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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the quarterly period ended February 1, 1997
Commission File Number 0-19558
CENTIGRAM COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2418021
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
91 East Tasman Drive
San Jose, California 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (408) 944-0250
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
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The number of outstanding shares of the Registrant's Common Stock as of February
28, 1997 was 6,994,000.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Centigram Communications Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 1, November 2,
(In thousands, except share and per share data) 1997 1996
- -------------------------------------------------------- ----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,256 $ 12,668
Short-term investments 27,040 29,408
Trade receivables, net 28,817 27,741
Inventories 11,484 11,467
Deferred tax assets 1,424 1,424
Other current assets 3,170 3,108
----------- -----------
Total current assets 86,191 85,816
Property and equipment, net 15,033 15,249
Intangible assets, net 2,204 2,004
Deposits and other assets 935 940
----------- -----------
$ 104,363 $ 104,009
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,338 $ 9,739
Accrued compensation 3,744 4,202
Accrued expenses and other liabilities 7,033 6,424
Current portion of capital lease obligations 157 154
----------- -----------
Total current liabilities 19,272 20,519
Capital lease obligations 38 78
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 authorized;
none outstanding
Common stock, $.001 par value, 25,000,000 authorized;
6,993,000 and 6,908,000 outstanding 7 7
Additional paid-in capital 89,745 88,767
Accumulated deficit (4,312) (4,992)
Unrealized loss on investments (42) (36)
Cumulative translation adjustments (45) (34)
Note receivable from officer (300) (300)
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Total stockholders' equity 85,053 83,412
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$ 104,363 $ 104,009
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See accompanying notes
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2
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Centigram Communications Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts-unaudited)
Quarter Ended
February 1, January 27,
1997 1996
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Net revenue $ 27,913 $ 24,013
Cost and expenses:
Costs of goods sold 11,343 9,511
Research and development 5,693 4,574
Selling, general and administrative 10,618 9,886
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27,654 23,971
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Operating income 259 42
Other income and expense, net 497 521
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Income before income taxes 756 563
Provision for income taxes 76 56
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Net income $ 680 $ 507
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Net income per share $ 0.10 $ .07
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Common and common equivalent shares
used in computing per share amounts 6,986 6,980
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See accompanying notes
3
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Centigram Communications Corporation
Consolidated Statements of Cash Flows
(In thousands - unaudited)
Quarter Ended
February 1, January 27,
1997 1996
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Cash and equivalents, beginning of period $ 12,668 $ 10,633
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Cash flows from operations:
Net income 680 507
Depreciation and amortization 1,987 1,641
Trade receivables (1,076) (6,402)
Inventories (17) (2,334)
Other assets (57) (543)
Accounts payable (1,401) 2,239
Accrued expenses and other liabilities 151 (1,969)
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267 (6,861)
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Cash flows from investing:
Purchase of short-term investments (15,793) (27,845)
Proceeds from sales and maturities of
short-term investments 18,155 55,979
Purchase of property and equipment (1,982) (1,690)
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380 26,444
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Cash flows from financing:
Proceeds from sale of common stock,
net of issuance costs 978 1,014
Principal payments on capital leases (37) (69)
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941 945
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Net change in cash and equivalents 1,588 20,528
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Cash and equivalents, end of period $ 14,256 $ 31,161
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See accompanying notes
4
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Centigram Communications Corporation
Notes to Consolidated Financial Statements
(unaudited)
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by the
Company without audit and reflect all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods. For further
information, refer to the audited Consolidated Financial Statements and
footnotes thereto incorporated by reference in the Company's Annual Report on
Form 10-K for the fiscal year ended November 2, 1996.
The results of operations for the quarter ended February 1, 1997 may not
necessarily be indicative of the results for the fiscal year ending November 1,
1997 or any future period.
