii) The exercise of this Option as an Incentive Stock
Option is limited to any time or times which, when this Option is aggregated
with all other Incentive Stock Options granted to Optionee by the Company or
any Parent or Subsidiary, results in Shares having an aggregate fair market
value (determined for each Shares as of the date of grant of the Option
covering such share) of $100,000 or less becoming first available for purchase
upon exercise of one or more Incentive Stock Options during any calendar year.
In the event that this Option becomes exercisable for Shares in excess of such
$100,000 limitation, this Option shall be, at the election of the Optionee,
treated as a nonstatutory option with respect to such excess.
(ix) NOTHING IN THIS AGREEMENT SHALL EFFECT IN ANY MANNER
WHATSOEVER THE RIGHT OR POWER OF THE COMPANY TO TERMINATE THE OPTIONEE'S
EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE COMPANY FOR ANY REASON, WITH OR
WITHOUT CAUSE. NOTHING IN THIS AGREEMENT CONSTITUTES AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED
-2-
<PAGE> 26
EMPLOYMENT OR A CONSULTING RELATIONSHIP FOR THE EXERCISE
PERIOD OR FOR ANY PERIOD AT ALL.
(b) Method of Exercise. This Option shall be exercisable by
written notice in the form attached hereto which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may
be required by the Company pursuant to the provisions of the Plan. Such
written notice shall be signed by the Optionee and shall be delivered in person
or by certified mail to the Secretary of the Company. The written notice shall
be accompanied by payment of the exercise price. This Option shall be deemed
exercised upon receipt by the Company of such written notice accompanied by the
exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be
listed. Assuming such compliance, for income tax purposes, the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
4. Optionee's Representations. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company his Investment Representation Statement in the
form attached hereto as Exhibit A, and shall read the applicable rules of the
Commissioner of Corporations attached to such Investment Representation
Statement.
5. Method of Payment. Payment of the exercise price shall be by any of
the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) delivery of a promissory note (the "Note") of Optionee in
the amount of the exercise price together with the execution and delivery by
the Optionee of the Security Agreement attached hereto as Exhibit B; the Note
shall be in the form attached hereto as Exhibit C, shall contain the terms and
be payable as set forth therein, shall bear interest at a rate not less than
the rate required to insure that there will be no "unstated interest" with
respect to the purchase of shares under this Option, pursuant to Section 483 of
the Code and the regula-
-3-
<PAGE> 27
tions in effect thereunder at the time of such purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the
Security Agreement;
(d) surrender of other Shares of Common Stock of the Company
which have been held for six (6) months or more and which are of a value equal
to the exercise price of the Shares as to which the Option is being exercised;
or
(e) delivery of a properly executed exercise notice together
with irrevocable instructions to the Optionee's broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price.
6. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule
under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G")
as promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
7. Termination of Continuous Status as an Employee.
(a) In the event of termination of Employee's Continuous Status
as an Employee, he may, but only within 30 days after the date he ceases to be
an Employee of the Company, exercise this Option to the extent that he was
entitled to exercise it at the date of such termination as provided in
paragraph 3(a). To the extent that he was not entitled to exercise this Option
at the date of such termination, or if he does not exercise this Option within
the time specified herein, the Option shall terminate.
(b) A leave of absence for a period of 90 days or less or a
reduction in the number of hours regularly worked by Optionee to fewer than
twenty (20) hours per week will not terminate an Employee's Continuous Status,
but will suspend the exercisability of the Option as set forth in subsections
3(a)(v) and (vi).
(c) In the event that the Optionee has paid the purchase price
hereunder by delivery of a Note, and before the Note is paid in full the
Optionee ceases to be an Employee or Consultant, the Company shall have the
right to accelerate the due date of the Note, and the whole unpaid balance of
principal and interest on the Note shall become immediately due.
8. Disability of Optionee. Notwithstanding the provisions of Section 7
above, if Optionee is unable to continue his employ-
-4-
<PAGE> 28
ment with the Company as a result of his total and permanent disability
(as defined in Section 22(e)(3) of the Code), he may, but only within six (6)
months from the date of termination of employment, exercise his Option to the
extent he was entitled to exercise it at the date of such termination as
provided in paragraph 3(a). To the extent that he was not entitled to exercise
the Option at the date of termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
9. Death of Optionee. In the event of the death of Optionee:
(a) during the term of this Option and while an Employee of the
Company and having been in Continuous Status as an Employee since the date of
grant of the Option, the Option may be exercised, at any time within six (6)
months following the date of death, by Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only
to the extent of the right to exercise that had accrued at the date of death;
or
(b) within 30 days after the termination of Optionee's
Continuous Status as an Employee, the Option may be exercised, at any time
within six (6) months following the date of death, by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
termination.
10. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
11. Term of Option. This Option may not be exercised after the later to
occur of (a) the date six (6) months after the Option becomes fully exercisable
or (b) five (5) years and six (6) months (five (5) years if Optionee owns,
immediately before the Option is granted, stock representing more than 10
percent of the total combined voting power of all classes of stock of the
Company or of any Parent or Subsidiary) from the date of grant of this Option,
and may be exercised during such term only in accordance with the Plan and the
terms of this Option.
12. Early Disposition of Stock. Optionee understands that if he disposes
of any Shares received under this Option within two (2) years after the date of
this Agreement or within one (1) year after such Shares were transferred to
him, he will be treated for federal income tax purposes as having received
ordinary income at
-5-
<PAGE> 29
the time of such disposition in an amount generally measured by the difference
between the price paid for the Shares and the lower of the fair market value of
the Shares on the date of the exercise or the fair market value on the date of
disposition. The amount of such ordinary income may be measured differently if
the Optionee is an officer, director, or 10% stockholder of the Company or if
the shares are subject to a substantial risk of forfeiture at the time they
were transferred to Optionee. Optionee hereby agrees to notify the Company in
writing within 30 days after the date of any such disposition. Optionee
understands that if he disposes of such Shares at any time after the expiration
of such two-year and one-year holding periods, any gain on such sale will be
taxed at capital gain rates.
OCTEL COMMUNICATIONS CORPORATION,
a Delaware corporation
By: ___________________________
Treasurer
Optionee acknowledges receipt of a copy of the Plan and certain
information related thereto, a copy of which is annexed hereto, and represents
that he is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
Optionee further acknowledges that he has read and is familiar with the terms
of the Plan and this Agreement and has read and understands Sections 3(a)(ix)
and 7(b), and has had an opportunity to obtain the advice of counsel prior to
executing this Agreement.
Dated: ______________________
__________________________
Optionee
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<PAGE> 30
NOTICE OF EXERCISE
TO: OCTEL COMMUNICATIONS CORPORATION
ATTN: Secretary of Octel Communications Corporation
SUBJECT: Notice of Intention to Exercise Stock Option
In respect of the stock option granted to the undersigned
______________________ on ______________, 19__ to purchase an aggregate of
_______________ shares of Octel Communication's Common Stock, this is official
notice that the undersigned intends to exercise such option to purchase as
follows:
Number of Shares: ______________________
Date of Purchase: ______________________
Mode of Payment: ______________________
Social Security #: ______________________
Grant Number: ______________________
The shares should be issued as follows:
Name: _____________________________
Address: _____________________________
_____________________________
_____________________________
_____________________________
Signed: _____________________________
Date: _____________________________
<PAGE> 1
Exhibit 10.3
OCTEL COMMUNICATIONS CORPORATION
ANNUAL SENIOR PERSONNEL INCENTIVE (ASPIN) PLAN
1. PURPOSE
The purpose of the Annual Senior Personnel Incentive ("ASPIN Plan") is to
provide performance incentives for those members of the management of Octel
Communications (the "Company") and other senior level employees who, in the
execution of their responsibilities, are in a position to significantly
influence the performance level for the Company. The ASPIN Plan is designed
to encourage the achievement of overall Company objectives as well as to
recognize and reward individual accomplishment.
2. TERM
The term of the ASPIN Plan is 1 year, to coincide with the Fiscal Year,
commencing July 1, and ending June 30. The ASPIN Plan will be subject to
review, modification, and renewal by the Board of Directors of the Company
(the "Board") on an annual basis.
3. PLAN ADMINISTRATION
The ASPIN Plan will be administered by an Executive Compensation Committee
(the "Committee") composed of designated Executive Staff members. Subject to
the review and approval of the Chief Executive Officer of the Company (the
"CEO"), the Committee will have responsibility to review and approve: (a)
participation levels, (b) target bonuses, and (c) individual performance
objectives, (d) year-end individual performance evaluations, and (e)
communications to employees regarding the ASPIN Plan.
4. ELIGIBILITY
4.1 Employees of the Company, designated by the Committee, will be eligible
to participate in the ASPIN Plan. Employees hired or promoted into such
positions during the fiscal year will be eligible to participate, with
the target bonus for such participants determined according to the
provisions of Section 5.0 below.
4.2 To be eligible to receive a bonus under the ASPIN Plan, the participant
must be employed by the Company on the last working day of the fiscal
year for which the bonus is to be paid. No bonus will be payable if the
participant is not so employed, provided, however, that where termination
of employment is due to death or disability of the participant, or normal
retirement as defined by the Company's retirement plan then in effect, a
pro-rata payment of the bonus may be made, at the discretion of the
Committee. The Company also reserves the right to withhold payment of
any or all of the bonus if the employee is on a leave of absence for
longer than nine months during the fiscal year (to be reviewed on a
case-by-case basis).
5. TARGET BONUSES
5.1 General: At the start of the ASPIN Plan term a target bonus will be set
for each participant, based upon the responsibility level and appropriate
target total compensation level for the participant. All target bonuses
are subject to the review and approval of the Committee.
5.2 Percentage of Base Salary: Target bonuses for all participants will be
expressed as a percentage of gross base salary paid during the fiscal
year. For purposes of the Plan, "gross base salary" includes base salary
<PAGE> 2
actually paid to the employee in the current fiscal year (before taxes
and other deductions). Excluded from earnings will be bonus payments
made in the current fiscal year for performance in the previous
fiscal year.
5.3 New Hires/Promotions: Employees hired or promoted into an eligible
position during the fiscal year will normally have a target bonus set at
the minimum of the appropriate target bonus range. Since the target
bonus percentage applies only to base salary paid during the eligibility
period, the bonus will be automatically prorated.
5.4 Demotions or Reclassifications: Employees downgraded to non-eligible
positions during the fiscal year will have their bonus participation
reviewed on a case-by-case basis. Since the reason for the downgrade
could be voluntary or involuntary due to individual performance or
business necessity, the handling of the bonus will be subject to review
and approval of the Committee.
6. COMPANY PERFORMANCE OBJECTIVES
Company performance objectives will be set for purposes of the ASPIN Plan will
be recommended by the President/CEO, subject to the review and approval of the
Board.
7. INDIVIDUAL PERFORMANCE OBJECTIVES
Individual performance objectives will be set for each participant by the
participant's immediate supervisor, department director, or above, subject to
the review and approval of the cognizant Executive Staff member. Performance
objectives will normally be goals that are strategic in nature and measurable.
8. PERFORMANCE MONITORING
During the ASPIN Plan year, Company and individual performance will be
monitored. Adjustments to performance objectives may be made where
appropriate, subject to the review and approval of the Executive Staff member,
with respect to individual performance objectives.
9. PERFORMANCE CRITERIA WEIGHTINGS
For all participants, 50% of the bonus will be based upon Company performance
and 50% will be based upon individual performance.
10. BONUS DETERMINATION PROCESS
10.1 Portion of Bonus Based on Company Performance: At the end of the fiscal
year, Company performance against objectives will be determined
according to the audited financial statements of the Company. The
portion of the target bonus based upon Company performance will be
adjusted as illustrated to Exhibit A.
10.2 Portion of Bonus Based on Individual Performance: At the end of the
ASPIN Plan year, an evaluation of performance versus plan goals will be
made by the participant's management. Such evaluations will be subject
to the review and approval of the Committee. The portion of the target
bonus based upon individual performance will be adjusted between 0% and
100% based upon achievement of performance against measurable
objectives.
10.3 Total Bonus: The Company and individual performance factors operate
independently. The participant's total bonus will be the sum of the
portion earned based on Company performance and the portion earned based
on individual performance.
10.4 Minimum Required Performance Levels: Notwithstanding the foregoing, NO
COMPANY-PERFORMANCE BONUS WILL BE PAYABLE TO ANY PARTICIPANT UNLESS THE
MINIMUM COMPANY PERFORMANCE LEVEL IS ACHIEVED. The
<PAGE> 3
Company also reserves the right to withhold payment of the
individual portion of the bonus if the Company is not profitable (to be
determined at year end).
Further, regardless of Company performance, no bonus will be paid to
the participant if the PARTICIPANT IS NOT MEETING GENERAL JOB
REQUIREMENTS (a rating of "good" or better) as determined by management
at the end of the fiscal year. If the participant does not receive a
bonus because the foregoing minimum requirements are not met, the
participant may nevertheless be eligible to receive an incentive payment
under the Company's Profit Sharing Plan, provided that the eligibility
requirements of that plan are met.
11. BONUS DISTRIBUTION
Bonuses will be distributed to participants as soon as practical after the
close of the fiscal year for which the bonus has been earned. Such
distribution will be subject to the eligibility requirements specified in
Section 4.0 above.
12. MISCELLANEOUS
12.1 The ASPIN Plan may be amended or terminated by the Company at any time,
except that amendment or termination will not affect bonus payments made
prior to such amendment or termination.
12.2 All Bonus payments under the ASPIN Plan are subject to the discretion of
the Company, and prior to distribution, pursuant to the provisions of
the ASPIN Plan, bonus payments may be reduced or eliminated entirely if
business considerations of the Company so require.
12.3 Participation in the ASPIN Plan does not constitute an agreement to
employ the participant for any length of time, and shall not restrict
the Company's right to terminate the employment of the participant for
any reason and at any time.
12.4 The Board of Directors may, at its discretion, partially fund the ASPIN
Plan if in its judgment factors causing under-achievement vis-a- vis
company goals were due to circumstances not fully related to the
performance of the ASPIN participants. In such cases, pro-rata bonuses
for all or some of the ASPIN participants would be authorized.
<PAGE> 1
EXHIBIT 10.15
U.S. $30,000,000
CREDIT AGREEMENT
DATED AS OF JUNE 30, 1994
____________________
BY AND AMONG
OCTEL COMMUNICATIONS CORPORATION,
THE BANKS HEREIN NAMED AS THE BANKS
AND
THE FIRST NATIONAL BANK OF BOSTON, AS AGENT
<PAGE> 2
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SECTION I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION II DESCRIPTION OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 The Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Notice and Manner of Borrowing or Conversion of Loans. . . . . . . . . . . . . . . . 10
2.3 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.4 Fees and Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a) Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(b) Agent's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(c) Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.5 Reduction of Commitment Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.6 The Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.7 Duration of Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.8 Interest Rates and Payments of Interest . . . . . . . . . . . . . . . . . . . . . . 14
2.9 Changed Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.10 Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.11 Payments and Prepayments of the Loans . . . . . . . . . . . . . . . . . . . . . . . 17
2.12 Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.13 Overdue Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.14 Payments Not at End of Interest Period . . . . . . . . . . . . . . . . . . . . . . . 18
2.15 Computation of Interest and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION III CONDITIONS OF LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.1 Conditions Precedent to Initial Loan . . . . . . . . . . . . . . . . . . . . . . . . 19
3.2 Conditions Precedent to All Loans . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION IV REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . 21
4.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.2 Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.3 Valid Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.4 Consents or Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.5 Title to Properties; Absence of Encumbrances . . . . . . . . . . . . . . . . . . . . 22
4.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.7 Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.8 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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4.11 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 23
4.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.13 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.14 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION V AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.1 Financial Statements and Other Reporting Requirements . . . . . . . . . . . . . . . 25
5.2 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.3 Maintenance and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.4 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.5 Inspection by the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.6 Maintenance of Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.7 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(a) Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(b) Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(c) Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(d) Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . 28
5.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.9 Post Closing Delivery of Termination Statement . . . . . . . . . . . . . . . . . . . 28
5.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION VI NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.2 Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.3 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.4 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.5 Merger; Consolidation; Sale or Lease of Assets . . . . . . . . . . . . . . . . . . . 32
6.6 Acquisitions and Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.7 Subsidiary Stock Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.8 Equity Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.9 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION VII DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION VIII AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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8.1 Appointment, Powers and Immunities . . . . . . . . . . . . . . . . . . .. . . . . . 37
8.2 Representations and Warranties; No Responsibility for Inspection . . . .. . . . . . 38
8.3 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 39
8.4 Delegation of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.5 Right to Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.6 Resignation and Appointment of Successor Agent . . . . . . . . . . . . . . . . . . 40
8.7 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.8 No Obligations of Borrower . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 40
SECTION IX MISCELLANEOUS . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 40
9.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 40
9.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.3 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 42
(a) General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(b) Survival; Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
9.4 Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 42
9.5 Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.6 No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.8 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.9 Binding Effect of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.10 Assignments, Participations, etc. . . . . . . . . . . . . . . . . . . . . . . . . 44
9.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.12 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.13 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.14 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.15 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
iii
<PAGE> 5
EXHIBITS
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Notice of Borrowing or Conversion
EXHIBIT C Form of Report of Chief Financial Officer
EXHIBIT D Form of Opinion of Counsel to Borrower
iv
<PAGE> 6
CREDIT AGREEMENT
DATED AS OF JUNE 30, 1994
THIS CREDIT AGREEMENT ("AGREEMENT") is made as of June 30, 1994, by and among
OCTEL COMMUNICATIONS CORPORATION ("BORROWER"), a Delaware corporation having
its chief executive office at 1001 Murphy Ranch Road, Milpitas, California
95035-7912, THE FIRST NATIONAL BANK OF BOSTON, a national banking association
("FNBB"), having its head office at 100 Federal Street, Boston, Massachusetts
02110, and each other lender whose name is set forth on the signature pages
hereof or which may hereafter execute and deliver an instrument of assignment
with respect to this Agreement (individually, the "BANK," and collectively, the
"BANKS") and FNBB, as Agent.
SECTION I
DEFINITIONS
1.1 DEFINITIONS.
All capitalized terms used in this Agreement or in the Note or in any
certificate, report or other document made or delivered pursuant to this
Agreement (unless otherwise defined therein) shall have the meanings assigned
to them below:
ACQUISITION. Any transaction, or any series of related transactions, by
which any Borrower or any of its Subsidiaries directly or indirectly (a)
acquires any ongoing business or all or substantially all of the assets of any
firm, partnership, joint venture, corporation or division thereof, whether
through purchase of assets, merger or otherwise, or (b) acquires (in one
transaction or as the most recent transaction in a series of transactions)
control of at least a majority of the stock of a corporation having ordinary
voting power for the election of directors, or (c) acquires control of fifty
percent (50%) or more of the ownership interest in any partnership or joint
venture.
ADJUSTED LIBOR RATE. Applicable to any Interest Period, shall mean a rate
per annum determined pursuant to the following formula:
ALR = [ LIBOR ]*
-----------
[ 1.00 - RP ]
ALR = Adjusted LIBOR Rate
LIBOR = London Interbank Offered Rate
RP = Reserve Percentage
<PAGE> 7
* The amount in brackets shall be rounded upwards, if necessary, to the
next higher 1/100 of 1%.
Where: "London Interbank Offered Rate" applicable to any LIBOR Loan for any
Interest Period means the rate of interest determined by Agent to be
the prevailing rate per annum at which deposits in U.S. dollars are
offered to FNBB by first-class banks in the interbank eurodollar
market in which it regularly participates on or about 10:00 a.m.
(Boston time) two Business Days before the first day of such Interest
Period in an amount approximately equal to the principal amount of the
LIBOR Loan to which such Interest Period is to apply for a period of
time approximately equal to such Interest Period.
"Reserve Percentage" applicable to any Interest Period
means the maximum reserve percentage (expressed as a decimal), whether
or not applicable to any Bank, under regulations issued from time to
time by the Board of Governors of the Federal Reserve System for
determining the maximum reserve requirement (including, without
limitation, any basic, supplemental, emergency or marginal reserve
requirement) with respect to "Eurocurrency liabilities" as that term
is defined under such regulations.
The Adjusted LIBOR Rate shall be adjusted automatically as of the effective
date of any change in the Reserve Percentage.
AFFECTED LOANS. See Section 2.9(a).
AGENT. The First National Bank of Boston, solely in its capacity as Agent.
AGREEMENT. This Agreement, as the same may be supplemented or amended from
time to time.
BANK OR BANKS. FNBB and each other lender which may hereafter execute and
deliver an instrument of assignment with respect to this Agreement.
BASE RATE. The greater of (i) the rate of interest announced from time to
time by FNBB at its head office as its Base Rate, and (ii) the Federal Funds
Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the
next 1/8 of 1%).
BASE RATE LOAN. Any Loan bearing interest determined with reference to the
Base Rate.
BORROWER. Octel Communications Corporation.
<PAGE> 8
BUSINESS DAY. (i) For all purposes other than as covered by clause (ii)
below, any day other than a Saturday, Sunday or legal holiday on which banks in
Boston, Massachusetts and San Francisco, California are open for the conduct of
a substantial part of their commercial banking business; and (ii) with respect
to all notices and determinations in connection with, and payments of principal
and interest on, LIBOR Loans, any day that is a Business Day described in
clause (i) and that is also a day for trading by and between banks in U.S.
Dollar deposits in the London interbank eurodollar market.
CODE. The Internal Revenue Code of 1986 and the rules and regulations
thereunder, collectively, as the same may from time to time be supplemented or
amended and remain in effect.
COMMITMENT. The amount set forth next to the name of such Bank on SCHEDULE 1
now or hereafter attached hereto (and as adjusted from time to time).
COMMITMENT AMOUNT. $30,000,000 in the aggregate, or any lesser amount,
including zero, resulting from a termination or reduction of such amount in
accordance with Section 2.5 or Section 7.2.
CONSOLIDATED CURRENT LIABILITIES. At any date as of which the amount thereof
shall be determined, all amounts that should, in accordance with generally
accepted accounting principles, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date,
plus, to the extent not already included therein, all Loans and all
Indebtedness that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendable at
the option of Borrower or any Subsidiary to a date more than one year from the
date of determination.
CONSOLIDATED TANGIBLE NET WORTH. At any date as of which the amount thereof
shall be determined, the Consolidated Total Assets of Borrower and its
Subsidiaries minus (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses
except prepaid expenses, (c) all reserves not already deducted from assets, (d)
any write-up in the book value of assets resulting from any revaluation thereof
subsequent to the date of the financial statements referred to in Section 4.6
and (e) the value of any minority interests in Subsidiaries and minus (ii)
Consolidated Total Liabilities.
