<PAGE> 1
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, 1996, 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, 1996 was 51,271,285.
This document consists of 18 pages of which this is Page 1.
<PAGE> 2
OCTEL COMMUNICATIONS CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - September 30, 1996 and
June 30, 1996................................................... 3
Condensed Consolidated Statements
of Operations - three months ended
September 30, 1996 and 1995..................................... 4
Condensed Consolidated Statements
of Cash Flows - three months ended
September 30, 1996 and 1995..................................... 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 2. Changes in Securities............................... ........... 17
Item 6. Exhibits and Reports on Form 8-K................................ 17
SIGNATURES ................................................................ 18
</TABLE>
2
<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>
Sept. 30, June 30,
1996 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,511 $ 24,492
Short-term investments 50,157 51,257
Accounts receivable net of allowance for doubtful accounts
of $3,324 at Sept. 30, 1996 and $3,750 at June 30, 1996 160,480 166,918
Inventories 47,880 40,411
Prepaid expenses and other 23,239 18,639
---------- -----------
Total current assets 301,267 301,717
Property, plant and equipment, net of accumulated
depreciation and amortization of $97,692 at
Sept. 30, 1996 and $89,864 at June 30, 1996 142,097 136,916
Deposits and other assets 34,537 30,585
---------- -----------
Total $ 477,901 $ 469,218
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 22,933 $ 18,399
Accrued compensation and employee benefits 23,806 34,801
Income taxes payable -- 9,755
Accrued and other liabilities 40,896 40,897
---------- -----------
Total current liabilities 87,635 103,852
Long-term obligations 288 374
Stockholders' equity:
Preferred stock, $.001 par value - authorized,
5.0 million shares; none outstanding -- --
Common stock, $.001 par value - authorized,
100.0 million shares; outstanding: Sept. 30, 1996 - 52.4
million shares, and June 30, 1996 - 51.4 million shares 246,473 232,250
Notes receivable from employees (4,239) (4,152)
Retained earnings 148,731 138,239
Other stockholders' equity (987) (1,345)
---------- -----------
Total stockholders' equity 389,978 364,992
---------- -----------
Total $ 477,901 $ 469,218
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
Sept.30, Sept.30,
1996 1995
-------- --------
<S> <C> <C>
NET REVENUES:
Systems $ 91,294 $ 71,959
Services and licenses 47,941 41,771
-------- --------
Total net revenues 139,235 113,730
COSTS AND EXPENSES:
Cost of systems 27,725 21,759
Cost of services and licenses 30,027 25,587
Research and development 21,914 17,566
Selling, general and administrative 44,388 39,178
-------- --------
Total costs and expenses 124,054 104,090
-------- --------
Operating income 15,181 9,640
Interest and other income, net 1,011 649
-------- --------
Income before income taxes 16,192 10,289
Provision for income taxes 5,700 3,700
-------- --------
NET INCOME $ 10,492 $ 6,589
======== ========
NET INCOME PER COMMON
AND EQUIVALENT SHARE $ 0.19 $ 0.12
======== ========
Weighted average number of
common shares and equivalents
used in computation $ 56,160 $ 53,138
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
Sept. 30, Sept. 30,
1996 1995
-------- -------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,492 $ 6,589
Adjustments to reconcile net income to net
cash (used for) provided by operating activities:
Depreciation and amortization 7,271 9,258
Amortization of premium on marketable securities 16 73
Deferred income taxes (802) (33)
Changes in assets and liabilities:
Accounts receivable 6,601 12,693
Inventories (10,457) (5,842)
Prepaid expenses and other (5,487) (4,654)
Trade payables 4,483 (2,330)
Accrued compensation and employee benefits (11,052) (6,672)
Income taxes payable and accrued and other liabilities (2,675) (6,879)
-------- -------
Net cash (used for) provided by operating activities (1,610) 2,203
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 9,057 11,081
Payment of employees' notes receivable 122 50
Repayments of long-term obligations (87) (89)
-------- -------
Net cash provided by financing activities 9,092 11,042
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (175,314) (14,416)
Sales and maturities of short-term investments 176,416 11,385
Property, plant and equipment additions (13,768) (8,858)
Changes in deposits and other assets 101 (2,737)
-------- -------
Net cash used for investing activities (12,565) (14,626)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 102 724
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,981) (657)
-------- -------
CASH AND CASH EQUIVALENTS:
Beginning of period 24,492 24,521
-------- -------
End of period $ 19,511 $ 23,864
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SEPTEMBER 30, 1996 AND 1995 - UNAUDITED)
1. The condensed consolidated financial statements include the Company and
its wholly owned subsidiaries. Intercompany balances and transactions
are eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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, 1996 and the
results of operations and cash flows for the three months ended
September 30, 1996 and 1995.
