SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the quarterly period ended January 29, 2000
Commission File Number 0-19558
CENTIGRAM COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2418021
(State of incorporation) (I.R.S. Employer
Identification Number)
91 East Tasman Drive
San Jose, California 95134
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 944-0250
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
The number of outstanding shares (not including treasury shares) of the
Registrant's Common Stock as of February 25, 2000 was 6,090,000.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Centigram Communications Corporation
Condensed Consolidated Balance Sheets
January 29, October 30,
(In thousands, except share and per share data) 2000 1999
- ---------------------------------------------- ------------ -----------
(Unaudited) (Note)
Assets
Current Assets:
Cash and cash equivalents .................... $ 24,249 $ 10,563
Short-term investments ....................... 31,033 34,135
Trade receivables, net ....................... 11,328 16,829
Inventories .................................. 2,491 2,342
Other current assets ......................... 1,319 1,378
-------- --------
Total current assets ...................... 70,420 65,247
Property and equipment, net ...................... 3,793 4,062
Intangible assets, net ........................... 4,960 5,233
Deposits and other assets ........................ 3,906 4,212
-------- --------
$ 83,079 $ 78,754
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ............................. $ 3,234 $ 3,866
Accrued compensation ......................... 3,546 4,229
Deferred income .............................. 2,753 3,385
Accrued expenses and other
liabilities ................................ 6,194 6,500
Warranty and retrofit reserves ............... 1,874 1,945
-------- --------
Total current liabilities ................. 17,601 19,925
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value,
1,000,000 authorized; none
outstanding ............................... -- --
Common stock, $.001 par value,
25,000,000 authorized; 7,171,000
outstanding and capital in
excess of par value ....................... 90,102 90,235
Treasury stock, 1,092,000 and
1,206,000 shares, at cost ................. (11,674) (12,915)
Accumulated deficit .......................... (17,259) (18,451)
Accumulated other comprehensive
income .................................... 4,309 (40)
-------- --------
Total stockholders' equity ................ 65,478 58,829
-------- --------
$ 83,079 $ 78,754
======== ========
Note: The balance sheet at October 30, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. See accompanying notes.
<PAGE>
Centigram Communications Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Quarters Ended
---------------------------
January 29, January 30,
(In thousands, except per share data) 2000 1999
- ----------------------------------------------- ------------ ------------
Net revenue ................................... $ 19,014 $ 20,233
Cost and expenses:
Cost of goods sold ........................ 5,943 8,934
Research and development .................. 3,620 4,153
Selling, general and
administrative .......................... 8,666 8,320
-------- --------
Total cost and expenses ............... 18,229 21,407
-------- --------
Operating income (loss) ....................... 785 (1,174)
Other income and expense, net ................. 709 590
-------- --------
Income (loss) before income taxes ............. 1,494 (584)
Provision for income taxes .................... 302 95
-------- --------
Net income (loss) ............................. $ 1,192 $ (679)
======== ========
Basic income (loss) per share ................. $ 0.20 $ (0.10)
======== ========
Diluted income (loss) per share ............... $ 0.18 $ (0.10)
======== ========
Shares used for basic income
(loss) per share ............................ 6,009 6,572
======== ========
Shares used for diluted income
(loss) per share ............................ 6,608 6,572
======== ========
See accompanying notes.
