==========================================================================
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 August 1, 1998
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
---- ----
The number of outstanding shares of the Registrant's Common Stock as of
August 28, 1998 was 7,171,000.
==========================================================================
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Centigram Communications Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
August 1, November 1,
1998 1997
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $15,958 $19,791
Short-term investments 36,303 32,262
Trade receivables, net 15,856 21,637
Inventories 5,494 9,060
Other current assets 1,473 2,370
----------- -----------
Total current assets 75,084 85,120
Property and equipment, net 6,847 12,893
Intangible assets, net 3,429 1,468
Deposits and other assets 2,320 439
----------- -----------
$87,680 $99,920
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,183 $6,925
Accrued compensation 4,705 5,141
Accrued expenses and other liabilities 12,227 4,069
Warranty and retrofit reserves 1,660 2,161
----------- -----------
Total current liabilities 23,775 18,296
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; 7,171,000 and 7,110,000
outstanding and capital in excess of
par value 90,626 90,724
Treasury stock, at cost (6,036) (2,427)
Accumulated deficit (20,920) (6,670)
Unrealized gain on investments 331 68
Cumulative translation adjustments (96) (71)
----------- -----------
Total stockholders' equity 63,905 81,624
----------- -----------
$87,680 $99,920
=========== ===========
See accompanying notes.
<FN>
Note: The balance sheet at November 1, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See accompanying notes.
</FN>
</TABLE>
<PAGE>
Centigram Communications Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------- ----------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue $18,143 $27,010 $57,503 $79,822
Cost and expenses:
Costs of goods sold 8,837 11,549 28,061 33,731
Research and development 4,056 4,959 14,143 16,103
Selling, general and
administrative 9,826 11,640 31,648 34,175
Non-recurring charges 14,000 -- 14,000 3,563
---------- ---------- ---------- ----------
36,719 28,148 87,852 87,572
---------- ---------- ---------- ----------
Operating loss (18,576) (1,138) (30,349) (7,750)
Other income, net 15,074 4,437 16,403 5,501
---------- ---------- ---------- ----------
Income (loss) before income taxes (3,502) 3,299 (13,946) (2,249)
Provision for income taxes 164 150 304 226
---------- ---------- ---------- ----------
Net income (loss) ($3,666) $3,149 ($14,250) ($2,475)
========== ========== ========== ==========
Basic and diluted earnings
(loss) per share ($0.53) $0.45 ($2.05) ($0.36)
========== ========== ========== ==========
Shares used for basic
earnings (loss) per share 6,885 6,934 6,966 6,963
========== ========== ========== ==========
Shares used for diluted
earnings (loss) per share 6,885 7,019 6,966 6,963
========== ========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Centigram Communications Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands - unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------
August 1, August 2,
1998 1997
---------- ----------
<S> <C> <C>
Cash and equivalents, beginning of period $19,791 $12,668
---------- ----------
Cash flows from operations:
Net loss (14,250) (2,475)
Write-off of purchsed in-process technology 8,400 --
Gain on sale of business units (14,302) (3,598)
Depreciation and amortization 5,591 6,943
Trade receivables 2,003 2,713
Inventories 666 1,544
Other assets (977) 703
Accounts payable (2,135) (858)
Accrued expenses and other liabilities 5,306 2,435
---------- ----------
(9,698) 7,407
---------- ----------
Cash flows from investing:
Purchase of short-term investments (35,088) (101,043)
Proceeds from sales and maturities of
short-term investments 31,310 110,061
Proceeds from the sale of CPE business unit 26,849 --
Purchase of property and equipment (1,817) (5,783)
Purchase of other assets -- (905)
Acquisition of TTC (11,558) --
---------- ----------
9,696 2,330
---------- ----------
Cash flows from financing:
Proceeds from sale of common stock 3,267 1,991
Purchase of treasury shares (78) (114)
Acquisition of treasury stock (7,020) (2,958)
---------- ----------
(3,831) (1,081)
---------- ----------
Net change in cash and equivalents (3,833) 8,656
---------- ----------
Cash and equivalents, end of period $15,958 $21,324
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Centigram Communications Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
Basis of Presentation
The accompanying condensed 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
included in the Company's Annual Report on Form 10-K for the
fiscal year ended November 1, 1997. The results of operations
for the three and nine month periods ended August 1, 1998 may
not necessarily be indicative of the results for the fiscal
year ending October 31, 1998 or any future period.
