- -------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995, or
_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-16588
OCTEL COMMUNICATIONS CORPORATION
___________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 77-0029449
------------------ ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
1001 Murphy Ranch Road
Milpitas, California 95035-7912
(Address of principal executive offices)
Registrant's telephone number, including area code, is (408) 321-2000
____________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the registrant's Common Stock on
October 31, 1995 was 24,672,776.
- -------------------------------------------------------------------------------
This document consists of 17 pages of which this is Page 1.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - September 30, 1995 and
June 30, 1995.................................... 3
Condensed Consolidated Statements
of Operations - three months ended
September 30, 1995 and 1994...................... 4
Condensed Consolidated Statements
of Cash Flows - three months ended
September 30, 1995 and 1994...................... 5
Notes to Condensed Consolidated
Financial Statements............................. 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations....................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 16
Item 6. Exhibits and Reports on Form 8-K................. 16
SIGNATURES ............................................... 17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OCTEL COMMUNICATIONS CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data - unaudited)
Sept. 30, June 30,
1995 1995
--------- --------
ASSETS
Current assets:
Cash and equivalents $ 23,864 $ 24,521
Short-term investments 31,025 28,054
Accounts receivable net of allowance
for doubtful accounts of $3,037 at
Sept. 30, 1995 and $2,938 at
June 30, 1995 98,957 110,679
Accounts receivable from related parties 4,914 6,270
Inventories 36,757 31,151
Prepaid expenses and other 20,413 15,448
-------- --------
Total current assets 215,930 216,123
Property, plant and equipment, net of
accumulated depreciation and amortization
of $67,841 at Sept. 30, 1995 and $76,974
at June 30, 1995 130,426 128,753
Deposits and other assets 23,622 23,400
-------- --------
Total $369,978 $368,276
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 18,793 $ 21,157
Accrued compensation and employee benefits 21,673 28,188
Income taxes payable -- 7,921
Accrued and other liabilities 32,008 35,465
-------- --------
Total current liabilities 72,474 92,731
Long-term obligations 512 602
Stockholders' equity:
Preferred stock, $.001 par value - authorized,
5.0 million shares; none outstanding -- --
Common stock, $.001 par value - authorized,
50.0 million shares; outstanding:
Sept. 30, 1995 - 24.5 million shares, and
June 30, 1995 - 23.8 million shares 199,141 183,193
Retained earnings 102,302 96,039
Treasury stock at cost: 0.1 million shares
at Sept. 30, 1995 and June 30, 1995 (2,347) (2,347)
Other stockholders' equity (2,104) (1,942)
-------- --------
Total stockholders' equity 296,992 274,943
-------- --------
Total $369,978 $368,276
======== ========
See notes to condensed consolidated financial statements.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts - unaudited)
Three Months Ended
---------------------
Sept. 30, Sept. 30,
1995 1994
--------- ---------
Net revenues:
Systems $ 71,959 $ 69,901
Services and license 41,771 35,844
--------- ---------
Total net revenues 113,730 105,745
Costs and expenses:
Cost of systems 21,759 21,537
Cost of services 25,587 20,591
Research and development 17,566 17,437
Selling, general and administrative 39,178 36,432
Non-recurring charge for acquired in-process
research and development -- 4,725
Integration costs -- 250
--------- ---------
Total costs and expenses 104,090 100,972
--------- ---------
Operating income 9,640 4,773
Interest and other income, net 649 841
--------- ---------
Income before income taxes 10,289 5,614
Provision for income taxes 3,700 1,800
--------- ---------
Net income $ 6,589 $ 3,814
========= =========
Net income per common
and equivalent share $ 0.25 $ 0.15
========= =========
Weighted average number of
common shares and equivalents
used in computation 26,569 25,132
========= =========
See notes to condensed consolidated financial statements.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands - unaudited)
Three Months Ended
______________________
Sept. 30, Sept. 30,
1995 1994
--------- ---------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS:
Cash flows from operating activities:
Net income $ 6,589 $ 3,814
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 9,258 7,329
