<PAGE> 1
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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 December 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
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
January 31, 1996 was 24,705,773.
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This document consists of 19 pages of which this is Page 1.
<PAGE> 2
OCTEL COMMUNICATIONS CORPORATION
INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - December 31, 1995 and
June 30, 1995.............................................................. 3
Condensed Consolidated Statements
of Operations - three and six months ended
December 31, 1995 and 1994................................................. 4
Condensed Consolidated Statements
of Cash Flows - six months ended
December 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.......................................................... 17
Item 4. Matters Submitted to Vote of Security Holders.............................. 17
Item 6. Exhibits and Reports on Form 8-K........................................... 18
SIGNATURES............................................................................................ 19
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA - UNAUDITED)
<TABLE>
<CAPTION>
Dec. 31, June 30,
1995 1995
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,426 $ 24,521
Short-term investments 28,970 28,054
Accounts receivable net of allowance for doubtful accounts
of $3,504 at Dec. 31, 1995 and $2,938 at June 30, 1995 118,952 110,679
Accounts receivable from related parties 8,273 6,270
Inventories 42,453 31,151
Prepaid expenses and other 16,592 15,448
--------- ---------
Total current assets 236,666 216,123
Property, plant and equipment, net of accumulated
depreciation and amortization of $75,244 at
Dec. 31, 1995 and $76,974 at June 30, 1995 132,999 128,753
Deposits and other assets 24,659 23,400
--------- ---------
Total $ 394,324 $ 368,276
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 23,837 $ 21,157
Accrued compensation and employee benefits 29,013 28,188
Income taxes payable 1,238 7,921
Accrued and other liabilities 36,354 35,465
--------- ---------
Total current liabilities 90,442 92,731
Long-term obligations 421 602
Stockholders' equity:
Preferred stock, $.001 par value - authorized,
5.0 million shares; none outstanding -- --
Common stock, $.001 par value - Dec. 31, 1995 - authorized,
100.0 million shares; outstanding, 24.5 million shares, June 30, 1995 -
authorized, 50.0 million shares;
outstanding, 23.8 million shares 200,735 183,193
Retained earnings 105,753 96,039
Treasury stock at cost: 0.1 million shares at June 30, 1995 -- (2,347)
Other (3,027) (1,942)
--------- ---------
Total stockholders' equity 303,461 274,943
--------- ---------
Total $ 394,324 $ 368,276
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 4
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES:
Systems $ 93,697 $ 78,542 $165,656 $148,443
Services and license 43,000 37,698 84,771 73,542
-------- -------- -------- --------
Total net revenues 136,697 116,240 250,427 221,985
COSTS AND EXPENSES:
Cost of systems 28,726 25,970 50,485 47,507
Cost of services 27,727 21,731 53,314 42,322
Research and development 19,747 17,688 37,313 35,125
Selling, general and administrative 42,578 37,718 81,756 74,150
Non-recurring charge for acquired
in-process research and
development -- -- -- 4,725
Integration costs -- 759 -- 1,009
-------- -------- -------- --------
Total costs and expenses 118,778 103,866 222,868 204,838
-------- -------- -------- --------
Operating income 17,919 12,374 27,559 17,147
Interest and other income, net 423 685 1,072 1,526
-------- -------- -------- --------
Income before income taxes 18,342 13,059 28,631 18,673
Provision for income taxes 6,600 4,300 10,300 6,100
-------- -------- -------- --------
NET INCOME $ 11,742 $ 8,759 $ 18,331 $ 12,573
======== ======== ======== ========
NET INCOME PER COMMON
AND EQUIVALENT SHARE $ 0.45 $ 0.36 $ 0.70 $ 0.51
======== ======== ======== ========
Weighted average number of
common shares and equivalents
used in computation 26,154 24,428 26,375 24,892
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
OCTEL COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
Dec. 31, Dec. 31,
1995 1994
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,331 $ 12,573
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 18,025 15,277
Amortization of premium on marketable securities 123 197
Deferred income taxes (99) (1,986)
Purchased in-process research and development -- 4,725
Changes in working capital:
Accounts receivable (10,095) (4,699)
Inventories (11,529) (5,167)
Prepaid expenses and other (879) (1,866)
Trade payables 2,730 (3,124)
Accrued compensation and employee benefits 721 (5,303)
Accrued and other liabilities (364) 2,315
-------- --------
Net cash provided by operating activities 16,964 12,942