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 consolidated financial statements and related notes.
2. Short-term investments
At September 30, 1996 and June 30, 1996, 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, 1996:
U.S. Government
securities $ 8,582 $ -- $(185) $ (19) $ 8,378
Municipal notes/bonds 47,662 87 (57) (462) 47,230
-------- ----- ----- ----- --------
$ 56,244 $ 87 $(242) $(481) $ 55,608
======== ===== ===== ===== ========
At June 30, 1996:
U.S. Government
securities $ 8,470 $ 3 $(194) $ (87) $ 8,192
Municipal notes/bonds 47,236 38 (20) (352) 46,902
-------- ---- ----- ----- --------
$ 55,706 $ 41 $(214) $(439) $ 55,094
======== ==== ===== ===== ========
</TABLE>
These securities were classified on the balance sheet as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
<S> <C> <C>
Cash equivalents $ 5,932 $ 4,276
Short-term investments 50,157 51,257
---------- ----------
$ 56,089 $ 55,533
========== ==========
</TABLE>
6
<PAGE> 7
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SEPTEMBER 30, 1996 AND 1995 - UNAUDITED)
The cost and estimated fair value of available-for-sale debt securities
by contractual maturity, consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1996
-------------------------
Estimated
Cost Fair Value
---------- ---------
<S> <C> <C>
Due in one year or less $ 35,604 $ 35,364
Due in one to five years 10,663 10,522
Due in five to ten years 2,650 2,446
Due thereafter 7,327 7,276
---------- ---------
$ 56,244 $ 55,608
========== =========
</TABLE>
For the three months ended September 30, 1996 and 1995, the Company had
$176.4 million and $55.2 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):
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------- -------
<S> <C> <C>
Finished goods $10,478 $ 7,236
Work-in-process 13,067 11,218
Raw materials 24,335 21,957
------- -------
Total $47,880 $40,411
======= =======
</TABLE>
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 1996, 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, equity distributions, 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, 1996. The line expires in June 1998.
7
<PAGE> 8
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(SEPTEMBER 30, 1996 AND 1995 - UNAUDITED)
At September 30, 1996, the Company had $4.7 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 Pound Sterling,
Japanese Yen, French Francs and U.S. Dollars and expire on various
dates through December 25, 1999.
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 under a 97% first-loss clause for up to $9.9 million. In June
1996, the lease was extended for another one-year period.
7. Interest and other income, net consists of the following
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
---------------------
Sept. 30, Sept. 30,
1996 1995
-------- --------
<S> <C> <C>
Interest and investment income, net $ 871 $ 718
Loss on sale of short-term investments, net -- (4)
Foreign exchange gains (losses), net 21 (44)
Other income (expense), net 119 (21)
-------- --------
Total $ 1,011 $ 649
======== ========
</TABLE>
8
<PAGE> 9
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 voice messaging systems,
performance of services and generation of license fees from its two strategic
business units: Global Business Solutions ("GBS") and Voice Information Services
("VIS"). GBS consists of system sales, services and maintenance contract sales
to corporations and institutions, including universities and governments. VIS
consists of system sales, services and maintenance contract sales to
telecommunications service providers such as telephone companies and wireless
providers. Certain services are provided to the GBS and VIS markets by the
Company's Octel Network Services ("ONS") and OcteLink operations. The services
provided by ONS include a range of voice processing and network management
services.