Amortization of premium on marketable
securities 73 56
Deferred income taxes (33) 191
Purchased in-process research and
development -- 4,725
Changes in assets and liabilities:
Accounts receivable 12,693 10,335
Inventories (5,842) (4,615)
Prepaid expenses and other (4,654) (507)
Trade payables (2,330) 277
Accrued compensation and employee
benefits (6,672) (7,403)
Accrued and other liabilities (6,879) (2,484)
-------- --------
Net cash provided by operating
activities 2,203 11,718
-------- --------
Cash flows from financing activities:
Sales of common stock, net 11,081 1,060
Repurchases of common stock -- (10,987)
Payment of employees' notes receivable 50 --
Proceeds from sale of financial
instruments - put warrants -- 1,144
Repayments of long-term obligations (89) (565)
-------- --------
Net cash provided by (used for)
financing activities 11,042 (9,348)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (14,416) (13,645)
Sales and maturities of short-term
investments 11,385 29,347
Property, plant and equipment additions (8,858) (14,691)
Changes in deposits and other assets (2,737) (2,529)
Acquisition of intellectual and personal
property -- (900)
-------- --------
Net cash used for investing activities (14,626) (2,418)
-------- --------
Effect of exchange rate changes on cash 724 (272)
-------- --------
Net decrease in cash and equivalents (657) (320)
-------- --------
Cash and equivalents:
Beginning of period 24,521 17,889
-------- --------
End of period $ 23,864 $ 17,569
======== ========
See notes to condensed consolidated financial statements.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements
(September 30, 1995 and 1994 - Unaudited)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial
position of the Company as of September 30, 1995 and the results of
operations and cash flows for the three months ended September 30, 1995
and 1994.
The consolidated financial statements and notes are presented as
permitted by Form 10-Q and do not contain certain information included in
the Company's annual consolidated financial statements and related notes.
Certain fiscal 1995 costs previously reported as research & development
expenses have been reclassified to selling, general and administrative
expenses to conform to the fiscal 1996 presentation.
2. Short-term investments
At September 30, 1995 and June 30, 1995, all cash equivalents and short-term
investments were classified as "available-for-sale" 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>
At September 30, 1995:
U.S. Government
securities $ 10,815 $ -- $ (156) $ (80) $ 10,579
Municipal notes/bonds 26,857 37 (47) (313) 26,534
-------- ---- ------- ------- --------
$ 37,672 $ 37 $ (203) $ (393) $ 37,113
======== ==== ======= ======= ========
At June 30, 1995:
U.S. Government
securities $ 12,117 $ -- $ (180) $ (82) $ 11,855
Municipal notes/bonds 22,200 41 (41) (376) 21,824
-------- ---- ------- ------- --------
$ 34,317 $ 41 $ (221) $ (458) $ 33,679
======== ==== ======= ======= ========
</TABLE>
These securities were classified on the balance sheet as follows (in
thousands):
September 30, 1995 June 30, 1995
------------------ -------------
Cash equivalents $ 6,481 $ 6,083
Short-term investments 31,025 28,054
------- -------
$37,506 $34,137
======= =======
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements
(September 30, 1995 and 1994 - Unaudited)
The cost and estimated fair value of available-for-sale debt securities by
contractual maturity, consisted of the following (in thousands):
September 30, 1995 June 30, 1995
--------------------- ------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------- ---------- ------- ----------
Due in less than one year $17,498 $ 17,347 $15,573 $ 15,457
Due in one to three years 10,161 10,008 14,778 14,476
Due thereafter 10,013 9,758 3,966 3,746
------- -------- ------- --------
$37,672 $ 37,113 $34,317 $ 33,679
======= ======== ======= ========
For the three months ended September 30, 1995 and 1994, the Company had
$55.2 million and $28.2 million in proceeds from sales of available-for-sale
investments, respectively. Gross realized gains and gross realized
losses on those sales were not material.
3. Inventories consist of (in thousands):
September 30, June 30,
1995 1995
------------- --------
Finished goods $ 6,550 $ 5,009
Work-in-process 12,476 8,586
Raw materials 17,731 17,556
-------- --------
Total $ 36,757 $ 31,151
======== ========
4. Net income per common and equivalent share is computed using the weighted
average number of common and dilutive common equivalent shares from stock
options (using the treasury stock method) and shares subscribed under the
Employee Stock Purchase Plan.
