_____________________________________________________________________________
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 March 31, 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 requir-
ed 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,
1995 was 23,641,875.
================================================================================
This document consists of 16 pages of which this is Page 1.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - March 31, 1995 and
June 30, 1994....................................... 3
Condensed Consolidated Statements
of Operations - three and nine months ended
March 31, 1995 and 1994............................. 4
Condensed Consolidated Statements
of Cash Flows - nine months ended
March 31, 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................................... 15
Item 6. Exhibits and Reports on Form 8-K.................... 15
SIGNATURES ................................................... 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OCTEL COMMUNICATIONS CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data, unaudited)
March 31, June 30,
1995 1994
--------- --------
ASSETS
Current assets:
Cash and equivalents $ 18,390 $ 17,889
Short-term investments 32,525 68,463
Accounts receivable net of allowance for
doubtful accounts of $2,910 at March 31,
1995 and $2,665 at June 30, 1994 89,809 90,013
Accounts receivable from related parties 7,235 2,159
Inventories 33,804 28,920
Prepaid expenses and other 15,642 13,865
--------- ---------
Total current assets 197,405 221,309
Property, plant and equipment, net of accumulated
depreciation and amortization of $77,835 at
March 31, 1995 and $64,304 at June 30, 1994 120,496 95,076
Deposits and other assets 27,249 29,743
--------- ---------
Total $ 345,150 $ 346,128
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 18,333 $ 16,250
Accrued compensation and employee benefits 21,800 25,010
Income taxes payable 4,312 2,616
Accrued and other liabilities 41,220 44,660
--------- ---------
Total current liabilities 85,665 88,536
Long-term obligations 691 1,400
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, 1995 -
23,588,005 shares, and June 30, 1994 - 24,170,344
shares 176,901 174,356
Notes receivable from sale of stock (1,286) --
Retained earnings 84,100 82,736
Unrealized loss on marketable securities (net of
deferred taxes of $226 at March 31, 1995 and $330
at June 30, 1994) (367) (540)
Accumulated translation adjustments (554) (360)
--------- ---------
Total stockholders' equity 258,794 256,192
--------- ---------
Total $ 345,150 $ 346,128
========= =========
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 Nine Months Ended
March 31, March 31, March 31, March 31,
1995 1994 1995 1994
--------- --------- --------- ---------
Net revenues:
Systems $ 74,653 $ 68,256 $ 223,096 $ 207,887
Service and license 40,389 28,941 113,931 81,812
-------- -------- --------- ---------
Total net revenues 115,042 97,197 337,027 289,699
Costs and expenses:
Cost of systems 25,981 20,906 73,488 65,900
Cost of service 23,391 19,796 65,713 51,363
Research and development 18,786 13,975 54,342 41,663
Selling, general and
administrative 37,724 36,226 111,443 107,355
Non-recurring charge for acquired
in-process research and
development -- -- 4,725 --
Integration costs 1,252 18,258 2,261 18,258
-------- -------- --------- ---------
Total costs and expenses 107,134 109,161 311,972 284,539
-------- -------- --------- ---------
Operating income (loss) 7,908 (11,964) 25,055 5,160
Interest and other income
(expense), net 683 (3,011) 2,209 (1,537)
-------- -------- --------- ---------
Income (loss) before income taxes 8,591 (14,975) 27,264 3,623
Provision for income taxes
(benefit) 2,500 (3,371) 8,600 800
-------- -------- --------- ---------
Net income (loss) $ 6,091 $(11,604) $ 18,664 $ 2,823
======== ======== ========= =========
Net income (loss) per common
and equivalent share $ 0.25 $ (0.49) $ 0.75 $ 0.11
======== ======== ========= =========
Weighted average number of
common shares and equivalents
used in computation 24,729 23,509 24,824 24,934
======== ======== ========= =========
See notes to condensed consolidated financial statements.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands - unaudited)
Nine Months Ended
______________________
March 31, March 31,
1995 1994
--------- ---------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS:
Cash flows from operating activities:
Net income $ 18,664 $ 2,823
