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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended OCTOBER 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number: 0-19558
CENTIGRAM COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2418021
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
91 EAST TASMAN DRIVE
SAN JOSE, CALIFORNIA
(Address of principal 95134
executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0250
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EXCHANGE
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Common Stock, $0.001 par value Nasdaq National Market System
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing price as reported on the NASDAQ/NMS for
December 31, 1998) was $41,000,000. Shares of the Registrant's Common Stock,
par value $0.001 per share, ("Common Stock") held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in calculating the aggregate market value of voting stock in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. The number of outstanding shares of the Registrant's Common Stock, as
of December 31, 1998 was 6,574,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders scheduled to be held on March 26, 1999 are incorporated by
reference to Part III of this Form 10-K Report.
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ITEM 1. BUSINESS
The following discussion contains forward-looking statements
regarding future events or the future financial performance of Centigram
Communications Corporation ("Centigram" or the "Company") that involve
risks and uncertainties. The Company's 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 Item 1
under "Manufacturing," "Patents, Trade Secrets and Licenses,"
"Competition," the last two paragraphs of "Sales and Distribution," and
the last two paragraphs of "Research and Development," as well as in Item
7 hereof under "Certain Trends and Uncertainties" and elsewhere in this
report. This report includes certain trademarks of Centigram and other
companies which remain the property of their respective holders.
OVERVIEW
Centigram designs, manufactures and markets wireless and wireline
messaging, enhanced services and communication management systems that
integrate voice and facsimile on the Company's communications server, and
provide access to this multimedia information through a telephone, mobile
device or a PC. Centigram's applications operate on industry-standard
hardware and software, based on the Company's Modular Expandable System
Architecture (MESA). MESA enables a user to generally expand the
capacity of a system in cost-effective increments from the Company's
smallest to its largest system configuration.
Centigram's "Series 6" platform, which was introduced in the first
quarter of fiscal 1996, was architected to extend across the Company's
entire product line. Series 6 was designed to offer significantly
expanded capacity, improved fault tolerance and greater use of industry-
standard hardware and software than the Company's prior platform. The
Series 6 incorporates the industry-standard Multi-Vendor Industry
Protocol (MVIP) Bus, digital signal processor (DSP) technology, Intel
Pentium processors, high-density interface cards, and international
signaling protocols. Significant changes in hardware are required to
upgrade from earlier generations of the Company's products to Series 6.
These hardware changes include line cards, and for the Company's larger
configurations, new hardware processors, which provide greater robustness
and fault tolerance.
The Company's systems are based on industry-standard computer
hardware and operating system software. This enables the Company to
bring additional product features and applications to market more
quickly, to utilize low-cost, commonly available components and to
capitalize on third party technological developments. Centigram's systems
can be integrated with carriers' central office systems, and mobile
switch and paging terminal systems. Such systems are used for switching
telephone calls in a variety of service provider environments. In
addition, Centigram systems located at different sites can be linked
together through MesaNet, Centigram's digital network, to create a larger
system.
Centigram's distribution strategy is to provide broad, effective
market coverage through the Company's direct sales force, original
equipment manufacturers (OEMs), and distributors. The Company sells its
systems in North America directly to Bell operating companies (BOCs),
independent local exchange carrier (ILECs), competitive local exchange
carriers (CLECs), and wireless operators. Internationally, the Company
sells to large independent telephone companies, other wireline and
wireless service providers, and distributors. Centigram trains carriers
on how to effectively market their services in their geographies through
the Company's Market Leadership seminar program. Additionally, the
Company sells to service provider customers through OEM arrangements with
Motorola, Inc., Siemens, and Lucent Technologies. Service providers, in
turn, employ Centigram systems to provide services to corporate,
institutional and individual end users.
In recent periods the Company has increased its international sales
and marketing. Export sales were 46%, 44%, and 30% of net revenue in
fiscal 1998, 1997 and 1996, respectively.
Since 1984, Centigram has been providing innovative, integrated
messaging systems to the Customer Premises Equipment ("CPE") and service
provider marketplaces. In May 1998, Centigram sold its CPE division to
Mitel Corporation (the "CPE Sale"). The CPE Sale allows the Company to
focus on the worldwide service provider market. Centigram's mission is
to provide revenue-generating integrated enhanced services to service
providers in emerging markets. Today, close to 15,000 Centigram systems
are installed worldwide with nearly 2,500 delivering revenue enhancing
services to telephone companies, cellular providers, paging companies,
and service bureaus.
In June 1998, Centigram acquired The Telephone Connection ("TTC").
TTC develops enhanced services for the telecommunications service
provider marketplace which will allow Centigram to offer the service
provider market a broader portfolio of competitive new products.
BACKGROUND
The technologies which form the foundation for the Company's
products-voice messaging, facsimile communications, and call management-
originated as independent technologies and have historically been offered
by different groups of vendors as stand-alone products with little, if
any, ability to integrate the disparate products. These technologies can
generally be described as follows:
VOICE MESSAGING enables users to store, send and receive
information, or to access information from automated voice
messaging systems, via the telephone. Voice messaging applications
include automated attendant for inbound call routing, audio text
and voice mail.
FACSIMILE technology permits communication of text and graphics
over the public telephone network using hard copy input and output.
This enables applications such as fax mail, fax broadcast and fax
publishing.
CALL MANAGEMENT allows users to program the features of a switching
system to facilitate call placement, call screening and call
completion.
Recognition of the benefits of simple, integrated access to these
communications technologies from any location continues to grow. The
Company provides customers the ability to access these technologies in an
integrated environment using either the telephone or the PC as a
communications workstation. Increasingly, mobile communication devices
can be used to access and process these multimedia messages.
PRODUCTS AND PRODUCT FEATURES
The Company's applications operate on a common software platform,
which is based on its Modular Expandable System Architecture (MESA). The
MESA architecture allows the Company's systems to be upgraded in
continual, cost-effective increments from the Company's smallest to its
largest system configurations, and to add new capabilities without having
to discard existing equipment. In contrast, systems offered by the
Company's principal competitors, due to their architectural constraints,
more often require customers to purchase a new system to upgrade features
or capacity. Significant changes in hardware are, however, required to
upgrade from the Company's Series 5 and earlier generations of the
products to the Company's Series 6 product line. These hardware changes
include line cards, and for the Company's larger configurations, new
hardware platforms which provide greater robustness and fault tolerance.
The Company provides financial incentives to those customers desiring
such upgrades, as well as software programs to assist in the transfer of
data and recorded speech.
Centigram's systems are available in configurations ranging from
eight ports, supporting 250-500 users in small installations, to 480-port
configurations supporting up to 250,000 subscribers. These large port
systems can be networked in clusters for telecommunications service
provider applications of up to one million users, depending on the
application. The Company sells its systems at prices ranging from below
$50,000 to several hundred thousand dollars, depending on system
configuration. Companies also buy multiple systems, for multi-million
dollar installations.
The Company's MESA architecture uses a distributed processing
approach that links separate modules together into a single system. The
Company's Series 6 users can expand systems to provide more ports and
hours of message storage by adding line cards and opening up partitions
in the disk drive. Additional system modules are added and linked as
existing modules are fully used. This approach provides a low-cost
entry-level product that can be expanded without replacing existing
equipment.
In addition, the Company offers connectivity between systems
through MESA-Net, a digital networking option that can link up to 1,500
Centigram systems anywhere in the world. MESA-Net provides end-to-end
digital networking, which preserves the clarity of voice and fax messages
and reduces transmission time and cost. MESA-Net provides two networking
options. Low-traffic sites can use MESA-Net Async over modem
connections. High traffic sites can use MESA-Net TCP/IP over high-speed
Ethernet networks. MESA-Net II, introduced with the Series 6, enables
messaging across wide area networks at Ethernet speeds using industry-
standard TCP/IP protocols. The Company's products also support the Audio
Messaging Interchange Specification (AMIS) analog networking protocol,
providing interoperability with disparate voice messaging servers from
other vendors.
In addition, Centigram has continued to play a leadership role
through its participation in the joint development of the industry-
standard Voice Profile for Internet Mail (VPIM) protocol for transferring
messages between disparate voice messaging servers. VPIM is being
designed to enable the exchange of voice, fax or compound voice and fax
messages between Centigram Series 6 communications servers and other
vendors' universal messaging systems.
Series 6 is based on standard hardware and software technology,
such as MVIP, Ethernet, QNX (a multi-tasking, real-time operating system
for Intel microprocessor-based computers) and the SCSI computer
peripherals bus. The Company believes this system architecture offers
competitive advantages. In the event that competitors were to
successfully implement a similar system architecture, it could have a
material adverse effect on the Company's competitive position.
The Company's Continuous System Operation software (CSO) is
designed to increase the reliability of Centigram's systems by providing
software-based fault tolerance in the Company's systems. With CSO, the
Company's operating system control is distributed across multiple modules
within a system. If one module ceases to function, the balance of the
operating system activity is shifted to other modules and the systems
continue to function. In addition, each of the Company's Series 6
configurations can store messages redundantly, thereby providing
protection against system or disk drive failures. The Company believes
that system reliability is a particularly important purchasing criterion
for service provider customers.
The Company's family of products include:
VoiceMemo Centigram's VoiceMemo application provides voice
messaging and call processing capabilities for customers in the service
provider market. Centigram's systems can be integrated with most central
office, mobile switch and paging terminal systems. VoiceMemo provides a
full range of features that have been designed to improve customer
service, increase operating flexibility and employee productivity, and
reduce communications costs. System services include:
TELEPHONE ANSWERING. Telephone answering automatically answers a
busy or unanswered telephone and allows a user to record a voice
message.
VOICE MESSAGING. Voice messaging enables users to store, forward
and send voice messages to other users on the system, within the
network, or to a telephone not associated with a voicemail box.
AUTOMATED ATTENDANT. Automated attendant answers incoming calls
and allows callers to direct calls to telephone extensions without
the use of a human operator.
PAGING. The VoiceMemo paging feature initiates a page upon receipt
of voicemail messages. VoiceMemo supports all commonly available
(tone only, tone/vibration, digital and voice) pagers.
AUDIOTEXT. Audiotext adds a voice bulletin board to a voice
messaging system which can provide callers access to recorded
announcements such as public service, product or service
information.
CALL PLACEMENT (OFF-SYSTEM MESSAGING). Call placement allows a
VoiceMemo user to send messages to an "off-system" telephone
number, such as a home number, much the same as a message is sent
to a VoiceMemo mailbox. Before making a message, the user enters a
telephone number to which the message is to be delivered. The
system dials the off-system telephone and attempts to deliver the
message.
CALLAGENT. CallAgent is a software application that allows system
users to control the manner in which their telephone is answered
and directed.
ONETALK. OneTalk is a spoken user interface that allows mailbox
owners to use voice commands to manage the messages in their
mailbox.
EASYANSWER. EasyAnswer is a feature that allows mailbox
subscribers to press a key to place a call to the person who left
them a message "live" while still in their mailbox. The subscriber
can also enter a different number for the call return if necessary.
OneNet The OneNet family of products allows carriers to manage
one or more Series 6 servers in their network. OneNet provides
administration and provisioning of the Series 6 server through
Centigram's OneNet Admin and OneNet Admin Application Programming
Interface (API) software products. OneNet Admin is a Windows based
Graphical User Interface (GUI) that is designed to be used in
provisioning of mailboxes, billing and reporting statistics, and in
class-of-service configuration.
FaxMemo Centigram's FaxMemo application enables a user to have
facsimile communications delivered to voice mailboxes rather than
directly to a facsimile machine. FaxMemo features include:
FAX MAIL. Using FaxMemo, users can receive facsimile messages in
their personal mailboxes with arrival notification, privacy and
control. The user can route the facsimile message to any machine
at any time, or distribute the facsimile to other users on the
system or within the network. Centigram's system permits
forwarding of facsimile messages from one person to another,
addition of voice comments and forwarding of facsimile messages to
a facsimile machine or mailbox at a pre-arranged time.
FAX BROADCASTING AND PUBLISHING. FaxMemo supports facsimile
publishing and broadcast capabilities. Fax publishing makes
frequently required documents such as sales literature, price
lists, technical documentation and reports available to any person
who has a telephone and fax machine. Fax broadcasting
automatically distributes a facsimile message to a large
distribution list.
GUARANTEED FAX. Guaranteed Fax stores facsimile messages for a
recipient when the message cannot be delivered to the recipient's
facsimile machine at the time of its initial transmission because
the machine is otherwise occupied. The facsimile message is
automatically delivered to the recipient's facsimile machine when
it becomes available.
OneView Centigram's OneView products allow users integrated access
to multimedia messaging from their personal computers and, with OneView
Remote, even while away from their offices. Connected through a LAN or
in a dial-up mode on a personal computer operating under Microsoftr
WindowsTM, OneView gives users point and click access to their voice, fax
and compound voice and fax messages by listing them in a single In-Box
window. In fiscal 1997, Centigram expanded OneView's remote capabilities
to include a remote mode which allows users to work "off-line". OneView
Remote users can create, play, answer and forward voice and fax messages
from their personal computers from remote locations by accessing their
messaging system, downloading their messages to their local hard disk,
answering messages off-line, and reconnecting to the messaging system to
deliver the messages.
MobileManager Centigram's MobileManager product adds call
management to the message and information management services provided on
the Series 6 platform. MobileManager is configured on a switching module
that integrates with the Series 6 platform and allows calls to be
transferred, connected or conferenced with other parties and
destinations. MobileManager is the result of the 1995 joint marketing
arrangement with Priority Call Management (PCM), a developer of
intelligent telephony systems for large organizations and service
providers. MobileManager services include:
PERSONAL NUMBER SERVICE. Personal Number Service enables network
operators to offer their subscribers a single telephone number that
will seamlessly route important communications to people on the
move at their mobile number, office or home number, or any
telephone number anywhere in the world. In addition to routing, the
Personal Number application uses that same number for faxes, voice
messages, text messages, and numeric or alpha pagers.
PREPAID AND DEBIT CARD SERVICES. Prepaid and Debit Card Services
allow carriers to offer creative, revenue-generating network
services that are purchased in advance by subscribers whose account
balances are debited as calls are made in real time.
CREDIT/CALLING CARD SERVICES. Credit/Calling Card Services let
subscribers bill toll calls to a corporate calling card. Calling
card service tracks and rates calls in real time to provide
corporate expense management tools for mobile employees.
CALLBACK. Callback lets customers call from anywhere in the world
using lowest cost dial tone, least cost routing, and prepaid, or
Credit/Calling card billing.
SALES AND DISTRIBUTION
The market for the Company's systems, prior to May 1998, had
generally been divided into two segments; the CPE market and the
telecommunications services provider market. Since the sale of the CPE
division in May 1998, Centigram has focused its business on providers of
telecommunications services, such as large telephone companies and
independent service providers, including BOCs, independent telephone
companies, cellular providers and voice mail and paging service bureaus,
who use Centigram systems to deliver voice, and fax processing
capabilities to third party customers on a subscription basis.
Centigram has developed a distinct sales channel focused on selling
its systems directly to BOCs, such as Bell Atlantic and BellSouth and to
independent telephone companies such as Sprint; to wireless service
providers such as BellSouth Mobility (BMI), Sonofon GSM, Optus
Communications Pty Limited, Paging Network Inc. (PageNet); to service
bureaus such as Premiere Technologies; and to large and small telephone
companies and service providers overseas. The Company also sells to
service provider customers through an OEM arrangement with Motorola,
Inc., Siemens and Lucent Technologies. These large telecommunications
service providers typically require a sustained, intense direct selling
effort and continual, comprehensive customer support.
No customer represented more than 10% of net revenue in the last
three fiscal years. The Company's top five customers collectively
accounted for approximately 32%, 28% and 35% of the Company's net revenue
during fiscal 1998, 1997 and 1996, respectively.
Centigram believes that a high level of product support is
essential to its success. The Company provides system documentation and
training to its customers. The training provided by the Company includes
courses in technical software, installation and maintenance, and customer
support. Centigram also maintains a support center 24 hours a day to
assist with customer and distributor inquiries and offers on-site
assistance through its field operations. Remote Technical Assistance
Centers (TACs) in the United Kingdom, Hong Kong and Sydney, Australia
provide local, on-call service and support. To expand its level of
service to its customers in 1998, the Company enhanced its "Market
Leadership Program" to deliver a comprehensive, fully integrated program
designed to increase and expand service providers' revenue streams,
maximize resources to reduce costs, and create market leadership in
customer service. The program focuses on key areas of a service launch,
including operations, market research, promotions, media relations,
product packaging and pricing, sales planning and tracking, customer
support and billing requirements. The program also offers consulting
services to help service providers create an enhanced services deployment
plan customized to their market requirements.
In recent periods, the Company has been increasing its focus on
international sales and direct sales to international service providers.
The Company now has sales offices in Europe, China, Korea, Hong Kong,
Australia and Latin America. Export sales were 46%, 44% and 30% of net
revenue in fiscal 1998, 1997 and 1996, respectively. In particular, the
Company's revenue from the Far East region was approximately $6.1
million, $9.2 million, and $1.5 million for fiscal 1998, 1997 and 1996,
respectively. There can be no assurance that the Company will be able to
maintain or increase its international sales or that the Company's sales
subsidiaries will be able to compete effectively.
International sales are subject to inherent risks, including the
need to obtain certain regulatory approvals and meet other standards,
unexpected changes in regulatory requirements and tariffs, difficulties
in staffing and managing foreign operations, costs and risks of
localizing products for foreign countries, more expensive support costs,
longer payment cycles, greater difficulty in accounts receivable
collection, potentially adverse tax consequences, potential restrictions
on repatriating earnings, and the burdens of complying with a wide
variety of foreign laws. In particular, in the last three years, the
Company experienced increased expenses associated with its efforts in
expanding sales in certain export markets. Gains and losses on the
conversion to U.S. dollars of assets and liabilities arising from
international operations may contribute to fluctuations in the Company's
results of operations, although such gains and losses have not to date
been material to the Company's results of operations, and fluctuations in
exchange rates could affect demand for the Company's products. In
addition, beginning in late fiscal 1997, economies throughout the Far
East region were negatively affected by devaluations in local currencies.
These devaluations caused the relative cost of the Company's products to
increase. Moreover, significant uncertainty exists with respect to these
economies, which could cause the businesses and governmental agencies to
delay or cancel plans to purchase the Company's products. If the Company
were to experience a slowdown in sales to this region, the Company's
business, financial condition and results of operations could be
materially adversely affected. In order to sell its products to
customers in other countries, the Company must comply with governmental
regulations, including U.S. export regulations, and convert its voice
prompts to additional foreign languages. Foreign sales are also
constrained by the limited penetration of touch-tone telephones in some
countries and the Company's need to develop adequate sales and marketing
channels.