5. Line of credit and letters of credit
Effective June 1994, the Company obtained a $30.0 million bank revolving
line of credit which also allows the Company to obtain stand-by letters
of credit. Borrowings under the line are unsecured and bear interest at
either an adjusted London interbank offering rate ("LIBOR") plus one and
one-quarter percent or the greater of the Bank's base rate or the Federal
Funds Effective Rate plus one-half of one percent, at the Company's
discretion upon borrowing the funds. Borrowings under the line are
subject to certain financial covenants and restrictions on indebtedness,
financial guarantees, business combinations and other related items. The
Company was in compliance with these covenants and had no borrowings
under this line as of September 30, 1995. The line expires in June 1996.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements
(September 30, 1995 and 1994 - Unaudited)
At September 30, 1995, the Company had $1.6 million of stand-by letters of
credit outstanding. The letters of credit are primarily to guarantee
payments for inventory purchases and facility lease payments. The
majority of the letters of credit are denominated in Japanese Yen, U.S.
Dollars and French Francs and expire on various dates through July 1,
1998.
6. Lease commitment
On July 6, 1995, the Company entered into a one-year operating lease for a
parcel of undeveloped land adjacent to its current campus on which
additional offices may be constructed over the next three years. This
lease provides for monthly payments which vary based on the LIBOR and
requires the Company to maintain certain financial covenants similar to
its credit facilities. In addition, this lease provides the Company with
the option at the end of the lease term of either renewing the lease,
acquiring the property at its original cost or arranging for the property
to be acquired. The Company is contingently liable to the lessor for up
to $9.9 million.
7. Interest and other income (expense), net consists of the following (in
thousands):
Three Months Ended
------------------
Sept. 30, Sept. 30,
1995 1994
--------- ---------
Interest and investment income $ 718 $ 751
Gain (loss) on sale of short-term
investments, net (4) 13
Foreign exchange gains (losses), net (44) 147
Other expense, net (21) (70)
----- -----
Total $ 649 $ 841
===== =====
8. Integration costs
In connection with the VMX merger, the Company recorded integration costs in
fiscal 1994 of $18.3 million related to costs associated with
consolidating facilities and personnel. The balance in the related
reserves of $1.7 million is included in Accrued and other liabilities on
the balance sheet at September 30, 1995. Additional expenses of $0.3
million were incurred during the first quarter of fiscal 1995, relating
primarily to literature design for name change and other modifications to
literature for the merged Company. Additional integration costs of
approximately $0.7 million were incurred during the first quarter of fiscal
1996 as the consolidation of the two companies was substantially
completed. These costs were entirely offset by excess integration
reserves which were identified and reversed during the quarter.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
NET REVENUES
The Company derives revenues from the sale of systems, performance of
services and generation of license fees. Systems revenues consist of
software, hardware, upgrades and expansions sold to corporations and other
institutions, including telephone and cellular companies. Service revenues
include a range of voice processing and network management services provided by
Octel Network Services ("ONS") to customers in the voice services market and the
residential market through a Regional Bell Operating Company. Services and
license revenues also include service contracts, applications development,
spares sales and hardware repair and maintenance.
Three Months Ended
------------------------------
Sept. 30, Sept. 30, Increase/
1995 1994 (decrease)
--------- --------- ----------
(Dollars in millions)
Systems $ 71.9 $ 69.9 3%
Services and license 41.8 35.8 17%
------ ------
Total net revenues $113.7 $105.7 8%
====== ======
Percentage of Total Net Revenues
- --------------------------------
Systems 63% 66% (3%)
Services and license 37% 34% 3%
Systems
- -------
The growth in systems revenues for the first quarter of fiscal 1996 was
attributable to revenue increases in the Voice Information Services ("VIS")
market partially offset by decreases in the Global Business Solutions ("GBS")
market over the first quarter of fiscal 1995. VIS increases resulted from
increases in both domestic and international sales. Domestic VIS sales were
favorably affected by a larger number of system expansions and by product
upgrades, while international sales increased due to higher sales in Japan
and Canada. Both domestic and international GBS revenues for the first
quarter of fiscal 1996 decreased compared to the same quarter of fiscal 1995.
GBS sales were negatively influenced by reduced selling activities of the
sales force resulting from the introduction of major new products and related
training and contract revisions during the first quarter of fiscal 1996.
This impact was partially offset by increased sales by the Company's PC
division and Rhetorex subsidiary.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Services and license
- --------------------
Revenues grew in the first quarter of fiscal 1996 as compared to the same
period in fiscal 1995 primarily as a result of the increase in ONS revenues,
as well as revenues from the Company's larger installed base of customers.
