<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION' PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Octel Communications Corporation
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
Christopher F. Boyd
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11:1
(4) Proposed maximum aggregate value of transaction:
1 Set forth the amount on which the filing fee is calculated and state how
it was determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
OCTEL COMMUNICATIONS CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 17, 1994
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Octel
Communications Corporation (the "Company") will be held on November 17, 1994,
at 9:30 a.m., local time, at The Fairmont Hotel, 170 South Market Street, San
Jose, California 95113 for the following purposes:
1. To elect eight directors to serve until the next annual meeting
of stockholders and until their successors are duly elected.
2. To approve an amendment to the Company's 1985 Incentive Stock
Plan limiting to 150,000 the total number of shares of Common Stock subject to
options that may be granted to any one employee in any one fiscal year of the
Company, so as to comply with the proposed Internal Revenue Service regulations
under Section 162(m) of the Internal Revenue Code.
3. To approve an amendment to the Company's 1987 Employee Stock
Purchase Plan increasing the number of shares of Common Stock reserved for
issuance by 400,000 shares to a total of 1,650,000 shares.
4. To approve an amendment to the Company's 1988 Directors' Stock
Option Plan increasing the number of shares of Common Stock reserved for
issuance by 150,000 shares to a total of 350,000 shares.
5. To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ending June 30, 1995.
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only stockholders of record at the close of business on September 19,
1994 are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to sign
and return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. Any stockholder attending the meeting may
vote in person even if the stockholder has previously returned a proxy.
By Order of the Board of Directors
(SIG)
Derek S. Daley, Secretary
Milpitas, California
October 17, 1994
<PAGE> 3
OCTEL COMMUNICATIONS CORPORATION
PROXY STATEMENT FOR 1994
ANNUAL MEETING OF STOCKHOLDERS
------------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of
Octel Communications Corporation (the "Company") for use at the Annual Meeting
of Stockholders to be held on Thursday, November 17, 1994 at 9:30 a.m., local
time, or at any adjournment thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at The Fairmont Hotel, 170 South Market Street, San Jose,
California 95113.
The proxy solicitation materials were mailed on or about October 17,
1994 to all stockholders entitled to vote at the meeting.
RECORD DATE AND SHARE OWNERSHIP
Stockholders of record at the close of business on September 19, 1994
(the "Record Date") are entitled to notice of the meeting and to vote at the
meeting. At the Record Date, 24,115,011 shares of the Company's Common Stock
were issued and outstanding and held of record by approximately 3,040
stockholders. Each stockholder is entitled to one vote for each share held.
No shares of the Company's Preferred Stock were outstanding. See "Security
Ownership of Certain Beneficial Owners and Management" below for information
regarding beneficial owners of more than five percent of the Company's
Common Stock.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before its use by delivering to the Secretary of
the Company a written notice of revocation or a duly executed proxy bearing a
later date or by attending the meeting and voting in person.
VOTING AND SOLICITATION
Each stockholder voting for the election of directors (Proposal No. 1)
may cumulate his votes, giving one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares which the
stockholder is entitled to vote, or distributing the stockholder's votes on the
same principle among as many candidates as the stockholder chooses, provided
that votes may not be cast for more than eight candidates. However, no
stockholder shall be entitled to cumulate votes unless the candidates' names
have been placed in nomination prior to the voting and the stockholder, or any
other stockholder, has given notice at the meeting prior to the voting of the
intention to cumulate the stockholder's votes. Any such notice should be
directed to the Inspector of Elections at the meeting. On all other matters
(Proposals No. 2-6), each share has one vote.
This solicitation of proxies is made by the Company, and all related
costs will be borne by the Company. The Company has retained Chemical Bank to
aid in the solicitation of proxies from brokers, banks and other institutional
nominees. The fees and expenses of such firm are not expected to exceed
$11,000. In addition, the Company may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
forwarding solicitation material to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by
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<PAGE> 4
telephone, telegraph or personal solicitations by directors, officers or
employees of the Company. No additional compensation will be paid for any
such services.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be
presented by such stockholders at the Company's 1995 Annual Meeting of
Stockholders must have been received by the Company no later than June 2, 1995
in order that they may be considered for inclusion in the proxy statement and
form of proxy relating to that meeting.
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<PAGE> 5
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
NOMINEES
A board of eight directors is to be elected at the Annual Meeting of
Stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's nominees named below. In the event
that any nominee of the Company is unable or declines to serve as a director at
the time of the Annual Meeting of Stockholders, the proxies will be voted for
any nominee who shall be designated by the present Board of Directors to fill
the vacancy. It is not expected that any nominee will be unable or will
decline to serve as a director. In the event that additional persons are
nominated for election as directors, the proxy holders intend to vote all
proxies received by them in such a manner (in accordance with cumulative
voting) as will assure the election of as many of the nominees listed below as
possible, and in such event the specific nominees to be voted for will be
determined by the proxy holders. The term of office of each person elected as
a director will continue until the next Annual Meeting of Stockholders or until
a successor has been elected and qualified.
The nominees, and certain information about them as of the Record Date,
are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION(S) SINCE
------------------------------------- ------ -------------------------------------------------- --------
<S> <C> <C> <C>
Robert Cohn . . . . . . . . . . . . . 45 Chairman of the Board, President, Chief 1982
Executive Officer and Director
Anson M. Beard, Jr. . . . . . . . . . 58 Director 1994
Leo J. Chamberlain . . . . . . . . . 64 Director 1989
Deborah A. Coleman . . . . . . . . . 41 Director 1994
John Freidenrich . . . . . . . . . . 57 Director 1986
Robert C. Hawk . . . . . . . . . . . 54 Director 1987
Nathaniel de Rothschild . . . . . . . 48 Director 1994
Dag Tellefsen . . . . . . . . . . . . 52 Director 1982
</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. Beard has served as a director of the Company since June 1994. He
joined Morgan Stanley & Co. Incorporated in May 1977, and from 1980 until his
retirement in February 1994 served as Managing Director of its Worldwide Equity
Division. In 1986, he was appointed a director of Morgan Stanley Group, the
holding company for Morgan Stanley & Co. Incorporated. He retains the position
of Advisory Director of Morgan Stanley & Co. Incorporated. Mr. Beard is also a
member of the Wheaton College Board of Trustees, and from 1990 to 1992 was a
director of the National Association of Securities Dealers, Inc. (the "NASD"),
serving as Vice Chairman of the NASD in 1992.
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<PAGE> 6
Mr. Chamberlain has served as a director of the Company since March
1989. Until ROLM's acquisition by IBM in 1984, Mr. Chamberlain served on the
Board of Directors of ROLM, where he had been employed as Executive Vice
President until his retirement in 1982. Mr. Chamberlain is also a director of
KLA Instruments Corporation, a manufacturer of semiconductor inspection
equipment.
Ms. Coleman has served as a director of the Company since March 1994.
Since June 1994, Ms. Coleman has been Chairman and Chief Executive Officer of
Merix Corporation, a manufacturer of technologically advanced components for
sophisticated electronic equipment. From April 1993 to June 1994, Ms. Coleman
served as Vice President of Materials Operations for Tektronix, Inc., a
worldwide high technology equipment design and manufacturing firm. From June
1985 to April 1993, she held officer-level positions with Apple Computer, Inc.,
including Vice President-World Wide Operations and Vice President-Chief
Financial Officer. Ms. Coleman has been a director of Software Publishing
Corporation, a publisher of personal computer software, since November 1991.
Mr. Freidenrich has served as a director of the Company since January
1986. He has been active in venture capital investments since 1976 and is
currently a general partner of Bay Partners III and Bay Partners IV, each of
which is a venture capital fund. From January 1987 to April 1992, Mr.
Freidenrich was of counsel to the law firm of Ware & Freidenrich. From 1969 to
January 1987, Mr. Freidenrich was a partner of that firm. Mr. Freidenrich is
also Chairman of the Board of Trustees of Stanford University.
Mr. Hawk has served as a director of the Company since March 1987. He
is President of the Carrier and Information Provider Division of U.S. West
Communications, a division of U.S. West, a regional Bell operating company
("RBOC"), which position he has held since January 1988. From April 1986 to
December 1987, he was Vice President of Marketing of Mountain Bell. From
August 1983 to March 1986, he served as Vice President of Strategic Planning
and Product Marketing of CXC Corp., a startup manufacturer of PBX systems.
Prior to that, Mr. Hawk served in various positions with AT&T. Mr. Hawk is
also a director of PairGain Technologies, Inc., a manufacturer of
telecommunications systems.
Mr. de Rothschild has served as a director of the Company since June
1994. He is President of Nathaniel de Rothschild Holdings Ltd., a private
investment company that he founded in 1988. Mr. de Rothschild is also Chairman
of the Board of Global Asset Management (USA) Inc., the U.S. subsidiary of
Global Asset Management Ltd., a worldwide money management firm, and a director
of St. James Place Capital, Plc.
Mr. Tellefsen has served as a director of the Company since September
1982. He is a general partner of Glenwood Management and Glenwood II
Management Corporation, investment management firms and the general partners of
Glenwood Ventures I and Glenwood Ventures II, respectively, which are venture
capital funds. He has been with Glenwood Management since 1982. Mr. Tellefsen
is also a director of KLA Instruments Corporation, a manufacturer of
semiconductor inspection equipment, Arix Computer Corporation, a manufacturer
of symmetrical multiprocessing UNIX systems, and Iwerks Entertainment, Inc., a
producer of out-of-home entertainment systems and software.
There are no family relationships between directors or executive
officers of the Company.
The eight nominees receiving the highest number of affirmative votes of
the shares present or represented entitled to be voted for them shall be
elected as directors. Votes withheld from any director are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, but have no legal effect under Delaware law. While there is no
definitive statutory authority or case law in Delaware as to the proper
treatment of abstentions and broker non-votes in the election of directors, the
Company believes that both abstentions and broker non-votes should be counted
for purposes of determining whether a quorum is present at the Annual Meeting
for the transaction of business. In the absence of controlling precedent to
the contrary, the Company intends to treat abstentions and broker non-votes
with respect to the election of directors in this manner.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership as of the Record Date of the Company's Common Stock as to
(i) each director, (ii) each of the executive officers listed in the Summary
Compensation table below, (iii) all executive officers and directors as a group
and (iv) each person known by the Company to beneficially own five percent or
more of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS AND NO. OF SHARES
FIVE PERCENT STOCKHOLDERS(1) BENEFICIALLY OWNED PERCENTAGE
------------------------------------------------------------------------ ---------------------- --------------
<S> <C> <C>
State of Wisconsin Investment Board . . . . . . . . . . . . . . . . . . 2,351,000 9.7%
Lake Terrace
121 East Wilson Street
Madison, WI 53707
Hewlett-Packard Company(2) . . . . . . . . . . . . . . . . . . . . . . 1,564,119 6.5%
3000 Hanover Street
Palo Alto, CA 94304
Anson M. Beard, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . -0- *
Donald L. Campodonico(3) . . . . . . . . . . . . . . . . . . . . . . . 26,370 *
Leo J. Chamberlain(4) . . . . . . . . . . . . . . . . . . . . . . . . . 31,603 *
Robert Cohn(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527,750 2.2%
Deborah A. Coleman . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 *
John Freidenrich(6) . . . . . . . . . . . . . . . . . . . . . . . . . . 70,371 *
Robert C. Hawk(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,305 *
David Ladd(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,644 *
Nathaniel de Rothschild . . . . . . . . . . . . . . . . . . . . . . . . 1,080 *
Dag Tellefsen(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,010 *
Michael West(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,244 *
Gary A. Wetsel(11) . . . . . . . . . . . . . . . . . . . . . . . . . . 39,864 *
Douglas C. Chance(12) . . . . . . . . . . . . . . . . . . . . . . . . . 26,223 *
Peter D. Olson(12)(13) . . . . . . . . . . . . . . . . . . . . . . . . 343,349 1.4%
Dennis McGinn(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,545 *
All Directors and executive officers as a group (15 persons)(14) . . . 1,462,278 5.9%
</TABLE>
________________
* Represents less than 1% of the outstanding shares of Common Stock.
(1) The persons named in the table, to the Company's knowledge, have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and the information contained in the footnotes hereunder.
(2) Hewlett-Packard Company ("HP") has sole voting and investment power with
respect to all shares shown as beneficially owned by it, subject to
certain provisions of a Common Stock Purchase Agreement dated as of August
10, 1988, as amended October 1, 1990, between the Company and HP. See
"Certain Transactions."
(3) Includes 24,600 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(4) Includes 29,000 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(5) Includes shares held of record by a trust for the benefit of Mr. Cohn, his
wife and their children. Also includes 271,064 shares issuable upon
exercise of options which are exercisable within 60 days of the Record
Date.
(6) Represents holdings by the Freidenrich Family Trust of 37,396 shares and
by the Freidenrich Family Partnership (of which the Freidenrich Family
Trust is a 50% beneficial owner) of 3,975 shares. Includes 29,000 shares
issuable upon exercise of options which are exercisable within 60 days of
the Record Date.
(7) Includes 19,000 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(8) Includes 22,500 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(9) Includes 29,000 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(10) Includes 73,472 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(11) Includes 38,400 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(12) Mr. Chance, former President and Chief Executive Officer of the Company,
resigned in November 1993. Mr. Olson, a former Executive Vice President
of the Company, resigned from this position in June 1994, but remains an
employee of the Company. Mr. McGinn, a former Vice President of the
Company, resigned in May 1994.
(13) Includes 119,600 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
(14) Includes 655,636 shares issuable upon exercise of options which are
exercisable within 60 days of the Record Date.
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<PAGE> 8
As of the Record Date, the per share market value of the Company's
Common Stock was $21.75, based on the closing price on that date on The Nasdaq
National Market.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of 12 meetings
during the fiscal year ended June 30, 1994. The Audit Committee held five
meetings, the Compensation Committee held five meetings and the Nominating
Committee held one meeting during the fiscal year ended June 30, 1994. Each
director attended at least 75% of Board and, where applicable, Committee
meetings held during fiscal 1994.
Messrs. Beard and Freidenrich and Ms. Coleman currently serve on the
Audit Committee of the Board of Directors. The purpose of the Audit Committee
is to review with the Company's management and independent auditors the
financial statements and internal financial reporting system and controls of
the Company, recommend resolutions for any dispute between the Company's
management and its auditors and review other matters relating to the
relationship of the Company with its auditors.
Messrs. Chamberlain, de Rothschild and Tellefsen and Ms. Coleman
currently serve on the Compensation Committee. The purpose of the Compensation
Committee is to review and approve the salaries of the Company's executive
officers and certain highly compensated employees for each fiscal year. The
compensation of the President and Chief Executive Officer of the Company
remains subject to approval by the full Board of Directors.
Messrs. Beard, Freidenrich, de Rothschild and Tellefsen currently
serve on the Nominating Committee. The purpose of the Nominating Committee is
to develop criteria for nominating new members of the Board and to identify
potential candidates for such nomination. The Nominating Committee will
consider stockholder recommendations for new directors. However, the final
determination of whether a candidate will be nominated to become a member of
the Company's Board of Directors is reserved for the Nominating Committee. Any
suggestions may be submitted in writing, attention "Nominating Committee of the
Board of Directors," at the Company's principal offices.
COMPENSATION OF DIRECTORS
During fiscal 1994, each of the directors was compensated for
participating in Board and committee meetings as follows: $5,000 annual fee,
provided that the director attended at least five of the six non-telephonic
meetings of the Board during the fiscal year; $1,500 for each meeting of the
Board which the director attended in person; $250 for each meeting of the Board
which the director attended via telephone; $500 for each meeting of a committee
of the Board (except the Stock Option Committee) which the director attended in
person; and $500 per year for each member of the Stock Option Committee. In
addition, the Company reimburses all directors for travel and other necessary
business expenses incurred in fulfilling their duties as directors. Directors
also receive stock options granted pursuant to the 1988 Directors' Stock Option
Plan. See "1988 Directors' Stock Option Plan" below.
CERTAIN TRANSACTIONS
Sales to U.S. West were approximately $25.9 million, or 6.4% of the
Company's net revenues, during the Company's fiscal year ended June 30, 1994.
Robert C. Hawk, a director of the Company, is an executive officer of U.S.
West. Based on its sales terms and prices for similar products to similar
companies (RBOCs), the Company believes that sales to U.S. West were made on an
arms' length basis.
In August 1988 the Company entered into an agreement with
Hewlett-Packard Company whereby Hewlett-Packard acquired 10% of the Company's
Common Stock. As of the Record Date, Hewlett-Packard owned 1,564,119 shares,
or approximately 6.5% of the Company's Common Stock. The agreement with
Hewlett-Packard, as amended in October 1990, includes certain covenants and
provisions regarding the Company's ability to sell, and Hewlett-Packard's
ability to acquire, additional Common Stock from the Company in order to
maintain Hewlett-Packard's interest
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<PAGE> 9
and limitations on Hewlett-Packard's right to acquire additional stock without
the Company's consent. Hewlett-Packard has agreed that it will be present, in
person or by proxy, and vote its shares at all meetings of the Company's
stockholders and that it will vote, except in the case of certain significant
events defined in the agreement with the Company, (i) for the nominees to the
Board of Directors of the Company who are recommended by the Company's
management and (ii) on all other matters to be voted upon by the stockholders,
in accordance with the Company's management's recommendations in not less than
the same proportion as the votes cast by the other holders of the Company's
shares.
In November 1993, prior to merging with the Company, VMX, Inc. ("VMX")
loaned David Ladd, an officer of the Company, $100,000 for personal use
pursuant to a promissory note secured by 8,000 shares of the Company's Common
Stock and due in four years with interest at the Bank of America prime rate
plus one percent. Should Mr. Ladd leave the Company for any reason, all
accrued interest and principal may be declared immediately due. At September
19, 1994, $100,000 was outstanding on this loan.
The stock option agreements between the Company and certain of its
officers and key employees provide for full acceleration of exercisability in
connection with a change of control of the Company. See "Compensation Committee
Report--Chairman and CEO Compensation" and "Proposal No. 2--Approval of
Amendment to the 1985 Incentive Stock Plan--Terms of Options."