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net 13,362 4,631
Repurchases of common stock (8,903) (25,260)
Proceeds from payment of employees' notes receivable 50 --
Proceeds from sale of financial instruments - put warrants 571 1,144
Repayments of long-term obligations (180) (653)
-------- --------
Net cash provided by/(used for) financing activities 4,900 (20,138)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (18,460) (22,292)
Sales and maturities of short-term investments 17,598 60,571
Property, plant and equipment additions (18,957) (27,756)
Changes in deposits and other assets (4,997) (2,593)
Acquisition of intellectual and personal property -- (4,764)
-------- --------
Net cash provided by/(used for) investing activities (24,816) 3,166
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (143) (595)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,095) (4,625)
-------- --------
CASH AND CASH EQUIVALENTS:
Beginning of period 24,521 17,889
-------- --------
End of period $ 21,426 $ 13,264
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DECEMBER 31, 1995 AND 1994 - UNAUDITED)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of normal adjustments) necessary to present fairly the financial
position of the Company as of December 31, 1995, the results of
operations for the three and six months ended December 31, 1995 and
1994 and cash flows for the six months ended December 31, 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 December 31, 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 December 31, 1995:
U.S. Government
securities $ 9,460 $ -- $ (44) $ (76) $ 9,340
Municipal notes/bonds 30,654 127 (85) (344) 30,352
-------- -------- -------- -------- --------
$ 40,114 $ 127 $ (129) $ (420) $ 39,692
-------- -------- -------- -------- --------
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):
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1995
----------------- -------------
<S> <C> <C>
Cash equivalents $ 11,142 $ 6,083
Short-term investments 28,970 28,054
-------- --------
$ 40,112 $ 34,137
======== ========
</TABLE>
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<PAGE> 7
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DECEMBER 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):
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1995
--------------------- ---------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Due in less than one year $21,445 $21,269 $15,573 $15,457
Due in one to three years 11,510 11,379 14,778 14,476
Due thereafter 7,159 7,044 3,966 3,746
------- ------- ------- -------
$40,114 $39,692 $34,317 $33,679
======= ======= ======= =======
</TABLE>
For the three and six months ended December 31, 1995, the Company had
$40.6 million and $95.8 million in proceeds from sales of
available-for-sale investments, respectively. Gross realized gains and
gross realized losses on those sales were not material. For the three
and six months ended December 31, 1994, the Company had $43.4 million
and $129.1 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, net of reserves, consist of (in thousands):
<TABLE>
<CAPTION>
Dec. 31, June 30,
1995 1995
------- -------
<S> <C> <C>
Finished goods $ 5,593 $ 5,009
Work-in-process 13,263 8,586
Raw materials 23,597 17,556
------- -------
Total $42,453 $31,151
======= =======
</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 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 December 31, 1995. The line expires in June 1996.
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<PAGE> 8
OCTEL COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DECEMBER 31, 1995 AND 1994 - UNAUDITED)
At December 31, 1995, the Company had $1.2 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,
Pounds Sterling and French Francs 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 in
Milpitas, California 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 a maximum of $9.9
million.
7. Interest and other income, net consists of the following (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- -----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest and investment income $ 551 $ 370 $ 1,269 $ 1,121
Loss on sale of short-term
investments, net (3) (32) (7) (19)
Foreign exchange gains (losses), net (131) 401 (175) 548
Other income (expense), net 6 (54) (15) (124)
------- ------- ------- -------
Total $ 423 $ 685 $ 1,072 $ 1,526
======= ======= ======= =======
</TABLE>
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 $0.5 million is included in Accrued and other liabilities
on the balance sheet at December 31, 1995. Additional expenses of
approximately $1.0 million were incurred during the first six months of
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.
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 first quarter. No additional integration costs
were incurred during the second quarter of fiscal 1996.
