<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 1994, or
_______ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ________
Commission File Number 0-16588
OCTEL COMMUNICATIONS CORPORATION
____________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 77-0029449
_____________________________ ___________________________
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
890 TASMAN DRIVE
MILPITAS, CALIFORNIA 95035-7439
(Address of principal executive offices)
Registrant's telephone number, including area code, is (408) 321-2000
____________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
____________ ____________
The number of shares outstanding of the registrant's Common Stock on
April 30, 1994 was 23,963,142
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This document consists of 19 pages of which this is Page 1.
<PAGE> 2
OCTEL COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - March 31, 1994 and
June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements
of Operations - three and nine months ended
March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements
of Cash Flows - nine months ended
March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 15
SIGNATURE ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1994 1993
-------- --------
ASSETS (Restated)
<S> <C> <C>
Cash and equivalents $ 18,727 $ 26,576
Short-term investments 64,915 73,781
Accounts receivable net of allowance for doubtful accounts
of $2,578 at March 31, 1994 and $2,365 at June 30, 1993 82,277 70,544
Accounts receivable from related parties 3,621 8,589
Inventories 30,260 28,399
Prepaid expenses and other 13,027 4,806
---------- ----------
Total current assets 212,827 212,695
Property and equipment, net of accumulated
depreciation and amortization of $61,543 at
March 31, 1994 and $48,788 at June 30, 1993 78,598 53,933
Deposits and other assets 31,399 30,755
-------- --------
Total $322,824 $297,383
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Trade payables $ 13,530 16,370
Accrued compensation and employee benefits 21,887 20,257
Income taxes payable -- 1,401
Accrued and other liabilities 42,605 27,689
---------- --------
Total current liabilities 78,022 65,717
Long-term obligations 2,521 1,985
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: March 31, 1994,
23,930,042 shares, and June 30, 1993, 23,280,241 shares 170,846 156,814
Deferred compensation -- (55)
Retained earnings 72,035 73,322
Accumulated translation adjustments (600) (400)
------- --------
Stockholders' equity 242,281 229,681
--------- -------
Total $322,824 $297,383
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1994 1993 1994 1993
-------- ------- -------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C>
NET REVENUES:
Systems $ 68,256 $63,056 $207,887 $181,158
Service and license 28,941 22,327 81,812 56,306
-------- ------- -------- --------
Total revenues 97,197 85,383 289,699 237,464
COSTS AND EXPENSES:
Cost of systems 20,906 20,622 65,900 57,506
Cost of service 19,223 12,381 49,763 31,765
Research and development 13,975 11,862 41,663 31,296
Selling, general and administrative 36,799 31,255 108,955 93,287
Restructuring costs 18,258 -- 18,258 --
-------- ------- -------- --------
Total costs and expenses 109,161 76,120 284,539 213,854
-------- ------- -------- --------
Operating income (loss) (11,964) 9,263 5,160 23,610
Interest and other income (expense), net (3,011) 1,268 (1,537) 3,625
-------- ------- -------- --------
Income (loss) before income taxes
and cumulative effect of
accounting change (14,975) 10,531 3,623 27,235
Provision for income taxes (benefit) (3,371) 3,148 800 7,856
-------- ------- -------- --------
Income (loss) before cumulative effect
of accounting change (11,604) 7,383 2,823 19,379
Cumulative effect of accounting
change -- -- -- 115
--------- ------- -------- --------
NET INCOME (LOSS) $ (11,604) $ 7,383 $ 2,823 $ 19,264
========= ======== ========= =========
Income (loss) per common and
equivalent share before
cumulative effect of
accounting change $ (0.49) $ 0.29 $ 0.11 $ 0.77
Cumulative effect of accounting
change -- -- -- --
--------- ------- -------- --------
NET INCOME (LOSS) PER COMMON
AND EQUIVALENT SHARE $ (0.49) $ 0.29 $ 0.11 $ 0.77
========= ======== ======== =========
Weighted average number of
common shares and equivalents
used in computation 23,509 25,193 24,934 24,882
========= ======== ======== =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
Mar. 31, Mar. 31,
1994 1993
-------- ---------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,823 $ 19,264
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 22,816 15,071
Deferred income taxes (2,828) (7,244)
Goodwill adjustment upon adoption
of SFAS 109 -- 6,773
Deferred compensation 55 162
Changes in assets and liabilities:
Accounts receivable (7,469) (8,199)
Inventories (1,882) 1,151