The Company has entered into indemnification agreements with each of
its directors and officers. Such agreements require the Company to indemnify
such individuals to the full extent permitted by Delaware law if certain claims
are brought against them in their capacities with the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the
"SEC"). Such officers, directors and ten-percent stockholders are also
required by SEC rules to furnish the Company with copies of all Section 16(a)
reports they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that Forms 5 have
been filed for such persons as required, the Company believes that, during the
fiscal year ended June 30, 1994, all reporting persons complied with Section
16(a) filing requirements applicable to them.
COMPENSATION COMMITTEE REPORT
The following is the Report of the Compensation Committee of the
Company, describing the compensation policies and rationale applicable to the
Company's executive officers with respect to the compensation paid to such
executive officers for the year ended June 30, 1994. The information contained
in the report shall not be deemed to be "soliciting material" or to be "filed"
with the Securities and Exchange Commission nor shall such information be
incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Exchange Act except to the extent that the Company
specifically incorporates it by reference into such filing.
COMPENSATION COMMITTEE REPORT
The Compensation Committee (the "Committee") of the Board of Directors
of Octel Communications Corporation determines the Company's executive
compensation policies. The Committee is comprised of four non-employee
directors. The Chairman and CEO participates as a non-voting member. After
evaluating management's performance, the Committee recommends compensation
programs and pay levels to the full Board for approval.
COMPENSATION PHILOSOPHY
The goals of the executive compensation program are to attract, retain
and reward executive officers who contribute to the success of the Company.
Compensation opportunities are aligned with the Company's business
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<PAGE> 10
objectives. The compensation programs are designed to motivate executive
officers to meet annual corporate performance goals and enhance long-term
stockholder value.
In designing and administering the individual elements of the
executive compensation program, the Committee strives to balance short- and
long-term incentive objectives and use prudent judgment in establishing
performance criteria, evaluating performance and determining actual incentive
awards.
Using the assistance of an independent compensation consulting firm,
the Committee regularly evaluates the competitiveness and appropriateness of
the Company's executive compensation program by comparing its pay practices
with other companies in the industry. For this comparison, compensation levels
are compared to those of a select group of similar high-technology companies
with approximately the same market capitalization, revenues and growth pattern
as the Company. The comparison group is subject to occasional changes as the
Company or the selected companies change their focus, merge or are acquired, or
as new companies emerge. Sales growth, operations profit, P/E ratio, compound
annual growth rate, and market capitalization are evaluated to ensure the
comparative companies have successful track records.
COMPENSATION VEHICLES
The Company's executive compensation program includes base salary,
annual incentive and long-term incentive compensation components.
BASE SALARY
The Company reviews base salaries annually for market competitiveness.
In determining competitive salary levels, the job responsibilities of each
executive are matched with like jobs in the comparison group. Individual base
salary increases may vary and reflect individual performance. This allows the
Company to attract and retain the key employees necessary to meet its business
objectives and enhance stockholder value.
ANNUAL SENIOR PERSONNEL INCENTIVE PLAN
The annual incentive portion of the 1994 executive compensation
program provided cash rewards based on achievement of corporate goals and
individual objectives. In 1994, the incentive target per individual was
defined as a percentage of his or her base compensation. Half of the annual
incentive was based on corporate performance goals, a combination of revenue
targets and operating income targets. The other half of the annual incentive
was based on individual performance objectives. These were designed to be
closely integrated with overall Company goals and initiatives. Achievement of
individual objectives could range from 0-100%. The Bonus Plan for fiscal year
1995 will be based upon the Company's achievement of revenue, operating income
and customer satisfaction objectives and, in the case of officers, upon the
Company's achievement of certain business objectives approved by the Board.
See "Compensation of Executive Officers--Annual Senior Personnel Incentive
Plan." The Company reviews the incentive targets annually for market
competitiveness based on job level and responsibilities. The Company's
philosophy is to leverage total compensation to provide better than average pay
if aggressive performance measures are met. The amount of compensation
actually paid under this plan is variable or "at risk," because it is tied
directly to achievement of specific corporate performance goals.
In fiscal year 1994, all named executives received a cash award for
the corporate performance portion of the Annual Senior Personnel Incentive
Plan. The Company met 99% of its revenue goals and 88% of its operating income
goals, which (because the calculation of bonus payments from corporate
financial achievements is nonlinear) translated into bonus payments equal to
60% of the total corporate performance goals portion. The cash awards for the
individual objective portion of the Annual Senior Personnel Incentive Plan
varied for each executive due to different levels of individual achievement.
In addition, all Named Executive Officers received stock option grants in
accordance with the stock option plan guidelines during the year.
-8-
<PAGE> 11
CHAIRMAN AND CEO COMPENSATION
The Committee bases compensation of all officers (except the Chairman
and CEO) on the policies and procedures described above. The Chairman's base
salary is $250,000 per year, well below competitive norms for a company of
comparable size. He has no annual incentive bonus. The greatest portion of
the Chairman and CEO's compensation is directly associated with the long-term
capitalization growth of the Company. Mr. Cohn was appointed to the position
of President and Chief Executive Officer of the Company and in connection
therewith was granted the following options:
350,000 shares at $25.00 per share;
200,000 shares at $35.00 per share; and
200,000 shares at $50.00 per share.
As with most options granted before June 2, 1994, these options become
exercisable as to 20% of the total shares under option one year after the date
of grant and up to an additional 20% after the end of each subsequent
twelve-month period. These options contain acceleration provisions consistent
with other stock purchases and options Mr. Cohn has made and received.
Principal rewards to be received are clearly tied to the stock price
performance of the Company, from which general stockholders will derive
substantial benefit as well.
STOCK OPTIONS
To balance the annual incentive plan, stock options focus the
executives' attention on the long-term performance of the Company and
maximizing stockholder value. Stock options are granted each year with an
exercise price equal to current fair market value. Grant ranges have been
established for each officer level which are based on competitive norms of the
comparison group. Individual grants may vary within the range to reflect
individual performance and potential. The option program also utilizes vesting
periods to encourage retention of key employees.
Specific information regarding compensation of the Chief Executive
Officer and other executive officers is contained in the accompanying table.
TAX POLICY
Recently enacted Section 162(m) of the Internal Revenue Code of 1986,
as amended, limits deductions for certain executive compensation in excess of
$1 million. The Company is endeavoring to structure its compensation plans to
achieve maximum deductibility under Section 162(m) with minimal sacrifices in
flexibility and corporate objectives. See Proposal No. 2 for a description of
an amendment to the Company's 1985 Incentive Stock Plan to ensure continued
deductibility under Section 162(m). With respect to non-equity compensation
arrangements, the Committee has reviewed the terms of those arrangements most
likely to be subject to Section 162(m).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of directors
Chamberlain, Coleman, de Rothschild and Tellefsen. Robert Cohn, the Chairman
of the Board, President and Chief Executive Officer of the Company, served as a
member of the Compensation Committee during fiscal 1993 and the first part of
fiscal 1994. He currently attends meetings of the Compensation Committee but
does not vote. There are no interlocks between the Company's Board of
Directors or Compensation Committee and the boards of directors or compensation
committees of other companies.
LEO J. CHAMBERLAIN
DEBORAH A. COLEMAN
NATHANIEL DE ROTHSCHILD
DAG TELLEFSEN
-9-
<PAGE> 12
STOCK PERFORMANCE GRAPH
In accordance with the Securities Exchange Act regulations, the
following performance graph compares the cumulative total stockholder return on
the Company's Common Stock to the cumulative total return on the Nasdaq Index
and on the Hambrecht & Quist Technology Index over the same period. The graph
assumes the value of the investment in the Company's Common Stock and each
index was $100 at June 30, 1989 and that all dividends were reinvested.
[GRAPH]
<TABLE>
<CAPTION>
6/89 6/90 6/91
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Octel $100.0 $103.7 $ 94.6 $ 87.1 $ 97.9 $39.8 $49.5 $ 84.4 $105.4 $ 99.5 $ 96.8
NASDAQ $100.0 $108.8 $104.7 $101.1 $107.8 $81.0 $88.9 $115.5 $114.2 $127.4 $142.7
H&Q Tech $100.0 $105.1 $102.2 $105.5 $114.5 $82.9 $93.5 $121.3 $115.2 $120.1 $138.2
</TABLE>
<TABLE>
<CAPTION>
6/92 6/93 6/94
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Octel $135.5 $ 98.9 $ 81.7 $ 90.3 $108.6 $ 95.7 $100.0 $119.4 $108.6 $ 71.0
NASDAQ $147.2 $137.1 $142.7 $166.0 $169.1 $172.3 $186.8 $189.4 $181.5 $173.0
H&Q Tech $142.8 $130.9 $136.5 $158.9 $156.6 $160.0 $162.8 $173.4 $175.0 $162.3
</TABLE>
-10-
<PAGE> 13
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth, for the three fiscal years ended June
30, 1994, certain compensation information with respect to the two individuals
who served as the Company's Chief Executive Officer during fiscal 1994, each of
the four other most highly compensated executive officers other than the Chief
Executive Officer who were serving as executive officers as of June 30, 1994,
and the two individuals who would have been included in these other four but
for the fact that they were not serving as executive officers as of June 30,
1994 (collectively, the "Named Executive Officers"), based upon salary and
bonus earned by such executive officers and individuals in fiscal 1994.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
AWARDS
------------
SECURITIES
OTHER UNDERLYING
ANNUAL OPTIONS/ ALL OTHER
BONUS COMPENSATION SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1) ($) (#)(2) ($)
-------------------------------- ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Cohn . . . . . . . . . . 1994 237,692 -- 5,726(3) 750,000 9,318(4)
Chairman of the Board, 1993 227,026 -- 5,522(3) -- 8,255(4)
President and Chief 1992 206,673 * 5,033(3) 10 *
Executive Officer
David Ladd . . . . . . . . . . 1994 185,208 53,613 -- 105,000 363(4)
Executive Vice President 1993 162,292 59,193 -- -- 333(4)
1992 157,167 56,616 * -- 174(4)
Michael West . . . . . . . . . 1994 238,658 92,400 -- 67,500 8,861(4)
Executive Vice President 1993 226,431 60,425 -- 20,000 8,389(4)
1992 205,057 44,950 * 50,006 *
Gary A. Wetsel . . . . . . . . 1994 217,097 79,251 -- 67,000 11,282(4)
Executive Vice President 1993 195,294 50,300 -- 25,000 10,269(4)
1992 171,169 33,350 * 15,002 *
Donald L. Campodonico . . . . . 1994 193,467 65,391 -- 60,000 8,493(4)
Vice President 1993 175,496 30,975 -- 10,500 7,643(4)
1992 158,939 41,075 * 47,100 6,626(4)
Douglas C. Chance . . . . . . . 1994 207,095 -- 13,170(6) -- 582,126(7)
Former President and 1993 407,075 124,400 35,120(6) 50,000 18,747(4)
Chief Executive Officer(5) 1992 380,585 83,400 * 50,000 *
Peter D. Olson . . . . . . . . 1994 277,481 -- -- 25,000 12,758(4)
Former Executive Vice 1993 255,585 73,500 -- 25,000 11,570(4)
President(5) 1992 244,019 59,675 * 20,010 *
Dennis McGinn . . . . . . . . . 1994 229,019 -- 11,760(6) 25,000 419,852(8)
Former Vice President(5) 1993 76,172 36,667 -- 100,000 --
1992 -- -- * -- --
</TABLE>
- - ----------------------
* Under the Commission's transition rules, no disclosure required.
(1) Comprised of bonuses earned in the applicable fiscal year but paid or to be
paid in the following fiscal year.
(2) No SARs were granted.
(3) Comprised of Mr. Cohn's portion of the profit-sharing payments made to
most employees of the Company.
(4) Comprised of premiums for insurance policies where the officers are the
beneficiaries.
(5) Mr. Chance, former President and Chief Executive Officer of the Company,
resigned in November 1993. Mr. Olson, a former Executive Vice President of
the Company, resigned from this position in June 1994, but remains an
employee of the Company. Mr. McGinn, a former Vice President of the
Company, resigned in May 1994.
(6) Includes interest forgiven on loan.
(7) Comprised of $333,336 of forgiven loan principal, $230,708 of severance
payment and $18,082 of premiums for insurance policies where the officer is
the beneficiary.
(8) Comprised of $400,000 of forgiven loan principal, $11,550 of severance
payment and $8,302 of premiums for insurance policies where the officer is
the beneficiary.
-11-
<PAGE> 14
ANNUAL SENIOR PERSONNEL INCENTIVE PLAN
The Company's Board of Directors has adopted an annual senior personnel
incentive plan (the "Bonus Plan") providing for cash bonuses to officers and
senior managers. Under the Bonus Plan, fiscal year 1994 bonuses to all
officers, including executive officers, of the Company in an aggregate amount
of approximately $870,000 were awarded as percentages of the individuals'
salaries, based on a combination of the Company's achievement of revenues and
operating income for the fiscal year as compared to the operating plan approved
by the Board and upon achievement of individual goals approved by the Board or
the Compensation Committee of the Board. The Bonus Plan for fiscal year 1995
will be based upon the Company's achievement of revenue, operating income and
customer satisfaction objectives and, in the case of officers, upon the
Company's achievement of certain business objectives approved by the Board. As
a part of the Bonus Plan, bonuses may also be awarded to other employees of the
Company on a discretionary basis.
EMPLOYEE STOCK PLANS
The following is a brief summary of the Company's employee stock plans
in effect during the fiscal year ended June 30, 1994 under which officers,
employees, consultants and directors of the Company received benefits. The
closing sale price of the Company's Common Stock on the Record Date, as
reported by The Nasdaq National Market, was $21.75 per share.
1985 INCENTIVE STOCK PLAN
The Company's 1985 Incentive Stock Plan (the "Option Plan"), under which
9,600,000 shares are currently reserved for issuance, was adopted by the Board
of Directors in 1985 and approved by the Company's stockholders in 1985.
Amendments to the Option Plan were approved by the Board of Directors and the
stockholders in each of the last five years and by the Board of Directors in
September 1994. The Option Plan permits the direct sale of shares and the
grant of both "incentive stock options" (within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Tax Code")) and
nonstatutory stock options to employees and officers of, and consultants to,
the Company.
As of the Record Date under the Option Plan, 690,070 shares had been
sold directly, options to purchase 5,825,734 shares were outstanding at a
weighted average exercise price of $20.84 per share, options for 1,711,195
shares had been exercised and 1,373,001 shares were available for future option
grant or direct sale.
The Option Plan is administered by the Board of Directors or a committee
appointed by the Board. The Board or committee determines the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof. The exercise price of all options to purchase
shares of Common Stock granted under the Option Plan must be at least equal to
the fair market value of such shares on the date of grant, and the maximum term
of each incentive stock option is ten years. Options granted to officers and
certain key employees under the Option Plan provide for full acceleration of
exercisability in the event that, following a change in control of the Company,
the optionee's employment is terminated or his compensation and benefits are
reduced. See Proposal No. 2 for a more detailed description of the Option
Plan.
-12-
<PAGE> 15
OPTION/SAR GRANTS IN FISCAL 1994
The following table sets forth certain information regarding options for
the purchase of the Company's Common Stock that were awarded to the Named
Executive Officers during fiscal 1994.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL RATES
NUMBER OF OPTIONS/ OF STOCK PRICE
SECURITIES SARS GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES EXERCISE OR OPTION TERM(1)
OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION --------------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
---------------------------- ------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Cohn . . . . . . . . 350,000 7.3% $25.00 05/18/99 2,690,951 6,023,987
200,000 4.1% $35.00 05/18/99 -0- 1,442,278
200,000 4.1% $50.00 05/18/99 -0- -0-
$22.50
Donald L. Campodonico . . . 50,000 1.0% $24.00 01/02/99 346,569 776,001
10,000 0.2% $21.90 01/29/99 73,935 165,547
David Ladd . . . . . . . . 11,800 0.2% $21.90 11/11/03 207,688 483,779
18,200 0.4% $20.75 11/11/03 320,333 746,168
75,000 1.6% $24.00 10/28/99 479,149 1,072,782
Michael West . . . . . . . 35,500 0.7% $26.25 01/29/99 262,469 587,692
32,000 0.7% $14.00 07/29/99 258,038 577,562
Gary A. Wetsel . . . . . . 42,000 0.9% $26.25 01/29/99 310,526 695,297
25,000 0.5% $ -- 07/29/99 201,592 451,221
Douglas C. Chance(2) . . . -- -- -- -- -- --
Peter D. Olson(2) . . . . . 25,000 0.5% $24.00 01/29/99 184,837 413,867
Dennis McGinn(2) . . . . . 25,000 0.5% $24.00 01/29/99 184,837 413,867
</TABLE>
- - --------------------
(1) This column shows the hypothetical gains or "options spreads" of the
options granted based on assumed annual compound stock appreciation rates
of 5% and 10% over the full term of the option. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices.
(2) Mr. Chance, former President and Chief Executive Officer of the Company,
resigned in November 1993. Mr. Olson, a former Executive Vice President of
the Company, resigned from this position in June 1994, but remains an
employee of the Company. Mr. McGinn, a former Vice President of the
Company, resigned in May 1994.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994
AND OPTION/SAR VALUES AS OF JUNE 30, 1994
The following table sets forth certain information regarding options for
the purchase of the Company's Common Stock that were exercised or held by
the Named Executive Officers during fiscal 1994.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
ACQUIRED ON REALIZED JUNE 30, 1994(#) AT JUNE 30, 1994($)(2)
NAME EXERCISE(#) ($) (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------- ------------ ---------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Robert Cohn . . . . . . . . -0- -0- 100,798/800,532 541,789/271,610
Donald L. Campodonico . . . 8,900 120,188 9,100/83,800 16,125/50,525
David Ladd . . . . . . . . -0- -0- 11,250/108,750 79,875/26,625
Michael West . . . . . . . -0- -0- 48,279/129,686 130,500/87,000
Gary A. Wetsel . . . . . . 8,000 163,000 19,000/112,000 66,000/132,000
Douglas C. Chance(3) . . . 104,995 1,483,054 -0-/-0- -0-/-0-
Peter D. Olson(3) . . . . . -0- -0- 86,200/105,800 393,450/262,300
Dennis McGinn(3) . . . . . -0- -0- -0-/-0- -0-/-0-
</TABLE>
- - --------------------
(1) Difference between the fair market value of the Common Stock purchased and
the exercise price on the date of exercise.