INVENTORIES
Inventories consisted of (in thousands):
August 1, November 1,
1998 1997
----------- -----------
Raw materials..................... $1,991 $3,005
Work-in-process................... 2,024 2,274
Finished goods.................... 1,479 3,781
----------- -----------
$5,494 $9,060
=========== ===========
Non-Recurring Charges
During the third quarter ended August 1, 1998 the
Company purchased substantially all of the assets of The
Telephone Connection, Inc. ("TTC") for approximately $11.6
million in cash, including transaction costs of approximately
$400,000. The acquisition has been accounted for under the
purchase method of accounting, and accordingly, accompanying
condensed consolidated financial statements include the
results of operations of TTC subsequent to the acquisition
date. During the third quarter the Company recorded a non-
recurring charge of $8.4 million, writing off the purchased
in-process technology as the technology had not reached
technological feasibility and had no alternative future use.
The remainder of the purchased intangible assets will be
amortized over their estimated useful lives, ranging from 36
to 84 months.
In December 1997, as disclosed in the Company's Form 10-
K, representatives of Lucent Technologies ("Lucent")
informed the Company that they believed that the Company's
products may infringe upon certain patents issued to Lucent,
and that Lucent was seeking compensation for any past
infringement by the Company. The Company has continued to
evaluate the assertions of Lucent and on August 25, 1998
signed a letter of intent pursuant to which the Company
expects to pay Lucent $9,200,000 during its fourth quarter
to settle this dispute. During the third quarter the
Company accrued $7,600,000 million as additional costs, of
which $5,600,000 was recorded as a non-recurring charge and
$2,000,000, which is attributable to the CPE business, was
recorded against the gain on the transaction and included in
other income. A portion of the proposed settlement amount
totaling $1,600,000 will be reflected, when paid, as prepaid
royalties and will be amortized to cost of goods sold over the
future royalty period.
During the quarter ended May 3, 1997 the Company
recorded charges of approximately $3.6 million, consisting of
$2.4 million in restructuring charges and $1.2 million in
expenses associated with the termination of acquisition
discussions with Voice-Tel Enterprises and Voice-Tel Network
("Voice-Tel"). The restructuring charges noted above
represent termination benefits for approximately 35 employees
from all functions of the Company and costs associated with
the resignation of the Company's president.
Other Income, Net
On May 8, 1998, the Company licensed and sold certain
Customer Premise Equipment ("CPE") business unit assets to
Mitel Corporation ("Mitel") for a total purchase price of
$26.8 million in cash, and Mitel assumed certain of the
Company's liabilities. The Company recorded a pre-tax gain
of approximately $14.3 million on this sale.
On June 29, 1997, the Company sold it's Text-to-Speech
business to Learnout & Hauspie Speech Products ("L&H") for
$5.0 million in L&H common stock. The Company recorded a pre-
tax gain computed as the difference between the fair market
value of the shares received at closing and the net carrying
value of related Text-to-Speech tangible and intangible
assets, of approximately $3.6 million during the third quarter
and subsequently sold this L&H stock for an additional gain of
approximately $0.3 million.
Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share," (FAS
128), which was required to be adopted on December 31, 1997.
The Company adopted this statement in its first quarter
ended January 31, 1998. The following table sets forth the
computation of basic and diluted earnings (loss) per share.
The quarter and nine months ended August 2, 1997 have been
restated in accordance with FAS 128.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------- -------------------------
August 1, August 2, August 1, August 2,
(in thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ($3,666) $3,149 ($14,250) ($2,475)
=========== =========== =========== ===========
Denominator:
Denominator for basic EPS -
weighted average shares 6,885 6,934 6,966 6,963
Effect of dilutive securities:
Employee stock options -- 85 -- --
----------- ----------- ----------- -----------
Denominator for diluted EPS -
adjusted weighted average shares 6,885 7,019 6,966 6,963
=========== =========== =========== ===========
Basic earnings (loss) per share ($0.53) $0.45 ($2.05) ($0.36)
=========== =========== =========== ===========
Diluted earnings (loss) per share ($0.53) $0.45 ($2.05) ($0.36)
=========== =========== =========== ===========
</TABLE>
Options were outstanding during the three and nine
month periods ended August 1, 1998 and the nine months ended
August 2, 1997 but were excluded from the computation of
diluted net loss per share because the effect in these
periods would have been anti-dilutive.