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<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 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 information 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ------------------------------------
Dec. 31, Dec. 31, Increase/ Dec. 31, Dec. 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
---- ---- ---------- ---- ---- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Systems $ 93.7 $ 78.5 19% $ 165.6 $ 148.5 12%
Services and license 43.0 37.7 14% 84.8 73.5 15%
-------- -------- -------- --------
Total net revenues $ 136.7 $ 116.2 18% $ 250.4 $ 222.0 13%
======== ======== ======== ========
Percentage of Total Net Revenues
Systems 69% 68% 1% 66% 67% (1%)
Services and license 31% 32% (1%) 34% 33% 1%
</TABLE>
Systems
The growth in systems revenues for the second quarter of fiscal 1996
over the second quarter of fiscal 1995 was attributable to a revenue increase in
the Voice Information Services (VIS) business partially offset by a small
decrease in the Global Business Solutions (GBS) business. VIS increases were
primarily derived from an increase in domestic sales and, to a lesser extent, an
increase in international sales. Domestic VIS sales were favorably affected by a
larger number of system expansions and by product upgrades. International VIS
sales increased due to higher sales in Canada and Europe. Domestic GBS revenues
for the second quarter of fiscal 1996 decreased compared to the same quarter of
fiscal 1995, whereas international GBS revenues increased slightly in the second
quarter of fiscal 1996 as compared to the same quarter of fiscal 1995. GBS
revenues were negatively affected by the continued transition to the new
Overture product line. Specifically, expansion and upgrade revenue for
installed-base systems decreased as compared to the second quarter of fiscal
1995. This impact was partially offset by increased sales by the Company's PC
division and Rhetorex subsidiary. GBS revenue increases in Canada and
Asia-Pacific were partially offset by a decrease in Europe.
The systems revenue increase in the first six months of fiscal 1996 is
due primarily to increased VIS systems revenues attributable to the sale of
system expansions and software upgrades. VIS revenues were higher for both
domestic and international markets for the first six months of fiscal 1996
compared to the same period for fiscal 1995. Revenue in future quarters could be
affected by the extent and timing of new orders from VIS providers. Such orders
are
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<PAGE> 10
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
typically significant in size and, therefore, can have a significant impact on
the amount and source of revenue in any given quarter. Total GBS revenues for
the first six months of fiscal 1996 decreased from the same period in fiscal
1995 due to a decrease in sales to the domestic market and, to a lesser extent,
a decrease in the international market. The decrease was primarily attributable
to the continued transition to the new Overture product line.
Services and license
Services and license revenues grew in the second quarter and first six
months of fiscal 1996 as compared to the same periods in the prior year
primarily as a result of the increase in ONS revenues, which reflects both
subscriber growth and increased usage. Additionally, revenues increased 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
services revenue growth in future quarters.
COST OF SALES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------- -----------------------------------
Dec. 31, Dec. 31, Increase/ Dec. 31, Dec. 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
---- ---- ---------- ---- ---- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Cost of systems $ 28.7 $ 26.0 11% $ 50.5 $ 47.5 6%
Cost of services 27.7 21.7 28% 53.3 42.3 26%
------- ------- -------- -------
Total cost of sales $ 56.4 $ 47.7 18% $ 103.8 $ 89.8 16%
======= ======= ======== =======
Percentage of Net Revenues
- --------------------------
Cost of systems 31% 33% (2%) 30% 32% (2%)
Cost of services 64% 58% 6% 63% 58% 5%
Total cost of sales 41% 41% - 41% 40% 1%
</TABLE>
Total cost of sales, as a percentage of total net revenues, increased
for the first six months of fiscal 1996 as a result of the continued growth of
services and license revenues, which have a higher cost of sales structure than
system sales. This impact was partially offset by lower cost of sales as a
percentage of net revenues which resulted from changes in product mix of systems
sales for both the second quarter and first six months of fiscal 1996 compared
to the same periods for fiscal 1995.
Systems
The decreases in cost of systems as a percentage of total systems
revenues in the second quarter and first six months of fiscal 1996 compared to
the same periods in the prior year were due primarily to product mix changes.
VIS revenues, which generally carry lower cost of sales as a percentage of total
net revenues than GBS revenues, increased as a percentage of total systems
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<PAGE> 11
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
revenues from the second quarter and first six months of fiscal 1995 to the same
periods of fiscal 1996.
Services and license
The increase in cost of services as a percentage of total services and
license revenues in the second quarter of fiscal 1996 compared to the second
quarter of fiscal 1995 was 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 cost of spares
as a percentage of total spares revenues. ONS cost of services remained flat as
a percentage of total services and license revenues compared to the second
quarter of fiscal 1995.
The increase in cost of services as a percentage of total services and
license revenues in the first six months of fiscal 1996 compared to the first
six months of fiscal 1995 was due primarily to higher cost of service contracts
and hardware repair and maintenance. In addition, fiscal 1995 revenue included a
significant one-time customer conversion to ONS services which had little
associated cost of services.
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 Six Months Ended
-------------------------------------- ----------------------------------
Dec. 31, Dec. 31, Increase/ Dec. 31, Dec. 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
---- ---- ---------- ---- ---- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Expenses $ 19.7 $ 17.7 12% $ 37.3 $ 35.1 6%
Percentage of revenues 14% 15% (1%) 15% 16% (1%)
</TABLE>
The increase in absolute dollars spent on research and development for
both the second quarter and first six months of fiscal 1996 is due primarily to
the Company's increased spending on projects such as OcteLink and the Company's
next-generation client/server architecture for its Sierra platform. 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.