Prepaid expenses and other (6,186) (779)
Trade payables (2,656) (6,408)
Accrued compensation and
employee benefits 1,764 2,070
Accrued and other liabilities 16,010 (2,747)
------- -------
Net cash provided by operating activities 22,447 19,114
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock 13,328 6,685
Repurchases of common stock (5,748) (7,446)
Payment of stockholders' notes receivable 56 10
Proceeds from sale of financial instruments - put warrants -- 781
Repayments of long-term obligations (451) (695)
------- -------
Net cash provided by (used in) financing activities 7,185 (665)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (103,894) (242,549)
Sales and maturities of short-term investments 112,760 230,030
Property and equipment additions (37,518) (22,918)
Changes in deposits and other assets (9,096) (8,614)
Net cash used to acquire business -- (9,391)
------- -------
Net cash used for investing activities (37,748) (53,442)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 267 360
------- -------
NET DECREASE IN CASH AND EQUIVALENTS (7,849) (34,633)
------- -------
CASH AND EQUIVALENTS:
Beginning of period 26,576 53,028
------- -------
End of period $ 18,727 $ 18,395
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1994 AND 1993 - UNAUDITED)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of normal recurring adjustments and merger-related and restructuring
adjustments - see Notes 6 and 7) necessary to present fairly the
financial position as of March 31, 1994 and June 30, 1993, the results
of operations for the three and nine months ended March 31, 1994 and
1993 and cash flows for the nine months ended March 31, 1994 and 1993.
The financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the Company's
annual financial statements and notes.
2. Inventories consist of (in thousands):
<TABLE>
<CAPTION>
Mar. 31, June 30,
1994 1993
---------- ----------
<S> <C> <C>
Finished goods $ 5,982 $ 6,407
Work-in-process 14,574 11,625
Raw materials 9,704 10,367
-------- -------
Total inventories $30,260 $28,399
======= =======
</TABLE>
3. Net income or loss per common and equivalent share is computed using
the weighted average number of common and dilutive common equivalent
shares from stock options (using the treasury stock method) and shares
subscribed under the Employee Stock Purchase Plan.
4. Letters of credit
At March 31, 1994, the Company had $1.5 million of stand-by letters of
credit outstanding. The letters of credit are primarily to guarantee
payments for inventory purchases and facility lease payments. The
majority of the letters of credit are denominated in yen and U.S.
dollars and expire on various dates ranging from August 1994 through
April 1995.
5. Interest and other income (expense) consists of the following (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1994 1993 1994 1993
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Interest and investment income $ 814 $ 981 $ 2,642 $3,160
Gain (loss) on sale of short-term
investments, net (21) 310 91 1,236
Foreign exchange gains (losses), net (161) 98 (274) 17
Other expense, net (51) (121) (404) (788)
Merger expenses (Note 6) (3,592) -- (3,592) --
------- ---------- ------- -------
Total other income (expense) $(3,011) $1,268 $(1,537) $3,625
======= ========== ======= =======
</TABLE>
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<PAGE> 7
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1994 AND 1993 - UNAUDITED)
6. Business Combinations and Merger Expenses
Business Combinations
On March 31, 1994, VMX, Inc. (VMX) was merged with and into Octel
Communications Corporation (Octel) and 5,431,785 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 conform 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 three and nine
months ended March 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1994 1993 1994 1993
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenues:
Octel $ 72,841 $63,829 $216,662 $173,103
VMX 24,746 21,916 74,270 65,416
Less intercompany sales (390) (362) (1,233) (1,055)
---------- -------- -------- --------
$ 97,197 $85,383 $289,699 $237,464
Net Income: ---------- -------- --------- --------
---------- -------- --------- --------
Octel $ 6,180 $ 6,038 $ 16,724 $ 14,739
VMX 904 1,340 4,844 4,538
Intercompany transactions 67 5 10 (13)
Merger related costs and
adjustments (net of tax benefit) (18,755) -- (18,755) --
--------- -------- --------- --------
$(11,604) $7,383 $ 2,823 19,264
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
In October 1992, the Company acquired Tigon Corporation (Tigon) which
was accounted for as a purchase. In the second quarter of fiscal
1994, the Company made the final adjustment to the purchase price
allocation with respect to Tigon which had the effect of increasing
the purchase reserve $2.2 million, goodwill $1.3 million and current
deferred income tax assets $.9 million.