Pro Forma Information
The following pro forma summary represents the combined
results of operations of the Company, plus the purchase of
substantially all of the assets of TTC as adjusted to
reflect the amortization of tangible and intangible assets
acquired in the purchase, less the sale of the CPE business
unit, as if each of these transactions had occurred at the
beginning of fiscal 1997. The pro forma summary results
exclude the gain realized on the CPE sale transaction and
exclude the non-recurring charge of the write-off of the
purchased in-process technology acquired in the TTC asset
purchase transaction. This summary does not purport to be
indicative of what operating results would have been had
these transactions been made as of the beginning of fiscal
1997 nor are they necessarily indicative of future operating
results.
(in thousands, except per share data) Nine Months Ended
- ------------------------------------------- ----------- -----------
1998 1997
----------- -----------
Net revenue $46,667 $51,885
Loss before income taxes ($22,454) ($11,837)
Net loss ($22,758) ($12,063)
Basic and diluted loss per share ($3.27) ($1.73)
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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, sufficiency of
Centigram's cash reserves and settlement of Centigram's
dispute with Lucent Technologies. 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 under
"Certain Trends and Uncertainties," and elsewhere herein.
Centigram designs, manufactures and markets wireless
and wireline messaging, enhanced services and communication
systems that integrate voice and facsimile on the Company's
communications server and provide access to this multimedia
information through a telephone or a PC. Centigram's
applications all operate on common hardware and software
platforms based on industry-standard hardware and software
which is the Company's implementation of its Modular
Expandable System Architecture (MESA). Centigram's system
architecture enables a user generally to expand the capacity
of a system in cost-effective increments from the Company's
smallest to its largest system configuration.
Centigram's systems can be integrated with wireline and
wireless switches and paging terminal systems. Such systems
are used for switching telephone calls and integrating voice
and facsimile messaging in a variety of service provider
environments. In addition, Centigram systems located at
different sites can be linked together in a digital network.
Sale of CPE Business Unit
On May 8, 1998, the Company licensed or sold certain
assets to Mitel Corporation ("Mitel") and Mitel assumed
certain liabilities related to the Company's customer
premise equipment voicemail and unified messaging ("CPE")
business for a purchase price of $26.8 million in cash. As
part of this sale ("CPE Sale"), the Company agreed until May
8, 2001, not to compete in the CPE market and until April
2000 to provide Mitel on an OEM basis large port count
systems as required until Mitel develops this internal
capability. During the fourth quarter of fiscal 1998, Mitel
commenced arbitration proceedings against the Company
alleging that Centigram has not delivered all materials
required to be delivered in connection with the CPE sale.
Centigram believes the allegations are without merit and
intends to vigorously defend against them.
Purchase of The Telephone Connection, Inc.
On June 24, 1998, the Company purchased substantially
all the assets of The Telephone Connection, Inc. ("TTC") for
approximately $11.6 million, including transaction costs of
approximately $400,000.
