-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K5GAFSa+odBeOdpn15YbaSTZnklEXUpxNklAWCVEEAY3fhDbtM0ITpbz8nwEQSQk viqHhNfUGB4U0WvWwigx6w== 0000877908-98-000002.txt : 19980126 0000877908-98-000002.hdr.sgml : 19980126 ACCESSION NUMBER: 0000877908-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971101 FILED AS OF DATE: 19980123 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTIGRAM COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000877908 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942418021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19558 FILM NUMBER: 98512076 BUSINESS ADDRESS: STREET 1: 91 EAST TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089440250 MAIL ADDRESS: STREET 1: 91 E TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 FORM 10-K FOR THE YEAR ENDED NOVEMBER 1, 1997 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 NOVEMBER 1, 1997 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 - ----------------------------------- ----------------------------------------- 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 _____ 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. ___ 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 January 2, 1998) was $76,000,000. 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 January 2, 1998 was 7,171,000. ================================================================================ 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 and remain the property of their respective holders. OVERVIEW Centigram designs, manufactures and markets messaging and communications systems that integrate voice, data and facsimile on the Company's communications server, and provides access to this multi-media information through a telephone or PC. Centigram products allow users to play, answer and forward voice and fax messages from any touch-tone telephone or PC anywhere in the world. Users can also add comments to any message and print fax documents at any fax machine. Centigram's applications operate on an open platform based on industry-standard hardware and software. Centigram's system architecture enables a user to 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. Incorporated into the Series 6 are the 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 central office systems, most telephone PBX systems and mobile switch and paging terminal systems. Such systems are used for switching telephone calls in a variety of service provider and customer premises equipment (CPE) environments. The Company's products can also connect with a broad range of host and local area network (LAN)-based computer systems, including systems based on widely-used mainframes and minicomputers and personal computers in LANs. In addition, Centigram systems located at different sites can be linked together in a digital network. Centigram's distribution strategy is to provide broad, effective market coverage through the Company's direct sales force and its distributors. The Company sells its complete line of systems to corporate and institutional end users through a broad network of distributors and original equipment manufacturers (OEMs). The Company also sells its systems in North America directly to regional Bell operating companies (RBOCs), wireless operators and to large independent telephone companies and service providers around the world. In addition, the Company sells to service provider customers through 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 efforts, particularly for international service providers. Export sales were 44%, 30%, and 23% of net revenue in fiscal 1997, 1996, and 1995, respectively. Since 1984, Centigram has been providing innovative, integrated messaging systems to the CPE and service provider marketplaces, and is becoming a leader in developing voice messaging and communications products. Today, close to 15,000 Centigram systems are installed with nearly 2,000 delivering revenue enhancing services to telephone companies, cellular providers, paging companies, and service bureaus. BACKGROUND The technologies which form the foundation for the Company's products-voice messaging, facsimile communications, e-mail-originally emerged 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 users 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 multi-media messages. Using Centigram's systems, customers can leverage Internet capabilities to provide increased accessibility to messaging services. PRODUCTS AND PRODUCT FEATURES The Company's applications operate on a common software platform, which is Centigram's implementation of its Modular Expandable System Architecture ("MESA"). The MESA architecture allows the Company's systems generally to be upgraded in continual, cost-effective increments from the Company's smallest to its largest system configurations. In contrast, systems offered by the Company's principal competitors, due to their architectural constraints, more often require customers to purchase a new system in order 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, including recorded speech. Centigram's systems are available in configurations ranging from four ports, supporting 50-100 users in small installations, to multiple 240 ports clusters (depending on application configuration), supporting large headquarters and telecommunications service provider applications of up to one million users depending on the application. The Company sells its systems at prices ranging from below $10,000 to more than several hundred thousand dollars, depending on system configuration. 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 in its participation in the joint development of the 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' voice messaging systems. Series 6 is based on standard hardware and software technology, such as MVIP, QNX (a multi-tasking, real-time operating system for Intel microprocessor-based computers) and the SCSI computer peripherals bus. The Company believes that its architecture and platform are unique in the industry, although it has not applied for patent protection (See "Patents, Trade Secrets, and Licenses"). The Company believes this system architecture offers competitive advantages to the Company. 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 a software- based measure of fault tolerance in the Company's systems. Under 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 the 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 providers and large CPE customers. The Company's family of products include: VoiceMemo Centigram's VoiceMemo application provides voice messaging and call processing capabilities for customers in both CPE and service provider markets. Centigram's systems can be integrated with most central office, mobile switch and paging terminal systems as well as with most telephone PBX systems, including PBXs manufactured by Mitel Corporation, NEC Corporation, Fujitsu Ltd., Northern Telecom, Hitachi Ltd., and Siemens Business Communications 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 records 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 on 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, providing 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. 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 multi- media 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 the 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. Text-to-Speech In the third quarter of fiscal 1997 the Company sold its text-to- speech (TTS) software, TruVoice, and related business to Lernout & Hauspie Speech Products N.V. ("L&H") headquartered in Belgium. In connection with this transaction, L&H has agreed to license to Centigram L&H's automatic speech recognition, text-to-speech and speech coding technologies (including TruVoice) on mutually acceptable terms and at their current market prices, subject to royalty discounts of up to $1,000,000. SALES AND DISTRIBUTION The market for the Company's systems has generally been divided into two segments; the CPE market and the telecommunications services provider market. The CPE market includes corporations, government agencies, universities, professional service firms and other institutional end users that purchase systems for installation directly on their premises. Providers of telecommunications services, such as large telephone companies and independent service providers, including RBOCs, independent telephone companies, cellular providers and voice mail and paging service bureaus, use Centigram systems to deliver voice, and fax processing capabilities to third party customers on a subscription basis. In order to achieve broad market coverage, Centigram has developed two distinct sales channels focused on separate segments of the voice processing industry. The Company uses a broad network of distributors and OEMs to sell into the CPE market, including Ameritech, BellSouth, Fujitsu, GTE Customer Networks, Mitel Corporation, NEC Business Communications Systems, Voice Plus and WilTel Communication Systems. Consultants are also a source of referrals and provide access to requests for proposals in the CPE market. The Company sells its systems directly to RBOCs, such as Bell Atlantic and BellSouth and to large 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); and to service bureaus such as Premiere Technologies. The Company also sells to service provider customers through an OEM arrangement with Motorola, Inc. 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 fiscal 1997 or 1996. Sprint accounted for approximately 12% of net revenue in fiscal 1995. The Company's top five customers collectively accounted for approximately 28%, 35% and 42% of the Company's net revenue during fiscal 1997, 1996 and 1995, respectively. Centigram believes that a high level of product support is essential to its success. The Company provides system documentation and training to distributors and to direct end-user 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 1997, the Company continued 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, particularly direct sales to international service providers. In fiscal 1997, The Company made substantial investments in sales and support and it now has sales offices in Europe, China, Australia and Latin America. Export sales were 44%, 30% and 23% of net revenue in fiscal 1997, 1996 and 1995, respectively. In particular, the Company's revenue from the Far East region was approximately $9.2 million, $1.5 million, and $2.7 million for fiscal 1997, 1996 and 1995, 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 both 1997 and 1996, 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 is in the process of evaluating the assertions of Lucent. Lucent, or any other third party alleging infringement, could seek an injunction prohibiting the Company from selling some or all of its products, which would have an immediate, adverse impact in the Company's business, financial condition and results of operations. There can be no assurance that the Company would prevail in any litigation to enjoin the Company from selling its products on the basis of such alleged infringement, or that the Company would be able to license any valid and infringed patents on reasonable terms, or at all. BACKLOG At November 1, 1997, the Company had a backlog of $15.2 million and at November 2, 1996, a backlog of $19.4 million. The Company includes in such 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 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 $21.3 million, $20.2 million and $14.8 million and as a percentage of net revenue these expenses were 19.5%, 19.3%, and 21.3% in fiscal 1997, 1996 and 1995, respectively. Development efforts are focused on enabling Centigram's messaging platform to operate on an NT operating system, continuing the development and testing of the Company's Series 6 platform, continuing to expand the capacity of the Company's systems (particularly for the telecommunications service provider and large CPE customer markets), enhancing voice messaging and facsimile product capabilities, 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 and overall performance 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 November 1, 1997, the Company had 418 employees, of whom 107 were engaged in research and development, 220 in sales, marketing and customer support, 42 in manufacturing and quality assurance and 49 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. Furthermore, manufacturers of PBX equipment have a competitive advantage in selling to the installed base of users of their PBX equipment and, to an even greater degree, purchasers of new installations of their PBX equipment. The Company expects to encounter continued competition from both existing competitors and new market entrants on the service provider side of the business, as well as in the customer premise equipment sector. 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 telephone PBX and Centrex systems is an important competitive feature. Consequently, the Company's operating results could be adversely affected if PBX manufacturers, such as AT&T, Northern Telecom and Siemens Business Communications Systems, redesign their PBXs to limit current methods of integration. Although the Company is not aware that any significant PBX manufacturer is pursuing a strategy of redesigning its PBXs 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, a 35,000 square foot manufacturing facility, and a 40,000 square foot office facility in San Jose, California, pursuant to leases that expire in September 2007, December 1998 and May 1998, respectively. The Company also leases training facilities and sales and support offices in various cities in the United States and overseas. In December 1996, the Company entered into two 12-year leases for approximately 225,000 square feet of office space in San Jose, California at a base monthly rent of approximately $293,000 and rent commencing in January 1999. 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 $2,243,000 at 9% interest. This unsecured 10-year loan will be fully amortized by monthly payments of $28,409, principal and interest, with the first payment commencing in March 1998. 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. 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, November 1, 1997, which is contained elsewhere in this Annual Report. ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)
Year Ended Month Year Ended -------------------------------------- Ended ------------------------- November 1, November 2, October 28, October 29, October 1, October 2, 1997 1996 1995 1994 1994 1993 ------------ ------------ ------------ ------------ ------------ ------------ Net revenue.................. $108,836 $104,324 $69,374 $1,988 $79,179 $60,002 Net income (loss)............ (1,678) 1,000 (4,134) (1,890) 7,745 5,188 Net income (loss) per share.. (0.24) 0.14 (0.63) (0.30) 1.18 1.00 Research and development..... 21,260 20,154 14,798 1,145 12,644 8,197 BALANCE SHEET DATA: Working capital.............. $66,824 $65,297 $64,489 $70,132 $72,401 $25,682 Total assets................. 99,920 104,009 99,017 98,374 102,309 47,959 Long-term liabilities........ -- 78 232 409 436 822 Stockholders' equity......... 81,624 83,412 79,800 81,006 83,177 32,149
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 bank's 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, Centigram's effective tax rates, 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. CHANGE IN FISCAL YEAR 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 included 53 weeks and ended November 2, 1996. Fiscal years 1997 and 1995 included 52 weeks and ended on November 1, 1997 and October 28, 1995, respectively. This change in the Company's fiscal periods was made primarily to improve the Company's operational efficiencies. By moving the Company's fiscal periods out one month, the Company's manufacturing operations have incurred reduced overtime payments during the December and July holiday periods. Also, because many of the Company's distributors have calendar quarter ends and place orders in the third month of the quarter, the Company has not always been able to process and ship these orders during this third month of the calendar quarter because of the late receipt of these orders. By staggering its fiscal quarters to end one month after the calendar quarter- end, the Company is in a better position to ship these late orders and at the same time avoid additional overtime and other expediting charges. RESULTS OF OPERATIONS NET REVENUE 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 were 44% of sales for fiscal 1997 as compared to 30% for fiscal 1996 due to increased large orders from Latin America and Asia. CPE Sales decreased 20% for fiscal 1997 as compared to the prior year due to reduced orders from the Company's distributors. These reduced sales are a result of increased competition from PC based systems providers whose products compete with the Company's small system products. Net revenue for fiscal 1996 was 50% higher than net revenue for fiscal 1995. This increase was primarily attributable to general expansion in the Company's channels of distribution in connection with the introduction of the Company's Series 6 platform, including an approximately 90% increase in service provider business, improved performance of the Company's larger distributors, and a 100% increase in sales to customers located outside the United States which increased from $15.9 million to $31.8 million. Sales of the Company's larger system configurations increased approximately 100% as compared to fiscal 1995, with smaller percentage increases in the Company's smaller product configurations and system upgrades and expansions. International sales are subject to numerous risks and uncertainties. See "Sales and Distribution" for a description of certain risks associated with the Company's international operations. There can be no assurance that the market for voice processing products will grow in future periods at its historical percentage rate and the Company believes that the growth rates of certain domestic CPE market segments have declined from prior levels. There is also no assurance that the Company's markets will remain at current levels in future periods. Further, there can be no assurance that the Company will be able to increase or maintain its market share in the future, or to re-attain historical growth rates. See "Certain Trends and Uncertainties." GROSS MARGIN Gross margin for 1997 decreased 1.2% from 59.2% in fiscal 1996 to 58.0% in fiscal 1997. 