CONSOLIDATED TOTAL ASSETS. At any date as of which the amount thereof shall
be determined, all obligations that should, in accordance with generally
accepted accounting principles, be classified as assets on the balance sheet of
Borrower and its Subsidiaries.
<PAGE> 9
CONSOLIDATED TOTAL LIABILITIES. At any date as of which the amount thereof
shall be determined, all obligations that should, in accordance with generally
accepted accounting principles, be classified as liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, including in any
event all Indebtedness.
CONTINGENT LIABILITIES. As applied to Borrower and its Subsidiaries, (i) any
Guarantee of Borrower or its Subsidiaries; and (ii) any direct or indirect
obligation or liability, contingent or otherwise, of Borrower or its
Subsidiaries, (a) in respect of any letter of credit or similar instrument
issued for the account of Borrower or its Subsidiaries as to which such entity
is otherwise liable for reimbursement of drawings, (b) to purchase any
materials, supplies or other property from, or to obtain the services of,
another person or entity if the relevant contract or other related document or
obligation requires that payment for such materials, supplies or other
property, or for such services, shall be made regardless of whether delivery of
such materials, supplies or other property is ever made or tendered, or such
services are ever performed or tendered, or (c) in respect of any Rate Contract
that is not entered into in connection with a bona fide hedging operation that
provides offsetting benefits to Borrower or any of its Subsidiaries. The
amount of any Contingent Obligation shall (subject, in the case of Guarantees,
to the last sentence of the definition of "Guarantee") be deemed equal to the
maximum reasonably anticipated liability in respect thereof, and shall, with
respect to item (ii)(c) of this definition, be marked to market on a current
basis.
CONTROLLED GROUP. All trades or businesses (whether or not incorporated)
under common control that, together with Borrower, are treated as a single
employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA.
DEFAULT. An Event of Default or event or condition that, but for the
requirement that time elapse or notice be given, or both, would constitute an
Event of Default.
DESIGNATED DEPOSIT ACCOUNT. A demand deposit account maintained by Borrower
with FNBB.
DISCLOSURE LETTER. That letter of even date herewith of Borrower disclosing
certain exceptions to the representations and warranties set forth herein.
ENCUMBRANCES. See Section 6.4.
ERISA. The Employee Retirement Income Security Act of 1974 and the rules and
regulations thereunder, collectively, as the same may from time to time be
supplemented or amended and remain in effect.
<PAGE> 10
ENVIRONMENTAL LAWS. Any and all applicable foreign, federal, state and local
environmental, health or safety statutes, laws, regulations, rules, ordinances,
policies and rules or common law (whether now existing or hereafter enacted or
promulgated), of all governmental agencies, bureaus or departments which may
now or hereafter have jurisdiction over Borrower or any of its Subsidiaries and
all applicable judicial and administrative and regulatory decrees, judgments
and orders, including common law rulings and determinations, relating to injury
to, or the protection of, real or personal property or human health or the
environment, including, without limitation, all requirements pertaining to
reporting, licensing, permitting, investigation, remediation and removal of
emissions, discharges, releases or threatened releases of Hazardous Materials,
chemical substances, pollutants or contaminants whether solid, liquid or
gaseous in nature, into the environment or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of such Hazardous Materials, chemical substances, pollutants or
contaminants.
EVENT OF DEFAULT. Any event described in Section 7.1.
FEDERAL FUNDS EFFECTIVE RATE. For any day, a fluctuating interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a Business Day,
the average of the quotations for such day on such transactions received by
Agent from three Federal funds brokers of recognized standing selected by
Agent.
FINAL PAYMENT DATE. June 30, 1997.
GUARANTEES. As applied to Borrower and its Subsidiaries, all guarantees,
endorsements or other contingent or surety obligations with respect to
obligations of others whether or not reflected on the consolidated balance
sheet of Borrower and its Subsidiaries, including any obligation to furnish
funds, directly or indirectly (whether by virtue of partnership arrangements,
by agreement to keep-well or otherwise), through the purchase of goods,
supplies or services, or by way of stock purchase, capital contribution,
advance or loan, or to enter into a contract for any of the foregoing, for the
purpose of payment of obligations of any other person or entity. The amount of
any Guarantee shall be deemed equal to the stated or determinable amount of the
primary obligation in respect of which such Guarantee is made or, if not stated
or if indeterminable, the maximum reasonably anticipated liability in respect
thereof.
<PAGE> 11
HAZARDOUS MATERIAL. Any substance (i) the presence of which requires or may
hereafter require notification, investigation or remediation under any
Environmental Law; (ii) which is or becomes defined as a "hazardous waste",
"hazardous material" or "hazardous substance" or "controlled industrial waste"
or "pollutant" or "contaminant" under any present or future Environmental Law
or amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
et seq.) and any applicable local statutes and the regulations promulgated
thereunder; (iii) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of any foreign country, the United States, any state
of the United States, or any political subdivision thereof to the extent any of
the foregoing has or had jurisdiction over Borrower and any of its
Subsidiaries; or (iv) without limitation, which contains gasoline, diesel fuel
or other petroleum products, asbestos or polychlorinated biphenyls ("PCB's").
INDEBTEDNESS. As applied to Borrower and its Subsidiaries, (i) all
obligations for borrowed money or other extensions of credit whether or not
secured or unsecured, absolute or contingent, including, without limitation,
unmatured reimbursement obligations with respect to letters of credit and all
obligations representing the deferred purchase price of property, other than
accounts payable arising in the ordinary course of business, (ii) all
obligations evidenced by bonds, notes, debentures or other similar instruments,
(iii) all obligations secured by any mortgage, pledge, security interest or
other lien on property owned or acquired by Borrower or any of its Subsidiaries
whether or not the obligations secured thereby shall have been assumed, (iv)
that portion of all obligations arising under capital leases that is required
to be capitalized on the consolidated balance sheet of Borrower and its
Subsidiaries, (v) all Guarantees, (vi) all net obligations with respect to Rate
Contracts, and (vii) all obligations that are immediately due and payable out
of the proceeds of or production from property now or hereafter owned or
acquired by Borrower or any of its Subsidiaries.
INTEREST PERIOD. With respect to each LIBOR Loan, the period commencing on
the date of the making or continuation of or conversion to such LIBOR Loan and
ending one, two or three months thereafter, as Borrower may elect in the
applicable Notice of Borrowing or Conversion; provided that:
(i) any Interest Period (other than an Interest Period determined
pursuant to clause (iii) below) that would otherwise end on a day that is
not a Business Day shall be extended to the next succeeding Business Day
unless, in the case of LIBOR Loans, such Business Day falls in the next
calendar
<PAGE> 12
month, in which case such Interest Period shall end on the immediately
preceding Business Day;
(ii) any Interest Period applicable to a LIBOR Loan that begins on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (iii) below, end on the last
Business Day of a calendar month;
(iii) any Interest Period during the Revolving Credit Period that
would otherwise end after the Final Payment Date shall end on the Final
Payment Date;
(iv) notwithstanding clause (ii) above, no Interest Period applicable
to a LIBOR Loan shall have a duration of less than one month, and if any
Interest Period applicable to such Loans would be for a shorter period,
such Interest Period shall not be available hereunder.
INVESTMENT. As applied to Borrower and its Subsidiaries, the purchase or
acquisition of any share of capital stock, partnership interest, joint venture
interest, evidence of indebtedness or other equity security of any other person
or entity, any loan, advance or extension of credit to, or contribution to the
capital of, any other person or entity, any real estate held for sale or
investment, any commodities futures contracts held other than in connection
with bona fide hedging transactions, any other investment in any other person
or entity, and the making of any commitment or acquisition of any option to
make an Investment.
JOINT VENTURE. A corporation, partnership, joint venture or other similar
arrangement (whether created pursuant to contract or conducted through a
separate entity) now or hereafter formed or maintained by Borrower or any of
its subsidiaries with another person or entity in order to conduct a common
venture or enterprise with such person or entity.
LETTER OF CREDIT. Any letter of credit issued pursuant to Section 2.3 of
this Agreement, and "Letters of Credit" means all such letters of credit,
collectively.
LIBOR LOAN. Any Loan bearing interest at a rate determined with reference to
the Adjusted LIBOR Rate.
LOAN. A loan made to Borrower by the Banks pursuant to Section 2.1(a) of
this Agreement, and "Loans" means all of such loans, collectively.
<PAGE> 13
LOAN DOCUMENTS. Any and all of this Agreement, the Note, and any and all
other agreements, documents and instruments executed and delivered by or on
behalf or in support of Borrower to Agent or any Bank or their authorized
designee evidencing or otherwise relating to the Loans and the Letters of
Credit, on behalf of Banks, as the same may from time to time be amended,
modified, supplemented or renewed.
"MAJORITY BANKS" means at any time Banks then holding in excess of 50% of the
then aggregate unpaid principal amount of the Loans, or, if no such principal
amount is then outstanding, Banks then having in excess of 50% of the
Commitments.
MATERIAL ADVERSE EFFECT. (i) a material adverse change in, or a material
adverse effect upon, the operations, business, properties, or condition
(financial or otherwise) of Borrower or Borrower and its Subsidiaries taken as
a whole; (ii) a material impairment of the ability of Borrower to perform under
any Loan Document and avoid any Event of Default; or (iii) a material adverse
effect upon the legality, validity, binding effect or enforceability of any
Loan Document.
NEW CAMPUS. That new facility located at 1001 Murphy Ranch Road in Milpitas,
California, which Borrower intends to occupy upon completion.
NOTE. A promissory note of Borrower, substantially in the form of EXHIBIT A
hereto, evidencing the obligation of Borrower to Agent to repay the Loans.
NOTICE OF BORROWING OR CONVERSION. See Section 2.2.
OBLIGATIONS. Any and all obligations of Borrower to the Banks and/or Agent
arising in connection with this Agreement or the other Loan Documents of every
kind and description, direct or indirect, absolute or contingent, primary or
secondary, due or to become due, now existing or hereafter arising, regardless
of how they arise or by what agreement or instrument, if any, and including
obligations to perform acts and refrain from taking action as well as
obligations to pay money.
PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to
any or all of its functions under ERISA.
PERMITTED ENCUMBRANCES. See Section 6.4.
PLAN. At any time, an employee pension or other benefit plan that is subject
to Title IV of ERISA or subject to the minimum funding standards under Section
412 of the Code and is either (i) maintained by Borrower or any member of the
Controlled Group for employees of Borrower or any member of the Controlled
Group or (ii) if such Plan
<PAGE> 14
is established, maintained pursuant to a collective bargaining agreement or any
other arrangement under which more than one employer makes contributions and to
which Borrower or any member of the Controlled Group is then making or accruing
an obligation to make contributions or has within the preceding five Plan years
made contributions.
QUALIFIED INVESTMENTS. As applied to Borrower and its Subsidiaries,
investments in (i) notes, bonds or other obligations of the United States of
America or any agency thereof that as to principal and interest constitute
direct obligations of or are guaranteed by the United States of America; (ii)
certificates of deposit or other deposit instruments or accounts or commercial
paper of FNBB; (iii) certificates of deposit or other deposit instruments or
accounts of banks or trust companies organized under the laws of the United
States or any state thereof that have capital and surplus of at least
$100,000,000, (iii) commercial paper that is rated not less than prime-one or
A-1 or their equivalents by Moody's Investors Service, Inc. or Standard &
Poor's Corporation, respectively, or their successors, and (iv) any repurchase
agreement secured by any one or more of the foregoing; (v) any Investments
permitted by Borrower's written and then current investment policy, as amended
from time to time, provided that such investment policy (and any such
amendments thereto) has been approved in writing by Requisite Banks, such
approval not to be unreasonably withheld.
RATE CONTRACTS. Interest rate and currency swap agreements, cap, floor and
collar agreements, interest rate insurance, currency spot and forward contracts
and other agreements or arrangements designed to provide protection against
fluctuations in interest or currency exchange rates.
REQUIREMENT OF LAW. As to any person or entity, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
governmental authority, in each case applicable to or binding upon the person
or entity or any of its property is subject.
REQUISITE BANKS. At any time Banks then holding at least 70% of the then
aggregate unpaid principal amount of the Loans, or, if no such principal amount
is then outstanding, Banks then having at least 70% of the Commitments.
RESPONSIBLE OFFICER. The Chief Executive Officer, the Chief Financial
Officer, the President or Treasurer of Borrower or any other officer reporting
directly to any of them.
REVOLVING CREDIT PERIOD. The period beginning on the date of this Agreement
and extending through and including the Revolving Credit Termination Date or
such earlier date on which the Commitments
<PAGE> 15
to make Loans are terminated or the Commitment Amount is reduced to zero in
accordance with the terms hereof.
REVOLVING CREDIT TERMINATION DATE. June 30, 1996.
SHARE REPURCHASE PROGRAM. That Share Repurchase Program of Borrower
presented to, and approved by, the Board of Directors of Borrower at its July
28, 1994 meeting, as such program shall be amended and modified from time to
time with the written approval of Majority Banks.
SUBSIDIARY. Any corporation, association, joint stock company, business
trust or other similar organization of which 50% or more of the ordinary voting
power for the election of a majority of the members of the board of directors
or other governing body of such entity is held or controlled by Borrower or a
Subsidiary of Borrower; or any other such organization the management of which
is directly or indirectly controlled by Borrower or a Subsidiary of Borrower
through the exercise of voting power or otherwise; or any joint venture,
whether incorporated or not, in which Borrower has a 50% ownership interest.
SUBORDINATED DEBT. Any Indebtedness of Borrower that is subordinated to the
Obligations on terms approved in writing by Agent and Requisite Banks, which
approval may be given or withheld in their sole and absolute discretion.
VMX MERGER AGREEMENT. That Agreement and Plan of Reorganization by and among
Borrower, Octel Acquisition Corporation and VMX, Inc., dated January 29, 1994.
1.2 ACCOUNTING TERMS. All terms of an accounting character shall have the
meanings assigned thereto by generally accepted accounting principles applied
on a basis consistent with the financial statements referred to in Section 4.6
of this Agreement, modified to the extent, but only to the extent, that such
meanings are specifically modified herein.
SECTION II
DESCRIPTION OF CREDIT
2.1 THE LOANS.
(a) Subject to the terms and conditions hereof, each Bank severally agrees
to make Loans to Borrower up to the amount of its Commitment, from time to time
until the close of business on the Revolving Credit Termination Date, in such
sums as Borrower may request, provided that the aggregate principal amount of
all Loans at any one time outstanding hereunder shall not exceed the Commitment
<PAGE> 16
Amount less the aggregate principal amount undrawn under Letters of Credit then
outstanding (the "MAXIMUM AVAILABILITY"). Borrower may borrow, prepay pursuant
to Section 2.11 and reborrow, from the date of this Agreement until the
Revolving Credit Termination Date, the full amount of the Commitment Amount or
any lesser sum that is at least $1,000,000 and an integral multiple of
$100,000.
(b) The Loans shall be fully amortizing, with the principal amount under
the Loans outstanding as of the Commitment Termination Date being due and
payable in four (4) consecutive equal quarterly installments commencing on June
30, 1996 with subsequent installments due and payable on September 30, 1996 and
December 31, 1996 and the final installment due and payable on the Final
Payment Date.
(c) Provided that no Default shall have occurred and be continuing,
Borrower may convert all or any part (in integral multiples of $100,000) of
any outstanding Loan into a Loan of any other type provided for in this
Agreement in the same aggregate principal amount, on any Business Day (which,
in the case of a conversion of a LIBOR Loan, shall be the last day of the
Interest Period applicable to such LIBOR Loan). Borrower shall give Agent
prior notice of each such conversion (which notice shall be effective upon
receipt) in accordance with Section 2.2.
(d) The obligation of Banks to make Loans and issue or participate in
Letters of Credit hereunder shall be limited at any time to the Maximum
Availability. Nothing contained in this Agreement shall under any circumstance
be deemed to require any Bank to make any Loan or participate in the issuance
of any Letter of Credit hereunder which, in the aggregate principal amount,
taking into account the making of such Loan or participation in such Letter of
Credit, exceeds such Bank's Commitment.
2.2 NOTICE AND MANNER OF BORROWING OR CONVERSION OF LOANS.
(a) Whenever Borrower desires to obtain or continue a Loan hereunder or
convert an outstanding Loan into a Loan of another type provided for in this
Agreement, Borrower shall notify Agent (which notice shall be irrevocable) by
telefax, telegraph or telephone received no later than 10:00 a.m. Boston time
on the date one Business Day before the day on which the requested Loan is to
be made or continued as or converted to a Base Rate Loan, and received no later
than 10:00 a.m. Boston time on the date three (3) Business Days before the day
on which the requested Loan is to be made or continued as or converted to a
LIBOR Loan. Such notice shall specify (i) the effective date and amount of
each Loan or portion thereof to be continued or converted, subject to the
limitations set forth in Section 2.1, (ii) the interest rate option to be
applicable thereto, and (iii) the duration of the applicable Interest Period,
if any (subject to the provisions of the definition of Interest Period and
<PAGE> 17
Section 2.7). Each such notification (a "NOTICE OF BORROWING OR CONVERSION")
shall be immediately followed by a written confirmation thereof by Borrower in
substantially the form of EXHIBIT B hereto, provided that if such written
confirmation of a notice given by telefax, telegraph or telephone differs in
any material respect from the action taken by Agent, the records of Agent shall
control absent manifest error.
(b) Agent shall promptly notify each Bank as to the content of each Notice
of Borrowing or Conversion and Agent's determination as to whether conditions
to the making of the Loan have been satisfied. Not later than 12:00 noon,
Boston time, on the date of such borrowing, each Bank shall make available its
pro rata share of such borrowing in immediately available funds, by wiring the
proceeds thereof to Agent for the account of Borrower. Upon satisfaction of
the applicable conditions precedent set forth in Section 3, the amount of the
Loan shall be credited in immediately available funds to the Designated Deposit
Account.
2.3 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement and in reliance
upon the representations and warranties of Borrower set forth herein, at any
time and from time to time from the date hereof through the Business Day
immediately prior to the Revolving Credit Termination Date, FNBB shall issue
for the account of Borrower such standby letters of credit ("LETTERS OF
CREDIT") as Borrower may request, which request shall be made by delivering to
Agent a duly executed letter of credit application on FNBB's standard form;
provided that each such Letter of Credit (i) (i) is denominated in U.S.
Dollars, (ii) supports an obligation maturing before the Revolving Credit
Termination Date, (iii) requires drawings based on sight drafts, and (iv) is
issuable without violating any Requirement of Law. Notwithstanding anything to
the contrary contained in this Agreement, upon issuing any such Letter of
Credit, the aggregate principal amount undrawn under all Letters of Credit then
outstanding shall not exceed the Commitment Amount less the amount of all Loans
then outstanding. No Letter of Credit shall have an expiration date that is
later than the earlier of the Revolving Credit Termination Date or that date
one year following the date of issuance thereof.
(b) Unless otherwise expressly provided therein, each beneficiary named by
Borrower with respect to a Letter of Credit issued hereunder shall be permitted
to make full or partial draws under such Letter of Credit. Upon the making of
any draw under a Letter of Credit by such beneficiary, the full amount of such
draw shall be immediately due and payable by Borrower to FNBB. FNBB shall
immediately notify Borrower, Banks and Agent of the amount of such draw and,
upon receipt of such notice, each Bank shall be deemed to have purchased a
participation from FNBB in the original principal
<PAGE> 18
amount of such Letter of Credit equal to an amount proportionate to such Bank's
pro rata share of the Commitment Amount.
(c) Upon receipt of notice from FNBB that Borrower has not reimbursed FNBB
for any payment made by FNBB under a Letter of Credit hereunder, Agent shall,
with notice to all Banks, cause a Base Rate Loan to be made by Banks in an
aggregate amount equal to the amount drawn under the Letter of Credit (plus any
unpaid commission). The proceeds of such Base Rate Loan shall be applied to
reimburse each Bank for such Bank's pro rata share of the payment required to
be made by FNBB under the Letter of Credit. In the event that a Base Rate Loan
shall be made to Borrower pursuant to this Section, such Base Rate Loan shall
be deemed to have been made as of the date of the draw under the respective
Letter of Credit and, except as contemplated in Section 2.1(e) above, interest
shall accrue thereon at the same rate as provided for other Base Rate Loans
under this Agreement.
(d) Without limiting Borrower's rights as set forth in Section 2.3(e)
below, the obligation of Borrower to immediately reimburse FNBB for drawings
made under Letters of Credit shall be absolute, unconditional and irrevocable,
and shall be performed strictly in accordance with the terms of this Agreement
and such Letters of Credit, under all circumstances whatsoever, including,
without limitation, the following circumstances:
(i) Any lack of validity or enforceability of the Letter of Credit, the
obligation supported by the Letter of Credit or any other agreement or
instrument relating thereto (collectively, the "RELATED DOCUMENTS");
(ii) Any amendment or waiver of or any consent to or departure from all or
any of the Related Documents;
(iii) The existence of any claim, set-off, defense or other rights
which Borrower may have at any time against any beneficiary or any transferee
of the Letter of Credit (or any persons or entities for whom any such
beneficiary or any such transferee may be acting), Banks, Agent or any other
person, whether in connection with the Loan Documents, the Related Documents or
any unrelated transaction;
(iv) Any breach of contract or other dispute between Borrower and any
beneficiary or any transferee of the Letter of Credit (or any persons or
entities for whom such beneficiary or any such transferee may be acting),
Banks, Agent or any other person;
(v) Any draft, statement or any other document presented under the Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect
whatsoever;
<PAGE> 19
(vi) Any delay, extension of time, renewal, compromise or other
indulgence or modification granted or agreed to by FNBB, with or without notice
to or approval by Borrower in respect of any of Borrower's indebtedness under
this Agreement; or
(vii) Any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
(e) Borrower assumes all risks of the acts or omissions of any beneficiary
and any transferee of each Letter of Credit; provided, however, this assumption
with respect to Agent and Banks, including FNBB, is not intended to, and shall
not, preclude Borrower's pursuing such rights and remedies as it may have
against any such beneficiary or transferee of a Letter of Credit at law or
under any other agreement. Neither Agent, nor any Bank, including FNBB, nor
any of their officers or directors shall be liable or responsible for: (i) the
use which may be made of any Letter of Credit or for any acts or omissions of
any beneficiary and any transferee of any Letter of Credit in connection
therewith; (ii) the validity, sufficiency or genuineness of documents, or of
any endorsement(s) thereon, even if such documents should in fact prove to be
in any or all respects invalid, insufficient, fraudulent or forged; or (iii)
any other circumstances whatsoever in making or failing to make payment under
the Letter of Credit; provided, however, notwithstanding anything to the
contrary contained in the preceding clauses (i), (ii) and (iii), Borrower shall
have a claim against FNBB, and FNBB shall be liable to Borrower for any direct
damages, but not for any consequential or punitive damages, suffered by
Borrower which Borrower proves were caused by FNBB's willful failure to pay
under a Letter of Credit after the presentation to it by any beneficiary (or
person to whom such Letter of Credit has been transferred in accordance with
its terms) of a sight draft and certificate strictly complying with the terms
and conditions of such Letter of Credit. In furtherance and not in limitation
of the foregoing, FNBB may accept documents that appear on their face to be in
order, without responsibility for further investigation, regardless of any
notice or information to the contrary.