Pro Forma Combined Condensed Statements of Operations
The following pro forma statements represent the
combined results of operations of the Company, plus the
purchase of substantially all of the assets of TTC as
adjusted to reflect the amortization of tangible and
intangible assets acquired in the purchase, less the sale of
the CPE business unit, as if each of these transactions had
occurred at the beginning of fiscal 1997. The pro forma
summary results exclude the gain realized on the CPE sale
transaction and exclude the non-recurring charge of the
write-off of the purchased in-process technology acquired in
the TTC asset purchase transaction. This summary does not
purport to be indicative of what operating results would
have been had these transactions been made as of the
beginning of fiscal 1997 nor are they necessarily indicative
of future operating results.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------- ----------------------
(in thousands, except per August 1, August 2, August 1, August 2,
share data) 1998 1997 1998 1997
- --------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue $18,323 $18,375 $46,667 $51,885
Cost and expenses:
Costs of goods sold 8,932 8,005 23,543 22,225
Research and development 4,451 4,896 14,007 15,900
Selling, general and
administrative 9,930 9,453 28,110 27,608
Non-recurring charges 5,600 -- 5,600 3,563
---------- ---------- ---------- ----------
28,913 22,354 71,260 69,296
---------- ---------- ---------- ----------
Operating loss (10,590) (3,979) (24,593) (17,411)
Other income, net 783 4,453 2,139 5,574
---------- ---------- ---------- ----------
Income (loss) before income taxes (9,807) 474 (22,454) (11,837)
Provision for income taxes 164 150 304 226
---------- ---------- ---------- ----------
Net income (loss) ($9,971) $324 ($22,758) ($12,063)
========== ========== ========== ==========
Basic and diluted earnings
(loss) per share ($1.45) $0.05 ($3.27) ($1.73)
========== ========== ========== ==========
Shares used for basic
earnings (loss) per share 6,885 6,934 6,966 6,963
========== ========== ========== ==========
Shares used for diluted
earnings (loss) per share 6,885 7,019 6,966 6,963
========== ========== ========== ==========
</TABLE>
Results of Operations
Net revenue for the third quarter of fiscal 1998 was
$18.1 million, which was 33% lower than net revenue for the
corresponding quarter of fiscal 1997. The decrease in net
revenue from the third quarter of 1997 reflects lower sales
of small and large systems and MobileManager products offset
in part by higher sales of upgrade and expansion products.
This decrease was primarily due to reduced sales volumes,
due to the CPE Sale. As a result of the sale of the CPE
business unit during the third quarter and other factors,
the Company expects revenue for 1998 to be less than revenue
for fiscal 1997. Sales to international customers were 46%
of revenues for the third quarter as compared to 47% in the
similar period of 1997. Net revenue for the first nine
months of fiscal 1998 was $57.5 million, which was 28% lower
than net revenue for the comparable 1997 period. This
decrease in revenue is attributable to essentially the same
factors as noted above. Sales to international customers
were 47% of revenues for the first nine months of fiscal
1998 as compared to 49% for the similar period of fiscal
1997.
On a pro forma basis, net revenue was $18.3 million and
$46.7 million versus $18.4 million and $51.9 million for the
three and nine month periods of 1998 and 1997, respectively.
These decreases in net revenue reflect lower sales of large
system products to international customers in Europe and the
Pacific Rim.
Gross margin was 51.3% and 57.2% of net revenue in the
third quarters of 1998 and 1997, respectively. This 5.9%
decrease from the prior year's third quarter reflects
reduced sales of and lower margins in the Company's large
systems products because of increased competitive pricing
pressures, partially offset by a favorable mix of increased
sales and margins of systems expansion products. For the
first nine months of fiscal 1998 the gross margin was 51.2%
of net revenue as compared to 57.7% for the first nine
months of fiscal 1997. This 6.5% decrease reflects
essentially the same factors as noted above in the
comparison of the third quarter of fiscal 1998 to the third
quarter of fiscal 1997. See "Certain Trends and
Uncertainties."
On a pro forma basis, gross margin was 51.3% and 50.4%
versus 56.4% and 57.2% for the three and nine month periods
of 1998 and 1997, respectively. These decreases in year
over year pro forma gross margins reflect essentially the
same factors as noted above.
Research and development ("R&D") expenses decreased 18%
in the third quarter of 1998 as compared to the
corresponding quarter of 1997 and represented 22% and 18% of
net revenue, respectively. These reductions in R&D expenses
reflect savings resulting from lower R&D staffing levels and
related costs due to the CPE Sale. For the first nine
months of fiscal 1998, R&D spending was down 12% as compared
to the comparable period in fiscal 1997 and represented 25%
and 20% of net revenue, respectively. These decreases in
absolute dollars reflect lower payroll expenses and other
costs resulting from lower staffing levels due to the CPE
Sale. The Company believes that ongoing development of new
products and features is required to maintain and enhance
its competitive position and accordingly, the Company
expects to continue to invest in R&D.
