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 July 31, 1999
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 (not including treasury shares) of the
Registrant's Common Stock as of August 27, 1999, was 5,992,000.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Centigram Communications Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and July 31, October 31,
per share data) 1999 1998
- ------------------------------------------ ------------ ------------
(Unaudited) (Note)
Assets
Current Assets:
Cash and cash equivalents ............ $ 8,458 $ 23,430
Short-term investments ............... 34,501 33,760
Trade receivables, net ............... 16,802 14,566
Inventories .......................... 2,294 5,297
Other current assets ................. 1,649 1,745
-------- --------
Total current assets .............. 63,704 78,798
Property and equipment, net .............. 4,706 6,653
Intangible assets, net ................... 5,748 6,637
Deposits and other assets ................ 3,507 3,889
======== ========
$ 77,665 $ 95,977
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ..................... $ 4,071 $ 5,985
Accrued compensation ................. 3,827 4,034
Patent settlement payable ............ -- 9,200
Deferred income ...................... 3,526 4,394
Accrued expenses and other
liabilities ....................... 5,694 5,179
Warranty and retrofit reserves ....... 2,038 1,977
-------- --------
Total current liabilities ......... 19,156 30,769
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
outstanding and capital in excess
of par value ...................... 90,356 90,625
Treasury stock, 1,106,000 and 597,000
shares, at cost ................... (12,048) (6,867)
Accumulated deficit .................. (19,890) (18,844)
Accumulated other comprehensive income 91 294
-------- --------
Total stockholders' equity ........ 58,509 65,208
-------- --------
$ 77,665 $ 95,977
======== ========
Note: The balance sheet at October 31, 1998 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.
<PAGE>
Centigram Communications Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Quarter Ended Nine Months Ended
--------------------- ---------------------
(In thousands, except July 31, August 1, July 31, August 1,
per share data) 1999 1998 1999 1998
- ---------------------------- --------- --------- --------- ---------
Net revenue ................ $ 21,016 $ 18,143 $ 62,084 $ 57,503
Cost and expenses:
Costs of goods sold .... 9,106 8,837 26,808 28,061
Research and development 3,914 4,056 12,256 14,143
Selling, general and
administrative ...... 8,646 9,826 25,596 31,648
Non-recurring charges .. -- 10,600 -- 10,600
-------- -------- -------- --------
Total costs and expenses 21,666 33,319 64,660 84,452
-------- -------- -------- --------
Operating loss ............. (650) (15,176) (2,576) (26,949)
Other income, net .......... 585 15,074 1,845 16,403
-------- -------- -------- --------
Loss before income taxes ... (65) (102) (731) (10,546)
Provision for income taxes . 110 164 315 304
-------- -------- -------- --------
Net loss ................... $ (175) $ (266) $ (1,046) $(10,850)
======== ======== ======== ========
Basic and diluted earnings
loss per share .......... $ (0.03) $ (0.04) $ (0.17) $ (1.56)
======== ======== ======== ========
Shares used for basic and
diluted loss per share .. 6,071 6,885 6,325 6,966
======== ======== ======== ========
See accompanying notes.
<PAGE>
Centigram Communications Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
-------------------------
July 31, August 1,
(In thousands) 1999 1998
- -------------------------------------------------- ----------- ----------
Cash and equivalents, beginning of period ........ $ 23,430 $ 19,791
----------- ----------
Cash flows from operations:
Net loss ..................................... (1,046) (10,850)
Write-off of purchased in-process
technology ................................ -- 5,000
Gain on sale of CPE business unit ............ -- (14,302)
Depreciation and amortization ................ 4,316 5,591
Trade receivables ............................ (2,236) 2,003
Inventories .................................. 3,003 666
Other assets ................................. 478 (977)
Accounts payable ............................. (1,914) (2,135)
Accrued expenses and other
liabilities ............................... (9,699) 5,306
----------- ----------
(7,098) (9,698)
----------- ----------
Cash flows from investing:
Purchase of short-term investments ........... (55,922) (35,088)
Proceeds from sale and maturities
of short-term investments ................. 55,039 31,310
Proceeds from the sale of CPE
business unit ............................. -- 26,849
Purchase of property and equipment ........... (1,541) (1,817)
Acquisition of TTC ........................... -- (11,558)
----------- ----------
(2,424) 9,696
----------- ----------
Cash flows from financing:
Proceeds from sale of common stock ........... 760 3,267
Principal payments on capital leases ......... -- (78)
Acquisition of treasury stock ................ (6,210) (7,020)
----------- ----------
(5,450) (3,831)
----------- ----------
Net change in cash and equivalents ............... (14,972) (3,833)
=========== ==========
Cash and equivalents, end of period .............. $ 8,458 $ 15,958
=========== ==========
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 October 31, 1998. The results of operations for the three and nine
month periods ended July 31, 1999 may not necessarily be indicative of the
results for the fiscal year ending October 30, 1999 or any future period.