Most of the Company's distributors also offer systems manufactured
by the competitors of the Company. Accordingly, the Company must compete
within any distributor to have the distributor recommend the Company's
products to end user customers. The Company also competes with other
voice messaging providers for access to distributors. There can be no
assurance that the Company will be able to maintain strong relationships
with existing distributors or establish strong relationships with new
distributors. In addition, certain former customers (including
distributors) of the Company had in the past experienced financial
difficulties resulting in the Company writing off related accounts
receivable balances, and a number of the Company's current customers
(including distributors) have limited financial resources. The loss of
one or more key customers or distributors, the decision by any key
distributor to offer a competitor's product line or otherwise de-
emphasize the Company's products, or the weakening of the financial
condition of any of the Company's key customers or distributors, could
have a material adverse effect on the Company's operating results,
financial position and cash flows.
PATENTS, TRADE SECRETS AND LICENSES
The Company's success depends in part on its proprietary
technology. While the Company attempts to protect its proprietary
technology through patents, trademarks, copyrights and trade secrets, as
well as confidentiality agreements with customers, suppliers and
employees and other security measures, the Company believes that its
success will depend more upon innovation, technological expertise and
distribution strength. There can be no assurance that the Company will
be able to protect its technology or that competitors will not be able to
develop similar technology independently. The Company currently holds a
number of patents and has multiple patent applications on file. No
assurance can be given that patents will issue from any applications
filed by the Company or that, if patents do issue, the claims allowed
will be sufficiently broad to protect the Company's technology.
Moreover, the Company relies upon trade secret protection for its basic
systems architecture and hardware platform, and does not hold any patents
thereon. In addition, no assurance can be given that any patents issued
to the Company will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide competitive advantages to
the Company.
In addition, a number of other companies, including competitors of
the Company, also hold patents in the same general area as the technology
used by the Company. The Company has obtained licenses to use certain
intellectual property, including patents, from others. 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 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 evaluated the assertions of Lucent and in the third quarter
of fiscal 1998 accrued $7.6 million. Of this amount, $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. In October 1998 the Company
signed an intellectual property cross-licensing agreement with Lucent and
in November 1998 paid Lucent $9.2 million. A portion of the settlement
agreement amount totaling $1.6 million was recorded as prepaid royalties
and will be amortized to cost of goods sold over the future royalty
period. 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.
BACKLOG
On October 31, 1998, the Company had a backlog of $27.5 million and
on November 1, 1997, a backlog of $15.2 million. The Company includes in
backlog orders received that the Company believes are shippable within
the next 12 months. The Company does not believe, however, that current
or future backlog levels are necessarily indicative of future operating
results. A significant portion of bookings and shipments in any quarter
have historically occurred near the end of the quarter, and the Company
has historically operated with very little backlog. There can be no
assurance that backlog will not decrease in the future, that there will
not be cancellation or deferral of a significant portion of backlog, or
that the Company will maintain any specific backlog level in the future.
RESEARCH AND DEVELOPMENT
Centigram's development strategy is focused on the development of
new applications for the Company's product platform and the enhancement
of the Company's MESA architecture. Expenditures for research and
development were $18.1 million, $21.3 million, and $20.2 million and as a
percentage of net revenue these expenses were 23.3%, 19.5%, and 19.3%, in
fiscal 1998, 1997 and 1996, respectively. Development efforts are
focused on additional enhanced services applications on the Company's
Series 6 platform, developing additional capabilities to connect the
Company's products with computer databases, high speed transmission
networks and foreign communications networks with non-standard protocols,
adding administration and network management capabilities to the
Company's products, and developing and enhancing the features,
performance, and capacity of the Company's systems.
As the Company seeks to continue to add functionality to its
products and to support a broader range of computer, LAN-based
applications and Internet capable applications, the Company faces
continually increasing technical challenges. There can be no assurance
that the Company will be able to incorporate additional technologies into
the Company's products or introduce new products in a timely manner in
order to meet evolving market needs.
As the functionality of the Company's systems increases, the
complexity of the software utilized in such systems will also increase
and software errors or "bugs" may become more numerous and difficult to
cure. Identifying and correcting errors and making required design
modifications is typically expensive and time consuming and the Company
expects that such modifications will increase in complexity with the
increasing sophistication of the Company's products. The Company has
made a substantial investment in additional testing equipment as well as
hiring additional employees to expand the Company's product testing
capabilities. There can be no assurance that such investment will lead
to reduced errors or that such errors will not in the future cause delays
in product introductions and shipments, require costly design
modifications or impair customer satisfaction with the Company's
products.
MANUFACTURING
The Company's manufacturing operations consist primarily of final
assembly and test and quality control of materials, components, sub-
assemblies and systems. The Company's hardware and software product
designs are proprietary but use industry-standard hardware components and
an industry-standard, real time, multi-tasking operating system. The
Company presently uses third parties to perform printed circuit board and
subsystem assembly. 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, semiconductor devices and other
components are available only from sole source vendors. In addition,
other components, including power supplies, disk drives, other
semiconductor devices and line cards are presently available or acquired
from a single source or from limited sources. The Company to date 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. However, the inability to develop such alternative sources if
and as required in the future, or to obtain sufficient sole or limited
source components as required, would have a material adverse effect on
the Company's operating results.
EMPLOYEES
As of October 31, 1998, the Company had 325 employees, including 13
temporary employees and contractors. Of this total, 87 were engaged in
research and development, 161 in sales, marketing and customer support,
38 in manufacturing and quality assurance and 39 in finance and
administration. The Company's future success will depend on its ability
to attract, train, retain and motivate highly qualified employees, who
are in great demand. The Company's employees are not represented by any
collective bargaining organization, and the Company has never experienced
a work stoppage. The Company believes that its employee relations are
good.
COMPETITION
The Company competes in a number of markets within the
communications systems industry, each of which is highly competitive.
Many of the Company's competitors have substantially greater financial,
technical, marketing and sales resources than the Company and have larger
installed bases of existing systems. The Company expects to encounter
continued competition from both existing competitors and new market
entrants in the service provider business. Increased competitive
pressures could result in intensified price competition, which would
adversely affect the Company's operating results. In addition, the
Company believes that its ability to integrate its systems with many
different central office systems is an important competitive feature.
Consequently, the Company's operating results could be adversely affected
if switch manufactures such as Lucent, Northern Telecom, and Siemens
redesign their switches to limit current methods of integration.
Although the Company is not aware of any significant switch manufacturer
who is pursuing a strategy of redesigning its switches to limit the
Company's current integrations, there can be no assurance that such
manufacturers are not doing so or will not do so in the future.
ITEM 2. PROPERTIES
The Company leases an 85,000 square foot headquarters facility and
a 35,000 square foot operations facility in San Jose, California,
pursuant to leases that expire in September 2007 and November 2003,
respectively. The Company also leases training facilities and sales and
support offices in various cities in the United States and overseas. The
Company believes that such facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available
in the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The information in the second paragraph in the section entitled
"Patents, Trade Secrets and Licenses" under Item 1 above is hereby
incorporated by reference. In addition, during the fourth quarter of
fiscal 1998, Mitel Corporation commenced arbitration proceedings against
the Company alleging that Centigram has not delivered all materials
required to be delivered in connection with the Company's sale of its CPE
division. Centigram believes the allegations are without merit and
intends to vigorously defend against them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Reference is made to the information regarding market, market price
range and dividend information appearing under "Quarterly Financial Data
(Unaudited)" in Registrant's Notes to Consolidated Financial Statements,
October 31, 1998, which is contained elsewhere in this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Month
--------------------------------------------------- Ended Year Ended
October 31, November 1, November 2, October 28, October 29, October 1,
1998 1997 1996 1995 1994(1) 1994(1)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operations Data:
Net revenue.................. $77,587 $108,836 $104,324 $69,374 $1,988 $79,179
Net income (loss)............ (12,174) (1,678) 1,000 (4,134) (1,890) 7,745
Basic income (loss) per
share....................... (1.77) (0.24) 0.15 (0.63) (0.30) 1.18
Diluted income (loss) per
share....................... (1.77) (0.24) 0.14 (0.63) (0.30) 1.26
Balance Sheet Data:
Working capital.............. $48,029 $66,824 $65,297 $64,489 $70,132 $72,401
Total assets................. 95,977 99,920 104,009 99,017 98,374 102,309
Long-term liabilities........ -- -- 78 232 409 436
Stockholders' equity......... 65,208 81,624 83,412 79,800 81,006 83,177
</TABLE>
(1) In the fourth quarter of fiscal 1995, the Company changed its
fiscal year-end from the Saturday following September 30 to a fiscal year
of 52 or 53 weeks ending on the Saturday nearest October 31. Fiscal 1996
was a 53 week year, while the other fiscal years are 52 weeks.
The Company has not paid and does not anticipate paying cash
dividends on its common stock in the foreseeable future. The Company's
bank credit line agreement requires the banks' consent to pay cash
dividends.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following 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, investment in receivables
and inventories, Centigram's expenditures for capital equipment and
sufficiency of Centigram's cash reserves. Actual results could differ
materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in this Item 7
under "Certain Trends and Uncertainties," in Item 1 hereof under
"Manufacturing," "Patents, Trade Secrets and Licenses," "Competition,"
the last two paragraphs of "Sales and Distribution," and the last two
paragraphs of "Research and Development" and elsewhere in this report.
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 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. The Company recorded a pre-tax gain of
approximately $14.3 million on this transaction.
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. Results of operations of TTC for the four months ended
October 31, 1998 are included in the Company's fiscal 1998 Consolidated
Statement of Operations. 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
------------------- -------------------
(in thousands, except per share As As
data) Reported Restated Reported Restated
- ------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Purchased IPR&D..................... $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 STATEMENTS OF OPERATIONS
The following pro forma statements represent the combined results
of operations of the Company, plus TTC, as adjusted to reflect the
amortization of intangible assets acquired in the purchase, less the CPE
Sale, as if each of these transactions had occurred at the beginning of
fiscal 1996. The pro forma statements exclude the gain realized on the
CPE Sale and exclude the non-recurring charge of the write-off of the
IPR&D acquired in the TTC 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 1996 nor are they
necessarily indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended
------------------------------------
October 31, November 1, November 2,
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Net revenue....................... $66,690 $70,789 $56,304
Cost and expenses:
Costs of goods sold............. 33,112 29,913 22,658
Research and development........ 17,595 20,795 19,283
Selling, general and
administrative............... 36,877 37,210 34,694
Non-recurring charges........... 5,600 3,263 --
----------- ----------- ----------
93,184 91,181 76,635
----------- ----------- ----------
Operating loss.................... (26,494) (20,392) (20,331)
Other income and expense, net..... 2,877 6,180 2,374
----------- ----------- ----------
Loss before income taxes. (23,617) (14,212) (17,957)
Provision for income taxes........ 379 833 53
----------- ----------- ----------
Net loss.......................... ($23,996) ($15,045) ($18,010)
=========== =========== ==========
Basic and diluted loss
per share......................... ($3.49) ($2.17) ($2.58)
=========== =========== ==========
Shares used for basic and
diluted loss per share............ 6,883 6,943 6,981
=========== =========== ==========
</TABLE>
RESULTS OF OPERATIONS
Net Revenue Net revenue for fiscal 1998 was 29% lower than net
revenue for fiscal 1997. This decrease reflects lower sales of both
small and large systems products and was primarily due to reduced volumes
as a result of the CPE Sale. Sales to international customers
represented 46% of sales for fiscal 1998 as compared to 44% for fiscal
1997.
Net revenue for fiscal 1997 was 4% higher than net revenue for
fiscal 1996. This increase was primarily attributable to higher sales of
large system products to service provider customers offset in part by
lower sales of CPE systems and upgrade products and small system sales.
Sales to international customers represented 44% of sales for fiscal 1997
as compared to 30% for fiscal 1996. This percentage increase was due
primarily to increased large orders from Latin America and the Pacific
Rim in 1997. CPE sales decreased 20% for fiscal 1997 as compared to the
prior year due to reduced orders from the Company's distributors. These
reduced CPE sales were a result of increased competition from PC based
systems providers whose products compete with the Company's small system
products.
On a pro forma basis, net revenue for fiscal 1998 was 6% lower than
1997 due to reduced large system orders from Europe and the Pacific Rim.
On a pro forma basis, net revenue for fiscal 1997 was 26% higher than
1996 due to the same factors affecting the service provider business as
noted above.
Gross Margin Gross margin for 1998 decreased 6.5% to 51.5% from
58.0% in the prior year. This decrease reflects lower sales of and lower
margins in the Company's large systems products which typically carry
higher profit margins due to increased sales price competition and
reduced international sales from the Pacific Rim due to slower economic
growth.
Gross margin for 1997 decreased 1.2% to 58.0% from 59.2% in fiscal
1996. This decrease in gross margin reflects lower margins on upgrade
and expansion products and customer services offset by a favorable mix of
increased sales of large system products and lower provisions for
retrofit obligations and inventory obsolescence.
On a pro forma basis, gross margin was 50.3%, 57.7%, and 59.8% for
1998, 1997 and 1996, respectively. The decrease in gross margin of 7.4%
from 1997 to 1998 and the 2.1% decrease from 1996 to 1997 reflects the
same factors as noted above in connection with the service provider
business.
Research & Development Research and development ("R&D") expenses
for 1998 were 15.0% below 1997. This decrease reflects reduced payroll
expenses and related costs resulting from lower average engineering
staffing levels due to the CPE Sale. R&D expenses for fiscal 1997 were
5% higher than fiscal 1996. This increase reflects higher payroll
expenses resulting from higher average engineering staffing levels and
increased supplies and outside services expenses.
As a percentage of net revenue, R&D expenses were 23.3%, 19.5%,
and 19.3% in fiscal 1998, 1997 and 1996, respectively. The Company
believes that ongoing development of new products and features is
required to maintain and enhance its competitive position. The Company
expects to continue to invest in R&D and therefore R&D expenses should
continue to increase, notwithstanding the level of sales realized in
future quarters.
On a pro forma basis, R&D expenses decreased $3.2 million in 1998
from 1997 reflecting 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 1998. On a pro forma basis, R&D expenses increased $1.5
million from 1996 to 1997 because of increased staffing levels and
related costs and costs associated with the release of the Series 6
platform in 1997.
Selling, General & Administrative Selling, General &
Administrative ("SG&A") expenses in 1998 were 11.8% below fiscal 1997.
This decrease reflects primarily reduced salaries and benefits and
related expenses in the sales and marketing functions due to the CPE
Sale. SG&A expenses in 1997 were 6.5% higher than fiscal 1996. This
increase reflects primarily increases in salaries and benefits in the
sales and marketing functions.
As a percentage of net revenue, SG&A expenses were 51.8%, 41.9%,
and 41.0% in fiscal 1998, 1997 and 1996, respectively. The Company
believes that continued investments in sales and marketing, particularly
in export markets, are essential to maintaining its competitive position
and that the dollar amount of SG&A expenses will increase in future
periods.
On a pro forma basis, SG&A expenses increased $0.3 million in 1998
over 1997 and $2.5 million in 1997 over 1996. These increases reflect
primarily increases in salaries and benefits in the sales and marketing
functions.
Non-recurring Charges Non-recurring charges were $10.6 million,
and $3.3 million for 1998 and 1997, respectively. The 1998 non-recurring
charges consisted of $5.0 million for the write-off of IPR&D acquired in
the purchase of TTC and $5.6 million associated with the Company's patent
dispute with Lucent Technologies. (See Acquisition and Revision of
Purchase Price Allocation.) The 1997 non-recurring charges consisted of
$2.4 million in restructuring expenses and $0.9 million associated with
the termination of acquisition discussions with Voice-Tel Enterprises and
Voice-Tel Network ("Voice-Tel"). These 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 and chief executive officer. The Company
restructured its business to align its operational expense with its
anticipated revenue levels. Cash payment termination benefits of $0.3
million and $1.8 million were paid in fiscal 1998 and 1997, respectively.
Other Income and Expense, Net Other income and expense, net was
$17.1 million, $6.1 million, and $2.2 million for 1998, 1997 and 1996,
respectively. Interest income on investments increased $0.4 million to
$3.1 million in fiscal 1998 due to higher average investment balances
although interest yields on investments were lower in 1998 versus 1997.
Interest income on investments increased in fiscal 1997 over 1996 due to
higher average investment balances and higher average interest rates. In
addition to the Company's net investment income, other income and expense
in 1998 included the $14.3 million gain on the CPE Sale and in 1997 a
$3.9 million gain on the sale of the Company's Text-To-Speech business.
Provision for income Taxes The Company recorded income tax
provision of $379,000, $833,000, and $53,000, respectively, for fiscal
years 1998, 1997 and 1996. The 1998 and 1997 tax provisions consist of
minimum federal, state, and foreign taxes. An additional provision of
$500,000 was provided in fiscal year 1997, resulting from an increase in
the valuation allowance for previously recognized deferred tax assets
that were no longer realizable through potentially refundable taxes. The
1996 income tax provision primarily represents current foreign taxes.
No income tax benefits were recorded for the losses incurred in
fiscal years 1998 and 1997 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.
LIQUIIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments at October 31,
1998 were $57.2 million, increasing $5.1 million from November 1, 1997.
At the end of fiscal 1997 and 1996, cash, cash equivalents and short-term
investments were $52.1 million and $42.1 million, respectively.
Net cash used for operating activities was $2.8 million during
fiscal 1998. Trade receivables at the end of fiscal 1998 decreased $3.3
million from the prior year balance primarily due to improved collection
efforts and a reduction in extended payment terms to certain
international service provider customers. Days sales outstanding
(computed using quarterly revenues) were 66 days at the end of fiscal
1998 compared to 68 days at end of fiscal 1997. This decrease in DSO was
primarily due to the factors noted above. Inventory levels at October
31, 1998 decreased $0.9 million from fiscal 1997 because of improved
inventory management. The Company expects investment in receivables and
inventories will continue to represent a significant portion of working
capital. The Company accrued $9.2 million in fiscal 1998 in connection
with its settlement with Lucent and paid this amount in November 1998.
During the fiscal year ended October 31, 1998, the Company made
$3.0 million in capital expenditures. A significant portion of these
expenditures were related to the purchase of engineering equipment and
computer equipment for all functions. The Company currently expects to
spend approximately $4.0 million for capital equipment during fiscal
1999, although no assurance can be given that expenditures will not be
higher or lower. During fiscal 1998 the Company sold its CPE business
unit to Mitel for $26.8 million in cash, and the Company purchased
substantially all of the assets of TTC for approximately $11.6 million.