INVENTORIES
Inventories consisted of (in thousands):
February 1, November 2,
1997 1996
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Raw materials $ 4,945 $ 4,603
Work-in-process 2,966 2,898
Finished goods 3,573 3,966
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$ 11,484 $ 11,467
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TERMINATION OF ACQUISITION DISCUSSIONS
In October 1996 the Company entered into a letter of intent for the acquisition
of Voice-Tel Enterprises and Voice-Tel Network ("Voice-Tel"). The proposed
transaction involved the Company issuing a certain number of shares of its
common stock and assuming up to $11.5 million of debt in exchange for all of the
equity interest of Voice-Tel. In February, the Company terminated all
acquisition discussions with Voice-Tel, consequently, expenses of approximately
$600,000 which have been previously deferred will be charged to operations
during the quarter ended May 3, 1997.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Centigram Communications Corporation
The following discussion contains forward-looking statements regarding
future events or the future financial performance of Centigram that involve
risks and uncertainties. These statements include but are not limited to
statements related to changes in Centigram's research and development and
selling, general and administrative expenses, Centigram's effective tax rate,
Centigram's expenditures for capital equipment and sufficiency of Centigram's
cash reserves. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth in this Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Company's last filed Form 10-K, specifically,
Item 7 under "Certain Trends and Uncertainties," in Item 1 hereof under
"Manufacturing," "Patents, Trade Secrets and Licenses," "Competition," the last
two paragraphs of "Sales and Distribution," and the last two paragraphs of
"Research and Development".
RESULTS OF OPERATIONS
Net revenue for the first quarter of fiscal 1997 ended February 1, 1997 was
16% higher than net revenue for the corresponding quarter of fiscal 1996 and 5%
lower than net revenue for the fourth quarter of 1996. The increase in net
revenue from the first quarter of 1996 reflects higher sales in all major
product segments, including higher sales of both large system and small system
products. Sales to export customers increased 44% year over year, increasing
from 37% of net revenue in the first quarter of fiscal 1996 to 46% in the first
quarter of fiscal 1997. Sales to domestic customers were unchanged in comparing
each first fiscal quarter. This increase in exports sales resulted primarily
from large sales in the first quarter to customers in Central and South America.
Customer premise equipment (CPE) sales increased in the first quarter of 1997
over the prior year first quarter while sales to service provider customers
decreased 8% because of large sales in the first quarter of fiscal 1996 to an
Australian customer. The decrease in net revenue from the fourth quarter of
fiscal 1996 reflects lower sales of system upgrade and expansion products and
lower sales of customer service spares parts partially offset by higher sales of
large system products. Sales to export customers in the first quarter increased
50% from the fourth quarter of fiscal 1996 with increased sales to Europe and
the Far East while domestic sales declined 28% during the same comparison
periods because of reduced orders from service provider customers and CPE
customers.
There can be no assurance that the market for voice processing products
will grow in future periods at its historical percentage rate and the Company
believes that the growth rates of certain market segments have declined from
prior levels. There is also no assurance that the Company will be able to
increase or maintain its market share in future periods. See "Certain Trends and
Uncertainties".
6
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Gross margin was 59.4%, 60.4% and 61.5% of net revenue in the first quarter
of fiscal 1997, the first quarter of 1996, and the fourth quarter of 1996,
respectively. The Company experienced a reduction in its gross margin from the
first quarter of last year due to a change in the overall mix of products sold.
In its recently completed quarter, the Company sold a higher proportion of the
Company's small system products (which typically carry lower margins) than the
Company has historically experienced. In addition margins were reduced because
the Company experienced a lower proportion of sales from system upgrade and
expansion products offset somewhat by an improved proportion of sales of large
system products which carry higher margins. The lower gross margin in the first
quarter of 1997 as compared to the fourth quarter of 1996 reflects reduced sales
and gross margins on the Company's system upgrade and expansion products as well
as higher customer support inventory provisions and higher freight costs, which
was partially offset by a higher percentage of the Company's sales from its
large systems products as well as lower warranty costs. See "Certain Trends and
Uncertainties."