<PAGE>
Centigram Communications Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Quarters Ended
--------------------------
January 29, January 30,
(In thousands) 2000 1999
- -------------------------------------------------- ------------ ------------
Cash and equivalents, beginning of period ........ $ 10,563 $ 23,430
------------ ------------
Cash flows from operations:
Net income (loss) ............................ 1,192 (679)
Depreciation and amortization ................ 1,043 1,574
Trade receivables, net ....................... 5,501 1,053
Inventories .................................. (149) 1,091
Other assets ................................. 348 160
Accounts payable ............................. (632) (571)
Patent settlement payable .................... -- (9,200)
Accrued expenses and other
liabilities ................................ (1,692) (640)
------------ ------------
5,611 (7,212)
------------ ------------
Cash flows from investing:
Purchase of short-term investments ........... (6,551) (21,320)
Proceeds from sale and maturities
of short-term investments .................. 14,036 17,947
Purchase of property and equipment ........... (535) (204)
------------ ------------
6,950 (3,577)
------------ ------------
Cash flows from financing:
Proceeds from sale of common stock ........... 1,252 342
Purchase of treasury shares .................. (144) (505)
Other assets ................................. 17 --
------------ ------------
1,125 (163)
------------ ------------
Net change in cash and equivalents ............... 13,686 (10,952)
------------ ------------
Cash and equivalents, end of period .............. $ 24,249 $ 12,478
============ ============
See accompanying notes.
<PAGE>
Centigram Communications Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit and reflect all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
to reflect a fair statement of the consolidated results for the interim periods.
For further information, refer to the audited Consolidated Financial Statements
and footnotes included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 30, 1999. The results of operations for the three
month period ended January 29, 2000 may not necessarily be indicative of the
results for the fiscal year ending October 28, 2000 or any future period.
Inventories
Inventories consisted of:
(In thousands) January 29, 2000 October 30, 1999
---------------------------------- ---------------- ----------------
Raw materials ............................ $ 704 $ 505
Work-in-process .......................... 1,156 1,134
Finished goods ........................... 631 703
-------- --------
$2,491 $2,342
======== ========
Income (Loss) Per Share
Basic and diluted earnings per share are computed using the weighted
average number of common shares outstanding during the period. In computing
diluted earnings per share in periods with income, the dilutive effect of
options are also included in the per share computation. Options to purchase
approximately 44,000 shares of common stock were outstanding during the quarter
ended January 29, 2000 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. The details of these computations are as follows:
Quarters Ended
----------------------------
January 29, January 30,
(In thousands, except per share data) 2000 1999
- ------------------------------------------------ ------------ -----------
Net income (loss) ............................... $ 1,192 $ (679)
======= ========
Weighted average shares outstanding ............. 6,009 6,572
Effect of dilutive securities:
Shares issued upon exercise of
dilutive outstanding stock
options ..................................... 599 --
------- -------
Adjusted weighted average shares ................ 6,608 6,572
======= ========
Basic income (loss) per share ................... $ 0.20 $ (0.10)
======= ========
Diluted income (loss) per share ................. $ 0.18 $ (0.10)
======= ========
<PAGE>
Comprehensive Income (Loss)
In the first quarter of fiscal 1999, the Company adopted the Statement on
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however adoption of this Statement had
no impact on the Company's net income or shareholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments to be included in other comprehensive
income rather than as a separate component of shareholders' equity.
The following are the components of comprehensive income (loss), net of
related tax:
Quarters Ended
--------------------------
January 29, January 30,
(In thousands) 2000 1999
- ---------------------------------------- ------------ -----------
Net income (loss) ................................ $ 1,192 $ (679)
Unrealized gain (loss) on investments ............ 4,383 (63)
Foreign currency translation adjustment .......... (34) (23)
------------ -----------
$ 5,541 $ (765)
============ ===========
The following are the components of accumulated other comprehensive income:
January 29, October 30,
(In thousands) 2000 1999
- ---------------------------------------- ------------ -----------
Unrealized gain on investments ................... $ 4,464 $ 81
Foreign currency translation adjustment .......... (155) (121)
------- -------
$ 4,309 $ (40)
======= =======
Pledge of Treasury Stock to Credit Bancorp
In August 1999 the Company entered into a line of credit agreement ("Credit
Agreement") with Credit Bancorp, N.V. Pursuant to this Credit Agreement the
Company pledged 900,000 shares of its treasury stock as security for borrowings
under this credit facility. The Company terminated this agreement in December
1999. Legal Proceedings (See Part II, Item 1.) for a description of the
circumstances resulting in the termination of this Credit Agreement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements regarding
future events or the future financial performance of Centigram that involve
risks and uncertainties. These statements include but are not limited to
statements related to changes in Centigram's research and development and
selling, general and administrative expenses, Centigram's effective tax rate,
Centigram's expenditures for capital equipment, and the sufficiency of
Centigram's cash reserves. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations under "Certain Trends and
Uncertainties," and elsewhere herein.