2.4 FEES AND COMMISSIONS.
(a) FACILITY FEE. Borrower shall pay to Agent for the account of each
Bank during the Revolving Credit Period a facility fee computed at the rate of
one-quarter of one percent ( 1/4 of 1%) per annum on the Commitment Amount.
Facility fees shall be payable quarterly in arrears, on the last day of June,
September, December and March of each year beginning September 30, 1994 for the
period beginning on the date hereof, and on the Final Maturity Date.
<PAGE> 20
(b) AGENT'S FEE. Borrower shall pay to Agent for Agent's own account an
agency fee in the amount and at the times set forth in a letter agreement
between Borrower and Agent dated the date hereof.
(c) COMMISSIONS. Borrower shall pay to Agent a nonrefundable commission
fee with respect to each Letter of Credit issued hereunder equal to one and
one-quarter (1.25%) of the principal amount of such Letter of Credit due and
payable upon issuance, of which one-eighth percent (0.125%) of the principal
amount of such Letter of Credit shall be for the account of FNBB and the
remainder shall be for the account of Banks according to their pro rata portion
of the Commitment Amount.
2.5 REDUCTION OF COMMITMENT AMOUNT. Borrower may from time to time by
written notice delivered to the Bank at least five Business Days prior to the
date of the requested reduction, reduce by integral multiples of $5,000,000 any
unborrowed portion of the Commitment Amount provided that the effect of such
reduction shall not cause the principal amount of the Loans and the undrawn
amount of the Letters of Credit then outstanding to exceed the Commitment
Amount as so reduced. No reduction of the Commitment Amount shall be subject
to reinstatement.
2.6 THE NOTE.
(a) The Loans shall be evidenced by the Note, payable to the order of
Agent for the account of Banks in the Commitment Amount and having a final
maturity of the Final Payment Date. The Note shall be dated as of the date
hereof and shall have the blanks therein appropriately completed.
(b) Agent shall, and is hereby irrevocably authorized by Borrower to,
enter on the schedule forming a part of the Note or otherwise in its records
appropriate notations evidencing the date and the amount of each Loan, the
interest rate applicable thereto and the date and amount of each payment of
principal made by Borrower with respect thereto; and in the absence of manifest
error, such notations shall constitute conclusive evidence thereof. Agent is
hereby irrevocably authorized by Borrower to attach to and make a part of the
Note a continuation of any such schedule as and when required. No failure on
the part of Agent to make any notation as provided in this subsection (b) shall
in any way affect any Loan or the rights or obligations of Banks or Borrower
with respect thereto.
(c) Upon the request of any Bank made through the Agent, the Loans made by
such Bank may be evidenced by one or more notes in favor of each Bank and
Borrower shall, upon redelivery of the Note to Borrower, substitute such notes
in lieu of the Note. After such substitution, each Bank shall endorse on the
schedules annexed to the
<PAGE> 21
note(s) in its favor the date, amount and maturity of each Loan made by it and
the amount of each payment of principal made by Borrower with respect thereto.
Each Bank is irrevocably authorized by Borrower to endorse the note(s) in its
favor and each Bank's record shall be conclusive absent manifest error;
provided, however, that the failure of a Bank to make, or an error in making, a
notation thereon with respect to any Loan shall not limit or otherwise affect
the obligations of Borrower hereunder or under any such note to such Bank.
After the substitution of notes in favor of the Note as contemplated in this
Agreement, each reference herein to the Note shall refer to all such notes
issued in substitution therefor.
2.7 DURATION OF INTEREST PERIODS.
(a) Subject to the provisions of the definition of Interest Period, the
duration of each Interest Period applicable to a Loan shall be as specified in
the applicable Notice of Borrowing or Conversion. Subject to Section III,
Borrower shall have the option to elect a subsequent Interest Period to be
applicable to such Loan by giving notice of such election to the Bank received
no later than 10:00 a.m. Boston time on the date one Business Day before the
end of the then applicable Interest Period if such Loan is to be continued as
or converted to a Base Rate Loan and three Business Days before the end of the
then applicable Interest Period if such Loan is to be continued as or converted
to a LIBOR Loan.
(b) If Agent does not receive a notice of election of duration of an
Interest Period for a LIBOR Loan pursuant to subsection (a) above within the
applicable time limits specified therein, or if, when such notice must be
given, a Default exists, Borrower shall be deemed to have elected to convert
such Loan in whole into a Base Rate Loan on the last day of the then current
Interest Period with respect thereto.
(c) Notwithstanding the foregoing, Borrower may not select an Interest
Period that would end, but for the provisions of the definition of Interest
Period, after the Final Maturity Date.
2.8 INTEREST RATES AND PAYMENTS OF INTEREST.
(a) Each Base Rate Loan shall bear interest on the outstanding principal
amount thereof at a rate per annum equal to the Base Rate. Such interest shall
be payable on the last day of each month commencing June 30, 1994, and when
such Loan is due (whether at maturity, by reason of acceleration or otherwise).
(b) Each LIBOR Loan shall bear interest on the outstanding principal
amount thereof, for each Interest Period applicable thereto, at a rate per
annum equal to the Adjusted LIBOR Rate plus one and one-quarter percent
(1.25%). Such interest shall be payable for such
<PAGE> 22
Interest Period on the last day thereof and when such LIBOR Loan is due
(whether at maturity, by reason of acceleration or otherwise) and, if such
Interest Period is longer than three months, at intervals of three months after
the first day thereof.
2.9 CHANGED CIRCUMSTANCES.
(a) In the event that:
(i) on any date on which the Adjusted LIBOR Rate would otherwise be
set, Agent or any Bank shall have determined in good faith (which
determination shall be final and conclusive) that adequate and fair means
do not exist for ascertaining the London Interbank Offered Rate, or
(ii) at any time Agent or any Bank shall have determined in good faith
(which determination shall be final and conclusive) that:
(A) the making or continuation of or conversion of any Loan to a LIBOR
Loan has been made impracticable or unlawful by (1) the occurrence of a
contingency that materially and adversely affects the London interbank
eurodollar market or the market for certificates of deposit maintained by
dealers in New York City of recognized standing or (2) compliance by any
Bank in good faith with any applicable law or governmental regulation,
guideline or order or interpretation or change thereof by any governmental
authority charged with the interpretation or administration thereof or with
any request or directive of any such governmental authority (whether or not
having the force of law); or
(B) the Adjusted LIBOR Rate shall no longer represent the effective
cost to any Bank for U.S. dollar deposits in the interbank market for
deposits in which it regularly participates;
then, and in any such event, Agent shall forthwith so notify Borrower thereof.
Until such Bank notifies Borrower that the circumstances giving rise to such
notice no longer apply, the obligation of Agent to allow selection by Borrower
of the type of Loan affected by the contingencies described in this Section
2.9(a) (herein called "AFFECTED LOANS") shall be suspended. If at the time
Agent so notifies Borrower, Borrower has previously given Agent a Notice of
Borrowing or Conversion with respect to one or more Affected Loans but such
Loans have not yet gone into effect, such notification shall be deemed to be
void and Borrower may borrow Loans of a non-affected type by giving a
substitute Notice of Borrowing or Conversion pursuant to Section 2.2 hereof.
<PAGE> 23
Upon such date as shall be specified in such notice (which shall not be
earlier than the date such notice is given) Borrower shall, with respect to the
outstanding Affected Loans, prepay the same, together with interest thereon and
any amounts required to be paid pursuant to Section 2.14, and may borrow a Loan
of another type in accordance with Section 2.1 hereof by giving a Notice of
Borrowing or Conversion pursuant to Section 2.2 hereof.
(b) In case any law, regulation, treaty or official directive or the
interpretation or application thereof by any court or by any governmental
authority charged with the administration thereof or the compliance with any
guideline or request of any central bank or other governmental authority
(whether or not having the force of law):
(i) subjects Agent or any Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of any Bank imposed by the United States of
America or any political subdivision thereof), or
(ii) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, any Bank (other than such
requirements as are already included in the determination of the Adjusted
LIBOR Rate), or
(iii) imposes upon any Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to such Bank,
reduce the income receivable by such Bank or impose any expense upon such Bank
with respect to any Loans, such Bank shall notify Borrower thereof. Borrower
agrees to pay to such Bank the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by such Bank of a statement in the
amount and setting forth the Bank's calculation thereof, which statement shall
be deemed true and correct absent manifest error; provided, however, that
Borrower shall not be liable for any such amount attributable to any period
prior to the date one hundred eighty (180) days prior to the date of such
statement.
Any and all payments by Borrower to each Bank or Agent under this Agreement
shall be made free and clear of, and without deduction or withholding for, any
and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the case
of each Bank and Agent, such taxes
<PAGE> 24
(including income taxes or franchise taxes) as are imposed on or measured by
each Bank's net income by the jurisdiction under the laws of which such Bank or
Agent, as the case may be, is organized or maintains an office or any political
subdivision thereof.
2.10 CAPITAL REQUIREMENTS. If after the date hereof any Bank determines that
(i) the adoption of or change in any law, rule, regulation or guideline
regarding capital requirements for banks or bank holding companies, or any
change in the interpretation or application thereof by any governmental
authority charged with the administration thereof, or (ii) compliance by such
Bank or its parent bank holding company with any guideline, request or
directive of any such entity regarding capital adequacy (whether or not having
the force of law), has the effect of reducing the return on such Bank's or such
holding company's capital as a consequence of such Bank's commitment to make
Loans hereunder to a level below that which such Bank or such holding company
could have achieved but for such adoption, change or compliance (taking into
consideration such Bank's or such holding company's then existing policies with
respect to capital adequacy and assuming the full utilization of such entity's
capital) by any amount deemed by such Bank to be material, then such Bank shall
notify Borrower thereof. Borrower agrees to pay to such Bank the amount of
such reduction in the return on capital as and when such reduction is
determined, upon presentation by such Bank of a statement in the amount and
setting forth such Bank's calculation thereof, which statement shall be deemed
true and correct absent manifest error; provided, however, that Borrower shall
not be liable for any such amount attributable to any period prior to the date
one hundred eighty (180) days prior to the date of such statement. In
determining such amount, such Bank may use any reasonable averaging and
attribution methods.
2.11 PAYMENTS AND PREPAYMENTS OF THE LOANS. Loans that are LIBOR Loans may
be prepaid without premium or penalty on the last day of any Interest Period
applicable thereto and, subject to payment of amounts required pursuant to
Section 2.14, may be prepaid at any other time, in each case upon three
Business Days' irrevocable notice. Loans that are Base Rate Loans may be
prepaid at any time, without premium or penalty, upon one Business Day's
irrevocable notice. If such notice is given by Borrower, Borrower shall make
such prepayment and the payment amount specified in such notice shall be due
and payable on the date specified therein, together with accrued interest to
each such date on the amount prepaid and any amounts required pursuant to
Section 2.14. No prepayment of the Loans during the Revolving Credit Period
shall affect the Commitment Amount or impair Borrower's right to borrow as set
forth in Section 2.1.
2.12 METHOD OF PAYMENT. All payments and prepayments of principal and all
payments of interest, fees and other amounts payable hereunder shall be made by
Borrower to Agent for the account of each
<PAGE> 25
Bank at 100 Federal Street, Boston, Massachusetts in immediately available
funds, on or before 2:00 p.m. (Boston time) on the due date thereof, free and
clear of, and without any deduction or withholding for, any taxes or other
payments and without set-off, recoupment or counterclaim. Agent may, and
Borrower hereby authorizes Agent to, debit the amount of any payment not made
by such time to the Designated Deposit Account of Borrower with Agent. Agent
will promptly distribute to each Bank its share of such payment according to
each Bank's Commitment (or other applicable share as expressly provided herein)
of such principal, interest, fees or other amounts, in like funds as received.
Any payment which is received by Agent later than 2:00 p.m. (Boston time) shall
be deemed to have been received on the immediately succeeding Business Day and
any applicable interest or fee shall continue to accrue.
2.13 OVERDUE PAYMENTS. Overdue principal (whether at maturity, by reason of
acceleration or otherwise) and, to the extent permitted by applicable law,
overdue interest and fees or any other amounts payable hereunder or under the
Note shall bear interest from and including the due date thereof until paid,
compounded daily and payable on demand, at a rate per annum equal to (a) if
such due date occurs prior to the end of an Interest Period, 4% above the
interest rate applicable to such Loan for such Interest Period until the
expiration of such Interest Period, and thereafter, 4% above the Base Rate; and
(b) in all other cases, 4% above the rate then applicable to Base Rate Loans.
2.14 PAYMENTS NOT AT END OF INTEREST PERIOD. If Borrower for any reason
makes any payment of principal with respect to any LIBOR Loan on any day other
than the last day of an Interest Period applicable to such LIBOR Loan, or fails
to borrow or continue or convert to a LIBOR Loan after giving a Notice of
Borrowing or Conversion pursuant to Section 2.2, Borrower shall pay to Agent
for the account of each Bank an amount computed pursuant to the following
formula:
L = (R - T) x P x D
---------------
360
L = amount payable to Agent for the account of the Banks
R = interest rate on such Loan
T = effective interest rate per annum at which any readily marketable bond
or other obligation of the United States, selected at FNBB's sole
discretion, maturing on or near the last day of the then applicable
Interest Period of such Loan and in approximately the same amount as
such Loan can be purchased by FNBB on the day of such payment of
principal or failure to borrow or continue or convert
P = the amount of principal prepaid or the amount of the requested Loan
<PAGE> 26
D = the number of days remaining in the Interest Period as of the date of
such payment or the number of days of the requested Interest Period
Borrower shall pay such amount upon presentation by Agent of a statement
setting forth the amount and Agent's calculation thereof pursuant hereto, which
statement shall be deemed true and correct absent manifest error.
2.15 COMPUTATION OF INTEREST AND FEES. Interest and all fees payable
hereunder shall be computed daily on the basis of a year of 360 days and paid
for the actual number of days for which due. If the due date for any payment
of principal is extended by operation of law, interest shall be payable for
such extended time. If any payment required by this Agreement becomes due on a
day that is not a Business Day such payment may be made on the next succeeding
Business Day (subject to clause (i) of the definition of Interest Period), and
such extension shall be included in computing interest in connection with such
payment.
SECTION III
CONDITIONS OF LOAN
3.1 CONDITIONS PRECEDENT TO INITIAL LOAN. The obligation of the Banks to
make the initial Loan and to issue the first Letter of Credit hereunder is
subject to the condition precedent that the Banks shall have received, in form
and substance satisfactory to the Banks and their respective counsel, the
following:
(a) this Agreement and the Note, duly executed by Borrower;
(b) a certificate of the Secretary or an Assistant Secretary of Borrower
with respect to resolutions of its Board of Directors authorizing the execution
and delivery of this Agreement and the Loan Documents and identifying the
officer(s) authorized to execute, deliver and take all other actions required
under this Agreement and the Loan Documents, and providing specimen signatures
of such officers;
(c) the certificate of incorporation of Borrower and all amendments and
supplements thereto, filed in the office of the Secretary of State of the state
of its incorporation, each certified by said Secretary of State as being a true
and correct copy thereof;
(d) the Bylaws of Borrower and all amendments and supplements thereto,
certified by its Secretary or an Assistant Secretary as being a true and
correct copy thereof;
<PAGE> 27
(e) a certificate of the Secretary of State of as to legal existence and
good standing in the state of its incorporation and listing all documents on
file in the office of said Secretary of State;
(f) a certificate of the California Franchise Tax Board and the Delaware
Secretary of State as to the tax good standing of Borrower;
(g) an opinion addressed to Agent from Borrower's in-house counsel,
substantially in the form of EXHIBIT D hereto;
(h) certified copies, dated close to the date hereof, of requests for
copies or information (Form UCC-3 or equivalent), or certificates, dated close
to the date hereof, satisfactory to Banks, of a UCC Reporter Service, listing
all effective financing statements which name Borrower and/or each of
Borrower's domestic Subsidiaries as debtor and which are filed in the
appropriate offices in the State of California, together with copies of such
financing statements, and accompanied by written evidence (including UCC
termination statements) satisfactory to Banks that the Encumbrances indicated
in any such financing statements are either permitted hereunder or have been
terminated or released;
(i) payment from Borrower of the commitment and facility fees set forth in
Section 2.4 hereof;
(j) payment from Borrower of an amount equal to the aggregate of Agent's
and Banks' good faith estimate of all fees (including reasonable attorneys'
fees), costs, expenses and other disbursements incurred by Agent and Banks in
connection with this Agreement and the transactions contemplated hereunder,
including, without limitation, the negotiation and preparation of this
Agreement and the other Loan Documents, which payment shall be subject to
post-closing adjustment following receipt by Agent of all final invoices;
(k) the Disclosure Letter, duly executed by Borrower;
(l) a copy of Borrower's current written investment policy certified by
Borrower's Chief Financial Officer as being a true and correct copy thereof;
(m) a copy of Borrower's Share Repurchase Program for the purchase of
Borrower's capital stock on the open market certified by Borrower's Chief
Financial Officer as being a true and correct copy thereof;
(n) an executed original of letter agreement regarding Agent's fee
contemplated under Section 2.4(b);
<PAGE> 28
(o) an executed original of the Report of Chief Financial Officer in the
form of EXHIBIT C hereto dated as of the date of such initial loan showing
Borrower's financial condition as of the last day of the quarter most recently
ended; and
(p) such other documents, and completion of such other matters, as counsel
for the Banks may deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Banks to make
each Loan, including the initial Loan, or continue or convert Loans to Loans of
another type, or to issue, extend or modify any Letter of Credit, is further
subject to the following conditions:
(a) timely receipt by Agent of the Notice of Borrowing or Conversion as
provided in Section 2.2;
(b) the representations and warranties contained in Section IV shall be
true and accurate in all material respects on and as of the date of such Notice
of Borrowing or Conversion and on the effective date of the making,
continuation or conversion of each Loan or issuance of each Letter of Credit as
though made at and as of each such date (except to the extent that such
representations and warranties expressly relate to an earlier date), and no
Default shall have occurred and be continuing, or would result from such Loan
or Letter of Credit;
(c) the resolutions referred to in Section 3.1(b) shall remain in full
force and effect; and
(d) no change shall have occurred in any law or regulation or
interpretation thereof that, in the opinion of counsel for Agent or any Bank,
would make it illegal or against the policy of any governmental agency or
authority for the Banks to make Loans or issue Letters of Credit hereunder.
The making of each Loan and issuance of each Letter of Credit shall be deemed
to be a representation and warranty by Borrower on the date of the making,
continuation or conversion of such Loan and issuance of such Letter of Credit
as to the accuracy of the facts referred to in subsection (b) of this Section
3.2.
SECTION IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Agreement and to make Loans
and issue Letters of Credit hereunder, Borrower represents and warrants to the
Banks that:
<PAGE> 29
4.1 ORGANIZATION AND QUALIFICATION. Each of Borrower and its Subsidiaries
(a) is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation, (b) has all requisite
corporate power to own its property and conduct its business as now conducted
and as presently contemplated and (c) is duly qualified and in good standing as
a foreign corporation and is duly authorized to do business in each
jurisdiction where the nature of its properties or business requires such
qualification except where the failure to so qualify cannot reasonably be
expected to have a Material Adverse Effect.
4.2 CORPORATE AUTHORITY. The execution, delivery and performance of this
Agreement and the Loan Documents and the transactions contemplated hereby are
within the corporate power and authority of Borrower and have been authorized
by all necessary corporate proceedings, and do not and will not (a) require any
consent or approval of the stockholders of Borrower, (b) contravene any
provision of the charter documents or by-laws of Borrower or any law, rule or
regulation applicable to Borrower, (c) contravene any provision of, or
constitute an event of default or event that, but for the requirement that time
elapse or notice be given, or both, would constitute an event of default under,
any other agreement, instrument, order or undertaking binding on Borrower, or
(d) result in or require the imposition of any Encumbrance on any of the
properties, assets or rights of Borrower.
4.3 VALID OBLIGATIONS. This Agreement and the Loan Documents and all of
their respective terms and provisions are the legal, valid and binding
obligations of Borrower, enforceable in accordance with their respective terms
except as limited by bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally, and except
as the remedy of specific performance or of injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be brought.
4.4 CONSENTS OR APPROVALS. The execution, delivery and performance of this
Agreement and the Loan Documents and the transactions contemplated herein do
not require any approval or consent of, or filing or registration with, any
governmental or other agency or authority, or any other party.
4.5 TITLE TO PROPERTIES; ABSENCE OF ENCUMBRANCES. Each of Borrower and its
Subsidiaries has good and marketable title to all of the properties, assets and
rights of every name and nature now purported to be owned by it, including,
without limitation, such properties, assets and rights as are reflected in the
financial statements referred to in Section 4.6 (except such properties, assets
or rights as have been disposed of in the ordinary course of business since the
date thereof), free from all Encumbrances except Permitted Encumbrances.
Without limiting the generality of the foregoing, there
<PAGE> 30
is no obligation of Borrower or any of its Subsidiaries for borrowed money or
lease rental outstanding in favor of Commerce Funding Corporation or Harris
Bank Roselle.
4.6 FINANCIAL STATEMENTS. Borrower has furnished Agent its consolidated
balance sheet as of June 30, 1993 and its consolidated statements of income,
changes in stockholders' equity and cash flow for the fiscal year then ended,
and related footnotes, audited and certified by KPMG Peat Marwick. Borrower
has also furnished Agent its consolidated balance sheet as of March 31, 1994
and its consolidated statements of income, changes in stockholders' equity and
cash flow for the nine months then ended, certified by the chief financial
officer of Borrower but subject, however, to normal, recurring year-end
adjustments that shall not in the aggregate be material in amount. All such
financial statements were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
specified and present fairly the consolidated financial position of Borrower
and its Subsidiaries as of such dates and the results of the consolidated
operations of Borrower and its Subsidiaries for such periods. There are no
liabilities, contingent or otherwise, as of the respective dates of such
financial statements not disclosed in such financial statements that involve a
material amount.
4.7 CHANGES. Since the date of the most recent financial statements
referred to in Section 4.6, there have been no changes in the assets,
liabilities, financial condition, or business of Borrower or any of its
Subsidiaries other than changes in the ordinary course of business, the effect
of which has not, in the aggregate, been materially adverse.