Research and development (R&D) expenses increased 24% in the first quarter
of fiscal 1997 as compared to the corresponding quarter of 1996 and were 3%
above the R&D expenses for the fourth quarter of fiscal 1996. These increases in
R&D expenses reflect general expansion of the Company's engineering and product
development programs including increased staffing and depreciation expenses. R&D
expenses represented 20%, 19%, and 19% of net revenue, respectively, in the
first quarter of 1997, the first quarter of 1996, and the fourth quarter of
1996. The Company believes that ongoing development of new products and features
is required to maintain and enhance its competitive position. The Company
expects to continue to invest in R&D and therefore R&D expenses should continue
to increase, notwithstanding the level of sales realized in future quarters.
Selling, general and administrative (SG&A) expenses for the first quarter
of fiscal 1997 were 7% above SG&A expenses in the first quarter of 1996 and 11%
below such expenses in the fourth quarter of fiscal 1996. The first quarter over
first quarter increase in SG&A expenses reflects increased sales expenses and
expansion of the Company's customer support programs, including increases in
salaries, facilities costs, depreciation, and travel, offset in part by lower
commission expenses. The first quarter of fiscal 1997 as compared to the fourth
quarter of fiscal 1996 reflects primarily lower commission expenses, offset
somewhat by higher salaries and facilities expenses. SG&A expenses represented
38%, 41%, and 41% of net revenue, respectively, in the first quarter of 1997,
the first quarter of 1996, and the fourth quarter of fiscal 1996. The Company
believes that continued investments in sales and customer support, particularly
in export markets, are essential to maintaining its competitive position and
that the dollar amount of SG&A expenses will increase in future periods.
The Company's effective tax rate was 10% for the first quarter of fiscal
1997 and 1996 primarily because of the anticipated tax benefit from the
realization of tax net operating loss carryforwards, for which a valuation
allowance had previously been established. Realization of such net operating
loss carryforwards is subject to the Company achieving profitability in fiscal
1997.
7
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments at February 1, 1997
were $41.3 million, decreasing $.8 million from the November 2, 1996 balance of
$42.1 million.
Net cash generated from operating activities was $.3 million during the
first quarter of fiscal 1997. Trade receivables at the end of first fiscal
quarter increased $1.1 million from the November 2, 1996 year end balance
primarily due to extended payment terms granted to selected service provider
customers, and delays in receiving final payments from certain international
customers where such payments are due upon formal customer acceptance of the
product. Days sales outstanding (computed using quarterly revenues) were 94 days
in the first quarter of fiscal 1997 as compared to 86 days at end of fiscal
1996. This increase in days sales outstanding was primarily due to the factors
noted above and a larger percentage of shipments to international service
provider customers which typically have longer payment terms. Inventory levels
at February 1, 1997 were unchanged from the end of fiscal 1997. The Company
expects investments in receivables and inventories will continue to represent a
significant portion of working capital.
During the first fiscal quarter ended February 1, 1997, the Company
purchased approximately $2.0 million in capital expenditures. These expenditures
consisted primarily of computer equipment and engineering lab equipment. The
Company currently expects to spend approximately $9.0 million for capital
equipment during fiscal 1997. The Company may finance a portion of these
expenditures through leasing arrangements. The Company presently believes,
notwithstanding its accumulated deficit, that its existing cash and short-term
investments and amounts available under its line of credit and lease credit
arrangements, will be sufficient to support the Company's working capital and
capital equipment purchase requirements at least through fiscal 1997.
The Company's principal sources of liquidity as of February 1, 1997
consisted of $41.3 million of cash and cash equivalents and short-term
investments and $10.0 million available under the Company's bank line of credit
(which expires May 1, 1997). The Company expects to renew this bank line in the
near term. This bank line requires the Company to maintain certain financial
ratios, minimum working capital, minimum tangible net worth, and financial
performance, and requires the bank's consent for the payment of cash dividends.