Centigram designs, manufactures and markets unified communications,
messaging, Internet- and WAP-enabled call management services to wireless,
wireline and Internet service providers. 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, paging systems and IP gateways.
Such systems are used for switching telephone calls and integrating voice and
data messaging in a variety of service provider environments. In addition,
Centigram systems located at different sites can be linked together in a digital
network.
Results of Operations
Net revenue for the first quarter of fiscal 2000 was $19.0 million, which
was 6% lower than net revenue for the corresponding quarter of fiscal 1999. The
decrease in net revenue from the first quarter of 1999 reflects lower sales of
upgrades and expansion products. This decrease was offset in part by higher
sales of custom software development revenue. The Company recognized in the
first quarter of fiscal 2000 approximately $1.0 million of revenue on a sales
transaction that was previously deferred due to a financing arrangement. Sales
to international customers were 42% of revenues for the first quarter as
compared to 39% in the similar period of 1999.
Gross margin was 68.7% and 55.8% of net revenue in the first quarters of
2000 and 1999, respectively. This 12.9% increase from the prior year's first
quarter reflects improved margins in large systems and upgrade and expansion
products due to increased software content in these products which favorably
improves gross margins and the higher prices of these products in the current
quarter. See "Certain Trends and Uncertainties."
Research and development ("R&D") expenses decreased 13% in the first
quarter of 2000 as compared to the corresponding quarter of 1999 and represented
19% and 21% of net revenue, respectively. This year over year decrease reflects
reduced prototype expense and lower depreciation expenses. The Company believes
that ongoing development of new products and features is required to maintain
and enhance its competitive position and accordingly, the Company expects to
continue to invest in R&D.
Selling, general and administrative ("SG&A") expenses increased 4% in the
first quarter of 2000 as compared to the corresponding quarter of fiscal 1999
and represented 46% and 41% of net revenue, respectively. This change reflects
increased salaries and related headcount expenses in sales and marketing.
Other income and expense, net was $0.7 million and $0.6 million for the
first quarter of 2000 and 1999, respectively. Other income and expense, net, is
composed primarily of interest income on investments and foreign currency
transaction gains and losses. The increase in year over year balances was
primarily due to increases in interest income on investments.
For fiscal year 2000, the Company recorded a provision for income taxes at
an effective tax rate of 20%. The rate is lower than the statutory rate due to
recognition of previously unrecognized benefits of net operating loss
carryforwards. The Company recorded a provision for income taxes for the first
quarter of fiscal 2000 and 1999 for anticipated foreign income tax liabilities.
No income tax benefits were recorded for the losses incurred in fiscal years
2000 and 1999 because realization of the deferred tax asset arising as a result
of the losses sustained is dependent upon future taxable income, the amount and
timing of which are uncertain. Accordingly, a valuation allowance has been
established to fully offset the deferred tax asset other than that which
represents potentially refundable taxes.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments at January 29, 2000
were $55.3 million, increasing $10.6 million from the year-end balance of $44.7
million.
For the first three months ended January 29, 2000 the net cash generated
from operating activities was $5.6 million. Short-term investments increased
approximately $4.4 million from year-end because of the mark to market
adjustment of the Company's common stock and warrants in InfoInterActive Inc.