Merger Expenses
In connection with the merger of VMX and Octel, $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.
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<PAGE> 8
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(MARCH 31, 1994 AND 1993 - UNAUDITED)
7. Restructuring costs
In connection with the VMX merger, the Company provided for
restructuring costs in the third quarter of fiscal 1994 of $18.3
million for costs associated with consolidating facilities and
personnel. Included in the charges are building lease termination
fees and moving costs in connection with redundant facilities,
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 $14.2 million is included in
Accrued and other liabilities on the balance sheet at March 31, 1994.
-8-
<PAGE> 9
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
Effective March 31, 1994, Octel Communications Corporation (Octel)
consummated a business combination with VMX, Inc. (VMX) which was accounted for
as a pooling of interests. 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, 5.4
million shares of the Company'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 financial statements have
been restated to include the accounts and operations of VMX for all periods
prior to the merger.
NET REVENUES
Net revenues increased to $97.2 million in the third quarter of fiscal
1994, a 14 percent increase from net revenues of $85.4 million in the third
quarter of fiscal 1993. In the first nine months of fiscal 1994 net revenues
increased to $289.7 million as compared to $237.5 million in the corresponding
period of fiscal 1993, representing growth of 22 percent. Systems revenues in
the third quarter of fiscal 1994 were $68.3 million, an increase of 8 percent
from $63.1 million in the same quarter of fiscal 1993, and for the first nine
months of fiscal 1994 systems revenues were $207.9 million, an increase of 15
percent compared to $181.2 million in the first nine months of fiscal 1993.
The growth in systems revenues was primarily attributable to the sale of
systems to new and existing customers and the sale of upgrades, expansions and
new features in the Customer Premise Equipment (CPE) and Voice Information
Services (VIS) sectors. CPE revenues for both the third quarter and first nine
months of fiscal 1994 increased over the same periods in fiscal 1993. Domestic
CPE revenues decreased in the third quarter of fiscal 1994 compared to the same
period in fiscal 1993, while it increased in the first nine months of fiscal
1994 compared to the first nine months of fiscal 1993. International CPE
revenues increased significantly in both the third quarter and first nine
months in fiscal 1994 compared to the same periods in fiscal 1993. VIS
revenues in total for both the third quarter and the first nine months of
fiscal 1994 increased over the corresponding periods in fiscal 1993; however;
international VIS revenues, which were exceptionally high in the second and
third quarters of fiscal 1993 due to several large orders, decreased in the
third quarter and first nine months of fiscal 1994 compared to the
corresponding periods in fiscal 1993. Revenue in future quarters could be
affected by the extent and timing of new orders from VIS customers. Such orders
are typically significant in size and, therefore, can have a significant impact
on the amount and source of revenue in any given quarter.