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 23,164 22,816
Amortization of premium on marketable
securities 195 --
Deferred income taxes (504) (2,828)
Deferred compensation -- 55
Purchased in-process research and development 4,725 --
Changes in assets and liabilities:
Accounts receivable (4,237) (7,469)
Inventories (4,607) (1,882)
Prepaid expenses and other (2,552) (6,186)
Trade payables 2,126 (2,656)
Accrued compensation and employee benefits (3,402) 1,764
Accrued and other liabilities (755) 16,010
--------- ---------
Net cash provided by operating activities 32,817 22,447
--------- ---------
Cash flows from financing activities:
Sales of common stock, net 5,953 13,328
Repurchases of common stock (25,320) (5,748)
Payment of stockholders' notes receivable -- 56
Proceeds from sale of financial instruments -
put warrants 1,408 --
Repayments of long-term obligations (741) (451)
--------- ---------
Net cash provided by (used for)
financing activities (18,700) 7,185
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (29,967) (103,894)
Sales and maturities of short-term investments 65,979 112,760
Property, plant and equipment additions (42,196) (37,518)
Changes in deposits and other assets (1,885) (9,096)
Acquisition of intellectual and personal property (5,054) --
--------- ---------
Net cash used for investing activities (13,123) (37,748)
--------- ---------
Effect of exchange rate changes on cash (493) 267
--------- ---------
Net increase (decrease) in cash and equivalents 501 (7,849)
--------- ---------
Cash and equivalents:
Beginning of period 17,889 26,576
--------- ---------
End of period $ 18,390 $ 18,727
========= =========
See notes to condensed consolidated financial statements.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements
(March 31, 1995 and 1994 - Unaudited)
1. In the opinion of management, the accompanying unaudited condensed consol-
idated financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the financial position
of the Company as of March 31, 1995, the results of operations for the
three and nine months ended March 31, 1995 and 1994 and cash flows for the
nine months ended March 31, 1995 and 1994.
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 related notes.
Certain fiscal 1994 costs previously reported as selling, general and
administrative expenses have been reclassified to cost of service to conform
to the fiscal 1995 presentation.
2. Short-term Investments
At March 31, 1995 and June 30, 1994, all short-term investments were
classified as "available-for-sale" and consisted of the following
(in thousands):
Unrealized Unrealized Accrued Estimated
Cost Gains Losses Interest Fair Value
-------- ---------- ---------- -------- ----------
At March 31, 1995:
U.S. Government $ 11,843 $ -- $ (372) $ (119) $ 11,352
securities
Municipal notes/
bonds 27,060 13 (234) (407) 26,432
-------- -------- -------- -------- ----------
$ 38,903 $ 13 $ (606) $ (526) $ 37,784
======== ======== ======== ======== ==========
At June 30, 1994:
U.S. Government $ 9,803 $ 9 $ (455) $ (103) $ 9,256
securities
Municipal notes/
bonds 60,598 17 (441) (891) 59,281
-------- -------- -------- -------- ----------
$ 70,401 $ 26 $ (896) $ (994) $ 68,537
======== ======== ======== ======== ==========
These securities were classified on the balance sheet as follows (in
thousands):
March 31, 1995 June 30, 1994
-------------- -------------
Cash equivalents $ 5,785 $ 1,068
Short-term investments 32,525 68,463
---------- ---------
$ 38,310 $ 69,531
========== =========
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements
(March 31, 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):
March 31, 1995 June 30, 1994
-------------- -------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------- ---------- -------- ----------
Due in less than one year $ 5,785 $ 5,759 $ 30,991 $ 30,525
Due in one to three years 17,566 16,724 24,087 23,436
Due thereafter 15,552 15,301 15,323 14,576
-------- ---------- -------- ----------
$ 38,903 $ 37,784 $ 70,401 $ 68,537
======== ========== ======== ==========
For the three and nine months ended March 31, 1995, the Company had
$25,714,000 and $154,808,000 in proceeds from sales of available-for-sale
investments, $0 and $324,000 of gross realized gains and $0 and $343,000
of gross realized losses on those sales and a change in net unrealized
holding loss of $249,000 and $173,000, respectively, included as a
separate component of stockholders' equity.