("IIA") as of January 29, 2000. Trade receivables decreased $5.5 million from
the year-end balance and days sales outstanding (computed using quarterly
revenues) were 54 days in the first quarter as compared to 72 days at end of
fiscal 1999. This decrease in trade receivables and decrease in days sales
outstanding was primarily due to improved linearity of shipments during the
first quarter versus the fourth quarter and improved collections from domestic
customers during the quarter. Inventory levels at January 29, 2000 were $0.1
million higher than the year-end balance. The Company expects investments in
receivables and inventories will continue to represent a significant portion of
working capital.
During the three months ended January 29, 2000, the Company made capital
expenditures of approximately $0.5 million. These expenditures consisted
primarily of purchases of computer equipment, software, and engineering lab
equipment. The Company currently expects to spend approximately $3.0 to $4.0
million for capital equipment during fiscal 2000, although actual expenditures
may differ from this forecast. In addition, the Company's Board of Directors has
authorized a stock repurchase program whereby up to 2,500,000 shares of its
Common Stock may be repurchased in the open market from time-to-time. During the
first quarter of fiscal 2000 the Company purchased approximately 15,000 shares.
The Company has purchased approximately 1,676,000 shares under this program at a
total cost of approximately $18.7 million. The Company may, in its discretion,
purchase additional shares under this program during fiscal 2000.
The Company's principal sources of liquidity as of January 29, 2000
consisted of $55.3 million of cash and cash equivalents and short-term
investments. The Company presently believes, notwithstanding its accumulated
deficit, that its existing cash and short-term investments will be sufficient to
support the Company's working capital, capital equipment purchase requirements,
and stock repurchase program at least through fiscal 2000.
Certain Trends and Uncertainties
The Company has in the past experienced and will likely in the future
experience substantial fluctuations in quarterly operating results. The Company
generally has no long-term order commitments from its customers, and a
significant portion of bookings and shipments in any quarter have historically
occurred near the end of the quarter. Accordingly, the Company has historically
operated with very little backlog, and net revenue has been difficult to
predict. In addition, the portion of backlog shippable in the next quarter
varies over time. As a result, revenue in future quarters will depend largely on
the level of orders received during such quarters.
If new order bookings do not meet expected levels, or if the Company
experiences delays in shipments at the end of a quarter, operating results will
be adversely affected, and these developments may not become apparent to the
Company until near or at the end of a quarter. Net revenue can also be affected
by product sales mix, distribution mix, the size and timing of customer orders
and shipments, customer returns and reserves provided therefor, competitive
pricing pressures, the effectiveness of key distributors and the Company's sales
force in selling the Company's products, changes in distributor inventory
levels, the ability of the Company's joint marketing partners to ship products
during the quarter, the timing of new product introductions by the Company and
its competitors, regulatory approvals, and the availability of components for
the Company's products, each of which is difficult to predict accurately. Each
of such factors has in the past affected the Company's revenue. The Company has
in the past experienced higher than usual headcount turnover, which has had an
adverse effect on the Company's booking levels. There can be no assurance that
such turnover will not continue in future periods. Any failure by the Company to
attract, retain and train additional sales and other personnel could have a
material adverse effect on the Company's business and results of operations.
A significant portion of the Company's net revenue is attributable to a
limited number of customers. The Company's top five customers accounted for
approximately 44% and 58% of the Company's net revenue in the first quarter of
fiscal 2000 and 1999, respectively, although the Company's five largest
customers were not the same in the two periods. Any material reduction in orders
from one or more of such customers or the cancellation or deferral of any
significant portion of backlog could have an adverse effect on net revenue and
operating results. Such concentration of sales typically results in a
corresponding concentration of accounts receivable. Although the Company has
established reserves for uncollectible accounts, the inability of any large
customer to pay the Company could have a material adverse impact on the
Company's financial position, results of operations and cash flows.