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. Gross margin for 1996 decreased 2.2% from 61.4% in fiscal 1995 to 59.2% in fiscal 1996. This decrease in gross margin reflects lower margins on large system products due to higher warranty and international freight costs because of increased international shipments and increased costs in the introduction of the Series 6 platform, offset in part by a favorable mix with large system products. See "Certain Trends and Uncertainties." RESEARCH & DEVELOPMENT Research and development ("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. R&D expenses for fiscal 1996 were 36% higher than fiscal 1995. This increase reflected general expansion of the Company's product development programs and increases in compensation expenses due to higher headcount and depreciation. As a percentage of net revenue, R&D expenses were 19.5%, 19.3%, and 21.3% in fiscal 1997, 1996 and 1995, 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. SELLING, GENERAL & ADMINISTRATIVE Selling, General & Administrative ("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. SG&A expenses in 1996 represented 41.0% of net revenue and were 28% higher than such expenses for fiscal 1995. This increase was primarily related to increased sales and marketing expenses and increased compensation and travel expenses due to higher headcount, offset in part by lower litigation expenses As a percentage of net revenue, SG&A expenses were 41.9%, 41.0%, and 48.2% in fiscal 1997, 1996 and 1995, respectively. The Company believes that continued investments in sales and customer support, 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. OTHER EXPENSES 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. The Company restructured its business to align its operational expenses with its anticipated revenue levels. As of November 1, 1997, $0.3 million remains in accrued liabilities relating primarily to severance payments after cash payments of $1.8 million. OTHER INCOME AND EXPENSE, NET Interest income on investments increased in fiscal 1997 over 1996 due to higher average investment balances and higher average interest rates. Interest income on investments increased in fiscal 1996 over 1995 because of higher average interest yields as the Company shifted its short-term investments from tax free state and municipal bonds to higher yielding U.S. Government and agency obligations and corporate debt securities. Fiscal 1997 included a gain on the sale of the Company's Text-to-Speech business and a gain on the stock received in this asset sale for a total gain of approximately $3.9 million. Fiscal 1995 included a charge of $550,000 for the Company's cost of settling its stockholder class action lawsuit and certain other litigation. PROVISION FOR INCOME TAXES The company recorded income tax provision of $833,000, $53,000, and $56,000, respectively, for fiscal years 1997, 1996 and 1995. The 1997 tax provision consists of $333,000 of current foreign and domestic minimum taxes and $500,000 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 and 1995 income tax provisions primarily represent current foreign taxes. No income tax benefits were recorded for the losses incurred in fiscal years 1997 and 1995 because realization of the deferred tax assets arising as a result of the loss sustained are dependent upon future taxable income, the amount and timing of which are uncertain. Accordingly, a valuation allowance has been established to fully offset the deferred tax assets resulting from the losses incurred. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments at November 1, 1997 were $52.1 million, increasing $10.0 million from November 2, 1996. At the end of fiscal 1996 and 1995, cash, cash equivalents and short-term investments were $42.1 million and $55.7 million, respectively. Net cash provided from operating activities was $12.2 million during fiscal 1997. Trade receivables at the end of fiscal 1997 decreased $6.1 million from the prior year balance primarily due to improved collection efforts and a reduction in extended payment terms to certain domestic service provider customers. Days sales outstanding (computed using quarterly revenues) were 68 days at the end of fiscal 1997 compared to 86 days at end of fiscal 1996. This decrease in DSO was primarily due to the factors as noted above. Inventory levels at November 1, 1997 decreased $2.4 million from fiscal 1996 because of reduced inventory requirements in 1997 for consignment and retrofit inventory over 1996 when the Company introduced the Series 6 platform. The Company expects investment in receivables and inventories will continue to represent a significant portion of working capital. During the fiscal year ended November 1, 1997, the Company made $6.2 million in capital expenditures. A significant portion of these expenditures were related to the purchase of engineering equipment, computer equipment for all functions, as well as increased leasehold improvements. The Company currently expects to spend approximately $7.0 million for capital equipment during fiscal 1998. On April 15, 1997, the Company's Board of Directors authorized a stock repurchase program whereby up to one million shares of its common stock may be repurchased in the open market from time-to-time. During 1997, the Company purchased 243,000 shares at a cost of approximately $3.0 million under this repurchase program. The Company may, depending on market conditions, purchase additional common stock in the open market during fiscal 1998. The Company's principal sources of liquidity as of November 1, 1997 consisted of $52.1 million of cash and cash equivalents and short-term investments and $20.0 million available under the Company's bank line of credit (which expires April 29, 1998). The Company expects to renew this bank line in fiscal 1998. This bank line requires the Company to maintain certain financial ratios, minimum working capital, minimum tangible net worth and financial performance, and requires the bank's consent for the payment of cash dividends. The Company is in compliance with this agreement and there were no borrowings outstanding under the bank line as of November 1, 1997. 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 1998. CERTAIN TRENDS AND UNCERTAINTIES The Company has in the past experienced and will likely in the future experience substantial fluctuations in quarterly operating results. 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 has recently experienced an increase in the percentage of its sales from its international operations, including sales from the Far East region. 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 Far East region. 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. 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 28%, 35% and 42% of the Company's net revenue in fiscal 1997, 1996 and 1995 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, 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 is in the process of evaluating the assertions of Lucent. Lucent, or any other third party, alleging infringement, could seek an injunction prohibiting the Company from selling some or all of its products, which would have an immediate, adverse impact in the Company's business, financial condition and results of operations, There can be no assurance that the Company would prevail in any litigation to enjoin the Company from selling its products on the basis of such alleged infringement, or that the Company would be able to license any valid and infringed patents on reasonable terms, or at all. The Company has conducted a comprehensive review of its internal computer systems, as well as the Company`s product line, to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Software programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company presently believes that, with modifications to existing software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems or the Company's product line. However, if such modifications are not made in a timely manner, the Company or its customers may be unable to implement appropriate Year 2000 solutions, which could have a material adverse affect on the Company's business, financial condition or results of operations. In recent years, stock markets have experienced extreme price and volume trading volatility. This volatility has had a substantial effect on the market prices of securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad markets fluctuations may adversely affect the market price of the Company's common stock. In addition, the trading price of the Company's common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of new products or technological innovations by the Company or its competitors, and general conditions in the computer and communications industries. 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 data)
November 1, November 2, 1997 1996 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents.......................... $19,791 $12,668 Short-term investments............................. 32,262 29,408 Trade receivables, net of allowances of $1,724 and $2,055................................ 21,637 27,741 Inventories........................................ 9,060 11,467 Deferred tax assets................................ -- 1,424 Other current assets............................... 2,370 3,108 ----------- ----------- Total current assets............................. 85,120 85,816 Property and equipment, net.......................... 12,893 15,249 Intangible assets, net............................... 1,468 2,004 Deposits and other assets............................ 439 940 ----------- ----------- $99,920 $104,009 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................... $6,925 $9,739 Accrued compensation............................... 5,141 4,202 Accrued expenses and other liabilities............. 3,991 4,587 Warranty and retrofit reserves..................... 2,161 1,837 Current portion of capital lease obligations....... 78 154 ----------- ----------- Total current liabilities........................ 18,296 20,519 Capital lease obligations............................ -- 78 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; 7,110,000 and 6,908,000 outstanding, and capital in excess of par value ............... 90,724 88,774 Treasury stock, 198,000 shares, at cost........... (2,427) -- Accumulated deficit................................ (6,670) (4,992) Unrealized gain(loss)on investments.................. 68 (36) Cumulative translation adjustments................. (71) (34) Note receivable from officer....................... -- (300) ----------- ----------- Total stockholders' equity....................... 81,624 83,412 ----------- ----------- $99,920 $104,009 =========== ===========
See accompanying notes. CENTIGRAM COMMUNICATIONS CORPORATION STATEMENTS OF OPERATIONS (in thousands, except per share data)
For the Years Ended ------------------------------------- November 1, November 2, October 28, 1997 1996 1995 ----------- ----------- ----------- Net revenue............................... $108,836 $104,324 $69,374 Cost and expenses: Cost of goods sold...................... 45,661 42,516 26,802 Research and development................ 21,260 20,154 14,798 Selling, general and administrative..... 45,611 42,832 33,470 Other expenses......................... 3,263 -- -- ----------- ----------- ----------- 115,795 105,502 75,070 ----------- ----------- ----------- Operating loss.......................... (6,959) (1,178) (5,696) Other income and expense, net............ 6,114 2,231 1,618 ----------- ----------- ----------- Income (loss) before income taxes......... (845) 1,053 (4,078) Provision for income taxes................ 833 53 56 ----------- ----------- ----------- Net income (loss)......................... ($1,678) $1,000 ($4,134) =========== =========== =========== Net income (loss) per share............... ($0.24) $0.14 ($0.63) =========== =========== =========== Common and common equivalent shares used in computing per share amounts.......... 6,943 6,981 6,560 =========== =========== ===========
See accompanying notes. CENTIGRAM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended November 1, 1997, November 2, 1996, and October 28, 1995 (in thousands)
For the Years Ended ------------------------------------- November 1, November 2, October 28, 1997 1996 1995 ----------- ----------- ----------- Common stock and capital in excess of par value: Balance, beginning of year.............. $88,774 $85,815 $83,184 Shares issued under stock plans......... 2,015 2,412 2,631 Issue of treasury shares under stock plans........................... (65) -- -- Tax benefits from stock plans........... -- 547 -- ----------- ----------- ----------- $90,724 $88,774 $85,815 ----------- ----------- ----------- Treasury stock: Balance, beginning of year.............. $ -- $ -- $ -- Purchase of treasury shares............. (2,970) -- -- Issue of treasury shares under stock plans........................... 543 -- -- ----------- ----------- ----------- ($2,427) $ -- $ -- ----------- ----------- ----------- Accumulated deficit: Balance, beginning of year.............. ($4,992) ($5,992) ($1,858) Net income (loss)....................... (1,678) 1,000 (4,134) ----------- ----------- ----------- ($6,670) ($4,992) ($5,992) ----------- ----------- ----------- Unrealized gain (loss) on investments: Balance, beginning of year.............. ($36) ($14) ($322) Unrealized gain (loss) on investments for year.............................. 104 (22) 308 ----------- ----------- ----------- $68 ($36) ($14) ----------- ----------- ----------- Cumulative translation adjustments: Balance, beginning of year.............. ($34) ($9) $1 Translation adjustments................. (37) (25) (10) ----------- ----------- ----------- ($71) ($34) ($9) ----------- ----------- ----------- Note receivable from officer: Balance, beginning of year.............. ($300) $ -- $ -- Loan issued to officer.................. -- ($300) -- Forgiveness of note..................... 300 -- -- ----------- ----------- ----------- $ -- ($300) $ -- ----------- ----------- ----------- $81,624 $83,412 $79,800
=========== =========== =========== See accompanying notes. CENTIGRAM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Years Ended ----------------------------------- November 1, November 2, October 28, 1997 1996 1995 ----------- ----------- ----------- Cash and equivalents beginning of year.... $12,668 $10,633 $10,836 ----------- ----------- ----------- Cash flows from operations: Net income (loss)........................ (1,678) 1,000 (4,134) Gain on sale of business................. (3,598) -- -- Depreciation and amortization............ 8,740 7,729 5,418 Deferred taxes........................... -- 679 -- Trade receivables........................ 6,104 (9,411) 2,416 Inventories.............................. 2,407 (5,646) 419 Other assets............................. 639 (1,392) (702) Accounts payable......................... (2,814) 2,786 1,365 Other liabilities and accrued expenses... 2,365 (682) 866 ----------- ----------- ----------- 12,165 (4,937) 5,648 ----------- ----------- ----------- Cash flows used for investing: Purchase of short-term investments....... (127,579) (68,702) (63,900) Proceeds from sale and maturities of short-term investments................. 129,829 84,354 65,127 Purchase of property and equipment....... (6,203) (10,615) (7,967) Increase in intangible assets............ (458) -- (1,350) Note receivable from officer............. -- (300) -- ----------- ----------- ----------- (4,411) 4,737 (8,090) ----------- ----------- ----------- Cash flows from financing: Proceeds from sale of common stock, net of issuance costs.................. 2,493 2,412 2,621 Purchase of treasury shares.............. (2,970) -- -- Principal payments on capital leases and long-term obligations.............. (154) (177) (382) ----------- ----------- ----------- (631) 2,235 2,239 ----------- ----------- ----------- Net change in cash and equivalents....... 7,123 2,035 (203) ----------- ----------- ----------- Cash and equivalents, end of year....... $19,791 $12,668 $10,633 =========== =========== =========== SUPPLEMENTAL DATA: Interest (paid)............................ ($98) ($37) ($89) Income taxes (paid) refunded............... $599 $383 ($235)
See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF BUSINESS OPERATIONS Centigram Communications Corporation (the Company) designs, manufactures and markets wireless and wireline messaging communications systems that integrate voice, data 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, Australia, Latin America, the Far East and Europe. The Company sells primarily to distributors, Regional Bell Operating Companies, independent telephone companies, and other telecommunications service providers. 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). Net Income (Loss) Per Share The computation of net income (loss) per share in each year is based on the weighted average number of shares outstanding. Stock options are included as share equivalents using the treasury stock method when the effect would be to decrease net income per share. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. Statement No. 128 is not expected to change the Company's per share calculation for fiscal year 1997, but would increase basic earnings per share by $0.01 per share in fiscal 1996. 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. Depreciation expense includes amortization of assets under capital leases and leasehold improvements. 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. 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. 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. Intangible amortization expense was approximately $290,000, $375,000, and $356,000 in fiscal 1997, 1996 and 1995, 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. 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 is effective for fiscal years beginning after December 15, 1997. 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 is effective for fiscal years beginning after December 15, 1997. 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 is effective for fiscal years beginning after December 15, 1997. 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. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 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 November 1, 1997 consisted primarily of U.S. government and agency bonds and corporate debt obligations. The Company sells primarily to distributors, Regional Bell Operating Companies, independent telephone companies, and other telecommunications service providers. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. At November 1, 1997 five customers represented approximately 41% of trade receivables. The Company occasionally enters into foreign exchange forward contracts to hedge certain balance sheet exposures. Gains and losses on the foreign exchange contracts are included in other income and expense, net, which offset foreign exchange gains or losses from revaluation of foreign currency-denominated balance sheet items. The counterparties to such contracts are major financial institutions and the Company's policy is to not require collateral. No foreign exchange contracts were entered into during fiscal 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 November 1, 1997 and November 2, 1996. Investments at November 1, 1997 were as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---------- ---------- ---------- --------- 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 ========== ========== ========== ========= Investments at November 2, 1996 were as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ---------- ---------- ---------- --------- U.S. government and agency obligations.................. $16,346 $6 ($72) $16,280 Corporate debt securities...... 11,728 4 (3) 11,729 Commercial paper............... 1,842 -- -- 1,842 Temporary cash investments..... 4,976 29 -- 5,005 Municipal securities........... 1,022 -- -- 1,022 ---------- ---------- ---------- --------- Total available-for-sale securities 35,914 39 (75) 35,878 Less amounts classified as cash equivalents (6,470) -- -- (6,470) ---------- ---------- ---------- --------- $29,444 $39 ($75) $29,408 ========== ========== ========== =========