Service and license revenues in the third quarter of fiscal 1994
increased to $28.9 million, or 30 percent from $22.3 million in the same
quarter of fiscal 1993, and for the first nine months of fiscal 1994 service
and license revenues increased to $81.8 million, or 45 percent compared to
$56.3 million in the first nine months of fiscal 1993. In addition, service
and license revenues continue to grow as a percentage of total net revenues and
accounted for 30 percent and 28 percent of net revenues for the third quarter
and first nine months of fiscal 1994, respectively, as compared to 26 percent
and 24 percent for the third quarter and first nine months of fiscal 1993,
respectively. The increase in service and license revenues in the first nine
months of fiscal 1994 over the same period in fiscal 1993 is significantly due
to the inclusion of service revenues from Tigon which have been included since
its acquisition on October 21, 1992. In addition, the increase in service and
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<PAGE> 10
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
license revenues in the third quarter and first nine months of fiscal 1994 as
compared to the same periods of the prior year is due to the Company's larger
installed base of customers and systems. Service and license revenues have also
increased due to new licensees generating incremental license issue fees.
COST OF SALES
As a percentage of net revenues, total cost of sales increased to 41
percent in the third quarter of fiscal 1994 from 39 percent in the third
quarter of fiscal 1993. For the first nine months of fiscal 1994 total cost of
sales increased to 40 percent from 38 percent in the comparable period of
fiscal 1993. The majority of this increase is a result of the higher
percentage of total revenues attributable to service revenues, which carry
lower margins than system revenues, as well as certain non-recurring costs in
the third quarter of fiscal 1994 necessary to conform VMX's accounting
practices to Octel's.
Cost of system sales was 31 percent and 33 percent of net system
revenues in the third quarter of fiscal 1994 and 1993, respectively. Cost of
system sales was 32 percent in the first nine months of fiscal 1994 and 1993.
Cost of system sales as a percentage of net revenue decreased from the third
quarter of fiscal 1993 to the third quarter of fiscal 1994 primarily because of
the effects of revenue transactions for which costs were previously expensed
due to uncertainty of revenue recognition and favorable product mix evidenced
by the fact that sales volume of the Company's higher end, higher margin
systems increased as a percentage of total volume quarter over quarter. These
positive effects were partially offset by non-recurring costs incurred to
conform VMX's accounting practices to Octel's, reduced list prices of certain
products and increased sales promotions offered in fiscal 1994. In the
comparable nine-month periods, cost of system sales as a percentage of revenues
remained the same, primarily because the factors discussed above were
essentially offsetting.
Cost of service and license revenues was 66 percent and 56 percent of
net service and license revenues in the third quarter of fiscal 1994 and 1993,
respectively. Cost of service and license revenues was 61 percent and 56
percent in the first nine months of fiscal 1994 and 1993, respectively. The
increases in the third quarter and first nine months of fiscal 1994 compared to
the same periods in fiscal 1993 were primarily due to Tigon's results. Tigon's
revenues have grown as a percentage of both consolidated revenue and
consolidated service and license revenue. Tigon's cost of service and license
revenues has increased as a percentage of net service and license revenues in
the third quarter and first nine months of fiscal 1994 compared to the same
periods in fiscal 1993 as a result of a change in service product mix with an
increase in revenue from the residential market, which traditionally has lower
gross margins than the commercial market. Certain non-recurring costs that
were incurred in the third quarter of fiscal 1994 to conform VMX's accounting
practices to Octel's also contributed to the increase in costs of service and
license as a percentage of net service and license revenues for both the
quarter and the nine-month periods.
On a quarter-to-quarter basis, the channel and product mix of sales
can fluctuate significantly. Such fluctuations can have a positive or negative
impact on operating margins. These fluctuations are difficult to predict.
-10-
<PAGE> 11
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses were $14.0 million in the third
quarter of fiscal 1994, an increase of 18 percent over the $11.9 million
expended in the third quarter of fiscal 1993. For the first nine months of
fiscal 1994 and 1993, research and development costs were $41.7 million and
$31.3 million, respectively, representing an increase of 33 percent in fiscal
1994. As a percentage of net revenues, research and development expenses were
14 percent in the third quarters of fiscal 1994 and 1993, and 14 percent and 13
percent for the first nine months of fiscal 1994 and 1993, respectively. 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. The Company believes
that additional research and development expenses will be required to maintain
market position and expects that expenses will increase in absolute terms and
could increase as a percentage of net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $36.8 million in the
third quarter of fiscal 1994, an 18 percent increase over the third quarter of
fiscal 1993 of $31.3 million. For the first nine months of fiscal 1994, these
expenses were $109.0 million, an increase of 17 percent over the $93.3 million
expended in the same period of fiscal 1993. Selling, general and
administrative expenses increased as a percentage of net revenues in the third
quarter ended March 31, 1994, increasing from 37 percent in the third quarter
of fiscal 1993, to 38 percent in the corresponding period of fiscal 1994.