3. Inventories consist of (in thousands):
March 31, June 30,
1995 1994
--------- --------
Finished goods $ 7,073 $ 5,864
Work-in-process 10,293 12,248
Raw materials 16,438 10,808
--------- --------
Total $ 33,804 $ 28,920
========= ========
4. Net income (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.
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 LIBOR rate 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 March 31,
1995. The line expires in June 1996.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements
(March 31, 1995 and 1994 - Unaudited)
At March 31, 1995, the Company had $1.7 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 and U.S. dollars and
expire on various dates through November 1995.
6. Interest and other income (expense), net consists of the following (in
thousands):
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
1995 1994 1995 1994
--------- --------- --------- ---------
Interest and investment income $ 682 $ 814 $ 1,803 $ 2,642
Gain (loss) on sale of
short-term investments, net -- (21) (19) 91
Foreign exchange gains
(losses), net 116 (161) 664 (274)
Other expense, net (115) (51) (239) (404)
Merger expenses (Note 7) -- (3,592) -- (3,592)
------ -------- -------- --------
Total $ 683 $(3,011) $ 2,209 $(1,537)
====== ======== ======== ========
7. Integration costs and merger expenses
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 consolidat-
ing facilities and personnel. The balance in the related reserves of $7.6
million is included in Accrued and other liabilities on the balance sheet
at March 31, 1995. Additional expenses of $2.3 million have been incurred
in fiscal 1995, relating primarily to literature design for name change
and other modifications to literature for the merged Company and the
consolidation of processes and computer systems of the merged Company.
These expenses have been reclassified from prior fiscal 1995 quarters'
presentations and are shown as Integration costs on the Condensed Consol-
idated Statements of Operations.
Merger expenses
---------------
In connection with the VMX merger, $3.6 million of merger expenses were
incurred and charged to Interest and other income (expense) during the
third quarter of fiscal 1994. These non-recurring expenses included
investment banking fees of $2.6 million, legal and accounting fees of $0.6
million and other miscellaneous expenses of $0.4 million.
8. Acquired in-process research and development
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 was
allocated to property and equipment. The in-process technology was
expensed in the first quarter of fiscal 1995.
<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, license fees and
performance of services. Systems revenues consist of equipment, upgrades and
expansions sold to corporations and other institutions, as well as phone and
cellular companies. Service revenues consist of network management services
provided by Octel Network Services (ONS) and hardware repair and maintenance.
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
March 31, March 31, Increase/ March 31, March 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
--------- --------- ---------- --------- --------- ---------
(Dollars in millions)
Systems $ 74.6 $ 68.3 9% $ 223.1 $ 207.9 7%
Service and
license 40.4 28.9 40% 113.9 81.8 39%
-------- -------- -------- --------
Total net
revenues $ 115.0 $ 97.2 18% $ 337.0 $ 289.7 16%
======== ======== ======== ========
Percent of Revenues
- -------------------
Systems 65% 70% (5%) 66% 72% (6%)
Service and license 35% 30% 5% 34% 28% 6%
Systems
- -------
The growth in systems revenues for the third quarter of fiscal 1995 was
attributable to revenue increases in the Voice Information Services (VIS)
market and the Global Business Solutions (GBS) market over the third quarter
of fiscal 1994. VIS increases were primarily derived from an increase in
domestic sales and, to a lesser extent, an increase in international sales.