Contractual maturities of available-for-sale securities at November 1, 1997 are as follows (in thousands): Estimated Amortized Fair Cost Value ---------- ---------- Due in one year or less........ $19,554 $19,598 Due in one to three years...... 14,591 14,615 ---------- ---------- $34,145 $34,213 ========== ========== BANK CREDIT LINES The Company has a $20,000,000 unsecured line of credit which expires April 29, 1998. Amounts borrowed bear interest at various rates as defined under the agreement, including the banks' reference rate (8.5% at November 1, 1997). 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 November 1, 1997. 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 $10,000,000 outstanding at one time. At November 1, 1997, the Company had no outstanding foreign exchange contracts. BALANCE SHEET COMPONENTS (in thousands) November 1, November 2, 1997 1996 ---------- ---------- Inventories Raw materials..................... $3,005 $4,603 Work-in-process................... 2,274 2,898 Finished goods.................... 3,781 3,966 ---------- ---------- $9,060 $11,467 ========== ========== Property and equipment Equipment......................... $35,701 $30,810 Furniture and fixtures............ 4,709 3,514 Leasehold improvements............ 2,785 2,593 ---------- ---------- 43,195 36,917 Less accumulated depreciation and amortization................ (30,302) (21,668) ---------- ---------- $12,893 $15,249 ========== ========== Intangible assets Goodwill.......................... $ -- $2,557 Patent licenses................... 1,350 1,350 Computer based training software.. 458 -- ---------- ---------- 1,808 3,907 Less accumulated amortization..... (340) (1,903) ---------- ---------- $1,468 $2,004 ========== ========== Accrued expenses and other liabilities Accrued expenses.................. $3,040 $3,680 Deferred income .................. 600 312 Other liabilities................. 351 595 ---------- ---------- $3,991 $4,587 ========== ========== COMMITMENTS AND CONTINGENCIES Leases The Company leases its facilities and certain equipment under noncancellable operating leases expiring through 2007. Leases for the Company's three principal operating facilities require the Company to pay property taxes, insurance premiums and normal maintenance costs, and one such lease contains provisions for rental adjustments. In December 1996, the Company entered into two 12-year leases ("the new leases") for approximately 225,000 square feet of office space currently under construction in San Jose, California at a base monthly rent of approximately $293,000 with rent commencing in January 1999. 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 $2,243,000 at 9% interest. This unsecured 10-year loan will be fully amortized by monthly payments of $28,409, including principal and interest, with the first payment commencing in March 1998. Future minimum lease payments under noncancellable operating leases and the present value of future minimum capital lease payments as of November 1, 1997, are as follows for the following years (in thousands): Operating Leases excluding Capital the New Leases Leases ---------- ---------- 1998............................. $80 $2,391 1999............................. -- 1,787 2000............................. -- 1,743 2001............................. -- 1,567 2002 and beyond.................. -- 9,081 ---------- ---------- Total minimum payments............. 80 $16,569 ========== Less amount representing interest.. (2) ---------- Present value of minimum lease payments......................... 78 Less current portion............... (78) ---------- $ -- ========== The Company acquired equipment, now fully amortized, of $640,000 under these capital leases. Rent expense totaled approximately $2,548,000, $1,964,000 and $1,475,000 for years 1997, 1996 and 1995, respectively. Letters of Credit The Company frequently enters into purchase agreements with vendors whereby the Company guarantees payment with standby letters of credit. Also, letters of credit are provided as performance securities for certain sales contracts. Various standby letters of credit totaling approximately $800,000 were outstanding as of year end 1997 and 1996, respectively. 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. While the Company believes that it does not infringe the intellectual property rights of Lucent or any other third parties, the Company is in the process of evaluating the assertions of Lucent. Lucent, or any other third party alleging infringement, could seek an injunction prohibiting the Company from selling some or all of its products, which would have an immediate, adverse impact in the Company's business, financial condition and results of operations. STOCKHOLDERS' EQUITY Common Stock The Company had 7,110,000 and 6,908,000 shares outstanding for fiscal 1997 and 1996, respectively. This increase represents 127,000 shares issued for exercises of stock options under the Company's stock plans and 120,000 shares issued under the Company's stock purchase plan. Approximately 45,000 of these shares were issued from the Company's treasury shares. Shares Authorized The Company has authorized but unissued shares of 2,183,000 and 111,000 common shares for the Company's Stock Option Plans and the Employee Stock Purchase Plan, respectively, at November 1, 1997. Treasury Stock On April 15, 1997 the Company's Board of Directors authorized a stock repurchase program whereby up to 1 million shares of its common stock may be repurchased in the open market from time-to-time. During fiscal 1997 the Company purchased 243,000 shares at a cost of approximately $3.0 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. Note Receivable from Officer In April 1996, the Company loaned $300,000 to an officer of the corporation. The note was secured by real property and was payable in full April 15, 2001, with interest thereon at the rate of 5.88% per annum, compounded annually. The Board of Directors approved forgiveness of this note with related accrued interest in fiscal 1997. 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 120,000 and 107,000 shares were issued under the Purchase Plan at average prices of $10.89 and $13.70 per share in 1997 and 1996, 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 on July 25, 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):
Author- Out- Option Weighted ized standing Price Average --------- --------- ---------------- ---------- October 29, 1994 ............... 96 848 $ 2.04-41.50 $17.98 Additional shares authorized .. 375 -- -- -- Granted ....................... (895) 895 12.63-21.50 15.55 Exercised ..................... -- (207) 2.04-19.00 6.43 Canceled ...................... 572 (572) 2.40-41.50 23.50 --------- --------- October 28, 1995 ............... 148 964 3.20-40.25 14.93 Additional shares authorized .. 505 -- -- -- Granted ....................... (637) 637 14.00-21.88 18.23 Exercised ..................... -- (123) 3.20-19.00 7.92 Canceled ...................... 147 (147) 5.00-21.50 14.37 --------- --------- November 2, 1996 ............... 163 1,331 5.00-40.25 17.22 Additional shares authorized .. 1,002 -- -- -- Granted ....................... (2,027) 2,027 9.50-17.75 12.68 Exercised ..................... -- (127) 5.00-15.63 9.42 Expired........................ (187) -- -- -- Canceled ...................... 1,272 (1,272) 6.75-40.25 16.33 --------- --------- November 1, 1997 ............... 223 1,959 $ 9.50-35.50 $13.62 ========= ========= ================ ==========
The following table summarizes information about options outstanding at November 1, 1997 (shares in thousands):
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 11/1/97 (in years) price at 11/1/97 price - ----------------- ------------ ----------- ----------- ------------ ----------- $ 9.50 - $10.13 227 9.42 $9.68 17 $9.63 10.38 574 7.73 10.38 271 10.38 11.25 - 13.50 473 8.85 12.25 59 12.98 13.75 - 16.94 402 8.96 16.85 39 16.49 17.38 - 35.50 283 7.07 21.08 118 25.71 ------------ ------------ $ 9.50 - $35.50 1,959 8.35 $13.62 504 $14.72 ============ ============
These options will expire if not exercised at specific dates ranging from December 1997 to October 2007. 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: Option Plans Purchase Plan -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Expected life in years 4.0 4.0 0.5 0.5 Expected stock price volatility factors 0.6 0.6 0.5 0.5 Risk-free interest rate percentage 6.0 5.9 5.4 5.7 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): 1997 1996 --------- --------- Net income (loss) - as reported ($1,678) $1,000 Net income (loss) - pro forma ($6,427) ($452) Net income (loss) per share - as reported ($0.24) $0.14 Net income (loss) per share - pro forma ($0.93) ($0.06) The weighted-average estimated fair value of employee stock options granted for fiscal year 1997 and 1996 were $6.89 and $9.83 per share, respectively. The weighted-average estimated fair value of employee stock purchase rights granted under the Purchase Plan during fiscal year 1997 and 1996 were $4.30 and $5.59, 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 the offer, stock options to purchase 809,000 shares of common stock with a weighted average exercise price of $16.50 per share were canceled and exchanged for new stock options to purchase 641,000 shares with an exercise price of $10.38 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 $532,000 were made through fiscal 1997. The Company contributed $205,000, $152,000 and $175,000 in 1997, 1996 and 1995, respectively. In December 1996 the Board of Directors approved a matching program, not to exceed $500 per eligible employee. OTHER INCOME AND EXPENSE, NET Other income and expense, net consists of (in thousands): 1997 1996 1995 ---------- ---------- ---------- Investment income $2,645 $2,321 $2,287 Interest expense (103) (76) (108) Other 3,572 (14) (561) ---------- ---------- ---------- $6,114 $2,231 $1,618 ========== ========== ========== 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): 1997 1996 1995 --------- --------- --------- FEDERAL Current.................... ($1,475) ($901) $ -- Deferred................... 2,023 901 -- STATE Current.................... 35 -- -- FOREIGN Current.................... 250 53 56 --------- --------- --------- $833 $53 $56 ========= ========= ========= The tax benefits resulting from the exercise of nonqualified stock options and the disqualifying dispositions of shares acquired under the Company's stock option plans and employee stock purchase plan reduced taxes currently payable as shown above by $0 and $547,000 in 1997 and 1996, respectively. Such benefits are credited to additional paid-in capital when realized. 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: 1997 1996 1995 --------- --------- --------- Income tax (benefit) computed at federal statutory rate................. -34.0% 34.0% -34.0% State taxes, net of federal benefit...... 2.7% -- -- Foreign taxes............................ 29.6% 5.0% 1.4% Goodwill amortization.................... 36.0% 8.3% 2.1% Adjustment to valuation allowance........ 49.0% -27.3% 49.5% Tax-exempt interest income............... -- -16.1% -19.0% Other individually immaterial items...... 15.3% 1.1% 1.4% --------- --------- --------- Effective tax rate....................... 98.6% 5.0% 1.4% ========= ========= ========= 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): 1997 1996 --------- --------- DEFERRED TAX LIABILITIES Difference in accounting periods........... ($2,889) ($2,854) --------- --------- DEFERRED TAX ASSETS Net operating loss carryforwards........... 2,531 2,576 Tax credit carryforwards................... 2,886 2,622 Fixed assets............................... 1,686 986 Allowance for doubtful accounts............ 780 839 Other accruals and reserves not currently deductible for tax purposes.............. 2,206 1,897 Inventory valuation accounts............... 2,026 2,272 Other...................................... 63 41 --------- --------- 12,178 11,233 Valuation allowance........................ (9,289) (6,356) --------- --------- 2,889 4,877 --------- --------- Total deferred taxes........................ $ -- $2,023 ========= ========= The change in the valuation allowance was a net increase of $2,933,000, $770,000 and $3,468,000 for 1997, 1996 and 1995, respectively. Approximately $775,000 of the valuation allowance is related to stock options which will be credited to additional paid-in capital when realized. As of November 1, 1997, the Company has federal tax net operating loss carryforwards of approximately $7,100,000 which will expire in 1999 through 2012, if not utilized. Also available at November 1, 1997 are tax credit carryforwards for federal and state income tax purposes of approximately $1,875,000 and $1,500,000 respectively, which will expire in the years 2002 through 2010, if not utilized. Utilization of approximately $5,000,000 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. OTHER EXPENSES 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. The Company restructured its business to align its operational expenses with its anticipated revenue levels. As of November 1, 1997, $0.3 million remains in accrued liabilities relating primarily to severance payments after cash payments of $1.8 million. SEGMENT INFORMATION The Company operates in a single industry segment: the design, manufacture and marketing of systems and software for communications applications including voice messaging, facsimile storage and forwarding and interactive voice response. No customer represented more than 10% of net revenue in 1996. Sprint Corporation accounted for approximately 12% of net revenue in 1995. 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): 1997 1996 1995 ---------- ---------- ---------- Latin America.................. $16,200 $9,800 $2,900 Europe......................... 10,200 5,600 2,700 Far East....................... 9,200 1,500 2,700 Canada......................... 6,700 5,900 3,600 Australia...................... 5,200 9,000 4,000 ---------- ---------- ---------- $47,500 $31,800 $15,900 ========== ========== ========== SUBSEQUENT EVENT In December 1997, 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 555,000 and 100,000, 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 second and sixth paragraphs of "Commitments and Contingencies" Note. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share data)
Research Net Income (Loss) Shares and Operating ------------------- Used in Net Gross Develop- Income Per Per Share Stock Price Range Revenue Margin ment (Loss) Amount Share Calculations High - Low --------- --------- --------- --------- --------- --------- ---------------- ------------------ 1997 First quarter $27,913 $16,570 $5,693 $259 $680 $0.10 6,986 $14.73 - 12.13 Second quarter (1) 24,899 14,060 5,451 (6,871) (6,304) (0.90) 6,994 (2) 13.75 - 9.50 Third quarter 27,010 15,461 4,959 (1,138) 3,149 0.45 7,019 13.75 - 9.50 Fourth quarter 29,014 17,084 5,157 791 797 0.11 7,176 21.88 - 11.00 --------- --------- --------- --------- --------- --------- $108,836 $63,175 $21,260 ($6,959) ($1,678) ($0.24) 6,943 (2) $21.88 - 9.50 ========= ========= ========= ========= ========= ========= ============= ================== 1997 First quarter $24,013 $14,502 (3) $4,574 $42 $507 $0.07 6,980 $23.00 - 16.25 Second quarter 24,533 13,583 (3) 4,961 (1,861) (1,311) (0.19) 6,806 (2) 23.75 - 15.88 Third quarter 26,500 15,714 (3) 5,114 100 710 0.10 6,958 23.63 - 12.88 Fourth quarter 29,278 18,009 (3) 5,505 541 1,094 0.16 6,954 16.88 - 12.75 --------- --------- --------- --------- --------- --------- $104,324 $61,808 $20,154 ($1,178) $1,000 $0.14 6,981 $23.75 - 12.75 ========= ========= ========= ========= ========= ========= ============= ==================
(1) 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. (2) Stock option shares excluded from the shares used in per share calculations since including these shares would decrease the net loss per share. (3) In the fourth quarter of fiscal 1996, the Company reclassified certain customer training and support costs from selling, general, and administrative expenses to cost of goods sold to more properly reflect their current and anticipated future direct correlation to product and service revenues. All 1996 quarterly financial data has been reclassified for consistent presentation. 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 November 1, 1997, 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. 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 November 1, 1997 and November 2, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the three years in the period ended November 1, 1997. 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 November 1, 1997 and November 2, 1996, and the consolidated results of its operations and its cash flows for the three years in the period ended November 1, 1997, 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 ERNST & YOUNG LLP San Jose, California December 1, 1997 except for the second and sixth paragraphs of "Commitments and Contingencies" and the note "Subsequent Events" as to which this date is January 9, 1998 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 31, 1998, 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 31, 1998, 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 31, 1998, 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 31, 1998, 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--November 1, 1997 and November 2, 1996 Consolidated Statement of Operations--Years ended November 1, 1997, November 2, 1996 and October 28, 1995 Consolidated Statements of Stockholders' Equity--Years ended November 1, 1997, November 2, 1996 and October 28, 1995 Consolidated Statements of Cash Flows--Years ended November 1, 1997, November 2, 1996 and October 28, 1995 Notes to Consolidated Financial Statements--November 1, 1997 (except the note "Quarterly Financial Data (Unaudited)" SUPPLEMENTARY FINANCIAL DATA NOT COVERED BY REPORT OF INDEPENDENT AUDITORS: The note "Quarterly Financial Data (Unaudited)" in Notes to Consolidated Financial Statements (A) 2. FINANCIAL STATEMENT SCHEDULES: The following financial schedules of the Registrant for the years ended November 1, 1997, November 2, 1996 and October 28, 1995 SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS: 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.)