Total net revenues for GBS, including ONS services, for the first
quarter of fiscal 1997 were $72.4 million compared to $70.7 million in the same
period last year. Total net revenues for VIS, including ONS services, for the
first quarter of fiscal 1997 were $66.8 million compared to $43.0 million in the
same period last year. ONS and OcteLink revenues were $19.3 million for the
first quarter of fiscal 1997 compared to $17.0 million for the same period in
fiscal 1996.
GBS and VIS systems revenues consist of software, hardware, and
upgrades and expansions to existing systems. Services revenues, as presented
below, include ONS as well as service contracts, applications development,
spares sales and hardware repair and maintenance.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
Sept. 30, Sept. 30, Increase/
1996 1995 (decrease)
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Systems $ 91.3 $ 71.9 27%
Services and licenses 47.9 41.8 15%
-------- --------
Total net revenues $ 139.2 $ 113.7 22%
======== ========
Percentage of Total Net Revenues
- --------------------------------
Systems 66% 63% 3%
Services and licenses 34% 37% (3%)
</TABLE>
Systems
The growth in systems revenues for the first quarter of fiscal 1997 was
attributable to revenue increases in the VIS market and, to a lesser extent, the
GBS market compared to the first quarter of fiscal 1996. VIS increases resulted
from increases in international sales, particularly in the Philippines and
Europe. Domestic VIS sales decreased compared to the prior year. VIS sales are
likely to be adversely affected in future fiscal 1997 quarters because of a
delay in a software release for a product upgrade for existing customers.
Increases in European GBS sales were partially offset by lower sales in the U.S.
and Canada. The decrease in U.S. GBS sales was partially offset by increased
sales by the Company's Rhetorex subsidiary and PC division.
9
<PAGE> 10
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Services and licenses
Revenues grew in the first quarter of fiscal 1997 as compared to the
same period in fiscal 1996 primarily as a result of the increase in revenues for
services provided to the Company's larger installed base of customers and an
increase in ONS revenues. The Company continues to focus resources on increasing
revenue from its services and licenses business and anticipates that services
and licenses revenues as a percentage of net revenues will continue to fluctuate
based on system sales.
COST OF SALES
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
Sept. 30, Sept. 30, Increase/
1996 1995 (decrease)
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Cost of systems $ 27.7 $ 21.7 27%
Cost of services and licenses 30.0 25.6 17%
-------- --------
Total cost of sales $ 57.7 $ 47.3 22%
======== ========
Percentage of Net Revenues
- --------------------------
Cost of systems 30% 30% --
Cost of services and licenses 63% 61% 2%
Total cost of sales 41% 42% (1%)
</TABLE>
The decrease in total cost of sales, as a percentage of total net
revenues, in the first quarter of fiscal 1997 as compared to the same period in
fiscal 1996 was due primarily to the increase in system sales as a percentage of
total net revenues. Systems sales generally carry lower cost of sales as a
percentage of total net revenues than services and licenses.
Systems
The increase in systems cost of sales in absolute dollars was
consistent with the increase in systems revenues and was consistent from the
first quarter of fiscal 1996 to the first quarter of fiscal 1997 as a percentage
of net systems revenues. However, cost as a percentage of net revenues may
fluctuate in the future depending on product mix. Different systems and like
systems with different configurations have varying cost structures and product
mix is difficult to predict.
Services and licenses
The increase in cost of services and licenses, as a percentage of
services and licenses revenues, from the first quarter of fiscal 1996 to the
first quarter of fiscal 1997 is due primarily to higher employee-related costs
associated with service contracts and hardware repair and maintenance
activities. This increase was partially offset by a decrease in ONS cost of
services
10
<PAGE> 11
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
as a percentage of net services revenues which resulted from ONS maintaining
costs at a consistent level.