(2) Difference between the fair market value of the underlying Common Stock and
the exercise price, for in-the-money options, on June 30, 1994.
(3) Mr. Chance, former President and Chief Executive Officer of the Company,
resigned in November 1993. Mr. Olson, a former Executive Vice President of
the Company, resigned from this position in June 1994, but remains an
employee of the Company. Mr. McGinn, a former Vice President of the
Company, resigned in May 1994.
-13-
<PAGE> 16
1987 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1987 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors in October 1987 and approved by the
stockholders in November 1987. Amendments to the Purchase Plan were approved
by the Board of Directors and the stockholders in each of the last five years
and by the Board of Directors in September 1994. A total of 1,250,000 shares
of Common Stock is currently reserved for issuance under the Purchase Plan (see
Proposal No. 3 for the proposed addition of 400,000 shares). The Purchase
Plan, which is intended to qualify under Section 423 of the Tax Code, is
implemented by one offering during each six-month period. Offering periods
commence on or about January 1 and July 1 of each year. The Purchase Plan is
administered by the Board of Directors of the Company or by a committee
appointed by the Board. Employees are eligible to participate if they are
employed by the Company for at least 20 hours per week and more than five
months per year. The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions, which may not exceed 10% of an
employee's compensation, at 85% of the lower of the fair market value of the
Common Stock at the beginning or at the end of each offering period. See
Proposal No. 3 for a more detailed description of the Purchase Plan.
As of the Record Date, 1,249,133 shares had been sold under the Purchase
Plan at a weighted average purchase price per share of $14.92 and 867 shares
remained available for future issuance. See Proposal No. 3 regarding the
addition of 400,000 shares to the Purchase Plan.
PURCHASE PLAN
The following table sets forth, as to the Named Executive Officers, all
current executive officers as a group and all other employees who participated
in the Purchase Plan: (i) the number of shares of the Company's Common Stock
purchased under the Purchase Plan during the last fiscal year; (ii) the dollar
value of the benefit (see footnote (1) to the table); and (iii) the amount of
payroll deductions for future purchases accumulated through June 30, 1994 for
the current purchase period under the Purchase Plan, which purchase period
commenced January 1, 1994:
<TABLE>
<CAPTION>
(I) (III)
NUMBER OF (II) CURRENT PERIOD
SHARES DOLLAR VALUE PAYROLL
NAME OF INDIVIDUAL OR IDENTITY OF GROUP PURCHASED ($)(1) DEDUCTIONS
------------------------------------------------------ --------- ------------ --------------
<S> <C> <C> <C>
Robert Cohn . . . . . . . . . . . . . . . . . . . . . 1,456 6,958 -0-
Donald L. Campodonico . . . . . . . . . . . . . . . . 544 2,989 -0-
David Ladd . . . . . . . . . . . . . . . . . . . . . -0- -0- -0-
Michael West . . . . . . . . . . . . . . . . . . . . 1,352 6,482 -0-
Gary A. Wetsel . . . . . . . . . . . . . . . . . . . 464 2,566 -0-
Douglas C. Chance(2) . . . . . . . . . . . . . . . . -0- -0- -0-
Peter D. Olson(2) . . . . . . . . . . . . . . . . . . 1,362 5,960 -0-
Dennis McGinn(2) . . . . . . . . . . . . . . . . . . 701 5,895 -0-
All current executive officers as a group
(10 persons) . . . . . . . . . . . . . . . . . . . . 5,330 26,643 -0-
All other employees as a group . . . . . . . . . . . 284,161 1,411,559 -0-
</TABLE>
- - --------------------
(1) Market value on date of purchase, minus the purchase price.
(2) Mr. Chance, former President and Chief Executive Officer of the Company,
resigned in November 1993. Mr. Olson, a former Executive Vice President
of the Company, resigned from this position in June 1994, but remains an
employee of the Company. Mr. McGinn, a former Vice President of the
Company, resigned in May 1994.
-14-
<PAGE> 17
1988 DIRECTORS' STOCK OPTION PLAN
The Company's 1988 Directors' Stock Option Plan (the "Directors'
Plan") was adopted by the Board of Directors in November 1988, was amended in
1989 and was approved by the Company's stockholders in 1989. Amendments to the
Directors' Plan were approved by the Board and the stockholders in 1990 and by
the Board in November 1991, April 1992 and September 1994. A total of 200,000
shares of Common Stock is reserved for issuance under the Directors' Plan (see
Proposal No. 4 for the proposed addition of 150,000 shares). The Directors'
Plan is administered by the Board of Directors. Only non-employee directors
are eligible to participate in the Directors' Plan. Eligible directors are
automatically granted an option to purchase 25,000 shares of the Company's
Common Stock on the date they are first elected a director, such option
becoming exercisable cumulatively with respect to 5,000 shares on each of the
first five anniversaries of the date of grant, unless accelerated because of a
director's death or disability. On the date of the Annual Meeting of
Stockholders each year, all non-employee directors who have served since the
previous Annual Meeting of Stockholders and are reelected receive an
immediately exercisable option for 3,000 shares. The exercise price of an
option granted under the Directors' Plan is the fair market value (based on The
Nasdaq National Market closing price) of the stock on the date the option is
granted. See Proposal No. 4 for a more detailed description of the Directors'
Plan.
-15-
<PAGE> 18
PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT
TO THE 1985 INCENTIVE STOCK PLAN
GENERAL
The 1985 Incentive Stock Plan (the "Option Plan") was amended by the
Board of Directors in September 1994, subject to approval by the Company's
stockholders, to limit to 150,000 the total number of shares of Common Stock
subject to options that may be granted to any one employee in any one fiscal
year of the Company, so as to comply with the proposed Internal Revenue Service
("IRS") regulations under Section 162(m) of the Internal Revenue Code (the
"Code").
This limit is intended to preserve the Company's ability to deduct for
federal income tax purposes the compensation expense relating to stock options
and stock purchase rights granted to certain executive officers under the
Option Plan. The Revenue Reconciliation Act of 1993, which was signed into law
in August 1993, added (among other things) Section 162(m) to the Code, which
limits the tax deduction for compensation paid to certain executives of public
companies to $1,000,000 per covered executive per year. However, compensation
is excluded from the $1,000,000 calculation if it is considered
performance-based, which includes compensation attributable to stock options or
stock purchase rights if, among other things, the plan under which the options
or rights are granted includes a limit on the maximum number of shares with
respect to which stock options or stock purchase rights may be granted during a
specified period to any employee. The limit described above has been included
in the Option Plan solely to preserve the Company's ability to deduct such
compensation. To the extent the Board determines in the future that such a
limit is not required to preserve the deductibility of compensation related to
such stock options and stock purchase rights, the Board may modify or eliminate
this limit.
See discussion below under "Tax Information--The Option Plan" for a
summary of the more general rules governing the availability to the Company of
tax deductions in connection with stock options or stock purchase rights
granted under the Option Plan.
VOTE REQUIRED
The affirmative vote of the majority of the Votes Cast will be
required under Delaware law to approve the amendment to the Option Plan. For
this purpose, the "Votes Cast" are defined under Delaware law to be the shares
of the Company's Common Stock present in person or represented by proxy at the
Annual Meeting of Stockholders and "entitled to vote on the subject matter."
Votes that are cast against the proposal will be counted for purposes of
determining (i) the presence or absence of a quorum for the transaction of
business and (ii) the total number of Votes Cast with respect to the proposal.
While there is no definitive statutory or case law authority in Delaware as to
the proper treatment of abstentions in the counting of votes with respect to a
proposal such as the amendment of the Option Plan, the Company believes that
abstentions should be counted for purposes of determining both (i) the presence
or absence of a quorum for the transaction of business and (ii) the total
number of Votes Cast with respect to the proposal. In the absence of
controlling precedent to the contrary, the Company intends to treat abstentions
in this manner. Accordingly, an abstention will have the same effect as a vote
against the proposal. In a 1988 Delaware case, Berlin v. Emerald Partners, the
Delaware Supreme Court held that, while broker non-votes may be counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, broker non-votes should not be counted for purposes of determining
the number of Votes Cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, broker non-votes with respect to
this proposal will not be counted as Votes Cast.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF
THE OPTION PLAN, AS AMENDED.
The essential features of the Option Plan are outlined below.
-16-
<PAGE> 19
PURPOSE
The purposes of the Option 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.
ADMINISTRATION; LIMITS ON GRANTS
With respect to grants of options to employees who are also officers
or directors of the Company, the Option Plan, as amended, shall be administered
by (i) the Board of Directors of the Company if the Board may administer the
Option Plan in compliance with Rule 16b-3 under the Exchange Act ("Rule 16b-3")
with respect to a plan intended to qualify under Rule 16b-3 as a discretionary
plan or (ii) a committee designated by the Board of Directors to administer the
Option Plan, which committee shall be constituted in such a manner as to permit
the Option Plan to comply with Rule 16b-3 with respect to a plan intended to
qualify thereunder as a discretionary plan. With respect to grants of options
to employees or consultants who are neither officers nor directors of the
Company, the Option Plan shall be administered by (i) the Board of Directors or
(ii) 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
law, federal and state and securities laws and the Tax Code. If permitted by
Rule 16b-3, the Option Plan may be administered by different bodies with
respect to directors, non-director officers and employees who are neither
officers nor directors and consultants who are not directors.
ELIGIBILITY
The Option Plan provides for the grant of options and sale of shares
to employees of and consultants to the Company. Only employees may be granted
incentive stock options. The Board or a committee of the Board selects the
purchasers and optionees and determines the number of shares to be sold or made
subject to option. As of the date of this Proxy Statement, directors who are
not also employees of the Company are not eligible to participate in the Option
Plan. However, prior to March 10, 1988, such directors were eligible to
participate in the Option Plan and they may still exercise options granted to
them prior to that date.
At the Record Date, the Company employed approximately 2,375 people,
2,365 of whom were eligible to participate in the Option Plan.
TERMS OF OPTIONS
Each option granted under the Option Plan is evidenced by a written
stock option agreement between the Company and the optionee. Options are
generally subject to the terms and conditions set forth below, but specific
terms may vary.
(a) Exercise of the Option. The Board or its committee determines
when options may be exercised. In no event may any incentive stock option
granted under the Option Plan be exercised more than ten years after the date
of grant. Incentive stock options currently being granted generally expire
after five years and six months. An option is exercised by giving written
notice of exercise to the Company specifying the number of full shares of
Common Stock to be purchased and by tendering payment of the purchase price.
Payment for shares purchased upon exercise of an option shall be in such form
of consideration as is authorized by the Option Plan and determined by the
Board, and such form of consideration may vary for each option.
(b) Exercise Price. The exercise price of options granted under
the Option Plan is determined by the Board or its committee and may not be less
than 100% of the fair market value of the Common Stock on the date the option
is granted. In the case of incentive stock options granted to an optionee who
owns more than 10% of the voting power or value of all classes of stock of the
Company, the exercise price must not be less than 110% of the fair market value
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<PAGE> 20
on the date of grant. The fair market value of the Common Stock is the closing
sale price on The Nasdaq National Market on the date of grant.
(c) Termination of Employment. If the optionee's employment or
association with the Company terminates for any reason (other than death or
disability), the optionee may, but only within 30 days (or such other period as
may be determined by the Board, but not exceeding three months for incentive
stock options) following the date of such termination, exercise any option
granted under the Option Plan, but only to the extent such option was
exercisable on the date of termination. To the extent that the option is not
exercised within such 30-day (or other) period, the option terminates.
(d) Disability. In the event that an employee or consultant is
unable to continue his employment or consulting relationship with the Company
as a result of his total and permanent disability (as defined in Section
22(e)(3) of the Tax Code), exercisability is accelerated from the usual
four-year period to a three-year period, and the optionee may, but only within
six months (or such other period of time not exceeding one year as is
determined by the Board at the time of grant of the option) from the date of
termination, exercise the option to the extent it was otherwise exercisable at
the date of such termination. To the extent that the option is not exercised
within such period, the option terminates.
(e) Death. If an optionee should die while employed by the
Company, exercisability of options granted under the Option Plan is accelerated
from the usual four-year period to a three-year period, and the option may be
exercised at any time within six months after death by the optionee's estate to
the extent the option would have been exercisable if the optionee had continued
living and remained an employee of the Company for six months after the date of
death. If an optionee should die within one month after termination of
employment with the Company, exercisability of options granted under the Option
Plan is accelerated from the usual four-year period to a three-year period, and
the options may be exercised by the optionee's estate at any time within six
months following the date of death, but only to the extent such options were
exercisable on the date of termination.
(f) Liquidation or Acquisition. In the event of a proposed
dissolution or liquidation of the Company, options under the Option Plan
terminate unless otherwise provided by the Board. In such event, the Board, in
its sole discretion, may determine to make options immediately exercisable as
to all shares.
Current option agreements provide that 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 shall be assumed or
equivalent options shall be substituted by such successor corporation or its
affiliate. If such successor corporation refuses to assume an option or to
substitute an equivalent option, the Board shall provide for the optionee to
have the right to exercise the option as to all of the Common Stock subject to
the option. Most options granted before December 1987 allowed the Board the
right to accelerate the exercisability of options whether or not a successor
corporation was willing to assume such options.
Option agreements for officers and certain key employees provide for
full acceleration of exercisability in the event that, following a change in
control of the Company, the optionee's employment is terminated or his
compensation and benefits are reduced. The Board may, in its discretion,
provide in individual option agreements for an optionee to have the right to
return an option to the Company for a cash payment equal to the net value of
the option 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.
(g) Non-transferability of Options. An option is generally not
transferable by the optionee, other than by will or the laws of descent and
distribution. However, the Board may grant or amend options in individual
cases to allow an option to be transferable to a trust for the benefit of an
employee or the employee's family members. Options are generally exercisable
during the optionee's lifetime only by the optionee unless transferred to a
trust as described above.
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(h) Withholding of Shares to Pay Tax Liability. The Option Plan
allows the Company to withhold shares as to which an option has been exercised
in order to comply with regulations requiring the Company to withhold taxes
upon certain exercises of options. See "Tax Information--Nonstatutory
Options."
(i) Other Provisions. The option agreement may contain such other
terms, provisions and conditions not inconsistent with the Option Plan as may
be determined by the Board or its committee.
OPTIONS OUTSTANDING
Options granted under the Option Plan generally become exercisable in
installments. Most options granted before June 2, 1994 become exercisable as
to 20% of the total shares under option one year after the date of beginning
employment (for new employees) or the date of option grant (for existing
employees), and as to an additional 20% after each subsequent twelve-month
period so long as the optionee remains an employee of the Company. Most
options granted on and after June 2, 1994 become exercisable as to 25% of the
total shares under option one year after the date of beginning employment (for
new employees) or the date of option grant (for existing employees), and as to
an additional 25% after each subsequent twelve-month period so long as the
optionee remains an employee of the Company. Exercisability is accelerated in
the case of death or disability or, in certain cases, by termination of
employment or reduction in compensation following a change in control, as
described above. Exercisability is delayed by leaves of absence or temporary
reductions in work hours. Options being granted at this time generally expire
five years and six months from the date of grant.
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
cancelling any options with exercise prices greater than $17.25 and receiving
new options for 90% of the shares subject to the options being cancelled. The
new options' vesting commencement date will be reset to June 22, 1994 and the
new options will become exercisable at the rate of 25% each year over four
years. The options expire in five and one-half years. The 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.
At the Record Date, 690,070 shares had been sold directly, options to
purchase 1,711,195 shares of the Company's Common Stock had been exercised,
options to purchase 5,825,734 shares were outstanding, and 1,373,001 shares
remained available for future sale or grant under the Option Plan. The range
of exercise prices per share for options outstanding under the Option Plan at
the Record Date was from $0.75 to $50.00, and the weighted average exercise
price per share was approximately $20.84. Expiration dates for outstanding
options range from September 1994 to March 2000.
CAPITAL CHANGES
In the event any change is made in the Company's capitalization which
results in an exchange of Common Stock for a greater or lesser number of shares
without receipt of consideration, appropriate adjustment will be made in the
exercise price and in the number of shares subject to options outstanding under
the Option Plan, as well as in the number of shares reserved for issuance under
the Option Plan.
AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time amend, alter, suspend or discontinue the
Option 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 such optionee's consent. In addition, to the extent
necessary and desirable to comply with Rule 16b-3 or
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<PAGE> 22
with Section 422 of the Tax 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.
TAX INFORMATION--THE OPTION PLAN
Options granted under the Option Plan may be either "incentive stock
options," as defined in Section 422 of the Tax Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not
recognize taxable income either at the time the option is granted or upon its
exercise, unless the exercise subjects the optionee to the alternative minimum
tax. Upon the sale or exchange of the shares more than two years after grant
of the option and one year after exercising the option, any gain or loss will
be treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of
(i) the fair market value of the shares at the date of the option exercise or
(ii) the sale price of the shares. A different timing rule for measuring
ordinary income upon such a premature disposition may apply if the optionee is
also an officer, director or 10% stockholder of the Company. The Company will
be entitled to a deduction in the same amount as the ordinary income recognized
by the optionee. Any gain or loss recognized on such a premature disposition
of the shares in excess of the amount treated as ordinary income will be
characterized as long-term or short-term capital gain or loss, depending on the
holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any
taxable income at the time he is granted a nonstatutory option. However, upon
its exercise, the optionee will recognize taxable income generally measured as
the excess of the then fair market value of the shares purchased over the
purchase price. Any taxable income recognized in connection with an option
exercise by an optionee who is also an employee of the Company will be subject
to tax withholding by the Company. Upon resale of such shares by the optionee,
any difference between the sales price and the optionee's purchase price, to
the extent not recognized as taxable income as described above, will be treated
as long-term or short-term capital gain or loss, depending on the holding
period.
The Company will be entitled to a tax deduction in the same amount as
the ordinary income recognized by the Optionee with respect to shares acquired
upon exercise of a nonstatutory option.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME
TAXATION UPON THE OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT AND
EXERCISE OF OPTIONS UNDER THE OPTION PLAN, DOES NOT PURPORT TO BE COMPLETE, AND
REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN
ADDITION, THIS SUMMARY DOES NOT DISCUSS THE INCOME TAX LAWS OF ANY
MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE OPTIONEE MAY RESIDE.