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------------ ------------------------------------------------------------------------------------------------------- 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. 10.22 Settlement Agreement and Mutual Release between the Company and George H. Sollman dated August 1, 1997. 10.23 Promissory note dated February 18, 1997 between the Company and Dennis L. Barsema. 10.24 Settlement Agreement and General Release dated October 4, 1997 between the Company and Dennis L. Barsema. 10.25 Termination of Build to Suit Leases and Loan to Sobtrato Interests III. 11.1 Statement of Computation of Earnings Per Share. 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedules.
- - ----------------------- (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. + Confidential treatment granted as to certain portions. 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 23, 1998 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 George H. Sollman and Dennis P. Wolf, 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.
Signature Title Date - ------------------------------ -------------------------------- -------------- /s/ ROBERT L. PUETTE President, Chief Executive January 23, 1998 ---------------------------- Officer, Director Robert L. Puette (Principal Executive Officer) /s/ DENNIS P. WOLF Senior Vice President and January 23, 1998 ---------------------------- Chief Financial Officer Dennis P. Wolf (Principal Financial Officer) /s/ THOMAS E. BRUNTON Vice President and January 23, 1998 ---------------------------- Controller (Principal Thomas E. Brunton Accounting Officer) /s/ JAMES H. BOYLE Director January 23, 1998 ---------------------------- James H. Boyle /s/ DOUGLAS CHANCE Director January 23, 1998 ---------------------------- Douglas Chance /s/ JAMES F. GIBBONS Director January 23, 1998 ---------------------------- James F. Gibbons /s/ DAVID S. LEE Director January 23, 1998 ---------------------------- David S. Lee /s/ DEAN O. MORTON Director January 23, 1998 ---------------------------- Dean O. Morton
SCHEDULE II CENTIGRAM COMMUNICATIONS CORPORATION VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions Additions Balance at Charged to Charged to Balance Beginning Statement of Other at end of Year Operations Amounts (2) Deductions (1) of Year ----------- ------------- ------------ --------------- --------- 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 Year ended October 28, 1995 Allowance for doubtful accounts 1,380 -- -- 539 841 Product return reserve 825 -- 275 -- 1,100
- -------------------------------- (1) Writeoffs of uncollectible accounts, net of recoveries. (2) The product return reserve is charged to revenue. EX-10.21 2 LOAN AGREEMENT CENTIGRAM COMMUNICATIONS CORPORATION AMENDED AND RESTATED LOAN AGREEMENT (UNSECURED) TABLE OF CONTENTS Page 1. DEFINITIONS AND CONSTRUCTION 1 1.1 Definitions 1 1.2 Accounting Terms 8 2. LOAN AND TERMS OF PAYMENT 8 2.1 Advances 8 2.2 Overadvances 12 2.3 Interest Rates, Payments, and Calculations 12 2.4 Crediting Payments 13 2.5 Fees 13 2.6 Additional Costs 13 2.7 Conversion/Continuation of Advances 14 2.8 Additional Requirements/Provisions Regarding LIBOR Rate Advances. 15 2.9 Term 16 3. CONDITIONS OF LOANS 17 3.1 Conditions Precedent to Initial Advance 17 3.2 Conditions Precedent to all Advances 17 4. REPRESENTATIONS AND WARRANTIES 17 4.1 Due Organization and Qualification 17 4.2 Due Authorization; No Conflict 17 4.3 No Prior Encumbrances 18 4.4 Name; Location of Chief Executive Office 18 4.5 Litigation 18 4.6 No Material Adverse Change in Financial Statements 18 4.7 Solvency 18 4.8 Regulatory Compliance 18 4.9 Environmental Condition 18 4.10 Taxes 19 4.11 Subsidiaries 19 4.12 Government Consents 19 4.13 Full Disclosure 19 5. AFFIRMATIVE COVENANTS 19 5.1 Good Standing 19 5.2 Government Compliance 19 5.3 Financial Statements, Reports, Certificates 19 5.4 Inventory; Returns 20 5.5 Taxes 20 5.6 Insurance 20 5.7 Principal Depository 20 5.8 Quick Ratio 20 5.9 Debt-Tangible Net Worth Ratio 20 5.10 Tangible Net Worth 20 5.11 Out-of-Debt 20 5.12 Further Assurances 21 6. NEGATIVE COVENANTS 21 6.1 Dispositions 21 6.2 Change in Business 21 6.3 Mergers or Acquisitions 21 6.4 Indebtedness 21 6.5 Encumbrances 21 6.6 Distributions 21 6.7 Investments 22 6.8 Transactions with Affiliates 22 6.9 Subordinated Debt 22 6.10 Compliance 22 7. EVENTS OF DEFAULT 22 7.1 Payment Default 22 7.2 Covenant Default 22 7.3 Material Adverse Change 23 7.4 Attachment 23 7.5 Insolvency 23 7.6 Other Agreements 23 7.7 Subordinated Debt 23 7.8 Judgments 23 7.9 Misrepresentations 23 8. BANK'S RIGHTS AND REMEDIES 23 8.1 Rights and Remedies 23 8.2 Bank Expenses 24 8.3 Remedies Cumulative 24 8.4 Demand; Protest 24 9. NOTICES 24 10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER 25 11. INTERCREDITOR PROVISIONS 25 11.1 Proportionate Interests 25 11.2 Designation of Service Agent 26 11.3 No Agency 26 11.4 No Reliance 26 12. GENERAL PROVISIONS 26 12.1 Successors and Assigns 26 12.2 Indemnification 26 12.3 Time of Essence 26 12.4 Severability of Provisions 26 12.5 Amendments in Writing, Integration 26 12.6 Effect of Amendment and Restatement 27 12.7 Counterparts 27 12.8 Survival 27 12.9 Confidentiality 27 This AMENDED AND RESTATED LOAN AGREEMENT is entered into as of April 30, 1997 by and among SILICON VALLEY BANK ("SVB") as Servicing Agent and a Bank and BANK OF HAWAII ("BofH;" SVB and BofH are referred to individually herein as a "Bank," and collectively as the "Banks") and CENTIGRAM COMMUNICATIONS CORPORATION, a Delaware corporation ("Borrower"). SVB will act as Agent for the Banks pursuant to the terms of the Master Agreement between SVB and BofH dated as of August 30, 1996. RECITALS A. Borrower and Bank are parties to that certain Credit Agreement dated as of March 28, 1994 (the "Credit Agreement"), that certain Foreign Exchange Letter Agreement dated as of April 1, 1994 (the "F/X Letter") and a Note dated March 28, 1994 by Borrower to Bank (the "Note") (the Credit Agreement, the F/X Letter and the Note, each as amended by Loan Modification Agreements dated March 1, 1995, April 21, 1995, September 12, 1995, February 16, 1996, and May 1, 1996, respectively and as may have been further amended, the "Original Loan Documents"). B. Borrower and Bank wish to amend and restate the terms of the Original Loan Documents as stated herein. This Agreement sets forth the terms on which Bank will loan money to Borrower and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Advance" or "Advances" means a cash advance or cash advances under the Revolving Facility. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and each Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records relating to its property. "Business Day" means a day of the year (a) that is not a Saturday, Sunday or other day on which banks in the States of California or Hawaii or the City of London are authorized or required to close and (b) on which dealings are carried on in the interbank market in which Banks customarily participate. "Cash Management Services" has the meaning set forth in Section 2.1.3. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Committed Line" means Twenty Million Dollars ($20,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, excluding all outstanding Advances made under Section 2.1 hereof, but including all other Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Equipment" means machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments. "Equivalent Amount" means the equivalent in United States Dollars of an Optional Currency, calculated at the spot rate for the purchase of such Optional Currency by BofH. "Exchange Contracts" means the foreign exchange contracts entered into pursuant to Section 2.1.2. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, extension generally with all or substantially all creditors, or proceedings seeking general reorganization, arrangement, or other relief. "Interest Period" means for each LIBOR Rate Advance, a period of approximately one, three or six months as Borrower may elect, provided that the last day of an Interest Period for a LIBOR Rate Advance shall be determined in accordance with the practices, of the LIBOR interbank market as from time to time in effect, provided, further, in all cases such period shall expire not later than the applicable Maturity Date. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Issuing Bank" means the Bank issuing a Letter of Credit pursuant to Section 2.1.1. SVB shall be the Issuing Bank, except that BofH shall be the Issuing Bank if (i) SVB is unable to issue a Letter of Credit or (ii) a Letter of Credit issued by SVB would require confirmation by another bank under circumstances in which a Letter of Credit issued by BofH would not require confirmation. "LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate Advance, the rate of interest per annum determined by SVB to be the per annum rate of interest at which deposits in United States Dollars are offered to SVB in the London interbank market in which SVB customarily participates at 11:00 A.M. (local time in such interbank market) three (3) Business Days before the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such Advance. "LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate Advance, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the LIBOR Base Rate for such Interest Period divided by (ii) 1 minus the Reserve Requirement for such Interest Period. "LIBOR Rate Advance" means an Advance bearing interest at a rate equal to the LIBOR Rate plus one and one-half percent (1 1/2%) and made pursuant to Section 2.1. "Lien" means any mortgage, lien, deed of trust, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Banks in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or financial condition of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower, taken as a whole, to repay the Obligations. "Maturity Date" means the date immediately preceding the first anniversary of the Closing Date. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to the Banks by Borrower pursuant to this Agreement, whether absolute or contingent, due or to become due (including any interest accruing after the commencement of an Insolvency Proceeding and any interest that would have accrued but for the commencement of an Insolvency Proceeding), now existing or hereafter arising. "Original Loan Documents" has the meaning set forth in the recital paragraph above. "Percentage Share" means, as to each Bank, the percentage calculated in accordance with Section 11.1 hereof. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to either Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and such Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Indebtedness to trade creditors and with respect to surety bonds and similar obligations incurred in the ordinary cause of business; (d) Subordinated Debt; (e) Indebtedness of Borrower to any Subsidiary and Contingent Obligations of any Subsidiary with respect to obligations of Borrower (provided that the primary obligations are not prohibited hereby), and Indebtedness of any Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary with respect to obligations of any other Subsidiary (provided that the primary obligations are not prohibited hereby); (f) Indebtedness secured by Permitted Liens; (g) Capital leases or indebtedness incurred solely to purchase equipment which is secured in accordance with clause (c) of "Permitted Liens" below and is not in excess of the lesser of the purchase price of such equipment or the fair market value of such equipment on the date of acquisition; and (h) Extensions, refinancings, modifications, amendments and restatements of any of items of Permitted Indebtedness (a) through (g) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, and (iv) any Investments permitted by Borrower's investment policy, as amended from time to time, provided that such investment policy (any such amendment thereto) has been approved by Bank; (c) Investments consisting of the endorsement of negotiable instrument for deposit or collection or similar transaction in the ordinary course of business; (d) Investments accepted in connection with Transfers permitted by Section 5.1; (e) Investments (whether consisting of the purchase or securities, loans, capital contribution, or otherwise) of Subsidiaries in or to other Subsidiaries or in Borrower; (f) Investments consisting of (i) compensation of employees, officers and directors of Borrower or its Subsidiaries so long as the Board of Directors of Borrower determines that such compensation is in the best interests of Borrower, (ii) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (iii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower's Board of Directors; (g) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (h) Investments pursuant to or arising under currency agreements or interest rate agreements entered into in the ordinary course of business; (i) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (i) shall not apply to Investments by Borrower in any Subsidiary; (j) Investments constituting acquisitions permitted under Section 7.3; (k) Deposit accounts of Borrower in which Banks have a Lien prior to any other Lien; and (l) Investments made in accordance with Borrower's investment policy, as reviewed by Banks and approved from time to time by Borrower's board of directors. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings; (c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such Equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such Equipment; (d) Liens on Equipment leased by Borrower or any Subsidiary pursuant to an operating or capital lease in the ordinary course of business (including proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease of such Equipment (including Liens pursuant to leases permitted pursuant to Section 6.1 and Liens arising from UCC financing statements regarding leases permitted by this Agreement); (e) Leases or subleases and license and sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license; (f) Liens on assets (including the proceeds thereof and accessions thereto) that existed at the time such assets were acquired by Borrower or any Subsidiary (including Liens on assets of any corporation that existed at the time it became or becomes a Subsidiary); provided such Liens are not granted in contemplation of or in connection with the acquisition of such asset by Borrower or a Subsidiary; (g) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 7.8; (h) Easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not constituting a Material Adverse Effect; (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of customs duties in connection with the importation of goods; (j) Liens which constitute rights of set-off of a customary nature or banker's Liens with respect to amounts on deposit, whether arising by operation of law or by contract, in connection with arrangement entered in to with banks in the ordinary course of business; (k) Earn-out and royalty obligations existing on the date hereof or entered into in connection with an acquisition permitted by Section 6.3; (l) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a), (c), (d), (e), (f) and (k) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and (m) Liens on insurance proceeds in favor of insurance companies granted solely as security for financed premiums. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by SVB as its "prime rate," or by BofH as its "base rate," as applicable to the Advances made hereunder by each Bank, whether or not such announced rate is the lowest rate available from such Bank. "Prime Rate Advance" means an Advance bearing interest at a rate equal to the Prime Rate and made pursuant to Section 2.1. "Quick Assets" means, at any date as of which the amount thereof shall be determined, the unrestricted cash and cash-equivalents; net, billed accounts receivable; and investments with maturities not to exceed twelve (12) months of Borrower determined in accordance with GAAP. "Reserve Requirement" means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Banks by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of "LIBOR Base Rate" or (ii) any category of extensions of credit or other assets which include Advances. "Responsible Officer" means each of the Chief Executive Officer, the Chief Financial Officer and the Corporate Controller of Borrower. "Revolving Facility" means the facility under which Borrower may request Bank to issue cash advances, as specified in Section 2.1 hereof. "Schedule" means the schedule of exceptions, if any, attached hereto. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the consolidated total assets of Borrower and its Subsidiaries minus, without duplication, (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (ii) Total Liabilities. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. 1.2 Accounting Terms1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT2. LOAN AND TERMS OF PAYMENT 2.1 Advances2.1 Advances. (a) Advances. Subject to and upon the terms and conditions of this Agreement, each Bank agrees to make Advances to Borrower in an aggregate amount not to exceed such Bank's Percentage Share of the Committed Line minus 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 minus any amounts owed from Borrower to Bank pursuant to Cash Management Services. