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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
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.
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<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Centigram Communications Corporation
Condensed Consolidated Balance Sheets (Restated)
(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........................... 6,829 1,468
Deposits and other assets........................ 2,320 439
----------- -----------
$91,080 $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.......................... (17,520) (6,670)
Unrealized gain on investments............... 331 68
Cumulative translation adjustments........... (96) (71)
----------- -----------
Total stockholders' equity............... 67,305 81,624
----------- -----------
$91,080 $99,920
=========== ===========
<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 (Restated)
(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........... 10,600 -- 10,600 3,563
---------- ---------- ---------- ----------
33,319 28,148 84,452 87,572
---------- ---------- ---------- ----------
Operating loss.................... (15,176) (1,138) (26,949) (7,750)
Other income, net................. 15,074 4,437 16,403 5,501
---------- ---------- ---------- ----------
Income (loss) before income taxes. (102) 3,299 (10,546) (2,249)
Provision for income taxes........ 164 150 304 226
---------- ---------- ---------- ----------
Net income (loss)................. ($266) $3,149 ($10,850) ($2,475)
========== ========== ========== ==========
Basic and diluted earnings (loss)
per share......................... ($0.04) $0.45 ($1.56) ($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 (Restated)
(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...................................... (10,850) (2,475)
Write-off of purchsed in-process technology... 5,000 --
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
Principal payments on capital leases.......... (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 (Restated) (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.
Acquisition and Revision of Purchase Price Allocation
On June 24, 1998, the Company acquired substantially all of the
assets of The Telephone Connection, Inc. ("TTC") for approximately $11.6
million, including transaction costs of $0.4 million. This acquisition
was accounted for as a business combination using the purchase method of
accounting. In accordance with Accounting Principles Board Opinion No.
16, "Accounting for Business Combinations," the costs of these
acquisitions were allocated to the assets acquired and the liabilities
assumed (including in-process research and development ("IPR&D") based
on their estimated fair values using valuation methods believed to be
appropriate at the time. The amount was computed using a discounted cash
flow analysis on the anticipated income stream of the related product
sales. The discounted cash flow analysis was based on management's
forecast of future revenues, costs of revenues, and operating expenses
related to the products and technologies purchased from TTC. The amount
allocated to IPR&D of $8.4 million was expensed in the period in which
the acquisition was consummated in accordance with FASB Interpretation
No. 4, "Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method." Subsequent to the acquisition
and the issuance of the Company's condensed financial statements for the
quarter ended August 1, 1998, the staff of the SEC in its September 9,
1998 letter to the American Institute of Certified Public Accountants set
forth their views on the valuation of IPR&D. The Company has reallocated
the previously reported purchase price based on its understanding and
interpretations of the issues set forth in the aforementioned letter.
The reallocation reduced the amount previously written-off as IPR&D from
$8.4 million to $5.0 million and increased goodwill and other intangible
assets by the same amount. The effect of these adjustments on previously
reported unaudited condensed consolidated financial statements for the
three and nine months ended August 1, 1998 and as of August 1, 1998 are as
follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------- ---------------------
As As
(in thousands, except per share data) Reported Restated Reported Restated
- ------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Purchased in-process research
and development................... $8,400 $5,000 $8,400 $5,000
Loss from operations................ ($18,576) ($15,176) ($30,349) ($26,949)
Net loss............................ ($3,666) ($266) ($14,250) ($10,850)
Basic and diluted net loss per
share............................. ($0.53) ($0.04) ($2.05) ($1.56)
<CAPTION>
August 1, 1998
---------------------
As
(in thousands) Reported Restated
- ------------------------------------- ---------- ----------
<S> <C> <C>
Intangible assets, net.............. $3,429 $6,829
Accumulated deficit................. ($20,920) ($17,520)
</TABLE>
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
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 $9.2
million during its fourth quarter to settle this dispute. During the
third quarter the Company accrued $7.6 million as additional costs, of
which $5.6 million was recorded as a non-recurring charge and $2.0
million, 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 $1.6 million 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 40 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 (Restated)
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>
Nine Months
Quarter Ended 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).................. ($266) $3,149 ($10,850) ($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...... ($0.04) $0.45 ($1.56) ($0.36)
========== ========== ========== ==========
Diluted earnings (loss) per share.... ($0.04) $0.45 ($1.56) ($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 (Restated)
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.
Nine Months Ended
---------------------
(in thousands, except per share data) 1998 1997
- ------------------------------------- ---------- ----------
Net revenue................................... $46,606 $51,885
Loss before income taxes ..................... ($22,368) ($11,976)
Net loss...................................... ($22,672) ($12,202)
Basic and diluted loss per share ............. ($3.25) ($1.75)
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.