In April 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. In September
1998, the repurchase of an additional 500,000 shares was authorized.
During 1998 and 1997, the Company purchased 659,000 and 243,000 shares,
respectively, at a total cost of approximately $10.8 million under this
repurchase program.
The Company's principal sources of liquidity as of October 31, 1998
consisted of $57.2 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). The Company expects to renew this
bank line in fiscal 1999. This bank line requires the Company to
maintain certain financial ratios, minimum working capital, minimum
tangible net worth and financial performance benchmarks, and requires the
banks' consent for the payment of cash dividends. The Company is in
compliance with this agreement and there were no borrowings outstanding
under the bank line as of October 31, 1998. The Company presently
believes, notwithstanding its accumulated deficit, that its existing cash
and short-term investments and credit under its line of credit will be
sufficient to support the Company's working capital and capital equipment
purchase requirements at least through fiscal 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. For instance, the Company has typically experienced a slowdown
in its sales levels in the first quarter of its fiscal year. 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. The Company continues to obtain a large
percentage of its sales from its international operations, including
sales from the Pacific Rim. In addition to the business risks associated
with international operations, the recent economic turmoil has increased
the uncertainty regarding future sales of the Company's products in the
Pacific Rim. See "Sales and Distribution" for a description of certain
risks associated with the Company's international operations.
If new order bookings do not meet expected levels, or if the
Company experiences delays in shipments at the end of a quarter,
operating results will be adversely affected, and these developments may
not become apparent to the Company until near or at the end of a quarter.
Net revenue can also be affected by product sales mix, distribution mix,
the size and timing of customer orders and shipments, customer returns
and reserves provided therefor, competitive pricing pressures, the
effectiveness of key distributors in selling the Company's products,
changes in distributor inventory levels, the timing of new product
introductions by the Company and its competitors, regulatory approvals,
and the availability of components for the Company's products, each of
which is difficult to predict accurately. Each of such factors has in
the past affected the Company's revenue. 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.
Approximately 46% of the Company's sales in fiscal 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 result 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 the Pacific Rim have been adversely affected in recent
quarters by financial difficulties in that region and may be so adversely
affected in the future.
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 32%, 28% and 35% of the Company's net revenue
in fiscal 1998, 1997 and 1996, respectively, although the Company's five
largest customers were not the same in these periods. The Company has no
long-term order commitments from any of its customers. Any material
reduction in orders from one or more 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. See Risk and
Uncertainties Note to "Consolidated Financial Statements".
The Company's gross margin can be affected by a number of factors,
including changes in product, distribution channel, and customer mix,
cost and availability of parts and components, royalty obligations to
suppliers of licensed software, provisions for warranty, retrofits, and
excess and obsolete inventory, customer returns, and competitive
pressures on pricing. The Company has experienced increasing competitive
pricing pressure in all 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 sales in any particular fiscal period. The
Company anticipates that its sales mix will fluctuate in future periods.
As a result of the above factors, gross margin fluctuations are difficult
to predict, and gross margins may decline from current levels in future
periods.
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. In this
regard, the Company during fiscal 1996, announced significant new
products, after experiencing delays in the introduction of such products.
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 financial position,
operating results and cash flows.
The Company presently uses third parties to perform printed circuit
board and subsystem assembly. 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.
In addition, certain components used in the Company's products, including
certain microprocessors, line cards, power supplies, disk drives,
application cards and other semiconductor devices and other components
are available from sole sources. To date, the Company has been able to
obtain adequate supplies of components in a timely manner from existing
sources or, when necessary, from alternative sources of supply. However,
the inability to develop such alternative sources if and as required in
the future, or to obtain sufficient sole or limited source components as
required, 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, also hold patents in the same general area as the technology
used by the Company. The Company has obtained licenses to use certain
intellectual property, including patents, from others. 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 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 evaluated the assertions of Lucent, and in October 1998
settled by signing an intellectual property cross-licensing agreement and
in November 1998 paid Lucent $9.2 million. (See Patents, Trade Secrets
and Licenses.) 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 the Company
currently plans to have changes to critical systems completed and tested
by mid-1999. 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 has commenced work on
various types of contingency planning to address potential problems areas
with internal systems and with suppliers and other third parties. It is
expected that assessment, remediation and contingency planing activities
will be on-going throughout 1999, with the goal of appropriately
resolving all material internal systems and third party issues.
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 compliant, 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 less than
$250,000. The Company currently expects that the total cost of these
programs, including both incremental spending and redeployed resources,
will not exceed $500,000, 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 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 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company
maintains a strict investment policy which ensures the safety and
preservation of its invested funds by limiting default risk, market risk,
and reinvestment risk. The table below presents notional amounts and
related weighted-average interest rates by year of maturity for the
Company's investment portfolio as of October 31, 1998.
<TABLE>
<CAPTION>
Fair
(in thousands) 1999 2000 2001 2002 2003 Therafter Total Value
- ----------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Fixed rate....... $3,125 $ -- $ -- $ -- $ -- $ -- $3,125 $3,125
Average rate..... 5.49% -- -- -- -- -- 5.49% --
Short-term investments
Fixed rate....... 28,143 5,275 -- -- -- -- 33,418 33,760
Average rate..... 5.62% 5.89% -- -- -- -- 5.66% --
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities... $31,268 $5,275 $ -- $ -- $ -- $ -- $36,543 $36,885
Average rate..... 5.61% 5.89% -- -- -- -- 5.65% --
</TABLE>
The Company endeavors to mitigate default risk by attempting to
invest in high credit quality securities and by constantly positioning
its portfolio to respond appropriately to a significant reduction in a
credit rating of any investment issuer or guarantor. The portfolio
includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity and maintains what the Company
believes is a prudent amount of diversification.
The company has cash flow exposure on the interest expense related
to its $15.0 million line of credit due to the rates which vary with the
banks' reference rate. At October 31, 1998 the Company had no borrowings
against its line of credit.
The Company conducts business on a global basis and sells its
products in U.S. dollars, except for an occasional sale in British
pounds. When the Company is exposed to adverse or beneficial movements
in foreign currency exchange rates, the Company enters into foreign
currency forward contracts to minimize the impact of exchange rate
fluctuations. The realized gains and losses on these contracts are
deferred and offset against realized and unrealized gains and losses from
the settlement of the related receivables. At October 31, 1998, the
notional amount of outstanding foreign currency exchange contracts were
$1,100,000. The unrealized loss on the contracts at October 31, 1998 was
$20,000. An adverse change in the British Pound of approximately 15%
would result in an unrealized loss of approximately $165,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements included with this Form 10-K are
set forth under Item 14.
CENTIGRAM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.......................... $23,430 $19,791
Short-term investments............................. 33,760 32,262
Trade receivables, net of allowances of
$1,919 and $1,724................................ 14,566 21,637
Inventories........................................ 5,297 9,060
Other current assets............................... 1,745 2,370
----------- -----------
Total current assets............................. 78,798 85,120
Property and equipment, net.......................... 6,653 12,893
Intangible assets, net............................... 6,637 1,468
Deposits and other assets............................ 3,889 439
----------- -----------
$95,977 $99,920
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable................................... $5,985 $6,925
Accrued compensation............................... 4,034 5,141
Patent settlement payable.......................... 9,200 --
Deferred income.................................... 4,394 678
Accrued expenses and other liabilities............. 5,179 3,391
Warranty and retrofit reserves..................... 1,977 2,161
----------- -----------
Total current liabilities........................ 30,769 18,296
Commitments and contingencies........................
Stockholders' equity:................................
Preferred stock, $0.001 par value, 1,000,000
authorized; none outstanding...................... -- --
Common stock, $0.001 par value, 25,000,000
authorized; 7,171,000 and 7,110,000 outstanding,
and capital in excess of par value ............... 90,625 90,724
Treasury stock, 597,000 and 198,000 shares,
at cost........................................... (6,867) (2,427)
Accumulated deficit................................ (18,844) (6,670)
Unrealized loss on investments..................... 342 68
Cumulative translation adjustments................. (48) (71)
----------- -----------
Total stockholders' equity....................... 65,208 81,624
----------- -----------
$95,977 $99,920
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
CENTIGRAM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
------------------------------------
October 31, November 1, November 2,
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net revenue............................. $77,587 $108,836 $104,324
Cost and expenses:
Cost of goods sold.................... 37,653 45,661 42,516
Research and development.............. 18,062 21,260 20,154
Selling, general and administrative... 40,212 45,611 42,832
Non-recurring charges................. 10,600 3,263 --
----------- ----------- ----------
106,527 115,795 105,502
----------- ----------- ----------
Operating loss.......................... (28,940) (6,959) (1,178)
Other income and expense, net........... 17,145 6,114 2,231
----------- ----------- ----------
Income (loss) before income taxes....... (11,795) (845) 1,053
Provision for income taxes.............. 379 833 53
----------- ----------- ----------
Net income (loss)....................... ($12,174) ($1,678) $1,000
=========== =========== ==========
Basic income (loss) per share........... ($1.77) ($0.24) $0.15
=========== =========== ==========
Diluted income (loss) per share......... ($1.77) ($0.24) $0.14
=========== =========== ==========
Shares used for basic income
(loss) per share........................ 6,883 6,943 6,824
=========== =========== ==========
Shares used for diluted income
(loss) per share........................ 6,883 6,943 6,981
=========== =========== ==========
</TABLE>
See accompanying notes.
<PAGE>
CENTIGRAM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
October 31, November 1, November 2,
1998 1997 1996
------------ ----------- -----------
<C> <C> <C>
Common stock and capital in excess of
par value:
Balance, beginning of year.............. $90,724 $88,774 $85,815
Shares issued under stock plans......... 599 2,015 2,412
Issue of treasury shares under
stock plans........................... (698) (65) --
Tax benefits from stock plans........... -- -- 547
------------ ----------- -----------
$90,625 $90,724 $88,774
------------ ----------- -----------
Treasury stock:
Balance, beginning of year.............. (2,427) $ -- $ --
Purchase of treasury shares............. (7,856) (2,970) --
Issue of treasury shares under
stock plans........................... 3,416 543 --
------------ ----------- -----------
($6,867) ($2,427) $ --
------------ ----------- -----------
Accumulated deficit:
Balance, beginning of year.............. ($6,670) ($4,992) ($5,992)
Net income (loss)....................... (12,174) (1,678) 1,000
------------ ----------- -----------
($18,844) ($6,670) ($4,992)
------------ ----------- -----------
Unrealized gain (loss) on investments:
Balance, beginning of year.............. $68 ($36) ($14)
Unrealized gain (loss) on investments
for year.............................. 274 104 (22)
------------ ----------- -----------
$342 $68 ($36)
------------ ----------- -----------
Cumulative translation adjustments:
Balance, beginning of year.............. ($71) ($34) ($9)
Translation adjustments................. 23 (37) (25)
------------ ----------- -----------
($48) ($71) ($34)
------------ ----------- -----------
Note receivable from officer:
Balance, beginning of year.............. $ -- ($300) $ --
Loan issued to officer.................. -- -- ($300)
Forgiveness of note..................... -- 300 --
------------ ----------- -----------
$ -- $ -- ($300)
------------ ----------- -----------
$65,208 $81,624 $83,412
</TABLE> ============ =========== ===========
See accompanying notes.
<PAGE>
CENTIGRAM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
October 31, November 1, November 2,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash and equivalents, beginning of year... $19,791 $12,668 $10,633
----------- ----------- -----------
Cash flows from operations:
Net income (loss)....................... (12,174) (1,678) 1,000
Gain on sale of business................ (14,302) (3,598) --
Write-off of IPR&D...................... 5,000 -- --
Depreciation and amortization........... 7,178 8,740 7,729
Deferred taxes.......................... (325) 1,424 679
Trade receivables....................... 3,293 6,104 (9,411)
Inventories............................. 863 2,407 (5,646)
Other assets............................ (2,492) 1,239 (1,392)
Accounts payable........................ (1,333) (2,814) 2,786
Patent settlement payable............... 9,200 -- --
Accrued expenses and other liabilities.. 2,298 341 (682)
----------- ----------- -----------
(2,794) 12,165 (4,937)
----------- ----------- -----------
Cash flows used for investing:
Purchase of short-term investments...... (50,195) (127,579) (68,702)
Proceeds from sale and maturities of
short-term investments................ 48,971 129,829 84,354
Proceeds from CPE sale.................. 26,849 -- --
Purchase of property and equipment...... (3,017) (6,203) (10,615)
Increase in intangible assets........... -- (458) --
Note receivable from officer............ -- -- (300)
Acquisition of TTC...................... (11,558) -- --
----------- ----------- -----------
11,050 (4,411) 4,737
----------- ----------- -----------
Cash flows from financing:
Proceeds from sale of common stock...... 3,317 2,493 2,412
Purchase of treasury shares............. (7,856) (2,970) --
Principal payments on capital leases.... (78) (154) (177)
----------- ----------- -----------
(4,617) (631) 2,235
----------- ----------- -----------
Net change in cash and equivalents...... 3,639 7,123 2,035
----------- ----------- -----------
Cash and equivalents, end of year....... $23,430 $19,791 $12,668
=========== =========== ===========
SUPPLEMENTAL DATA:
Interest (paid)......................... ($100) ($98) ($37)
Income taxes paid....................... $226 $599 $383
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS OPERATIONS
Centigram Communications Corporation (the Company) designs,
manufactures and markets wireless and wireline messaging, enhanced
services, communications systems that integrate voice and facsimile on
the Company's communications server, and provide access to this
multimedia information through a telephone or PC. In addition to these
products, the Company offers installation, training, consulting, and
post-contract support services to its customers. The principal
geographic markets for the Company's products are North America, Latin
America, the Pacific Rim, and Europe. The Company sells primarily to
telecommunications service providers, Bell Operating Companies, and
independent telephone companies.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying consolidated financial
statements include the Company and its wholly owned subsidiaries after
eliminating all significant intercompany accounts and transactions.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Revenue Recognition Revenue from sales of the Company's products
is recognized upon shipment to customers. Allowances for estimated future
returns and exchanges are provided at that time based on the Company's
return policies and experience. In October 1997, the AICPA issued
Statement of Position 97-2, "Software Revenue Recognition" which will be
effective for the Company in fiscal 1999. The adoption of this statement
is not expected to have a significant impact on the Company's results of
operations.
Warranty The Company generally warrants its products for one year.
A provision for estimated future warranty costs is recorded at the time
of revenue recognition.
Research and Development Research and Development expenses include
costs of developing new products and processes as well as design and
engineering costs. Such costs are charged to expense as incurred.
Product customization costs incurred pursuant to customer orders and/or
contracts are included in cost of sales. Development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are
capitalized in accordance with Statement of Financial Accounting
Standards No.86 (FAS86).
Cash Equivalents and Short-term Investments Cash equivalents
consist of highly liquid investments with a maturity of three months or
less at the time of acquisition and are carried at cost plus accrued
interest which approximates fair value. Short-term investments have an
initial maturity of greater than three months and are carried at fair
value.
Inventories Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to five
years. Capitalized leases and leasehold improvements are amortized using
the straight-line method over the shorter of the useful lives of the
assets or the terms of the leases.
Intangible Assets Intangible assets consist of patent license
acquisition costs and goodwill and are stated at cost. Patent license
costs are being amortized over ten years, the estimated useful lives of
the patents. During fiscal 1997 the Company sold its Text-to-Speech
business and as a result of this transaction the Company reduced goodwill
by $703,000, net. During fiscal 1998 the Company purchased substantially
all the assets of The Telephone Connection, Inc. ("TTC") including
purchased intangibles which will be amortized over their estimated useful
lives, ranging from three to seven years. The carrying values of
intangible assets are reviewed if the facts and circumstances suggest
that they may be impaired. If this review indicates that the asset is
not fully recoverable, as determined by the undiscounted cash flows of
the acquired business or the related products over the remaining
amortization period, the Company would reduce these asset's carrying
value to net realizable value. Intangible amortization expense was
approximately $337,000, $290,000, and $375,000 in fiscal 1998, 1997 and
1996, respectively.
Foreign Currency Translation The Company's international
subsidiaries use their local currencies as their functional currencies.
Assets and liabilities are translated at exchange rates in effect at the
balance sheet date, and income and expense accounts at average exchange
rates during the year. Translation adjustments are recorded to a
separate component of stockholders' equity.
Derivative Financial Instruments The Company uses derivative
financial instruments to reduce financial market risks and as a matter of
policy does not engage in speculative or trading transactions. The
Company enters into foreign exchange forward contracts to hedge certain
receivables denominated in foreign currencies. The Company's accounting
policies for these instruments are based on the Company designation of
such instruments as hedging transactions. The criteria the Company uses
for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on these
contracts are designated and effective as hedges and are deferred and
recognized in income in the same period that the underlying transactions
are settled. Gains and losses on any instruments not meeting the above
criteria would be recognized in the current period.
Capital Structure In February 1997, the FASB released Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" (FAS 129). FAS 129 consolidates the existing guidance
regarding disclosure relating to a company's capital structure and will
be effective in the Company's fiscal 1999. Adoption of FAS 129 is not
expected to have a material impact on the Company's consolidated
financial statements.
Comprehensive Income In June 1997, the FASB released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(FAS 130). FAS 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general
purpose financial statements and will be effective in the Company's
fiscal 1999. The Company believes that adoption of FAS 130 will not have
a material impact on the Company's consolidated financial statements.
Segment Information In June 1997, the FASB released Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 will change the
way companies report selected segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. FAS 131 will
be effective in the Company's fiscal 1999. The Company has not yet
reached a conclusion as to the appropriate segments, if any, which it
will be required to report to comply with FAS 131.
Derivative Instruments and Hedging Activities In June 1998, the
Financial Accounting Standards Board issued Statement No. 133.
"Accounting for Derivative Instruments and Hedging Activities." The
Statement requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings, or is recognized in
other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. SFAS 133 is effective as of
the beginning of the Company's fiscal year 2001. The Company is
currently evaluating the impact of SFAS 133 on its financial statements
and related disclosures.
Reclassifications Certain prior year amounts have been
reclassified to conform to the current year presentation.
ACQUISITION AND DIVESTITURE
In June 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 $0.4 million. The acquisition
has been accounted for using the purchase method of accounting with the
purchase price being allocated as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Net fixed assets....................................... $600
Purchased IPR&D charged to operations in
the quarter ended August 1, 1998 .................... 5,000
Purchased technology and other intangible assets....... 2,600
Goodwill............................................... 3,400
---------
$11,600
=========
</TABLE>
Amortization of these purchased intangibles is provided on the
straight-line basis over the respective useful lives of the assets,
ranging from three to seven years. The operating results of TTC which
have not been material in relation to those of the Company, have been
included in consolidated financial statements from the acquisition date.