During previous quarters, services and license revenues have experienced
significant growth in absolute dollars and as a percentage of net revenues.
The Company may experience lower levels of service revenue growth in future
quarters.
COST OF SALES
Three Months Ended
------------------------------
Sept. 30, Sept. 30, Increase/
1995 1994 (decrease)
--------- --------- ----------
(Dollars in millions)
Systems $ 21.7 $ 21.5 1%
Services and license 25.6 20.6 24%
------ ------
Total cost of sales $ 47.3 $ 42.1 12%
====== ======
Percentage of Net Revenues
- --------------------------
Cost of systems 30% 31% (1%)
Cost of services and license 61% 57% 4%
Total cost of sales 42% 40% 2%
The increase in total cost of sales, as a percentage of total net revenues,
in the first quarter of fiscal 1996 as compared to the same period in fiscal
1995 was due primarily to the increase of services revenues as a percentage
of total net revenues. Services generally carry higher cost of sales than
systems cost of sales.
Systems
- -------
The decrease in cost of systems as a percentage of total systems revenues in
the first quarter of fiscal 1996 as compared to the same period in fiscal
1995 was due primarily to product mix changes. VIS revenues, which generally
carry lower cost of sales than GBS revenues, increased as a percentage of
total systems revenues from the first quarter of fiscal 1995 to the first
quarter of fiscal 1996. The positive effect which resulted from the
increased VIS sales was slightly offset by the negative effect of credits
issued under the Company's trade-in program to replace installed systems with
the recently introduced Overture 250.
Services and license
- --------------------
The increase in cost of services as a percentage of total services and
license revenues in the first quarter of fiscal 1996 as compared to the same
period in fiscal 1995 was due primarily to revenue with little associated
cost of services earned in fiscal 1995 for converting a customer to ONS
services that was not repeated in fiscal 1996.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
On a quarter-to-quarter basis, the channel and product mix of sales can
fluctuate significantly. Such fluctuations can have a positive or negative
impact on operating margins. These fluctuations are difficult to predict.
RESEARCH AND DEVELOPMENT
Three Months Ended
------------------------------
Sept. 30, Sept. 30, Increase/
1995 1994 (decrease)
--------- --------- ----------
(Dollars in millions)
Expenses $ 17.6 $ 17.4 1%
Percentage of total
net revenues 15% 16% (1%)
There was minimal change in the absolute dollars spent on research and
development from the first quarter of fiscal 1995 to the first quarter of
fiscal 1996. Spending increased primarily due to continued spending on the
development of OcteLink and the Company's next-generation client/server
architecture for its Sierra platform, partially offset by the Company's
completion of many backlogged customer commitments and new products. 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 total net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended
-----------------------------
Sept. 30, Sept. 30,
1995 1994 Increase
--------- --------- --------
(Dollars in millions)
Expenses $ 39.2 $ 36.4 8%
Percentage of total
net revenues 34% 34% --
The increase in selling, general and administrative expenses in absolute
dollars resulted primarily from payroll-related expenses for employees hired
to support the growth of the Company's services business and international
operations. The increase was partially offset by decreases related to
facilities and other operational consolidations implemented after the merger
with VMX. The consolidation of facilities was completed during the first
quarter of fiscal 1996. The Company believes that additional selling,
general and administrative expenses will be required to maintain its
competitive position, including the expansion of international sales activities,
and expects that these expenses will increase in absolute terms and could
increase as a percentage of net revenues. Additionally, the Company is
currently involved in patent litigation that is expected to cause an increase
in legal expenses in the future.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
NON-RECURRING CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In August 1994, the Company purchased certain intellectual property and
fixed assets from another company for $5.1 million. Of the total purchase
price, $4.7 million was allocated to in-process technology and $0.4 million
was allocated to property and equipment. The in-process technology was
expensed in the first quarter of fiscal 1995.
INTEGRATION COSTS
In connection with the VMX merger in fiscal 1994, the Company recorded
additional integration costs of $0.3 million in the first quarter of fiscal
1995. The integration costs related primarily to literature design for name
change and other modifications to literature for the merged Company.