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement. (b) Requests for Advances. Whenever Borrower desires an Advance, Borrower will notify Servicing Agent by facsimile transmission or telephone no later than 3:00 p.m. California time on the Business Day that a Prime Rate Advance is to be made and 3:00 p.m. California time on the Business Day that is three (3) Business Days prior to the Business Day on which a LIBOR Rate Advance is to be made. Servicing Agent shall promptly deliver such notice to the Banks. Each Bank may make Advances under this Agreement, based upon instructions received by Servicing Agent from a Responsible Officer, or without instructions if in Servicing Agent's discretion such Advances are necessary to meet Obligations under this Agreement which have become due and remain unpaid. Each Bank shall be entitled to rely on any notice by telephone or otherwise given by a person who Servicing Agent reasonably believes to be a Responsible Officer, and Borrower shall indemnify and hold such Bank harmless for any damages or loss suffered by such Bank as a result of such reliance. Such Bank will wire or credit, as appropriate, the amount of Advances in United States Dollars made under this Section 2.1 to Borrower's deposit account held by Servicing Agent. Each such notice shall specify: (i) the date such Advance is to be made, which shall be a Business Day; (ii) the amount of such Advance; (iii) whether such Advance is to be a Prime Rate Advance or a LIBOR Rate Advance; (iv) if the Advance is to be a LIBOR Rate Advance, the Interest Period for such Advance. Each written request for an Advance, and each confirmation of a telephone request for such an Advance, shall be in the form of an Advance Request Form in the form of Exhibit A for a Prime Rate Advance, and an Advance Request Form in the form of Exhibit B-1 for a LIBOR Rate Advance, in each case executed by Borrower. (c) Prime Rate Advances. Each Prime Rate Advance shall be in an amount not less than Twenty Five Thousand Dollars ($25,000). The outstanding principal balance of each Prime Rate Receivables Advance shall bear interest (computed daily on the basis of a 360 day year and actual days elapsed), at a rate per annum equal to the Prime Rate. Borrower shall pay the entire outstanding principal amount of each Prime Rate Advance on the Maturity Date. (d) LIBOR Rate Advances. Each LIBOR Rate Advance shall be in an amount of not less than Five Hundred Thousand Dollars ($500,000). The outstanding principal balance of each LIBOR Rate Advance shall bear interest until principal is due (computed daily on the basis of a 360 day year and actual days elapsed) at a rate per annum equal to the LIBOR Rate plus 150 basis points for such LIBOR Rate Advance. The entire outstanding principal amount of each LIBOR Rate Advance shall be due and payable on the last day of the LIBOR Rate Interest Period for such LIBOR Rate Advance. Not more than ten (10) LIBOR Rate Advances shall be outstanding at any time. (e) Prepayment of the Advances. Borrower may at any time prepay any Prime Rate Advance or any LIBOR Rate Advance, in full or in part. Each partial prepayment for a LIBOR Rate Advance shall be in an amount not less than Two Hundred Fifty Thousand Dollars ($250,000). Each prepayment shall be made upon the irrevocable written or telephone notice of Borrower received by Servicing Agent not later than 10:00 a.m. California time on the date of the prepayment of a Prime Rate Advance, and not less than three (3) Business Days prior to the date of the prepayment of a LIBOR Rate Advance. The notice of prepayment shall specify the date of the prepayment, the amount of the prepayment, and the Advance or Advances to be prepaid. Each prepayment of a LIBOR Rate Advance shall be accompanied by the payment of accrued interest on the amount prepaid and any amount required by Section 2.8. (f) Maturity. The Revolving Facility shall terminate on the Maturity Date, at which time all Advances under this Section 2.1 and other amounts due under this Agreement shall be immediately due and payable. 2.1.1 Letters of Credit. (a) At Borrower's written request, Issuing Bank shall issue Letters of Credit for Borrower's account. Each Bank severally agrees to participate in Letters of Credit, in accordance with such Bank's Percentage Share. (b) Issuing Bank shall issue the Letter of Credit upon receipt of a Borrower's written request and Issuing Bank's standard form of application, stating (a) the date such Borrower wishes to receive the Letter of Credit (which shall be a Business Day); (b) the requested amount of such Letter of Credit; (c) the aggregate amount of all Advances and Letters of Credit then outstanding; (d) if appropriate, the conditions requested by Borrower under which the Letter of Credit may be drawn upon; and (e) any other information Issuing Bank might need to issue the Letter of Credit. Issuing Bank shall promptly notify the other Bank upon receipt of a request for a Letter of Credit. (c) The maximum aggregate obligation at any one time for undrawn and drawn but unreimbursed Letters of Credit shall not exceed the Committed Line minus the outstanding amount of the Foreign Exchange Reserve minus any amounts owed from Borrower to Bank pursuant to Cash Management Services, 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). Each Letter of Credit shall be issued pursuant to the terms and conditions of this Agreement and of the Issuing Bank's standard form of application and security agreement for letters of credit. Each Letter of Credit shall (a) expire no later than the Maturity Date, and (b) be otherwise in form and substance satisfactory to Issuing Bank, provided that a Letter of Credit may expire after the Maturity Date for so long as Borrower's reimbursement obligation in connection therewith is secured by cash on terms acceptable to Banks. Upon issuing a Letter of Credit, the Issuing Bank shall immediately notify the other Bank of such issuance and shall, on a continuing basis, keep the other Bank informed of the drawn and undrawn but unreimbursed amount of each Letter of Credit for so long as such Letter of Credit is outstanding. With respect to standby Letters of Credit, Borrower shall pay to Issuing Bank a nonrefundable issuance fee of at least one and one-half percent (1 1/2%) of the face amount of the Letter of Credit at the time Borrower requests the Letter of Credit. The Issuing Bank shall retain a fee equal to one-eighth of one percent (0.125%) of the face amount of the Letter of Credit, and shall share the balance of such issuance fee equally with the other Bank. With respect to commercial Letters of Credit, Borrower shall pay to Issuing Bank a nonrefundable issuance fee equal to one-eighth of one percent (0.125%) of the face amount of the Letter of Credit at the time Borrower requests the Letter of Credit and a negotiation fee equal to one-eighth of one percent (0.125%) of the face amount of the Letter of Credit at the time a draw is made on the Letter of Credit. The Issuing Bank shall retain an issuance fee of One Hundred Dollars ($100) and a negotiation fee of One Hundred Dollar ($100), and shall share the balance of such issuing fee and negotiation fee equally with the other Bank. On the day on which Issuing Bank honors any drawing made by the beneficiary of a Letter of Credit, Borrower shall pay to Issuing Bank the full amount of the drawing so honored, or at Borrower's option, shall treat the amount of such drawing as an Advance under Section 2.1. The obligation to reimburse Issuing Bank for the amount of such drawing is absolute, unconditional, and irrevocable. (d) Borrower may request that Issuing Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Issuing Bank shall treat such demand as an Advance to Borrower of the Equivalent Amount thereof. Upon the issuance of any Letter of Credit payable in a currency other than United States Dollars, Banks shall create a reserve under the Committed Line for letters of credit against fluctuations in currency exchange rates, in an amount equal to twenty percent (20%) of the face amount of such Letter of Credit. The amount of such reserve may be amended by Banks from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Line shall be reduced by the amount of such reserve for so long as such Letter of Credit remains outstanding. 2.1.2 Foreign Exchange Contract; Foreign Exchange Settlements. (a) Subject to the terms of this Agreement, Borrower may enter into foreign exchange contracts, in currencies acceptable to the Banks, (the "Exchange Contracts") not to exceed an aggregate amount of Two Million Dollars ($2,000,000) (the "Contract Limit"), pursuant to which a Bank shall sell to or purchase from Borrower foreign currency on a spot or future basis. Borrower shall not request any Exchange Contracts at any time it is out of compliance with any of the provisions of this Agreement. All Exchange Contracts must provide for delivery of settlement on or before the Maturity Date. The amount available under the Committed Line at any time shall be reduced by the following amounts (the "Foreign Exchange Reserve") on any given day (the "Determination Date"): (i) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed more than two business days after the Determination Date, ten percent (10%) of the gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two business days after the Determination Date, one hundred percent (100%) of the gross amount of the Exchange Contracts. (b) Either Bank may, in its discretion, terminate the Exchange Contracts at any time (a) that an Event of Default occurs or (b) that there is no sufficient availability under the Committed Line and Borrower does not have available funds in its bank account to satisfy the Foreign Exchange Reserve. If a Bank terminates the Exchange Contracts, and without limitation of any applicable indemnities, Borrower agrees to reimburse Bank for any and all fees, costs and expenses relating thereto or arising in connection therewith. (c) Borrower shall not permit the total gross amount of all Exchange Contracts on which delivery is to be effected and settlement allowed in any two business day period to be more than Two Million Dollars ($2,000,000) (the "Settlement Limit"), nor shall Borrower permit the total gross amount of all Exchange Contracts to which Borrower is a party, outstanding at any one time, to exceed the Contract Limit. Notwithstanding the above, however, the amount which may be settled in any two (2) business day period may be increased above the Settlement Limit up to, but in no event to exceed, the amount of the Contract Limit under either of the following circumstances: (i) if there is sufficient availability under the Committed Line in the amount of the Foreign Exchange Reserve as of each Determination Date, provided that Bank in advance shall reserve the full amount of the Foreign Exchange Reserve against the Committed Line; or (ii) if there is insufficient availability under the Committed Line, as to settlements within any two (2) business day period, provided that a Bank, in its sole discretion, may: (A) verify good funds overseas prior to crediting Borrower's deposit account with such Bank (in the case of Borrower's sale of foreign currency); or (B) debit Borrower's deposit account with such Bank prior to delivering foreign currency overseas (in the case of Borrower's purchase of foreign currency). (d) In the case of Borrower's purchase of foreign currency, Borrower in advance shall instruct a Bank upon settlement either to treat the settlement amount as an advance under the Committed Line, or to debit Borrower's account for the amount settled. (e) Borrower shall execute all standard form applications and agreements of Banks in connection with the Exchange Contracts and, without limiting any of the terms of such applications and agreements, Borrower will pay all standard fees and charges of Banks in connection with the Exchange Contracts. (f) Without limiting any of the other terms of this Agreement or any such standard form applications and agreements of Banks, Borrower agrees to indemnify Banks and hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, costs and expenses (including, without limitation, attorneys' fees of counsel of Banks' choice), of every nature and description which it may sustain or incur, based upon, arising out of, or in any way relating to any of the Exchange Contracts or any transactions relating thereto or contemplated thereby. 2.1.3 PC-ACH Sublimit. Subject to the terms and conditions of this Agreement, Borrower may utilize, subject to availability under the Committed Line, up to an aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) for PC-ACH services as defined in that certain Cash Management Services Agreement provided to Borrower in connection herewith (a "Cash Management Service", or the "Cash Management Services"). Any amounts actually paid by Bank in respect of a Cash Management Service or Cash Management Services shall, when paid, constitute an Advance under this Agreement. 2.2 Overadvances2.2 Overadvances. If, at any time or for any reason, 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 2.1.1(d) plus (iv) the Foreign Exchange Reserve plus (v) any Advances owed by Borrower to Banks pursuant to Section 2.1.3 is greater than the Committed Line, 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. 2.3 Interest Rates, Payments, and Calculations2.3 Interest Rates, Payments, and Calculations. (a) Interest Rate. Except as set forth in Section 2.3(b), any Advances of each Bank shall bear interest, on the average Daily Balance, at the rates specified in Sections 2.1(c), and 2.1(d), respectively. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Accrued interest shall be due and payable in arrears upon the earlier of (i) with respect to any LIBOR Advance, the end of the Interest Period or (ii) any payment of principal or (iii) on the twenty-ninth (29th) day of each calendar month (except for the month of February for which the date shall be the twenty-eighth (28th) day). Servicing Agent shall, at the option of Servicing Agent, charge such interest, all Bank Expenses, and all Periodic Payments against Borrower's deposit account held at SVB or against the Committed Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments2.4 Crediting Payments. Prior to the occurrence of an Event of Default, each Bank shall credit a wire transfer of funds, check, or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence and during the continuation of an Event of Default, the receipt by a Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by a Bank after noon California time shall be deemed to have been received by such Bank as of the opening of business on the immediately following Business Day. Whenever any payment to a Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees2.5 Fees. Borrower shall pay to Banks the following: (a) Facility Fee. A facility fee equal to Twenty-Seven Thousand Five Hundred Dollars ($27,500) which fee shall be due and payable on the Closing Date and shall be fully earned and non-refundable as of such date; (b) Financial Examination and Appraisal Fees. Each Bank's customary fees and out-of-pocket expenses for such Bank's financial analysis and examination of Borrower performed from time to time by such Bank or its agents; and (c) Bank Expenses. Upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses, and, within thirty (30) days of demand, other Bank Expenses as they become due from time to time hereunder. 2.6 Additional Costs2.6 Additional Costs. In case any law, regulation, treaty or official directive or the written interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects any Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of such Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, any Bank; or (c) imposes upon any Bank any other material condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to such Bank, reduce the income receivable by such Bank or impose any expense upon such Bank with respect to any loans, such Bank shall notify Borrower thereof in writing. Borrower shall pay to such Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by such Bank of a statement of the amount and setting forth such Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error; provided, however, that Borrower shall not be liable for any such amount attributable to any period prior to 180 days prior to the date of such certificate. 2.7 Conversion/Continuation of Advances2.7 Conversion/Continuation of Advances. (a) Borrower may from time to time submit in writing a request that Prime Rate Advances be converted to LIBOR Rate Advances or that any existing LIBOR Rate Advances continue for an additional Interest Period. Such request shall specify the amount of the Prime Rate Advances that will constitute LIBOR Rate Advances (subject to the limits set forth below) and the Interest Period to be applicable to such LIBOR Rate Advances. Each written request for a conversion to a LIBOR Rate Advance or a continuation of a LIBOR Rate Advance shall be substantially in the form of a LIBOR Rate Conversion/Continuation Certificate as set forth on Exhibit B-2, which shall be duly executed by a Responsible Officer. Subject to the terms and conditions contained herein, three (3) Business Days after Servicing Agent's receipt of such a request from Borrower, such Prime Rate Advances shall be converted to LIBOR Rate Advances or such LIBOR Rate Advances shall continue, as the case may be provided that: (i) no Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists; (ii) no party hereto shall have sent any notice of termination of the Agreement; (iii) Borrower shall have complied with such customary procedures as Banks have established from time to time for Borrower's requests for LIBOR Rate Advances; (iv) the amount of a Prime Rate Advance shall be Twenty-Five Thousand Dollars ($25,000) or more, and the amount of a LIBOR Rate Advance shall be Five Hundred Thousand Dollars ($500,000) or such greater amount which is an integral multiple of Fifty Thousand Dollars ($50,000); and (v) Servicing Agent shall have determined that the Interest Period or LIBOR Rate is available to Banks as of the date of the request for such LIBOR Rate Advance. Any request by Borrower to convert Prime Rate Advances to LIBOR Rate Advances or continue any existing LIBOR Rate Advances shall be irrevocable. Notwithstanding anything to the contrary contained herein, Banks shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable LIBOR Rate market to fund any LIBOR Rate Advances, but the provisions hereof shall be deemed to apply as if Banks had purchased such deposits to fund the LIBOR Rate Advances. (b) Any LIBOR Rate Advances shall automatically convert to Prime Rate Advances upon the last day of the applicable Interest Period, unless Banks have received and approved a complete and proper request to continue such LIBOR Rate Advance at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any LIBOR Rate Advances shall, at Banks' option, convert to Prime Rate Advances in the event that an Event of Default shall exist. Borrower shall pay to Banks, upon demand by Banks (or Servicing Agent may, at its option, charge Borrower's deposit account) any amounts required to compensate Banks for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of LIBOR Rate Advances to Prime Rate Advances pursuant to any of the foregoing. 