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
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
Sept. 30, Sept. 30, Increase/
1996 1995 (decrease)
------------ ------------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Expenses $ 21.9 $ 17.6 25%
Percentage of total net revenues 16% 15% 1%
</TABLE>
The increase in research and development expenditures in absolute
dollars is due primarily to increased development associated with Unified
Messaging, Intelligent Messaging Architecture ("IMA") and OcteLink, as well as
research activities for future products and services. 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
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
Sept. 30, Sept. 30,
1996 1995 Increase
------------ ------------ --------
(Dollars in millions)
<S> <C> <C> <C>
Expenses $ 44.4 $ 39.2 13%
Percentage of total net revenues 32% 34% (2%)
</TABLE>
The increase in selling, general and administrative expenses in
absolute dollars resulted primarily from increased headcount and costs
associated with a new sales program effective for fiscal 1997. The increase was
partially offset by a decrease in legal costs related to the Gilbarco
litigation.
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.
11
<PAGE> 12
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net for the first quarter of
fiscal 1997 increased $0.4 million from the same period of fiscal 1996. The
increase was due primarily to higher interest and investment income which
resulted from higher average cash and cash equivalents and short-term investment
balances in the first quarter of fiscal 1997 compared to the first quarter of
fiscal 1996.
INCOME TAXES
The Company's effective tax rate was 35.2% in the first quarter of
fiscal 1997 as compared to 36.0% in the corresponding period of fiscal 1996. The
effective rate was lower in fiscal 1997 due to the extension of the U.S. federal
research and development credit. The Company expects its effective tax rate to
approximate 35.5% for fiscal 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Various paragraphs of this Item 2 (Management's Discussion and Analysis
of Financial Condition and Results of Operations) contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
including, but not limited to, statements regarding future VIS sales, revenues
from the services and licenses business, fluctuations in the cost of systems,
ability to collect accounts receivable in a timely fashion, effect of
investments in property, plant and equipment, research and development expenses
and selling, general and administrative expenses. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors set forth below and elsewhere in this document.
The Company believes that in the future its results of operations could
be affected by various factors including, but not limited to, 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.
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. In October 1996, the Company announced the delay of a
software release for its Sierra platform. The release, which is an upgrade for
existing customers, was originally expected to begin shipping late in the first
quarter of fiscal 1997 but has been delayed until the latter portion of fiscal
1997. As a result, expected revenues in future fiscal 1997 quarters are likely
to be adversely affected and the Company's quarterly trend of results of
operations may be negatively affected throughout the remainder of fiscal 1997.
While the Company believes that this delay will not put contracts or customer
relationships at risk, and that this delay is merely a timing issue, there can
be no assurance that further delays will not occur, that customer relationships
will not be damaged or that expected revenues related to this upgrade will not
be permanently lost.
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
12
<PAGE> 13
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
capability, regardless of protocol, system size or geographic location. OcteLink
revenues may be derived from either the sale of hardware to service providers or
from OcteLink directly providing services to a customer. Revenues from OcteLink
commenced during the second quarter of fiscal 1996 but have not been material to
date. The Company has incurred additional research and development and selling,
general and administrative 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. Furthermore, demand for a global messaging network
may be slow to materialize, may not materialize or competitors may successfully
introduce alternative solutions to OcteLink that achieve better market
acceptance.
The Company is currently engaged in various new projects and product
development which are necessary to help maintain market share and Octel's
leadership position in the industry. Two of the more significant projects are
"unified messaging" products for voice, fax and electronic mail messaging and
the Company's next-generation client/server architecture for its Sierra
platform, IMA. 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 the
latter half of fiscal 1997 but are not expected to be material for fiscal 1997.
IMA was originally scheduled for first-phase release during the end of fiscal
1996; however, shipment of this product has been delayed in order to allow for
incorporating newly available third party technologies, the completion of
product development and the release of a more feature-rich product. The
successful introduction of these and other new products is dependent on a number
of factors, some of which are beyond the Company's control, including product
acceptance in the marketplace, introduction of competitive products by existing
or new competitors, changes in technology, price competition and other factors.
Any delay in introducing new products or failure of such products to achieve
substantial market share could significantly reduce future expected revenues or
result in the need for additional expenses to bring the product to market.