In-Process Research and Development Management estimates that
$5.0 million of the purchase price represents purchased IPR&D that has not
yet reached technological feasibility and has no alternative future use.
Accordingly, this amount was expensed in the third quarter of the current
fiscal year following consummation of the acquisition. The value
assigned to purchased IPR&D, based on a valuation prepared by a third-
party appraisal, was determined by identifying research projects in areas
for which technological feasibility had not been achieved. The value was
determined by estimating the costs to develop the purchased IPR&D into
commercially viable products, estimating the resulting net cash flows
from such projects, and discounting the net cash flows back to their
present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the
purchased IPR&D projects.
Developed Technology To determine the value of the developed
technology ($ 2.2 million), the expected future cash flows of the
existing developed technologies were discounted taking into account the
characteristics and applications of the product, the size of existing
markets, growth rates of existing and future markets, as well as an
evaluation of past and anticipated product-life cycles.
Assembled Work Force To determine the value of the assembled work
force ($0.4 million), the Company evaluated the work force in place at
the acquisition date and utilized the cost approach to estimate the value
of replacing the work force. Costs considered in replacing the work
force included costs to recruit and interview candidates, as well as the
cost to train new employees.
Revision of Purchase Price Allocation 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
------------------- -------------------
(in thousands, except per share As As
data) Reported Restated Reported Restated
- ------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Purchased IPR&D..................... $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>
SALE OF CPE BUSINESS UNIT
In May 1998, the Company licensed and sold certain Customer Premise
Equipment ("CPE') business unit assets to Mitel Corporation ("Mitel") for
$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 transaction representing the difference between the sales
price and the net carrying value of the tangible and intangible assets
sold by the Company and the liabilities assumed.
PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated results of
operations for the Company's last three fiscal years assumes the TTC
acquisition and the CPE Sale occurred as of October 29, 1995. These pro
forma results also reflect the amortization of purchased TTC tangible and
intangible assets and exclude the gain realized on the CPE sale and the
write-off of TTC in-process research and development. This pro forma
information is not necessarily indicative of the results that would
actually have been reported had the sale and purchase transactions
underlying the pro forma adjustments actually been consummated on such
dates, nor is it necessarily indicative of future operating results.
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Net revenue....................... $66,690 $70,789 $56,304
Net loss.......................... ($23,996) ($15,045) ($18,010)
Basic and diluted loss
per share......................... ($3.49) ($2.17) ($2.58)
</TABLE>
INCOME (LOSS) PER SHARE
In February 1997, the financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards No. 128 "Earnings
Per Share" ("FAS 128"), which was adopted during the quarter ended
January 31, 1998. FAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted
earnings per share. For fiscal 1998 and 1997, net loss per share was
computed using only the weighted average number of shares of Centigram
common stock outstanding during the period. For fiscal 1996, basic net
income per share was based on the weighted average number of shares of
Centigram common stock outstanding during the period. For the same
period diluted net income per share further included the effect of stock
options outstanding which were dilutive. Options to purchase
approximately 420,000 shares of common stock were outstanding during
1996, but were not included in the computation of diluted net income per
share because the options' exercise price was greater than the average
market price of the common shares and, therefore, the effect would be
antidilutive. All net income (loss) amounts for prior periods have been
presented and, where necessary, restated to conform to FAS 128
requirements.
Basic income (loss) per share amounts are computed by dividing net
income (loss) by the average number of shares outstanding. Diluted
income (loss) per share amounts are computed by dividing net income
(loss) by the sum of the average number of shares outstanding and all
potentially dilutive common stock equivalents outstanding. The details
of these computations are as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Net income (loss)....................... ($12,174) ($1,678) $1,000
=========== =========== ==========
Weighted average shares outstanding..... 6,883 6,943 6,824
Effect of dilutive securities:
Shares issued upon exercise of
dilutive outstanding stock options... -- -- 157
----------- ----------- ----------
Adjusted weighted average shares........ 6,883 6,943 6,981
=========== =========== ==========
Basic income (loss) per share........... ($1.77) ($0.24) $0.15
=========== =========== ==========
Diluted income (loss) per share......... ($1.77) ($0.24) $0.14
=========== =========== ==========
</TABLE>
RISK AND UNCERTAINTIES
Supplies/Source of Supply The Company's manufacturing operations
consist primarily of final assembly and test and quality control of
materials, components, sub-assemblies and systems. The Company's
hardware and software product designs are proprietary but use industry-
standard hardware components and an industry-standard, real time, multi-
tasking operating system. The Company presently uses third parties to
perform printed circuit board and subsystem assembly. Although the
Company generally uses standard parts and components for its products,
certain of these parts and components are available only from sole source
vendor or from limited sources. The Company to date 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.
However, the inability to develop such alternative sources if and as
required in the future, or to obtain sufficient sole or limited source
components as required, would have a material adverse effect on the
Company's operating results.
Diversification of Credit Risks and Off-balance-sheet Risks The
Company's investments and trade receivables subject the Company to
certain credit risks. The Company maintains cash and investments in
various financial instruments, and maintains policies establishing credit
and concentration criteria for such assets and limiting the exposure to
any one institution or guarantor. Cash equivalents and short-term
investments at October 31, 1998 consisted primarily of commercial paper,
U.S. government and agency bonds and corporate debt obligations. The
Company sells primarily to telecommunications service providers, Bell
Operating Companies, and independent telephone companies. The Company
performs ongoing credit evaluations of its customers' financial condition
and generally requires no collateral. At October 31, 1998 five customers
represented approximately 52% of trade receivables.
The Company enters into foreign exchange forward contracts to hedge
customer receivables denominated in foreign currencies. The
counterparties to such contracts are major financial institutions and the
Company's policy is to not require collateral. At October 31, 1998 the
notional amount of outstanding foreign exchange contracts was
approximately $1.1 million and the unrealized loss on these contracts was
approximately $20,000. The Company had no foreign exchange contracts
outstanding as of November 1, 1997.
INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
Management determines the appropriate classifications of securities
at the time of the investment purchase and reevaluates such designation
as of each balance sheet date. The Company has classified its
investments as "available for sale" at the estimated fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity. Investment income is recorded using an effective
interest rate for each investment which includes interest earned and an
amortization or accretion of each investment's associated premium or
discount over the term of the investment. Realized gains or losses,
using the specific identification method, and declines in value judged to
be other than temporary are also included in investment income. The fair
values of the Company's investments are based on quoted market prices at
October 31, 1998 and November 1, 1997.
Investments at October 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations....................... $10,500 $49 $ -- $10,549
Corporate debt securities........... 6,188 45 -- 6,233
Commercial paper.................... 19,809 248 -- 20,057
Temporary cash investments.......... 46 -- -- 46
---------- ---------- ---------- ---------
Total available-for-sale securities. 36,543 342 0 36,885
Less amounts classified as
cash equivalents.................. (3,125) -- -- (3,125)
---------- ---------- ---------- ---------
$33,418 $342 $ -- $33,760
========== ========== ========== =========
</TABLE>
Contractual maturities of available-for-sale securities at October 31, 1998
are as follows (in thousands):
Estimated
Amortized Fair
Cost Value
---------- ----------
Due in one year or less............. $31,268 $31,566
Due in one to three years........... 5,275 5,319
---------- ----------
$36,543 $36,885
========== ==========
Investments at November 1, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations....................... $17,086 $34 ($23) $17,097
Corporate debt securities........... 4,564 12 -- 4,576
Commercial paper.................... 9,489 45 -- 9,534
Temporary cash investments.......... 3,006 -- -- 3,006
---------- ---------- ---------- ---------
Total available-for-sale securities. 34,145 91 (23) 34,213
Less amounts classified as
cash equivalents.................. (1,951) -- -- (1,951)
---------- ---------- ---------- ---------
$32,194 $91 ($23) $32,262
========== ========== ========== =========
</TABLE>
NOTE RECEIVABLE
In December 1996, the Company entered into two 12-year leases for
approximately 225,000 square feet of office space in San Jose,
California. In January 1998, the Company and the developer of the
property terminated these leases. As a condition of this termination
agreement, the Company loaned the developer approximately $2.2 million at
9% interest. This unsecured 10-year loan will be fully amortized by
monthly payments of $28,409, including principal and interest, commencing
in March 1998. At October 31, 1998 the remaining balance on the note was
approximately $2.1 million and this balance is included in deposits and
other assets.
BANK CREDIT LINES
The Company has a $15.0 million unsecured line of credit which
expires May 29, 1999. Amounts borrowed bear interest at various rates as
defined under the agreement, including the banks' reference rate (8.0% at
October 31, 1998). The loan agreement requires the Company to maintain
certain financial ratios, minimum working capital, and minimum tangible
net worth and requires the banks' consent for the payment of cash
dividends. The Company is in compliance with this agreement and there
were no borrowings outstanding under the line on October 31, 1998. The
Company plans to renew this line of credit upon its expiration.
The Company also has bank contracts allowing it to enter into
foreign currency spot and future exchange transactions in amounts not to
exceed $10.0 million outstanding at one time.
BALANCE SHEET COMPONENTS (in thousands)
October 31, November 1,
1998 1997
---------- ----------
Inventories
Raw materials..................... $1,198 $3,005
Work-in-process................... 1,793 2,274
Finished goods.................... 2,306 3,781
---------- ----------
$5,297 $9,060
========== ==========
Property and equipment
Equipment......................... $33,527 $35,701
Furniture and fixtures............ 4,106 4,709
Leasehold improvements............ 2,661 2,785
---------- ----------
40,294 43,195
Less accumulated depreciation
and amortization................ (33,641) (30,302)
---------- ----------
$6,653 $12,893
========== ==========
Intangible assets
Goodwill.......................... $3,373 $ --
Patent licenses................... 1,350 1,350
Developed technology and other.... 2,590 458
---------- ----------
7,313 1,808
Less accumulated amortization..... (676) (340)
---------- ----------
$6,637 $1,468
========== ==========
Accrued expenses and other liabilities
Accrued expenses.................. $4,664 $3,040
Other liabilities................. 515 351
---------- ----------
$5,179 $3,391
========== ==========
COMMITMENTS AND CONTINGENCIES
Leases The Company leases its facilities and certain equipment
under noncancellable operating leases expiring through 2007. Leases for
the Company's two principal operating facilities, its headquarters
facility and operations facility, require the Company to pay property
taxes, insurance premiums and normal maintenance costs, and contain
provisions for rental adjustments. In November 1998 the Company renewed
its lease on its operations facility ("Renewal"), for an additional five
year period.
Future minimum lease payments under noncancellable operating leases
inclusive of the November 1998 Renewal are as follows for the following
years:
Operating
(in thousands) Leases
- ------------------------------------- ----------
1999............................. $2,521
2000............................. 2,609
2001............................. 2,414
2002............................. 2,368
2003 and beyond.................. 8,541
----------
Total minimum payments........... $18,453
==========
Rent expense totaled approximately $3,028,000, $2,548,000, and
$1,964,000 for years 1998, 1997 and 1996, respectively.
Letters of Credit The Company enters into letters of credit as
performance securities for certain sales contracts. Various standby
letters of credit totaling approximately $1,100,000 were outstanding as
of October 31, 1998.
Litigation The Company from time to time has received letters from
other parties, including competitors of the Company, that make
allegations of patent infringement. Certain lawsuits have also arisen
from time to time in the ordinary course of business. In December 1997,
representatives of Lucent Technologies ("Lucent") informed the Company
that they believed that the Company's products may infringe upon certain
patents issued to Lucent. The Company evaluated the assertions of Lucent
and in the third quarter of fiscal 1998 accrued $7.6 million. Of this
amount, $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. In October
1998, the Company signed an intellectual property cross-licensing
agreement with Lucent and in November 1998, paid Lucent $9.2 million. A
portion of the settlement agreement amount totaling $1.6 million was
recorded as prepaid royalties and will be amortized to cost of goods sold
over the future royalty period.
STOCKHOLDERS' EQUITY
Common Stock The Company had 7,171,000 and 7,110,000 shares
outstanding for fiscal 1998 and 1997, respectively. This increase
represents shares issued for exercises of stock options under the
Company's stock plans and shares issued under the Company's stock
purchase plan.
Shares Authorized The Company has authorized but unissued shares
of 2,208,000 and 111,000 common shares for the Company's Stock Option
Plans and the Employee Stock Purchase Plan, respectively, at October 31,
1998.
Treasury Stock In April 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.
In September 1998, an additional 500,000 shares was authorized. The
Company purchased 659,000 and 243,000 shares in fiscal 1998 and 1997,
respectively, at a total cost of approximately $10.8 million.
Stockholder Rights Plan The Company has adopted a Stockholder
Rights Plan (the Rights Plan) which is intended to protect stockholders
from unfair or coercive takeover practices. In accordance with the
Rights Plan, the Company declared a dividend distribution of one
Preferred Share Purchase Right (the Purchase Right) for each outstanding
share of the Company's common stock held at the close of business on
November 30, 1992. Each Purchase Right entitles the registered holder to
purchase from the Company a unit consisting of one-thousandth of a share
of the Company's Series A Participating Preferred Stock at an exercise
price of $115.00. The Purchase Rights separate from the common stock and
become exercisable by the holders and are redeemable by the Company on
various dates and in certain situations as defined in the Rights Plan.
The Purchase Rights expire November 30, 2002.
STOCK AND BENEFIT PLANS
Employee Stock Purchase Plan The Company's 1991 Employee Stock
Purchase Plan (the Purchase Plan), as amended, allows eligible employees
through payroll deduction to purchase shares of the Company's common
stock at the lower of 85% of the fair market value of the stock on the
first or last day of a six-month offering period, or such other offering
period as determined by the Board of Directors but at no time to exceed
27 months. Approximately 100,000 and 120,000 shares were issued under
the Purchase Plan at average prices of $10.07 and $10.89 per share in
1998 and 1997, respectively.
Stock Option Plans The Company has in effect two stock option
plans: the 1997 Stock Plan (the 1997 Plan) and the 1995 Nonstatutory
Stock Option Plan (the 1995 Plan).
The 1997 Plan has a ten year term and provides for the granting of
incentive stock options and nonstatutory stock options to officers,
directors, employees and consultants of the Company at prices ranging
from 100% to 110% of the fair market value of the common stock on the
date prior to the grant as determined by the Board of Directors. Also,
stock options are automatically granted to directors who are not
employees of the Company. Options generally expire five or ten years
after the date of grant. The vesting and exercise provisions of option
grants are determined by the Board of Directors. Options to new
employees generally vest at the rate of 25% of the shares subject to the
option one year after the date of grant, and then ratably over the
following 36 months, based on continued service to the Company. Options
granted to current employees generally vest at the rate of 12.5% of the
shares subject to the option six months after the date of grant and then
ratably over the following 42 months, based on continued service to the
Company. Options to outside directors generally vest in equal monthly
amounts over a three-year or one-year period depending on the nature of
the option. Unexercised options are canceled thirty days following
termination of the optionee's service to the Company.
The 1995 Plan has a ten year term and was approved by the Board of
Directors in July 1995. The 1995 plan provides for the granting of
nonstatutory stock options to employees (excluding officers and
directors) and consultants of the Company at the fair market value of the
common stock on the date prior to the option grant. The vesting and
exercise provisions of option grants are determined by the Board of
Directors, and are generally similar to those provided under the 1997
Plan.
A summary of stock option plan transactions follows (shares in
thousands):
<TABLE>
<CAPTION>
Outstanding Options
--------------------
Shares Weighted
Available Average
for Out- Exercise
Options standing Price
----------- --------- ----------
<S> <C> <C> <C>
October 29, 1995 ............... 148 964 $14.93
Additional shares authorized .. 505 -- --
Granted ....................... (637) 637 18.23
Exercised ..................... -- (123) 7.92
Canceled ...................... 147 (147) 14.37
----------- ---------
November 2, 1996 ............... 163 1,331 17.22
Additional shares authorized .. 1,002 -- --
Granted ....................... (2,027) 2,027 12.68
Exercised ..................... -- (127) 9.42
Expired........................ (187) -- --
Canceled ...................... 1,272 (1,272) 16.33
----------- ---------
November 1, 1997 ............... 223 1,959 13.62
Additional shares authorized .. 705 -- --
Granted ....................... (1,088) 1,088 11.45
Exercised ..................... -- (222) 10.41
Expired........................ (457) -- --
Canceled ...................... 1,321 (1,321) 14.19
----------- ---------
October 31, 1998 ............... 704 1,504 $10.44
=========== =========
Options exercisable at:
November 2, 1996 .............. 472 $17.54
November 1, 1997 .............. 504 $14.72
October 31, 1998 .............. 328 $10.85
</TABLE>
The following tables summarize information about options
outstanding at October 31, 1998: (shares in thousands):
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
--------------------------------- ----------------------
Weighted
Number average Weighted Number Weighted
of shares contractual average of shares average
Range of outstanding life exercise exercisable exercise
Exercise Prices at 10/31/98 (in years) price at 10/31/98 price
- ---------------- ----------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$9.50 - 9.63 105 8.45 $9.57 50 $9.59
10.13 882 9.63 10.13 23 10.13
10.38 - 11.50 462 8.58 10.90 225 10.90
11.75 - 18.88 55 6.83 13.14 30 13.09
----------- ------------
$9.50 - 18.88 1,504 9.12 $10.44 328 $10.85
=========== ============
</TABLE>
These options will expire if not exercised at specific dates
ranging from November 1998 to October 2008.
Stock Based Compensation As permitted under Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation," the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related interpretations, in accounting for stock-based awards to
employees. Under APB 25, the Company generally recognized no
compensation expense with respect to such awards since the exercise price
of such grants were at the market price of the Company's stock on the
date of such grants.
Pro forma information regarding net income (loss) and net income
(loss) per share is required by FAS 123 for awards granted in fiscal
years beginning after December 31, 1994 (fiscal 1996), as if the Company
had accounted for its stock-based awards to employees under the fair
value method of FAS 123. The fair value of the Company's stock-based
awards to employees was estimated using a Black-Scholes option pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes
model requires the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock-based
awards to employees have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock-based awards to
employees. The fair value of the Company's stock-based awards to
employees was estimated assuming no expected dividends and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Option Plans Purchase Plan
----------------------- -----------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Expected life in years....... 4.0 4.0 4.0 0.5 0.5 0.5
Expected stock price
volatility factors......... 0.6 0.6 0.6 0.6 0.5 0.5
Risk-free interest rate
percentage................. 5.5 6.0 5.9 5.5 5.4 5.7
</TABLE>
For pro forma purposes, the estimated fair value of the Company's
stock-based awards is amortized over the options' vesting period (for
Option Plans) and the six-month purchase period (for the Purchase Plan).