Additional integration costs of approximately $0.7 million were incurred during
the first quarter of fiscal 1996 as the consolidation of the two companies
was substantially completed. These costs were entirely offset by excess
integration reserves which were identified and reversed during the quarter.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net for the first quarter of fiscal
1996 decreased $0.2 million from the same period of fiscal 1995. The
decrease was due primarily to foreign currency exchange losses in the first
quarter of fiscal 1996 compared to foreign currency exchange gains in the
first quarter of fiscal 1995.
INCOME TAXES
The Company's effective tax rate was 36% in the first quarter of fiscal 1996
as compared to 32% in the corresponding period of fiscal 1995. The effective
rate was higher in fiscal 1996 due to the expiration of the U.S. federal
research and development credit and the smaller impact that certain tax
benefits have on the effective tax rate. The Company expects its effective tax
rate to decrease slightly if the legislation which extends the research and
development tax credit is passed.
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 market acceptance of new products and upgrades,
growth in the worldwide voice processing market, competition, expansion of
services by its VIS customers, the outcome of litigation and changes in
general economic conditions in any of the countries in which the Company does
business.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company believes that the successful introduction of new and enhanced
products and services will be essential for it to maintain or improve its
competitive position. The Company's backlog on a quarterly basis generally
will not be large enough to ensure that the Company will meet its revenue
targets for a particular quarter. Furthermore, a large percentage of any
quarter's shipments have traditionally been booked in the last month of the
quarter. Consequently, quarterly revenues and operating results will depend
on the volume and timing of new orders received during a quarter, which is
difficult to forecast.
In July 1995, the Company introduced OcteLink - a global "messaging post
office" that could eventually allow the interconnection of virtually any
voice messaging system with networking capability, regardless of protocol,
system size or geographic location. Revenues from OcteLink are expected to
commence during the latter part of the second quarter of fiscal 1996 but are not
expected to be material for the fiscal year. The Company has incurred
additional research and development expenditures to launch OcteLink and
expects to incur additional costs in future quarters. Although the Company
believes OcteLink is a viable global messaging network, there is currently
no reliable data regarding the demand for such services in multiple customer
segments. Furthermore, demand for a global messaging network may be slow to
materialize or potential competitors may successfully introduce alternative
solutions to OcteLink that achieve better market acceptance.
The Company introduced the Overture Family of message servers in July 1995.
The Overture 250, which replaced the Aspen family, is a mid-level system
within the GBS product line designed for medium-sized businesses and large
branch offices. Although the Company anticipates a favorable reception of the
Overture 250 into the marketplace, there can be no assurance that it will be
successful in generating incremental sales. Additionally, the Company has
issued credits under its trade-in program to replace installed systems with
the Overture 250. These trade-in costs have negatively affected, and will
continue to negatively affect, gross margins.
The Company is also developing "unified messaging" products for voice, fax
and electronic mail messaging. Unified messaging essentially unites voice,
fax and e-mail together in a client/server architecture that uses standard PC
and LAN technology. This integration brings together several discrete
technologies into a single mailbox that provides user access from a telephone or
a PC. In May 1995, Octel announced the first component of its unified
messaging technology that will be available on Microsoft Exchange, a LAN-
based, enterprise-wide messaging architecture. Current expectations are for
revenue to commence in fiscal 1997; however, product introduction may not be
successful in the marketplace or it could be delayed, thereby reducing future
expected revenues or resulting in additional expenses to bring the product to
market.
The timely introduction and market acceptance of the Company's next-
generation client/server architecture for its Sierra platform is a key factor
in determining the Company's success in the VIS market, and the Company is
focusing significant resources and talent on developing and bringing products
using this architecture to market. The new architecture is scheduled for first-
phase release in fiscal 1996; however, the introduction of products using this
architecture may be delayed, allowing competitors to gain a market share
advantage, or such products may not be successful in the marketplace, thereby
resulting in additional expenses to bring the product to market or reducing
future expected revenues.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
During the latter half of fiscal 1995, the Company adopted a new, capacity-
based pricing approach for its largest GBS system, the XC-1000. This pricing
approach was also adopted for the Overture systems introduced during fiscal
1996. This approach allows customers to purchase systems with only part of
the equipment's capacity enabled and then have additional capacity enabled in
the future upon payment of additional fees. While the Company believes that
this approach will make it more competitive, this approach may not be successful
in winning additional sales or may defer revenue that might have otherwise
been earned earlier. Difficulties in implementing this approach, delays or
adverse results due to renegotiation of sales and distribution agreements to
accommodate capacity-based pricing, deferral of revenue or the failure to
generate additional sales could have an adverse effect on the Company's
results of operations.