The Company is in compliance with this agreement and there were no borrowings
outstanding under the bank line as of February 1, 1997.
CERTAIN TRENDS AND UNCERTAINTIES
The Company has in the past experienced and will likely in the future
experience substantial fluctuations in quarterly operating results. The Company
generally has no long-term order commitments from its customers, and a
significant portion of bookings and shipments in any quarter have historically
occurred near the end of the quarter. Accordingly, the Company has historically
operated with very little backlog, and net revenue has been difficult to
predict. In addition, the portion of backlog shippable in the next quarter
varies over time. As a result,
8
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revenue in future quarters will depend largely on the level of orders received
during such quarters.
If new order bookings do not meet expected levels, or if the Company
experiences delays in shipments at the end of a quarter, operating results will
be adversely affected, and these developments may not become apparent to the
Company until near or at the end of a quarter. Net revenue can also be affected
by product sales mix, distribution mix, the size and timing of customer orders
and shipments, customer returns and reserves provided therefor, competitive
pricing pressures, the effectiveness of key distributors in selling the
Company's products, changes in distributor inventory levels, the timing of new
product introductions by the Company and its competitors, regulatory approvals,
and the availability of components for the Company's products, each of which is
difficult to predict accurately. Each of such factors has in the past affected
the Company's revenue.
A significant portion of the Company's net revenue is attributable to a
limited number of customers. The Company's top five customers, representing a
combination of major distributors and service providers, accounted for
approximately 31%, 52% and 35% of the Company's net revenue in the first quarter
of fiscal 1997, the first quarter of fiscal 1996, and all of fiscal 1996,
respectively, although the Company's five largest customers were not the same in
the three periods. The Company has no long-term order commitments from any of
its customers. Any material reduction in orders from one or more of such
customers or the cancellation or deferral of any significant portion of backlog
could have an adverse effect on net revenue and operating results. Such
concentration of sales typically results in a corresponding concentration of
accounts receivable. Although the Company has established reserves for
uncollectible accounts, the inability of any large customer to pay the Company
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
Approximately 46% of the Company's sales in the first fiscal quarter ended
February 1, 1997 consisted of sales outside of the United States. The Company's
international sales are subject to a number of additional risks generally
associated with international sales, including the effect on demand for the
Company's products in international markets as the results of any strengthening
or weakening of the U.S. dollar, the effect of currency fluctuations on
consolidated multinational financial results, state imposed restrictions on the
repatriation of funds, import and export duties and restrictions, the need to
modify products for local markets, and the logical difficulties of managing
multinational operations.
The Company's gross margin can be affected by a number of factors,
including changes in product, distribution channel and customer mix, cost and
availability of parts and components, royalty obligations to suppliers of
licensed software, provisions for warranty, retrofits, and excess and obsolete
inventory, customer returns, and competitive pressures on pricing. The Company
has experienced increasing competitive pricing pressure in its international
service provider markets and expects this pricing pressure to continue. Further,
distributors purchase products at discounts, and the Company's margins can
therefore vary depending upon the mix of distributor and direct end user sales
in any particular fiscal period. The Company anticipates that its sales mix will
continue to fluctuate in future periods.
9
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The Company's future success will depend in part upon the ability of the
Company to continue to introduce new features and products as the Company's
markets evolve, new technologies become available, and customers demand
additional functionality. The Company's competitors continue to add
functionality to their products, and any failure by the Company to introduce in
a timely manner new products and features that meet customer requirements would
adversely affect the Company's operating results and cash flows. The Company's
ability to develop such new features and products depends in large measure on
its ability to hire and retain qualified technical talent and outside
contractors in highly competitive markets for such services. There can be no
assurance that the Company's product development efforts will be successful, or
that it will be able to introduce new products in a timely manner. Any material
additional delays in the introduction and market acceptance of such products
would be adverse to the Company's business. Moreover, customers' expectations of
the introduction of new products by the Company or its competitors can adversely
affect sales of current products. In addition, upon the introduction of new
products, the Company could be subject to higher customer returns with respect
to prior generations of products, which could adversely affect the Company's
financial position, operating results and cash flows.