Inventories
Inventories consisted of:
July 31, October 31,
(In thousands) 1999 1998
------------------------------------------ ---------- ----------
Raw materials ............................ $ 255 $1,198
Work-in-process .......................... 1,352 1,793
Finished goods ........................... 687 2,306
========== ==========
$2,294 $5,297
========== ==========
Loss Per Share
Basic and diluted per share amounts are computed using the weighted average
number of common shares outstanding during the periods. In computing diluted per
share amounts in periods with income, the dilutive effect of stock options were
also included in the per share computations. Options to purchase common stock
were outstanding during the three and nine-month periods ended July 31, 1999 and
August 1, 1998, but were excluded from the computation of diluted net loss per
share because the effect in these periods would have been anti-dilutive.
The details of these computations are as follows:
Quarter Ended Nine Months Ended
-------------------- --------------------
(In thousands, except July 31, August 1, July 31, August 1,
per share data) 1999 1998 1999 1998
- ----------------------------------- -------- --------- --------- ---------
Net loss .......................... $ (175) $ (266) $(1,046) $(10,850)
======== ========= ========= =========
Weighted average shares
outstanding ................... 6,071 6,885 6,325 6,966
Effect of dilutive securities:
Shares issued upon exercise
of dilutive outstanding
options ........... -- -- -- --
======== ========= ========= =========
Adjusted weighted average shares .. 6,071 6,885 6,325 6,966
======== ========= ========= =========
Basic loss per share .............. $ (0.03 $ (0.04) $ (0.17) $ (1.56)
======== ========= ========= =========
Diluted loss per share ............ $ (0.03) $ (0.04) $ (0.17) $ (1.56)
======== ========= ========= =========
<PAGE>
Comprehensive Income (Loss)
As of November 1, 1998, the Company adopted the Statement on Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive income. Prior to
adoption, unrealized gains or losses related to foreign currency translation
adjustments were reported as a separate component of shareholders' equity.
The following are the components of comprehensive income (loss):
Quarter Ended Nine Months Ended
--------------------- ----------------------
July 31, August 1, July 31, August 1,
(In thousands) 1999 1998 1999 1998
- ---------------------------- --------- --------- --------- ----------
Net loss ................... $ (175) $ (266) $ (1,046) $(10,850)
Unrealized gain (loss) on
investments ........... (49) 128 (142) 263
Foreign currency translation
adjustment ............ 5 (49) (61) 25
======== ======== ========= ==========
$ (219) $ (187) $ (1,249) $(10,612)
======== ======== ========= ==========
The following are the components of accumulated other comprehensive income,
net of related tax:
July 31, October 31,
(In thousands) 1999 1998
- --------------------------------------- ---------- ----------
Unrealized gain on investments ........ $ 200 $ 342
Foreign currency translation adjustment (109) (48)
========== ==========
$ 91 $ 294
========== ==========
Pro Forma Information
In June 1998, the Company purchased substantially all of the assets of The
Telephone Connection, Inc. ("TTC Acquisition") for approximately $11.6 million
in cash, including transaction costs of $0.4 million. The acquisition has been
accounted for using the purchase method of accounting.
In May 1998, the Company licensed and sold certain Customer Premise
Equipment business unit assets to Mitel Corporation ("the CPE Sale") for $26.8
million in cash, and Mitel assumed certain of the Company's liabilities.
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 CPE Sale, as if each of these transactions
had occurred at the beginning of fiscal 1998. 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 1998 nor are they necessarily indicative
of future operating results.
Nine Months Ended
------------------------------
(In thousands, except July 31, 1999 August 1, 1998
per share data) (Pro Forma)
- -------------------------------- ------------ --------------
Net revenue .................... $ 62,084 $ 46,606
Loss before income taxes ....... $ (731) $(22,368)
Net loss ....................... $ (1,046) $(22,672)
Basic and diluted loss per share $ (0.17) $ (3.25)
<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, and the 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 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.
<PAGE>
Pro Forma Combined Condensed Statements of Operations
In June 1998, the Company purchased substantially all of the assets of The
Telephone Connection, Inc. ("TTC Acquisition") for approximately $11.6 million
in cash, including transaction costs of $0.4 million. The acquisition has been
accounted for using the purchase method of accounting.