Domestic GBS revenues for the third quarter of fiscal 1995 decreased compared
to the same quarter of fiscal 1994, whereas international GBS revenues
increased in the third quarter of fiscal 1995 as compared to the same quarter
of fiscal 1994. Special promotions for new products introduced during the
third quarter of fiscal 1995 put downward pressure on the average selling
price of larger systems sold to GBS customers. Additionally, the Company
experienced a decrease in GBS upgrades and expansions revenue during the
third quarter of fiscal 1995 as compared to the third quarter of fiscal 1994.
The systems revenue increase in the first nine months of fiscal 1995 is
due primarily to increased GBS systems revenues attributable to the sale of
systems to new and existing customers and the sale of upgrades, expansions
and new features. GBS revenues were higher for both domestic and
international markets for the first nine months of fiscal 1995 compared to
the same period for fiscal 1994. Total VIS revenues for the first nine
months of fiscal 1995 increased over the same period in fiscal 1994 due to an
increase in sales to the international market, partially offset by a decrease
in the domestic market. Revenue in future quarters could be affected by the
extent and timing of new orders from VIS providers. 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.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Service and license
- -------------------
Revenues grew in the third quarter and first nine months of fiscal 1995 as
compared to the same periods in the prior year 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, service 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 Nine Months Ended
---------------------------- ------------------------------
March 31, March 31, Increase/ March 31, March 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
--------- --------- ---------- --------- --------- ----------
(Dollars in millions)
Cost of Systems $ 26.0 $ 20.9 24% $ 73.5 $ 65.9 12%
Cost of Service 23.4 19.8 18% 65.7 51.4 28%
-------- -------- -------- --------
Total cost of
sales $ 49.4 $ 40.7 21% $ 139.2 $ 117.3 19%
======== ======== ======== ========
Percent of Revenues
- -------------------
Cost of Systems 35% 31% 4% 33% 32% 1%
Cost of Service 58% 68% (10%) 58% 63% (5%)
Total cost of sales 43% 42% 1% 41% 40% 1%
The increase in total cost of sales, as a percentage of total net
revenues, in the third quarter of fiscal 1995 as compared to the same period
in fiscal 1994 is due to an increase in the cost of systems. In the first
nine months of fiscal 1995 total cost of sales as a percentage of total net
revenues increased over the first nine months of fiscal 1994 due to an
increase in the cost of systems as well as the continued growth of service
and license revenues, which have a higher cost of sales structure than system
sales.
Systems
- -------
The increase in cost of systems as a percentage of total systems revenues in
the third quarter of fiscal 1995 compared to the same period in the prior
year was due primarily to product mix changes, particularly a decrease in
sales of upgrades and expansions which generally carry lower costs. The
increase in cost of systems as a percentage of total net systems revenues in
the first nine months of fiscal 1995 was due primarily to product mix changes.
Service and license
- -------------------
The decreases in cost of services as a percentage of total service and
license revenues in the third quarter and the first nine months of fiscal
1995 compared to fiscal 1994 were primarily due to the increase in ONS
revenue, which has a lower cost structure as a percentage of service
and license revenue than hardware repair and maintenance.