Approximately 42% of the Company's sales in the first fiscal quarter ended
January 29, 2000 consisted of sales outside of the United States. The Company's
international sales are subject to a number of additional risks generally
associated with international sales, including the effect on demand for the
Company's products in international markets as the results of any strengthening
or weakening of the U.S. dollar, the effect of currency fluctuations on
consolidated multinational financial results, state imposed restrictions on the
repatriation of funds, import and export duties and restrictions, the need to
modify products for local markets, and the logical difficulties of managing
multinational operations. In particular, the Company's sales in Asia and Latin
American have been adversely affected in recent quarters by financial
difficulties in these regions and may be so adversely affected in the future.
The Company's gross margin can be affected by a number of factors,
including changes in product configuration and mix including the volume of OEM
products, distribution channel and customer mix, cost and availability of parts
and components, royalty obligations to suppliers of licensed software,
provisions for warranty, retrofits, and excess and obsolete inventory, customer
returns, and competitive pressures on pricing. The Company has experienced
increasing competitive pricing pressure in its markets and expects this pricing
pressure to continue. Further, distributors purchase products at discounts, and
the Company's margins can therefore vary depending upon the mix of distributor
and direct end user sales in any particular fiscal period. While the Company
anticipates that its sales mix will continue to fluctuate in future periods, the
Company anticipates selling an increasing percentage of sales through direct
sales rather than through distribution.
The Company's future success will depend in part upon the ability of the
Company to continue to introduce new features and products as the Company's
markets evolve, new technologies become available, and customers demand
additional functionality. The Company's competitors continue to add
functionality to their products, and any failure by the Company to introduce in
a timely manner new products and features that meet customer requirements would
adversely affect the Company's operating results and cash flows. The Company's
ability to develop such new features and products depends in large measure on
its ability to hire and retain qualified technical talent and outside
contractors in highly competitive markets for such services. There can be no
assurance that the Company's product development efforts will be successful, or
that it will be able to introduce new products in a timely manner. Any material
additional delays in the introduction and market acceptance of such products
would be adverse to the Company's business. Moreover, customers' expectations of
the introduction of new products by the Company or its competitors can adversely
affect sales of current products. In addition, upon the introduction of new
products, the Company could be subject to higher customer returns with respect
to prior generations of products, which could adversely affect the Company's
financial position, operating results and cash flows.
The Company presently uses third parties to perform printed circuit board
and subsystem assembly. In addition, although the Company has not experienced
significant problems with third-party manufacturers in the past, there can be no
assurance that such problems will not develop in the future. Although the
Company generally uses standard parts and components for its products, certain
microprocessors, line cards, application cards and other semiconductor devices
and other components are available from sole sources. Other components,
including power supplies, disk drives, certain other semiconductor devices and
subcontracted line card assemblies, are presently available or acquired from a
single source or from limited sources. The Company has been notified by
suppliers that certain components will no longer be manufactured. To date, the
Company has been able to obtain adequate supplies of these components in a
timely manner from existing sources or, when necessary, from alternative sources
of supply although such alternatives have resulted in increased costs to the
Company. However, the inability to develop such alternative sources if and as
required in the future, to obtain sufficient sole or limited source components
as required, or to locate alternatives to discontinued parts would have a
material adverse affect on the Company's operating results and cash flows. In
addition, the Company's products are dependent on the QNX software operating
system, a multitasking, real-time operating system for Intel
microprocessor-based computers. In future periods, the Company's products may
become increasingly dependent on software licensed from third party suppliers.
There can be no assurance such licenses will continue to be available to the
Company as needed or at commercially reasonable prices.