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PROPOSAL NO. 3 -- APPROVAL OF AMENDMENT TO
THE 1987 EMPLOYEE STOCK PURCHASE PLAN
The 1987 Employee Stock Purchase Plan ("Purchase Plan") was amended by
the Board of Directors in September 1994 to reserve an additional 400,000
shares of Common Stock for issuance thereunder, bringing the total number of
shares under the Purchase Plan to 1,650,000.
The Company believes that its Purchase Plan is an important factor in
attracting and retaining skilled personnel. Each year the Company reviews the
number of shares available for issuance under the Purchase Plan and, based on
the Company's estimates of the number of shares expected to be purchased under
the Purchase Plan during the coming year, management presents to the Board of
Directors a recommendation for the addition of shares to the pool reserved for
issuance under the Purchase Plan. The Board then reviews this recommendation
and presents a proposal such as this one to the stockholders for approval.
The initial offering period under the Purchase Plan began on February
26, 1988, and from that date to the Record Date 1,249,133 shares of the
Company's Common Stock were sold under the Purchase Plan. The number of shares
sold in each offering period will vary with the number of participants, the
amount of their payroll deductions and the fair market value of the Company's
Common Stock.
VOTE REQUIRED
The affirmative vote of the majority of the Votes Cast will be
required under Delaware law to approve the amendment to the Purchase Plan. For
this purpose, the "Votes Cast" are defined under Delaware law to be the shares
of the Company's Common Stock present in person or represented by proxy at the
Annual Meeting of Stockholders and "entitled to vote on the subject matter."
Votes that are cast against the proposal will be counted for purposes of
determining (i) the presence or absence of a quorum for the transaction of
business and (ii) the total number of Votes Cast with respect to the proposal.
While there is no definitive statutory or case law authority in Delaware as to
the proper treatment of abstentions in the counting of votes with respect to a
proposal such as the amendment of the Purchase Plan, the Company believes that
abstentions should be counted for purposes of determining both (i) the presence
or absence of a quorum for the transaction of business and (ii) the total
number of Votes Cast with respect to the proposal. In the absence of
controlling precedent to the contrary, the Company intends to treat abstentions
in this manner. Accordingly, an abstention will have the same effect as a vote
against the proposal. In a 1988 Delaware case, Berlin v. Emerald Partners, the
Delaware Supreme Court held that, while broker non-votes may be counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, broker non-votes should not be counted for purposes of determining
the number of Votes Cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, broker non-votes with respect to
this proposal will not be counted as Votes Cast.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF
THE PURCHASE PLAN AS AMENDED, INCLUDING THE ADDITION OF SHARES TO THE POOL
RESERVED FOR ISSUANCE THEREUNDER.
The essential features of the Purchase Plan are outlined below.
GENERAL
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Tax Code. See "Tax Information--The Purchase Plan."
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<PAGE> 24
PURPOSE
The purpose of the Purchase Plan is to provide employees of the
Company with an opportunity to purchase Common Stock of the Company at a
discount through accumulated payroll deductions.
ADMINISTRATION
The Purchase Plan is administered by the Board of Directors or a
committee of members of the Board appointed by the Board, who receive no
separate additional compensation for such service. All questions of
interpretation or application of the Purchase Plan are determined by the Board
or its appointed committee, whose decisions are final and binding upon all
participants. Members of the Board who are eligible employees are permitted to
participate in the Purchase Plan but may not vote on any matter affecting the
administration of the Purchase Plan or the grant of any option pursuant to the
Purchase Plan.
ELIGIBILITY
Any person who is customarily employed at least 20 hours per week and
5 months per calendar year by the Company during the applicable offering period
is eligible to participate in the Purchase Plan, unless the employee would own
5% or more of the total combined voting power or value of all classes of stock
of the Company or of its subsidiaries (including stock issuable upon exercise
of options held by him) at the end of the offering period, or the employee
would receive more than $25,000 worth of stock (computed as of the date of
grant) pursuant to the Purchase Plan in any calendar year.
At the Record Date, the Company employed approximately 2,375 people,
2,346 of whom were eligible to participate in the Purchase Plan. Approximately
1,200 employees were participating in the Purchase Plan as of that date.
OFFERING DATES
The Purchase Plan is generally implemented by one offering during each
six-month period. Offering periods commence on or about January 1 and July 1
of each year.
ENROLLMENT IN THE PLAN
Eligible employees become participants in the Purchase Plan by
delivering to the Company's payroll office a subscription agreement authorizing
payroll deductions. Employees hired after the first day of an offering period
(or who otherwise become eligible after such date) may begin participation in
the Purchase Plan on the first business day of the calendar month following the
month in which they are hired (or become eligible). Under the Purchase Plan,
once an employee elects to participate in the Purchase Plan, enrollment in each
successive offering period occurs automatically unless the employee withdraws
from participation in the Purchase Plan.
PURCHASE PRICE
The purchase price per share under the Purchase Plan is the lower of
(i) 85% of the fair market value of a share of Common Stock on the date of
commencement of the offering (or for employees beginning participation later,
the date such participation began) or (ii) 85% of the fair market value of a
share of Common Stock on the last day of the offering period. The fair market
value of the Common Stock on a given date is the closing sale price on The
Nasdaq National Market.
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<PAGE> 25
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the shares is accumulated by after-tax payroll
deductions over the offering period. The deductions may not exceed 10% of a
participant's compensation. The total number of shares purchased by any
participant shall in no event exceed, in any calendar year, the number of
shares of Common Stock which $25,000 could purchase at the fair market value of
a share of the Company's Common Stock, calculated as of the offering date. A
participant may discontinue participation in the Purchase Plan, and may
decrease but not increase the rate of payroll deductions, during the offering
period.
PURCHASE OF STOCK; EXERCISE OF OPTION
By executing a subscription agreement to participate in the Purchase
Plan, the employee is entitled to have shares placed under option to him. The
maximum number of shares placed under option to a participant in an offering is
that number determined by dividing the total amount of the participant's
contribution for the offering period by the lower of (i) 85% of the fair market
value of the Common Stock at the beginning of the offering period (or date his
participation began) or (ii) 85% of the fair market value of the Common Stock
at the end of the offering period, but in no event shall more than the number
of shares of Common Stock which $25,000 could purchase at the fair market value
of a share of the Company's Common Stock, calculated as of the offering date,
be placed under option to a single participant in any one calendar year.
Unless the employee's participation is discontinued, the option for the
purchase of shares will be exercised automatically at the end of the offering
period at the applicable price. No fractional shares will be issued upon
exercise of the option. Any amounts insufficient to purchase a full share
remaining in a participant's account after exercise of the option will be
returned to the participant. No interest will accrue on the payroll deductions
of a participant in the Purchase Plan.
WITHDRAWAL
A participant's interest in a given offering may be terminated by
signing and delivering to the Company a notice of withdrawal from the Purchase
Plan. Upon withdrawal from the Purchase Plan, accrued but unused payroll
deductions are returned to the employee. Such withdrawal may be elected at any
time prior to the end of the applicable six-month offering period. A
participant's withdrawal from an offering will not have any effect upon such
participant's eligibility to participate in subsequent offering periods under
the Purchase Plan.
TERMINATION OF EMPLOYMENT
Termination of a participant's employment for any reason, including
retirement or death, cancels participation in the Purchase Plan immediately.
In such event the payroll deductions credited to the participant's account will
be returned without interest to such participant, or, in the case of death, to
the person or persons entitled thereto as specified by the employee in the
subscription agreement.
CAPITAL CHANGES
In the event of changes in the capitalization of the Company, such as
stock splits or stock dividends, which result in an increase or decrease in the
number of shares of Common Stock without receipt of consideration by the
Company, appropriate adjustments will be made by the Company in the number of
shares subject to purchase and in the price per share.
EFFECT OF LIQUIDATION, DISSOLUTION, SALE OF ASSETS OR MERGER
In the event of a liquidation or dissolution of the Company, an
employee's participation in the Purchase Plan will be terminated immediately
before consummation of such event unless otherwise provided by the Board. In
the event of a sale of all or substantially all of the assets of the Company or
a merger of the Company with or into another
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<PAGE> 26
corporation, the employee's rights may be satisfied by assumption of the
Company's obligations by such acquiring or successor corporation. If such
corporation refuses to assume those obligations, the Board shall allow the
immediate exercise of the employee's rights for 30 days, after which the
employee's rights under the Purchase Plan shall terminate.
NON-ASSIGNABILITY
No rights or accumulated payroll deductions of an employee under the
Purchase Plan may be pledged, assigned or transferred for any reason, and any
such attempt may be treated by the Company as an election to withdraw from the
Purchase Plan.
REPORTS
Individual accounting will be maintained for each participant in the
Purchase Plan. Each participant receives as promptly as practicable after the
end of the six-month offering period a report showing the details of the
participant's account.
AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time amend, alter, suspend or discontinue the
Purchase Plan, but, except under certain conditions, no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of
any participant arising out of any offering period which has already commenced
without such participant's written consent. In addition, to the extent
necessary and desirable to comply with Rule 16b-3 under the Exchange Act or
with Section 423 of the Tax 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 Purchase Plan amendment in
such a manner and to such a degree as required
TAX INFORMATION--THE PURCHASE PLAN
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Tax Code. Under these provisions, no income will be taxable to a
participant until the shares purchased under the Plan are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant
will generally be subject to tax and the amount of the tax will depend upon the
holding period. If the shares are sold or otherwise disposed of more than two
years from the first day of the offering period, the participant will recognize
ordinary income measured as the lesser of (a) the excess of the fair market
value of the shares at the time of such sale or disposition over the purchase
price, or (b) an amount equal to 15% of the fair market value of the shares as
of the first day of the offering period. Any additional gain will be treated
as long-term capital gain. If the shares are sold or otherwise disposed of
before the expiration of this holding period, the participant will recognize
ordinary income generally measured as the excess of the fair market value of
the shares on the date the shares are purchased over the purchase price. Any
additional gain or loss on such sale or disposition will be long-term or
short-term capital gain or loss, depending on the holding period. The Company
is not entitled to a deduction for amounts taxed as ordinary income or capital
gain to a participant except to the extent of ordinary income recognized by
participants upon a sale or disposition of shares prior to the expiration of
the holding period(s) described above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME
TAXATION UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES
PURCHASED UNDER THE PURCHASE PLAN, DOES NOT PURPORT TO BE COMPLETE, AND
REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN
ADDITION, THIS SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT'S
DEATH OR THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN
WHICH THE PARTICIPANT MAY RESIDE.
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PROPOSAL NO. 4 -- APPROVAL OF AMENDMENT
TO THE 1988 DIRECTORS' STOCK OPTION PLAN
The 1988 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors in November 1988 and approved by the
Company's stockholders in 1989. The Directors' Plan was subsequently amended
by the Board and the stockholders in 1989, 1990 and 1992, and by the Board in
September 1994 to increase the number of shares of Common Stock reserved for
issuance by 150,000 shares to 300,000 shares.
The Company believes that the ability to grant stock options to
directors is an important factor in attracting and retaining the best available
personnel for service as directors of the Company. Each year the Company
reviews the number of shares available for issuance under the Directors' Plan.
Then, based on the Company's estimates of the incentive value of stock options
and the number of current and potential future vacancies on the Board of
Directors, management presents to the Board a recommendation for the addition
of shares to the pool reserved for issuance under the Directors' Plan. The
Board reviews this recommendation and presents a proposal such as this one to
the stockholders for approval.
As of the Record Date, options to purchase an aggregate of 205,000
shares were outstanding, options for 21,000 shares had been exercised and
124,000 shares remained available for issuance pursuant to future option grants
under the Directors' Plan (assuming approval of this Proposal No. 4). The
range of exercise prices per share for options outstanding under the Directors'
Plan at the Record Date was from $11.125 to $25.25, and the weighted average
exercise price per share was approximately $20.70. Expiration dates for
outstanding options range from February 1995 to January 2000.
The affirmative vote of the majority of the Votes Cast will be
required under Delaware law to approve the amendment to the Directors' Plan.
For this purpose, the "Votes Cast" are defined under Delaware law to be the
shares of the Company's Common Stock present in person or represented by proxy
at the Annual Meeting of Stockholders and "entitled to vote on the subject
matter." Votes that are cast against the proposal will be counted for purposes
of determining (i) the presence or absence of a quorum for the transaction of
business and (ii) the total number of Votes Cast with respect to the proposal.
While there is no definitive statutory or case law authority in Delaware as to
the proper treatment of abstentions in the counting of votes with respect to a
proposal such as the amendment of the Directors' Plan, the Company believes
that abstentions should be counted for purposes of determining both (i) the
presence or absence of a quorum for the transaction of business and (ii) the
total number of Votes Cast with respect to the proposal. In the absence of
controlling precedent to the contrary, the Company intends to treat abstentions
in this manner. Accordingly, an abstention will have the same effect as a vote
against the proposal. In a 1988 Delaware case, Berlin v. Emerald Partners, the
Delaware Supreme Court held that, while broker non-votes may be counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, broker non-votes should not be counted for purposes of determining
the number of Votes Cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, broker non-votes with respect to
this proposal will not be counted as Votes Cast.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF
THE DIRECTORS' PLAN AS AMENDED, INCLUDING THE ADDITION OF SHARES TO THE POOL
RESERVED FOR ISSUANCE THEREUNDER.
The essential features of the Directors' Plan are outlined below.
PURPOSE
The purposes of the Directors' Plan are to attract and retain the best
available individuals for service as directors of the Company, to provide
additional incentive to the directors of the Company and to encourage their
continued service on the Board.
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ADMINISTRATION
The Directors' Plan, and the right of directors to receive options and
purchase stock thereunder, is intended to qualify as a plan having
"disinterested administration" under Rule 16b-3 pursuant to the Exchange Act.
The Directors' Plan is administered by the Board of Directors, who receive no
additional compensation for such service. All grants of options under the
Directors' Plan are automatic and non- discretionary pursuant to the terms of
the Directors' Plan. All questions of interpretation or application of the
Directors' Plan are determined by the Board, whose decisions are final and
binding upon all participants.
ELIGIBILITY
Options under the Directors' Plan may be granted only to non-employee
directors of the Company. As of the Record Date, there were seven non-employee
directors of the Company, all of whom have been nominated to serve as directors
for the 1995 fiscal year.
PARTICIPATION
Participation in the Directors' Plan provides for grants of options to
be made in four ways:
(a) Each non-employee director is automatically granted
an option to purchase 25,000 shares upon the date on which such
individual first becomes a director, whether through election by the
stockholders of the Company or by appointment by the Board of
Directors in order to fill a vacancy;
(b) Each non-employee director who has served since the
previous Annual Meeting of Stockholders and is continuing to serve on
the Board receives, on the date of the Annual Meeting of Stockholders
each year, an immediately exercisable option for 3,000 shares;
(c) All non-employee directors serving at the time of the
August 1989 amendments to the Directors' Plan and who did not receive
any option grant prior to January 1, 1988, received a one-time
automatic grant of an option for 10,000 shares as of November 21,
1991. All non-employee directors who were serving at the time of the
November 1991 amendments to the Directors' Plan and had not received
any option grant prior to January 1, 1988, received a one-time
automatic grant of an option for 10,000 shares; and
(d) All non-employee directors serving during fiscal year
1992 who did not receive a grant under paragraph (c) received a
similar one-time grant as of April 22, 1992.
TERM OF OPTIONS
Each option granted under the Directors' Plan is evidenced by a
written stock option agreement between the Company and the optionee. Options
are generally subject to the terms and conditions listed below.
(a) Exercise of the Option. The 25,000 share option
granted to new directors upon their initial election to the Board and
the 10,000 share one-time automatic grants to non-employee directors
become exercisable at the rate of 20% per year, with the effect that
these options are not exercisable as to the full number of shares
until the fifth anniversary of the date of their grant. The 3,000
share option granted to non-employee directors on the date of the
Annual Meeting of Stockholders each year is exercisable immediately.
Options granted under the Directors' Plan expire five years and seven
months following the date of grant. An option is exercised by giving
written notice of exercise to the Company specifying the number of
full shares of Common Stock to be purchased and by tendering payment
of the purchase price. Payment for shares purchased upon exercise of
an option shall be in such form of consideration as is authorized by
the Directors' Plan and determined by the Board, and such form of
consideration may vary for each option.
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<PAGE> 29
(b) Exercise Price. The per share exercise price for
shares to be issued pursuant to exercise of an option under the
Directors' Plan is 100% of the fair market value per share of the
Company's Common Stock on the date of grant of the option. The fair
market value is determined by the closing price on The Nasdaq National
Market on the date of grant.
(c) Termination of Employment. If an optionee ceases to
serve as a director, he may, but only within seven months after the
date he ceases to be a director of the Company, exercise his option to
the extent that 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 such termination, or if he does not exercise
such option within the time specified, the option terminates.
(d) Disability. In the event that a director is unable
to continue his service as such with the Company as a result of his
total and permanent disability (as defined in Section 22(e)(3) of the
Tax Code), exercisability is accelerated from the usual five-year
period to a three-year period, and the optionee may, but only within
seven months from the date of termination, exercise his option to the
extent he was entitled to exercise his option at the date of such
termination. To the extent that the option is not exercised within
such seven-month period, the option terminates.
(e) Death. If an optionee should die while a director of
the Company, exercisability of any option having a five-year
exercisability schedule under the Directors' Plan is accelerated from
the usual five-year period to a three-year period, and the option may
be exercised at any time within seven months after death by the
optionee's estate to the extent the option would have been exercisable
by the optionee on the date of death. If an optionee should die
within one month after termination of his status as a director of the
Company, exercisability of any option having a five-year
exercisability schedule under the Directors' Plan is accelerated from
the usual five-year period to a three-year period and the option may
be exercised by the optionee's estate at any time within seven months
following the date of death, but only to the extent the option was
exercisable on the date of termination.
(f) Liquidation or Acquisition. In the event of a
proposed liquidation or dissolution of the Company, options under the
Directors' Plan shall terminate unless otherwise provided by the
Board. In such event, the Board, in its sole discretion, may
determine to make options immediately exercisable as to all shares.