<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 Nine Months Ended
----------------------------- -----------------------------
March 31, March 31, Increase/ March 31, March 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
--------- --------- ---------- --------- --------- ----------
(Dollars in millions)
Expenses $ 18.8 $ 14.0 34% $ 54.3 $ 41.7 30%
Percent of revenues 16% 14% 2% 16% 14% 2%
The increase in research and development expenses is due to the Company's
increased spending on projects to meet customer commitments, the adaptation
of existing products and technology for international markets, and the
continued commitment to the development of new products and enhancements to
existing products. Additionally, the Company incurred a one-time charge of
approximately $1.2 million during the third quarter of fiscal 1995 related to
a canceled contract for software development. 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 Nine Months Ended
----------------------------- -----------------------------
March 31, March 31, Increase/ March 31, March 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
--------- --------- ---------- --------- --------- ----------
(Dollars in millions)
Expenses $ 37.7 $ 36.2 4% $ 111.4 $ 107.4 4%
Percent of revenues 33% 37% (4%) 33% 37% (4%)
The increase in absolute dollars resulted from the Company's continuing
efforts to develop and manage its organization, train new and existing
personnel and the commitment of resources to support international
opportunities. These increases were partially offset by a reduction in legal
expenses of approximately $0.9 million related to ongoing patent litigation
incurred in the first nine months of fiscal 1994, the absence of costs
related to the departure of the prior CEO which were incurred in the second
quarter of fiscal 1994 and reduced occupancy costs due to the consolidation
of certain office facilities 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. Additionally, the Company
is currently involved in patent litigation that may 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 $18.3
million of integration costs. In fiscal 1995, an additional $2.3 million of
integration costs were incurred which related primarily to literature design
for name change and other modifications to literature for the merged Company
and the consolidation of processes and computer systems of the merged Company.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net for the third quarter and first
nine months of fiscal 1995 improved $3.7 million from the same periods of
fiscal 1994. The improvement is primarily attributable to merger expenses of
$3.6 million recorded in the third quarter of fiscal 1994 for which no such
expenses were incurred in fiscal 1995. Interest and investment income for
the third quarter and first nine months of fiscal 1995 decreased compared to
fiscal 1994 as a result of lower cash and equivalents and short-term invest-
ment balances in fiscal 1995. The decrease in interest and investment income
was offset by net foreign exchange gains in the third quarter and first nine
months of fiscal 1995 as compared to net losses in the same periods in fiscal
1994.
INCOME TAXES
The Company's effective tax rate was 29 percent and 32 percent in the third
quarter and first nine months of fiscal 1995, respectively, as compared to 23
percent and 22 percent in the corresponding periods of fiscal 1994. The
effective rate was lower in fiscal 1994 due to a combination of factors.
First, various tax assets of VMX that had been fully reserved were recognized
as a tax benefit. Additionally, the retroactive reinstatement of the federal
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 Company
expects its effective tax rate to be approximately 32 percent for the
remainder of fiscal 1995.
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,
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 will not
generally be large enough to assure 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. The integration of certain operations as a result of
the merger with VMX continues to require the dedication of management
resources which may temporarily distract attention from the day-to-day
business of the Company. The Company is executing a plan to reduce certain
expenses by eliminating duplicate facilities, employees, marketing programs
and other expenses. These efforts are expected to continue through the first
quarter of fiscal 1996 as the consolidation of the Company's manufacturing
facilities progresses. 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. Although it believes there are opportunities to gain from
synergies resulting from the VMX merger, 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.
The Company has recently adopted a new, capacity-based pricing approach for
its largest GBS system, the XC-1000. 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, there can be no assurance that this approach will be successful
in winning additional sales or will not defer revenue that might have other-
wise been received earlier. Difficulties in implementing this approach,
deferral of revenue or the failure to generate additional sales could have
an adverse effect on the Company and its results of operations.
Due to the factors noted above, 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 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. Further, 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.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and equivalents and short-term investments in the first
nine months of fiscal 1995 decreased $35.4 million from June 30, 1994. Cash
flows from operations resulted in a net source of cash of $32.5 million in
the first nine months of fiscal 1995. The primary uses of cash during the
first nine months of fiscal 1995 were investment in property, plant and
equipment of $42.2 million, the repurchase of common stock for $25.3 million
and the payment of $5.1 million for the August 1994 purchase of certain
intellectual property and fixed assets.
As of March 31, 1995, the Company had invested $48.2 million in the
purchase of land and the development of the Company's new corporate offices
on that land. The Company now occupies those facilities. The Company
expects to purchase additional equipment and make certain leasehold improve-
ments during the remainder of fiscal 1995. The Company anticipates that its
property, plant and equipment investments will result in reduced operating
expenses, greater efficiencies and increased capacity and flexibility for the
Company.