The Company's reported and pro forma information follows (in thousands
except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) - as reported....... ($12,174) ($1,678) $1,000
Net loss - pro forma.................. ($14,027) ($6,427) ($452)
Diluted income (loss) per share -
as reported......................... ($1.77) ($0.24) $0.14
Diluted loss per share - pro forma.... ($2.04) ($0.93) ($0.06)
</TABLE>
The weighted-average estimated fair value of employee stock
options granted were $6.77, $6.89, and $9.83 per share for fiscal 1998,
1997 and 1996, respectively. The weighted-average estimated fair value
of employee stock purchase rights granted under the Purchase Plan were
$4.25, $4.30, and $5.59 for fiscal 1998, 1997 and 1996, respectively.
The effects on pro forma disclosures of applying FAS No. 123 are
not likely to be representative of the effects on pro forma disclosures
of future years. Because FAS 123 is applicable only to options granted
subsequent to October 28, 1995, its pro forma effect will not be fully
reflected until approximately fiscal 2000.
In June 1997, the Company offered all employees the option to
exchange their stock options on a 5 for 4 share exchange ratio at the
current market price, with no change in the stock options vesting
periods. As a result of this offer, stock options to purchase 809,000
shares of common stock with a weighted average exercise price of $16.50
per share were canceled or amended to stock options to purchase 641,000
shares with an exercise price of $10.38 per share.
In June 1998, the Company offered all employees and directors the
option to reprice their stock options to the then current market price
with a restart of the options vesting periods. As a result of this
offer, 904,000 shares of common stock with a weighted average exercise
price of $16.21 per share were canceled or amended to stock options with
an exercise price of $10.13 per share.
Employee Benefit Plan The Company has an employee savings plan,
which qualifies under Section 401(k) of the Internal Revenue Code (the
401(k) Plan). Under the 401(k) Plan, all eligible employees may defer
from 1% to 20% of their pre-tax compensation, but not more than statutory
limits. The Company is allowed to make contributions as defined in the
401(k) Plan and as approved by the Board of Directors. Company
contributions of $713,000 were made through fiscal 1998. The Company
contributed $181,000, $205,000, and $152,000 in 1998, 1997 and 1996,
respectively. In December 1996 the Board of Directors approved a
matching program, not to exceed $500 per eligible employee.
NON-RECURRING CHARGES
During the third quarter of fiscal 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 $0.4 million. During this quarter the Company wrote off
$5.0 million of IPR&D. See Acquisition and Divestiture Note.
In December 1997, 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. During
the third quarter of fiscal 1998 the Company accrued $7.6 million, $5.6
million of this amount was recorded as a non-recurring charge. See
Commitments and Contingencies Note.
During the second quarter of fiscal 1997, the Company recorded
restructuring and other charges of $3.3 million. These expenses
consisted of $2.4 million in restructuring charges and $0.9 million in
expenses associated with the termination of acquisition discussions with
Voice-Tel Enterprises and Voice-Tel Network ("Voice-Tel"). The
restructuring charges primarily represent termination benefits for
approximately 40 employees from all functions of the Company and costs
associated with the resignation of the Company's president and chief
executive officer. The Company restructured its business to align its
operational expenses with its anticipated revenue levels. Cash payment
termination benefits of $0.3 million and $1.8 million were paid in fiscal
1998 and 1997, respectively.
OTHER INCOME AND EXPENSE, NET
Other income and expense, net consists of (in thousands):
1998 1997 1996
--------- --------- ---------
Investment income................. $3,053 $2,645 $2,321
Interest expense.................. (100) (103) (76)
Other............................. 14,192 3,572 (14)
--------- --------- ---------
$17,145 $6,114 $2,231
========= ========= =========
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, computed as the difference
between the net carrying value of the tangible and intangible assets sold
and the liabilities assumed by the Company and the purchase price.
During fiscal 1997 the Company sold its 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. The Company subsequently sold this
common stock for an additional gain of approximately $.3 million which
was included in investment income.
INCOME TAXES
Income tax provisions have been determined in accordance with
statement of Financial Accounting Standards No. 109 -- Accounting for
Income Taxes (FAS 109). The components of the provision for income taxes
are as follows (in thousands):
1998 1997 1996
--------- --------- ---------
FEDERAL
Current................................. $421 ($1,475) ($901)
Deferred................................ (325) 2,023 901
STATE
Current................................. 83 35 --
FOREIGN
Current................................. 200 250 53
--------- --------- ---------
$379 $833 $53
========= ========= =========
The total provision for income taxes differs from the amount
computed by applying the federal statutory income tax rate to income before
taxes as follows:
1998 1997 1996
--------- --------- ---------
Income tax (benefit) computed at
federal statutory rate................. -34.0% -34.0% 34.0%
State taxes, net of federal benefit...... 0.5% 2.7% --
Foreign taxes............................ 1.7% 29.6% 5.0%
Goodwill amortization.................... -- 36.0% 8.3%
Adjustment to valuation allowance........ 33.5% 49.0% -27.3%
Tax-exempt interest income............... -- -- -16.1%
Other individually immaterial items...... 1.5% 15.3% 1.1%
--------- --------- ---------
Effective tax rate....................... 3.2% 98.6% 5.0%
========= ========= =========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of deferred tax assets and liabilities are as
follows (in thousands):
1998 1997
--------- ---------
Deferred tax liabilities
Difference in accounting periods........... ($1,660) ($2,889)
--------- ---------
Deferred tax assets
Net operating loss carryforwards........... 867 2,531
Tax credit carryforwards................... 3,410 2,886
Fixed assets............................... 2,750 1,686
Allowance for doubtful accounts............ 740 780
Other accruals and reserves not currently
deductible for tax purposes.............. 8,354 2,206
Inventory valuation accounts............... 203 2,026
Other...................................... 41 63
--------- ---------
16,365 12,178
Valuation allowance........................ (14,380) (9,289)
--------- ---------
1,985 2,889
--------- ---------
Total deferred taxes....................... $325 $ --
========= =========
The change in the valuation allowance was a net increase of
$5,091,000, $2,933,000, and $770,000 for 1998, 1997 and 1996,
respectively. Approximately $1,267,000 of the valuation allowance is
related to stock options, the benefits of which will be credited to
additional paid-in capital when realized.
As of October 31, 1998, the Company has federal tax net operating
loss carryforwards of approximately $1,875,000, which will expire
beginning in 2001 through 2003, if not utilized. Also available at
October 31, 1998 are tax credit carryforwards for federal and state
income tax purposes of approximately $2,308,000 and $1,670,000,
respectively, which will expire beginning in the year 2002, if not
utilized. Utilization of all of the federal net operating loss
carryforwards and the deduction equivalent of approximately $118,000 of
tax credit carryforwards are limited to less than $1,000,000 per year,
due to the application of the change in ownership provisions of Sections
382 and 383 of the internal Revenue Code of 1986, as amended.
SEGMENT AND CUSTOMER INFORMATION
The Company operates in a single industry segment: the design,
manufacture and marketing of systems and software for communications
applications including voice messaging and facsimile storage and
forwarding. No customer represented more than 10% of net revenue in the
last three fiscal years. 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 32%, 28% and 35% of the
Company's net revenue in fiscal 1998, 1997 and 1996 respectively,
although the Company's five largest customers were not the same in these
periods.
Export revenue consist of sales from the Company's U.S. operating
company to non-affiliated customers by geographic area after adjustments to
include such export sales based on the location of the customer (in
thousands):
1998 1997 1996
--------- --------- ---------
Latin America............................ $16,700 $16,200 $9,800
Europe................................... 6,000 10,200 5,600
Far East................................. 6,100 9,200 1,500
Canada................................... 5,200 6,700 5,900
Australia................................ 1,800 5,200 9,000
--------- --------- ---------
$35,800 $47,500 $31,800
========= ========= =========
SUBSEQUENT EVENTS
In December 1998, the Board of Directors approved an increase in
shares reserved for issuance under the Company's stock option plans and
the Employee Stock Purchase plan of 300,000 and 125,000, respectively.
The increase in the shares for the Employee Stock Plan and the increase
in ISO shares for the 1997 Plan are subject to stockholders' approval.
See the first, second and fifth paragraphs of "Commitments and
Contingencies" Note.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Net Income (Loss)
Operating -------------------
Net Gross Income Per Stock Price Range
Revenue Margin (Loss) Amount Share(1) Shares(1) High - Low
--------- --------- --------- --------- --------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Q1 $18,158 $9,087 ($6,626) ($5,978) ($0.85) 7,016 $18.00 - 11.06
Q2 21,202 11,049 (5,147) (4,606) (0.66) 6,996 14.06 - 11.63
Q3(2) 18,143 9,306 (15,176) (266) (0.04) 6,885 13.75 - 10.13
Q4 20,084 10,492 (1,991) (1,324) (0.20) 6,634 11.50 - 5.63
--------- --------- --------- ---------
$77,587 $39,934 ($28,940) ($12,174) ($1.77) 6,883 $18.00 - 5.63
========= ========= ========= =========
1997
Q1 $27,913 $16,570 $259 $680 $0.10 6,986 $14.73 - 12.13
Q2(3) 24,899 14,060 (6,871) (6,304) (0.90) 6,994 13.75 - 9.50
Q3(4) 27,010 15,461 (1,138) 3,149 0.45 7,019 13.75 - 9.50
Q4 29,014 17,084 791 797 0.11 7,176 21.88 - 11.00
--------- --------- --------- ---------
$108,836 $63,175 ($6,959) ($1,678) ($0.24) 6,943 $21.88 - 9.50
========= ========= ========= =========
</TABLE>
(1) Represents the computation of basic and diluted net income (loss)
per share. Shares represent the weighted average number of shares
outstanding. Net income (loss) per share is computed independently
for each of the quarters presented and therefore may not sum to the
total for the year.
(2) During the third quarter of fiscal 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 $0.4 million. The third quarter
was restated; see Acquisition and Divestiture Note.
In December 1997, 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 settled this dispute by signing a patent license
agreement and paying Lucent $9.2 million. The Company recorded
$5.6 million as a non-recurring charge in the third fiscal quarter.
See Commitments and Contingencies Note.
(3) During the second quarter of fiscal 1997, the Company recorded
restructuring and other charges of $3.3 million. The expenses
consisted of $2.4 million in restructuring charges and $0.9 million
in expenses associated with the termination of acquisition
discussions with Voice-Tel Enterprises and Voice-Tel Network
("Voice-Tel"). The restructuring charges primarily represent
termination benefits for approximately 40 employees from all
functions of the Company and costs associated with the resignation
of the Company's president and chief executive officer.
(4) During the third quarter of fiscal 1997, the Company sold its
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. The Company subsequently sold this
common stock for an additional gain of approximately $0.3 million
which was included in investment income.
The Company's common stock is traded on the over-the-counter market
and is quoted on The Nasdaq National Market System under the symbol CGRM.
As of October 31, 1998, there were approximately 350 stockholders of
record. The Company has not paid and does not anticipate paying cash
dividends on its common stock in the foreseeable future. The Company's
bank credit line agreement requires the banks' consent to pay cash
dividends.
PRO FORMA QUARTERLY FINANCIAL DATA (UNAUDITED)
The following pro forma information represents the combined results
of operations of the Company, plus TTC, as adjusted to reflect the
amortization of intangible assets acquired in the purchase, less the CPE
Sale, as if each of these transactions had occurred at the beginning of
fiscal 1997. The pro forma statements exclude the gain realized on the
CPE Sale and exclude the non-recurring charge of the write-off of the
IPR&D acquired in the TTC 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>
(in thousands, except per share data)
Net Income (Loss)
-------------------
Net Gross Operating Per
Revenue Margin R&D SG&A Loss Amount Share(1)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Q1 $12,816 $6,023 $4,587 $8,976 ($7,540) ($6,876) ($0.98)
Q2 15,524 7,821 4,718 9,313 (6,210) (5,658) (0.81)
Q3(2) 18,266 9,242 4,371 15,624 (10,753) (10,138) (1.47)
Q4 20,084 10,492 3,919 8,564 (1,991) (1,324) (0.20)
--------- --------- --------- --------- --------- ---------
$66,690 $33,578 $17,595 $42,477 ($26,494) ($23,996) ($3.49)
========= ========= ========= ========= ========= =========
1997
Q1 $15,885 $9,499 $5,601 $8,524 ($4,626) ($4,181) ($0.60)
Q2(3) 17,625 9,758 5,290 13,365 (8,897) (8,297) (1.19)
Q3(4) 18,375 10,350 4,837 9,540 (4,027) 276 0.04
Q4 18,904 11,269 5,067 9,044 (2,842) (2,843) (0.40)
--------- --------- --------- --------- --------- ---------
$70,789 $40,876 $20,795 $40,473 ($20,392) ($15,045) ($2.15)
========= ========= ========= ========= ========= =========
</TABLE>
(1) Represents the computation of basic and diluted net income (loss)
per share. Net income (loss) per share is computed independently
for each of the quarters presented and therefore may not sum to the
total for the year.
(2) As noted above in footnote (2) to the QUARTERLY FINANCIAL DATA
(UNAUDITED), the Company accrued and recorded in Q3, as a
non-recurring charge, $5.6 million to reflect the settlement of its
patent license dispute with Lucent.
(3) As noted above in footnote (3) to the QUARTERLY FINANCIAL DATA
(UNAUDITED), the Company recorded in Q2, restructuring and other
charges of $3.3 million.
(4) As noted above in footnote (4) to the QUARTERLY FINANCIAL DATA
(UNAUDITED), the Company recorded in Q3, a pre-tax gain on the sale
of its Text-to-Speech business of $3.6 million.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CENTIGRAM COMMUNICATIONS CORPORATION
We have audited the accompanying consolidated balance sheets of
Centigram Communications Corporation as of October 31, 1998 and November
1, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years in the period
ended October 31, 1998. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Centigram Communications Corporation at October 31, 1998 and November 1,
1997 and the consolidated results of its operations and its cash flows
for the three years in the period ended October 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
November 24, 1998
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference
to the Proxy Statement for the Company's Annual Meeting of Stockholders
scheduled to be held on March 26, 1999, under the headings "Proposal No.
1" and "Management".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
to the Proxy Statement for the Company's Annual Meeting of Stockholders,
scheduled to be held on March 26, 1999, under the heading "Executive
Officer Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
to the Proxy Statement for the Company's Annual Meeting of Stockholders,
scheduled to be held on March 26, 1999, under the heading "Security
Ownership of Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
to the Proxy Statement for the Company's Annual Meeting of Stockholders,
scheduled to be held on March 26, 1999, under the heading "Certain
Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS OF CENTIGRAM
COMMUNICATIONS CORPORATION ARE INCLUDED IN ITEM 8:
FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS:
Report of Independent Auditors
Consolidated Balance Sheets-October 31, 1998 and November 1, 1997
Consolidated Statements of Operations-Years ended October 31, 1998,
and November 1, 1997 and November 2, 1996
Consolidated Statements of Stockholders' Equity-Years ended October
31, 1998, November 1, 1997 and November 2, 1996
Consolidated Statements of Cash Flows-Years ended October 31, 1998,
November 1, 1997 and November 2, 1996
Notes to Consolidated Financial Statements-October 31, 1998,
except the note "Quarterly Financial Data (Unaudited)"
SUPPLEMENTARY FINANCIAL DATA NOT COVERED BY REPORT OF INDEPENDENT AUDITORS:
The notes: "Pro Forma Information (Unaudited)", "Quarterly Financial Data
(Unaudited)" and "Pro Forma Quarterly Financial Data (Unaudited)"
in Notes to Consolidated Financial Statements
(A) 2. FINANCIAL STATEMENT SCHEDULE:
The following financial schedule of the Registrant for the years
ended October 31, 1998, November 1, 1997 and November 2, 1996
Schedule II-Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the consolidated financial statements or
notes.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.
(C) EXHIBITS
(The Company will furnish to any stockholders who so request a copy of
this Annual Report on Form 10-K, as amended, including a copy of any
Exhibit listed below, provided that the Company may require payment of a
reasonable fee not to exceed its expense in furnishing any such
Exhibit.)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
<S> <C>
3.1 Second Restated Certificate of Incorporation of Registrant.(1)
3.2 Bylaws of Registrant.(1)
4.1 Preferred Shares Rights Agreement dated as of October 20, 1992 by
and between Registrant and The First National Bank of Boston.(2)
4.2 Amendment to Preferred Shares Rights Agreement dated April 26, 1994.(4)
10.1 Amended and Restated 1987 Incentive Stock Option Plan.(4)
10.2 Amended and Restated 1991 Employee Stock Purchase Plan.(4)
10.3 Settlement Agreement and Cross-License between the Company and VMX,
Inc. dated June 29, 1990.(1)+
10.4 Standard Triple Net Industrial Lease between the Company and Pactel
Properties dated May 30, 1990.(1)
10.7 Form of Change of Control Agreement.(1)
10.8 Employment Agreement dated February 22, 1985 by and between Registrant
and George H. Sollman, as amended.(1)
10.11 Credit Agreement dated as of March 28, 1994 by and between the
Registrant and Silicon Valley Bank.(4)
10.12 Industrial Lease Agreement dated June 7, 1993 between the Company and
Aetna Life Insurance Company.(3)
10.13 Loan Modification Agreement entered into as of April 21, 1995 between
the Registrant and Silicon Valley Bank.(5)
10.14 Loan Modification Agreement entered into as of September 12, 1995
between the Registrant and Silicon Valley Bank.(5)
10.15 1995 Nonstatutory Stock Option Plan.(5)
10.16 Amendment to Triple Net Industrial Lease Between the Company and
Bryan/Cilker Properties (successor in interest to Pactel Properties)
dated December 23, 1996.(6)
10.17 1997 Stock Plan.(6)
10.18 Promissory Note dated April 15, 1996 between the Company and George H.
Sollman. (6)
10.19 Standard Triple Net Industrial Lease between the Company and Sobrato
Interests III dated December 20, 1996.(6)
10.20 Standard Triple Net Industrial Lease between the Company and Sobrato
Interests III dated December 20, 1996.(6)
10.21 Amended and Restated Loan Agreement entered into April 30, 1997
between the Company and Silicon Valley Bank and Bank of Hawaii.(7)
10.22 Settlement Agreement and Mutual Release between the Company and George
H. Sollman dated August 1, 1997.(7)
10.23 Promissory note dated February 18, 1997 between the Company and Dennis
L. Barsema.(7)
10.24 Settlement Agreement and General Release dated October 4, 1997 between
the Company and Dennis L. Barsema.(7)
10.25 Termination of Build to Suit Leases and Loan to Sobrato Interests III.(7)
10.26 Amendment to Amended and Restated Loan Agreement entered into May 30,
1998 between the Company and Silicon Valley Bank and Bank of Hawaii.