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 shall be assumed or equivalent options
shall be substituted by such successor corporation or its affiliate.
If such successor corporation refuses to assume the option or to
substitute an equivalent option, the Board shall provide for the
optionee to have the right to exercise the option as to all of the
shares subject to the option. The Board may also provide in option
agreements for an optionee to have the right to return an option to
the company for a cash payment equal to the net value of the option
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.
(g) Nontransferability of Options. Options granted
pursuant to the Directors' Plan 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, only by the optionee.
(h) Suspension or Termination of Option. In the event
that the President of the Company or his designee reasonably believes
that a participant in the Directors' Plan has committed an act of
serious misconduct, the President may suspend the optionee's right to
exercise any option pending a determination by the Board. Further, if
the Board determines that an optionee has committed such an act of
misconduct, all of
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<PAGE> 30
that director's outstanding options under the Directors' Plan may be
cancelled. The Board shall act fairly in making any such
determination.
(i) Other Provisions. The option agreement may contain
such other terms, provisions and conditions not inconsistent with the
Directors' Plan as may be determined by the Board.
CAPITAL CHANGES
In the event of any changes made in the Company's capitalization which
result in an exchange of Common Stock for a greater or lesser number of shares
without receipt of consideration, appropriate adjustment shall be made in the
exercise price and in the number of shares subject to options outstanding under
the Directors' Plan, as well as the number of shares reserved for issuance
under the Directors' Plan.
AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time amend, alter, suspend or discontinue the
Directors' Plan, but no amendment, alteration, suspension or discontinuance
shall be made which would impair the rights of any optionee under any grant
theretofore made without such optionee's consent. In addition, to the extent
necessary and desirable to comply with Rule 16b-3 (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 amendment to
the Directors' Plan in such a manner and to such a degree as required.
TAX INFORMATION--THE DIRECTORS' PLAN
Options granted pursuant to the Directors' Plan are "nonstatutory
options" and will not qualify for any special tax benefits to the optionee.
An optionee will not recognize any taxable income at the time the
option is granted. Upon exercise of the option, the optionee will generally
recognize ordinary income for federal tax purposes measured by the excess, if
any, of the fair market value of the shares over the exercise price. Because
shares held by directors might be subject to restrictions on resale under
Section 16(b) of the Securities Exchange Act of 1934, as amended, the date of
taxation may be deferred unless the optionee files an election with the
Internal Revenue Service pursuant to Section 83(b) of the Tax Code within
thirty days after the date of exercise.
Upon a resale of shares acquired pursuant to an option under the
Directors' Plan, any difference between the sales price and the exercise price,
to the extent not recognized as ordinary income as provided above, will be
treated as capital gain or loss. The tax rate on net capital gain (net
long-term capital gain minus net short-term capital loss) is capped at 28%.
Capital losses are allowed in full against capital gains plus $3,000 of other
income.
The Company will be entitled to a tax deduction in the amount and at
the time that the optionee recognizes ordinary income with respect to shares
acquired upon exercise of an option under the Directors' Plan. The Company is
not required to withhold any amount for tax purposes on any such income
included by the optionee.
THE FOREGOING SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON
THE OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT OF OPTIONS UNDER THE
DIRECTORS' PLAN DOES NOT PURPORT TO BE COMPLETE, AND REFERENCE SHOULD BE MADE
TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN ADDITION, THIS SUMMARY DOES
NOT DISCUSS THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR
FOREIGN COUNTRY IN WHICH THE OPTIONEE MAY RESIDE.
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<PAGE> 31
PROPOSAL NO. 5 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has nominated KPMG Peat Marwick LLP to audit
the consolidated financial statements of the Company for the fiscal year ending
June 30, 1995. Such nomination is being presented to the stockholders for
ratification at the meeting. A representative of KPMG Peat Marwick LLP is
expected to be present at the meeting, will have the opportunity to make a
statement and is expected to be available to respond to appropriate questions.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the meeting is required
to ratify the Board's selection. If the stockholders reject the nomination,
the Board will reconsider its selection.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S
AUDITORS.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting.
If any other matters properly come before the meeting, it is the intention of
the persons named in the enclosed proxy card to vote the shares they represent
as the Company may recommend.
By Order of the Board of Directors
(SIG)
Derek S. Daley, Secretary
Milpitas, California
October 17, 1994
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<PAGE> 32
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
PROXY
OCTEL COMMUNICATIONS CORPORATION
1994 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder(s) of Octel Communications Corporation, a
Delaware corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement, each dated October 17, 1994, and
hereby appoints Robert Cohn and Derek S. Daley, and each of them, Proxies and
Attorneys-in-Fact, with full power to each of substitution, on behalf and in
the name of the undersigned, to represent the undersigned at the 1994 Annual
Meeting of Stockholders of Octel Communications Corporation, to be held on
November 17, 1994, at 9:30 a.m., local time, at The Fairmont Hotel, 170 South
Market Street, San Jose, California 95113, and at any adjournments thereof, and
to vote all shares of Common Stock which the undersigned is entitled to vote on
the matters set forth below:
THIS BALLOT WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF THE NAMED DIRECTORS, FOR APPROVAL
OF THE AMENDMENTS TO THE 1985 INCENTIVE STOCK PLAN, FOR APPROVAL OF THE
AMENDMENTS TO AND INCREASE IN THE NUMBER OF SHARES RESERVED UNDER THE 1987
EMPLOYEE STOCK PURCHASE PLAN, FOR APPROVAL OF THE AMENDMENTS TO AND INCREASE IN
THE NUMBER OF SHARES RESERVED UNDER THE 1988 DIRECTORS' STOCK OPTION PLAN, FOR
RATIFICATION OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS FOR THE
1995 FISCAL YEAR AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS
MAY PROPERLY COME BEFORE THE MEETING.
(Continued and to be signed on the other side)
<PAGE> 33
<TABLE>
<CAPTION>
_________________ [x] Please mark your
COMMON votes in box
<S> <C> <C>
1. ELECTION OF DIRECTORS: 2. Proposal to amend the 1985 Incentive 4. Proposal to amend the 1988 Directors'
Stock Plan to limit to 150,000 Stock Option Plan to increase the
FOR all WITHHOLD authority the total number of shares of Common number of shares reserved for
nominees listed to vote for all Stock subject to options that may be issuance thereunder.
(except as nominees listed granted to any one employee in any
indicated) below one fiscal year of the Company.
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
If you wish to withhold authority 3. Proposal to amend the 1987 Employee 5. Proposal to ratify the appointment
to vote for any individual nominee, Stock Purchase Plan to increase the of KPMG Peat Marwick LLP as independent
strike a line through that number of shares reserved for auditors of the company for the 1995
nominee's name in the list below: issuance thereunder. fiscal year.
Robert Cohn, Anson M. Beard, Jr., FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
Leo J. Chamberlain, Deborah A. Coleman, [ ] [ ] [ ] [ ] [ ] [ ]
John Freidenrich, Robert C. Hawk,
Nathaniel de Rothschild, Dag Tellefsen.
In their discretion the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy should be marked, dated, signed by the stockholder(s) exactly
as the stockholder's name appears herein and returned promptly in the
enclosed envelope. Persons signing in a fiduciary capacity should so
indicate. If shares are held by joint tenants or as community property,
both should sign.
------------------------------------------------------------------------
Typed or Printed Name(s)
------------------------------------------------------------------------
Signature
------------------------------------------------------------------------
Signature
------------------------------------------------------------------------
Title, if applicable
Dated: , 1994
------------------------------------------------------------
</TABLE>
<PAGE> 34
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 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.
<PAGE> 35
(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.
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.
CFB012.R2(5P3)
09/09/94 -2-
<PAGE> 36
(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 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.
(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
CFB012.R2(5P3)
09/09/94 -3-
<PAGE> 37
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.
(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.
CFB012.R2(5P3)
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<PAGE> 38
(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 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 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.
CFB012.R2(5P3)
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<PAGE> 39
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 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
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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 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 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.
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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.
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.
(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
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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 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.
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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.
(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> 44
OCTEL COMMUNICATIONS CORPORATION
1987 EMPLOYEE STOCK PURCHASE PLAN
As amended September 1994
The following constitute the provisions of the Employee Stock Purchase
Plan of Octel Communications Corporation.
1. Purpose. The purpose of the Plan is to provide employees of
the Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The provisions of the Plan shall, accordingly, be construed so as to
extend and limit participation in a manner consistent with the requirements of
that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(c) "Common Stock" shall mean the Common Stock, no par
value, of the Company.
(d) "Company" shall mean Octel Communications
Corporation, a Delaware corporation.
(e) "Compensation" shall mean all regular gross earnings,
including payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses, commissions or other compensation.
(f) "Continuous Status as an Employee" shall mean the
absence of any interruption or termination of service as an Employee.
Continuous Status as an Employee shall not be considered interrupted in the
case of a leave of absence agreed to in writing by the Company, 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.
(g) "Designated Subsidiaries" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole
discretion as eligible to participate in the Plan.
<PAGE> 45
(h) "Employee" shall mean any person, including an
officer, who is customarily employed for at least twenty (20) hours per week
and more than five (5) months in a calendar year by the Company or one of its
Designated Subsidiaries.
(i) "Exercise Date" shall mean the last day of each
offering period of the Plan.
(j) "Offering Date" shall mean the first business day of
each offering period of the Plan, except that in the case of an individual who
becomes an eligible Employee after the first business day of an offering period
but prior to the first business day of the last calendar month of such offering
period, the term "Offering Date" shall mean the first business day of the
calendar month following the month in which that individual becomes an eligible
Employee.
Options granted after the first business day of an
offering period will be subject to the same terms as the options granted on the
first business day of such offering period except that they will have a
different grant date (thus, potentially, a different exercise price) and,
because they expire at the same time as the options granted on the first
business day of such offering period, a shorter term.
(k) "Plan" shall mean this Employee Stock Purchase Plan.
(l) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the
Company or a Subsidiary, whether or not such corporation now exists or is
hereafter organized or acquired by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who is an Employee as of an Offering Date
of a given offering period shall be eligible to participate in such offering
period under the Plan, provided that such person was not eligible to
participate in such offering period as of any prior Offering Date, and further
subject to the requirements of paragraph 5(a) and the limitations imposed by
Section 423(b) of the Code. Notwithstanding the foregoing sentence, any
Employee who becomes an eligible Employee in the months of July or August, 1988
may begin participation in the Plan on September 1, 1988.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) if,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 425(d) of the Code)
would own stock and/or hold outstanding options to purchase stock possessing
five percent (5%) or more of the total combined voting power or value of all
classes
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<PAGE> 46
of stock of the Company or of any Subsidiary of the Company, or (ii)
which permits his rights to purchase stock under all employee stock purchase
plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of fair market value of such stock (determined at the time such
option is granted) for each calendar year in which such option is outstanding
at any time.
4. Offering Periods.
The Plan shall be implemented by one offering during each
six-month period of the Plan, commencing on or about the first day following
the end of the prior offering period, and continuing thereafter until
terminated in accordance with paragraph 19 or 23 hereof. The Board of
Directors of the Company shall have the power to change the duration of
offering periods with respect to future offerings without stockholder approval
if such change is announced at least fifteen (15) days prior to the scheduled
beginning of the first offering period to be affected.
5. Participation.
(a) An eligible Employee may become a participant in the
Plan by completing a subscription agreement authorizing payroll deduction on
the form provided by the Company and filing it with the Company's payroll
office at such time as is specified by the Company and is prior to the
applicable Offering Date (unless a later time for filing the subscription
agreement is set by the Board for all eligible Employees with respect to a
given offering period). Once properly made, an eligible Employee's election to
participate shall be automatically renewed for each subsequent offering period,
subject to any termination or withdrawal as provided in paragraph 10.
(b) Payroll deductions for a participant shall commence
on the first payroll following the Offering Date and shall end on the Exercise
Date of the offering period to which such authorization is applicable, unless
sooner terminated by the participant as provided in paragraph 10.
6. Payroll Deductions.
(a) At the time a participant files his subscription
agreement, he shall elect to have payroll deductions made on each payday during
the offering period in an amount not exceeding ten percent (10%) of the
Compensation which he receives on each payday
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during the offering period, and the aggregate of such payroll deductions during
the offering period shall not exceed ten percent (10%) of his aggregate
Compensation during said offering period.
(b) All payroll deductions made by a participant shall be
credited to his account under the Plan. A participant may not make any
additional payments into such account.
(c) A participant may discontinue his participation in
the Plan as provided in paragraph 10, or may decrease (but not increase) the
rate of his payroll deductions during the offering period by completing or
filing with the Company a new authorization for payroll deduction. The change
in rate shall be effective fifteen (15) days following the Company's receipt of
the new authorization.
(d) Notwithstanding the foregoing, to the extent
necessary to comply with Section 423(b)(8) of the Code and paragraph 3(b)
herein, a participant's payroll deductions may be decreased to 0% at such time
during any Offering Period that the aggregate of all payroll deductions
accumulated with respect to such Offering Period and any other Offering Period
ending within the same calendar year equal $21,250. Payroll deductions shall
recommence at the rate provided in such participant's subscription agreement at
the beginning of the first Offering Period which is scheduled to end in the
following calendar year, unless terminated by the participant as provided in
paragraph 11.
7. Grant of Option.
(a) On each Offering Date of each offering period, each
eligible Employee beginning participation in such offering period on such
Offering Date shall be granted an option to purchase (at the per share option
price) up to a number of shares of the Company's Common Stock determined by
dividing such Employee's payroll deductions to be accumulated during such
offering period by the lower of (i) eighty-five percent (85%) of the fair
market value of a share of the Company's Common Stock on the Offering Date, or
(ii) eighty-five percent (85%) of the fair market value of a share of the
Company's Common Stock on the Exercise Date; provided that in no event shall an
Employee be permitted to purchase during any offering period more than a number
of shares determined by dividing $25,000 by the fair market value of a share of
the Company's Common Stock on the first day of such offering period, and
provided further that such purchase shall be subject to the limitations set
forth in Section 3(b) and 12 hereof. Fair market value of a share of the
Company's Common Stock shall be determined as provided in Section 7(b) herein.
(b) The option price per share of the shares offered in a
given offering period shall be the lower of: (i) 85% of the fair
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market value of a share of the Common Stock of the Company on the Offering
Date; or (ii) 85% of the fair market value of a share of the Common Stock of
the Company on the Exercise Date. The fair market value of the Company's
Common Stock on a given date 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 closing sale price
or, if not so reported, the mean of the bid and asked prices of the Common
Stock for such date, as reported in either case in The Wall Street Journal (or,
if not so reported, as otherwise reported by the National Association of
Securities Dealers Automated Quotation (NASDAQ) System) 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 such date, as reported in The
Wall Street Journal.
8. Exercise of Option. Unless a participant withdraws from the
Plan as provided in paragraph 10, his option for the purchase of shares will be
exercised automatically on the Exercise Date of the offering period, and the
maximum number of full shares subject to option will be purchased for him at
the applicable option price with the accumulated payroll deductions in his
account. The shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Exercise Date. During his
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him.
9. Delivery. As promptly as practicable after the Exercise Date
of each offering period, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his option. Any cash remaining to the credit of a
participant's account under the Plan after a purchase by him of shares at the
termination of each offering period, or which is insufficient to purchase a
full share of Common Stock of the Company, shall be retained in the
participant's account for the subsequent offering period, subject to earlier
withdrawal by the participant as provided in paragraph 10.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all
the payroll deductions credited to his account under the Plan at any time prior
to the Exercise Date of the offering period by giving written notice to the
Company. All of the participant's payroll deductions credited to his account
will be paid to him promptly after receipt of his notice of withdrawal and his
option for the current period will be automatically terminated, and no further
payroll deductions for the purchase of shares will be made during the offering
period.
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(b) Upon termination of the participant's Continuous
Status as an Employee prior to the Exercise Date of the offering period for any
reason, including retirement or death, the payroll deductions credited to his
account will be returned to him or, in the case of his death, to the person or
persons entitled thereto under paragraph 14, and his option will be
automatically terminated.
(c) In the event an Employee fails to remain in
Continuous Status as an Employee of the Company for at least twenty (20) hours
per week during the offering period in which the employee is a participant, he
will be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to his account will be returned to him and his option
terminated.
(d) A participant's withdrawal from an offering period
will not have any effect upon his eligibility to participate in a succeeding
offering period or in any similar plan which may hereafter be adopted by the
Company.
11. Interest. No interest shall accrue on the payroll deductions
of a participant in the Plan.
12. Stock.
(a) The maximum number of shares of the Company's Common
Stock which shall be made available for sale under the Plan shall be 1,650,000
shares, subject to adjustment upon changes in capitalization of the Company as
provided in paragraph 18. If the total number of shares which would otherwise
be subject to options granted pursuant to Section 7(a) hereof during an
offering period exceeds the number of shares then available under the Plan
(after deduction of all shares for which options have been exercised or are
then outstanding), the Company shall make a pro rata allocation of the shares
remaining available for option grant in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Company shall give written notice of such reduction of the number of shares
subject to the option to each Employee affected thereby and shall similarly
reduce the rate of payroll deductions, if necessary.
(b) The participant will have no interest or voting right
in shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the
Plan will be registered in the name of the participant or jointly (with right
of survivorship) in the name of the participant and another person, such as his
spouse, whom the participant designates.
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13. Administration. The Plan shall be administered by the Board
of the Company or a committee of members of the Board appointed by the Board.
The administration, interpretation or application of the Plan by the Board or
its committee shall be final, conclusive and binding upon all participants.
Members of the Board who are eligible Employees are permitted to participate in
the Plan, provided that:
(a) Members of the Board who are eligible to participate
in the Plan may not vote on any matter affecting the administration of the Plan
or the grant of any option pursuant to the Plan.
(b) If a Committee is established to administer the Plan,
no member of the Board who is eligible to participate in the Plan may be a
member of the Committee.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to the end of the offering period but prior to delivery to him of
such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to the
Exercise Date of the offering period.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known
to the Company, then to such other person as the Company may designate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option
or to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in paragraph 14 hereof) by the participant. Any
such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with paragraph 10.