The Company presently uses third parties to perform printed circuit board
and subsystem assembly. In addition, although the Company has not experienced
significant problems with third-party manufacturers in the past, there can be no
assurance that such problems will not develop in the future. Although the
Company generally uses standard parts and components for its products, certain
microprocessors, line cards, application cards and other semiconductor devices
and other components are available from sole sources. Other components,
including power supplies, disk drives, certain other semiconductor devices and
subcontracted line card assemblies, are presently available or acquired from a
single source or from limited sources. The Company has been notified by
suppliers that certain components will no longer be manufactured. To date, the
Company has been able to obtain adequate supplies of these components in a
timely manner from existing sources or, when necessary, from alternative sources
of supply although such alternatives have resulted in increased costs to the
Company. However, the inability to develop such alternative sources if and as
required in the future, to obtain sufficient sole or limited source components
as required, or to locate alternatives to discontinued parts would have a
material adverse affect on the Company's operating results and cash flows. In
addition, the Company's products are dependent on the QNX software operating
system, a multitasking, real-time operating system for Intel
microprocessor-based computers. In future periods, the Company's products may
become increasingly dependent on software licensed from third party suppliers.
There can be no assurance such licenses will continue to be available to the
Company as needed or at commercially reasonable prices.
In recent years, stock markets have experienced extreme price and volume
trading volatility. This volatility has had a substantial effect on the market
prices of securities of many high technology companies for reasons frequently
unrelated to the operating performance of the specific companies. These broad
markets fluctuations may adversely affect the market price of the Company's
common stock. In addition, the trading price of the Company's common stock
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating
10
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results, announcements of new products or technological innovations by the
Company or its competitors, and general conditions in the computer and
communications industries.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement of Computation of Net Income Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
February 1, 1997.
11
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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.
CENTIGRAM COMMUNICATIONS CORPORATION
(Registrant)
Date: March 14, 1997 By: /s/ George H. Sollman
----------------------------------
George H. Sollman
President and Chief Executive Officer
Date: March 14, 1997 By: /s/ Dennis P. Wolf
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Dennis P. Wolf
Sr. Vice President and
Chief Financial Officer
12
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EXHIBIT 11.1
Centigram Communications Corporation
Statement of Computation of Net Income Per Share
(In thousands, except per share data--unaudited)
Quarter Ended
February 1, January 27,
1997 1996
-------------------------
Net income $ 680 $ 507
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Computation of common and common
equivalent shares outstanding:
Common stock 6,959 6,727
Stock options 27 253
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Common and common equivalent shares
used in computing per share amounts 6,986 6,980
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Net income per share $ .10 $ .07
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Fully diluted computation not presented since such amount differs by less than
3% of the net income per share amounts shown above.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION FROM THE COMPANY'S FIRST FISCAL
QUARTER 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-01-1997
<PERIOD-START> NOV-03-1996
<PERIOD-END> FEB-01-1997
<CASH> 14,256
<SECURITIES> 27,040
<RECEIVABLES> 29,571
<ALLOWANCES> 754
<INVENTORY> 11,484
<CURRENT-ASSETS> 86,191
<PP&E> 38,888
<DEPRECIATION> 23,855
<TOTAL-ASSETS> 104,363
<CURRENT-LIABILITIES> 19,272
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 85,046
<TOTAL-LIABILITY-AND-EQUITY> 104,363
<SALES> 27,913
<TOTAL-REVENUES> 27,913
<CGS> 11,343
<TOTAL-COSTS> 11,343
<OTHER-EXPENSES> 16,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 756
<INCOME-TAX> 76
<INCOME-CONTINUING> 680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 680
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