Selling, general and administrative expenses decreased as a percentage of net
revenues in the nine months ended March 31, 1994, decreasing from 39 percent in
the first nine months of fiscal 1993 to 38 percent in the first nine months of
fiscal 1994. The increase in absolute dollars resulted from the Company's
continuing efforts to develop and manage its organization and train new and
existing personnel and the commitment of resources to support international
opportunities. In addition, the inclusion of Tigon's selling, general and
administrative expenses, which were included for only approximately five and
one-half months in the first nine months of fiscal 1993, contributed to the
increase in the nine-month period. Two expense items contributed to the
increase in absolute terms of selling, general and administrative expenses in
the first nine months of fiscal 1994. First, approximately $750,000 of non-
recurring expense was incurred in the second quarter of fiscal 1994, related to
the departure of the former President and Chief Executive Officer from the
Company. The second item, legal expenses related to ongoing patent litigation,
generated incremental expenses of approximately $1.0 million and $2.1 million
in the third quarter and first nine-months of fiscal 1994, respectively. The
Company estimates legal expenses related to ongoing patent litigation will be
approximately $800,000 in the fourth quarter of fiscal 1994. Following the
merger of Octel and VMX, the Company is analyzing synergies that exist and
anticipates the
-11-
<PAGE> 12
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
reflection of any benefits from those synergies after an initial period of
consolidation and adjustment. 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.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net for the third quarter of
fiscal 1994 decreased $4.3 million from the same period of fiscal 1993 and
decreased in the first nine months of fiscal 1994 by $5.2 million from the same
period last year. The decreases are primarily attributable to merger expenses
of $3.6 million recorded in the third quarter of fiscal 1994, smaller net gains
on sales of short-term investments and lower interest income due to lower
interest rates and lower cash and equivalent and short-term investment
balances, offset by the absence of the Compass acquisition expenses which were
incurred in the first quarter of fiscal 1993.
INCOME TAXES
The Company's effective tax rate was 23 percent and 22 percent in the
third quarter and first nine months of fiscal 1994, respectively, as compared
to 30 percent and 29 percent in the corresponding periods of fiscal 1993. This
decrease was attributable to a combination of several factors. First, the
Company had lower taxable income due to restructuring charges in fiscal 1994 as
compared to fiscal 1993, resulting in permanent tax differences having a
greater impact on the effective tax rate. Another major factor was that the
merger of Octel and VMX allowed various tax assets of VMX that were previously
fully reserved to be recognized. 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.
Substantially all of the adjustment for the retroactive reinstatement was
recorded in the first quarter of fiscal 1994 and amounted to $1.1 million. The
Company expects its effective tax rate to be approximately 23 percent for the
remainder of fiscal 1994.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations
could be affected by factors such as market acceptance of new products and
upgrades, changes in the rate of growth in the worldwide voice processing
market, competition, the success of the Company's customers in marketing voice
information services and changes in general economic conditions in any of the
countries in which the Company does business. The Company believes that the
successful introduction of new and enhanced products and services will be
essential for it to maintain its competitive position. The Company believes
that its backlog on a quarterly basis will not generally be large enough to
assure that its revenue targets for a particular quarter will be met.
Furthermore, a large percentage of any quarter's shipments have traditionally
been booked in the last month of the quarter. Consequently, quarterly revenues
and operating results will depend on the volume and timing of new orders
received during a quarter, which is difficult to forecast. The integration of
certain operations following the merger with VMX will 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
eliminating duplicate facilities, employees, marketing
-12-
<PAGE> 13
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 integration of Octel and VMX will have on
revenues, earnings or stock price.