Due to the factors noted above and elsewhere in management's discussion and
analysis of financial condition and results of operations, the Company's
future earnings and Common Stock price may be subject to significant
volatility, particularly on a quarterly basis. Past financial performance
should not be considered a reliable indicator of future performance and
investors should not use historical trends to anticipate results or trends in
future periods. Any shortfall in revenue or earnings from the levels
anticipated by securities analysts could have an immediate and significant
adverse effect on the trading price of the Company's Common Stock in any given
period. Additionally, the Company may not learn of such shortfalls until
late in a fiscal quarter, which could result in an even more immediate and
adverse effect on the trading price of the Company's Common Stock. Both the
Company's Common Stock and the stock market generally have been at or near
historic highs and there can be no assurance that such valuations will continue
or increase. Finally, the Company participates in a highly dynamic industry
which often results in volatility of the Company's Common Stock price.
The Company has been and may in the future continue to be required to
litigate enforcement of its intellectual property or commercial rights or to
defend itself in litigation arising out of claims by third parties. Such
litigation, even if the Company is ultimately victorious, can be extremely
expensive and may have a material adverse effect on the Company's results of
operations in any particular period. Litigation may also occupy management
resources that would otherwise be available to address other aspects of the
Company's business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and equivalents and short-term investments in the first
three months of fiscal 1996 increased $2.3 million from June 30, 1995. Cash
flows from operations resulted in a net source of cash of $2.2 million in the
first three months of fiscal 1996 and $11.7 million for the same period in
fiscal 1995. The decrease from the prior year was due primarily to the timing
of payment of certain liabilities, such as income taxes, and an increase in
inventory.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The primary sources of cash during the first three months of fiscal 1996
resulted from net income of $6.6 million, which included $9.3 million of non-
cash expenses for depreciation and amortization, and cash provided by the
sale of common stock, resulting from the exercise of stock options, of $11.1
million. The primary uses of cash during the first three months of fiscal 1996
were related to an increase in working capital of $13.7 million and investment
in property, plant and equipment of $8.9 million. The change in working
capital resulted from higher inventory levels due to lower than expected
sales, substantial tax payments made during the quarter and the timing of
payments of salaries, commissions, bonuses and other accrued expenses. These
items were offset by the $4.7 million tax benefit of disqualifying Common
Stock dispositions, which is included in the change in accrued and other
liabilities and by lower receivables, which was primarily due to a decrease
in revenues from the fourth quarter of fiscal 1995. The Company expects to
purchase additional equipment and make certain leasehold improvements during
the remainder of fiscal 1996. The Company anticipates that its property,
plant and equipment investments will result in greater efficiencies and
increased flexibility for the Company.
Effective July 6, 1995, the Company entered into a one-year operating lease
agreement to lease undeveloped land on which additional offices may be
constructed adjacent to the existing corporate offices over the next three
years under a similar leasing arrangement. Under the terms of the operating
lease, the Company is contingently liable for up to $9.9 million. Cash payments
under the operating lease were $0.1 million during the first quarter of
fiscal 1996.
In connection with the VMX merger, the Company recorded $18.3 million of
integration costs in fiscal 1994. Expenditures totaled approximately $2.3
million for the first quarter of fiscal 1996 as the consolidation of the
Company's manufacturing facilities was completed. The majority of the
remaining $1.7 million balance is expected to be paid during the second quarter
of fiscal 1996.
In July 1994, the Company's Board of Directors approved the repurchase of
up to 3.5 million shares of its Common Stock over a period of approximately
two years. As of September 30, 1995, the Company had repurchased
approximately 1.3 million shares of its Common Stock at an average per share
price of $20, including the impact of put warrant proceeds. The Company
expects to continue to repurchase its Common Stock under this program. There
were no repurchases during the first quarter of fiscal 1996.
The Company anticipates that cash flows from operations, its existing cash
and equivalents balance, its short-term investment balance and its existing
$30 million bank revolving line of credit will be adequate to meet the
Company's cash requirements through the end of fiscal 1996.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Theis Research, Inc.