In addition, a number of other companies, including competitors of the
Company, hold patents in the same general area as the technology used by the
Company. The Company from time to time has received, and may receive in the
future, letters alleging infringement of patent rights by the Company's
products. For example, in December 1997, representatives of Lucent informed the
Company that they believed that the Company's products may infringe upon certain
patents issued to Lucent, and that Lucent was seeking compensation for any past
infringement by the Company. The Company evaluated the assertions of Lucent, and
in October 1998 settled with Lucent by signing an intellectual property
cross-licensing agreement and in November 1998 paid Lucent $9.2 million. Third
party companies alleging infringement could seek an injunction prohibiting the
Company from selling some or all of its products, which would have an immediate,
adverse impact in the Company's business, financial condition and results of
operations. There can be no assurance that the Company would prevail in any
litigation to enjoin the Company from selling its products on the basis of such
alleged infringement, or that the Company would be able to license any valid and
infringed patents on reasonable terms, or at all. In October 1998, CASA, a
distributor of the Company, brought suit against the Company alleging wrongful
termination of their distribution agreement and other claims. In October 1999,
the Company settled this dispute by agreeing to pay CASA $700,000, including
past due commissions on prior sales. This amount was accrued as of October 30,
1999 and was paid in the first quarter of fiscal 2000.
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 completed and tested its critical systems with the help of
outside consultants and contractors. These activities encompassed all major
categories of systems in use by the Company, including network and
communications infrastructure, manufacturing, sales, customer service, finance
and administration. As of January 29, 2000, all critical systems are considered
by the Company to be year 2000 capable. The Company has also worked with its
critical suppliers of products to determine that the suppliers' operations and
the products they provide are year 2000 capable. The Company has received
responses from its critical suppliers that they are year 2000 capable. In
addition, the Company has completed a contingency plan to address potential
problem areas with internal systems and with suppliers and other third parties.
The Company also has a program to assess the capability of its products to
handle the year 2000. 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 Company believes that its
products are year 2000 capable. 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.
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. There can be no assurance
that the failure to ensure year 2000 capability by a supplier or another third
party would not have a material adverse effect on the Company.
In April 1998 the Company entered into an Agreement for Purchase and Sale
of Assets with Mitel, Inc. and Mitel Corporation (collectively, "Mitel")
providing for the purchase by Mitel of the Company's customer premises equipment
("CPE") business. Pursuant to this agreement, the Company has agreed, until May
of 2001, not to compete with Mitel in the CPE business. As a result, the Company
is unable to sell its equipment or services to certain customers, which could
adversely affect the Company's business, financial condition and results of
operations.
In recent years, stock markets have experienced extreme price and volume
trading volatility. This volatility has had a substantial effect on the market
prices of securities of many high technology companies for reasons frequently
unrelated to the operating performance of the specific companies. These broad
markets fluctuations may adversely affect the market price of the Company's
common stock. In addition, the trading price of the Company's common stock could
be subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of new products or technological innovations by
the Company or its competitors, and general conditions in the computer and
communications industries.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
PLEDGE OF TREASURY STOCK TO CREDIT BANCORP
In August 1999 the Company entered into a credit facility with Credit
Bancorp, N.V. Pursuant to the credit facility, the Company pledged 900,000
shares of its treasury stock to Credit Bancorp as security for borrowings under
the credit facility. Credit Bancorp agreed that the Centigram treasury shares
were to be placed in a trust account and were not to be sold, pledged, margined
or otherwise transferred.
In November 1999 the Securities and Exchange Commission commenced a civil
action against Credit Bancorp and certain entities and individuals affiliated
with it, alleging numerous violations of the federal securities laws relating to
Credit Bancorp's "insured credit facility program." The SEC alleges that the
Credit Bancorp defendants induced investors to place restricted securities in
trust accounts with Credit Bancorp, which securities Credit Bancorp improperly
either sold or used to obtain margin loans and converted the proceeds. While the
Company is not identified as an investor in the SEC complaint, the Credit
Bancorp credit facility entered into by the Company is similar to the "insured
credit facility" described in the SEC complaint and the SEC recognizes the
Company as an investor in the insured credit facility program. In connection
with its action against the Credit Bancorp defendants, the SEC has subpoenaed
the Company to produce all documents relating to its Credit Bancorp credit
facility. The Company has and intends to cooperate fully with the SEC.