Because of the factors noted herein, the Company's future earnings and
stock price may be subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant effect on the trading price of
the Company's common stock in any given period. Additionally, the Company may
not learn of such shortfalls until late in a fiscal quarter, which could result
in an even more immediate and adverse effect on the trading price of the
Company's common stock. Further, the Company participates in a highly dynamic
industry which often results in volatility of the Company's common stock price.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and equivalents and short-term investments in the
first nine months of fiscal 1994 decreased $16.7 million from June 30, 1993.
Cash flows from operations resulted in a net source of cash of $22.7 million in
the first nine months of fiscal 1994 and $22.7 for the same period in fiscal
1993. The primary uses of cash during the first nine months of fiscal 1994
were investment in property and equipment of $37.5 million and the repurchase
of common stock for approximately $5.7 million under the Company's stock
repurchase plan, 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
current low rates.
As of March 31, 1994, the Company had invested $33.5 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 $7.6 million during the
remainder of fiscal 1994 and $3 million in fiscal 1995 in connection with the
construction of the Company's new corporate offices. The Company also expects
to purchase additional equipment and make certain leasehold improvements during
the remainder of fiscal 1994. 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 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 restructuring 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 restructuring costs, while $5.3 million relates to
employee severance and relocation expenses. 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
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<PAGE> 14
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Director's and Officer's run-off liability insurance.
Of the $18.3 million of total restructuring charges recorded in the
third quarter of fiscal 1994, approximately $4.5 million relates to non-cash
write-offs of recorded assets and $13.8 million of cash expenditures expected
to occur in the future. The Company estimates the cash expenditures to occur
over the next several quarters approximately as follows: $1.5 million in the
fourth quarter of fiscal 1994, $5.0 million in the first quarter of fiscal
1995, $4.0 million in the second quarter of fiscal 1995, $3.1 million in the
third quarter of fiscal 1995, and $0.2 million thereafter.
In addition to the restructuring costs recorded in the third quarter
of fiscal 1994, the Company may incur additional merger-related restructuring
costs, which will be charged to operations, over the next several quarters.
Such restructuring charges are expected to be cash expenditures estimated at
approximately $6.0 million. These anticipated restructuring charges consist of
$3.2 million for literature design for name change and other modifications to
literature for the merged Company, $1.8 million for consolidating processes and
computer systems of the merged Company and $1.0 million for personnel-related
expenses.
The Company anticipates that cash flows from operations and existing
cash and equivalents and short-term investment balances will be adequate to
meet the Company's cash requirements through the end of calendar 1994.
-14-
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 4. MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS
Octel Communications Corporation held a Special Meeting of
Stockholders on March 31, 1994.
The following matters were voted upon at the meeting:
1. Approval of the Agreement and Plan of Reorganization (the
"Reorganization Agreement") dated as of January 29, 1994, among
Octel Communications Corporation ("Octel"), Octel Acquisition
Corporation ("Merger Sub") and VMX, Inc. (VMX) and to approve the
merger of Merger Sub with and into VMX pursuant to the
Reorganization Agreement and the issuance of shares of Octel
Common Stock in the Merger.
2. Approval of proposal regarding the 1985 Incentive Stock Plan to
increase shares reserved.
The votes of the stockholders on these proposals were as follows:
<TABLE>
<CAPTION>
Proposal Number of Number of Number of Number of
Number affirmative votes negative votes abstentions broker non-votes
________ _________________ ______________ ___________ ________________
<S> <C> <C> <C> <C>
1. 12,324,813 145,259 55,730 -
2. 7,445,363 4,998,888 81,551 -
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.0--Agreement and Plan of Reorganization by and among Octel
Communications Corporation, Octel Acquisition Corporation and
VMX, Inc. dated as of January 29, 1994. (1)
10.20--Executive Officer Employment Letter - David J. Ladd.