Furthermore, there can be no assurance that the Company will be successful in
introducing new products or that such products will generate significant
revenues or profits.
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 Overture and Sierra system sales 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. The Company adopted contract
accounting during fiscal 1996 (based upon percentage-of-completion) to recognize
revenue in connection with capacity on demand transactions when firm commitments
to purchase additional capacity exist. Under this method, revenues are
recognized as a function of the capacity provided to the customer and costs are
recognized proportionally to revenue recognized. Consequently, certain costs are
deferred in the Balance Sheet under the caption "Deposits and other assets."
While the Company believes that capacity-based pricing will make it more
competitive, difficulties in implementing this approach, delays or adverse
results due to renegotiation of sales and distribution agreements to accommodate
capacity-based pricing or the failure to generate additional sales could have an
adverse effect on the Company's results of operations.
13
<PAGE> 14
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. 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 cash equivalents and short-term investments in
the first three months of fiscal 1997 decreased $6.1 million from June 30, 1996.
Cash flows from operations resulted in a net use of cash of $1.6 million in the
first three months of fiscal 1997 compared to a net source of cash of $2.2
million for the same period in fiscal 1996. The decrease from the prior year was
due primarily to the timing of payment of certain liabilities, including income
taxes, profit sharing and commissions, an increase in inventory and lower
collections from accounts receivable. The increase in inventory is attributable
to lower than expected sales for the first quarter of fiscal 1997. The lower
than expected decrease in accounts receivable collections is attributable to a
reorganization of the Company's customer administration group in which employees
are being trained to handle multiple responsibilities such as order
administration and collections. As a result of time required for training, less
time was available for collection efforts. The Company expects this situation to
reverse in future quarters.
The primary sources of cash during the first three months of fiscal
1997 resulted from net income of $10.5 million, which included $7.3 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 $9.1
million. The primary uses of cash during the first three months of fiscal 1997
were related to an increase in working capital of $15.8 million and investment
in property, plant and equipment of $13.8 million. The Company expects to
purchase additional equipment and make certain leasehold improvements during the
remainder of fiscal 1997. 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
14
<PAGE> 15
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
corporate offices over the next three years under a similar leasing arrangement.
In June 1996, the operating lease was extended for another one-year period.
Under the terms of the operating lease, the Company is contingently liable under
a 97% first-loss clause for up to $9.9 million. Cash payments under the
operating lease were not significant during the first quarter of fiscal 1997.
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, 1996, the Company had repurchased approximately
3.2 million shares of its Common Stock at an average per share price of $11, net
of the impact of sales of put warrants. In June 1996, the Company's Board of
Directors approved the repurchase of an additional 3.5 million shares of its
Common Stock over an additional two-year period. The Company expects to continue
to repurchase its Common Stock under this program if warranted by market
conditions. There were no repurchases during the first quarter of fiscal 1997,
however in October 1996, the Company repurchased an additional 1.5 million
shares at an average per share price of $14.78, net of the impact of sales of
put warrants.
The Company anticipates that cash flows from operations, its existing
cash and cash 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 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will be
effective for fiscal years beginning after December 15, 1995, and will require
that the Company either recognize in its consolidated financial statements costs
related to its employee stock-based compensation plans, such as stock option and
stock purchase plans, or make pro forma disclosures of such costs in a footnote
to the consolidated financial statements.
The Company will continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its annual consolidated financial statements for fiscal 1997, the Company will
make the required pro forma disclosures in a footnote to the consolidated
financial statements. SFAS No. 123 is not expected to have a material effect on
the Company's consolidated results of operations or financial position.
15
<PAGE> 16
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Theis Research, Inc.