Acquisition and Revision of Purchase Price Allocation
On June 24, 1998, the Company acquired substantially all of the
assets of The Telephone Connection, Inc. ("TTC") for approximately $11.6
million, including transaction costs of $0.4 million. This acquisition
was accounted for as a business combination using the purchase method of
accounting. Subsequent to the acquisition and the issuance of the
Company's condensed financial statements for the quarter ended August 1,
1998, the staff of the SEC in its September 9, 1998 letter to the
American Institute of Certified Public Accountants set forth their views
on the valuation of IPR&D. The Company has reallocated the previously
reported purchase price based on its understanding and interpretations of
the issues set forth in the aforementioned letter. The reallocation
reduced the amount previously written-off as IPR&D from $8.4 million to
$5.0 million and increased goodwill and other intangible assets by the
same amount. The effect of these adjustments on previously reported
unaudited condensed consolidated financial statements for the three and
nine months ended August 1, 1998 and as of August 1, 1998 are as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------- ---------------------
As As
(in thousands, except per share data) Reported Restated Reported Restated
- ------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Purchased in-process research
and development................... $8,400 $5,000 $8,400 $5,000
Loss from operations................ ($18,576) ($15,176) ($30,349) ($26,949)
Net loss............................ ($3,666) ($266) ($14,250) ($10,850)
Basic and diluted net loss per
share............................. ($0.53) ($0.04) ($2.05) ($1.56)
<CAPTION>
August 1, 1998
---------------------
As
(in thousands) Reported Restated
- ------------------------------------- ---------- ----------
<S> <C> <C>
Intangible assets, net.............. $3,429 $6,829
Accumulated deficit................. ($20,920) ($17,520)
</TABLE>
Pro Forma Combined Condensed Statements of Operations (Restated)
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 share August 1, August 2, August 1, August 2,
data) 1998 1997 1998 1997
- ---------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue....................... $18,266 $18,375 $46,606 $51,885
Cost and expenses:
Costs of goods sold............. 9,024 8,025 23,520 22,278
Research and development........ 4,371 4,837 13,676 15,728
Selling, general and
administrative............... 10,024 9,540 28,313 28,166
Non-recurring charges........... 5,600 -- 5,600 3,263
---------- ---------- ---------- ----------
29,019 22,402 71,109 69,435
---------- ---------- ---------- ----------
Operating loss.................... (10,753) (4,027) (24,503) (17,550)
Other income, net................. 779 4,453 2,135 5,574
---------- ---------- ---------- ----------
Income (loss) before income taxes. (9,974) 426 (22,368) (11,976)
Provision for income taxes........ 164 150 304 226
---------- ---------- ---------- ----------
Net income (loss)................. ($10,138) $276 ($22,672) ($12,202)
========== ========== ========== ==========
Basic and diluted earnings (loss)
per share......................... ($1.47) $0.04 ($3.25) ($1.75)
========== ========== ========== ==========
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 $46.6
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 50.6% and 49.5% versus
56.3% and 57.1% 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 $0.5 million and $2.1
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 and $0.1 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 $10.6 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 $5.0
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. (See Acquisition and Revision of
Purchase Price Allocation.) 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 40 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 $9.2
million 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.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule (Restated).
(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: January 8, 1999 By: /s/ Robert L. Puette
-------------------------------
Robert L. Puette
President and Chief Executive
Officer
Date: January 8, 1999 By: /s/ Thomas E. Brunton
-------------------------------
Thomas E. Brunton
Sr. Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH RESTATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> AUG-01-1998
<CASH> 15,958
<SECURITIES> 36,303
<RECEIVABLES> 15,856
<ALLOWANCES> 0
<INVENTORY> 5,494
<CURRENT-ASSETS> 75,084
<PP&E> 6,847
<DEPRECIATION> 0
<TOTAL-ASSETS> 91,080
<CURRENT-LIABILITIES> 23,775
<BONDS> 0
0
0
<COMMON> 90,626
<OTHER-SE> (23,321)
<TOTAL-LIABILITY-AND-EQUITY> 91,080
<SALES> 57,503
<TOTAL-REVENUES> 57,503
<CGS> 28,061
<TOTAL-COSTS> 28,061
<OTHER-EXPENSES> 56,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,546)
<INCOME-TAX> 304
<INCOME-CONTINUING> (10,850)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,850)
<EPS-PRIMARY> ($1.56)
<EPS-DILUTED> ($1.56)
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