4.8 DEFAULTS. As of the date of this Agreement, no Default exists.
4.9 TAXES. Borrower and each Subsidiary have filed all federal, state and
other tax returns required to be filed, and all taxes, assessments and other
governmental charges due from Borrower and each Subsidiary have been fully paid
or Borrower or such Subsidiary has established on its books reserves adequate
for the payment of all federal, state and other tax liabilities.
4.10 LITIGATION. Except as set forth in the Disclosure Letter, there is no
litigation, arbitration, proceeding or investigation pending, or, to the
knowledge of any Responsible Officer of Borrower or any Subsidiary, threatened,
against Borrower or any Subsidiary that, if adversely determined, could result
in a forfeiture of all or any substantial part of the property of Borrower or
its Subsidiary or could otherwise have a Material Adverse Effect.
<PAGE> 31
4.11 USE OF PROCEEDS. Borrower does not own any "margin security", as that
term is defined in Regulations G and U of the Federal Reserve Board, and the
proceeds of the Loans and draws under Letters of Credit under this Agreement
will be used only for the purposes contemplated hereunder. None of the Loans
or Letters of Credit will be used, directly or indirectly, for the purpose of
purchasing or carrying any margin security, for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or carry
any margin security or for any other purpose which might cause any of the Loans
or Letters of Credit under this Agreement to be considered a "purpose credit"
within the meaning of Regulations G, T, U or X.
4.12 SUBSIDIARIES. As of the date of this Agreement, all the Subsidiaries of
Borrower are listed on SCHEDULE 4.12 hereto. Borrower or a Subsidiary of
Borrower is the owner, free and clear of all Encumbrances, of all of the issued
and outstanding stock of each such Subsidiary other than shares of Borrower's
foreign Subsidiaries issued to directors to meet foreign ownership
requirements. All shares of such stock have been validly issued and are fully
paid and nonassessable, and no rights to subscribe to any additional shares
have been granted, and no options, warrants or similar rights are outstanding.
4.13 INVESTMENT COMPANY ACT. Neither Borrower nor any of its Subsidiaries is
subject to regulation under the Investment Company Act of 1940, as amended.
4.14 COMPLIANCE WITH ERISA. Borrower and each member of the Controlled Group
have fulfilled their obligations under the minimum funding standards of ERISA
and the Code with respect to each Plan and are in compliance in all material
respects with the applicable provisions of ERISA and the Code, and have not
incurred any liability to the PBGC or a Plan under Title IV of ERISA; and no
"prohibited transaction" or "reportable event" (as such terms are defined in
ERISA) has occurred with respect to any Plan.
4.15 ENVIRONMENTAL MATTERS.
(a) Borrower and each of its Subsidiaries have obtained all permits,
licenses and other authorizations which are required under all Environmental
Laws, except to the extent failure to have any such permit, license or
authorization would not have a Material Adverse Effect. Borrower and each of
its Subsidiaries are in compliance in all material respects with the terms and
conditions of all such permits, licenses and authorizations, and are also in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any applicable Environmental Law or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand
<PAGE> 32
letter issued, entered, promulgated or approved thereunder, except to the
extent failure to comply would not have a material adverse effect on the
business, financial condition or operations of Borrower and its Subsidiaries.
(b) No notice, notification, demand, request for information, citation,
summons or order has been issued, no complaint has been filed, no penalty has
been assessed and no investigation or review is pending or threatened by any
governmental or other entity with respect to any alleged failure by Borrower or
any of its Subsidiaries to have any permit, license or authorization required
in connection with conduct of its business or with respect to any Environmental
Laws, including, without limitation, Environmental Laws relating to the
generation, treatment, storage, recycling, transportation, disposal or release
of any Hazardous Materials, except to the extent that such notice, complaint,
penalty or investigation did not or could not result in the remediation of any
property owned or used by Borrower or any of its Subsidiaries costing in excess
of $100,000 per occurrence or $100,000 in the aggregate.
(c) To the best of Borrower's knowledge no material oral or written
notification of a release of a Hazardous Material has been filed by or on
behalf of Borrower or any of its Subsidiaries and no property now or previously
owned, leased or used by Borrower or any of its Subsidiaries is listed or
proposed for listing on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
on any similar state list of sites requiring investigation or clean-up.
(d) There are no liens or encumbrances arising under or pursuant to any
Environmental Laws on any of the real property or properties owned, leased or
used by Borrower or any of its Subsidiaries and no governmental actions have
been taken or are in process which could subject any of such properties to such
liens or encumbrances or, as a result of which Borrower would be required to
place any notice or restriction relating to the presence of Hazardous Materials
at any property owned by it in any deed to such property.
(e) Neither Borrower nor any of its Subsidiaries, nor, to the best
knowledge of Borrower, any previous owner, tenant, occupant or user of any
property owned, leased or used by Borrower or any of its Subsidiaries, has (i)
engaged in or permitted any operations or activities upon or any use or
occupancy of such property, or any portion thereof, for the purpose of or in
any way involving the handling, manufacture, treatment, storage, use,
generation, release, discharge, refining, dumping or disposal (whether legal or
illegal, accidental or intentional) of any Hazardous Materials on, under, in or
about such property, except to the extent commonly used in day-to-day
operations of such property and in such case only, in compliance with all
Environmental Laws, or (ii) transported any
<PAGE> 33
Hazardous Materials to, from or across such property except to the extent
commonly used in day-to-day operations of such property and, in such case, in
compliance with, all Environmental Laws; nor to the best knowledge of Borrower
have any Hazardous Materials migrated from other properties upon, about or
beneath such property, nor, to the best knowledge of Borrower, are any
Hazardous Materials presently constructed, deposited, stored or otherwise
located on, under, in or about such property except to the extent commonly used
in day-to-day operations of such property and, in such case, in compliance
with, all Environmental Laws.
SECTION V
AFFIRMATIVE COVENANTS
So long as the Banks have any commitment to lend hereunder or any Loan,
Letter of Credit or other Obligation hereunder remains outstanding, and unless
Requisite Banks shall otherwise consent in writing, Borrower covenants as
follows:
5.1 FINANCIAL STATEMENTS AND OTHER REPORTING REQUIREMENTS. Borrower shall
furnish to the Banks in form and detail satisfactory to Agent and Requisite
Banks:
(a) as soon as available, but in any event within 90 days after the end of
each of its fiscal years, a consolidated and consolidating balance sheet as of
the end of, and a related consolidated and consolidating statements of income,
changes in stockholders' equity and cash flow for, such year, audited and
certified by KPMG Peat Marwick or other independent certified public accountant
acceptable to the Banks) in the case of such consolidated statements, and
certified by the chief financial officer in the case of such consolidating
statements; and, concurrently with such financial statements, a copy of said
certified public accountant's management report and opinion on such audited
financial statements that such accountant has obtained no knowledge of any
Default under Section 5.7 or, if in the opinion of such accountants any such
Default exists, they shall disclose in such written statement the nature and
status of the Default;
(b) as soon as available, but in any event within 45 days after the end of
each of its fiscal quarters, a consolidated and consolidating balance sheet as
of the end of, and a related consolidated and consolidating statements of
income and cash flow for, the period then ended, certified by the chief
financial officer of Borrower but subject, however, to normal, recurring
year-end adjustments that shall not in the aggregate be material in amount;
(c) concurrently with the delivery of each financial statement pursuant to
subsections (a) and (b) of this Section 5.1, a
<PAGE> 34
report in substantially the form of EXHIBIT C hereto signed on behalf of
Borrower by its chief financial officer;
(d) promptly after the receipt thereof by Borrower, copies of any final
reports submitted to Borrower by independent public accountant in connection
with any interim review of the accounts of Borrower made by such accountant;
(e) promptly after the same are available, copies of all proxy statements,
financial statements and reports as Borrower shall send to its stockholders
generally and copies of all final registration statements (other than on form
S-8 or other registration statements relating to option plans) and material
reports (in each case without exhibits) as Borrower may file with the
Securities and Exchange Commission;
(f) if and when Borrower gives or is required to give notice to the PBGC
of any "Reportable Event" (as defined in Section 4043 of ERISA) with respect to
any Plan that might constitute grounds for a termination of such Plan under
Title IV of ERISA, or knows that any member of the Controlled Group or the plan
administrator of any Plan has given or is required to give notice of any such
Reportable Event, a copy of the notice of such Reportable Event given or
required to be given to the PBGC;
(g) immediately upon a Responsible Officer becoming aware of the existence
of any condition or event that constitutes a Default, written notice thereof
specifying the nature and duration thereof and the action being or proposed to
be taken with respect thereto;
(h) promptly upon a Responsible Officer becoming aware of any litigation
or of any investigative proceedings by a governmental agency or authority
commenced or threatened against Borrower or any of its Subsidiaries of which it
has notice, the outcome of which would or might have a Material Adverse Effect,
written notice thereof and the action being or proposed to be taken with
respect thereto;
(i) promptly upon a Responsible Officer becoming aware of any
investigative proceedings by a governmental agency or authority commenced or
threatened against Borrower or any of its Subsidiaries regarding any potential
violation of Environmental Laws or any spill, release, discharge or disposal of
any Hazardous Material, written notice thereof and the action being or proposed
to be taken with respect thereto; and
(j) from time to time, such other financial data and information about
Borrower or its Subsidiaries as any of the Banks may reasonably request.
<PAGE> 35
5.2 CONDUCT OF BUSINESS. Borrower shall and shall cause its Subsidiaries to:
(a) duly observe and comply with all applicable laws and valid
requirements of any governmental authorities relative to its corporate
existence, rights and franchises, to the conduct of its business and to its
property and assets (including without limitation all Environmental Laws and
ERISA), and shall maintain and keep in full force and effect all licenses and
permits necessary to the proper conduct of its business except where failure to
do so cannot be expected to have a Material Adverse Effect;
(b) maintain its corporate existence, provided, however, that the
corporate existence of any Subsidiary may be terminated if, in the good faith
judgment of the Board of Directors of Borrower, such termination is in the best
interests of Borrower and its Subsidiaries taken as a whole; and
(c) remain engaged substantially in the business of manufacturing,
marketing and supporting voice information processing systems and software and
activities reasonably related or incidental thereto.
5.3 MAINTENANCE AND INSURANCE. Borrower shall maintain and cause its
Subsidiaries to maintain its properties in good repair, working order and
condition as required for the normal conduct of its business. Borrower shall
at all times maintain and cause its Subsidiaries to maintain liability and
casualty insurance covering their respective properties and assets, with
financially sound and reputable insurers in such amounts as the respective
officers in the exercise of their reasonable judgment deem to be adequate.
5.4 TAXES. Borrower shall pay or cause to be paid all taxes, assessments or
governmental charges on or against it or any of its Subsidiaries or its or
their properties on or prior to the time when they become due; provided that
this covenant shall not apply to any tax, assessment or charge that is being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been established and are being maintained in accordance
with generally accepted accounting principles if no lien shall have been filed
to secure such tax, assessment or charge.
5.5 INSPECTION BY THE BANK. Borrower shall permit Agent, the Banks or their
designees, at any reasonable time, and upon reasonable notice (or if a Default
shall have occurred and is continuing, at any time and without prior notice),
to (i) visit and inspect the properties of Borrower and its Subsidiaries, (ii)
examine and make copies of and take abstracts from the books and records of
Borrower and its Subsidiaries, and (iii) discuss the affairs, finances and
accounts of Borrower and its Subsidiaries with their appropriate
<PAGE> 36
officers, employees and accountants. In handling such information, each of
Agent and the Banks shall exercise the same degree of care that it exercises
with respect to its own proprietary information of the same types to maintain
the confidentiality of any non-public information thereby received or received
pursuant to subsections 5.1(a), (b), or (c) except that disclosure of such
information may be made (i) to the subsidiaries or affiliates of Agent and the
Banks in connection with their present or prospective business relations with
Borrower, (ii) to prospective transferees or purchasers of an interest in the
Loans, (iii) as required by law, regulation, rule or order, subpoena, judicial
order or similar order and (iv) as may be required in connection with the
examination, audit or similar investigation of Agent or the Banks.
5.6 MAINTENANCE OF BOOKS AND RECORDS. Borrower shall keep and Borrower
shall cause its Subsidiaries to keep adequate-books and records of account, in
which true and complete entries will be made reflecting all of its business and
financial transactions, and such entries will be made in accordance with
generally accepted accounting principles consistently applied and applicable
law.
5.7 FINANCIAL COVENANTS. Borrower agrees and understands that the following
financial covenants shall be subject to quarterly compliance (as measured on
the last day of each fiscal quarter of Borrower), and in each case review by
Banks of the respective fiscal quarter's consolidated financial statements
delivered to Agent by Borrower pursuant to Section 5.1:
(a) QUICK RATIO. Borrower shall maintain a ratio of (i) the sum of cash,
short term Qualified Investments and accounts receivable on a consolidated
basis to (ii) Consolidated Current Liabilities plus, to the extent not already
included as Consolidated Current Liabilities, the principal amount of Loans and
the principal amount undrawn under Letters of Credit then outstanding of at
least 1.25:1.00.
(b) PROFITABILITY.
(i) Borrower shall not in any fiscal quarter have an operating and/or net
loss on a consolidated basis greater than five percent (5%) of Borrower's
Consolidated Tangible Net Worth as of the end of such fiscal quarter; and
(ii) Borrower shall not have an operating and/or net loss on a
consolidated basis in any two consecutive fiscal quarters as measured quarterly
for that fiscal quarter and the immediately preceding fiscal quarter.
(c) LEVERAGE RATIO. Borrower shall maintain a ratio of Consolidated Total
Liabilities (including the undrawn amount of all
<PAGE> 37
outstanding Letters of Credit) to Consolidated Tangible Net Worth not to exceed
0.75:1.00.
(d) CONSOLIDATED TANGIBLE NET WORTH. Borrower shall maintain Consolidated
Tangible Net Worth of at least $231,000,000, PLUS (i) a minimum of 80% of
quarterly net income (after taxes) for each fiscal quarter after June 30, 1994
in which net income shall be positive, PLUS (ii) 100% of any new equity raised
after June 30, 1994, MINUS (iii) 100% of the cost of repurchases by Borrower of
its capital stock after June 30, 1994 in an aggregate amount of up to
$40,000,000, and MINUS (iv) 50% of the cost of such repurchases in excess of
$40,000,000 but less than $60,000,000.
5.8 USE OF PROCEEDS. Borrower will use the proceeds of the Loans and the
Letters of Credit solely for working capital purposes and not in contravention
of any Requirement of Law. Without limiting the foregoing, Borrower will not
take or permit any agent acting on its behalf to take any action which might
cause this Agreement or any document or instrument delivered pursuant hereto to
violate any regulation of the Federal Reserve Board.
5.9 POST CLOSING DELIVERY OF TERMINATION STATEMENT. On or before September
26, 1994, Borrower agrees to deliver to Agent a fully executed termination
statement suitable for filing with the California Secretary of State
terminating that financing statement #91001483 filed with the California
Secretary of State on January 4, 1991 against VMX, Inc. in favor of Commerce
Funding Corporation as "Secured Party" and Harris Bank Roselle as "Assignee".
5.10 FURTHER ASSURANCES. At any time and from time to time Borrower shall,
and shall cause each of its Subsidiaries to, execute and deliver such further
instruments and take such further action as may reasonably be requested by
Agent or Requisite Banks to effect the purposes of this Agreement and the Loan
Documents.
SECTION VI
NEGATIVE COVENANTS
So long as the Banks have any commitment to lend hereunder or any Loan,
Letter of Credit or other Obligation remains outstanding, and unless Requisite
Banks shall otherwise consent in writing, Borrower covenants as follows:
6.1 INDEBTEDNESS. Neither Borrower nor any of its Subsidiaries shall
create, incur, assume, guarantee or be or remain liable with respect to any
Indebtedness other than the following:
(a) Indebtedness of Borrower or any of its Subsidiaries to the Banks or
any of their affiliates;
<PAGE> 38
(b) Indebtedness existing as of the date of this Agreement and disclosed
on SCHEDULE 6.1 hereto, in the financial statements referred to in Section 4.6
and other Indebtedness of a type set forth on Schedule 6.1 hereto;
(c) Indebtedness secured by Permitted Encumbrances;
(d) Indebtedness arising from a purchase money mortgage or other purchase
money financing of the New Campus, provided, however, that such Indebtedness
shall not exceed the appraised value of the New Campus at the time such
mortgage or other financing is made;
(e) Indebtedness incurred in favor of Banks after notice to Agent and all
other Banks hereunder;
(f) Guarantees permitted under Section 6.2;
(g) Except as such may be limited by Section 6.9 below, Indebtedness of
any wholly owned Subsidiary to Borrower, Indebtedness of Borrower to any
Subsidiary and Indebtedness of any Subsidiary to any other Subsidiary;
(h) Indebtedness incurred by wholly owned Subsidiaries of Borrower to
finance leases of Borrower's products in the ordinary course of business;
(i) Indebtedness constituting royalty obligations to licensors incurred in
the ordinary course of business;
(j) other Indebtedness of Borrower or any Subsidiary in an aggregate
outstanding principal amount not exceeding $10,000,000; and
(k) extensions, refinancings, modifications, amendments and restatements
of any of items of indebtedness set forth in (a) through (j) above, provided
that the principal amount thereof is not increased or the terms thereof are not
modified to impose more burdensome terms upon Borrower or its Subsidiary, as
the case may be.
6.2 CONTINGENT LIABILITIES. Neither Borrower nor any of its Subsidiaries
shall create, incur, assume or remain liable with respect to any Contingent
Liabilities other than the following:
(a) Guarantees in favor of the Banks or any of their affiliates;
(b) Guarantees existing on the date of this Agreement and disclosed on
SCHEDULE 6.2 hereto or in the financial statements referred to in Section 4.6;
<PAGE> 39
(c) Guarantees resulting from the endorsement of negotiable instruments
for collection in the ordinary course of business;
(d) Guarantees with respect to surety, appeal performance and
return-of-money and other similar obligations incurred in the ordinary course
of business (exclusive of obligations for the payment of borrowed money) not
exceeding in the aggregate at any time $5,000,000;
(e) Guarantees of normal trade debt relating to the acquisition of goods
and supplies;
(f) Contingent Liabilities undertaken pursuant to Borrower's Share
Repurchase Program.
(g) Contingent Liabilities in respect of the obligations or performance of
Subsidiaries by Borrower made in the ordinary course of business not to exceed
an amount of $5,000,000 in the aggregate, excluding the amount of any
Guarantees referenced in Subsection 6.2(b).
6.3 SALE AND LEASEBACK. Neither Borrower nor any of its Subsidiaries shall
enter into any arrangement, directly or indirectly, whereby it shall sell or
transfer any property owned by it in order to lease such property or lease
other property that Borrower or any of its Subsidiaries intends to use for
substantially the same purpose as the property being sold or transferred;
except that Borrower may enter into a sale and leaseback of the New Campus as
part of the long term financing thereof.
6.4 ENCUMBRANCES. Neither Borrower nor any of its Subsidiaries shall
create, incur, assume or suffer to exist any mortgage, pledge, security
interest, lien or other charge or encumbrance, including the lien or retained
security title of a conditional vendor upon or with respect to any of its
property or assets ("ENCUMBRANCES"), or assign or otherwise convey any right to
receive income, including the sale or discount of accounts receivable with or
without recourse, except the following ("PERMITTED ENCUMBRANCES"):
(a) Encumbrances in favor of the Banks or any of their affiliates;
(b) Encumbrances existing as of the date of this Agreement and disclosed
on SCHEDULE 6.4 hereto;
(c) liens for taxes, fees, assessments and other governmental charges to
the extent that payment of the same may be postponed or is not required in
accordance with the provisions of Section 5.4;
<PAGE> 40
(d) landlords' and lessors' liens in respect of rent not in default or
liens in respect of pledges or deposits under workmen's compensation,
unemployment insurance, social security laws, or similar legislation (other
than ERISA) or in connection with appeal and similar bonds incidental to
litigation; mechanics', laborers' and materialmen's and similar liens, if the
obligations secured by such liens are not then delinquent; liens securing the
performance of bids, tenders, contracts (other than for the payment of money);
and statutory obligations incidental to the conduct of its business and that do
not in the aggregate materially detract from the value of its property or
materially impair the use thereof in the operation of its business;
(e) judgment liens that shall not have been in existence for a period
longer than 30 consecutive days after the creation thereof or, if a stay of
execution shall have been obtained, for a period longer than 30 consecutive
days after the expiration of such stay;
(f) rights of lessors under capital leases including, without limitation,
those rights of the purchaser and lessor in the New Campus;
(g) Encumbrances in respect of (i) any purchase money mortgage or other
purchase money financing of the New Campus to the extent permitted in Section
6.1 above and (ii) any purchase money obligations for tangible property used in
its business that at any time shall not exceed $1,000,000 in the aggregate,
provided, however, that in each case (i) and (ii) above any such Encumbrances
shall not extend to property and assets of Borrower or any such Subsidiary not
financed by such a purchase money obligation;
(h) easements, rights of way, restrictions and other similar charges or
Encumbrances relating to real property and not interfering in a material way
with the ordinary conduct of its business;
(i) Encumbrances in favor of customs and revenue authorities arising in a
matter of law to secure payment of customs duties in connection with the
importation of goods and Encumbrances on insurance proceeds in favor of
insurance companies with respect to the financing of insurance premiums;
(j) Encumbrances which constitute rights of set-off of a customary nature
or bankers' liens with respect to amounts on deposit, whether arising by
operation of law or by contract, in connection with arrangements entered into
with banks or investment firms in the ordinary course of business;
<PAGE> 41
(k) Encumbrances, not otherwise permitted hereunder, which Encumbrances do
not in the aggregate exceed $250,000 at any time; and
(l) Encumbrances on its property or assets created in connection with the
refinancing of Indebtedness secured by Permitted Encumbrances on such property,
provided that the amount of Indebtedness secured by any such Encumbrance shall
not be increased as a result of such refinancing and no such Encumbrance shall
extend to property and assets of Borrower or any Subsidiary not encumbered
prior to any such refinancing.