10.27 Patent License Agreement between Lucent Technologies, Inc. and the
Company effective as of October 1, 1998.+
10.28 Employment Agreement dated October 27, 1997 by and between Registrant
and Robert L. Puette.
21.1 List of Subsidiaries of Registrant.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to the Form S-1 Registration Statement as
filed with the Securities and Exchange Commission on October 10, 1991
(Registration No. 33-42039).
(2) Incorporated by reference to the Form 8-A Registration Statement as
filed with the Securities and Exchange Commission on November 3, 1992.
(3) Incorporated by reference to Annual Report on Form 10-K for fiscal 1993.
(4) Incorporated by reference to Annual Report on Form 10-K for fiscal 1994.
(5) Incorporated by reference to Annual Report on Form 10-K for fiscal 1995.
(6) Incorporated by reference to Annual Report on Form 10-K for fiscal 1996.
(7) Incorporated by reference to Annual Report on Form 10-K for fiscal 1997.
+ Confidential treatment requested as to certain portions filed
separately with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: January 22, 1999 By: /s/ Robert L. Puette
----------------------------------------
Robert L. Puette
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert L. Puette and Thomas E.
Brunton, jointly and severally his attorneys-in-fact, each with the power
of substitution for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same with exhibits thereto
and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------ -------------------------------- ---------------
<S> <C> <C>
/s/ ROBERT L. PUETTE President, Chief Executive January 25, 1999
---------------------------- Officer, Director
Robert L. Puette (Principal Executive
Officer)
/s/ THOMAS E. BRUNTON Senior Vice President and January 25, 1999
---------------------------- Chief Financial Officer
Thomas E. Brunton (Principal Accounting and
Financial Officer)
/s/ JAMES H. BOYLE Director January 25, 1999
----------------------------
James H. Boyle
/s/ DOUGLAS CHANCE Director January 25, 1999
----------------------------
Douglas Chance
/s/ JAMES F. GIBBONS Director January 25, 1999
----------------------------
James F. Gibbons
Director
----------------------------
Edward R. Kozel
/s/ DAVID S. LEE Director January 25, 1999
----------------------------
David S. Lee
/s/ DEAN O. MORTON Director January 25, 1999
----------------------------
Dean O. Morton
</TABLE>
<PAGE>
SCHEDULE II
CENTIGRAM COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at end
of Period Expenses Accounts(2) Deductions(1) of Period
----------- ------------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1998
Allowance for doubtful
accounts.................... $774 $160 $ -- ($190) $744
Product return reserve....... 950 -- 225 -- 1,175
Year ended November 1, 1997
Allowance for doubtful
accounts.................... $955 $160 $ -- ($341) $774
Product return reserve....... 1,100 -- (150) -- 950
Year ended November 2, 1996
Allowance for doubtful
accounts.................... $841 $330 -- ($216) $955
Product return reserve....... 1,100 -- -- -- 1,100
</TABLE>
- ------------------------------
(1) Write-offs of uncollectible accounts, net of recoveries.
(2) The product return reserve is charged to revenue.
AMENDMENT
TO
AMENDED AND RESTATED LOAN AGREEMENT (UNSECURED)
This Amendment to Amended and Restated Loan Agreement (Unsecured) is
entered into as of May 30, 1998 (the "Amendment") by and between SILICON
VALLEY BANK ("Agent") as Servicing Agent and a Bank and BANK OF HAWAII
("BofH"; SVB and BofH are referred to individually herein as "Bank", and
collectively as the "Banks") and CENTIGRAM COMMUNICATIONS CORPORATION, a
Delaware corporation ("Borrower").
RECITALS
Borrower and Bulk are parties to that certain Amended and Restated
Loan Agreement (Unsecured) dated as of April 30, 1997, and modified by that
certain Loan Modification Agreement dated as of April 27, 1998 (the
"Agreement"). The parties desire to amend the Agreement in accordance with
the terms of this Amendment,
NOW, THEREFORE the parties agree as follows:
1. The following definitions in Section 1.1 are amended to read as
follows:
"Committed Line" means Fifteen Million Dollars ($15,000,000).
"LIBOR Rate Advance" means an Advance bearing interest at a rate
equal to the LIBOR Rate plus
two percent (2.00%) and made pursuant to Section 2.1.
"Maturity Date" means May 29, 1999.
2. The following new definitions are added to Section 1.1:
"Borrowing Base" means an amount equal to eighty percent (80%)
of Eligible Accounts, as determined by Bank with reference to the most
recent Borrowing Base Certificate delivered by Borrower.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided,
that standards of eligibility may be fixed and revised from time to time by
Bank in Bank's reasonable judgment and upon notification thereof to
Borrower in accordance with the provisions thereof. Unless otherwise
agreed to by Bank, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, twenty-five
percent (25%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the account debtor
may be conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
(f) Accounts with respect to which the account debtor does
not have its principa1 place of business in the United States, except for
Eligible Foreign Accounts;
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States;
(h) Account with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of fifty percent (50%) of any amounts
owing to the amount debtor against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations
exceed the aforementioned percentage;
(j) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or
is subject to any Insolvency Proceeding, or becomes insolvent, or goes out
of business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business in
the United States and that (i) are supported by one or more letters of
credit in an amount and of a tenor, and issued by a financial institution
acceptable to Bank, or (ii) that Bank approves on a case-by-case basis.
3. Section 2.1(a) is hereby deleted in its entirety and replaced
with the following:
"(a) Advances. Subject to and upon the terms and conditions
of this Agreement, Banks agree to make Advances to Borrower in an aggregate
amount not to exceed the Committed Line; provided that if the aggregate
outstanding Advances plus Letters of Credit plus the Foreign Exchange
Reserve exceed $5,000,000 then Banks will make Advances to Borrower in an
aggregate amount not to exceed (i) the lesser of the Committed Line or the
Borrowing Base minus (ii) the face amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit) minus the
outstanding amount of the Foreign Exchange Reserve. Subject to the terms
and conditions of this Agreement, amounts borrowed pursuant to this Section
2.1 may he repaid and reborrowed at any time during the term of this
Agreement."
4. The reference in Section 2.1(d) to 150 basis points is hereby
amended to read "200 basis points".
5. The first sentence in Section 2.1.1(c) is hereby deleted and
replaced with the following:
"The maximum aggregate obligation at any one time for undrawn
and drawn but unreimbursed Letters of Credit shall not exceed (i) the
lesser of the Committed Line or the Borrowing Base minus (ii) the
outstanding amount of the Foreign Exchange Reserve, provided that the
aggregate face amount of outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) shall not in any case exceed Two Million
Dollars ($2,000,000)."
6. The reference in Section 2.1.2(a) to ten percent (10%) of the
gross amount of the Exchange Contracts is hereby amended to read "twenty
percent (20%)".
7. Section 2.2 is hereby deleted in its entirety and replaced with
the following:
"2.2 Overadvances. If, at any time or for any reason that a
Borrowing Base Certificate is required under Section 5.3, the sum of (i)
Advances owed by Borrower to Banks pursuant to Section 2.1(a) of this
Agreement plus (ii) the face amount of Letters of Credit issued under
Section 2.1.1 (including undrawn and drawn but unreimbursed Letters of
Credit) plus (iii) the reserve, if any, taken under Section 2.1.l(d) plus
(iv) the Foreign Exchange Reserve is greater then the lesser of the
Committed Line or the Borrowing Base, Borrower shall immediately pay to
Servicing Agent, in cash, the amount of such excess, for payment to the
Banks according to their respective Percentage Shares."
8. The last paragraph in Section 5.3 is hereby deleted and
replaced with the following paragraphs:
"In the event that outstanding Advances (including undrawn and
drawn but unreimbursed Letters of Credit) exceed Four Hundred Thousand
Dollars ($400,000), then Borrower shall deliver to Banks with the quarterly
financial statements a Compliance Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto.
In the event that outstanding Advances under the Committed Line
exceed Five Million Dollars ($5,000,000), then within thirty (30) days
after the last day of each month, Borrower shall deliver to Bank a
Borrowing Base Certificate signed by a Responsible Officer in substantially
the form of Exhibit D hereto, together with aged listings of accounts
receivable and accounts payable."
9. The attached Exhibit D is hereby added incorporated by
reference into the Agreement.
10. Section 5.10 is hereby deleted in its entirety and replaced
with the following:
"5.10 Tangible Net Worth . Borrower shall maintain, as of the
last day of each fiscal quarter, a Tangible Net Worth of not less than
Seventy Million Dollars ($70,000.000), minus the amount used to repurchase
Borrower's capital stock in accordance with Section 6.6 up to aggregate
amount of Seven Million Five Hundred Thousand Dollars ($7,500,000).
11. The following now Section 5.13 shall be added:
"5.13 Bona Fide Eligible Accounts. The Eligible Accounts are
bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by
the account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor that is included in any
Borrowing Base Certificate as an Eligible Account."
12. Section 6.6 is hereby deleted in its entirety and replaced with
the following:
"6.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or
purchase of any capital stock; provided, that (i) Borrower may declare and
make any dividend payment or other distribution payable in its equity
securities, (ii) Borrower may convert any of its convertible securities
into other securities pursuant to the terms of such convertible securities
or otherwise in exchange therefor, and (iii) Borrower may repurchase stock
in an aggregate amount not to exceed Seven Million Five Hundred Thousand
Dollars ($7,500,000) for so long as an Event of Default has not occurred
and will not exist after giving effect to such repurchase."
13. The first sentence of Section 11.1 is hereby deleted and
replaced with the following:
"Except as otherwise provided in this Agreement, the rights,
interests, and obligations of each Bank under this Agreement and the Loan
Documents at any time shall be shared in the ratio of (a) Seven Million
Five Hundred Thousand Dollars ($7,500,000) to (b) the Committed Line."
14. As a result of the termination by Borrower of two twelve-year
property leases entered into in December of 1996, Borrower has made an
unsecured loan in the approximate amount of Two Million Two Hundred Forty-
Three Thousand Dollars ($2,243,000) to a third party developer ("Unsecured
Loan''), This Unsecured Loan violates Section 6.7 of the Agreement because
the Unsecured Loan is not a Permitted Investment. Bank hereby consents to
such Unsecured Loan and hereby waives such Event of Default under the
Agreement.
15. In connection with this Amendment, Borrower shall pay Bank a
fee in an amount equal to Twenty-Five Thousand Dollars ($25,000), payable
upon the date hereof, plus all Bank Expenses incurred in connection with
the preparation of this Amendment."
16. As a condition to the effectiveness of this Amendment, Bank
shall have received, in form and substance satisfactory to Bank, the
following:
(a) a resolution by Borrower authorizing the execution and
delivery of this Amendment; and
(b) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
17. Unless otherwise defined, all capitalized terms in this
Amendment shall be as defined in the Agreement. Except as. amended, the
Agreement remains in full force and effect.
18. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date
of this Amendment, and that no Event of Default has occurred and is
continuing.
19. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as
of the first date above written .
CENTIGRAM COMMUNICATIONS CORPORATION
By:
/s/ Tom Brunton
Title:
Chief Financial Officer
SILICON VALLEY BANK
By:
/s/ Timothy M. Walker
Title:
Vice President
BANK OF HAWAII
By:
/s/ David L. Ward
Title
Officer
PATENT LICENSE AGREEMENT
between
LUCENT TECHNOLOGIES INC.
and
CENTIGRAM COMMUNICATIONS CORPORATION
Effective as of October 1, 1998
Relating to Various Product
PATENT LICENSE AGREEMENT
TABLE OF CONTENTS
ARTICLE I - GRANTS OF LICENSES
1.01 Grant
1.02 Duration and Extent
1.03 Scope
1.04 Ability to Provide Licenses
1.05 Joint Inventions
1.06 Publicity
ARTICLE II - ROYALTY AND PAYMENTS
2.01 Initial Fee
2.02 Running Royalty [ * ]
2.03 Accrual
2.04 Records and Adjustments
2.05 Reports and Payments
ARTICLE III - TERMINATION
3.01 Breach
3.02 Voluntary Termination
3.03 Survival
ARTICLE IV - MISCELLANEOUS PROVISIONS
4.01 Disclaimer
4.02 [ * ]
4.03 Addresses
4.04 Taxes
4.05 Choice of Law
4.06 Integration
4.07 Outside the United States
4.08 Dispute Resolution
4.09 Releases
4.10 Confidentiality
4.11 Counterparts
DEFINITIONS APPENDIX
PATENT LICENSE AGREEMENT
Effective as of October 1, 1998, LUCENT TECHNOLOGIES INC., a Delaware
corporation ("LUCENT"), having an office at 600 Mountain Avenue, Murray
Hill, New Jersey 07974, and CENTIGRAM COMMUNICATIONS CORPORATION, a
Delaware corporation ("CENTIGRAM"), having an office at 91 East Tasman
Drive, San Jose, California 95134 agree as follows:?
ARTICLE I
GRANTS OF LICENSES
1.01 Grant
(a) LUCENT grants to CENTIGRAM under LUCENT's PATENTS personal,
nonexclusive and non-transferable licenses for:
[ * ]
(b) CENTIGRAM grants to LUCENT under CENTIGRAM's PATENTS personal,
nonexclusive, royalty-free and non-transferable licenses for [ * ]
1.02 Duration and Extent
Subject to the provisions of ARTICLE III and Section 4.02, all licenses
granted herein shall continue [ * ]
1.03 Scope
(a) The licenses granted herein are licenses to (i) make, have made,
use, lease, sell and import LICENSED PRODUCTS; (ii) make, have made, use
and import machines, tools, materials and other instrumentalities, insofar
as such machines, tools, materials and other instrumentalities are involved
in or incidental to the development, manufacture, testing or repair of
LICENSED PRODUCTS which are or have been made, used, leased, owned, sold or
imported by the grantee of such license; and (iii) convey to any customer
of the grantee, with respect to any LICENSED PRODUCT which is sold or
leased by such grantee to such customer, rights to use and resell such
LICENSED PRODUCT as sold or leased by such grantee (whether or not as part
of a larger combination); provided, however, that no rights may be conveyed
to customers with respect to any invention which is directed to (1) a
combination of such LICENSED PRODUCT (as sold or leased) with any other
product [ * ] (2) a method or process which is other than the inherent use
of such LICENSED PRODUCT itself (as sold or leased), or (3) a method or
process involving the use of a LICENSED PRODUCT to manufacture (including
associated testing) any other product.
(b) Licenses granted herein to CENTIGRAM are not to be construed
either (i) as consent by the grantor to any act which may be performed by
the grantee, except to the extent impacted by a patent licensed herein to
the grantee, or (ii) to include licenses to contributorily infringe [ * ]
or to induce infringement under U.S. law or a foreign equivalent thereof.
[ * ]
(c) The grant of each license hereunder includes the right to grant
sublicenses within the scope of such license to a party's RELATED COMPANIES
for so long as they remain its RELATED COMPANIES. Any such sublicense may
be made effective retroactively, but not prior to the effective date
hereof, nor prior to the sublicensee's becoming a RELATED COMPANY of such
party. Each party shall not have any right to sublicense any entity other
than as specified in this Section.
1.04 Ability to Provide Licenses
(a) It is recognized that certain actions of the parties to this
Agreement may limit their ability to provide licenses hereunder without
constituting a breach. In particular, (i) prior to the earliest filing of
a patent application disclosing an invention of a party or its RELATED
COMPANY, such party or RELATED COMPANY may assign to a third party the
title to patents on such invention, or (ii) prior to the execution of this
Agreement, a party or its RELATED COMPANY may have limited by contract its
ability to provide licenses hereunder with respect to certain patents or
technologies.
(b) Each party agrees to disclose to the other party, promptly upon
receipt of a written request for such disclosure, any such assignment or
other contractual limitation with respect to any patent and/or technology
which is specifically identified in such request.
(c) Each party represents that it has already disclosed to the other
party any such assignment or other contractual limitation currently in
effect with respect to any patent and/or technology specifically identified
in any such disclosure request received by it prior to execution of this
Agreement.
(d) A party's failure to meet any obligation hereunder, due to the
assignment of title to any invention or patent, or the granting of any
licenses, to the United States Government or any agency or designee thereof
pursuant to a statute or regulation of, or contract with, such Government
or agency, shall not constitute a breach of this Agreement.
(e) LUCENT represents to CENTIGRAM that it has the right to license
LUCENT's PATENTS as specified in this Agreement and CENTIGRAM represents to
LUCENT that it has the right to license CENTIGRAM's PATENTS as specified in
this Agreement.
1.05 Joint Inventions
(a) There are countries (not including the United States) which
require the express consent of all inventors or their assignees to the
grant of licenses or rights under patents issued in such countries for
joint inventions.
(b) Each party shall give such consent, or shall obtain such consent
from its RELATED COMPANIES, its employees or employees of any of its
RELATED COMPANIES, as required to make full and effective any such licenses
and rights respecting any joint invention granted to the grantee hereunder
by such party and by another licensor of such grantee.
(c) Each party shall take steps which are reasonable under the
circumstances to obtain from third parties whatever other consents are
necessary to make full and effective such licenses and rights respecting
any joint invention purported to be granted by it hereunder. If, in spite
of such reasonable steps, such party is unable to obtain the requisite
consents from such third parties, the resulting inability of such party to
make full and effective its purported grant of such licenses and rights
shall not be considered to be a breach of this Agreement.
1.06 Publicity
Nothing in this Agreement shall be construed as conferring upon either
party or its RELATED COMPANIES any right to include in advertising,
packaging or other commercial activities related to a LICENSED PRODUCT, any
reference to the other party (or any of its RELATED COMPANIES), its trade
names, trademarks or service marks in a manner which would be likely to
cause confusion or to indicate that such LICENSED PRODUCT is in any way
certified by the other party hereto or its RELATED COMPANIES.
ARTICLE II
ROYALTY AND PAYMENTS
2.01 Initial Fee
[ * ] CENTIGRAM shall pay LUCENT after October 1, 1998 and before October
31, 1998 (but in no case sooner than 10 days after execution of this
Agreement by LUCENT), the sum of nine million, two hundred thousand United
States dollars (U.S. $9,200,000.00). This fee shall not be creditable with
respect to any additional payments due under Sections 2.02 and 4.02 and in
no event shall such fee or any portion thereof be refunded to CENTIGRAM.