In May 1998, the Company licensed and sold certain Customer Premise
Equipment business unit assets to Mitel Corporation (the "CPE Sale") for $26.8
million in cash, and Mitel assumed certain of the Company's liabilities.
The following pro forma statements and the discussion of pro forma results
herein 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 CPE Sale, as if each of these transactions had occurred at the beginning of
fiscal 1998. 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 1998 nor are they necessarily indicative of future operating results.
Quarter Ended Nine Months Ended
---------------------- -------------------
July 31, August 1, July 31, August 1,
(In thousands, except per share 1999 1998 1999 1998
data) (Pro Forma) (Pro Forma)
- --------------------------------- --------- --------- --------- ----------
Net revenue ..................... $ 21,016 $ 18,266 $ 62,084 $ 46,606
Cost and expenses:
Costs of goods sold ......... 9,106 9,024 26,808 23,520
Research and development .... 3,914 4,371 12,256 13,676
Selling, general and
administrative ........... 8,646 10,024 25,596 28,313
Non-recurring charges ....... -- 5,600 -- 5,600
--------- --------- --------- ----------
Total costs and expenses . 21,666 29,019 64,660 71,109
--------- --------- --------- ----------
Operating loss .................. (650) (10,753) (2,576) (24,503)
Other income, net ............... 585 779 1,845 2,135
--------- --------- --------- ----------
Loss before income taxes ........ (65) (9,974) (731) (22,368)
Provision for income taxes ...... 110 164 315 304
--------- --------- --------- ----------
Net loss ........................ $ (175) $(10,138) $ (1,046) $(22,672)
========= ========= ========= ==========
Basic and diluted loss per
share ...................... $ (0.03) $ (1.47) $ (0.17) $ (3.25)
========= ========= ========= ==========
Shares used for basic and diluted
loss per share .............. 6,071 6,885 6,325 6,966
========= ========= ========= ==========
<PAGE>
Results of Operations
Net revenue was $21.0 million and $62.1 million for the third quarter and
nine months of fiscal 1999, and was 16% and 8% higher than the comparable
periods in fiscal 1998. The increase in net revenue for the third quarter and
nine months of 1999 as compared to the similar periods in 1998 reflects higher
sales of large system expansion products offset in part by lower sales of
smaller system products. The decrease in sales of smaller system products from
the prior year was primarily due to the CPE Sale. Sales to international
customers were 38% and 40% of revenues for the third quarter and nine months of
1999 as compared to 46% and 47% in the similar periods of 1998. This year over
year decrease in the percentage of international sales to total sales resulted
from flat year over year international revenue and increased growth in domestic
revenues.
On a pro forma basis, net revenue was $21.0 million and $62.1 million for
the third quarter and nine months of 1999 and was 15% and 33% higher than the
comparable periods in fiscal 1998. This increase in pro forma net revenue
reflects higher sales of large system expansion products to domestic customers.
Gross margin was 56.7% and 51.3% of net revenue for the third quarters and
56.8% and 51.2% for the nine months of 1999 and 1998, respectively. This year
over year increase of 5.4% and 5.6% for the third quarter and nine months ended
July 31, 1999, respectively, reflects a favorable mix of increased sales of the
Company's large system expansion products which typically have higher gross
margins as compared to smaller system products. See "Certain Trends and
Uncertainties."
On a pro forma basis, gross margin was 56.7% and 50.6% for the third
quarter and 56.8% and 49.5% for the nine months of 1999 and 1998, respectively.
These increases in year over year pro forma gross margins reflect essentially
the same factors as noted above.
Research and development ("R&D") expenses were $3.9 million and $12.3
million for the third quarter and nine months of 1999, decreasing 4% and 13%
from the corresponding periods of 1998. R&D expenses as a percentage of net
revenue were 19% and 22% for the third quarter and 20% and 25% for the nine
months of 1999 and 1998, respectively. These reductions in R&D expenses reflect
lower R&D staffing levels and related costs and outside services due to the CPE
Sale offset, in part, by the increased R&D expenses related to the TTC
Acquisition. 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 10% in the third quarter and
nine months of 1999 as compared to 1998. These reductions in pro forma R&D
spending reflect lower R&D staffing levels and related costs.