6.5 MERGER; CONSOLIDATION; SALE OR LEASE OF ASSETS. Neither Borrower nor any
of its Subsidiaries shall
(a) sell, lease or otherwise dispose of assets or properties (valued at
the lower of cost or market) in the aggregate in excess of five percent (5%) of
Consolidated Total Assets in any fiscal year other than (i) sales of inventory
in the ordinary cause of business; (ii) as permitted by Section 6.3 in respect
of the New Campus (iii) sales of used, worn-out or surplus assets in the
ordinary course of business; (iv) sales of equipment to the extent that such
equipment is exchanged for credit against the purchase price of similar
replacement equipment or the proceeds of such sale are applied to the purchase
price of such replacement equipment within ninety (90) days of the date
Borrower shall have provided Agent written notice of its intent to sell
specifically identified equipment and so apply the purchase price; and (v)
sales of assets to Borrower, or
(b) liquidate or merge or consolidate into or with, or acquire all or
substantially all of the assets of, any other person or entity, provided,
however, that (i) any Subsidiary may merge or consolidate into or with Borrower
if no Default has occurred and is continuing or would result from such merger
or consolidation and Borrower, if a party to such merger or consolidation, is
the surviving company, (ii) any Subsidiary may merge or consolidate with any
other wholly owned Subsidiary; and (iii) any Subsidiary may be liquidated if,
in the good faith judgment of the Board of Directors or Borrower, such
termination is in the best interests of Borrower and its Subsidiaries taken as
a whole.
6.6 ACQUISITIONS AND JOINT VENTURES. Borrower shall not, and shall not
permit any of the Subsidiaries to, make any Acquisition or Joint Venture or to
enter into any agreement to make any Acquisition or Joint Venture; provided
Borrower and its Subsidiaries may make any Acquisition or Joint Venture or
enter into an agreement to make an Acquisition or Joint Venture if
(a) no Default has occurred and is then continuing or is projected to
result from such Acquisition or Joint Venture;
<PAGE> 42
(b) the total assets (including securities and all other assets) of the
business which is the subject of the Acquisition or Joint Venture, together
with the total assets for all such transactions occurring after the date hereof
and prior to the Final Payment Date, do not exceed the amount equal to 25% of
Borrower's Consolidated Tangible Net Worth as such Consolidated Tangible Net
Worth is determined as of the last day of the fiscal quarter ending immediately
prior to the closing of such Acquisition or Joint Venture;
(c) the aggregate consideration (including the dollar value of all cash
and debt) paid in connection with any such Acquisition or Joint Venture does
not (i) cause the total consideration paid for all such transactions occurring
after the date hereof and prior to the first anniversary of the date hereof to
exceed $25,000,000, (ii) cause the total consideration paid for all such
transactions occurring after the first anniversary hereof and prior to the
second anniversary of the date hereof to exceed $28,000,000, or (iii) cause the
total consideration paid for all such transactions occurring after the second
anniversary hereof and prior to the Final Payment Date to exceed $30,000,000;
and
(d) at least twenty days prior to the making of such Acquisition or Joint
Venture, Borrower shall provide written notice to Agent demonstrating
compliance with all covenants contained in this Agreement after giving effect
to the Acquisition or Joint Venture and on a projected basis thereafter.
6.7 SUBSIDIARY STOCK ISSUANCE. Borrower shall not permit any of its
Subsidiaries to issue any additional shares of its capital stock or other
equity securities, any options therefor or any securities convertible thereto
other than to Borrower or any wholly owned Subsidiary (or to other persons in
connection with the issuance of directors shares or shares to satisfy local
ownership requirements). Neither of Borrower nor any of its Subsidiaries shall
sell, transfer or otherwise dispose of any of the capital stock or other equity
securities of a Subsidiary, except (i) to Borrower or any of its wholly-owned
Subsidiaries, or (ii) in connection with a transaction permitted by Section
6.5.
6.8 EQUITY DISTRIBUTIONS. Borrower shall not pay any dividends on any class
of its capital stock or make any other distribution or payment on account of or
in redemption, retirement or purchase of such capital stock; provided, however,
that this Section shall not apply to (i) the issuance, delivery or distribution
by Borrower of shares of its common stock pro rata to its existing
shareholders, (ii) the purchase or redemption by Borrower of its capital stock
with the proceeds of the issuance of additional shares of capital stock, or
(iii) the purchase or redemption by Borrower of its capital stock pursuant to
Borrower's Share Repurchase Program.
<PAGE> 43
6.9 INVESTMENTS. Neither Borrower nor any of its Subsidiaries shall make or
maintain any Investments other than
(a) Investments by Borrower in Subsidiaries existing on the date hereof,
additional Investments by Borrower in wholly-owned Subsidiaries aggregating an
amount not in excess of 5% of Borrower's Consolidated Tangible Net Worth as of
the end of the fiscal quarter of Borrower most recently ended, Investments by
Subsidiaries in Borrower and Investments by Subsidiaries in other Subsidiaries;
(b) Qualified Investments;
(c) Investments existing on the date of this Agreement disclosed on
SCHEDULE 6.9;
(d) Investments consisting of the endorsements of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business;
(e) Investments by Borrower or a Subsidiary as part of a transaction
permitted by Sections 6.2 and 6.6;
(f) Investments consisting of receivables owing to Borrower or its
Subsidiaries and advances to customers or suppliers, in each case, if created,
acquired or made in the ordinary course of business;
(g) Investments consisting of (i) compensation or employee, officers and
directors of Borrower or its Subsidiaries so long as the Board of Directors of
Borrower determines that such compensation is in the best interests of
Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to
employees, officers or directors relating to the purchase of equity securities
of Borrower or its Subsidiaries, (iv) other loans to officers and employees
approved by the Board of Directors;
(h) Investments (including debt obligations) received in connection with
the bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business;
(i) Investments pursuant to or arising under currency agreements or
interest rate agreements;
(j) Investments consisting of notes receivable of, or prepaid royalties
and other credit extensions to, customers and suppliers in the ordinary course
of business;
(k) Deposit accounts; and
<PAGE> 44
(l) Other investments of a type not described in (a) through (k) above to
the extent all such Investments shall not at any time exceed $1,000,000.
6.10 ERISA. Neither of Borrower nor any member of the Controlled Group shall
permit any Plan maintained by it to (i) engage in any "prohibited transaction"
(as defined in Section 4975 of the Code, (ii) incur any "accumulated funding
deficiency" (as defined in Section 302 of ERISA) whether or not waived, or
(iii) terminate any Plan in a manner that could result in the imposition of a
lien or encumbrance on the assets of Borrower or any of its Subsidiaries
pursuant to Section 4068 of ERISA.
SECTION VII
DEFAULTS
7.1 EVENTS OF DEFAULT. There shall be an Event of Default hereunder if any
of the following events occurs:
(a) Borrower shall fail to pay when due (i) any amount of principal of any
Loans, or (ii) any amount of interest thereon or any fees or expenses payable
hereunder or under the Note within three (3) days of the due date therefor; or
(b) Borrower shall fail to perform any term, covenant or agreement
contained in Sections 5.1(a), (b), and (g), 5.5, 5.7 through 5.10 or 6.1
through 6.10; or
(c) Borrower shall fail to perform any covenant contained in Sections
5.1(f), 5.1(h), 5.2 or 5.6, and such failure shall continue for 30 days; or
(d) Borrower shall fail to perform any term, covenant or agreement (other
than in respect of subsections 7.l(a) through (c) hereof) contained in this
Agreement and such default shall continue for 30 days after notice thereof has
been sent to Borrower by Agent; or
(e) any representation or warranty of Borrower made in this Agreement or
in the Loan Documents or any other documents or agreements executed in
connection with the transactions contemplated by this Agreement or in any
certificate delivered hereunder shall prove to have been false in any material
respect upon the date when made or deemed to have been made; or
(f) there shall occur any change in the assets, liabilities, financial
condition, business of Borrower and its Subsidiaries, which change shall have a
Material Adverse Effect; or
<PAGE> 45
(g) Borrower or any of its Subsidiaries shall fail to pay at maturity, or
within any applicable period of grace, any obligations in excess of $1,000,000
in the aggregate for borrowed monies or advances or for the use of real or
personal property, or fail to observe or perform any term, covenant or
agreement evidencing or securing such obligations for borrowed monies or
advances or relating to such use of real or personal property, the result of
which failure is to permit the holder or holders of such Indebtedness to cause
such Indebtedness to become due prior to its stated maturity upon delivery of
required notice, if any; or
(h) Borrower or any of its Subsidiaries shall (i) apply for or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee, liquidator or similar official of itself or of all or a substantial
part of its property, (ii) be generally not paying its debts as such debts
become due, (iii) make a general assignment for the benefit of its creditors,
(iv) take any action or commence any case or proceeding under any law relating
to bankruptcy, insolvency, reorganization, winding-up or composition or
adjustment of debts, or any other law providing for the relief of debtors, (v)
fail to contest in a timely or appropriate manner, or acquiesce in writing to,
any petition filed against it in an involuntary case under any bankruptcy or
other law, (vii) take any action under the laws of its jurisdiction of
incorporation or organization similar to any of the foregoing, or (viii) take
any corporate action for the purpose of effecting any of the foregoing; or
(i) a proceeding or case shall be commenced, without the application or
consent of Borrower or any of its Subsidiaries in any court of competent
jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding
up, or composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets, or (iii) similar relief in respect of it, under
any law relating to bankruptcy, insolvency, reorganization, winding-up or
composition or adjustment of debts or any other law providing for the relief of
debtors, and such proceeding or case shall continue undismissed, or unstayed
and in effect, for a period of 30 consecutive days; or an order for relief
shall be entered in an involuntary case under any bankruptcy law against
Borrower or such Subsidiary; or action under the laws of the jurisdiction of
incorporation or organization of Borrower or any of its Subsidiary similar to
any of the foregoing shall be taken with respect to Borrower and shall continue
unstayed and in effect for any period of 30 consecutive days; or
(j)(i) a judgment or order for the payment of money shall be entered against
Borrower or any of its Subsidiary by any court, or a warrant of attachment or
execution or similar process shall be issued or levied against property of
Borrower or such Subsidiary, that
<PAGE> 46
in the aggregate exceeds $500,000 in value and such judgment, order, warrant or
process shall continue undischarged or unstayed for 30 consecutive days; or
(ii) Borrower or any of its Subsidiaries shall enter into any settlement, or
any verdict, judgment or order for the payment of money shall be entered
against any of them by any court, or a warrant of attachment or execution or
similar process shall be issued or levied against property of Borrower or such
Subsidiary, whether or not such verdict, judgment, order, warrant or process
shall have been discharged or stayed, which settlement, verdict, judgment,
order, warrant or process has an aggregate value exceeding the lesser of (A)
$40,000,000 or (B) 20% of Borrower's Consolidated Tangible Net Worth for the
fiscal quarter most recently ended; or
(k) Borrower or any member of the Controlled Group shall fail to pay when
due any amount that it shall have become liable to pay to the PBGC or to a Plan
under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall
be filed under Title IV of ERISA by Borrower, any member of the Controlled
Group, any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any such Plan or Plans or a proceeding
shall be instituted by a fiduciary of any such Plan or Plans against Borrower
and such proceedings shall not have been dismissed within 30 days thereafter;
or a condition shall exist by reason of which the PBGC would be entitled to
obtain a decree adjudicating that any such Plan or Plans must be terminated.
7.2 REMEDIES. Upon the occurrence of an Event of Default described in
subsections 7.1(h) and (i), immediately and automatically, and upon the
occurrence of any other Event of Default, at any time thereafter while such
Event of Default is continuing, at Majority Banks' option and upon Majority
Banks' declaration:
(a) the Banks' Commitments to make any further Loans or issue any further
Letters of Credit hereunder shall terminate;
(b) the unpaid principal amount of the Loans together with accrued
interest and all other Obligations hereunder shall become immediately due and
payable without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived;
(c) Agent or the Banks may demand that Borrower (i) deposit cash with
Agent in an amount equal to the amount of any Letters of Credit remaining
undrawn, as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all fees and commissions scheduled to be paid
or payable over the remaining terms of such Letters of Credit; and
<PAGE> 47
(d) Agent and the Banks may exercise any and all rights they have under
this Agreement, the Loan Documents or any other documents or agreements
executed in connection herewith, or at law or in equity, and proceed to protect
and enforce Agent's and the Banks' rights by any action at law, in equity or
other appropriate proceeding.
SECTION VIII
AGENT
8.1 APPOINTMENT, POWERS AND IMMUNITIES.
(a) Each Bank hereby appoints FNBB as Agent hereunder and under the other
Loan Documents and each Bank hereby irrevocably authorizes Agent to act
hereunder and thereunder as Agent of such Bank. Agent agrees to act as such
upon the express conditions contained in this Section 8. In performing its
functions and duties under this Agreement and under the other Loan Documents,
Agent shall act solely as Agent of Banks and does not assume and shall not be
deemed to have assumed any obligation towards or relationship of agency or
trust with or for Borrower.
(b) Each Bank irrevocably authorizes Agent to take such action on such
Bank's behalf and to exercise such powers hereunder as are specifically
delegated to Agent by the terms hereof, together with such powers as are
reasonably incidental thereto. Agent shall have only those duties which are
specified in this Agreement and it may perform such duties by or through its
agents, representatives or employees. In performing its duties hereunder on
behalf of Banks, Agent shall exercise the same care which it would exercise in
dealing with loans made or letters of credit issued for its own account, but it
shall not be responsible to any Bank for the execution, effectiveness,
genuineness, validity, enforceability, collectibility or sufficiency of all or
any of the Loan Documents, or for any representations, warranties, recitals or
statements made herein or therein or made in any written or oral statement or
in any financial or other statements, instruments, reports, certificates or any
other documents furnished or delivered in connection herewith or therewith by
Agent to any Bank or by or on behalf of Borrower to Agent or any Bank, or be
required to ascertain or inquire as to the performance or observance of any of
the terms, conditions, provisions, covenants or agreements contained herein or
therein or as to the use of the proceeds of the Loans or amounts drawn under
the Letters of Credit. Unless the officers of Agent acting in their capacity
as officers of Agent on Borrower's account have actual knowledge thereof or
have been notified in writing thereof by Banks, Agent shall not be required to
ascertain or inquire as to the existence or possible existence of any Event of
Default. Neither Agent nor any of its officers, directors, employees,
representatives or agents shall be liable to Banks for any
<PAGE> 48
action taken or omitted hereunder or under any of the other Loan Documents or
in connection herewith or therewith unless caused by its or their gross
negligence or willful misconduct. No provision of this Agreement or of any
other Loan Document shall be deemed to impose any duty or obligation on Agent
to perform any act or to exercise any power in any jurisdiction in which it
shall be illegal, or shall be deemed to impose any duty or obligation on Agent
to perform any act or exercise any right or power if such performance or
exercise (i) would subject Agent to a tax in a jurisdiction where it is not
then subject to a tax or (ii) would require Agent to qualify to do business in
any jurisdiction where it presently is not so qualified. Without prejudice to
the generality of the foregoing, no Bank shall have any right of action
whatsoever against Agent as a result of Agent acting or (where so instructed)
refraining from acting under this Agreement or under any of the other Loan
Documents in accordance with the instructions, request or consent of Requisite
Banks and any action taken or failure to act, pursuant to such instructions,
request or consent shall be binding on all Banks. Agent shall be entitled to
refrain from exercising any power, discretion or authority vested in it under
this Agreement unless and until it has obtained the written instructions of
Requisite Banks. The agency hereby created shall in no way impair or affect
any of the rights and powers of, or impose any duties or obligations upon Agent
in its individual capacity.
8.2 REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR INSPECTION. Each
Bank represents and warrants that it has made its own independent investigation
of the financial condition and affairs of Borrower in connection with the
making of the Loans and issuance of the Letters of Credit hereunder and has
made and shall continue to make its own appraisal of the creditworthiness of
Borrower. Agent shall have no duty or responsibility either initially or on a
continuing basis to make any such investigation or any such appraisal on behalf
of Banks or to provide any Bank with any credit or other information (other
than information obtained under the provisions of this Agreement which Agent
shall make available to each Bank upon request by such Bank) with respect
thereto whether coming into its possession before the date hereof or any time
or times thereafter and shall further have no responsibility with respect to
the accuracy of or the completeness of the information provided to Banks. With
respect to its participation in the Loans and the Letters of Credit hereunder,
Agent shall have the same rights and powers hereunder as any other Bank and may
exercise the same rights and powers as though it were not performing the duties
and functions delegated to it hereunder and the term "Bank" or "Banks" or any
similar term shall unless the context clearly indicates otherwise include Agent
in its individual capacity. Agent and each of its affiliates may accept
deposits from, lend money to and generally engage in any kind of business with
Borrower as if it were not Agent.
8.3 RELIANCE BY AGENT.
<PAGE> 49
(a) Agent may consult with counsel, and any opinion or legal advice of
such counsel who are not employees of Agent or Borrower or any affiliate of
Borrower shall be full and complete authorization and protection in respect of
any action taken or suffered by Agent hereunder or under any other Loan
Documents in accordance therewith.
(b) Agent may rely, and shall be fully protected in acting, upon any
resolution, statement, certificate, instrument, opinion, report, notice,
request, consent, order, bond or other paper or document that it has no reason
to believe to be other than genuine and to have been signed or presented by the
proper party or parties or, in the case of cables, telecopies and telexes, to
have been sent by the proper party or parties. In the absence of its gross
negligence or willful misconduct, Agent may conclusively rely, as to the truth
of the statements and the correctness of the opinions expressed therein, upon
any certificates or opinions furnished to Agent and conforming to the
requirements of this Agreement or any of the other Loan Documents.
(c) Agent shall not be under any obligation to exercise any of the rights
or powers granted to Agent by this Agreement and the other Loan Documents at
the request or direction of Requisite Banks unless Agent shall have been
provided by Requisite Banks with adequate security and indemnity against the
costs, expenses and liabilities that may be incurred by it in compliance with
such request or direction.
8.4 DELEGATION OF DUTIES. Agent may execute any of the powers hereof and
perform any duty hereunder either directly or by or through agents or
attorneys-in-fact. Agent shall be entitled to advice of counsel concerning all
matters pertaining to such powers and duties. Agent shall not be responsible
for the negligence or misconduct of any agents or attorneys-in-fact selected by
it without gross negligence or willful misconduct on the part of Agent.
8.5 RIGHT TO INDEMNITY. Each of Banks severally, but not jointly, agrees
(a) to indemnify and hold Agent (and any person acting on behalf of Agent)
harmless from and against and (b) promptly on receipt by each Bank of Agent's
statement, to reimburse Agent, according to such Bank's pro rata share of the
Commitment Amount, to the extent Agent shall not otherwise have been reimbursed
by Borrower on account of and for, any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses
(including, without limitation, the fees and disbursements of counsel and other
advisors) or disbursements of any kind of nature whatsoever with respect to
Agent's performance of its duties under this Agreement and the other Loan
Documents. Such reimbursement shall not in any respect release Borrower from
any liability or obligation. If any indemnity furnished to Agent for any
purpose shall, in the opinion of
<PAGE> 50
Agent, be insufficient or become impaired, Agent may call for additional
indemnity and cease, or not commence, to do the acts indemnified against until
such additional indemnity is furnished.
8.6 RESIGNATION AND APPOINTMENT OF SUCCESSOR AGENT. Agent may, and at the
request of Majority Banks shall, resign by giving thirty (30) days' prior
written notice thereof to Banks and Borrower; provided, however, that the
retiring Agent shall continue to serve until a successor Agent shall have been
selected and approved pursuant to this Section 8.6. Upon any such notice or
request, Majority Banks shall appoint a successor agent for the Banks. If no
successor agent is appointed prior to the effective date of the resignation of
the Agent, the Agent may appoint, after consulting with Banks and Borrower, a
successor Agent from among the Banks. Upon the acceptance of any appointment
as an Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations under this Agreement. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Section 8 shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Agent under this Agreement.
8.7 CONFLICTS. FNBB and its affiliates may accept deposits from, lend money
to, act as trustee under indentures of, act as merchant banker in any
transaction for, and generally engage in any kind of business with, Borrower
and any person who may do business with or own securities of Borrower, all as
if FNBB were not Agent and without any duty to account therefor to Banks or to
disclose to Banks confidential information which FNBB may receive from Borrower
in connection with such other activity or business.
8.8 NO OBLIGATIONS OF BORROWER. Nothing contained in this Section 8 shall
be deemed to impose upon Borrower any obligation in respect of the due and
punctual performance by Agent of its obligations to Banks under any provision
of this Agreement, and Borrower shall have no liability to Agent or any Bank in
respect of any failure by Agent or any Bank to perform any of their respective
obligations to each other under this Agreement. Without limiting the
generality of the foregoing sentence, where any provision of this Agreement
relating to the payment of any amounts due and owing under the Loan Documents
provides that such payments shall be made by Borrower to Agent for the account
of Banks, Borrower's obligations to Banks in respect of such payments shall be
deemed to be satisfied upon the making of such payments to Agent in the manner
provided by this Agreement.
SECTION IX
MISCELLANEOUS
<PAGE> 51
9.1 NOTICES. Unless otherwise specified herein, all notices hereunder to
any party hereto shall be in writing and shall be deemed to have been given
when delivered by hand, when properly deposited in the mails postage prepaid,
when sent by telex, answerback received, or electronic facsimile transmission
with electronic confirmation of receipt, or when sent by telegraph or overnight
courier, addressed to such party at its address indicated below:
<TABLE>
<S> <C>
If to Borrower at 1001 Murphy Ranch Road
Milpitas, California 95035-7912
Telephone: (408) 321-2000
Facsimile: (408) 321-6522
Attention: Gary A. Wetsel
Chief Financial Officer
If to Agent at BANK OF BOSTON
435 Tasso Street, Suite 250
Palo Alto, California 94301
Telephone: (415) 853-0390
Facsimile: (415) 853-1425
Attention: Maryfrances B. Galligan
Director
BANK OF BOSTON
100 Federal Street
Boston, Massachusetts 02110
Telephone: (617) 434-7349
Facsimile: (617) 434-0819
Attention: Andrea Peabody
Division Executive
With copies to: COOLEY GODWARD CASTRO HUDDLESON & TATUM
Five Palo Alto Square, 4th Floor
Palo Alto, California 94306
Telephone: (415) 843-5000
Facsimile: (415) 857-0663
Attention: Joseph A. Scherer, Esq.
</TABLE>
If to any Bank, at its address specified on the signature pages hereto, or at
any other address specified by such party in writing.
9.2 EXPENSES. Borrower will pay on demand all expenses of Agent in
connection with the preparation, waiver or amendment of this Agreement, the
Loan Documents or other documents executed in connection therewith, and all
expenses of Agent and each of the Banks in connection with the administration,
default on or collection of the Loans or other Obligations or administration,
default, collection in
<PAGE> 52
connection with Agent's or any Bank's exercise, preservation or
enforcement of any of its rights, remedies or options thereunder, including,
without limitation, fees of outside legal counsel or the allocated costs of
in-house legal counsel, accounting, consulting, brokerage or other similar
professional fees or expenses, and any fees or expenses associated with any
travel or other costs relating to any appraisals or examinations conducted in
connection with the Obligations,and the amount of all such expenses shall,
until paid, bear interest at the rate applicable to principal hereunder
(including any default rate).