-11-
<PAGE> 12
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ------------------------------------
Dec. 31, Dec. 31, Increase/ Dec. 31, Dec. 31, Increase/
1995 1994 (decrease) 1995 1994 (decrease)
---- ---- ---------- ---- ---- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Expenses $ 42.6 $ 37.7 13% $ 81.8 $ 74.2 10%
Percentage of revenues 31% 32% (1%) 33% 33% --
</TABLE>
The increase for both the second quarter and first six months of fiscal
1996 in selling, general and administrative expenses in absolute dollars
resulted from payroll-related expenses for employees hired to support the growth
of the Company's services business and international operations. 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.
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 $1.0 million in the first six months of fiscal
1995. The integration costs 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.
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 first quarter of fiscal
1996. No additional integration costs were incurred during the second quarter of
fiscal 1996.
INTEREST AND OTHER INCOME, NET
Interest and other income, net for the second quarter and first six
months of fiscal 1996 decreased $0.3 million and $0.5 million, respectively,
from the same periods of fiscal 1995. Net foreign exchanges losses were incurred
during the second quarter and first six months of fiscal 1996 compared to net
foreign exchange gains in the same periods in fiscal 1995. The losses for the
second quarter and first six months of fiscal 1996 are due primarily to costs of
the Company's
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<PAGE> 13
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
expanded foreign exchange management program. These losses were partially offset
by increases in interest and investment income for the second quarter and first
six months of fiscal 1996 as compared to the same periods in fiscal 1995. The
increases resulted primarily from higher average investment yields in fiscal
1996 compared to fiscal 1995.
INCOME TAXES
The Company's effective tax rate was 36 percent in the second quarter
and first six months of fiscal 1996, respectively, as compared to 33 percent in
the corresponding periods 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 for fiscal 1996 to decrease
slightly if the proposed legislation which extends the research and development
tax credit is enacted prior to the end of the fiscal year.
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.
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 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.
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.
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 commenced during the second
quarter of fiscal 1996 but were not material and 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, may not materialize or
potential
-13-
<PAGE> 14
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, which extends through the end of fiscal
1996, 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.
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. The Company believes that delays in
expected revenue in fiscal 1996 have occurred as a result of renegotiating
contracts with certain customers and distributors to accommodate this pricing
approach. While the Company believes that this approach will make it more
competitive, this approach may not be successful in winning additional sales or
may continue to delay revenue. 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.
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
-14-
<PAGE> 15
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 six months of fiscal 1996 decreased $2.2 million from June 30, 1995.
Cash flows from operations resulted in a net source of cash of $17.0 million in
the first six months of fiscal 1996 and $12.9 million in the first six months of
fiscal 1995. The increase from the prior year was due primarily to net income
and the timing of payment of certain liabilities, offset by increases in
inventory and accounts receivable. The increase in inventory resulted primarily
from the Company's transition to its Overture product line as well as a change
in vendors during the second quarter of fiscal 1996.
The primary sources of cash during the first six months of fiscal 1996
resulted from net income of $18.3 million, which included $18.0 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 $13.4
million. The primary uses of cash during the first six months of fiscal 1996
were investment in property, plant and equipment of $19.0 million and the
repurchase of common stock for $8.3 million, net of put warrant proceeds of $0.6
million. 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.
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 December 31, 1995, the Company had repurchased approximately
1.6 million shares of its Common Stock under this program at an average per
share price of approximately $22, including the impact of put warrant proceeds.
The Company expects to continue to repurchase its Common Stock under this
program.
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
-15-
<PAGE> 16
OCTEL COMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
the operating lease, the Company is contingently liable for up to $9.9 million.
Cash payments under the operating lease were $0.3 million during the first six
months of fiscal 1996.
In connection with the VMX merger, the Company recorded $18.3 million
of integration reserves in fiscal 1994. Expenditures charged against the reserve
totaled approximately $4.1 million for the first six months of fiscal 1996 as
the consolidation of the Company's manufacturing facilities was completed. The
balance of the integration reserves was $0.5 million at December 31, 1995.
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 1996.
-16-
<PAGE> 17
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. 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. Discovery in the case has
been substantially completed. Both parties have filed motions for summary
judgment scheduled to be heard in February 1996, and trial is scheduled to
commence on March 19, 1996.