In connection with the VMX merger, the Company recorded $18.3 million of
integration costs in fiscal 1994. As of March 31, 1995, the balance of
expected future cash expenditures was $7.6 million. The majority of this
amount will be spent during the remainder of fiscal 1995 and the first
quarter of fiscal 1996 as consolidation of the Company's manufacturing
facilities progresses.
In addition to the integration costs recorded in fiscal 1994, the Company
incurred additional merger-related integration costs during fiscal 1995 of
$2.3 million, which have been charged to operations. Remaining integration
charges are expected to be in the form of cash expenditures and are estimated
at approximately $2.1 million. The remaining costs are primarily for consol-
idating processes and computer systems of the merged Company and literature
design for name change and other modifications to literature for the merged
Company.
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 March 31, 1995, the Company had repurchased 1,165,600
shares of its Common Stock at an average per share price of $22. The Company
expects to continue to repurchase its Common Stock under this program.
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. During the third quarter of fiscal
1995, the remaining balance of the $5.1 million purchase price was paid.
The Company anticipates that cash flows from operations and existing cash
and equivalents and short-term investment balances, together with its exist-
ing $30 million bank line, will be adequate to meet the Company's cash
requirements through the end of calendar 1995.
<PAGE>
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Theis Research, Inc.
- --------------------
The Company and Northern Telecom were engaged in a jury trial versus Theis
Research, Inc. (Theis) in the Northern District of California during the
first quarter of fiscal 1995. The trial centered on Theis' allegation that
Octel and Northern Telecom were infringing three patents held by Theis. In
October 1994, the jury returned a verdict finding, among other things, that
Octel and Northern Telecom were correct in their 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 its
telephone company customers, U.S. West, alleging infringement of a United
States patent and seeking unspecified damages. The Company filed an answer
to the complaint denying any infringement and asserting 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 is substantially complete and a trial date has been set
for October 16, 1995.
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 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 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 March 31, 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: May 11, 1995
/s/ ROBERT COHN
-----------------------------------
Robert Cohn, President and Chief Executive
Officer
/s/ HERZEL ASHKENAZI
------------------------------------
Herzel Ashkenazi, Controller
(Chief Accounting Officer)
OCTEL COMMUNICATIONS CORPORATION
EXHIBIT INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
Exhibit Page
Number Description Number
- ------ ----------- ------
11 Statement re computation of earnings per share.......... 2
<PAGE>
Exhibit 11
OCTEL COMMUNICATIONS CORPORATION
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts - unaudited)
Three Months Ended Nine Months Ended
-------------------- -------------------
March 31, March 31, March 31, March 31,
1995 1994 1995 1994
--------- --------- --------- ---------
Primary net income per share
Net income (loss)............ $ 6,091 $ (11,604) $ 18,664 $ 2,823
========= ========= ========= =========
Weighted average shares
outstanding................ 23,516 23,566 23,678 23,370
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method).................... 954 (57) 975 1,554
Other........................ 259 -- 171 10
--------- -------- -------- --------
24,729 23,509 24,824 24,934
========= ======== ======== ========
Primary net income (loss) per
share..................... $ 0.25 $ (0.49) $ 0.75 $ 0.11
========= ======== ======== ========
Fully diluted net income per share*
Net income (loss)........... $ 6,091 $(11,604) $ 18,664 $ 2,823
========= ======== ======== ========
Weighted average shares
outstanding............... 23,516 23,566 23,678 23,370
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method).................. 954 (57) 976 1,644
Other...................... 259 -- 172 10
--------- -------- ------- -------
24,729 23,509 24,826 25,024
========= ======== ======= =======
Fully diluted net income (loss) per
share.................... $ 0.25 $ (0.49) $ 0.75 $ 0.11
========= ======== ======= =======
* 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.
2
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