2.8 Additional Requirements/Provisions Regarding LIBOR Rate Advances.2.8 Additional Requirements/Provisions Regarding LIBOR Rate Advances. (a) If for any reason (including voluntary or mandatory prepayment or acceleration), Banks receive all or part of the principal amount of a LIBOR Rate Advance prior to the last day of the Interest Period for such LIBOR Rate Advance Borrower shall on demand by Servicing Agent, pay Servicing Agent the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period or term exceeds (ii) the interest which would have been recoverable by Banks by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period or term at the interest rate determined by Servicing Agent in its reasonable discretion. Servicing Agent's determination as to such amount shall be conclusive absent manifest error. (b) Borrower shall pay to a Bank, upon demand by a Bank, from time to time such amounts as such Bank may reasonably determine to be necessary to compensate it for any costs incurred by such Bank that such Bank determines are attributable to its making or maintaining of any amount receivable by such Bank hereunder in respect of any Advances relating thereto (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement in respect of any Advances (other than changes which affect taxes measured by or imposed on the overall net income of such Bank by the jurisdiction in which such Bank has its principal office); or (ii) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of such Bank (including any Advances or any deposits referred to in the definition of "LIBOR Base Rate"); or (iii) imposes any other material condition affecting this Agreement (or any of such extensions of credit or liabilities). Such Bank will notify Borrower of any event occurring after the date of the Agreement which will entitle such Bank to compensation pursuant to this section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Such Bank will furnish Borrower with a statement setting forth the basis and amount of each request by such Bank for compensation under this Section 2.8. Determinations and allocations by a Bank for purposes of this Section 2.8 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Advances or of making or maintaining Advances or on amounts receivable by it in respect of Advances, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be conclusive absent manifest error. (c) Borrower shall pay to a Bank, upon the request of such Bank, such amount or amounts as shall be sufficient (in the sole good faith opinion of such Bank) to compensate it for any reasonable loss, costs or expense incurred by it as a result of any failure by Borrower to borrow a LIBOR Rate Advance on the date for such borrowing specified in the relevant notice of borrowing hereunder. (d) If a Bank shall determine that the adoption or implementation of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any respect or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank or any person or entity controlling Bank (a "Parent") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within fifteen (15) days after demand by such Bank, Borrower shall pay to Bank such additional amount or amounts as will compensate such Bank for such reduction. A statement of such Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error. (e) If at any time a Bank, in its sole and absolute discretion, determines that: (i) the amount of the LIBOR Rate Advances for periods equal to the corresponding Interest Periods or any other period are not available to such Bank in the offshore currency interbank markets, or (ii) the LIBOR Rate does not accurately reflect the cost to Bank of lending the LIBOR Rate Advance, then such Bank shall promptly give notice thereof to Borrower, and upon the giving of such notice such Bank's obligation to make the LIBOR Rate Advances shall terminate, unless Banks and Borrower agree in writing to a different interest rate applicable to LIBOR Rate Advances. If it shall become unlawful for a Bank to continue to fund or maintain any Advances, or to perform its obligations hereunder, upon demand by such Bank, Borrower shall prepay the Advances in full with accrued interest thereon and all other amounts payable by Borrower hereunder (including, without limitation, any amount payable in connection with such prepayment pursuant to Section 2.8(a)). 2.9 Term2.9 Term. This Agreement shall become effective upon the date hereof and shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Banks shall have the right to terminate any obligation to make Advances under this Agreement immediately and without notice upon the earlier of (i) the occurrence and during the continuance of an Event of Default or (ii) the Maturity Date. On the date of termination, all Obligations shall become immediately due and payable in cash or by wire transfer. 3. CONDITIONS OF LOANS3. CONDITIONS OF LOANS 3.1 Conditions Precedent to Initial Advance3.1 Conditions Precedent to Initial Advance. The obligation of either Bank to make the initial Advance is subject to the condition precedent that such Bank shall have received, in form and substance satisfactory to such Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof, provided reasonably detailed invoices are received; and (d) such other documents, and completion of such other matters, as Banks may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Advances3.2 Conditions Precedent to all Advances. The obligation of any Bank to make each Advance, including the initial Advance, is further subject to the following conditions: (a) timely receipt by Servicing Agent of the Loan Payment/Advance Request Form or LIBOR Rate Advance Request Form, as applicable, as provided in Section 2.1; and (b) the representations and warranties contained in Section 4 shall be true and correct in all material respects on and as of the date of such Loan Payment/Advance Request Form or LIBOR Rate Advance Request Form, as applicable, and on the effective date of each Advance as though made at and as of each such date (except to the extent they relate specifically to an earlier date, in which case such representations and warranties shall continue to have been true and accurate as of such date), and no Event of Default shall have occurred and be continuing, or would result from such Advance. The making of each Advance shall be deemed to be a representation and warranty by Borrower on the date of such Advance or Inventory Advance as to the accuracy of the facts referred to in this Section 3.2(b). 4. REPRESENTATIONS AND WARRANTIES4. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 4.1 Due Organization and Qualification4.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 4.2 Due Authorization; No Conflict4.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 4.3 No Prior Encumbrances4.3 No Prior Encumbrances. Borrower has good and indefeasible title to its property, free and clear of Liens, except for Permitted Liens. 4.4 Name; Location of Chief Executive Office4.4 Name; Location of Chief Executive Office. Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 9 hereof. 4.5 Litigation4.5 Litigation. There are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect. Borrower does not have knowledge of any such pending or threatened actions or proceedings. 4.6 No Material Adverse Change in Financial Statements4.6 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 4.7 Solvency4.7 Solvency. The fair saleable value of Borrower's assets (including good will minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 4.8 Regulatory Compliance4.8 Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 4.9 Environmental Condition4.9 Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 4.10 Taxes4.10 Taxes. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein. 4.11 Subsidiaries4.11 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 4.12 Government Consents4.12 Government Consents. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of their respective businesses as currently conducted. 4.13 Full Disclosure4.13 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading (it being recognized by Bank, except as provided in Section 4.12, that the projections and forecasts provided by Borrower are not viewed as facts and that the actual results during the period or periods covered by any such projections or forecasts may differ from the projected or forecasted results). 5. AFFIRMATIVE COVENANTS5. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as a Bank may have any commitment to make an Advance hereunder, Borrower shall do all of the following: 5.1 Good Standing5.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 5.2 Government Compliance5.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect. 5.3 Financial Statements, Reports, Certificates5.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Banks: (a) within five (5) days upon becoming available or, if earlier, to the extent applicable, forty-five (45) days after the end of each fiscal quarter, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K and 10- Q filed with the Securities and Exchange Commission; (b) as soon as available, but in any event within one hundred and twenty (120) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Five Hundred Thousand Dollars ($500,000) or more; and (d) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. 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. 5.4 Inventory; Returns5.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Servicing Agent of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Two Million Dollars ($2,000,000). 5.5 Taxes5.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Banks, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Banks with proof satisfactory to Banks indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 5.6 Insurance5.6 Insurance. Borrower, at its expense, shall keep its business insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of its assets in amounts and of a type that are customary to businesses similar to Borrower's. 5.7 Principal Depository5.7 Principal Depository. Borrower shall maintain its principal depository and operating accounts with SVB. 5.8 Quick Ratio5.8 Quick Ratio. Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities of at least 2.00 to 1.00. 5.9 Debt-Tangible Net Worth Ratio5.9 Debt-Tangible Net Worth Ratio. Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 1.00 to 1.00. 5.10 Tangible Net Worth5.10 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 up to an aggregate amount of Fifteen Million Dollars (15,000,000) provided such amount is used to repurchase Borrower's capital stock in accordance with Section 6.6. 5.11 Out-of-Debt5.11 Out-of-Debt. Borrower shall, between the time of the date of the initial Advance hereunder and the Maturity Date, have repaid all outstanding Obligations hereunder for a period of thirty (30) consecutive days. 5.12 Further Assurances5.12 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 6. NEGATIVE COVENANTS6. NEGATIVE COVENANTS Borrower covenants and agrees that, without the prior written consent of Banks, which may be withheld in Banks' sole discretion, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as a Bank may have any commitment to make any Advances, Borrower will not do any of the following: 6.1 Dispositions6.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment, or Equipment financed by other vendors; (iv) Transfers which constitute liquidation of Investments permitted under Section 6.7; and (v) other Transfers not otherwise permitted by this Section 6.1 not exceeding One Million Dollars ($1,000,000) in the aggregate in any fiscal year. 6.2 Change in Business6.2 Change in Business. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership other than the sale of additional Common Stock of the Company. Borrower will not, without thirty (30) days prior written notification to Banks, relocate its chief executive office. 6.3 Mergers or Acquisitions6.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person where the aggregate consideration paid in any fiscal year with respect to such mergers, consolidations and acquisitions exceeds One Million Dollars ($1,000,000); provided that this Section 6.3 shall not apply to (i) the purchase of inventory, equipment or intellectual property rights in any transaction valued at less than One Hundred Thousand Dollars ($100,000) in the ordinary course of business or (ii) transactions among Subsidiaries or among Borrower and its Subsidiaries in which Borrower is the surviving entity. 6.4 Indebtedness6.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 6.5 Encumbrances6.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any accounts receivable, or permit any of its Subsidiaries so to do, except for Permitted Liens. 6.6 Distributions6.6 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 Fifteen Million Dollars ($15,000,000) for so long as an Event of Default has not occurred and will not exist after giving effect to such repurchase. 6.7 Investments6.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 6.8 Transactions with Affiliates6.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non- affiliated Person except for transactions with a Subsidiary that are upon fair and reasonable terms and transactions constituting Permitted Investments. 6.9 Subordinated Debt6.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Banks' prior written consent. 6.10 Compliance6.10 Compliance. Become an "investment company" controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect, or permit any of its Subsidiaries to do any of the foregoing. 7. EVENTS OF DEFAULT7. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 7.1 Payment Default7.1 Payment Default. If Borrower fails to pay the principal of, or any interest on, any Advances when due and payable; or fails to pay any portion of any other Obligations not constituting such principal or interest, including without limitation Bank Expenses, within thirty (30) days of receipt by Borrower of an invoice for such other Obligations; 7.2 Covenant Default7.2 Covenant Default. If Borrower fails to perform any obligation under Sections 5.7, 5.8, 5.9, 5.10 or 5.11 or violates any of the covenants contained in Article 6 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and a Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 7.3 Material Adverse Change7.3 Material Adverse Change. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations; 7.4 Attachment7.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Advances will be required to be made during such cure period); 7.5 Insolvency7.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within thirty (30) days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 7.6 Other Agreements7.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000) or that could have a Material Adverse Effect; 7.7 Subordinated Debt7.7 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 7.8 Judgments7.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Five Hundred Thousand Dollars ($500,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Advances will be made prior to the satisfaction or stay of such judgment); or 7.9 Misrepresentations7.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 8. BANK'S RIGHTS AND REMEDIES8. BANK'S RIGHTS AND REMEDIES 8.1 Rights and Remedies8.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 7.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; and (c) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (e) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank. 8.2 Bank Expenses8.2 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then a Bank may do any or all of the following: (a) make a payment of the same or any parts thereof; (b) set up such reserves under the Revolving Facility as Banks deem necessary to protect Banks from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by a Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided. Any payments made by a Bank shall not constitute an agreement by a Bank to make similar payments in the future or a waiver by a Bank of any Event of Default under this Agreement. 8.3 Remedies Cumulative8.3 Remedies Cumulative. Banks' rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. A Bank shall have all other rights and remedies not inconsistent herewith as provided under applicable law. No exercise by a Bank of one right or remedy shall be deemed an election, and no waiver by a Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by a Bank shall constitute a waiver, election, or acquiescence by it. No waiver by a Bank shall be effective unless made in a written document signed on behalf of a Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 8.4 Demand; Protest8.4 Demand; Protest. Subject to any requirement under other sections of this Agreement, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by a Bank on which Borrower may in any way be liable. 