In April 1992, the Company filed suit, in United States District Court
in Northern 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. The Court entered judgment on the jury
verdict in January 1996, declaring Octel a "prevailing party" entitled to
recover its substantial costs in connection with the lawsuit. 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. Both parties filed motions
for summary judgment on a variety of issues, including a motion by Octel for
summary judgment declaring the Gilbarco patent unenforceable due to inequitable
conduct during the procurement of the patent. On February 12, 1996, the Court
granted Octel's motion for summary judgment (and denied Gilbarco's
counter-motion) and declared the patent unenforceable as a matter of law. The
Court subsequently entered judgment in favor of Octel and against Gilbarco in
the underlying action and awarded Octel its costs in connection with the
lawsuit. Gilbarco's subsequent challenge of the Court's ruling was denied and
Gilbarco has filed a notice of appeal of the final judgment invalidating its
patent.
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.
16
<PAGE> 17
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On August 1, 1990, the Company filed a Registration Statement on Form
8-A with the Securities Exchange Commission in order to register common share
purchase rights issuable in accordance with the terms of the Common Shares
Rights Agreement (the "Prior Rights Agreement") between the Company and Bank of
America NT & SA, as rights agent. On August 29, 1996, the Company and The First
National Bank of Boston, as successor rights agent, entered into the Amended and
Restated Common Shares Rights Agreement (the "Amended Rights Agreement"), which
supersedes the Prior Rights Agreement as originally executed. The Amended Rights
Agreement is substantially the same as the Prior Rights Agreement as originally
executed, with the exception that, among other things (i) the exercise price of
each Right has been changed to $100.00, (ii) the Redemption Price of each Right
has been changed to $.001 per share and (iii) the term of the Amended Rights
Agreement has been extended to August 29, 2006. For additional information
relating to the Amended Rights Agreement, please see the Registration Statement
on Form 8-A/A filed by the Company on August 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
11.0 Statement re computation of earnings per share
27.0 Financial Data Schedule
(b) Report on Form 8-K
No report on Form 8-K was filed by the Company during its
fiscal quarter ended September 30, 1996.
17
<PAGE> 18
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 14, 1996
/s/ JEAN-YVES DEXMIER
--------------------------------------------
Jean-Yves Dexmier, Senior Vice President and
Chief Financial Officer
18
<PAGE> 19
OCTEL COMMUNICATIONS CORPORATION
EXHIBIT INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
Exhibit Description
- ------- -----------
11.0 Statement re computation of earnings per share
27.0 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.0
OCTEL COMMUNICATIONS CORPORATION
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
Sept. 30, Sept. 30,
1996 1995
--------- ---------
<S> <C> <C>
PRIMARY NET INCOME PER SHARE
Net income ................................... $ 10,492 $ 6,589
========= =========
Weighted average shares
outstanding................................. 51,911 48,490
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method)..................................... 4,216 4,728
Other......................................... 33 (80)
--------- ---------
56,160 53,138
========= =========
Primary net income per share.................. $ 0.19 $ 0.12
========= =========
FULLY DILUTED NET INCOME PER SHARE*
Net income ................................... $ 10,492 $ 6,589
========= =========
Weighted average shares
outstanding................................. 51,911 48,490
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method)....................................... 4,731 4,734
Other........................................... 49 (80)
--------- ---------
56,691 53,144
========= =========
Fully diluted net income per
share.......................................... $ 0.19 $ 0.12
========= =========
</TABLE>
* This computation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083 although not required for all periods under APB Opinion
No. 15 because it results in dilution of less than three percent.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 19,511
<SECURITIES> 50,157
<RECEIVABLES> 163,804
<ALLOWANCES> 3,324
<INVENTORY> 47,880
<CURRENT-ASSETS> 301,267
<PP&E> 239,789
<DEPRECIATION> 97,692
<TOTAL-ASSETS> 477,901
<CURRENT-LIABILITIES> 87,635
<BONDS> 0
0
0
<COMMON> 242,234
<OTHER-SE> 147,744
<TOTAL-LIABILITY-AND-EQUITY> 477,901
<SALES> 91,294
<TOTAL-REVENUES> 139,235
<CGS> 27,725
<TOTAL-COSTS> 57,752
<OTHER-EXPENSES> 66,302
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 871
<INCOME-PRETAX> 16,192
<INCOME-TAX> 5,700
<INCOME-CONTINUING> 10,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,492
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