9.3 INDEMNIFICATION.
(a) GENERAL INDEMNITY. Borrower shall pay, indemnify, and hold each Bank,
Agent and each of their respective officers, directors, employees, counsel,
agents and attorneys-in-fact (each, an "INDEMNIFIED PERSON") harmless from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, charges, expenses or disbursements (including
reasonable attorneys' fees and costs) of any kind or nature whatsoever with
respect to the execution, delivery, enforcement, performance and administration
of this Agreement and any other Loan Documents, or the transactions
contemplated hereby and thereby, and with respect to any investigation,
litigation or proceeding (including any proceeding in bankruptcy or appellate
proceeding) related to this Agreement or the Loans or the use of the proceeds
thereof, whether or not any Indemnified Person is a party thereto (all the
foregoing, collectively, the "INDEMNIFIED LIABILITIES"); provided, that
Borrower shall have no obligation hereunder to any Indemnified Person with
respect to Indemnified Liabilities arising from the gross negligence or willful
misconduct of such Indemnified Person.
(b) SURVIVAL; DEFENSE. The obligations in this Section 9.3 shall survive
payment of all other Obligations. At the election of any Indemnified Person,
Borrower shall defend such Indemnified Person using legal counsel satisfactory
to such Indemnified Person in such person's sole discretion, at the sole cost
and expense of Borrower. All amounts owing under this Section 9.3 shall be
paid within thirty (30) days after demand.
9.4 SET-OFF.
(a) Regardless of the adequacy of other means of obtaining repayment of the
Obligations, any deposits, balances or other sums credited by or due from the
head offices of Agent, Banks or any of their branch offices to Borrower may, at
any time and from time to time after the occurrence of an Event of Default
hereunder, without notice to Borrower or compliance with any other condition
precedent now or hereafter imposed by statute, rule of law, or otherwise (all
of which are hereby expressly waived) be set off, appropriated, and
<PAGE> 53
applied by Agent and the Banks against any and all obligations of
Borrower to Agent and the Banks or any of their affiliates in such manner as
the head offices of the Banks or any of their branch offices in their sole
discretion may determine, and Borrower hereby grants Agent and the Banks a
continuing security interest in such deposits, balances or other sums for the
payment and performance of all such obligations.
(B) Unless otherwise expressly provided herein, all interest, fees and
principal payments on the Loans to the Borrower hereunder are to be divided
among the Banks in the same proportion as each Bank's pro rata share of the
Commitment Amount. Any sums obtained from the Borrower or any Subsidiary by
any Bank by reason of the exercise of its rights of set-off or banker's lien or
otherwise shall be shared among all the Banks in the same proportion and
applied first to Obligations of the Borrower under this Agreement. Nothing in
this Section 9.4(b) shall be deemed to require the sharing by the Banks of
collections (other than by set-off or banker's lien) with respect to any other
Obligations of the Borrower or any Subsidiary to any Bank.
9.5 TERM OF AGREEMENT. This Agreement shall continue in full force and
effect so long as the Banks have any Commitment to make Loans or issue Letters
of Credit hereunder or any Loan or Letter of Credit or any Obligation hereunder
shall be outstanding.
9.6 NO WAIVERS. No failure or delay by Agent or the Banks in exercising any
right, power or privilege hereunder or under the Note or under any other
documents or agreements executed in connection herewith shall operate as a
waiver thereof; nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein and in the Loan Documents provided
are cumulative and not exclusive of any rights or remedies otherwise provided
by agreement or law.
9.7 GOVERNING LAW. This Agreement and the Loan Documents shall be deemed to
be contracts made under seal and shall be construed in accordance with and
governed by the laws of the State of California (without giving effect to any
conflicts of laws provisions contained therein).
9.8 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this
Agreement or any other Loan Document, and no consent with respect to any
departure by Borrower therefrom, shall be effective unless the same shall be in
writing and signed by the Requisite Banks, Borrower and acknowledged by the
Agent, and then such waiver shall be effective only in the specific instance
and for the specific purpose for which given; provided, however, that no such
waiver, amendment, or consent shall, unless in writing and signed by
<PAGE> 54
all Banks, Borrower and acknowledged by the Agent, do any of the following:
(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment terminated pursuant to subsection 7.2(a)) or subject any Bank to any
additional obligations;
(b) postpone or delay any date fixed for any payment of principal,
interest, fees or other amounts due to the Banks (or any of them) hereunder or
under any Loan Document;
(c) reduce the principal of, or the rate of interest specified herein on
any Loan, or of any fees or other amounts payable hereunder or under any Loan
Document;
(d) change the percentage of the Commitments or of the aggregate unpaid
principal amount of the Loans which shall be required for the Banks or any of
them to take any action hereunder;
(e) amend this Section 9.8 or Section 9.4(b); or
(f) discharge any guarantor of the Obligations, or release all or
substantially all of any collateral for the Obligations except as otherwise may
be provided in the Loan Documents or except where the consent of the Requisite
Banks only is specifically provided for;
and, provided further, that no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Requisite Banks or all the
Banks, as the case may be, affect the rights or duties of the Agent under this
Agreement or any other Loan Document.
9.9 BINDING EFFECT OF AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of Borrower and the Banks and their respective successors
and assigns; provided that Borrower may not assign or transfer its rights or
obligations hereunder. The Banks may sell, transfer or grant participations in
the Note without the prior written consent of Borrower, and Borrower agrees
that, in addition to such rights as a Bank may grant pursuant to Section 9.10
below, any transferee or participant shall be entitled to the benefits of
Sections 2.9, 2.10, 2.14, 5.5, 9.3 and 9.4 to the same extent as if such
transferee or participant were a Bank hereunder; provided that notwithstanding
any such transfer or participation, Borrower may, for all purposes of this
Agreement, treat such Banks as the persons entitled to exercise all rights
hereunder and under the Note and to receive all payments with respect thereto.
9.10 ASSIGNMENTS, PARTICIPATIONS, ETC.
(a) Any Bank may, with the written consent of Borrower (at all times other
than during the existence of an Event of Default) and
<PAGE> 55
Agent, which consents shall not be unreasonably withheld, at any time
assign and delegate to one or more financial institutions (provided that no
written consent of Borrower or Agent shall be required in connection with any
assignment and delegation by a Bank to an affiliate of such Bank) (each an
"ASSIGNEE") all, or any ratable part of all, of the Loans, the Commitments and
the other rights and obligations of such Bank hereunder, in a minimum amount of
$5,000,000.00 (provided that FNBB may assign and delegate such rights and
obligations to any of its affiliates in a minimum amount of $1,000,000.00);
provided, however, that (i) Borrower and Agent may continue to deal solely and
directly with such Bank in connection with the interest so assigned to an
Assignee until (A) written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee,
shall have been given to Borrower and Agent by such Bank and the Assignee; (B)
such Bank and its Assignee shall have delivered to Borrower and Agent an
Assignment and Acceptance in form and substance acceptable to Agent
("ASSIGNMENT AND ACCEPTANCE") and (C) the assignor Bank or Assignee has paid to
Agent Agent's customary fee as agreed to by the assignor Bank, provided that no
processing fee shall be charged for any assignment to a Bank or a Bank's
affiliate.
(b) From and after the date that Agent notifies the assignor Bank that it
has received an executed Assignment and Acceptance and payment of the
above-referenced processing fee, (i) the Assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, shall have the
rights and obligations of a Bank under the Loan Documents, and (ii) the
assignor Bank shall, to the extent that rights and obligations hereunder and
under the other Loan Documents have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights and be released from its
obligations under the Loan Documents.
(c) Immediately upon each Assignee's making its processing fee payment
under the Assignment and Acceptance, this Agreement shall be deemed to be
amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments
arising therefrom. The Commitment allocated to each Assignee shall reduce such
Commitment of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more commercial banks or other
persons not affiliates of Borrower (a "PARTICIPANT") participating interests in
any Loans, the Commitment of that Bank and the other interests of that Bank
(the "ORIGINATING BANK") hereunder and under the other Loan Documents;
provided, however, that (i) the originating Bank's obligations under this
Agreement shall remain unchanged, (ii) the originating Bank shall remain solely
responsible for the performance of such obligations, (iii) Borrower and Agent
<PAGE> 56
shall continue to deal solely and directly with the originating Bank in
connection with the originating Bank's rights and obligations under this
Agreement and the other Loan Documents, and (iv) no Bank shall transfer or
grant any participating interest under which the Participant shall have rights
to approve any amendment to, or any consent or waiver with respect to, this
Agreement or any other Loan Document, except to the extent such amendment,
consent or waiver would otherwise require unanimous consent of the Banks.
(e) Notwithstanding any other provision in this Agreement, any Bank may at
any time create a security interest in, or pledge, all or any portion of its
rights under and interest in this Agreement and the Note held by it in favor of
any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S.
Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may
enforce such pledge or security interest in any manner permitted under
applicable law.
9.11 COUNTERPARTS. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument.
9.12 PARTIAL INVALIDITY. The invalidity or unenforceability of any one or
more phrases, clauses or sections of this Agreement shall not affect the
validity or enforceability of the remaining portions of it.
9.13 CAPTIONS. The captions and headings of the various sections and
subsections of this Agreement are provided for convenience only and shall not
be construed to modify the meaning of such sections or subsections.
9.14 WAIVER OF JURY TRIAL. AGENT, BANKS AND BORROWER AGREE THAT NONE OF THEM
NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT,
PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF,
THIS AGREEMENT, ANY RELATED INSTRUMENTS, OR THE DEALINGS OR THE RELATIONSHIP
BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH
ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE
PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY AGENT, BANKS AND
BORROWER, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER
AGENT NOR BANKS NOR BORROWER HAS AGREED WITH OR REPRESENTED TO ANY OTHER THAT
THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
<PAGE> 57
9.15 ENTIRE AGREEMENT. This Agreement, the Note and the documents and
agreements executed in connection herewith constitute the final agreement of
the parties hereto and supersede any prior agreement or understanding, written
or oral, with respect to the matters contained herein and therein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized officers as of the day and year first above written.
BORROWER OCTEL COMMUNICATIONS CORPORATION
By:
Printed Name:
Title:
AGENT THE FIRST NATIONAL BANK OF BOSTON
By:
Printed Name:
Title:
BANKS THE FIRST NATIONAL BANK OF BOSTON
By:
Printed Name:
Title:
Address for notices:
Bank of Boston
435 Tasso Street, Suite 250
Palo Alto, California 94301
Telephone: (415) 853-0568
Facsimile: (415) 853-1425
Attention: Maryfrances B. Galligan,
Director
<PAGE> 58
Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
Telephone: (617) 434-7349
Facsimile: (617) 434-0819
Attention: Andrea Peabody,
Division Executive
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:
Printed Name: Stephen L. Parry
Title: Vice President
Address for notices:
Domestic and Offshore Lending Office
1850 Gateway Boulevard
Concord, California 94520
Telephone: (510) 675-7153
Facsimile: (510) 675-7519
Attention: Jodie Leopardi
<PAGE> 59
EXHIBIT A
OCTEL COMMUNICATIONS CORPORATION
PROMISSORY NOTE
U.S.$30,000,000.00 Milpitas, California
June 30, 1994
OCTEL COMMUNICATIONS CORPORATION, a Delaware corporation ("Borrower"), for
value received, hereby unconditionally promises to pay to the order of THE
FIRST NATIONAL BANK OF BOSTON ("FNBB"), a national banking association as agent
on behalf of the Banks ("Agent"), in lawful money of the United States of
America, the principal amount of Thirty Million Dollars ($30,000,000.00)
payable on the dates and in the manner set forth below.
This Note is the promissory note (the "Note") referred to in that certain
Credit Agreement dated as of June 30, 1994 (as the same may from time to time
be amended, modified, supplemented or restated, the "Credit Agreement"), by and
among (a) Borrower; (b) FNBB and each other lender whose name is set forth on
the signature pages of the Credit Agreement or which may hereafter execute and
deliver an instrument of assignment with respect to the Credit Agreement
(collectively, the "Banks"); and (c) Agent. All terms defined in the Credit
Agreement shall have the same definitions when used herein, unless otherwise
defined herein.
All payments of principal and interest in respect of this Note shall be made
in lawful money of the United States of America in immediately available funds
at the head office of Agent for the account of the Banks.
1. PRINCIPAL PAYMENTS. The aggregate outstanding principal amount of all
Loans made pursuant to the Credit Agreement shall be due and payable in full on
the Final Payment Date.
2. INTEREST RATE. Borrower promises to pay interest on the sum of the daily
unpaid principal balance of all Loans outstanding on each day in lawful money
of the United States of America, from the date of this Note until all such
principal amounts shall have been indefeasibly repaid in full, which interest
shall be payable at the rates per annum and on the dates specified in the
Credit Agreement.
3. APPLICATION OF PAYMENTS; ACCELERATION. Payments on this Note shall be
applied in the manner set forth in the Credit Agreement. Without limiting the
generality of Section 1 of this Note, provisions in the Credit Agreement for
acceleration of the maturity of the principal amount hereof upon the happening
of certain stated events and also for prepayments of all or portions
<PAGE> 60
of the principal balance thereof prior to the Final Payment Date, on the terms
and conditions therein stated, shall supersede provisions to the contrary
herein.
All Loans evidenced by this Note made by the Banks to Borrower pursuant to
the Credit Agreement shall be recorded by Agent on its books and records. The
failure of Agent to record any Loan or any prepayment or repayment made on
account of the principal balance hereof shall not limit or otherwise affect the
obligation of Borrower under this Note and under the Credit Agreement to pay
the principal, interest and other amounts due and payable thereunder.
Any principal repayment or interest payment on the Loans not paid when due
shall bear interest and be subject to additional charges as follows:
(a) Overdue principal (whether at maturity, by reason of acceleration or
otherwise) and, to the extent permitted by applicable law, overdue interest and
fees or any other amounts payable hereunder or under the Note shall bear
interest from and including the due date thereof until paid, compounded daily
and payable on demand, at a rate per annum equal to (i) if such due date occurs
prior to the end of an Interest Period, 4% above the interest rate applicable
to such Loan for such Interest Period until the expiration of such Interest
Period, and thereafter, 4% above the Base Rate; and (ii) in all other cases, 4%
above the rate then applicable to Base Rate Loans.
(b) If a payment of principal or interest hereunder is not made within 30
days of its due date, Borrower will also pay on demand a late payment charge
equal to 5% of the amount of such payment.
4. DEFAULT. Borrower's failure to pay timely any of the principal amount due
under this Note on the date the same becomes due and payable or any accrued
interest or other amounts due under this Note on the date the same becomes due
and payable or within three (3) business days thereafter shall constitute a
default under this Note. Upon the occurrence of a default hereunder or an
Event of Default under the Credit Agreement, all unpaid principal, accrued
interest and other amounts owing hereunder shall, at the option of the Banks,
be immediately due and payable to the Banks, pursuant to the Credit Agreement
and applicable law.
5. WAIVER. Borrower hereby waives diligence, presentment, protest, demand
and notice of dishonor, protest, demand and notice of every kind and, to the
full extent permitted by law, the right to plead any and all statutes of
limitations as a defense to any demands hereunder.
Borrower promises to pay all reasonable costs and expenses, incurred in the
collection and enforcement of this Note, including, without limitation,
reasonable attorneys' fees, costs and other expenses.
<PAGE> 61
6. GOVERNING LAW. This Note shall be deemed a contract made under seal and
shall be governed by, and construed and enforced in accordance with, the laws
of the State of California, (without giving effect to any conflicts of laws
provisions contained therein).
7. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Borrower and shall extend to any
holder hereof.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered by its duly authorized officer, as of the date and the place first
above written.
OCTEL COMMUNICATIONS CORPORATION,
a Delaware corporation
By:
Printed Name
<PAGE> 62
EXHIBIT B
NOTICE OF BORROWING OR CONVERSION
________________, 199_
The First National Bank of Boston, as Agent
100 Federal Street
Boston, Massachusetts 02110
Attention: ____________________
RE: CREDIT AGREEMENT DATED AS OF JUNE 30, 1994 (AS THE SAME MAY FROM TIME TO
TIME BE AMENDED, MODIFIED, SUPPLEMENTED OR RESTATED, THE "CREDIT
AGREEMENT"), BY AND AMONG (I) OCTEL COMMUNICATIONS CORPORATION
("BORROWER"); (II) THE FIRST NATIONAL BANK OF BOSTON ("FNBB") AND EACH
OTHER LENDER WHOSE NAME IS SET FORTH ON THE SIGNATURE PAGES OF THE CREDIT
AGREEMENT OR WHICH MAY HEREAFTER EXECUTE AND DELIVER AN INSTRUMENT OF
ASSIGNMENT WITH RESPECT TO THE CREDIT AGREEMENT (COLLECTIVELY, THE
"BANKS"); AND (III) FNBB AS AGENT ("AGENT")
Ladies and Gentlemen:
Reference is made to the Credit Agreement. The capitalized terms used in this
Borrowing Notice which are defined in the Credit Agreement have the same
meaning herein as given to them therein.
Borrower and the undersigned authorized officer of Borrower hereby certify
that:
I. All representations and warranties of Borrower stated in Section IV of
the Credit Agreement are true, accurate and complete in all material respects
as of the date hereof; provided, however, that those representations and
warranties expressly referring to another date shall be deemed to be made as of
such date;
II. As of the date hereof, no Default or Event of Default has occurred and
is continuing; and
III. The information set forth on SCHEDULE 1 hereto, which Schedule is
incorporated herein by this reference, is true and correct.
<PAGE> 63
The First National Bank of Boston, as Agent
Page 2
IN WITNESS WHEREOF, this Notice of Borrowing or Conversion is executed by
the undersigned this ____ day of ____________, 199_.
OCTEL COMMUNICATIONS CORPORATION,
a Delaware corporation
By:
Printed Name:
Title:
ACCEPTED AND APPROVED:
THE FIRST NATIONAL BANK OF BOSTON,
as Agent
By:
Printed Name:
Title:
Date:
<PAGE> 64
SCHEDULE 1
TO
NOTICE OF BORROWING OR CONVERSION
DATED ________________, 199_
<TABLE>
<CAPTION>
LOANS
<S> <C> <C>
1. Current principal amount of
Loans outstanding under the Credit Agreement. $
-----------
2. Current principal amount undrawn under
outstanding Letters of Credit under
the Credit Agreement. $
-----------
3. Amount available for borrowing: ($30,000,000
minus Line 1 minus Line 2) $
----------
a. Principal amount of Loan requested for
this advance (must not be greater than
Line 3). $
-----------
b. Requested Funding Date.
-------------
c. Requested Rate (LIBOR Loan[ ]
or Base Rate Loan[ ])
-------------
d. If LIBOR Loan, Interest Period
requested
-------------
e. Principal amount of Loans outstanding plus
principal amount undrawn under Letters of
Credit outstanding after giving effect to this advance $
-----------
</TABLE>
<PAGE> 65
EXHIBIT C
OCTEL COMMUNICATIONS CORPORATION
REPORT OF CHIEF FINANCIAL OFFICER
OCTEL COMMUNICATIONS CORPORATION (the "Company") hereby certifies that:
This Report of Chief Financial Officer (the "Report") is furnished
pursuant to Section 5.1(c) of the Credit Agreement (the "Credit Agreement")
dated as of June 30, 1994 by and between the Company and The First National
Bank of Boston ("FNBB"), and the other Banks party thereto (collectively,
"Banks") and FNBB as agent for Banks (the "Credit Agreement"). Unless
otherwise defined herein, the terms used in this Report have the meanings given
to them in the Credit Agreement.
As required by Section 5.1(a) and (b) of the Credit Agreement,
consolidated and consolidating financial statements of the Company and its
Subsidiaries for the [year/quarter] ended _______________, 19____ (the
"Financial Statements") prepared in accordance with generally accepted
accounting principles consistently applied accompany this Report. The
Financial Statements present fairly the consolidated financial position of the
Company and its Subsidiaries as at the date thereof and the consolidated and
consolidating results of operations of the Company and its Subsidiaries for the
period covered thereby (subject only to normal recurring year-end adjustments
in the case of quarterly statements).
The figures set forth in SCHEDULE A hereto for determining compliance
by the Company with the financial covenants contained in the Credit Agreement
are true and complete as of the date hereof.
The activities of the Company and its Subsidiaries during the period
covered by the Financial Statements have been reviewed by the Chief Financial
Officer or by employees or agents under his immediate supervision. Based on
such review, to the best knowledge and belief of the Chief Financial Officer,
and as of the date of this Report, no Default has occurred.*
WITNESS my hand this _______________ day of _______________, 19___.
OCTEL COMMUNICATIONS CORPORATION
By:
Title:
* If a Default has occurred, this paragraph is to be modified with an
appropriate statement as to the nature thereof, the period of existence thereof
and what action the Company has taken, is taking, or proposes to take with
respect thereto.
<PAGE> 66
SCHEDULE A
TO
EXHIBIT C
FINANCIAL COVENANTS
QUICK RATIO (SECTION 5.7(A))
<TABLE>
<S> <C> <C>
REQUIRED: 1.25:1.00
---------
ACTUAL:
(i) Sum of cash, short term Qualified Investment
and accounts receivable $
(ii) Consolidated Current Liabilities $
(iii) To the extent not included in Line (ii),
the principal amount of Loans and the principal
amount undrawn under Letters of Credit outstanding $
(iv) Line (ii) plus Line (iii) $
(v) Quick Ratio: Line (i) divided by Line (iv) :1.00
-----
</TABLE>
PROFITABILITY (SECTION 5.7(B))
<TABLE>
<S> <C> <C>
(a) REQUIRED: No operating or net loss in any two consecutive quarters.
(b) REQUIRED: No operating or net loss in any quarter > 5% of Consolidated Tangible Net
Worth as of the end of such quarter from above.
ACTUAL:*
Consolidated net income at [prior quarter end] $
-----
Consolidated net income at [most recent quarter end] $
-----
Consolidated operating income at [prior quarter end] $
-----
Consolidated operating income at [most recent quarter end] $
-----
</TABLE>
LEVERAGE RATIO (SECTION 5.7(C))
__________________________________
* Excluded are those restructuring charges up to $30,000,000 which
are directly attributable to the merger under the VMX Merger Agreement.