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16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose,
and the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees promptly following the Exercise Date, which statements will set forth
the amounts of payroll deductions, the per share purchase price, the number of
shares purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the number of shares of
Common Stock covered by each option under the Plan which has not yet been
exercised and the number of shares of Common Stock which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the price per share of Common Stock
covered by each option under the Plan which has not yet been exercised, 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 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 issue 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.
In the event of the proposed dissolution or liquidation of the
Company, the offering period will 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 offering period shall terminate as of a date fixed by the
Board and give each Plan participant the right to exercise his option as to all
or any part of the shares subject to option thereunder, including shares as to
which the option 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, each option under the
Plan shall be assumed or an equivalent option 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 to
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<PAGE> 52
substitute an equivalent option, the Board shall, in lieu of such assumption or
substitution, provide for the Plan participant to have the right to exercise
the option as to all of the shares subject to option thereunder, including
shares as to which the option would not otherwise be exercisable. If the Board
makes an option fully exercisable in lieu of assumption or substitution in the
event of a merger or sale of assets, the Board shall notify the Plan
participant that the option shall be fully exercisable for a period of thirty
(30) days from the date of such notice, and the option will terminate upon the
expiration of such period.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the
price per share of Common Stock covered by each outstanding option, in the
event that the Company effects one or more reorganizations, recapitalizations,
rights offerings or other increases or reductions of shares of its outstanding
Common Stock, and in the event of the Company being consolidated with or merged
into any other corporation.
19. Amendment and Termination. The Board may at any time amend,
alter, suspend or discontinue the Plan, but, except as provided in paragraph
18, no amendment, alteration, suspension or discontinuation shall be made which
would impair the rights of any participant arising out of any offering period
which has already commenced without his or her written consent. In addition,
to the extent necessary and desirable to comply with Rule 16b-3 under the
Exchange Act or with Section 423 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.
20. Notices. All notices or other communications by a participant
to the Company under or in connection with the Plan shall be deemed to have
been duly given when received in the form specified by the Company at the
location, or by the person, designated by the Company for the receipt thereof.
21. Stockholder Approval.
(a) Continuance of the Plan shall be subject to approval
by the stockholders of the Company within twelve (12) months before or after
the date the Plan is adopted. If such stockholder approval is obtained at a
duly held stockholders' meeting, it must be obtained by the affirmative vote of
the holders of a majority of the outstanding shares of the Company, or if such
stockholder approval is obtained by written consent, it must be obtained by the
unanimous written consent of all stockholders of the Company; provided,
however, that approval at a meeting or by written consent may be obtained by a
lesser degree of stockholder approval if the
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Board determines, in its discretion after consultation with the Company's legal
counsel, that such a lesser degree of stockholder approval will comply with all
applicable laws and will not adversely affect the qualification of the Plan
under Section 423 of the Code.*
(b) If and in the event that the Company registers any
class of equity securities pursuant to Section 12 of the Exchange Act, any
required approval of the stockholders of the Company obtained after such
registration shall be solicited substantially in accordance with Section 14(a)
of the Exchange Act and the rules and regulations promulgated thereunder.
(c) If any required approval by the stockholders of the
Plan itself or of any amendment thereto is solicited at any time otherwise than
in the manner described in paragraph 21(b) hereof, then the Company shall, at
or prior to the first annual meeting of stockholders held subsequent to the
later of (1) the first registration of any class of equity securities of the
Company under Section 12 of the Exchange Act or (2) the granting of an option
hereunder to an officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to
vote for the Plan substantially the same information which would be required
(if proxies to be voted with respect to approval or disapproval of the Plan or
amendment were then being solicited) by the rules and regulations in effect
under Section 14(a) of the Exchange Act at the time such information is
furnished; and
(ii) file with, or mail for filing to, the
Securities and Exchange Commission four copies of the written information
referred to in subsection (i) hereof not later than the date on which such
information is first sent or given to stockholders.
22. Conditions Upon Issuance of Shares. Shares shall not be
issued with respect to an option unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, 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.
__________________________________
* The Plan was approved at a duly held Shareholder's meeting in November
of 1987.
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As a condition to the exercise of an option, the Company may require the
person exercising such option 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 applicable provisions of law.
23. 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 paragraph 21. It shall
continue in effect for a term of twenty (20) years unless sooner terminated
under paragraph 19.
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<PAGE> 55
OCTEL COMMUNICATIONS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT FORM
Date of enrollment: _________________
1. I, ________________________, hereby elect to participate in the Octel
Communications Corporation 1987 Employee Stock Purchase Plan (the
"Stock Purchase Plan") and subscribe to purchase shares of the
Company's Common Stock, without par value, in accordance with this
enrollment form and the Stock Purchase Plan.
2. I hereby authorize the Company to deduct from each paycheck ____% of
my GROSS PAY for each payday during this Offering Period, and each
subsequent offering period during which I am eligible to participate,
in accordance with the provisions of the Stock Purchase Plan. I also
understand that this calculated amount will be deducted from my NET
PAY, or after all payroll taxes.
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock, without par value, at the
applicable purchase price determined in accordance with the Stock
Purchase Plan. I further understand that, except as otherwise set
forth in the Stock Purchase Plan, unless I withdraw from the Stock
Purchase Plan by giving written notice to the Company, shares will be
purchased for me automatically on the Exercise Date of each offering
period subsequent to my filing of this enrollment form.
4. I understand that, before the Exercise Date for this Offering Period,
the Company will provide me with a copy of the Company's most recent
prospectus describing the 1987 Employee Stock Purchase Plan, and
thereafter will provide me with annual updates and copies of any
revised versions of the prospectus. Therefore, before my options
received under the Plan are exercised to purchase Shares, I will have
the opportunity (after receiving the prospectus and before the
Exercise Date) to withdraw from the Plan and have returned to me all
the money that was deducted from my pay for the purpose of purchasing
shares. I acknowledge that I have received a copy of the complete
"Octel Communications Corporation 1987 Employee Stock Purchase Plan."
I understand that my participation in the Stock Purchase Plan is in
all respects subject to the terms of the Plan.
<PAGE> 56
5. Shares purchased for me under the Stock Purchase Plan should be issued
in the name(s) of:
Your name _________________________________________________
As you wish it to appear on the stock certificate
and
Other* _________________________________________________
As you wish it to appear on the stock certificate
* Please Note: If you wish for another person's name to appear on the stock
certificate in addition to you own, you must check off one of the selections
below to specify the type of ownership. This selection will be indicated on
your stock certificate.
_____ TENANTS IN COMMON - Abbreviated as "TEN COM," may be specified to
identify two or more owners.
_____ JOINT TENANCY WITH RIGHT OF SURVIVORSHIP AND NOT AS TENANTS IN COMMON
- Abbreviated as "JT TEN," may be specified to identify two or more
joint owners.
_____ TENANTS BY THE ENTIRETIES - Abbreviated as "TEN ENT," (not appropriate
for California residents) may be specified for ownership by husband
and wife.
_____ COMMUNITY PROPERTY - If specified, will not be abbreviated.
6. I understand that if I dispose of any shares received by me pursuant
to the Plan, either (1) within 2 years after the Offering Date (the
first day of the offering period during which I purchased such shares)
or (2) within 1 year after the date on which such shares were
transferred to me, I will be treated for federal income tax purposes
as having received ordinary income at the time of such disposition in
an amount equal to the excess of the fair market value of the shares
at the time such shares were transferred to me over the price which I
paid for the shares.
I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER
THE DATE OF ANY SUCH DISPOSITION.
However, if I dispose of such shares at any time after the expiration
of the 2-year and 1-year holding periods, I understand that I will be
treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be treated
as ordinary income only to the extent of an amount equal to the lesser
of (1) the
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<PAGE> 57
excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares under
the option, or (2) the excess of the fair market value of the shares
over the option price, measured as if the option had been exercised on
the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or
loss. The federal income tax treatment of ordinary income and capital
gain and loss is described in the Company's prospectus relating to the
Stock Purchase Plan.
7. I hereby agree to be bound by the terms of the Stock Purchase Plan. I
understand that my enrollment is dependent upon my eligibility to
participate in the Stock Purchase Plan.
8. I FURTHER ACKNOWLEDGE AND UNDERSTAND THAT THE COMPANY'S OBLIGATION TO
SELL SHARES TO ME IS CONDITIONAL UPON COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS, AND SPECIFICALLY CONDITIONAL UPON
THE EXISTENCE OF AN EFFECTIVE REGISTRATION STATEMENT REGARDING THE
SHARES WHICH I WILL PURCHASE ON THE DATE OF THAT PURCHASE.
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9. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under
the Stock Purchase Plan:
NAME: (Please print)_________________________________________________
(First) (Middle) (Last)
__________________________ ____________________________________
Relationship
____________________________________
(Address)
NAME: (Please print)_________________________________________________
(First) (Middle) (Last)
__________________________ ____________________________________
Relationship
____________________________________
(Address)
NAME: (Please print)_________________________________________________
(First) (Middle) (Last)
__________________________ ____________________________________
Relationship
____________________________________
(Address)
NAME: (Please print)_________________________________________________
(First) (Middle) (Last)
__________________________ ____________________________________
Relationship
____________________________________
(Address)
Note: You may use the back side of this form to list any additional
beneficiary(ies) than those above or attach a list of your own.
* * * * * * * * * * * * * * * * * * *
Dated:____________________ ____________________________________
Signature of Employee
Print Name: _______________________
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<PAGE> 59
OCTEL COMMUNICATIONS CORPORATION
1988 DIRECTORS' STOCK OPTION PLAN
As Amended September 1994
1. Purposes of the Plan. The purposes of this Directors' Stock Option Plan
are to attract and retain the best available personnel for service as Directors
of the Company, to provide additional incentive to the Outside Directors of the
Company to serve as Directors, and to encourage their continued service on the
Board.
All options granted hereunder shall be "nonstatutory stock options."
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(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) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director.
(f) "Director" shall mean a member of the Board.
(g) "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 in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(i) "Option" shall mean a stock option granted pursuant to the Plan.
(j) "Optioned Stock" shall mean the Common Stock subject to an Option.
<PAGE> 60
(k) "Optionee" shall mean an Outside Director who receives an Option.
(l) "Outside Director" shall mean a Director who is not an Employee.
(m) "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 425(e) of the Code.
(n) "Plan" shall mean this 1988 Directors' Stock Option Plan.
(o) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(p) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 425(f) of the Code.
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 sold
under the Plan is 300,000 Shares (the "Pool") 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. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in
any event be returned to the Plan and shall not become available for future
grant under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the Plan shall be
administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance with
the following provisions:
(i) No person shall have any discretion to select
which Outside Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
<PAGE> 61
(ii) Each Outside Director shall be automatically
granted an Option to purchase 25,000 Shares upon the date (on or after the
effective date of this Plan) on which such person first becomes a Director,
whether through election by the stockholders of the Company or appointment by
the Board of Directors to fill a vacancy.
(iii) Each Outside Director shall automatically
receive, on the date of each Annual Meeting of Stockholders, an Option to
purchase 3,000 Shares of the Company's Common Stock, such Option to become
exercisable immediately unless a later date is specified in the written
agreement therefor in order to comply with Section 16 of the Exchange Act;
provided however, that such Option shall only be granted to Outside Directors
who have served since the date of the last Annual Meeting of Stockholders and
will continue to serve after the date of grant of such Option.
(iv) Each Outside Director who has been serving
since the August 1989 amendments to the Plan and did not receive any option
grant prior to January 1, 1988, shall receive a one-time automatic grant of an
option to purchase 10,000 shares of the Company's Common Stock as of November
21, 1991. Such one-time automatic grant may be in addition to any similar
grant received pursuant to the Plan as amended in August 1989.
(v) Each Outside Director serving during fiscal
1992 who did not otherwise receive a grant under subparagraph (iv) shall
receive a one-time automatic grant of an option to purchase 10,000 shares of
the Company's Common Stock as of April 22, 1992. Such one-time automatic grant
may be in addition to any similar grant received pursuant to the Plan as
amended in August 1989.
(vi) The terms of an Option granted hereunder
shall be as follows:
(A) the term of the Option shall be
five (5) years and seven (7) months.
(B) the Option shall be exercisable only
while the Outside Director remains a Director of the
Company, except as set forth in Section 9 hereof.
(C) the exercise price per Share shall
be 100% of the fair market value per Share on the
date of grant of the Option.
(D) any Option granted pursuant to
subsections 4(b)(ii), (iv) or (v) above shall become
exercisable in installments cumulatively with respect
to 20% of the aggregate number of Shares subject to
the Option on each of the first five annual
anniversaries of the date of grant of such Option;
provided however, that if the Optionee is
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unable to continue his service as a
director of 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 become
exercisable as to 1/3 of the aggregate number of
Shares subject to the Option on each of the first
three annual anniversaries of the date of grant of
the Option.
(E) To the extent necessary to comply
with the applicable provisions of Rule 16b-3
promulgated under the Exchange Act ("Rule 16b-3"), no
Option will be exercisable until a date more than six
months subsequent to the date of the grant of that
Option.
(c) Powers of the Board. Subject to the provisions and
restrictions of the Plan, the Board shall have the authority, in its
discretion: (i) to determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the Common
Stock; (ii) to determine the exercise price per share of Options to be granted,
which exercise price shall be determined in accordance with Section 8(a) of the
Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules
and regulations relating to the Plan; (v) to authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
Option previously granted hereunder; and (vi) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions,
determinations and interpretations of the Board shall be final and binding on
all Optionees and any other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the
President of the Company or his designee reasonably believes that an Optionee
has committed an act of misconduct, the President may suspend the Optionee's
right to exercise any option pending a determination by the Board of Directors
(excluding the Outside Director accused of such misconduct). If the Board of
Directors (excluding the Outside Director accused of such misconduct)
determines an Optionee has committed an act of embezzlement, fraud, dishonesty,
nonpayment of an obligation owed to the Company, breach of fiduciary duty or
deliberate disregard of the Company rules resulting in loss, damage or injury
to the Company, or if an Optionee makes an unauthorized disclosure of any
Company trade secret or confidential information, engages in any conduct
constituting unfair competition, induces any Company customer to breach a
contract with the Company or induces any principal for whom the Company acts as
agent to terminate such agency relationship, neither the Optionee nor his
estate shall be entitled to exercise
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any option whatsoever. In making such determination, the Board of Directors
(excluding the Outside Director accused of such misconduct) shall act fairly
and shall give the Optionee an opportunity to appear and present evidence on
Optionee's behalf at a hearing before a committee of the Board.
5. Eligibility. Options may be granted only to Outside
Directors. All Options shall be automatically granted in accordance with the
terms set forth in Section 4(b) hereof.
The Plan shall not confer upon any Optionee any right with
respect to continuation of service as a Director or nomination to serve as a
Director, nor shall it interfere in any way with any rights which the Director
or the Company may have to terminate his directorship at any time.
6. Term of Plan. The Plan shall become effective upon the
earlier of (i) its adoption by the Board or (ii) 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 (until November 30, 1998)
unless sooner terminated under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be five (5)
years and seven (7) months from the date of grant thereof.
8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be 100% of the fair
market value per Share on the date of grant of the Option.
(b) Fair Market Value. 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 closing bid price of the Common Stock in the over-the-counter market on
the date of grant, as reported in The Wall Street Journal (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System) or, in the event the Common
Stock is traded on the NASDAQ National Market System or listed on a stock
exchange, the fair market value per Share shall be the closing price on such
system or exchange on the date of grant of the Option, as reported in The Wall
Street Journal.
(c) Form of Consideration. Subject to compliance with
applicable provisions of Section 16b of the Exchange Act, (or other applicable
law), the consideration to be paid for the Shares to be issued upon exercise of
an Option, including the method of payment, shall be determined by the Board
and may consist entirely of
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(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
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 shall be exercised, (v) authorization for the
Company to retain from the total number of Shares as to which the Option 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).
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times as are set forth in
Section 4(b) hereof; provided, however, that no Options shall be exercisable
until stockholder approval of the Plan in accordance with Section 17 hereof has
been obtained.
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 consist of any consideration and method of
payment allowable under Section 8(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. A share certificate for the number of Shares so
acquired shall be issued to the Optionee as soon as practicable after exercise
of the Option. No adjustment will be made for a dividend or other right
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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 may 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.
(b) Termination of Status as a Director. If an Outside
Director ceases to serve as a Director, he may, but only within seven (7)
months after the date he ceases to be a Director of the Company, exercise his
Option to the extent that he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise an 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.
(c) Disability of Optionee. Notwithstanding the
provisions of Section 9(b) above, in the event an Optionee is unable to
continue his service as a Director with the Company as a result of his total
and permanent disability (as defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended), he may, but only within seven (7) months
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.
(d) Death of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of the death of an Optionee:
(i) during the term of the Option who is at the
time of his death a Director of the Company and who shall have been in
Continuous Status as a Director since the date of grant of the Option, the
Option may be exercised, at any time within seven (7) 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
(ii) within thirty (30) days after the termination
of Continuous Status as a Director, the Option may be exercised, at any time
within seven (7) 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 termination.
MEB2BZ.R2(5P3)
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<PAGE> 66
10. Non-Transferability of Options. The Option 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, only by the Optionee.
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 the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, 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.
In the event of the proposed dissolution or liquidation of the
Company, the Option will 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 shall terminate as of a date fixed by the Board and give each Optionee
the right to exercise his Option as to all or any part of the Optioned Stock,
including Shares as to which the Option 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, the
Option shall be assumed or an equivalent option 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 to
substitute an equivalent Option, the Board shall, in lieu of such assumption or
substitution, provide that the Optionee shall have the right to exercise the
Option as to all of the Optioned Stock, including Shares as to which the Option
would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Board shall notify the
MEB2BZ.R2(5P3)
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<PAGE> 67
Optionee that the Option shall be fully exercisable for a period of fifteen
(15) days from the date of such notice, and the Option 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. The date of grant of an Option
shall, for all purposes, be the date determined in accordance with Section 4(b)
hereof. Notice of the determination shall be given to each Outside Director to
whom an Option is so granted within a reasonable time after the date of such
grant.
13. Amendment and Termination of the Plan.
(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 any other applicable law or regulation), the Company shall
obtain shareholder 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 already granted
and such Options shall remain in full force and effect as if this Plan had not
been amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by the
Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be
issued pursuant to the exercise of an Option unless the exercise of such Option
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, state securities laws, 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, the Company may
require the person exercising such Option 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
MEB2BZ.R2(5P3)
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<PAGE> 68
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.