- --------------------
In April 1992, the Company filed suit, in California, against Theis Research
, Inc. ("Theis") for declaratory judgment that the Company's products do not
infringe three patents of Theis and that those patents are invalid. In
November 1992, Theis filed a counterclaim against the Company alleging
infringement of seven of Theis' patents. Subsequently, Theis dismissed with
prejudice the claims as to all but four of the patents, and its claims as to one
of the remaining four patents were dismissed on summary judgment. During the
first quarter of fiscal 1995, the Company engaged in a jury trial regarding
infringement of the three remaining patents and the defense of patent
invalidity. In October 1994, the jury returned a verdict finding, among other
things, that Octel was correct in its claim that the three patents at issue
were invalid. Post-trial motions are pending, and, if no settlement between
the parties is reached, it is anticipated that Theis will appeal the verdict.
Gilbarco Inc.
- -------------
In January 1994, Gilbarco Inc. ("Gilbarco") filed suit in the U.S.
District Court for the District of Colorado against the Company and one of
the Company's telephone company customers, U.S. West, alleging infringement
of a Gilbarco patent and seeking unspecified damages. The Company filed an
answer to the complaint denying any infringement of the patent and raising
several affirmative defenses, including an assertion that the patent is
invalid and unenforceable. In September 1994, the claims asserted against
the Company were transferred to the U.S. District Court for the Northern
District of California and those claims asserted against U.S. West were
stayed and administratively closed pending the outcome of the California action.
Fact discovery in the case has been completed, expert discovery is scheduled
for completion in December 1995 and a trial date has been set for March 19,
1996. The Company is currently planning to file one or more motions before
the trial which could dispose of some or all of the claims asserted against it.
The Company believes, based on information currently available, that the
Company is not infringing any valid patents of Theis or Gilbarco.
The Company will vigorously defend the patent infringement claims and any
related claims for compensatory damages. While litigation is inherently
uncertain, the Company believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
11.0 Statement re computation of earnings per share
(b) Report on Form 8-K
No report on Form 8-K was filed by the Company during its fiscal
quarter ended September 30, 1995.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCTEL COMMUNICATIONS CORPORATION
Dated: November 13, 1995
/s/ ROBERT COHN
------------------------------------
Robert Cohn, President and Chief
Executive Officer
/s/ HERZEL ASHKENAZI
------------------------------------
Herzel Ashkenazi, Vice President and
Corporate Controller
(Chief Accounting Officer)
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
EXHIBIT INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
Exhibit Page
Number Description Number
- ------- ----------- ------
11.0 Statement re computation of earnings per share... 2
<PAGE>
Exhibit 11.0
OCTEL COMMUNICATIONS CORPORATION
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts - unaudited)
Three Months Ended
------------------
Sept. 30, Sept. 30,
1995 1994
--------- ---------
Primary net income per share
Net income .......................... $ 6,589 $ 3,814
======= =======
Weighted average shares
outstanding....................... 24,245 23,987
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method)........................... 2,364 1,045
Other............................... (40) 100
------- -------
26,569 25,132
======= =======
Primary net income per share......... $ 0.25 $ 0.15
======= =======
Fully diluted net income per share*
Net income .......................... $ 6,589 $ 3,814
======= =======
Weighted average shares
outstanding........................ 24,245 23,987
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method)........................... 2,367 1,062
Other............................... (40) 100
------- -------
26,572 25,149
======= =======
Fully diluted net income per
share............................. $ 0.25 $ 0.15
======= =======
* This computation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083 although not required for all periods under APB
Opinion No. 15 because it results in dilution of less than three percent.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 23,864
<SECURITIES> 31,025
<RECEIVABLES> 106,908
<ALLOWANCES> 3,037
<INVENTORY> 36,757
<CURRENT-ASSETS> 215,930
<PP&E> 198,267
<DEPRECIATION> 67,841
<TOTAL-ASSETS> 369,978
<CURRENT-LIABILITIES> 72,474
<BONDS> 0
<COMMON> 199,141
0
0
<OTHER-SE> 97,851
<TOTAL-LIABILITY-AND-EQUITY> 369,978
<SALES> 71,959
<TOTAL-REVENUES> 113,730
<CGS> 21,759
<TOTAL-COSTS> 47,346
<OTHER-EXPENSES> 56,095
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,289
<INCOME-TAX> 3,700
<INCOME-CONTINUING> 6,589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,589
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