Contrary to the express terms of the credit facility, Credit Bancorp placed
the Centigram treasury shares in margin accounts and these treasury shares
secure outstanding margin loans. In December 1999 the Company terminated the
Credit Bancorp credit facility and demanded the return of the treasury shares.
The Company did not borrow any funds under the Credit Bancorp credit facility.
Upon the request of the SEC, the United States District Court for the
Southern District of New York issued a temporary restraining order against the
Credit Bancorp defendants prohibiting any further violation of the federal
securities laws. The court also froze the assets of the Credit Bancorp
defendants, including the Centigram treasury shares. The court appointed a
receiver, who is authorized to take control of Credit Bancorp's funds, assets
and property and to take any action necessary and appropriate to preserve and
prevent the dissipation of Credit Bancorp's assets. The receiver has reported to
the Company that none of the 900,000 treasury shares has been sold by Credit
Bancorp and that all Centigram treasury shares remain in Credit Bancorp
brokerage accounts. Under the court's order, the receiver may not sell any
securities deposited by Credit Bancorp customers, including the Company's
treasury shares, without the approval of the Court after notice to all Credit
Bancorp customers.
The receiver has advised the court and all Credit Bancorp customers that he
believes that as of November 30, 1999 Credit Bancorp had approximately
$183,000,000 in assets and that the shortfall between the aggregate amount
invested by all Credit Bancorp customers and available assets is approximately
$50,000,000. Based upon the SEC's prior practice, it is likely that the SEC will
request the court to allocate the available assets pro rata among all the Credit
Bancorp customers. In that event, the Company may have to bear a portion of the
aggregate loss suffered by the Credit Bancorp customers even though none of the
treasury shares has been sold. The Company will request the court to direct the
receiver to return the Centigram treasury shares without any contribution or
other payment by the Company. The Company cannot predict with any certainty
whether the court will grant its request for the return of the treasury shares.
Any shortfall between the aggregate amount invested by Credit Bancorp
customers and available Credit Bancorp assets may be reduced by the availability
of insurance. Credit Bancorp maintained insurance policies through Lloyd's of
London that may provide coverage for some or all of the losses. The receiver has
made a claim against these insurance policies. The insurers, however, have
responded that coverage is not available under the policies. It is likely that
the issue of insurance coverage will have to be resolved through litigation. The
receiver intends to retain counsel to pursue the interests of Credit Bancorp and
its customers against the insurers. It is uncertain, however, whether the
receiver will prevail in any such litigation, whether the insurance would cover
all losses and when insurance proceeds would be available. Any shortfall may
also be reduced to the extent the SEC is able to recover from the individual
defendants any proceeds from the improper sales and margin loans. However, it is
not possible to predict with any certainty whether the SEC will be successful in
recovering any proceeds from the individual defendants.
Given the uncertainties relating to the aggregate amount of the loss
suffered by, and the assets available to satisfy the claims of, Credit Bancorp
customers, including the availability of insurance, and the actions the court
may take with respect to the distribution of the available assets, the Company
cannot predict with any certainty whether it will be required to bear a portion
of the aggregate loss suffered by Credit Bancorp customers. If the Company does
not fully recover its treasury shares, it is anticipated that such loss will be
reflected within stockholders' equity and, possibly, as a reduction in per share
earnings available for common shareholders.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative information about market risk was addressed in
Item 7A of the Company's Form 10-K for the fiscal year ended October 30, 1999.
There has been no material change to that information required to be disclosed
in this Form 10-Q filing.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTIGRAM COMMUNICATIONS CORPORATION
(Registrant)
Date: March 7, 2000 By /s/ Robert L. Puette
-------------------------------------
Robert L. Puette
President and Chief Executive Officer
Date: March 7, 2000 By /s/ Thomas E. Brunton
-------------------------------------
Thomas E. Brunton
Sr. Vice President and
Chief Financial Officer
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<PERIOD-START> OCT-31-1999
<PERIOD-END> JAN-29-2000
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