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 liability in respect of the failure
to issue or sell such Shares as to which such requisite authority shall not
have been obtained.
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.
16. Option Agreement. Options shall be evidenced by written
option agreements in such form as the Board shall approve.
17. Stockholder Approval.
(a) Continuance of the Plan shall be subject to approval
by the stockholders of the Company at or prior to the first annual meeting of
stockholders held subsequent to the granting of an Option hereunder. 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
outstanding shares of the Company present or represented and entitled to vote
thereon. If such stockholder approval is obtained by written consent, it may
be obtained by the written consent of the holders of a majority of the
outstanding shares of the Company.
(b) Any required approval of the stockholders of the
Company shall be solicited substantially in accordance with Section 14(a) of
the Exchange Act and the rules and regulations promulgated thereunder.
18. Information to Optionees. The Company shall provide to each
Optionee, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports to stockholders, proxy statements and
other information provided to all stockholders of the Company.
MEB2BZ.R2(5P3)
09/11/94 -10-
<PAGE> 69
(Front cover)
OCTEL COMMUNICATIONS CORPORATION
[Four drawings of various types of
communication using the telephone as a terminal]
1994 ANNUAL REPORT
<PAGE> 70
(Inside front cover)
CORPORATE PROFILE
Octel Communications Corporation is a leading international supplier of voice
information processing systems. Since the Company's founding in 1982, Octel
has applied its technology in creative ways, allowing individuals to be more
productive through effective and easy-to-use communications.
With Octel's integrated voice information processing solution, a voice
mailbox can function as a multimedia mailbox allowing users to access, manage
and integrate voice, image and data information across the worldwide telephone
network.
MISSION STATEMENT
To provide products and services that improve communications using the
telephone as a terminal.
FINANCIAL HIGHLIGHTS
SELECTED CONSOLIDATED 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 $ 1.19 $ 1.08 $ 0.598 $ 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 . . . . . . . . . . . . . . $ 132,733 $ 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 share and
equivalent share would have been $39.3 million, $32.3 million and $1.27,
respectively.
CONTENTS
Letter to Stockholders 1
Form 10-K 9
Corporate Directory 70
Corporate Information 71
<PAGE> 71
(Letter to the Stockholders - Pages 1 thru 8)
Photo (Bob Cohn)
LETTER TO STOCKHOLDERS
IN THE LETTER BELOW, I WOULD LIKE TO SPEAK TO YOU FROM MY HEART TO TELL YOU
ABOUT OUR COMPANY AND WHERE WE SEE OUR FUTURE. HOWEVER, IN THIS LITIGIOUS
CLIMATE WHERE COMPANIES ARE SUED IN CLASS ACTION SUITS FOR EXPRESSING OPTIMISM
IN THEIR FUTURE AND THEN NOT ACHIEVING RESULTS PEOPLE EXPECT, OUR LAWYERS HAVE
ADVISED THAT WE ADD THIS WARNING. IN THE LETTER BELOW, I WOULD LIKE TO EXPRESS
TO YOU WHERE WE SEE OPPORTUNITIES FOR GROWTH (I.E., POTENTIAL) AND DESCRIBE TO
YOU THE KINDS OF THINGS WE BELIEVE OCTEL MUST DO TO BE ABLE TO ACHIEVE THAT
POTENTIAL. THESE ARE NOT PROJECTIONS OR PROMISES -- THEY ARE EXPRESSIONS OF
WHAT WE SEE, WHAT WE WOULD LIKE TO ACCOMPLISH AND WHAT WE ARE COMMITTED TO WORK
VERY HARD TO ATTEMPT. THERE ARE NO GUARANTEES.
In many respects, fiscal 1994 marked a pivotal point in Octel's
history. Our charter moving forward is to maintain our momentum and renew the
entrepreneurial spirit that has animated our company from its infancy. We
believe there is a large opportunity for Octel to grow at strong rates in
future years and an even bigger chance for us to increase the rate of profit
growth and profitability. Fiscal 1995 will be a building year as we catch up
on strengthening our infrastructure and product offerings to enable us to take
advantage of these opportunities.
We have plenty of opportunity in all of our business sectors and in
some new (related) areas that are now emerging. To some, "the voice mail
business" may seem like a slowing, maturing business that's losing its sparkle.
To me, this is a business that's finally "caught on!" If we are successful at
our major projects and activities, we can become a major force in the
telecommunications industry worldwide with great growth to come.
Last year, with much enthusiasm, I rejoined Octel as president and
CEO. Our company's continuing goal is to provide better, faster and more
affordable products and services to improve communications using the telephone
as a terminal. This vision powered our growth in fiscal 1994. We are now
leading Octel into its next phase of growth, during a period of exciting
opportunity.
In this letter, I'd like to share with you why I have strong
enthusiasm for this industry and particularly Octel's potential to lead it at
an exciting pace. I'll try to explain where our potential is in each market
segment, why we are the best positioned in this industry to continue to lead
and, finally, where we think our growth will come from. Then I'd like to
review our performance for the year and some of the challenges we have been
dealing with as we look ahead.
LARGE POTENTIAL IN CPE
The market for our systems and services to corporations, institutions
and governments for their own use is called the CPE (Customer Premises
Equipment) market. We are proud to have the leading market share in CPE in
virtually all geographic areas. We have a very strong product offering for our
customers that is unparalleled in the industry. Our powerful voice processing
product, which works with nearly every brand of PBX system sold in the Western
world, offers the best in such features as voice mail, telephone answering,
automated attendant, information center and powerful inter-system networking.
This past year we introduced several very successful fax products so that our
voice mail systems take not only voice messages but fax messages as well.
These features can be retrofitted onto virtually any Octel(R) system shipped in
the past. We also began shipping Visual Mailbox(TM) for the VMX(R) product
line. This is our first software offering for desktop PCs that provides a
visual point of access to both fax and voice messages.
<PAGE> 72
We have the two most popular user interfaces in the world (Octel and
VMX). We have three extensive lines of proprietary hardware products that
offer high reliability, high capacity and high performance to our customers.
We offer a line of PC-based voice mail products that are sold both to small
sites of major accounts as well as thousands of smaller companies. We have
also developed leading-edge technology that puts voice mail on a LAN system.
As LANs, WANs and e-mail become more pervasive and capable of much higher
bandwidths and as PCs become increasingly powerful, voice mail may be provided
on LANs. We have partnered with the leading e-mail LAN Desktop software
providers to deliver products in this area. Finally, our networking products
allow customers to link any Octel systems together with smooth convenience and
soon will provide the same connectivity between VMX products and all Octel
products.
Our growth opportunities in CPE are from the following areas:
- WITHIN NORTH AMERICA, SELLING SYSTEMS TO COMPANIES AND
LOCATIONS THAT DO NOT NOW HAVE VOICE MAIL. While some surveys
suggest that over three-quarters of major companies now have
purchased voice mail, we believe that a fair percentage of the
sites at these companies do not yet have voice mail.
- OUTSIDE NORTH AMERICA, THE CPE MARKET IS JUST BEGINNING. It
is probably where the U.S. market was 10 years ago, and it is
possible that it could develop similarly in several countries.
We are already seeing this growth beginning in the U.K., and
we should see it develop elsewhere over the next several
years. We are expanding our international sales force to
prepare for and drive this growth.
- POWERFUL NEW FEATURES TO THE INSTALLED BASE. We have only
recently started to focus on taking advantage of our installed
base. With strong new features such as Visual Mailbox, fax
products and many important convenience features that respond
to user demand, we have a lot to sell to our installed base of
37,000 systems. Further, only Octel can provide these new
features to Octel systems previously sold. In addition, as we
continue to make technology enhancements, we will offer
customers attractive upgrade options.
- HELPING CUSTOMERS INCREASE THE AMOUNT OF VOICE MAIL ON OUR
SYSTEMS (RATHER THAN JUST TELEPHONE ANSWERING). Today only
about one-third of the people who use our systems understand
the power of "two-way messaging" (see Voice Processing Terms
below). The remaining two-thirds use the system for telephone
answering only. Those ratios should be reversed. We are
putting together programs and designing features to encourage
users to send voice mail more. If this happens as we hope,
then our customers will need to expand the capacity of their
systems to handle the increased usage. Only Octel can sell
the products that increase the capacity on Octel systems.
- REPLACEMENT MARKET. There are many older voice mail systems
in the market that were sold by competitors that could be a
good opportunity for Octel to replace. We will offer
compelling trade-in programs to replace other voice mail
systems with Octel products.
- COST REDUCTIONS. On the margin side, we will be vigorously
reducing our costs while at the same time increasing our
quality and flexibility. In the past we did not put adequate
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<PAGE> 73
resources into projects to reduce our costs for the Aspen(R)
line of product(1) and we believe there is substantial
opportunity to do so.
- OCTEL NETWORK SERVICES. A valuable component to our offering
to customers is services (as opposed to service). Some of our
customers don't want to buy hardware but would rather rent
services. More importantly, many of our long-time CPE
customers are recognizing the value of outsourcing the
management of their large and increasingly complex voice mail
networks. Octel, through its subsidiary, Octel Network
Services (formerly Tigon), is the largest voice mail
outsourcing organization in the world. We receive recurring
revenue from this activity and provide customers with system
management, through proprietary tools developed over many
years, that no one else can provide. Octel Network Services
(ONS) provides many services including complete voice mail
network management, disaster recovery, voice processing
services, operations management, systems administration and
project management. This is a potent tool against all of our
competitors and a major reason why many customers choose Octel
as their primary supplier.
A major win for ONS along these lines occurred this year when EDS
(Electronic Data Systems) selected ONS as the voice processing service
provider both for EDS and for its customers throughout the United
States. Octel has sold CPE systems to EDS for many years. The
success of that alliance has now developed into a seven-year agreement
whereby ONS will provide facilities management and services for more
than 100 Octel voice processing systems at EDS sites across the
country. There are many other long-term agreements that ONS has
entered into with companies such as Kodak, Texas Instruments,
Blockbuster Entertainment and Raychem. Other ONS major customers
include the government offices of two midwestern states, a major
automobile manufacturer, one of the largest food conglomerates and one
of the world's largest banks.
ONS has over 700,000 end users from over 600 customers. The ability
to provide the combination of systems, services and facilities
management is available from very few (if any) other competitors and
is an important advantage of Octel.
VIS MARKET IS ALSO HIGH POTENTIAL
The VIS (Voice Information Services) market is the market where we
sell our systems or services to phone companies, cellular companies or other
service providers. They, in turn, rent the service of voice mail, or other
features of our systems, to businesses or consumers. Services we provide in
this market are typically behind the scenes. That is, we private label the
services so consumers don't know they are dealing directly with Octel. For
example, we provide all of Ameritech's residential voice mail services
including training and trouble calls but we do it in the name of Ameritech's
operating companies. In that case, Ameritech markets the service with their
name but we do all the "backroom" service provision and trouble handling.
Systems used in providing these services are manufactured by Octel.
Machines that we sell to this market are typically very high capacity,
highly specialized systems that are located inside the central office of a
phone company or service provider. We were the first to enter this business
and are proud to be leading it worldwide. Our Sierra(R) product has been the
leader in this market and this year was expanded by shipment of our clustered
Sierra system that offers system capacity of 432 ports, about triple the ports
of our previously largest system. Sierra meets the tough Network Equipment
__________________________________
(1) This includes the Branch(R), Branch XP, Aspen(R), Maxum(R) and XC1000
products.
-3-
<PAGE> 74
Building Standards (NEBS) often required of gear going into central offices as
well as offering unparalleled reliability. Our direct sales organization is
very experienced and the service and support network is a strong competitive
weapon. If anything should happen to our systems, our customers can rely on
prompt and thorough service -- something very critical when the services they
offer, namely voice processing, are critical to their customers. In fact, we
believe that our service and support organization is a strategic weapon.
Worldwide -- and in most geographic areas -- our market share is substantially
higher than any competitor.
In North America, virtually all the major cellular companies and phone
companies use our products and services. Overseas, we have sold substantial
installations to many wireless providers in Europe and elsewhere, and we see
that as a strong potential market. Residential use of the technology is
widespread in the U.S. and Canada but barely starting overseas.
The product is a natural for wireless phones (like cellular) because
it is the best and most economical way to provide telephone answering for these
types of phones. While it is of great benefit to the consumer, it also is a
major revenue generator for the wireless provider in that our systems "pay for
themselves" in one to two years at the outset and very often in less than a
year.
Our growth opportunities in VIS are from the following areas:
GROWTH IN THE WIRELESS MARKET. Overseas, wireless providers are
growing at a faster rate than we can keep up with. That growth is quite
remarkable and we believe we should be at the forefront of that. Competition
is increasing but we have many important installations, product strengths and
support benefits that will help us be one of the (if not "the") major player in
those markets. In North America, there are two areas of potential for us.
First, other wireless providers are springing up beyond the two cellular
providers now common in most cities. Since voice mail is such a strong
offering in the wireless market, we believe the new providers will want voice
mail for all subscribers as part of their basic offering. Second, cellular
providers are looking for new services to increase network usage now that they
are attracting large amounts of users who buy phones for casual or emergency
use but don't use them much. We have just introduced some new services that
are meeting with good response and that can increase network usage by casual
users in a way that benefits both the consumer and the cellular company. This
may add a new dimension to voice mail systems already installed and give us a
potential to sell additional software to our large base of installed systems.
We are working diligently on making our systems more flexible to meet
the highly specialized needs of each of these markets so that we win as much
business as we can. These changes to our systems will be backward
retrofittable to all our systems but will give us substantially more
expandability and flexibility than we currently have. We believe that Sierra
is a very strong offering today. But with these changes, which will take some
time to develop, we hope to make Sierra very tough to beat. As with CPE, we
are expanding our overseas sales organization to address this market growth.
VOICE MESSAGING IN THE RESIDENTIAL MARKET (services offered to
consumers at their home phones) has great potential. Millions of people are
using voice mail from their homes now, but it is a fraction of who could and
should. Today, almost all residential offerings are for telephone answering.
Experiments done with our equipment in the province of New Brunswick, Canada,
by New Brunswick Tel have shown that voice messaging has even greater potential
than telephone answering. Voice messaging would allow messaging between two
parties where they didn't originally place a phone call. For example, a little
league coach could send a message to all the parents of a team advising of
changes in the practice schedule. With voice messaging, schools could improve
communications between teachers and parents or between parents and parents.
This is done by recording messages on our system and sending them to single
destinations or to group lists (lists of home phone numbers). Initial usage in
these areas has been very successful. Over
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<PAGE> 75
time, the concept of voice mail rather than telephone answering would
dramatically increase the need for systems in phone companies. We believe
Octel has a competitive advantage in voice mail services because we have the
greatest experience with it among all competitors.
OCTEL NETWORK SERVICES, mentioned previously in the discussion on the
CPE business, also is an important piece of our VIS business. ONS provides an
important tool in that we can offer any service provider full turn-key service
provision including training and trouble calls. The phone company (or service
provider) can focus on marketing, billing and getting to market much faster
than if they owned and managed their own systems. We supply voice mailboxes to
over 400,000 residential customers at Ameritech, the midwestern Regional Bell
Operating Company, and the number is growing rapidly each month. Ameritech
also markets ONS-supplied voice mailboxes and other services to its small
business and Centrex customers. Ameritech recently signed a multimillion
dollar agreement for the delivery of expanded services through the end of the
decade.
A major milestone for ONS occurred in the fourth quarter of fiscal
1994 when we signed a large contract with a major long distance carrier
allowing ONS to provide all capabilities in support of its private branded
voice messaging service offering to its corporate accounts. ONS forged a
number of other strategic partnerships with service providers including Cable
and Wireless and MFS Intelenet, Inc., a wholly owned subsidiary of MFS
Communications Company Inc., where ONS provides private labeled services that
are remarketed by the service providers.
VIRTUAL TELEPHONES presents perhaps the biggest potential in the
company. Emerging countries aren't able to install telephones to consumers
very quickly for many reasons. It isn't generally an issue of money -- it's
more structural. Phone lines can't be laid quickly and in many cases the
buildings are inadequate to wire permanently. Yet, without phone service, the
basic economy is stuck. By installing a very large voice mail system at each
central office, the phone company can immediately provide any consumer a phone
number and a voice mailbox. While the conversation is not "real time," people
can now get the equivalent of having a phone without the actual hardware. All
they do is go to any pay phone and check messages. They can also send messages
from any pay phone to anyone else's voice mailbox. Octel has major
installations in Brazil and China and early usage has been very positive. We
believe this market could be validated within the next few years and could
present a multibillion dollar potential if significant population groups in
emerging countries adopt this concept. Octel was one of the first to enter
this market, and we are working hard to build products, services and
infrastructure in our attempt to win the leadership in what will certainly be a
large but competitive market.
1994 - A BREAKTHROUGH YEAR
On March 31, 1994, Octel merged with VMX, Inc., a pioneer and major
force in the CPE segment of the voice processing market. The strengths of the
two companies are complementary and will add significant value for our
customers, employees and shareholders.
So far, the transition has been smooth, with rapid integration taking
place in all areas of the company. We are continuing to support fully both the
Octel and VMX product lines, offering users expanded product features and
software upgrades.
Together, Octel and VMX constitute a powerful global presence,
supplying products in over 42 countries, with a combined installed base of
37,000 systems and over 28,000 customers, enhanced capabilities to deliver
voice processing software and services and a broader range of voice processing
technology joining forces on new products that link PCs, LANs and voice
processing equipment.
-5-
<PAGE> 76
Results of fiscal 1994 reflected success in all key domestic and
international markets, including customer premise equipment (CPE), voice
information services (VIS) and customer services. Net revenues for the year
grew by 20% to a record $406.2 million, as compared to fiscal 1993. Net income
was $32.3 million, or $1.27 per share, excluding certain merger-related charges
taken in the third quarter. After deducting the one-time merger related
charges, net income was $13.5 million, or $.54 per share.