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 4. MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS
Octel Communications Corporation held its regular Annual Meeting of
Stockholders on November 16, 1995.
-17-
<PAGE> 18
OCTEL COMMUNICATIONS CORPORATION
PART II
OTHER INFORMATION
The following individuals were elected to serve on the Company's Board of
Directors.
<TABLE>
<CAPTION>
Number of Number of
affirmative votes votes withheld
----------------- --------------
<S> <C> <C>
Robert Cohn 21,402,006 56,085
Anson M. Beard, Jr. 21,404,946 53,145
Leo J. Chamberlain 21,334,280 123,811
Deborah A. Coleman 21,404,293 53,798
Nathaniel de Rothschild 21,400,812 57,766
Dag Tellefsen 21,334,885 123,206
W. Michael West 21,400,325 57,766
</TABLE>
The following matters were voted upon at the meeting:
1. Approval of proposal regarding the 1985 Incentive Stock Plan to
extend the term of the Plan for an additional ten-year period and
change the name of the Plan to the "1995 Incentive Stock Plan."
2. Approval of proposal regarding the 1987 Employee Stock Purchase
Plan to increase the number of shares reserved for issuance by
475,000 shares.
3. Approval of proposal regarding the Certificate of Incorporation to
increase the authorized number of shares to 100,000,000.
4. Ratification of appointment of
KPMG Peat Marwick LLP as independent auditors.
The votes of the stockholders on these proposals were as follows:
<TABLE>
<CAPTION>
Proposal Number of Number of Number of Number of
number affirmative votes negative votes abstentions broker non-votes
- -------- ----------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
1. 14,340,289 6,856,035 74,906 186,861
2. 19,521,756 1,793,361 55,370 87,604
3. 18,947,311 2,448,358 62,422 --
4. 21,378,383 40,436 39,272 --
</TABLE>
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 December 31, 1995.
-18-
<PAGE> 19
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: February 13, 1996
/s/ ROBERT COHN
----------------------------------------
Robert Cohn, Chief Executive Officer
/s/ JEAN-YVES DEXMIER
----------------------------------------
Jean-Yves Dexmier, Senior Vice President
and Chief Financial Officer
-19-
<PAGE> 20
OCTEL COMMUNICATIONS CORPORATION
EXHIBIT INDEX
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- -------
<S> <C> <C>
11 Statement re computation of earnings per share........ 2
27.1 Financial Data Schedule
</TABLE>
1
<PAGE> 1
EXHIBIT 11
OCTEL COMMUNICATIONS CORPORATION
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE
Net income ............................ $ 11,742 $ 8,759 $ 18,331 $ 12,573
======== ======== ======== ========
Weighted average shares
outstanding ......................... 24,468 23,462 24,357 23,890
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method) ............................. 1,730 976 2,057 1,010
Other ................................. (44) (10) (39) (8)
-------- -------- -------- --------
26,154 24,428 26,375 24,892
======== ======== ======== ========
Primary net income per share .......... $ 0.45 $ 0.36 $ 0.70 $ 0.51
======== ======== ======== ========
FULLY DILUTED NET INCOME PER SHARE*
Net income ............................ $ 11,742 $ 8,759 $ 18,331 $ 12,573
======== ======== ======== ========
Weighted average shares
outstanding ......................... 24,468 23,462 24,357 23,890
Dilutive effect of outstanding stock
options (as determined by the
application of the treasury stock
method) ............................. 1,782 986 2,059 1,013
Other ................................. (41) (10) (39) (8)
-------- -------- -------- --------
26,209 24,438 26,377 24,895
======== ======== ======== ========
Fully diluted net income per
share ............................... $ 0.45 $ 0.36 $ 0.69 $ 0.51
======== ======== ======== ========
</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> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 21426
<SECURITIES> 28970
<RECEIVABLES> 130729
<ALLOWANCES> 3504
<INVENTORY> 42453
<CURRENT-ASSETS> 236666
<PP&E> 208243
<DEPRECIATION> 75244
<TOTAL-ASSETS> 394324
<CURRENT-LIABILITIES> 90442
<BONDS> 0
0
0
<COMMON> 200735
<OTHER-SE> 102726
<TOTAL-LIABILITY-AND-EQUITY> 394324
<SALES> 93697
<TOTAL-REVENUES> 136697
<CGS> 28726
<TOTAL-COSTS> 56453
<OTHER-EXPENSES> 61902
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18342
<INCOME-TAX> 6600
<INCOME-CONTINUING> 11742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11742
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