2.02 Running Royalty [ * ]
2.03 Accrual
(a) Royalty shall accrue and become payable under Section 2.02 upon
the receipt of revenues for such product or service. Obligations to pay
royalties under Section 2.02 for time periods prior to any termination of
licenses and rights pursuant to Article III shall survive such termination
and the expiration of any patent.
(b) Royalties which have accrued under Section 2.02 but have not been
paid for any company which is a RELATED COMPANY of the acquired, separately
identifiable business and then ceases to be the same, shall become payable
with the next scheduled royalty payment under Section 2.02.
(c) Notwithstanding any other provisions hereunder, royalty shall
accrue and be payable only to the extent that enforcement of the obligation
to pay such royalty would not be prohibited by applicable law.
2.04 Records and Adjustments
(a) [ * ] to pay royalties under Section 2.02, hereinafter referred
to as "the Entity", shall keep full, clear and accurate records so as to
enable LUCENT to ascertain the proper royalty due thereunder. The Entity
shall retain such records with respect to each product for at least five
(5) years from the sale, lease or putting into use of such product. LUCENT
shall have the right through an independent, nationally recognized
accounting firm (hereinafter "auditors") to make an examination, during
normal business hours, but upon at least fourteen (14) calendar days
notice, of all records and accounts bearing upon the amount of royalty
payable to it under Section 2.02. LUCENT's right to have auditors inspect
the Entity's records and accounts shall be limited to one audit per
calendar year, unless the immediately previous audit revealed an
underpayment by the Entity of at least ten percent (10%) for the audited
period. Prompt adjustment shall be made to compensate for any errors or
omissions disclosed by such examination. The auditors must execute an
appropriate confidential information nondisclosure agreement (NDA) with the
Entity prior to its inspection of the Entity's records.
(b) Independent of any such examination, LUCENT will credit the Entity
against future royalty payments, provided there are any, the amount of any
overpayment of royalties made in error which is identified and fully
explained in a written notice to LUCENT delivered within five (5) years
after the due date of the payment which included such alleged overpayment,
provided that LUCENT is able to verify, to its own satisfaction, the
existence and extent of the overpayment.
(c) No refund, credit or other adjustment of royalty payments shall
be made by LUCENT except as provided in this Section 2.04. Rights conferred
by this Section 2.04 shall not be affected by any statement appearing on
any check or other document, except to the extent that any such right is
expressly waived or surrendered by a party having such right and signing
such statement.
2.05 Reports and Payments
(a) The provisions of Section 2.05 shall apply [ * ]
(b) Within sixty (60) days after each anniversary date of the end of
the SEMIANNUAL PERIOD that [ * ]
(i) [ * ]
(ii) [ * ]
(iii) [ * ]
(iv) the amount of royalty, if any, payable for the twelve
month period in (i).
If there are no [ * ] for the twelve month period, the statement shall show
that fact.
(c) Within such sixty (60) days the acquired, separately identifiable
business or the acquiring company shall pay in United States dollars to
LUCENT at the address specified in Section 4.03 the royalties payable in
accordance with such statement. Any conversion to United States dollars
shall be at the prevailing rate for bank cable transfers as quoted for the
last day of such semiannual period by leading United States banks in New
York City dealing in the foreign exchange market.
(d) If payment for a semiannual period is overdue, such payment shall
be subject to a late payment charge calculated at an annual rate of three
percentage points (3%) over the prime rate or successive prime rates quoted
for the last day of such semiannual period by leading U.S. banks in New
York City during delinquency. If the amount of such charge exceeds the
maximum permitted by law, such charge shall be reduced to such maximum.
ARTICLE III
TERMINATION
3.01 Breach
In the event of a breach of this Agreement by either party, the other party
may, in addition to any other remedies that it may have, at any time
terminate all licenses and rights granted by it hereunder by not less than
two (2) months' written notice specifying such breach, unless within the
period of such notice all breaches specified therein shall have been
remedied. Exercise of the right of either party to terminate this
Agreement pursuant to this Section 3.01 shall be subject to challenge in
accordance with Section 4.08, in which case the effectiveness of such
termination shall be determined by the Dispute Resolution process defined
in Section 4.08.
3.02 Voluntary Termination
By written notice to the other party, either party may voluntarily
terminate all or a specified portion of the licenses and rights granted to
it hereunder. Such notice shall specify the effective date (not more than
six (6) months prior to the giving of said notice) of such termination and
shall clearly specify any affected patent, invention or product.
3.03 Survival
(a) If a company ceases to be a RELATED COMPANY of a party, licenses
and rights granted hereunder with respect to patents of such company on
inventions made prior to the date of such cessation, shall not be affected
by such cessation.
(b) Any termination of licenses and rights of a party under the
provisions of this Article III shall not affect such party's licenses,
rights and obligations with respect to any LICENSED PRODUCT made prior to
such termination, and shall not affect the other party's licenses and
rights (and obligations related thereto) hereunder.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.01 Disclaimer
Neither party nor any of its SUBSIDIARIES makes any representations,
extends any warranties of any kind, assumes any responsibility or
obligations whatever, or confers any right by implication, estoppel or
otherwise, other than the licenses, rights and warranties herein expressly
granted.
4.02 [ * ]
4.03 Addresses
(a) Any notice or other communication hereunder shall be sufficiently
given to CENTIGRAM when sent by certified mail addressed to Centigram
Communications Corporation, 91 East Tasman Drive, San Jose, California
95134, Attn: President, or to LUCENT when sent by certified mail addressed
to Contract Administrator, Intellectual Property Business, Lucent
Technologies Inc., Suite 105, 14645 N.W. 77th Avenue, Miami Lakes, Florida
33014, United States of America. Changes in such addresses may be
specified by written notice.
(b) Payments by CENTIGRAM shall be made to LUCENT at Sun Trust, P.O.
Box 913021, Orlando, Florida, 32891-3021, United States of America.
Alternatively, payments to LUCENT may be made by bank wire transfers to
LUCENT's account: Lucent Technologies Licensing, Account No. 910-2-568475,
Swift Code: CHASUS33, ABA Code: 021000021, at Chase Manhattan Bank, N.A.,
55 Water Street, New York, New York 10041, United States of America.
Changes in such address or account may be specified by written notice.
4.04 Taxes
(a) CENTIGRAM shall bear all taxes, duties, levies, or similar charges
("taxes"), including interest and penalties thereon, however designated,
imposed as a result of the operation or existence of this Agreement,
including taxes which CENTIGRAM is required to withhold or deduct from
payments to LUCENT, except (i) any net income tax imposed upon LUCENT by
any governmental entity within the United States (the fifty (50) states and
the District of Columbia), and (ii) any tax imposed upon LUCENT by
jurisdictions outside the United States if such tax is allowable as a
credit against the United States income taxes of LUCENT or is actually
fully usable as a credit toward the income taxes of LUCENT in the
jurisdiction in which the tax is imposed. In order for the exception in
(ii) to be effective, CENTIGRAM must furnish to LUCENT evidence sufficient
to satisfy the United States or other country's taxing authorities that
such taxes have been paid. Such evidence must be furnished to LUCENT
within sixty (60) days of CENTIGRAM's actual receipt thereof from the local
taxing authority.
(b) If CENTIGRAM is required to bear a tax, duty, levy, or similar
charge pursuant to (a) above, CENTIGRAM shall pay such tax, duty, levy or
similar charge and any additional amounts as are necessary to ensure that
the net amounts received by LUCENT hereunder after all such payments or
withholdings equal the amounts to which LUCENT is otherwise entitled under
this Agreement as if such tax, duty, levy or similar charge did not apply.
4.05 Choice of Law
The parties are familiar with the principles of New York commercial law,
and desire and agree that the law of New York shall apply in any dispute
arising with respect to this Agreement.
4.06 Integration
This Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter hereof and merges all prior
discussions between them. Neither of the parties shall be bound by any
warranties, understandings or representations with respect to such subject
matter other than as expressly provided herein or in a writing signed with
or subsequent to execution hereof by an authorized representative of the
party to be bound thereby.
4.07 Outside the United States
(a) There are countries in which the owner of an invention is entitled
to compensation, damages or other monetary award for another's unlicensed
manufacture, sale, lease, use or importation involving such invention prior
to the date of issuance of a patent for such invention but on or after a
certain earlier date, hereinafter referred to as the invention's
"protection commencement date" (e.g., the date of publication of allowed
claims or the date of publication or "laying open" of the filed patent
application). In some instances, other conditions precedent must also be
fulfilled (e.g., knowledge or actual notification of the filed patent
application). The parties agree that (i) an invention which has a
protection commencement date in any such country may be used in such
country pursuant to the terms of this Agreement on and after any such date,
and (ii) all such conditions precedent are deemed satisfied by this
Agreement.
(b) There may be countries in which a party hereto may have, as a
consequence of this Agreement, rights against infringers of the other
party's patents licensed hereunder. Each party hereby waives any such
right it may have by reason of any third party's infringement or alleged
infringement of any such patents.
(c) CENTIGRAM hereby agrees to register or cause to be registered,
to the extent required by applicable law, and without expense to LUCENT or any
of its RELATED COMPANIES, any agreements wherein sublicenses are granted by
it under LUCENT's PATENTS. CENTIGRAM hereby waives any and all claims or
defenses, arising by virtue of the absence of such registration, that might
otherwise limit or affect its obligations to LUCENT.
4.08 Dispute Resolution
In the event a dispute or disagreement (hereinafter called "Dispute")
arises between the parties in connection with the interpretation of any
provision of this Agreement or the compliance or noncompliance therewith,
or the validity or enforceability thereof, or the performance or
nonperformance of either party to the Agreement, the following Dispute
resolution process shall be followed by the parties:
(a) A dispute will be deemed to have arisen upon the delivery of a
written "Dispute Notice" advising of the nature of the dispute. Upon such
delivery, the parties agree to attempt to resolve the Dispute in a prompt
and expeditious manner. Except for the Notice of Dispute, all
communications between the parties will be on a without prejudice basis.
(b) If the parties have not been able to resolve the Dispute in a
prompt and expeditious manner after delivery of the Dispute Notice, either
party may at any time thereafter request by written notice to the other
that the dispute be escalated to Senior Management.
(c) In the event a request is made under (b) hereinabove, each party
shall make available the senior executives specified in this subparagraph
who shall meet within fifteen (15) business days after such request is made
at the offices of the party which received the request to attempt to
resolve the Dispute. The Senior Management for each party is as follows:
Centigram Communications Corporation
Mr. Thomas Brunton
Chief Financial Officer
Lucent Technologies Inc.
Contract Manager
Intellectual Property Business
Either party may change the Senior Management appointee upon prior written
notice to the other.
(d) In case such Dispute is not settled amicable by Senior
Management within forty-five (45) days of escalation to Senior Management,
such Dispute will be arbitrated by an Arbitration Board acting in
accordance with the rules of The American Arbitration Association, whose
decision will be final and binding upon the parties. The Arbitration Board
will consist of the person or persons that the parties may agree on and in
default of agreement within twenty (20) days following the expiration of
the above-mentioned forty-five (45) day period, each of the parties in
dispute shall nominate one member to serve on the Arbitration Board and
shall give notice to the other party of the name of its nominee. If one
party fails to give this notice within the later of fifteen (15) days after
the other party has done so or sixty (60) days of escalation to Senior
Management, then the member nominated by the other party shall constitute
the Arbitration Board. If each party gives this notice, then the two
members so nominated by agreement shall select a third member who shall be
Chairman. If the original two members are unable to agree upon a third
member within thirty (30) days after the second notice has been given, then
either party may apply to a Judge of an appropriate Court of the
jurisdiction in which the arbitration will take place to appoint the third
member who shall be unconditionally accepted by both parties. The place of
arbitration for disputes for which arbitration is initiated by LUCENT will
be San Jose or Palo Alto, California (to be selected by CENTIGRAM) and the
place of arbitration for disputes for which arbitration is initiated by
CENTIGRAM will be New York, New York. Each member shall have knowledge of
and experience in the telecommunications and/or voice mail industry and
shall determine issues of arbitrability but may not limit, expand or
otherwise modify the terms of the agreement. The arbitration hearing will
commence within sixty (60) days after appointment of the Arbitration Board
is done.
(e) Expenses related to the compensation and expenses of the
Arbitration Board will be borne equally by the parties.
(f) Each party shall bear the cost of preparing its own case.
However, the Arbitration Board will have the right to include in the award
the prevailing party's costs of arbitration and reasonable fees of
attorneys, accountants, engineers and other professionals incurred by it in
connection with the arbitration.
(g) Any award made (i) shall be a holding for or against a party and
affording such remedy as is deemed equitable, just and within the scope of
the agreement; provided that any monetary award be accompanied by an
accounting summary sufficient to assure that the provisions of this
Agreement, including subsection (k) of this Section 4.08 set forth below,
have been followed; (ii) shall be without findings as to issues of patent
validity and/or infringement; (iii) may in appropriate circumstances (other
than patent disputes) include injunctive relief; (iv) shall be made within
four (4) months of the appointment of the arbitrators; and (v) may be
entered in any court of competent jurisdiction within the continental
United States.
(h) The requirement for mediation and arbitration shall not be deemed
a waiver of any right of termination under this Agreement and the
arbitrator is not empowered to act or make any award other than based
solely on the rights and obligations of the parties prior to any such
termination.
(i) The agreement shall be interpreted in accordance with the laws
of the State of New York exclusive of its conflict of laws provisions.
(j) A request by a party to a court for interim measures shall not
be deemed a waiver of the obligation to mediate and arbitrate.
(k) The arbitrator shall not have authority to award punitive or other
damages in excess of compensatory damages and each party irrevocably waives
any claim thereto.
(l) The parties, their representatives, other participants and the
mediator and arbitrator shall hold the existence, content and result of any
activities under this Section 4.08 in confidence except to the extent
required for enforcement of any award in a court of law or defense of such
court action alleging improprieties in the arbitration process.
4.09 Releases
(a) In consideration of [ * ] and other good and valuable
consideration paid by CENTIGRAM to LUCENT, and subject to the receipt
thereof, LUCENT, for itself and for its present RELATED COMPANIES, hereby
releases CENTIGRAM, its present RELATED COMPANIES, all of the present and
former directors of such companies, and all customers (purchasers and
users) of products of the kinds herein licensed as of the effective date
hereof to CENTIGRAM, from all claims, demands and rights of action which
LUCENT or any of its present RELATED COMPANIES may have on account of any
infringement or alleged infringement of any patent issued in any country of
the world by reason of the manufacture or any past or future use, lease,
sale or importation of any of such products which, prior to the effective
date hereof, were manufactured by or for, or used, furnished or imported by
CENTIGRAM or any of its present RELATED COMPANIES. The releases granted in
this Section 4.09(a) with respect to any of CENTIGRAM's present RELATED
COMPANIES cover any such company for all time periods prior to its becoming
a RELATED COMPANY of CENTIGRAM.
(b) CENTIGRAM, for itself and for its present RELATED COMPANIES,
hereby releases LUCENT, both in its present form and as part of AT&T Corp.,
LUCENT's present RELATED COMPANIES, all of the present and former directors
of such companies, and all customers (purchasers and users) of products of
the kinds herein licensed as of the effective date hereof to LUCENT, from
all claims, demands and rights of action which CENTIGRAM or any of its
present RELATED COMPANIES may have on account of any infringement or
alleged infringement of any patent issued in any country of the world by
reason of the manufacture or any past or future use, lease, sale or
importation of any of such products which, prior to the effective date
hereof, were manufactured by or for, or used, furnished or imported by
LUCENT, both in its present form and as part of AT&T Corp., or any of its
present RELATED COMPANIES. The releases granted in this Section 4.09(b)
with respect to any of LUCENT's present RELATED COMPANIES cover any such
company for all time periods prior to its becoming a RELATED COMPANY of
LUCENT.
4.10 Confidentiality
Neither party shall disclose any of the terms and conditions (including but
not limited to payments) of this Agreement without the written consent of
the other party, unless such disclosure is:
(i) in response to a valid order of a court or other governmental
body of the United States or any political subdivision thereof;
provided, however, that the disclosing party shall have given
prior notice to the other party and made a reasonable effort to
obtain a protective order requiring that the information so
disclosed be used only for the purposes for which the order was
issued; or
(ii) otherwise required by law, including but not limited to
disclosures required by securities laws or regulations; or
(iii) necessary to establish rights under this Agreement; or
necessary for use by outside accountants and legal counsel.
Notwithstanding (ii) and (iii), each party shall take reasonable steps to
preclude the release of the financial terms of this Agreement such as, for
example, filing this Agreement in confidence with the Securities and
Exchange Commission (SEC), and deleting the financial terms therefrom in
any copy, if any, made available to the public.
4.11 Counterparts
This Agreement may be executed in counterparts, which taken together shall
constitute one document.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in duplicate originals by its duly authorized representatives on
the respective dates entered below.
LUCENT TECHNOLOGIES INC.
By:
M. R. Greene
Vice President - Intellectual Property
Date:
CENTIGRAM COMMUNICATIONS CORPORATION
By:
Robert L. Puette
President
Date:
THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY
IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED
REPRESENTATIVES OF BOTH PARTIES.
DEFINITIONS APPENDIX
GENERAL DEFINITIONS:
[ * ]
CENTIGRAM's PATENTS means [ * ]
LICENSED PRODUCT means, as to any grantee, any product (including any
specified combination of other products) listed for such grantee in Section
1.01.
LIMITED PERIOD means the period commencing on the effective date of this
Agreement and having a duration of [ * ]
LUCENT's PATENTS means [ * ]
RELATED COMPANIES of a company are SUBSIDIARIES of the company and any
other company so designated in writing signed by LUCENT and CENTIGRAM.
SEMIANNUAL PERIOD of any year means a twenty-six (26) or twenty-seven (27)
week interval. The first SEMIANNUAL PERIOD of any year commencing thirteen
weeks before the Saturday closest to October 31st of that year and ending
thirteen weeks thereafter and the second SEMIANNUAL PERIOD of that year
commencing at the end of the first SEMIANNUAL PERIOD of that year and
ending thirteen (13) weeks after the Saturday closest to October 31st of
the next year.
[ * ]
SUBSIDIARY of a company means a corporation or other legal entity (i) the
majority of whose shares or other securities entitled to vote for election
of directors (or other managing authority) is now or hereafter controlled
by such company either directly or indirectly; or (ii) which does not have
outstanding shares or securities but the majority of whose ownership
interest representing the right to manage such corporation or other legal
entity is now or hereafter owned and controlled by such company either
directly or indirectly; but any such corporation or other legal entity
shall be deemed to be a SUBSIDIARY of such company only as long as such
control or ownership and control exists.