In the fourth quarter -- the first full quarter after the Octel/VMX
merger, net revenues increased 15% from the fourth quarter of 1993, to $116.5
million, and net income rose by 4%, to $10.7 million or $.43 per share. These
results demonstrate positive customer response to Octel's broad set of
equipment and service offerings. While our competitors had hoped our merger
would not be accepted by our customers, our fourth quarter performance was
quite strong and shows that the combination of VMX and Octel was well accepted
by our customers and is meaningful to the marketplace.
In fiscal 1994 we completed our new corporate headquarters and are
very proud of our new home. It is a five-building complex encompassing 368,000
square feet of space. The project was completed on-time and within 2% of
budget. This new campus expands our space by over 70% and will lower our
per-square-foot occupancy cost by around 30%. It will also house all of the
employees located at the former VMX San Jose headquarters.
The facility was designed from the outset to provide a better working
environment for our employees. It contains over 300 tons of electronic gear
for our engineering group as well as state of the art telephone and data
communications gear for everyone. It has a complete fitness center and
incorporates advanced, energy-efficient lighting and heating systems. Among
many other attributes, the facility improves communications between employees
by making it easier to get around within the five buildings. A large cafeteria
and the park-like landscaping behind the buildings provides a setting that
increases employee interaction and communications. Initial reaction to the
facility by our employees has been very positive. The work environment has
improved substantially, the facility is nicer, it's less costly than before --
and it is ours!
STRENGTHENED MANAGEMENT TEAM
Octel achieved another goal in fiscal 1994 -- bringing together the
most experienced and talented team in the industry to help us reach our
objectives. During the year, we appointed three new vice presidents. Mike
Gilbert joined us as vice president of engineering to head up our CPE, VIS,
core technology and VMX engineering groups. Margaret Norton, formerly director
of VIS marketing, was promoted to vice president of VIS marketing, and Carol
Snell recently joined Octel as vice president of CPE marketing. We were also
very fortunate to add to our company several key executives from VMX as part of
the merger. Dave Ladd, one of the founders of the predecessor to VMX (OPCOM)
is now an executive vice president and chief technology officer of Octel. Ed
Mattiuz, formerly the chief operating officer of VMX, is now our vice president
running international operations. Ray Glynn, formerly executive vice president
of sales at VMX, is now a vice president in charge of several key channels of
distribution in our sales organization. Charlie Singmaster, formerly vice
president of manufacturing at VMX, is now a vice president at Octel in charge
of all of our manufacturing.
We set a goal this year to strengthen the board in the areas of
operations, finance and international business. Toward that goal, we are
honored to have added three new board members. They are Debi Coleman, chairman
and CEO of Merix Corporation and former Apple executive; Anson Beard, Jr., a
32-year veteran of the investment banking business and former managing director
of Morgan Stanley & Co. Incorporated; and Nathaniel de Rothschild, a French
national and president of a private investment company.
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<PAGE> 77
MAJOR USES FOR OUR CASH
Octel is making major investments in its future because we believe
that there is much potential in this business if we execute properly. We
believe that we are investing as much as we can absorb in strengthening our
fundamentals and building our strengths. In addition, we have used cash from
operations to purchase our new facility because it will save us money and
improve the work environment. We have made some acquisitions (some with cash,
some with stock) because we believe these new businesses are strategically
important to our business. We also believe that, at certain prices, the
purchase of Octel stock is an excellent use of the cash that is produced from
operations. As a result, we announced the intention of repurchasing 3.5
million shares of the company's common stock from open market purchases. This
program should have the effect of reducing the overall number of shares
outstanding and increasing the earnings per share. The program may take some
time to complete but is currently well under way.
PATENTS AND LITIGATION
Octel has always had great respect for the law and intellectual
property. We hold 31 patents and have 13 more pending. Several of the patents
we hold are the definitive patents for voice mail and voice processing. We
have purchased licenses for several patents from companies whenever we believed
the technology would help us or whenever we thought we might infringe someone
else's intellectual property. We have tried to negotiate fairly and equitably
in all such licensing discussions and will continue to do so in the future. In
addition, we have tried to settle disputes as quickly and efficiently as
possible in the past, rarely resorting to the courts for dispute resolution.
Unfortunately, it has become a common practice in the U.S. for holders
of some obscure patents to sue successful companies for infringement of these
patents. Sadly, these claims are often without any merit, but the legal system
tries to be fair and allows these actions to enter the courts. Very often,
leading companies, faced with the prospect of multimillion dollar litigation by
these "patent pirates," have settled out of court for hundreds of thousands --
and sometimes millions -- of dollars because (in the short term) it may be
cheaper than the legal fees, faster than the litigation process and avoids the
unproductive and wasteful usage of key employees' time that would be consumed
in the litigation process. Because there are a large number of these facing
our industry, Octel has taken the position that it will vigorously defend in
court any action asserted against the company that is without merit so that we
can show that meritless actions taken against the company will not be
profitable for the plaintiff. We believe that this is in the best long-term
interest of stockholders even though it involves some risk because of the
inherent uncertainty of the legal process.
THE FUTURE IS HERE
Voice mail is a technology that's here to stay because it addresses
the way people behave and communicate. The telephone is generally an intrusive
device -- it is convenient for the caller but often not for the person being
called. Yet voice communication is natural, and communication through voice
mail makes telephonic communication less intrusive, more efficient and easier.
In a recent survey of employees in Fortune 500 companies, voice mail was cited
(by a big margin) as the tool that improves office productivity the most. And
voice mail is now bringing ever increasing help to people by enabling the
telephone to be the gateway to other information such as fax and "voiced"
computer information. Voice processing technology is now spreading to homes,
mobile phones and even to "virtual phones." This widespread acceptance of the
technology is opening up new and large markets and great opportunities for
Octel. We believe that communication via voice mail will someday be as
pervasive as communication by
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<PAGE> 78
letter -- not just within a corporation, but between people anywhere. We are
committed to keeping Octel at the forefront of this exciting technology.
While 1994 proved to be a breakthrough year -- in which we merged
Octel and VMX, broadened our markets worldwide, built on our existing customer
base and greatly enlarged our range of products and services -- we have new
opportunities, as well as challenges, ahead of us. In fiscal 1995, we have
five targets: to focus intensely on customer satisfaction, improve our gross
margins, reduce operating expenses, improve our competitive position and lower
our cost of doing business. In short -- to knock the ball out of the park.
Octel became the leader in its field by being the best, executing
well, treating its customers with enormous respect and being a great place to
work. This year we launched several programs to revive these values and we
will continue to do so with vigor. We have reorganized much of the management
team, de-divisionalized the company to make things happen faster and focused
the company on clear and simple corporate objectives. We are reviving the
entrepreneurial spirit, reducing or eliminating bureaucracy wherever it has
crept into the organization, speeding up our decision-making process and
increasing accountability. From a product perspective, we have many exciting
products and services under development that are targeted to provide our
customers with increased value and make a good dent in our competitors'
offerings. By making Octel an easier company with which to do business,
streamlining our operations, improving our margins and exploiting several new
and existing markets, we believe our future has great potential. We think
these changes will result in greatly improved results. But it's also true that
these changes will take time to happen. Results from these actions should
start appearing by the end of fiscal 1995 or the beginning of fiscal 1996.
We thank our customers, employees and stockholders for their
consistent support throughout the year -- and look forward to an even more
exciting partnership in fiscal 1995.
Robert Cohn
Chairman and Chief Executive Officer
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<PAGE> 79
(Sidebar to Letter to Stockholders)
VOICE PROCESSING TERMS
*AUTOMATED ATTENDANT. When you call the main number of a company, the
automated attendant asks you to enter an extension number or the name of person
you are trying to reach, then transfers your call to that extension.
*INFORMATION CENTER MAILBOXES. Lets you call a specific mailbox that stores
recorded information or announcements. These mailboxes can be configured for
simple voice announcements (listen only) or they can allow callers to record
replies to announcements (listen and reply).
*ENHANCED CALL PROCESSING. Lets you route yourself to specific people,
departments, Information Center mailboxes or other information resources within
an organization by pressing single digits on your touchtone phone.
*FAX FEATURES. A variety of features that include fax on demand (gives you
24-hour access to a library of stored fax documents), fax store and forward
(lets you receive and forward fax documents--just as you would your voice mail
messages--from the same mailbox), fax broadcast (lets you send documents to
multiple fax devices with a single address command), and fax overflow
(guarantees that your faxes will be received even when your fax device is busy
or out of service).
*NETWORKING. Lets you send a voice mail message across a network to someone
on a different voice mail system at another location by entering a network
address and their mailbox number.
*OCTELFORMS. Lets you use your voice messaging system as an information
collection tool. Those who call the OctelForms mailbox are asked a series of
questions. Their responses (in touchtone or audio format) are stored in
sequence for later review and processing.
*TELEPHONE ANSWERING. Allows others to call and leave a voice mail message for
you when you are on your phone or away from your desk.
*TWO-WAY MESSAGING. Lets you record and send a voice mail message to someone.
After listening to your message, they can record a reply message and send it
back to you. Two-way messaging lets you communicate effectively with others
without having to talk live.
<PAGE> 80
(Sidebar to Letter to Stockholders)
Voice Mail is Like Sending a Letter
TO SEND A LETTER . . .
You write a letter to John Smith. [Drawing of woman writing a letter]
You post the letter. [Drawing of mailbox]
The postal system delivers your letter to John Smith's mailbox.
[Drawing of John Smith's mailbox]
John Smith gets the letter from his mailbox. [Drawing of John Smith
opening the letter]
TO SEND A VOICEMAIL MESSAGE . . .
You record a message for John Smith. [Drawing of woman recording a
message]
Leave the message on Octel's voice mail system. [Drawing of the
Octel System]
Octel's voice mail system delivers your message to John Smith's voice
mailbox. [Drawing of Octel System delivering message to John Smith's
mailbox]
John Smith enters his mailbox and listens to your message. [Drawing
of John Smith listening to the message]
<PAGE> 81
(Sidebar to Letter to Stockholders)
[Four bar charts depicting financial results over the past three fiscal years:
net revenues of $406.2 million in fiscal 1994, $338.5 million in fiscal 1993
and $262.7 million in fiscal 1992; operating income of $18.8 million in fiscal
1994, $37.1 million in fiscal 1993 and $429.5 million in fiscal 1992; net
income of $13.5 million in fiscal 1994, $29.6 million in fiscal 1993 and $26.4
million in fiscal 1992; and earnings per share of $0.54 in fiscal 1994, $1.19
in fiscal 1993 and $1.08 in fiscal 1992.]
<PAGE> 82
(Sidebar to Letter to Stockholders)
[Four bar charts depicting Octel's growth over the past three fiscal years:
international revenues of $97.4 million in fiscal 1994, $80.7 million in fiscal
1993 and $58.7 million in fiscal 1992; research and development expenses of
$58.3 million in fiscal 1994, $44.4 million in fiscal 1993 and $32.3 million in
fiscal 1992; system base of 37,012 systems in fiscal 1994, 19,600 systems in
fiscal 1993 and 11,367 systems in fiscal 1992; and customer base of 28,402
customers in fiscal 1994, 20,400 customers in fiscal 1993 and 12,143 customers
in fiscal 1992.]
<PAGE> 83
(Sidebar for last page for Letter to Stockholders)
Why Voice Mail?
Voice mail lets you exchange information:
o FASTER...
by letting you quickly record and send a message--or reply to
one. Eliminated are repeated attempts to reach someone "live"
or having to dictate your message to an administrative
assistant. And you can also send a message to a number of
people simultaneously.
o MORE ACCURATELY...
by leaving your complete message in full, in your own voice.
Potential inaccuracies inherent in "pink slips" are eliminated.
o AND MORE COST EFFECTIVELY...
by ensuring that you communicate the information concisely on
the first try. There's no "telephone tag" or needless
callbacks. Telephone calls are shorter and to the point.
o SO YOU CAN BE MORE PRODUCTIVE.
Voice mail allows you to send and respond to more messages in
less time. You can also send and receive messages at any
time--day or night--whenever it is most convenient for you.
Interruptions are minimized.
<PAGE> 84
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1994
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
<TABLE>
<S> <C>
/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
</TABLE>
OCTEL COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0029449
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
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.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
9
<PAGE> 85
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Markets and Product Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Product Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Sales and Customer Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Research and Product Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Patents, Copyrights, Trademarks and Technology Licenses . . . . . . . . . . . . . . . . . 27
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 29
EXECUTIVE OFFICERS OF OCTEL COMMUNICATIONS CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . 31
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . 32
Basis of Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Annual Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Net Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Cost of Systems and Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Selling, General and Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Interest and Other Income (Expense), Net . . . . . . . . . . . . . . . . . . . . . . . . . 36
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Factors that May Affect Future Results of Operations . . . . . . . . . . . . . . . . . . . 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . 40
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
10
<PAGE> 86
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . 60
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . 60
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 60
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
(a) 1. Consolidated Financial Statements and Financial Statement Schedules . . . . . . 60
2. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
(c) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
(d) Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
</TABLE>
11
<PAGE> 87
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
12
<PAGE> 88
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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<PAGE> 90
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.
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. 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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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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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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(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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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
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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> 99
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> 100
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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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.
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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
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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,
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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.
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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
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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>
31
<PAGE> 107
<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.
32
<PAGE> 108
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
33
<PAGE> 109
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
34
<PAGE> 110
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.
35
<PAGE> 111
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.
36
<PAGE> 112
<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
37
<PAGE> 113
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
38
<PAGE> 114
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.
39
<PAGE> 115
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 45
Financial Statement Schedules:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Schedule I - Marketable Securities and Investments . . . . . . . . . . . . . . . 64
Schedule II - Amounts Receivable From Related Parties, Underwriters,
Promoters and Employees other than Related Parties . . . . . . . . . 65
Schedule V - Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . 66
Schedule VI - Accumulated Depreciation and Amortization of Property, Plant and
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . 68
</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.
40
<PAGE> 116
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.
41
<PAGE> 117
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.
42
<PAGE> 118
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.
43
<PAGE> 119
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.
44
<PAGE> 120
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
45
<PAGE> 121
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.
46
<PAGE> 122
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>
47
<PAGE> 123
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,
48
<PAGE> 124
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>
49
<PAGE> 125
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
50
<PAGE> 126
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
51
<PAGE> 127
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.
52
<PAGE> 128
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>
53
<PAGE> 129
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.
54
<PAGE> 130
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>
55
<PAGE> 131
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.
56
<PAGE> 132
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.
57
<PAGE> 133
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.
58
<PAGE> 134
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
59
<PAGE> 135
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.
60
<PAGE> 136
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.
61
<PAGE> 137
(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.
62
<PAGE> 138
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>
63
<PAGE> 139
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.
64
<PAGE> 140
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.
65
<PAGE> 141
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>
66
<PAGE> 142
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>
67
<PAGE> 143
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>
68
<PAGE> 144
(Page before inside back cover - Page 70)
CORPORATE DIRECTORY
<TABLE>
<S> <C>
OFFICERS
Robert Cohn Paul Scott
Chairman, Founder, President and Chief Executive Vice President
Officer
David Ladd Carol Snell
Executive Vice President Vice President
W. Michael West Charles Singmaster
Executive Vice President Vice President
Gary A. Wetsel John R. Viera
Executive Vice President and Chief Financial Officer Vice President
Edmund P. Ang James F. Engle
Vice President Treasurer
Donald L. Campodonico
Vice President BOARD OF DIRECTORS
Derek S. Daley Robert Cohn
Vice President, General Counsel and Secretary Chairman, Founder, President and Chief Executive
Officer
J. Kim Fennell Anson M. Beard, Jr.
Vice President Advisory Director,
Morgan Stanley & Co. Incorporated
Michael Gilbert Leo J. Chamberlain
Vice President Private Investor
Raymond Glynn Deborah Coleman
Vice President Chairman and CEO
Merix Corporation
Richard LaBarbera John Freidenrich
Vice President General Partner, Bay Partners,
Venture Capital Fund
Edward Mattiuz Robert C. Hawk
Vice President President,
Carrier and Information Provider Division,
US WEST Communications
Margaret Norton Nathaniel de Rothschild
Vice President President,
Nathaniel de Rothschild Holdings, Ltd.
Daniel G. Patyk Dag Tellefsen
Vice President General Partner, Glenwood Management, Venture Capital
Fund
</TABLE>
(Inside back cover - Page 71)
69
<PAGE> 145
CORPORATE INFORMATION
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Palo Alto, CA
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
Palo Alto, CA
TRANSFER AGENT
Chemical Trust Company of California
STOCKHOLDER ADMINISTRATION
Please direct inquiries about stockholder accounting records to
Chemical Trust Company of California, 50 California Street, San
Francisco, CA 94111, (415) 954-9500 or (800) 674-4273.
STOCK TRADING
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.
STOCK PRICES
<TABLE>
<CAPTION>
Fiscal Quarter High* Low*
-------------- ------ ----
<S> <C> <C>
Q1 1993 27 1/2 18 3/4
Q2 1993 24 14 1/2
Q3 1993 30 20
Q4 1993 25 1/4 19
Q1 1994 24 3/4 19 1/4
Q2 1994 28 1/2 23 1/4
Q3 1994 30 23
Q4 1994 26 1/4 16 1/2
</TABLE>
*Trading ranges
70
<PAGE> 146
ANNUAL MEETING
The annual meeting of stockholders will be held November 17, 1994 at 9:30 a.m.
at the Fairmont Hotel, 170 South Market Street, San Jose, California 951113,
(408) 998-1900.
INVESTOR RELATIONS
Octel Communications Corporation welcomes inquiries from its stockholders and
other interested investors. If you would like a free copy of this report or
other financial matter, direct your written request to: Octel Communications
Corporation, Investor Relations Dept., Mail Stop C3-15, 1001 Murphy Ranch Road,
Milpitas, California USA 95035-7912 or call the Octel Investor Relations
Hotline, (408) 324-6285.
All trademarks identified by the (TM) or (R) symbols are trademarks, or
registered trademarks, respectively, of Octel Communications Corporation or
VMX, Inc. All other trademarks belong to their respective owners.
(C) Copyright 1994 Octel Communications Corporation
Printed in USA. All Rights Reserved.
71
<PAGE> 147
(Back cover)
(Octel Logo)
Octel Communications Corporation
1001 Murphy Ranch Road
Milpitas, CA 95035-7912
(408) 321-2000
CFB097.W42(5P3)
10/07/94 72