<PAGE> 67
<TABLE>
<CAPTION>
REQUIRED: Not to exceed 0.75:1.00
-----------------------
ACTUAL:
<S> <C> <C> <C>
(i) CONSOLIDATED TOTAL LIABILITIES $
(including the undrawn amount of all outstanding
Letters of Credit)
(ii) CONSOLIDATED TANGIBLE NET WORTH $
(iii) LEVERAGE RATIO: Line (i) divided by Line (ii) ---
:1.00
------
</TABLE>
CONSOLIDATED TANGIBLE NET WORTH (SECTION 5.7(D))
<TABLE>
<CAPTION>
REQUIRED:
<S> <C> <C>
(i) BEGINNING BALANCE $231,000,000
(ii) PLUS: 80% of consolidated
quarterly net income (after
taxes) for each fiscal quarter
after June 30, 1994 in which net
income shall be positive $
(iii) PLUS: 100% of net cash proceeds
from sale of equity securities
after June 30, 1994 $
(iv) MINUS: 100% of the cost of
repurchases by Borrower of its
capital stock after June 30, 1994
in an aggregate amount of up to
$40,000,00 $
(v) MINUS: 50% of the cost of
repurchases by Borrower of its
capital stock after June 30, 1994
in excess of $40,000,000 but less
than $60,000,000 $
(vi) REQUIRED AMOUNT: $
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
ACTUAL:
<S> <C> <C>
(i) CONSOLIDATED TOTAL ASSETS OF COMPANY $
(ii) LESS: excluded items** $( )
(iii) LESS: Consolidated Total Liabilities $0
(iv) CONSOLIDATED TANGIBLE NET WORTH: $
</TABLE>
WITNESS my hand this ________________ day of ________________, 19__.
OCTEL COMMUNICATIONS CORPORATION
By:
Title:
__________________________________
** Excluded items are: (a) goodwill, (b) book value, net of any
reserves, of intangible assets, including unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research
and development expenses, except prepaid expenses, (c) reserves not already
deducted from assets, (d) any write-up in the book value of assets resulting
from any revaluation thereof subsequent to the date of the financial statement
and (e) value of minority interests in Subsidiaries.
<PAGE> 69
EXHIBIT D
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 415-493-9300 FACSIMILE 415-439-6811
JOHN ARNOT WILSON
OF COUNSEL
August 29, 1994
The First National Bank of Boston,
as Agent
100 Federal Street
Boston, Massachusetts 02110
and
The Banks Listed on Annex A hereto
Re: Credit Agreement, dated as of June 30, 1994,
among Octel Communications Corporation, the
Banks named therein, and The First National
Bank of Boston, as Agent for the Banks
Ladies and Gentlemen:
We have acted as special counsel to Octel Communications Corporation, a
Delaware corporation (the "Company"), in connection with the execution and
delivery of that certain Credit Agreement, dated as of June 30, 1994 (the
"Credit Agreement"), among the Company, the Banks named therein and The First
National Bank of Boston, as Agent for the Banks. Capitalized terms used herein
which are not defined in the Credit Agreement shall have the respective
meanings set forth in the Credit Agreement, unless otherwise defined herein.
This opinion is being furnished to you pursuant to Section 3.1(g) of the Credit
Agreement.
In rendering the opinions expressed below, we have examined executed
originals or copies of the following documents:
(a) the Credit Agreement;
(b) a letter agreement, dated as of the date hereof, by and
between the Company and the Agent with respect to certain fees
payable in connection with the Credit Agreement (the "Fee
Letter");
(c) the Note of the Company, dated as of June 30, 1994,
executed in favor of The First National Bank of Boston, as
Agent (the "Note");
<PAGE> 70
(d) a certificate of the Secretary of the Company, dated as
of the date hereof, executed and delivered to you pursuant
to Section 3.1(b) of the Credit Agreement, as to, among other
things: (i) the incumbency and signature of certain officers of
the Company; (ii) the Certificate of Incorporation of the
Company; (iii) the bylaws of the Company; and (iv) the adoption
of certain resolutions by the directors of the Company.
(e) records of the proceedings of the Board of Directors of
the Company during or by which resolutions were adopted
relating to matters covered by this opinion;
(f) a copy of the Certificate of Incorporation of the
Company, certified as of August 4, 1994, by the
Secretary of State of the State of Delaware;
(g) (i) a certificate of the Secretary of State of the
State of Delaware, dated August 4, 1994, with respect to the
corporate and tax good standing of the Company as a
corporation incorporated under the laws of the State of
Delaware; (ii) a certificate of the Secretary of State of the
State of California, dated August 4, 1994, with respect to the
standing of the Company as a foreign corporation qualified to
do business in the State of California; (iii) and a certificate
of the Franchise Tax Board of the State of California, dated as
of August 4, 1994, as to the tax status of the Company in the
State of California;
(h) the records of actions by the Company's board of
directors, committees thereof and shareholders since
January 1, 1992, as set forth in the minute books of the
Company;
(i) certificates of certain officers of the Company as to
certain factual matters (copies of which have been delivered to
the Banks);
(j) the other documents delivered by the Company to the
Banks on the date hereof in connection with the closing of the
transactions covered hereby; and
(k) each of the documents and agreements listed on Annex B
hereto (the "Reviewed Agreements") which the Company has
certified to us constitute all the documents listed as exhibits
to the Company's most recent Annual Report on Form 10-K or
Quarterly Reports on Form 10-Q pursuant to the requirements of
clause (10) of Item 601(b) of Regulation S-K (other than those
which have expired, terminated or are otherwise no longer in
effect)
<PAGE> 71
and all of the documents which would be required to be listed
as exhibits pursuant to the requirements of clause (10) of Item
601(b) of Regulation S-K as exhibits to an Annual Report on
Form 10-K or Quarterly Report on Form 10-Q of the Company if
such report were filed as of the date hereof (other than those
which have expired, terminated or are otherwise no longer in
effect).
With respect to any documents submitted for our review we have assumed
that all signatures are genuine, all documents submitted as originals are
authentic, all documents submitted as copies conform to the original documents
and that all documents, books and records made available to us by the Company
are accurate and complete. The Credit Agreement, the Fee Letter and the Note
are sometimes referred to herein as the "Transaction Documents."
We have also relied upon and obtained from public officials and
officers and representatives of the Company such other certificates and
assurances as we consider necessary for the purposes of rendering this opinion.
With respect to certain matters of fact we have relied upon, with your
permission, the representations and warranties of the Company set forth in the
Credit Agreement (but only to the extent they relate to factual matters), the
Certificate of the Secretary of the Company referenced in paragraph (d) above
and the certificates of certain officers of the Company referred to in
paragraph (i) above.
As used in this opinion, the expression "to our knowledge" or "known to
us" with reference to matters of fact means that during the course of our
representation of the Company in connection with the Transaction Documents no
information has come to the attention of the attorneys of our firm involved in
this engagement or any of the other attorneys of our firm listed on Annex C
hereto (which includes the primary attorneys currently performing services on
behalf of the Company) which would give them actual knowledge of the existence
or absence of such facts; however, except to the extent expressly set forth
herein, we have made no independent investigation to determine the existence or
absence of such facts, and any limited inquiry undertaken by us during the
preparation of this opinion should not be regarded as such an investigation.
No inference as to our knowledge of the existence or absence of any facts
underlying any opinion given "to our knowledge" should be drawn from the fact
of our representation of the Company.
On the basis of the foregoing and in reliance thereon, and based upon
examination of questions of law as we have deemed appropriate, and subject to
the assumptions, exceptions, qualifications and limitations set forth herein,
we advise you that in our opinion:
1. The Company is a corporation duly incorporated and validly
existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power to own or hold
under lease its properties. The
<PAGE> 72
Company is a corporation duly qualified to do business and in
good standing as a foreign corporation in the State of
California.
2. The Company has the requisite corporate power and
authority to enter into the Transaction Documents and to carry
on its business as now conducted and to carry out the
transactions contemplated thereby.
3. The execution and delivery by the Company, and the
performance by the Company of its obligations under each
of the Transaction Documents, and the consummation of the
transactions contemplated thereby, have been duly authorized by
all necessary corporate action by the Company.
4. Each of the Transaction Documents to which
Company is a party has been duly executed and delivered and
constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
5. The execution and delivery of each of the Transaction
Documents, the borrowings of Loans in accordance with the
Credit Agreement, repayment of any such Loans by the Company
and the undertaking of the covenants set forth in the Credit
Agreement do not (a) violate or conflict with any provision of
the Certificate of Incorporation or the Bylaws of the Company,
(b) violate any provision of any law, rule or regulation, or
(c) result in a breach of, constitute an event of default
under, constitute an event which, with the passage of time,
giving of notice or both would constitute an event of default
under, or permit the acceleration of any obligation owed under
any Reviewed Agreement.
6. No governmental consents, approvals,
authorizations, registrations, declarations or filings are
required to be made or obtained by the Company (on its behalf)
for the due authorization, execution and delivery by the
Company of the Transaction Documents, the borrowing of Loans in
accordance with the Credit Agreement or the repayment of any
such Loans by the Company.
7. The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
<PAGE> 73
8. Except as set forth on the Disclosure Letter to
the Credit Agreement, to our knowledge, there is no litigation,
proceeding or investigation pending or overtly threatened in
writing against Company or any Subsidiary which we believe is
reasonably likely to have a material adverse effect on the
business of the Company and its Subsidiaries, taken as a whole.
The opinions set forth above are subject to the following exceptions,
qualifications and limitations:
A. We express no opinion as to any matter relating to
laws of any jurisdiction other than the laws of the State of
California, the General Corporation Law of the state of
Delaware and the federal laws of the United States, as such are
in effect on the date hereof. As you know, we are not licensed
to practice law in the State of Delaware and, accordingly, our
opinions as to the General Corporation Law of the State of
Delaware are based solely on our review of the official
statutes of Delaware.
B. We express no opinion as to (i) the effect of
any bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws relating to or affecting the
rights of creditors generally, or (ii) the effect of general
principles of equity, including without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and
the possible unavailability of specific performance, injunctive
relief or other equitable relief, whether considered in a
proceeding in equity or at law.
C. We express no opinion (i) regarding the rights or remedies
available to any party for violations or breaches
of any provisions which are immaterial or for violations or
breaches of any provisions the enforcement of which a court
determines would be unreasonable under the then existing
circumstances, (ii) regarding the rights or remedies available
to any party insofar as such party may take discretionary
action which is arbitrary, unreasonable or capricious, or is
not taken in good faith or in a commercially reasonable manner,
whether or not such action is permitted under the Transaction
Documents, (iii) as to the effect of the exercise of judicial
discretion, whether in a proceeding in equity or at law, (iv)
regarding the enforceability of any provision deemed to be
"unconscionable" within the meaning of Section 1670.5 of the
California Civil Code, or (v) regarding the enforceability of
any provision authorizing the exercise of any remedy without
reasonable notice and opportunity to cure.
<PAGE> 74
D. We express no opinion as to the legality, validity, binding
nature or enforceability of (i) any provisions in the
Transaction Documents providing for the payment or
reimbursement of costs or expenses or indemnifying a
party, to the extent such provisions may be held unenforceable
as contrary to public policy, (ii) any provision of any
Transaction Documents insofar as it provides for the payment or
reimbursement of costs and expenses or indemnification for
claims, losses or liabilities in excess of a reasonable amount
determined by any court or other tribunal, (iii) any provisions
regarding the Banks' ability to collect attorneys' fees and
costs in an action involving the Transaction Documents, if the
Banks are not the prevailing party in such action (we call your
attention to the effect of Section 1717 of the California Civil
Code, which provides that, where a contract permits one party
thereto to recover attorneys' fees, the prevailing party in any
action to enforce any provision of the contract shall be
entitled to recover its reasonable attorneys' fees), (iv) any
provisions of any Transaction Documents imposing penalties or
forfeitures, late payment charges or any increase in interest
rate, upon delinquency in payment or the occurrence of a
default to the extent they constitute a penalty or forfeiture
or are otherwise contrary to public policy, (v) any rights of
set-off, or (vi) any provision of the Transaction Documents to
the effect that a statement, certificate, determination or
record shall be deemed conclusive absent manifest error (or
similar effect), including, without limitation, that any such
statement, certificate, determination or record shall be prima
facie evidence of a fact, or any provision of the Transaction
Documents, insofar as it provides that notice is not actually
received may be binding on any party.
E. We express no opinion with respect to the
legality, validity, binding nature or enforceability of (i) any
vague or broadly stated waiver, including without limitation,
the waivers of diligence, presentment, demand, protest or
notice, (ii) any waivers or consents (whether or not
characterized as a waiver or consent in the Transaction
Documents) relating to the rights of the Company or duties
owing to them existing as a matter of law, including, without
limitation, waivers of the benefits of statutory or
constitutional provisions, to the extent such waivers or
consents are found by courts to be against public policy or
which are ineffective pursuant to California statutes and
judicial decisions, or (iii) any waivers of any statute of
limitations to the extent such waivers are in excess of four
years beyond the statutory period.
<PAGE> 75
F. We express no opinion with respect to the
legality, validity, binding nature or enforceability of any
provision of the Transaction Documents to the effect that
rights or remedies are not exclusive, that every right or
remedy is cumulative and may be exercised in addition to any
other right or remedy, that the election of some particular
remedy or remedies does not preclude recourse to one or more
other remedies or that failure to exercise or delay in
exercising rights or remedies will not operate as a waiver of
any such right or remedy.
G. We express no opinion as to any provision of
the Transaction Documents requiring written amendments or
waivers of such documents insofar as it suggests that oral or
other modifications, amendments or waivers could not be
effectively agreed upon by the parties or that the doctrine of
promissory estoppel might not apply.
H. We have assumed that there are no agreements or
understandings between or among the Company, a Bank, the Agent
or third parties which would expand, modify or otherwise affect
the terms of the Transaction Documents or the respective rights
or obligations of the parties thereunder and that the
Transaction Documents correctly and completely set forth the
intent of all parties thereto.
I. We have assumed that all parties to the
Transaction Documents (other than the Company) have filed all
required franchise tax returns, if any, and paid all required
taxes, if any, under the California Revenue & Taxation Code.
J. We have assumed that the Credit Agreement has
been duly authorized, executed and delivered by the Agent and
each of the Banks and that the Agent and each of the Banks have
full power, authority and legal right to enter into and perform
the terms and conditions of the Credit Agreement on their parts
to be performed and that the Credit Agreement constitutes
legal, valid and binding obligations of the Agent and each of
the Banks, enforceable against them in accordance with its
terms.
K. We express no opinion as to the applicability
or effect of compliance or non-compliance by the Banks with any
state, federal or other laws applicable to the Banks or to the
transactions contemplated by the Transaction Documents because
of the nature of their business, including their legal or
regulatory status.
<PAGE> 76
L. We have assumed that each Bank is either (i) a
"Bank" as defined in and operating under that certain act known
as the "Bank Act" approved March 1, 1909, as amended, (ii) a
bank created and operating under and pursuant to the laws of
the State of California or of the United States or (iii) a
foreign bank complying with the criteria set forth in Section
1716 of the California Financial Code, as amended, and that the
Banks are therefore exempt from the restrictions of Section 1
of Article XV of the California Constitution and related
statutes relating to rates of interest upon the loan of money.
M. We express no opinion regarding compliance or
non-compliance (or the effect thereof) with applicable
anti-fraud provisions of federal or state securities laws, or
with respect to the "Blue Sky" laws of any state other than the
State of California.
N. Our opinions set forth in paragraph 1 as to
valid existence, due qualification and good standing are based
solely on the certificates referenced in paragraph (g) above
(copies of which have been furnished to you).
O. This opinion speaks only at and as of its date
and is based solely on the facts and circumstances known to us
at and as of such date. We express no opinion as to the effect
on the Banks' rights under the Transaction Documents of any
statute, rule, regulation or other law which is enacted or
becomes effective after, or of any court decision which changes
the law relevant to such rights which is rendered after, the
date of this opinion or the conduct of the parties following
the closing of the contemplated transaction. In addition, in
rendering this opinion, we assume no obligation to revise or
supplement this opinion should the present laws of the
jurisdictions mentioned herein be changed by legislative
action, judicial decision or otherwise.
P. Our opinions in clause (b) of paragraph 5 above
are intended to express our opinion that the execution,
delivery and performance by the Company of the Transaction
Documents are neither prohibited by, nor do they subject the
Company to a fine, penalty or similar sanction that would be
materially adverse to the Company under any law, rule or
regulation of the State of California or federal law that a
lawyer practicing in the State of California exercising
customary professional diligence would reasonably recognize to
be applicable to the Company and the transactions
<PAGE> 77
contemplated by the Transaction Documents; accordingly,
our opinions set forth above are limited to the foregoing.
This opinion is made with the knowledge and understanding that you (but
no other person) may rely thereon in entering into the Credit Agreement and is
solely for your benefit, and this opinion may not be quoted to or relied upon
by any person other than you, except that (i) this opinion may be disclosed to
bank regulatory and other governmental authorities having jurisdiction over you
requesting (or requiring) such disclosure and (ii) this opinion may be
disclosed to and relied upon by Assignees if the assignments relating thereto
are permitted under and made in accordance with the Credit Agreement; provided
that in no event does this opinion extend to any issue or matter related to any
such assignment or arising from or out of any such assignment (as distinct from
the subject transaction).
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON, SONSINI, GOODRICH & ROSATI
<PAGE> 78
ANNEX A
The First National Bank of Boston
Bank of America National Trust and Savings Association
<PAGE> 79
ANNEX B
REVIEWED AGREEMENTS
1. Equity Option Contract, dated October 21,
1992, between Goldman Sachs & Co. and the Company.
2. Master Agreement for Equity and Index Options, dated July 28,
1994, between Swiss Bank Corporation and the Company.
3. Lease dated September 17, 1985 for facilities
located at 890 Tasman Drive (1390 McCarthy Blvd.), Milpitas,
California, as amended by Amendment No. 1, dated February 13,
1986; Amendment No. 2, dated August 20, 1986; and Amendment No.
3, dated December 22, 1986.
4. Sublease dated November 24, 1987 for facilities located
at 850 Tasman Drive, Milpitas, California.
5. Lease dated January 12, 1989 for facilities located at
1401 McCarthy Blvd., Milpitas, California.
6. Lease dated January 12, 1989 for facilities located at
700 Tasman Drive, Milpitas, California.
7. Lease dated January 12, 1989 for facilities located at
520 Alder Drive, Milpitas, California.
8. Sublease dated June 28, 1989 for facilities located at
800 Tasman Drive, Milpitas, California.
9. Interface License Agreement (IMS-Link Interface) dated
December 2, 1983 between Northern Telecom Inc. and the Company.
10. Interface License Agreement (Digital Set Interface)
dated March 16, 1990 between Northern Telecom Inc. and the
Company.
11. License Agreement dated February 1, 1989 between Mitel
Corporation and the Company.
12. License Agreement dated August 1, 1990 between ROLM
Systems and the Company.
13. Form of Indemnification Agreement as entered into by
the Company with its directors and officers.
14. Amended and Restated Registration Rights Agreement
dated March 12, 1987 between the Company and
the holders of Series A, Series B, Series C
and Series D Preferred
<PAGE> 80
Stock, as amended by the form of Amendment of
Registration Rights Agreement with respect to Initial Public
Offering.
15. Common Stock Purchase Agreement between the
Company and Hewlett-Packard Company dated as of August 10, 1988
(including a Registration Rights Agreement between the parties
attached thereto as Exhibit A).
16. Amendment to Common Stock Purchase Agreement
dated as of October 1, 1990 between the Company and
Hewlett-Packard Company.
17. Common Shares Rights Agreement dated as of
July 25, 1990 between the Company and Bank of America NT & SA.
18. Employment agreement between the Company and
Robert Cohn effective October 6, 1990.
19. Employment agreement between the Company and
Douglas Chance dated October 13, 1990.
20. Memorandum regarding and promissory note for
loan to Douglas Chance dated November 9, 1990.
-2-
<PAGE> 81
ANNEX C
Deborah C. Aikins
Mark E. Bonham
Christopher F. Boyd
Susan A. Creighton
Robert P. Feldman
Donna M. Petkanics
Barry E. Taylor
<PAGE> 82
SCHEDULE 1
COMMITMENT AMOUNT
<TABLE>
<CAPTION>
BANK COMMITMENT
---- ----------
<S> <C>
First National Bank of Boston $20,000,000.00
Bank of America National Trust and Savings Association $10,000,000.00
</TABLE>
<PAGE> 83
SCHEDULE 4.12
OFFICERS AND BOARD OF DIRECTORS OF OCTEL SUBSIDIARIES
<TABLE>
<S> <C> <C> <C>
1. Octel Communications Limited (Incorporated: UK) Registered: November 9, 1990
----------------------------------------------- Ownership: 100%
AKA: Octel Communications Europe Officers: Directors:
Octel House, Ancells Road -------- ---------
Fleet Gary Wetsel, Pres. Gary Wetsel, Chairman
Hampshire, GU13 8UN Derek Daley, Secretary Robert Cohn, Director
Kim Fennell, Director
2. Octel Communications S.A. (Incorporated: France) Incorporated: October 18, 1991
------------------------- Ownership: 100%
28 R. Jacques Ibert, Officers: Directors:
75017, Paris France -------- ---------
Francois Brandon, Pres. Kim Fennell, Chairman
Derek Daley, Secretary Francois Brandon, Director
Robert Cohn, Director
Gary Wetsel, Director
3. Octel Communications Canada Inc. (Incorp. Canada) Incorporated: March 7, 1990
-------------------------------- Ownership: 100%
1500-1075 West Georgia St. Officers: Directors:
Vancouver, British Columbia, Canada -------- ---------
Gary Wetsel, Pres. Gary Wetsel, Chairman
Derek Daley, Secretary Kim Fennell, Director
James Engle, Treasurer
4. Octel Communications (Israel) Ltd. (Incorp. Israel) Acquired: July 1, 1991
--------------------------------- Incorporated: Nov. 15, 1985
Ownership: 100%
16 Derech Ha'atzmaut, Officers: Directors:
Yehud 56304, Israel -------- ---------
Derek Daley, Secretary Avi Cohen, Director
Gary Wetsel, Director
Derek Daley, Director
5. Octel Communications Int'l Corporation (Incorporated U.S. Virgin Islands) Incorporated: March 30, 1988
-------------------------------------- Ownership: 100%
5 Kronprindsens Gade Officers: Directors:
P.O. Box 8560 -------- ---------
Charlotte Amalie, St. Thomas Gary Wetsel, Pres. Gary Wetsel, Director
U.S. Virgin Islands 00801 Herzel Ashkenazi, VP Derek Daley, Director
Derek Daley, Secretary James Engle, Director
James Engle, Treasurer Catherine Sitting, Director
Bonnie Love, Director
(C. Sargent Altrn)
6. Compass Technology, Inc. (Incorporated: Florida) Acquired: August 12, 1992
------------------------ Incorporated: January 25, 1989
Ownership: 100%
Live Oak Office Center Officers: Directors:
2201 Cantu Court, #116 -------- ---------
Sarasota, Florida 34232 Randy Savell, Exec. VP Gary Wetsel
Robert Freedman, VP
Derek Daley, Secretary
James Engle, Treasurer
7. Tigon Corporation (Incorporated: Texas)
-----------------
17080 Dallas Parkway Officers: Directors:
Dallas, TX 75248-1986 -------- ---------
Bruce D. Simpson, Pres. Gary Wetsel
Carl F. Schoenberger, VP Bruce D. Simpson
Barbara Echols, VP
Freddie Carroll, VP
Derek Daley, Secretary
James Engle, Treasurer
8. Octel Communications K.K. (Incorp. Japan) Recorded: September 13, 1993
-------------------------
Aoyama Bldg., Officers: Representative Directors:
2-3 Kita-aoyama 1-chome -------- ------------------------
Minato-ku, Tokyo Not Applicable Gary Wetsel
Derek Daley
Statutory Auditor: Michael West
----------------- Bruce MacLennan
Herzel Ashkenzai
</TABLE>
-2-
<PAGE> 84
<TABLE>
<S> <C> <C>
9. Octel Communications Pacific, Ltd. (Inc. Hong Kong) Incorporated: February 22, 1994
---------------------------------
35th Floor, Central Plaza Officers: Directors:
18 Harbor Road -------- ---------
Wanchai, Hong Kong Not Applicable Gary Wetsel - Chairman of the
Board
Derek Daley
Mike West
10. VMX, INC. (Incorp. Delaware) Acquired: March 13, 1994
--------- --------
2115 O'Nel Drive Officers: Director:
San Jose, CA 95131-2032 -------- --------
Patrick S. Howard, Pres. Robert Cohn
David J. Ladd, Exec. VP
John Niedermaier, VP,
Controller
Raymond V. Glynn, Exec. VP
Edward J. Mattiuz, Exec. VP
Charlie Singmaster, VP
Bruce C. Pollock, Exec. VP,
CFO & Secretary
Linda Speer, Assistant
Secretary
</TABLE>
-3-
<PAGE> 85
OCTEL COMMUNICATIONS CORPORATION
CREDIT AGREEMENT
JUNE 30, 1994
SCHEDULE 6.1 - INDEBTEDNESS
Indebtedness secured by Encumbrances permitted under Section 6.4 of the
Credit Agreement (other than Encumbrances referenced in clause (k) of such
Section 6.4).