? Any term in capital letters which is defined in the Definitions Appendix shall
have the meaning specified therein.
[ * ] An asterisk indicates that certain material has been omitted pursuant to
an application for confidential treatment. The omitted material has been
separately filed with the Securities and Exchange Commission.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of October 24, 1997, by and between Centigram Communications
Corporation, a Delaware corporation (the "Company") and Robert L. Puette
(the "Employee").
R E C I T A L S
A. The Employee has been employed by the Company as the Company's
President and Chief Executive Officer.
B. The Company and the Employee desire to enter into this
Agreement to provide additional financial security and benefits to the
Employee as an inducement for Employee to be employed by the Company and
to encourage the Employee to continue his employment with the Company.
C. Certain capitalized terms used in the Agreement are defined in
Section 3 below.
A G R E E M E N T
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of the Employee by the Company,
the parties agree as follows:
1. Employment Relationship and Compensation.
(a) Subject to the terms and conditions hereof, the Employee
shall be employed as the Company's President and Chief Executive Officer
with all the duties, authority and responsibilities customary to such
positions. The Company and the Employee acknowledge that the Employee's
employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
the Employee shall not be entitled to any payments, benefits, damages,
awards or compensation other than as provided by this Agreement, or as may
otherwise be available in accordance with the Company's established
employee plans and policies at the time of termination.
(b) Employee's base salary shall initially be $340,000 per
year at $28,333.33 per month, paid bi-weekly. Employee shall also
participate in the Company's Executive Bonus Program pursuant to which
Employee shall be eligible to receive a bonus of at least fifty percent
(50%) of Employee's then current base salary upon achievement of one
hundred percent (100%) of target operating profits and corporate
objectives as determined by the Company's Board of Directors (the
"Board"). For fiscal year 1998 (November 1997 to October 1998), Employee
is guaranteed his bonus of at least $170,000 provided that he is an
employee at the end of such fiscal year, provided further that, in the
event Employee is Involuntarily Terminated other than for Cause during
such fiscal year, such guaranteed bonus shall be prorated to the
Termination Date. For fiscal year 1998, $85,000 of Employee's bonus shall
be paid promptly following the end of the Company's second fiscal quarter
and the remainder of Employee's bonus shall be paid promptly following the
end of the Company's fiscal year. As of the first date of his employment,
Employee shall also be granted an option to purchase 350,000 shares of the
Company's Common Stock. Such option shall vest over four (4) years with
twenty-five percent (25%) vesting one year after Employee's first date of
employment and the remaining shares shall vest monthly thereafter.
(c) Employee shall be eligible to participate in the
Company's Employee Benefit Program which presently includes medical,
dental, prescription, vision and hospital coverage, life insurance, long-
term disability income insurance, a 401(k) Plan and the Company's Employee
Stock Purchase Plan. Employee shall also receive $500 per month for car
allowance and reimbursement for tax preparation and an annual executive
physical exam.
2. Severance Benefits.
(a) Termination Not for Cause. Subject to Sections 4 and 5
below, if the Employee's employment with the Company terminates as a
result of Involuntary Termination other than for Cause at any time prior
to a Change of Control, then (i) the Employee shall be entitled to receive
a severance payment equal to one year of the Employee's base compensation
for the Company's fiscal year then in effect plus Employee's bonus
calculated at one hundred percent of target for the Company's fiscal year
then in effect and (ii) for the one year period commencing on the
Employee's Termination Date, Employee shall continue to receive at
Company's expense all benefits described in Section 1(c) hereof which are
provided to Employee on the Termination Date except participation in the
Company's 401(k) Plan and Employee Stock Purchase Plan. The Company may
satisfy the obligation to provide the foregoing benefits by a cash payment
to Employee equal to the reasonable cost to obtain equivalent benefits.
Any severance payments to which the Employee is entitled pursuant to
clause (i) of this Section 2(a) shall be paid to the Employee (or to the
Employee's estate or beneficiary in the event of the Employee's death) in
a lump sum within fifteen (15) days of the Employee's Termination Date.
(b) Termination as Part of or Following A Change of Control.
Subject to Sections 4 and 5 below, if the Employee's employment with the
Company terminates at any time within twelve months after a Change of
Control (or within sixty days prior to a Change in Control if such
termination is directly caused by such Change of Control) as a result of
Involuntary Termination other than for Cause, (i) the Employee shall be
entitled to receive a severance payment equal to the 1.5 times one year of
the Employee's base compensation for the Company's fiscal year then in
effect plus 1.5 times Employee's bonus calculated at one hundred percent
of target for the Company's fiscal year then in effect and (ii) for the
five hundred and forty day period commencing on the Employee's Termination
Date, Employee shall continue to receive at Company's expense all benefits
described in Section 1(c) hereof which are provided to Employee on the
Termination Date except participation in the Company's 401(k) Plan and
Employee Stock Purchase Plan. The Company may satisfy the obligation to
provide the foregoing benefits by a cash payment to Employee equal to the
reasonable cost to obtain equivalent benefits. Any severance payments to
which the Employee is entitled pursuant to clause (i) of this Section 2(b)
shall be paid to the Employee (or to the Employee's estate or beneficiary
in the event of the Employee's death) in a lump sum within fifteen (15)
days of the Employee's Termination Date.
(c) Voluntary Resignation; Termination For Cause. If the
Employee voluntarily resigns from the Company (other than as an
Involuntary Termination), or if the Company terminates the Employee's
employment for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be
established under the Company's then existing severance and benefits plans
and policies at the time of such resignation or termination.
(d) Disability; Death. If the Company terminates the
Employee's employment as a result of the Employee's Disability, or if the
Employee's employment terminates due to the death of the Employee, then
the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's
then existing severance and benefits plans and policies at the time of
such Disability or death.
(e) Options. Subject to Sections 4 and 5 below, (i) in the
event of a Change of Control, the unvested portion of any stock option(s)
held by the Employee under the Company's stock option plans which, were
the Employee to remain employed by the Company for all relevant periods,
would have vested and become exercisable at any time during the two years
following such Change in Control, shall, as of the date of such Change in
Control, immediately vest and become exercisable in full, and the Employee
shall have the right to exercise such additional vested portion of such
stock option(s) at such time; and (ii) in the event the Employee is
entitled to severance benefits pursuant to Section 2(b), then in addition
to any such severance benefits, the unvested portion of all stock
option(s) held by the Employee granted by the Company or any successor in
interest thereto shall, as of the Termination Date, immediately vest and
become exercisable in full, and the Employee shall have the right to
exercise such additional vested portion of such stock option(s) at such
time.
3. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities
as an employee and intended to result in substantial personal enrichment
of the Employee, (ii) conviction of a felony that is demonstrably
injurious to the Company, (iii) a willful act by the Employee which
constitutes gross misconduct and which is demonstrably injurious to the
Company, and (iv) continued violations by the Employee of the Employee's
obligations as an employee of the Company that are demonstrably willful
and deliberate on the Employee's part after there has been delivered to
the Employee a written demand for performance from the Company which
dearly describes the basis for the Company's belief that the Employee has
not substantially performed his duties and Employee has been given
fourteen (14) days to perform after receipt of such written demand.
(b) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:
(i) The acquisition by any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) (other than the
Company or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company) of the "beneficial
ownership" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%)
or more of the total voting power represented by the Company's then
outstanding voting securities; or
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of
the directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board with
the affirmative votes of at least a majority of the Incumbent Directors at
the time of such election or nomination; or
(iii) A merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the approval by
the stockholders of the Company of a plan of complete liquidation of the Company
or of an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
(c) Disability. "Disability" shall mean that the Employee
has been unable to substantially perform his duties under this Agreement
as the result of his incapacity due to physical or mental illness for at
least 26 weeks and such incapacity is determined to be total and permanent
by a physician selected by the Company or its insurers and acceptable to
the Employee or the Employee's legal representative (such Agreement as to
acceptability not to be unreasonably withheld).
d) Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(e) Involuntary Termination. "Involuntary Termination"
shall mean (i) without the Employee's express written consent, the
significant reduction of the Employee's duties, authority or
responsibilities relative to the Employee's duties, authority and
responsibilities granted by this Agreement; (ii) without the Employee's
express written consent, a substantial reduction, without good business
reasons, of the facilities and perquisites (including office space and
location) available to the Employee immediately prior to such reduction;
(iii) without the Employee's express written consent, a reduction by the
Company in the base compensation of the Employee as in effect immediately
prior to such reduction; (iv) a material reduction by the Company in the
kind or level of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that the Employee's
overall benefits package is significantly reduced; (v) the relocation of
the Employee to a facility or a location more than 30 miles from the
Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company
which is not effected for Disability or for Cause, or any purported
termination for which the grounds relied upon are not valid; or (vii) the
failure of the Company to obtain the assumption of this agreement by any
successors contemplated in Section 6 below.
(g) Termination Date. "Termination Date" shall mean (i) if
the Employee's employment is terminated by the Company for Death or
Disability, thirty (30) days after notice of termination is given to the
Employee (provided that, in the event of Disability, the Employee shall
not have returned to the performance of the Employee's duties on a
full-time basis during such thirty (30) day period), (ii) if the
Employee's employment is terminated by the Company for any other reason,
the date on which the Company delivers notice of termination to the
Company or such later date, not to exceed ninety (90) days, specified in
the notice of termination, or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers notice of termination to
the Company.
4. Limitation on Payments.
(a) In the event that the severance and other benefits
provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section 4 would be subject to the excise tax imposed by Section 4999
of the Code, then the Employee's severance benefits under Section 2 shall
be payable either (i) in full, or (ii) as to such lesser amount which
would result in no portion of such severance benefits being subject to
excise tax under Section 4999 of the Code, whichever of the foregoing
amounts, taking into account the applicable federal, state and local
income taxes and the excise tax imposed by Section 4999, results in the
receipt by the Employee on an after-tax basis, of the greatest amount of
severance benefits under this Agreement, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of
the Code.
(b) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Employee under the terms of this
Agreement is necessary to comply with the provisions of Section 4(a), the
Employee shall be entitled to select which payments or benefits will be
reduced and the manner and method of any such reduction of such payments
or benefits (including but not limited to the number of options that would
vest under Section 2(e)) subject to reasonable limitations (including, for
example, express provisions under the Company's benefit plans) (so long as
the requirements of Section 4(a) are met). Within thirty (30) days after
the amount of any required reduction in payments and benefits is finally
determined in accordance with the provisions of Section 4(c), the Employee
shall notify the Company in writing regarding which payments or benefits
are to be reduced. If no notification is given by the Employee, the
Company will determine which amounts to reduce. If, as a result of any
reduction required by Section 4(a), amounts previously paid to the
Employee exceed the amount to which the Employee is entitled, the Employee
will promptly return the excess amount to the Company. Subject to the
terms and conditions of this Section 4, in connection with any reduction
of benefits pursuant to Section 4(a), the Company will use its
commercially reasonable efforts to assist Employee in obtaining the
benefits to which Employee is entitled hereunder to the fullest extent
practicable.
(c) Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 4 shall be made in
writing by the Company's independent public accountants (the
"Accountants"), whose determination shall be conclusive and binding upon
the Employee and the Company for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may make
reasonable assumptions and approximations concerning applicable taxes and
may rely on reasonable, good faith interpretations concerning the
application of Sections 280G
and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may
reasonably request in order to make a determination under this Section.
The Company shall bear all costs the Accountants may reasonably incur in
connection with any calculations contemplated by this Section 4.
5. Certain Business Combinations. In the event it is determined
by the Board, upon receipt of a written opinion of the Company's
independent public accountants, that the enforcement of any Section or
subsection of this Agreement, including, but not limited to, Section 2(e)
hereof, which allows for the acceleration of vesting of options to
purchase shares of the Company's common stock upon a termination in
connection with a Change of Control, would preclude accounting for any
proposed business combination of the Company involving a Change of Control
as a pooling of interests, and the Board otherwise desires to approve such
a proposed business transaction which requires as a condition to the
closing of such transaction that it be accounted for as a pooling of
interests, then any such Section of this Agreement shall be null and void,
but only if the absence of enforcement of such Section would preserve the
pooling treatment. For purposes of this Section 5, the Board's
determination shall require the unanimous approval of the disinterested
Board members. In such event, if Employee is Involuntarily Terminated
other than for Cause within twelve months following such Change in
Control, Employee shall be retained as a consultant to the Company for two
years and be permitted to continue vesting of all stock options held by
the Employee on the Termination Date during such period, provided that,
nothing in this sentence shall require the Company (or any successor
thereto or acquirer thereof) to take any action which would result in such
entity incurring a material accounting expense for purposes of such
entity's financial statements as a result of such continued vesting.
6. Successors.
(a) Companys Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of
the Company's business and/or assets shall assume the obligations under
this Agreement and agree expressly to perform the obligations under this
Agreement in the same manner and to the same extent as the Company would
be required to perform such obligations in the absence of a succession.
For all purposes under this Agreement, the term "Company" shall include
any successor to the Company's business and/or assets which executes and
delivers the assumption agreement described in this Section 6(a) or which
becomes bound by the terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and
all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives,
executors, administrators, successors, heirs, devisees and legatees.
7. Notice.
(a) General. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by U. S.
registered or certified mail, return receipt requested and postage
prepaid. In the case of the Employee, mailed notices shall be addressed
to him at the home address which he most recently communicated to the
Company in writing. In the case of the Company, mailed notices shall be
addressed to its corporate headquarters, and all notices shall be directed
to the attention of its Chief Financial Officer.
(b) Notice of Termination. Any termination by the Company
for Cause or by the Employee as a result of an Involuntary Termination
shall be communicated by a notice of termination to the other party hereto
given in accordance with Section 7(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied
upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so
indicated, and shall specify the Termination Date (which shall be not more
than ninety (90) days after the giving of such notice). The failure by
the Employee to include in the notice any fact or circumstance which
contributes to a showing of Involuntary Termination shall not waive any
right of the Employee hereunder or preclude the Employee from asserting
such fact or circumstance in enforcing his rights hereunder.
8. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required
to mitigate the amount of any payment contemplated by this Agreement
(whether by seeking new employment or in any other manner), nor shall any
such payment be reduced by any earnings that the Employee may receive from
any other source.
(b) Waiver. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or
discharge is agreed to in writing and signed by the party hereto whose
interests are adversely affected thereby (provided that Employee may not
sign on behalf of the Company for such purpose). No waiver by either
party of any breach of, or of compliance with, any condition or provision
of this Agreement by the other party shall be considered a waiver of any
other condition or provision or of the same condition or provision at
another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied)
which are not expressly set forth in this Agreement have been made or
entered into by either party with respect to the subject matter hereof.
This Agreement shall replace and supersede any prior agreement between the
parties hereto relating to the accrual of any benefits to the Employee in
connection with a change in control or organic change to the Company or
the cessation of Employee's employment relationship with the Company
(other than stock option agreements, if any, but including, without
limitation, that certain letter agreement pursuant to which the Company
offered Employee the position of President and Chief Executive Officer of
the Company dated on or about September 24, 1997) and all such agreements
shall henceforth be void and of no further force and effect.
(d) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the
laws of the State of California.
(e) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(f) Arbitration. Any dispute or controversy arising out of,
relating to or in connection with this Agreement shall be settled
exclusively by binding arbitration in San Jose, California, in accordance
with the California Code of Civil Procedure section 1280 et seq., as
amended, including, but not limited to, sections 1283, 1283.05 and 1283.1,
such that the full degree of discovery permitted under the aforementioned
statutes will be allowed in any dispute hereunder. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. The
prevailing party shall be awarded its counsel fees and expenses, including
costs of arbitration. Punitive damages shall not be awarded.
(g) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to
option or assignment, either by voluntary or involuntary assignment or by
operation of law, including (without limitation) bankruptcy, garnishment,
attachment or other creditor's process, and any action in violation of
this Section 8(g) shall be void.
(h) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and
employment taxes.
(i) Assignment by Company. The Company may assign its
rights under this Agreement to an affiliate, and an affiliate may assign
its rights under this Agreement to another affiliate of the Company or to
the Company; provided, however, that no assignment shall be made if the
net worth of the assignee is less than the net worth of the Company at the
time of assignment. In the case of any such assignment, the term
"Company" when used in a section of this Agreement shall mean the
corporation that actually employs the Employee.
(j) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(k) Attorney's Fees. The Company shall reimburse Employee
for his reasonable attorney's fees incurred in connection with this
Agreement, up to a maximum of $3,500.
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as
of the day and year first above written.
COMPANY:
CENTIGRAM COMMUNICATIONS CORPORATION
By:
/s/ D. O. Morton
Title: Chairman
EMPLOYEE:
/s/ Robert L. Puette
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF REGISTRANT
Centigram Asia Limited
Centigram Australasia Pty Limited
Centigram Communications (Barbados), Inc.
Centigram Europe B.V.
Centigram UK Limited
TTCI Acquisition Corp.
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 333-56469, 33-43726, 33-98484, 333-4215, 333-4217, 333-
21051, and 333-41831) pertaining to the Amended and Restated 1987 Stock
Option Plan, 1991 Employee Stock Purchase Plan, the 1995 Nonstatutory Stock
Option Plan, 1997 Stock Plan and Stock Option Agreements of Centigram
Communications Corporation of our report dated November 24, 1998, with
respect to the consolidated financial statements and schedule of Centigram
Communications Corporation included in the Annual Report (Form 10-K) for
the year ended October 31, 1998.
/s/ Ernst & Young LLP
San Jose, California
January 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the year ended October 31, 1998 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> OCT-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 23,430
<SECURITIES> 33,760
<RECEIVABLES> 16,485
<ALLOWANCES> 1,919
<INVENTORY> 5,297
<CURRENT-ASSETS> 78,798
<PP&E> 40,294
<DEPRECIATION> 33,641
<TOTAL-ASSETS> 95,977
<CURRENT-LIABILITIES> 30,769
<BONDS> 0
0
0
<COMMON> 90,625
<OTHER-SE> (25,417)
<TOTAL-LIABILITY-AND-EQUITY> 95,977
<SALES> 77,587
<TOTAL-REVENUES> 77,587
<CGS> 37,653
<TOTAL-COSTS> 37,653
<OTHER-EXPENSES> 68,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,795)
<INCOME-TAX> 379
<INCOME-CONTINUING> (12,174)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,174)
<EPS-PRIMARY> ($1.77)
<EPS-DILUTED> ($1.77)
</TABLE>