9. NOTICES9. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to a Bank, as the case may be, at its addresses set forth below: If to Borrower: Centigram Communications Corporation 91 East Tasman Drive San Jose, CA 95134 Attn: Mr. Tom Brunton FAX: (408) 428-3732 If to Servicing Agent Silicon Valley Bank or SVB: 3003 Tasman Drive Santa Clara, CA 95054 Attn: Mr. Jeffrey Huhn FAX: (408) 748-9478 If to BofH: Bank of Hawaii 1850 North Central Avenue, Suite 400 Phoenix, AZ 85004 Attn: Mr. Kenneth Loveless FAX: (602) 257-2235 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 11. INTERCREDITOR PROVISIONS11. INTERCREDITOR PROVISIONS 11.1 Proportionate Interests11.1 Proportionate Interests. 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) the maximum amount the Bank has committed to advance as set forth on the signature page signed by the Bank to (b) the Committed Line. Any reference in this Agreement or the Loan Documents to an allocation between or sharing by the Banks of any right, interest, or duty "ratably," "proportionally," "pro rata," or in similar terms shall refer to this ratio. No Bank is obligated to advance any funds in lieu of or for the account of the other Bank if the latter Bank fails to make such Advance. 11.2 Designation of Service Agent11.2 Designation of Service Agent. To facilitate the administration of this Agreement, SVB shall act as "Servicing Agent" for itself and BofH. Servicing Agent shall have only such duties as are expressly set forth in this Agreement, or as otherwise agreed in writing by the Banks. Servicing Agent shall be deemed to act on behalf of both Banks whenever Servicing Agent acts under this Agreement. 11.3 No Agency11.3 No Agency. EXCEPT AS SPECIFIED HEREIN, NEITHER BANK IS AN AGENT OF THE OTHER. NEITHER BANK HAS ANY AUTHORITY TO ACT OR FAIL TO ACT FOR THE OTHER. THE OBLIGATIONS OF EACH BANK HEREUNDER ARE SEVERAL. NO BANK SHALL BE LIABLE FOR THE FAILURE OF ANY OTHER BANK TO PERFORM ITS OBLIGATIONS HEREUNDER. 11.4 No Reliance11.4 No Reliance. The provisions of this Article 11 are solely for the benefit of Banks in specifying their rights and obligations with respect to each other, and not for the benefit of any Borrower or its assigns or successors. 12. GENERAL PROVISIONS12. GENERAL PROVISIONS 12.1 Successors and Assigns12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Banks' prior written consent, which consent may be granted or withheld in Bank's sole discretion. Banks shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Banks' obligations, rights and benefits hereunder. 12.2 Indemnification12.2 Indemnification. Borrower shall defend, indemnify and hold harmless each Bank and its officers, employees, and agents against (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement, and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by a Bank as a result of, or in any way arising out of, following, or consequential to, transactions between such Bank and Borrower, whether under this Agreement or otherwise, (including without limitation reasonable attorneys fees and expenses), except for losses caused by such Bank's gross negligence or willful misconduct. 12.3 Time of Essence12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing, Integration12.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 Effect of Amendment and Restatement12.6 Effect of Amendment and Restatement. This Agreement is intended to and does completely amend and restate, without novation, the Original Loan Documents. 12.7 Counterparts12.7 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.8 Survival12.8 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations (excluding Obligations under Section 2.6 and 12.2 to the extent they remain inchoate at the time the outstanding payment Obligations are paid in full) remain outstanding. The obligations of Borrower to indemnify a Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against such Bank have run. 12.9 Confidentiality12.9 Confidentiality. In handling any confidential information each Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Advances, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may deem appropriate in the exercise of its remedies under this Agreement. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. Notwithstanding any provision of this Agreement to the contrary, neither Borrower nor any of its Subsidiaries will be required to disclose, permit the inspection, examination, copying or making extracts of, or discussions of: any document, information or other matter (i) prior to the occurrence of an Event of Default that constitutes non-financial trade secrets or non-financial proprietary information (provided that the terms of agreements that generate Accounts shall not be deemed to be "non-financial trade secrets or non-financial proprietary information"), or (ii) in respect to which disclosure to Bank (or designated representative) is then prohibited by (a) law, or (b) an agreement binding upon Borrower or any Subsidiary that was not entered into by Borrower or such Subsidiary for the primary purpose of concealing information from Bank. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. CENTIGRAM COMMUNICATIONS CORPORATION By: Title: SILICON VALLEY BANK By: Title: Maximum Commitment Amount: $10,000,000 BANK OF HAWAII By: Title: Maximum Commitment Amount: $10,000,000 EXHIBIT A LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M. PACIFIC TIME TO: CENTRAL CLIENT SERVICE DIVISION DATE: FAX#: (408) 496-2426 TIME: FROM: Centigram Communications Corporation CLIENT NAME (BORROWER) REQUESTED BY: AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: PHONE NUMBER: FROM ACCOUNT # TO ACCOUNT # REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT PRINCIPAL INCREASE (ADVANCE) $ PRINCIPAL PAYMENT (ONLY) $ INTEREST PAYMENT (ONLY) $ PRINCIPAL AND INTEREST (PAYMENT) $ OTHER INSTRUCTIONS: All representations and warranties of Borrower stated in the Amended and Restated Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for an Advance confirmed by this Loan Payment/Advance Form; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. Authorized Requester Phone # Received By (Bank) Phone # Authorized Signature (Bank) EXHIBIT B-1 LIBOR RATE ADVANCE REQUEST FORM The undersigned hereby certifies as follows: I, , am the duly elected and acting of Centigram Communications Corporation ("Borrower"). This certificate is delivered to Silicon Valley Bank, as Servicing Agent, pursuant to Section 2 of that certain Amended and Restated Loan Agreement by and between Borrower and Banks (the "Agreement"). The terms used in this LIBOR Rate Advance Request Form that are defined in the Agreement have the same meaning herein as ascribed to them therein. Borrower hereby requests a LIBOR Rate Advance as follows: (a) The date on which the Advance is to be made is , 19 . (b) The amount of the Advance is to be ($ ), in the form of a LIBOR Rate Advance for an Interest Period of months. All representations and warranties of Borrower stated in the Agreement are true, correct and complete in all material respects as of the date of this request for a loan; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. IN WITNESS WHEREOF, this LIBOR Rate Advance Request Form is executed by the undersigned as of this day of , 19 . CENTIGRAM COMMUNICATIONS CORPORATION By: Title: For Internal Bank Use Only LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date % EXHIBIT B-2 LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE The undersigned hereby certifies as follows: I, , am the duly elected and acting of Centigram Communications Corporation ("Borrower"). This certificate is delivered to Silicon Valley Bank, as Servicing Agent, pursuant to Section 2 of that certain Amended and Restated Loan Agreement by and between Borrower and Banks (the "Agreement"). The terms used in this LIBOR Rate Conversion/Continuation Certificate that are defined in the Agreement have the same meaning herein as ascribed to them therein. Borrower hereby requests on , 19 a LIBOR Rate Advance (the "Advance") as follows: (a) (i) A rate conversion of an existing Prime Rate Advance from a Prime Rate Advance to a LIBOR Rate Advance; or (ii) A continuation of an existing LIBOR Rate Advance as a LIBOR Rate Advance. [Check (i) or (ii) above] (b) The date on which the Advance is to be made is , 19 . (c) The amount of the Advance is to be ($ ), for an Interest Period of month(s). All representations and warranties of Borrower stated in the Agreement are true, correct and complete in all material respects as of the date of this request for a loan; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate is executed by the undersigned as of this day of , 19 . CENTIGRAM COMMUNICATIONS CORPORATION By: Title: For Internal Bank Use Only LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date % EXHIBIT C COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK, BANK OF HAWAII FROM: CENTIGRAM COMMUNICATIONS CORPORATION The undersigned authorized officer of Centigram Communications Corporation hereby certifies that in accordance with the terms and conditions of the Amended and Restated Loan Agreement between Borrower and Banks (the "Agreement"), (i) Borrower is in complete compliance for the period ending with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. Please indicate compliance status by circling Yes/No under "Complies" column. Reporting Covenant Required Complies Quarterly financial statements Quarterly within 45 days Yes No Annual (CPA Audited) FYE within 120 days Yes No Financial Covenant Required Actual Complies Maintain on a Quarterly Basis: Minimum Quick Ratio 2.00:1.00 _____:1.0 Yes No Minimum Tangible Net Worth $70,000,000* $_______ Yes No Maximum Debt/Tangible Net Worth 1.00:1.00 ____:1.0 Yes No 30 consecutive days during term Out of Debt after first Advance _________ Yes No * Minus up to aggregate of $15,000,000 utilized for stock repurchases. BANK USE ONLY Received by: AUTHORIZED SIGNER Date: Verified: AUTHORIZED SIGNER Date: Compliance Status: Yes No Comments Regarding Exceptions: See Attached. Sincerely, SIGNATURE TITLE DATE DISBURSEMENT REQUEST AND AUTHORIZATION Borrower: Centigram Communications Corporation Banks: Silicon Valley Bank Bank of Hawaii LOAN TYPE. This is a variable rate, revolving line of credit of a principal amount up to $20,000,000. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business. SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working Capital. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Bank's conditions for making the loan have been satisfied. Please disburse the loan proceeds as follows: Revolving Line Amount paid to Borrower directly: $ Undisbursed Funds $ Principal $ CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: Charges Paid in Cash: $27,500 Loan Fee $TBD Outside Counsel Fees and Expenses (Estimate) $TBD UCC Search Fee $TBD UCC Filing Fee Total Charges Paid in Cash $ AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from Borrower's account numbered the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Bank shall not be obligated to advance funds to cover the payment. FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS AUTHORIZATION IS DATED AS OF APRIL 30, 1997. BORROWER: CENTIGRAM COMMUNICATIONS CORPORATION Authorized Officer CORPORATE RESOLUTIONS TO BORROW Borrower: CENTIGRAM COMMUNICATIONS CORPORATION I, the undersigned Secretary or Assistant Secretary of Centigram Communications Corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation and Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: Borrow Money. To borrow from time to time from Silicon Valley Bank and Bank of Hawaii ("Banks"), on such terms as may be agreed upon between the officers, employees, or agents and Banks, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Amended and Restated Loan Agreement dated as of April 30, 1997 (the "Loan Agreement"). Execute Notes. To execute and deliver to Banks the Loan Agreement and extensions, modifications, refinancings, consolidations, or substitutions for the Loan Agreement. Negotiate Items. To draw, endorse, and discount with Banks all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Banks, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. Letters of Credit; Foreign Exchange. To execute letters of credit applications, foreign exchange agreements and other related documents pertaining to Banks' issuance of letters of credit and foreign exchange contracts. Further Acts. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Banks may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Banks. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on April 30, 1997 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X Attachment 1 - Certificate of Incorporation Attachment 2 - ByLaws EX-10.22 3 SETTLEMENT AGREEMENT SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release ("Agreement") is made by and between Centigram Communications Corporation, a Delaware corporation (the "Company"), and George Sollman, an individual residing in California ("Employee"). WHEREAS, Employee was employed by the Company; WHEREAS, the Company and Employee have entered into a Confidential Information and Invention Assignment Agreement (the "Confidentiality Agreement"); WHEREAS, the Company and Employee have entered into a letter agreement (the "Change in Control Agreement") dated October 8, 1991 pursuant to which Employee has been granted certain rights in connection with any "Involuntary Termination" within 12 months of a "Change of Control" of the Company (as such terms are defined in the Change in Control Agreement); WHEREAS, the Company and Employee have entered into an Employment Agreement dated February 22, 1985, as amended by that certain First Amended Employment Agreement between the Company and Employee dated as of January 6, 1986 and that certain Amendment No. 1 to First Amended Employment Agreement between the Company and Employee dated as of May 13, 1991 (together with the Change in Control Agreement, the "Employment Agreements"); WHEREAS, the Company has loaned $300,000 to Employee pursuant to a Promissory Note dated as of April 1996, which loan has been secured pursuant to a Stock Pledge Agreement between the Company and Employee dated as of April 1996 (together, the "Note"); WHEREAS, the Company has advanced $10,000 to Employee in connection with certain travel expenses (the "Advance"); WHEREAS, the Company and Employee have mutually agreed to terminate the employment relationship and to release each other from any claims arising from or related to the employment relationship; NOW THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as "the Parties") hereby agree as follows: 1. Resignation. Employee resigned from his positions as the Company's President and Chief Executive Officer effective April 15, 1997. 2. Consideration. (a) Severance Payment. The Company agrees to pay Employee the net sum of Two Hundred and Eighty Nine Thousand Three Hundred and Twenty Dollars ($289,320), which number reflects applicable deductions and withholding consistent with the Company's usual payroll practices, promptly following the Effective Date (as defined in Section 28 hereof). (b) Loan Forgiveness. At the later of the Effective Date or January 1, 1998, (i) if Employee has satisfied the terms of Section 7 through such date, the Note shall be canceled and of no further effect and the principal and accrued interest owing thereon shall be forgiven and (ii) all obligations of Employee to repay the Advance shall be forgiven and shall be of no further effect, provided, however, that in the event that prior to the later of the Effective Date or January 1, 1998, there shall occur a breach of any representation, warranty, covenant or agreement on the part of Employee set forth in this Agreement, then the terms of this Section 2(b) shall be void and of no force and effect. (c) Benefits. For the time period from April 15, 1997 through April 15, 1999 (the "payment period"), Employee shall continue to participate in the Company's health and dental insurance benefit plans in accordance with the rules established for individual participation in such plans, as such rules may be amended from time to time. The Company shall also reimburse Employee for the actual cost of one medical exam per calendar year, such amount not to exceed $650 per exam. In addition, the Company shall pay Employee the actual cost of his maintaining a life insurance policy in the amount of $1,000,000 on his own life (with such beneficiaries as he may select) during the payment period and shall reimburse Employee for up to $1,000 per year in costs incurred in connection with Employee's preparation of federal and state income tax returns during the payment period. Except as set forth in this Section 2(c), during the payment period, Employee will not be entitled to accrual of any employee benefits, including, but not limited to, vacation benefits or bonuses. (d) Office Support. For the time period from April 15, 1997 through the earlier of (i) November 1, 1997 or (ii) such time as Employee shall commence employment with a party other than the Company (the "office period"), the Company shall allow Employee to maintain an office at the Company's headquarters facility (the "office"). Such office shall be selected by the Company in its sole discretion. In addition, during the office period, (i) the Company shall provide Employee with reasonable secretarial support at the office, and (ii) the Company shall reimburse Employee for Employee's reasonable telephone expense incurred at the office, such expense not to exceed $200 per month. Moreover, for the time period from April 15, 1997 through the earlier of April 15, 1998 or such time as Employee shall commence employment with a party other than the Company, the Company shall provide Employee with continued access to e-mail and voice-mail selected by the Company. (e) Computer System. After the Effective Date, the Employee may purchase the Dell 486 computer system now in his possession at its book value in the event he notifies the Company of his intent to do so within ten days following the later of (i) the Effective Date and (ii) receipt of notification of such book value from the Company. 