<PAGE> 86
OCTEL COMMUNICATIONS CORPORATION
CREDIT AGREEMENT
JUNE 30, 1994
SCHEDULE 6.2 - GUARANTEES
<TABLE>
<CAPTION>
Amount
Subsidiary Description (in US$)
---------- ----------- -----------
<S> <C> <C>
Octel Communications Ltd. (U.K.) Building Lease $ 1,250,514
Tigon Corporation Tokai Financial - Equipment Leases (Masterlease) $ 3,000,000(B)
Tigon Corporation Real Estate Lease $ 1,096,000
Compass Technology, Inc. IBM Credit Corporation $ 125,000
VMX, Inc. Bank of America (former) Line of Credit Guarantee $ 5,000,000(A)
-----------
$10,471,514
===========
</TABLE>
Notes:
(A) Will be incorporated in this new Credit Agreement
with the Banks, as defined. Supports outstanding Letters of Credit
for VMX, Inc. at Bank of America.
(B) Lease Amount outstanding at June 30, 1994 is $1,294,891.
<PAGE> 87
OCTEL COMMUNICATIONS CORPORATION
CREDIT AGREEMENT
JUNE 30, 1994
SCHEDULE 6.4 - ENCUMBRANCES
<TABLE>
<CAPTION>
Amount
Subsidiary Lien Holder Collateral (In U.S.$)
---------- ----------- ---------- ----------
<S> <C> <C> <C>
Tigon Corporation Tokai Financial - (Masterlease) Equipment $1,294,891
Compass Technology, Inc. West Coast Bank, Sarasota, FL Equipment $ 49,532
----------
$1,344,423
==========
</TABLE>
-6-
<PAGE> 88
OCTEL COMMUNICATIONS CORPORATION
CREDIT AGREEMENT
JUNE 30, 1994
SCHEDULE 6.9 - INVESTMENTS
<TABLE>
<CAPTION>
Amortized Cost
Basis
Description (In U.S.$)
----------- --------------
<S> <C>
Per Detailed Schedule Attached $70,400,755
===========
</TABLE>
<PAGE> 89
OCTEL COMMUNICATIONS CORPORATION
ANALYSIS OF CASH AND INVESTMENTS - <> 90 DAYS MATURITY
30-JUN-94
Payden & Rygel
Weiss, Peck, and Greer
<TABLE>
<CAPTION>
Face Amount/ Cost Accrued
Settlement Due Number of (principal) Interest
Account 6005 Date Date Units (only)
Account 1068 Z A B
<S> <C> <C> <C> <C> <C>
Cash & Cash Equivalents
FHLMC DISC NY 06/08/94 08/30/94 1,040,000 1,029,955.91 2,694.76
US TBILL 06/30/94 09/22/94 35,000 34,665.17 3.99
Total Cash & Cash Equivalents 1,075,000 1,064,621.08 2,698.75
AL ST SCHL REV BD 01/28/93 01/01/94 3,000,000 3,015,090.00 18,500.00
CA MARIN CNTY TRANS 08/23/93 07/06/94 1,000,000 1,001,150.00 29,500.00
VA ARLINGTON BANS 02/04/93 08/01/94 2,000,000 2,013,300.00 30,000.00
FIRST ALABAMA BA 02/15/94 08/10/94 1,000,000 982,400.00 13,600.00
VA ST HDA MPT 7/17 08/31/93 08/10/94 3,000,000 3,001,350.00 76,250.00
CA SAC CTY USD TRANS 08/19/93 08/11/94 1,000,000 1,006,160.00 31,111.11
WA STATE GO BD 09/29/93 10/01/94 3,000,000 3,024,030.00 27,000.00
VT SAC ED LN REV 12/15/93 10/04/94 1,000,000 1,000,000.00 1,400.00
US TBILL 912794L93 04/26/94 11/17/94 930,000 907,934.87 0.00
NC WAKE CNTY GO BD 03/29/93 04/01/95 4,000,000 4,073,160.00 42,000.00
OR KLLMTH MPUT5/23ETM 05/02/94 05/02/95 2,500,000 2,500,000.00 15,364.58
US TNOTE 912827F31 04/11/94 05/15/95 950,000 960,205.07 7,128.00
Short-Term Subtotals 23,380,000 23,484,779.94 291,853.69
KC MISS AIRPORT REV 08/18/93 09/01/95 1,200,000 1,210,531.00 19,600.00
FL JACK EL AU 12/S10 08/24/93 10/01/95 2,000,000 2,000,000.00 17,250.00
US TNOTE 912827M58 04/05/94 10/31/95 1,670,000 1,643,123.44 10,903.00
CONN STATE SPL TAX OBL 08/10/93 11/01/95 500,000 548,030.00 7,417.00
US TNOTE 912827M90 12/14/93 11/30/95 1,825,000 1,812,659.88 6,570.00
NE OMAHA PPD ETM BD 04/15/94 02/01/96 2,000,000 2,026,960.00 41,666.67
TX FR Worth GO BD 01/14/94 03/01/96 2,050,000 2,149,384.00 39,291.67
U.S. TREASURY NOTE 04/16/93 04/30/96 1,595,000 1,744,531.25 20,490.12
OH ST HWY SER T GO 06/30/94 05/15/96 1,000,000 1,013,010.00 4,000.00
BRAZOS TX EDUC AUTH 08/24/93 06/01/96 1,000,000 1,000,000.00 3,750.00
Subtotals 14,840,000 15,148,229.57 170,938.46
AMT-LA PFA SER92A-2 06/08/94 09/01/96 2,000,000 2,030,040.00 35,333.33
KY ST HI EDUC LOAN 04/20/94 12/01/96 1,000,000 1,027,830.00 5,042.00
CHI IL OHARE INTL AIRPORT 08/24/93 01/01/97 1,250,000 1,265,387.50 29,375.00
</TABLE>
<PAGE> 90
OCTEL COMMUNICATIONS CORPORATION
ANALYSIS OF CASH AND INVESTMENTS - <> 90 DAYS MATURITY
30-JUN-94
Payden & Rygel
Weiss, Peck, and Greer
<TABLE>
<CAPTION>
Unrealized Difference
Book Market Gain or Between
Value Value (Loss) Face & Cost
Account 6005 (A+B) (A-D) (A-Z)
Account 1068 C D E
<S> <C> <C> <C> <C>
Cash & Cash Equivalents 24,236.62
FHLMC DISC NY 1,032,650.67 1,029,678.57 (277.34) 10,044.09
US TBILL 34,669.16 34,653.01 (12.16) 344.83
0.00
Total Cash & Cash Equivalents 1,091,556.45 1,064,331.58 (289.50) 10,378.92
0.00
0.00
AL ST SCHL REV BD 3,033,590.00 3,007,110.00 (7,980.00) (15,090.00)
CA MARIN CNTY TRANS 1,030,650.00 999,970.00 (1,180.00) (1,150.00)
VA ARLINGTON BANS 2,043,300.00 2,001,100.00 (12,200.00) (13,300.00)
FIRST ALABAMA BA 996,000.00 981,311.11 (1,088.89) 17,600.00
VA ST HDA MPT 7/17 3,077,600.00 3,000,060.00 (1,290.00) (1,350.00)
CA SAC CTY USD TRANS 1,037,271.11 1,000,540.00 (5,620.00) (6,160.00)
WA STATE GO BD 3,051,030.00 3,002,070.00 (21,960.00) (24,030.00)
VT SAC ED LN REV 1,001,400.00 1,000,000.00 0.00 0.00
US TBILL 912794L93 907,934.87 913,688.00 5,753.13 22,065.13
NC WAKE CNTY GO BD 4,115,160.00 4,019,000.00 (54,160.00) (73,160.00)
OR KLLMTH MPUT5/23ETM 2,515,364.58 2,502,000.00 2,000.00 0.00
US TNOTE 912827F31 967,333.07 960,205.00 (0.07) (10,205.07)
Short-Term Subtotals 23,776,633.63 23,387,054.11 (97,725.83) (104,779.94)
KC MISS AIRPORT REV 1,230,131.00 1,203,432.00 (7,099.00) (10,531.00)
FL JACK EL AU 12/S10 2,017,250.00 1,984,600.00 (15,400.00) 0.00
US TNOTE 912827M58 1,654,026.44 1,629,820.00 (13,303.44) 26,876.56
CONN STATE SPL TAX OBL 555,447.00 524,285.00 (23,745.00) (48,030.00)
US TNOTE 912827M90 1,819,229.88 1,787,077.00 (25,582.88) 12,340.12
NE OMAHA PPD ETM BD 2,068,626.67 2,025,760.00 (1,200.00) (26,960.00)
TX FR Worth GO BD 2,188,675.67 2,088,089.00 (61,295.00) (99,384.00)
U.S. TREASURY NOTE 1,765,021.37 1,635,871.88 (108,659.37) (149,531.25)
OH ST HWY SER T GO 1,017,010.00 1,009,610.00 (3,400.00) (13,010.00)
BRAZOS TX EDUC AUTH 1,003,750.00 992,350.00 (7,650.00) 0.00
Subtotals 15,319,168.03 14,880,894.88 (267,334.69) (308,229.57)
AMT-LA PFA SER92A-2 2,065,373.33 2,021,500.00 (8,540.00) (30,040.00)
KY ST HI EDUC LOAN 1,032,872.00 1,025,970.00 (1,860.00) (27,830.00)
CHI IL OHARE INTL AIRPORT 1,294,762.50 1,251,450.00 (13,937.50) (15,387.50)
</TABLE>
<PAGE> 91
OCTEL COMMUNICATIONS CORPORATION
ANALYSIS OF CASH AND INVESTMENTS - <> 90 DAYS MATURITY
30-JUN-94
Payden & Rygel
Weiss, Peck, and Greer
<TABLE>
<CAPTION>
Face Amount/ Cost
Settlement Due Number of (principal) Accrued
Account 6005 Date Date Units (only) Interest
Account 1068 Z A B
<S> <C> <C> <C> <C> <C>
AMES,IW ELEC REVENUE 01/18/94 01/01/97 1,270,000 1,306,106.10 38,100.00
OHIO STATE BLDG AUTH 08/05/93 04/01/97 500,000 559,775.00 10,500.00
ILL ST S/T REV BD 02/10/94 06/15/97 2,500,000 2,574,225.00 51,875.00
PHOENIX AZ STREE HIIWAAY 08/23/93 07/01/97 500,000 527,750.00 18,000.00
DE ST GO SER C BD 08/31/93 07/01/97 3,250,000 3,324,457.50 73,125.00
AIASKA GEN OBL BONDS 11/02/93 08/01/97 750,000 756,007.50 18,125.00
AUSTIN TX LTD TAX 10/29/93 09/01/97 905,000 1,004,061.30 21,117.00
MINNEAPOLIS MN 09/29/93 10/01/97 250,000 255,800.00 4,531.00
NEB HI EDUC LOAN PROG 03/29/94 12/01/97 875,000 892,386.00 4,229.00
ALTOONA PA SCH DIST 05/11/94 06/15/98 410,000 453,393.95 1,822.00
MA ST HOUS FINANCE AG 04/29/94 08/01/98 100,000 105,110.00 3,292.00
TEXAS STATE VET LAND 06/29/94 12/01/98 1,000,000 1,047,390.00 8,000.00
CO SUD 3A VRDDN/SLMA 04/14/94 07/01/99 1,500,000 1,500,000.00 2,942.47
MI HSP 591 VRDN/DOMR 04/14/94 06/01/01 900,000 900,000.00 1,728.49
US Treasury Note 09/28/93 08/15/03 2,565,000 2,659,584.38 55,409.67
PENN STGEN OBL SER3 08/13/93 04/15/05 1,000,000 1,124,070.00 18,367.00
NJ ECONOMIC DEV AUTH 08/19/93 04/15/05 1,000,000 1,124,470.00 89,118.00
MASS STATE HEALTH EDUC 07/30/93 07/01/11 500,000 566,480.00 24,375.00
OHIO ST AIR QUALITY DEV 05/02/94 05/01/18 500,000 500,000.00 3,904.00
LA DESOTO VRDN/SWIS 05/17/94 07/01/18 3,100,000 3,100,000.00 6,081.10
AMMT-IL DFA VRDN/SWS 04/14/94 12/15/19 1,400,000 1,400,000.00 2,918.90
0.00
Subtotals 29,025,000 30,004,324 527,311
Totals 68,320,000 69,701,955 992,802
</TABLE>
<PAGE> 92
OCTEL COMMUNICATIONS CORPORATION
ANALYSIS OF CASH AND INVESTMENTS - <> 90 DAYS MATURITY
30-JUN-94
Payden & Rygel
Weiss, Peck, and Greer
<TABLE>
<CAPTION>
Unrealized Difference
Book Market Gain or Between
Value Value (Loss) Face & Cost
Account 6005 (A+B) (A-D) (A-Z)
Account 1068 C D E
<S> <C> <C> <C> <C>
AMES,IW ELEC REVENUE 1,344,206.10 1,285,608.00 (20,498.10) (36,106.10)
OHIO STATE BLDG AUTH 570,275.00 537,365.00 (22,410.00) (59,775.00)
ILL ST S/T REV BD 2,626,100.00 2,484,225.00 (90,000.00) (74,225.00)
PHOENIX AZ STREE HIIWAAY 545,750.00 510,000.00 (17,750.00) (27,750.00)
DE ST GO SER C BD 3,397,582.50 3,248,147.50 (76,310.00) (74,457.50)
AIASKA GEN OBL BONDS 774,132.50 751,718.00 (4,289.50) (6,007.50)
AUSTIN TX LTD TAX 1,025,178.30 965,002.00 (39,059.30) (99,061.30)
MINNEAPOLIS MN 260,331.00 252,590.00 (3,210.00) (5,800.00)
NEB HI EDUC LOAN PROG 896,615.00 890,418.00 (1,968.00) (17,386.00)
ALTOONA PA SCH DIST 455,215.95 460,307.00 6,913.05 (43,393.95)
MA ST HOUS FINANCE AG 108,402.00 102,218.00 (2,892.00) (5,110.00)
TEXAS STATE VET LAND 1,055,390.00 1,046,690.00 (700.00) (47,390.00)
CO SUD 3A VRDDN/SLMA 1,502,942.47 1,500,000.00 0.00 0.00
MI HSP 591 VRDN/DOMR 901,728.49 900,000.00 0.00 0.00
US Treasury Note 2,714,994.05 2,294,873.44 (364,710.94) (94,584.38)
PENN STGEN OBL SER3 1,142,437.00 1,071,550.00 (52,520.00) (124,070.00)
NJ ECONOMIC DEV AUTH 1,213,588.00 1,065,820.00 (58,650.00) (124,470.00)
MASS STATE HEALTH EDUC 590,855.00 539,800.00 (26,680.00) (66,480.00)
OHIO ST AIR QUALITY DEV 503,904.00 500,000.00 0.00 0.00
LA DESOTO VRDN/SWIS 3,106,081.10 3,100,000.00 0.00 0.00
AMMT-IL DFA VRDN/SWS 1,402,918.90 1,400,000.00 0.00 0.00
0.00
Subtotals 30,531,635 29,205,252 -799,072 -979,324
Totals 70,718,993 68,537,533 -1,164,422 -1,381,955
</TABLE>
<PAGE> 1
Exhibit 11.0
OCTEL COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
PRIMARY NET INCOME PER SHARE
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $13,543 $29,567 $26,383
======= ======= =======
Weighted average shares outstanding . . . . . . . . . . . . . . 23,609 23,242 22,534
Dilutive effect of outstanding stock options (as determined by
the application of the treasury stock method) . . . . . . . . 1,487 1,627 1,890
------- ------- -------
25,096 24,869 24,424
======= ======= =======
Primary net income per share . . . . . . . . . . . . . . . . . $ .54 $ 1.19 $ 1.08
======= ======= =======
FULLY DILUTED NET INCOME PER SHARE*
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $13,543 $29,567 $26,383
======= ======= =======
Weighted average shares outstanding . . . . . . . . . . . . . . 23,609 23,242 22,534
Dilutive effect of outstanding stock options (as determined by 1,495 1,634 1,890
the application of the treasury stock method) . . . . . . . . 1,495 1,634 1,890
------- ------- -------
25,104 24,876 24,424
======= ======= =======
Fully diluted net income per common share . . . . . . . . . . . $ .54 $ 1.19 $ 1.08
======= ======= =======
</TABLE>
__________________
* This computation is submitted in accordance with Securities Exchange
Act of 1934 Release No. 9083 although not required for all periods
under APB Opinion No. 15 because it results in dilution of less than
three percent.
<PAGE> 1
Exhibit 21.0
OCTEL COMMUNICATIONS CORPORATION
SUBSIDIARIES OF THE COMPANY
<TABLE>
<S> <C> <C> <C>
1. OCTEL COMMUNICATIONS LIMITED 7. TIGON CORPORATION
---------------------------- -----------------
ADDRESS: Octel House, Ancells Road ADDRESS: 17080 Dallas Parkway
Fleet, Hampshire GUI38UN Dallas, Texas 75248-1986
England
8. OCTEL COMMUNICATIONS K.K.
-------------------------
2. OCTEL COMMUNICATIONS S.A. ADDRESS: Kamiyacho Mori Bldg., 4th Floor
-------------------------
ADDRESS: 21, Boulevard de la Madeleine 4-3-20 Toranomon
Immeuble des Trois Quartiers Minato-ku, 105
Cedex, Paris F-75001 Japan
France
9. OCTEL COMMUNICATIONS PACIFIC, LTD.
----------------------------------
3. OCTEL COMMUNICATIONS CANADA INC. ADDRESS: c/o Plaza Business Center
--------------------------------
ADDRESS: 1500 - 1075 West Georgia St. 35th Floor, Central Plaza
Vancouver, British Columbia 18 Harbour Road, Wanchai
Canada Hong Kong
4. OCTEL COMMUNICATIONS (ISRAEL) LTD. 10. VMX, INC.
---------------------------------- ---------
ADDRESS: 16 Derech Ha'atzmaut ADDRESS: 2115 O'Nel Drive
Yehud 56304 San Jose, California 95131-2032
Israel
11. RHETOREX
--------
5. OCTEL COMMUNICATIONS INTERNATIONAL CORPORATION ADDRESS: 200 E. Hacienda Avenue
----------------------------------------------
AGENT'S ADDRESS: 5 Kronprindsens Gade, Campbell, California 95008
P.O. Box 8560
Charlotte Amalie, St. Thomas 12. RHETOREX LTD.
-------------
U.S. Virgin Islands 00801 ADDRESS: Centennial Court
Easthampstead Road, Bracknell
6. COMPASS TECHNOLOGY, INC. Berkshire RG12 1JA
------------------------
ADDRESS: Live Oak Office Center England
22001 Cantu Court, #116
Sarasota, Florida 34232
</TABLE>
<PAGE> 1
Exhibit 23.0
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Octel Communications Corporation
We consent to incorporation by reference in the registration statements
Nos. 33-22121, 33-33568 and 33-38888 on Form S-3 and Nos. 33-26343, 33-49046
and 33-56510 on Form S-8 of Octel Communications Corporation and subsidiaries
of our report dated July 27, 1994, relating to the consolidated balance sheets
of Octel Communications Corporation and subsidiaries as of June 30, 1994 and
1993, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1994,
and all related schedules, which report appears in the Octel Communications
Corporation Annual Report on Form 10-K for fiscal year 1994.
KPMG PEAT MARWICK LLP
Palo Alto, California
September 26, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS $
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-START> JUL-01-1993
<PERIOD-END> JUN-30-1994
<EXCHANGE-RATE> 1
<CASH> 17,889
<SECURITIES> 68,463
<RECEIVABLES> 94,837
<ALLOWANCES> (2,665)
<INVENTORY> 28,920
<CURRENT-ASSETS> 221,309
<PP&E> 159,380
<DEPRECIATION> (64,304)
<TOTAL-ASSETS> 346,128
<CURRENT-LIABILITIES> 88,536
<BONDS> 0
<COMMON> 174,356
0
0
<OTHER-SE> 81,836
<TOTAL-LIABILITY-AND-EQUITY> 346,128
<SALES> 292,090
<TOTAL-REVENUES> 406,225
<CGS> 89,423
<TOTAL-COSTS> 159,656
<OTHER-EXPENSES> 228,959
<LOSS-PROVISION> 1,213
<INTEREST-EXPENSE> 267
<INCOME-PRETAX> 17,343
<INCOME-TAX> 3,800
<INCOME-CONTINUING> 13,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,543
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