Selling, general and administrative ("SG&A") expenses were $8.6 million and
$25.6 million for the third quarter and nine months of 1999, decreasing 12% and
19% from the corresponding periods of 1998. These decreases reflect primarily
reduced sales, marketing and customer support expenses, including decreases in
salary expenses and related costs due to the CPE Sale and other reductions in
average headcount offset, in part, by the increased SG&A expenses related to the
TTC Acquisition. SG&A expenses as a percentage of net revenue were 41% and 54%
for the third quarter and 41% and 55% for the nine months of 1999 and 1998,
respectively.
On a pro forma basis, SG&A expenses decreased 14% and 10% in the third
quarter and nine months of 1999 as compared to 1998. These decreases reflect
reduced sales and support expenses due to reduced headcount and related costs.
Non-recurring charges were zero and $10.6 million for the three and nine
month periods of 1999 and 1998, respectively. For 1998 these non-recurring
charges consisted of $5.0 million for the write-off of purchased in-process
technology from the TTC Acquisition 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.
Other income, net was $0.6 million and $15.1 million for the third quarter
and $1.8 million and $16.4 million for the nine months of 1999 and 1998,
respectively. Excluding the $14.3 million gain on the sale of the CPE Sale in
the third quarter and nine months of 1998, other income net decreased $0.2
million and $0.3 million in the third quarter and nine months of 1999 as
compared to 1998. This decrease in other income, net reflects lower interest
income due to lower average invested balances in 1999 versus 1998.
The Company recorded a provision for income taxes for the third quarter and
nine months of fiscal 1999 and 1998 for anticipated foreign income tax
liabilities. No income tax benefits were recorded for the losses incurred in
fiscal years 1999 and 1998 because realization of the deferred tax asset arising
as a result of the losses sustained is 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 asset other than that which
represents potentially refundable taxes.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments at July 31, 1999 were
$43.0 million, decreasing $14.2 million from the year end balance of $57.2
million. In October 1998 the Company settled a patent dispute with Lucent
Technologies Inc. ("Lucent") with an intellectual property cross-licensing
agreement and in November 1998 paid Lucent $9.2 million.
For the first nine months ended July 31, 1999 the net cash used for
operating activities was $7.1 million. Trade receivables increased $2.2 million
from the year-end balance and days sales outstanding (computed using quarterly
revenues) were 72 days in the third quarter as compared to 65 days at the end of
fiscal 1998. This increase in trade receivables and days sales outstanding
resulted primarily from a larger percentage of quarterly shipments occurring in
the last month of the third quarter as compared to the last month in the prior
year and delayed payments from certain international customers. Inventory
balances at July 31, 1999 were $3.0 million lower than year-end 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.
During the nine months ended July 31, 1999, the Company made capital
expenditures of approximately $1.5 million. These expenditures consisted
primarily of purchases of computer equipment, software, and engineering lab
equipment. The Company currently expects to spend approximately $2.0 million for
capital equipment during fiscal 1999, although actual expenditures may differ
from this forecast. In addition, the Company's Board of Directors has authorized
a stock repurchase program whereby up to 2.5 million shares of its Common Stock
may be repurchased in the open market from time to time. During the first nine
months of fiscal 1999 the Company purchased approximately 600,000 shares at a
total cost of $6.2 million. The Company has purchased an aggregate of
approximately 1.5 million shares under this program at a total cost of
approximately $17.0 million. The Company may, at its discretion, purchase
additional shares under this program during the next twelve months. The Company
presently believes, notwithstanding its accumulated deficit, that its existing
cash and short-term investments will be sufficient to support the Company's
working capital, capital equipment purchase requirements, and stock repurchase
program for the next twelve months.
The Company's principal sources of liquidity as of July 31, 1999 consisted
of $43.0 million of cash and cash equivalents and short-term investments. The
Company elected not to renew its $15.0 million bank line of credit which expired
in May 1999.
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 45% and 31% of the Company's net revenue in the first nine month
periods of fiscal 1999 and 1998, 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 on a timely basis could have a material adverse
impact on the Company's financial position, results of operations and cash
flows.
Approximately 38% and 40% of the Company's sales in the third quarter and
nine months ended July 31, 1999 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 and Latin American have been adversely affected in recent quarters
by financial difficulties in these regions 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, 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 evaluated the assertions of Lucent, and
in October 1998 settled with Lucent by signing an intellectual property
cross-licensing agreement and in November 1998 paid Lucent $9.2 million. Third
party companies 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.