On a pro forma basis, R&D expenses decreased $0.4
million and $1.9 million for the three and nine month
periods of 1998 and 1997, respectively. These reductions in
pro forma R&D spending reflect savings from lower R&D
staffing levels and related costs. Also, expenses were
higher in fiscal 1997 resulting from the release in the
first quarter of the Series 6 platform without comparable
expenses in fiscal 1998.
Selling, general and administrative ("SG&A") expenses
for the third quarter were 16% below the SG&A expenses for
the third quarter of fiscal 1997. These decreases reflect
primarily reduced sales, marketing and customer support
expenses, including decreases in salaries and related costs
due to the CPE sale and other reductions in average
headcount. SG&A expenses represented 54%, and 43% of net
revenue the third quarter of 1998 and 1997, respectively.
SG&A expenses for the first nine months of fiscal 1998 were
down 7% from the prior year and represented 55% and 43% of
net revenues for 1998 and 1997, respectively. This decrease
reflects the same factors as noted above.
On a pro forma basis, SG&A expenses increased $0.5
million for the three and nine month periods of 1998 and
1997, respectively. These increases reflect increased sales
and marketing expenses.
Non-recurring charges were $14.0 million for the three
and nine month periods of 1998 and zero and $3.6 million for
the comparable periods in 1997. For 1998 these non-
recurring charges consisted of $8.4 million for the write-
off of purchased in-process technology acquired in the
purchase of The Telephone Connection, Inc. on June 24, 1998
as this technology had not reached technological feasibility
and had no alternative use and $5.6 million associated with
the Company's patent dispute with Lucent Technologies. For
1997, these charges consisted of $2.4 million in
restructuring expenses and $1.2 million associated with the
termination of acquisition discussions with Voice-Tel
Enterprises and Voice-Tel Network ("Voice-Tel"). The
restructuring expenses represented termination benefits for
approximately 35 employees from all functions of the Company
and costs associated with the resignation of the Company's
president.
Other income, net was $15.1 million and $16.4 million
and $4.4 million and $5.5 million for the three and nine month
periods of 1998 and 1997, respectively. In addition to the
Company's net investment income, other income in the 1998
periods included the $14.3 million gain on the sale of the CPE
business unit and in 1997 periods the $3.9 million gain on the
sale of the Text-to-Speech business.
The Company recorded a provision for income taxes for
the three and nine month periods of fiscal 1998 and 1997 for
anticipated foreign income tax liabilities. No income tax
benefit has been recorded for the losses incurred in the
first nine months of fiscal 1998 and 1997, respectively,
because realization of the deferred tax assets arising as a
result of the losses sustained are dependent upon future
taxable income, the amount and timing of which are
uncertain. Accordingly, a valuation allowance has been
established to fully offset the deferred tax assets
resulting from the losses incurred.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments at
August 1, 1998 were $52.3 million, increasing $5.9 million
from the second quarter balance of $46.4 million and
increasing $0.2 million from the year end balance.
For the first nine months ended August 1, 1998 the net
cash used for operating activities was $9.7 million. Trade
receivables decreased $2.0 million from the year-end balance
primarily due to reduced revenues in the third quarter as
compared to the last quarter in fiscal 1997. Days sales
outstanding (computed using quarterly revenues) were 78 days
in the third quarter as compared to 68 days at end of fiscal
1997. This increase in days sales outstanding was primarily
due to extended payment terms to certain international
customers. Inventory levels at August 1, 1998 were $0.7
million lower than the year-end balance due to improved
management of the Company's inventory stocking levels. The
Company expects investments in receivables and inventories
will continue to represent a significant portion of working
capital.
In December 1997, as disclosed in the Company's Form
10-K, representatives of Lucent Technologies ("Lucent")
informed the Company that they believed that the Company's
products may infringe upon certain patents issued to Lucent,
and that Lucent was seeking compensation for any past
infringement by the Company. The Company has continued to
evaluate the assertions of Lucent and on August 25, 1998
signed a letter of intent pursuant to which the Company
expects to pay Lucent $9,200,000 during its fourth quarter
to settle this dispute.