------------
(1) Incorporated by reference to the exhibit filed with the
Company's Form 10-Q filed with the Securities and Exchange
Commission on February 11, 1994.
-15-
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Report on Form 8-K
A report on Form 8-K was filed by the Company on April 13,
1994, reporting the merger with VMX and filing the following
financial statements of VMX, Inc.:
- Consolidated audited balance sheets as of June 30, 1993 and
1992
- Consolidated audited statements of income and cash flows for
the fiscal years ended June 30, 1993, 1992 and 1991
- Consolidated unaudited balance sheet as of December 31, 1993
- Consolidated unaudited statements of income and cash flows
for the six month periods ended December 31, 1993 and 1992
In addition, pro forma financial information was incorporated
by reference in the Form 8-K for the combined entity of Octel
and VMX.
-16-
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCTEL COMMUNICATIONS CORPORATION
Dated: May 9, 1994
/s/ GARY A. WETSEL
----------------------------------
Gary A. Wetsel
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
-17-
<PAGE> 18
CONFIDENTIAL
March 29, 1994
Mr. David Ladd
14568 Horseshoe Court
Saratoga, California 95070
Dear Dave:
I am delighted to enclose an offer for you as an officer and Executive Vice
President of Octel Communications, reporting to me. This assignment will begin
at the close of the merger which is expected to be April 1, 1994. While I
would like to word this letter in a more warm and friendly fashion, it is,
however, an official document and may seem a bit formal in places.
As an EVP, your salary will be $15,000 per month ($180,000 annualized) for the
remainder of fiscal year 1994. Your bonus incentive of $62,000 will be paid in
accordance with the VMX Management Bonus Plan. Your VMX stock options will
convert to Octel shares at a ratio of 5:1, with a price of five (5) times the
original VMX strike price. For fiscal year 1995, the compensation plan for all
officers is set by the Board as a group at the beginning of the fiscal year.
You will be enrolled in the standard Octel benefits plan as soon as the legal
aspects of switching plans are worked out. As an Executive Vice President, you
are also entitled to other special benefits. These are $1,000,000 personal
life insurance (subject to insurability), additional disability coverage, and a
free annual physical. These special benefits are paid by the company and may
be subject to personal eligibility.
This offer also includes a stock option grant of 75,000 additional shares of
Octel stock under the terms of the Octel Stock Option Plan. These shares are
contingent upon the approval of the Octel Board of Directors and shareholders.
<PAGE> 19
Dave, this offer is also contingent upon the successful close of the pending
Octel/VMX merger transition and your entering into an agreement acceptable to
Octel which nullifies the Employment Agreement dated January 7, 1994 between
you and VMX, Inc. Your acceptance of this offer letter confirms your
representation to us that (1) you are not a party to any employment agreement
or other contract or arrangement which prohibits your full-time employment with
Octel; (2) you will not disclose (nor have we solicited) any trade secrets or
confidential information of any person, including prior employers, (except VMX)
to Octel; and (3) you do not know of any conflict which would restrict your
employment with Octel. You understand that your position at Octel will be on
an "at will" basis and Octel may terminate your employment at any time. You
agree that this letter does not constitute, nor have representations by Octel
been made, for employment other than on an "at will" basis.
Terms of this offer are considered confidential information to Octel, and we
trust that you will treat it as proprietary information between you and Octel's
Board of Directors. Before beginning work at Octel Communications Corporation,
you will be required to sign an agreement regarding trade secrets, inventions,
and confidential information. Your position will be salaried (otherwise called
exempt). Your performance and compensation will be reviewed annually following
your commencement of employment with Octel.
The Board of Directors, Executive Staff, and I personally believe Octel has a
promising future which requires talented, motivated, and dedicated people like
you to make it successful. We are all excited about you joining our team.
Please call if you have any questions.
Sincere regards,
Position Accepted.
____________________________________________________________________________
Signature Date
Please sign and return the attached photocopy of the offer letter in
the self-addressed envelope. Thank you.