Like many other companies, the year 2000 computer issue creates risks for
Centigram. If internal systems do not correctly recognize and process date
information beyond the year 1999, there could be an adverse impact on the
Company's operations. To address the year 2000 issues with its internal systems,
the Company has initiated a comprehensive program which is designed to deal with
the most critical systems first. Assessment and remediation are proceeding in
tandem and changes to critical systems have been completed and tested. These
activities are intended to encompass all major categories of systems in use by
the Company, including manufacturing, sales, customer service, finance and
administration. The Company is also actively working with critical suppliers of
products and services to determine that the suppliers' operations and the
products and services they provide are year 2000 capable or to monitor their
progress toward year 2000 capability. In addition, the Company is completing its
draft contingency plan which should be completed in the Company's fourth quarter
to address potential problem areas with internal systems and with suppliers and
other third parties.
In the event the Company fails to anticipate the degree of disruptions
caused by Year 2000 problems in its contingency plans, the Company's systems
could be affected in some or all of the following respects: disruptions of an
extended period (i.e., in excess of one week) in the economic infrastructure of
the regions in which the Company does business, including power, communication
and transportation system disruptions, could materially affect the Company's
ability to deliver systems as scheduled or to provide in a timely manner spare
parts or warranty support for such systems; and disruptions of an extended
period (i.e., generally in excess of 30 days) could materially affect the
Company's inventory supply of parts for system manufacture and delay scheduled
systems to our customers. The Company's contingency plans, when completed and
implemented by the Company, are intended to ensure that temporary disruptions to
its infrastructure systems will have no materially adverse effect on the
Company's operations and financial performance. However, extended disruptions in
these systems beyond the Company's control or ability to remedy, such as
described above, could impact the Company's ability to deliver products and
services to customers on schedule and to maintain Company operations and provide
appropriate employee support (including payroll and benefits) and would,
thereby, potentially have a materially adverse effect on the Company's
operations and financial performance.
The Company also has a program to assess the capability of its products to
handle the year 2000. The Company believes that its products are Year 2000
Capable, although there can be no assurance of this. The Company is incurring
various costs to provide customer support and customer satisfaction services
regarding year 2000 issues, and it is anticipated that these expenditures will
continue through 1999 and thereafter. As used by Centigram, "Year 2000 Capable"
means that when used properly and in conformity with the product information
provided by Centigram, the Centigram product will accurately store, display,
process, provide, and/or receive data from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the Centigram product properly
exchanges date data with the Centigram product.
The costs incurred to date related to these programs are approximately
$500,000 and include both incremental spending and redeployed resources. The
total costs of these programs should not exceed $600,000, although there can be
no assurance of this. The total cost estimate does not include potential costs
related to any customer or other claims or the cost of internal software and
hardware replaced in the normal course of business. In some instances, the
installation schedule of new software and hardware in the normal course of
business is being accelerated to also afford a solution to year 2000 capability
issues. The total cost estimate is based on the current assessment of the
projects and is subject to change as the projects progress.
Based on currently available information, management does not believe that
the year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier or another third party would not have a material adverse effect on the
Company.
In April 1998 the Company entered into an Agreement for Purchase and Sale
of Assets with Mitel, Inc. and Mitel Corporation (collectively, "Mitel")
providing for the purchase by Mitel of the Company's customer premises equipment
("CPE") business. Pursuant to this agreement, the Company has agreed, until May
of 2001, not to compete with Mitel in the CPE business. As a result, the Company
is unable to sell its equipment or services to certain customers which could
adversely affect the company's business, financial condition and results of
operations.
The Company sells its MobileManager product which adds call management to
the message and information management services provided on the Series 6
platform under a 1995 joint marketing arrangement with Priority Call Management
("PCM"). In May 1999 this agreement was terminated. The Company has negotiated a
follow on agreement with PCM which, under certain circumstances, allows the
Company to sell PCM products and services through November 1999. As a result of
these developments, the Company's business, financial condition, and results of
operations may be adversely affected in the fourth quarter of fiscal 1999 and
thereafter. MobileManager revenues were approximately $4.0 million and $5.8
million for the first nine months of fiscal 1999 and fiscal 1998, respectively.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative information about market risk was addressed in
Item 7A of the Company's Form 10-K for the fiscal year ended October 31, 1998.
There has been no material change to that information required to be disclosed
in this Form 10-Q filing.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
<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 2, 1999 By: /s/ Robert L. Puette
-------------------------------------
Robert L. Puette
President and Chief Executive Officer
Date: September 2, 1999 By: /s/ Thomas E. Brunton
-------------------------------------
Thomas E. Brunton
Sr. Vice President and
Chief Financial Officer
<TABLE> <S> <C>
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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.
</LEGEND>
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<NAME> Centigram Communications Corporation
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