During the first nine months ended August 1, 1998, the
Company made capital expenditures of approximately $1.8
million. These expenditures consisted primarily of
purchases of computer equipment, software, and engineering
lab equipment. The Company currently expects to spend
approximately $3.0 million for capital equipment during
fiscal 1998. On April 15, 1997 the Company's Board of
Directors authorized a stock repurchase program whereby up
to one million shares of its Common Stock may be repurchased
in the open market from time-to-time. During the first nine
months of 1998 the Company purchased under this repurchase
program approximately 800,000 shares at a cost of $7.0
million. The Company presently believes, notwithstanding
its accumulated deficit, that its existing cash and short-
term investments and amounts available under its line of
credit, will be sufficient to support the Company's working
capital, capital equipment purchase requirements, and stock
repurchase program at least through fiscal 1999.
The Company's principal sources of liquidity as of
August 1, 1998 consisted of $52.3 million of cash and cash
equivalents and short-term investments and $15.0 million
available under the Company's bank line of credit which
expires May 29, 1999. 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. There were no borrowings outstanding
under the bank line as of August 1, 1998.
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, 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 and the
Company's sales force in selling the Company's products,
changes in distributor inventory levels, the ability of the
Company's joint marketing partners to ship products during
the quarter, 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. The
Company has in the past experienced higher than usual
headcount turnover which has had an adverse effect on the
Company's booking levels. There can be no assurance that
such turnover will not continue in future periods. Any
failure by the Company to attract, retain and train
additional sales and other personnel could have a material
adverse effect on the Company's business and results of
operations.
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 58% and 31% of the Company's net revenue in
the three and nine month periods of fiscal 1998 and the 34%
and 27% for the similar periods in fiscal 1997,
respectively, although the Company's five largest customers
were not the same in the two 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 third
fiscal quarter ended August 1, 1998 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. In particular, the Company's sales in Asia have
been adversely affected in recent quarters by financial
difficulties in that region and may be so adversely affected
in the future.
The Company's gross margin can be affected by a number
of factors, including changes in product configuration and
mix including the volume of OEM products, 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 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. While the Company anticipates that its sales
mix will continue to fluctuate in future periods, with the
sale of the CPE business unit in the third quarter of 1998,
the Company anticipates selling an increasing percentage of
sales through direct sales rather than through distribution.
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 addition, a number of other companies, including
competitors of the Company, hold patents in the same general
area as the technology used by the Company. The Company
from time to time has received, and may receive in the
future, letters alleging infringement of patent rights by
the Company's products. For example, in December 1997,
representatives of Lucent informed the Company that they
believed that the Company's products may infringe upon
certain patents issued to Lucent, and that Lucent was
seeking compensation for any past infringement by the
Company. The Company has continued to evaluate the
assertions of Lucent, and on August 25, 1998 signed a letter
of intent to settle this dispute. Lucent, or any other
third party, alleging infringement, could seek an injunction
prohibiting the Company from selling some or all of its
products, which would have an immediate, adverse impact in
the Company's business, financial condition and results of
operations. There can be no assurance that the Company
would prevail in any litigation to enjoin the Company from
selling its products on the basis of such alleged
infringement, or that the Company would be able to license
any valid and infringed patents on reasonable terms, or at
all.
The Company has conducted a review of its internal
computer systems, as well as the Company's product line, to
identify the systems that could be affected by the "Year
2000" issue and has developed an implementation plan to
resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits (rather
than four) to define the applicable year. Software programs
that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could
result in a major system failure or miscalculations. If
modifications are not made in a timely manner, the Company
or its customers may be unable to implement appropriate Year
2000 solutions, which could have a material adverse affect
on the Company's business, financial condition or results of
operations.
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 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
May 8, 1998, sale of CPE business unit to Mitel;
amended to include pro forma financial statements,
with an 8-K/A on July 15, 1998.
June 1, 1998, disclosing the effect of adoption of
FAS128, "Earnings per Share" on the Annual Report
on Form 10-K for the fiscal year ended November 1,
1997 and prior periods.
June 24, 1998, purchase of The Telephone
Connection, Inc.; amended to include pro forma
financial statements, with an 8-K/A on September
2, 1998.
<PAGE>
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: September 14, 1998 By: /s/ Robert L. Puette
Robert L. Puette
President and Chief Executive
Officer
Date: September 14, 1998 By: /s/ Thomas E. Brunton
Thomas E. Brunton
Sr. Vice President and
Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
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<COMMON> 90,626
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