3. Board of Directors. Employee hereby irrevocably tenders his resignation from the Company's Board of Directors, effective November 1, 1997. Employee acknowledges and agrees that he shall not be entitled to receive any additional grants of stock or stock options by virtue of his service on the Company's Board of Directors. 4. Options. Except as provided herein, the exercise of any stock options held by Employee shall continue to be subject to the terms and conditions of the Company's stock plans and the applicable stock option agreements between Employee and the Company. 5. Employment Agreements. As of the Effective Date, the Employment Agreements shall be canceled and of no further force or effect. 6. Consulting. (a) During the period from April 15, 1997 through November 1, 1997 (the "first consulting period"), Employee shall make himself available to the Company as a consultant at least two full working days during any one- month period. In the event that the Company shall request in writing that Employee perform consulting services on behalf of the Company during the first consulting period (such services not to include Employee's service as a member of the Company's Board of Directors), then the Company shall pay Employee $200 per hour, in a minimum increment of four (4) hours for any consulting day, for the performance of such services, payable in accordance with the Company's regular payroll practices. (b) During the period from November 1, 1997 through May 1, 1998 (the "second consulting period"), the Company shall request and Employee shall perform consulting services on behalf of the Company at least thirty- five hours during each calendar month period. Employee shall receive no further compensation for the first thirty-five hours per month of such services, and Employee acknowledges and agrees that the payments made hereunder shall constitute full consideration for such services. Services in addition to such thirty-five hours shall be compensated at the rate set forth in Section 6(a) above. Employee and the Company further agree that all options to purchase Common Stock of the Company granted by the Company to the Employee, except those granted pursuant to grant number 002527 (granted December 10, 1996 to purchase 117,700 shares of the Company's Common Stock at an exercise price of $13.50 per share) and grant number 002528 (granted December 10, 1996 to purchase 7,300 shares of the Company's Common Stock at an exercise price of $13.50 per share) (the "Excepted Options"), shall expire and be of no further force and effect, effective November 30, 1997, and that the Excepted Options shall expire and be of no further force and effect on the thirtieth day following the earlier of (i) the last day of the second consulting period or (ii) such time following the thirtieth day of the second consulting period as Employee shall not have performed at least thirty-five hours of consulting services on behalf of the Company during any calendar month of the second consulting period. The Company covenants that it shall take all reasonable action under its control reasonably necessary to enable Employee to perform consulting services on behalf of the Company at least thirty-five hours during each calendar month until the last day of the second consulting period (or such earlier time as Employee shall not have performed at least thirty-five hours of consulting services on behalf of the Company during any calendar month of the second consulting period). Employee and the Company shall cooperate with each other to reasonably schedule the time, date and location of performance of Employee's obligations pursuant to this Section 6(b). Without limiting the generality of the foregoing, in the event that the services requested by the Company to be performed by the Employee in connection with this Section 6(b) must, by their nature, be performed on a specific day and time, Employee shall have the right, if Employee is subject to preexisting obligations conflicting with such day and time, to request in good faith an alternative assignment, which request shall be accommodated by the Company, provided that such right shall not be exercised with regard to more than 10 days in any calendar month. 7. Covenant Not to Compete. (a) During the first consulting period and the second consulting period, Employee shall not, directly or indirectly, either as an individual or as an employee, agent, consultant, advisor, independent contractor, general partner, officer, director, shareholder, investor, lender, or in any other capacity whatsoever, of any person, firm, corporation, partnership or other entity or in any other capacity directly or indirectly: (1) own, manage, control or participate in the ownership, management or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any of Octel Communications Corporation, Boston Technology, Inc., Converse Technology (S) Pte Ltd., Applied Voice Technology, Inc., Active Voice Corporation or any other corporation, partnership, proprietorship, firm, association or other business entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, any of the foregoing (a "Competitive Business"); (2) induce or attempt to induce any person who at the time of such inducement is an employee of the Company or any subsidiary thereof to perform work or services for any other person or entity other than the Company; or (3) permit the name of Employee to be used in connection with a Competitive Business. Employee and the Company expressly acknowledge and agree that the non-competition provisions contained in this Section 7 are entered into in connection with Employee's service as a consultant of the Company and are permissible and enforceable pursuant to the provisions of applicable law. Nonetheless, if any restriction set forth in this Section 7 is held to be unreasonable or unenforceable, then Employee agrees, and hereby submits, to the reduction and limitation of such prohibition to such area or period as shall be deemed reasonable. 8. Confidential Information. Employee shall continue to maintain the confidentiality of all confidential and proprietary information of the Company and shall continue to comply with the terms and conditions of the Confidentiality Agreement between Employee and the Company. Employee shall return all the Company property and confidential and proprietary information in his possession to the Company on the Effective Date of this Agreement. 9. Payment of Salary. Employee acknowledges and represents that the Company has paid all salary, wages, bonuses, accrued vacation, amounts payable for sabbaticals not taken, commissions and any and all other benefits due to Employee. 10. Release of Claims. Employee agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Employee by the Company. Employee and the Company, on behalf of themselves, and their respective heirs, family members, executors, officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, hereby fully and forever release each other and their respective heirs, family members, executors, officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predeces- sor and successor corporations, and assigns, from, and agree not to sue concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that any of them may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation, (a) any and all claims relating to or arising from Employee's employment relationship with the Company and the termination of that relationship; (b) any and all claims relating to, or arising from, Employee's right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law; (c) any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion; (d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, The Worker Adjustment and Retraining Notification Act, Older Workers Benefit Protection Act; the California Fair Employment and Housing Act, and Labor Code section 201, et seq. and section 970, et seq.; (e) any and all claims for violation of the federal, or any state, constitution; (f) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and (g) any and all claims for attorneys' fees and costs. The Company and Employee agree that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. 11. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and release is knowing and voluntary. Employee and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the Effective Date of this Agreement. Employee acknowledges that the consideration given for this waiver and release Agreement is in addition to anything of value to which Employee was already entitled. Employee further acknowledges that he has been advised by this writing that (a) he should consult with an attorney prior to executing this Agreement; (b) he has at least twenty-one (21) days within which to consider this Agreement; (c) he has at least seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (d) this Agreement shall not be effective until the revocation period has expired. 12. Civil Code Section 1542. The Parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. Employee and the Company acknowledge that they have been advised by legal counsel and are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee and the Company, being aware of said code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect. 13. No Pending or Future Lawsuits. Employee represents that he has no lawsuits, claims, or actions pending in his name, or on behalf of any other person or entity, against the Company or any other person or entity referred to herein. Employee also represents that he does not intend to bring any claims on his own behalf or on behalf of any other person or entity against the Company or any other person or entity referred to herein. 14. Application for Employment. Employee understands and agrees that, as a condition of this Agreement, he shall not be entitled to any employment with the Company, its subsidiaries, or any successor, and he hereby waives any right, or alleged right, of employment or re-employment with the Company. Employee further agrees that he will not apply for employment with the Company, its subsidiaries or related companies, or any successor. 15. Confidentiality. The Parties hereto each agree to use their best efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as "Settlement Information"). Each Party hereto agrees to take every reasonable precaution to prevent disclosure of any Settlement Information to third parties, and each agrees that there will be no publicity, directly or indirectly, concerning any Settlement Information except as required by court order or in connection with the Company's reporting obligations under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any state "blue sky laws." The Parties hereto agree to take every precaution to disclose Settlement Information only to those employees, officers, directors, attorneys, accountants, governmental entities, and family members who have a reasonable need to know of such Settlement Information. 16. No Cooperation. Employee agrees he will not act in any manner that might damage the business of the Company. Employee agrees that he will not counsel or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against the Company and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company, unless under a subpoena or other court order to do so. 17. Non-Disparagement. Each party agrees to refrain from any defamation, libel or slander of the other, or tortious interference with the contracts and relationships of the other. All inquiries by potential future employers of Employee will be directed to Dean Morton or such other representative of the Company reasonably approved by the Employee. Upon inquiry, the Company shall state no more than Employee's last position, dates of employment and the statement set forth in paragraph 4 of the Company's press release dated April 2, 1997, a copy of which is attached. 18. Tax Consequences. The Company makes no representations or warranties with respect to the tax consequences of the payment of any sums to or forgiveness of indebtedness of Employee under the terms of this Agreement. Employee agrees and understands that he is responsible for payment, if any, of local, state and/or federal taxes on the sums paid and debt forgiven hereunder by the Company and any penalties or assessments thereon. Employee further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of Employee's failure to pay federal or state taxes or damages sustained by the Company by reason of any such claims, including reasonable attorneys' fees. 19. No Admission of Liability. No action taken by the Parties hereto, or either of them, either previously or in connection with this Agreement shall be deemed or construed to be (a) an admission of the truth or falsity of any claims heretofore made or (b) an acknowledgment or admission by either party of any fault or liability whatsoever to the other party or to any third party. 20. Costs. The Parties shall each bear their own costs, expert fees, attorneys' fees and other fees incurred in connection with this Agreement; however, following the Effective Date, the Company will pay the reasonable fees and expenses of one special counsel to Employee and reasonable accounting fees and expenses incurred by Employee, in an aggregate amount not to exceed $7,500. 21. Arbitration. The Parties agree that any and all disputes arising out of the terms of this Agreement, their interpretation, and any of the matters herein released, shall be subject to binding arbitration in Santa Clara County before the American Arbitration Association under its California Employment Dispute Resolution Rules, or by a judge to be mutually agreed upon. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The Parties agree that the prevailing party in any arbitration shall be awarded its reasonable attorney's fees and costs. 22. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 23. No Representations. Each party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 24. Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 25. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Employee concerning Employee's separation from the Company, and supersedes and replaces any and all prior agreements and understandings concerning Employee's relationship with the Company and his compensation by the Company. 26. No Oral Modification. This Agreement may only be amended in writing signed by Employee and the President, Chairman of the Board, Chief Financial Officer or Senior Vice President and General Manager, Service Provider Division of the Company. 27. Governing Law. This Agreement shall be governed by the laws of the State of California without regard to the conflict of laws provisions thereof. 28. Effective Date. This Agreement is effective seven days after it has been signed by both Parties (the "Effective Date"). 29. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 30. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; (b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (c) They understand the terms and consequences of this Agreement and of the releases it contains; (d) They are fully aware of the legal and binding effect of this Agreement. [remainder of page intentionally left blank] IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. CENTIGRAM COMMUNICATIONS CORPORATION Dated: August 1, 1997 By: Dean O. Morton Chairman of the Board GEORGE SOLLMAN, an individual Dated: August 1, 1997 George Sollman APPROVED AS TO FORM: WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION Attorneys for Centigram Communications Corporation Dated: August 1, 1997 By: Todd Cleary HELLER, EHRMAN, WHITE & MCAULIFFE Attorneys for George Sollman Dated: August 1, 1997 By: Matthew P. Quilter EX-10.23 4 PROMISSORY NOTE PROMISSORY NOTE $100,000 San Jose, California February 18, 1997 FOR VALUE RECEIVED, the undersigned, Dennis L. Barsema, hereby promises to pay to Centigram Communications Corporation, a Delaware corporation (the "Company"), the principal sum of One Hundred Thousand Dollars ($100,000), with interest thereon at the rate of five point eight one percent (5.81%) per annum, compounded annually, at the principal offices of the Company, upon the following terms and conditions: The principal amount of this Note and all accrued but unpaid interest from the date hereof shall be due on the third anniversary of the date of execution of this Note as set forth above (the "Maturity Date") In the event that prior to the Maturity Date the undersigned shall cease to be an employee of the Company for any reason other than death or permanent disability, then the principal amount of this Note shall be due and payable on written demand by the Company on or at any time after the tenth (10th) day following the occurrence of such event, together with all interest accrued but unpaid thereon. The undersigned shall have the right to prepay at any time, and from time to time, without premium or penalty all or any portion of the principal and/or accrued interest hereunder. The undersigned hereby waives presentment, protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The undersigned agrees to pay any costs of collection of this Note, including without limitation reasonable attorneys' fees and costs, in the event it is not fully paid when due. This Note has been made and delivered in the State of California and shall be construed in accordance with, and all actions arising hereunder shall be governed by, the laws of the State of California Dennis L. Barsema EX-10.24 5 SETTLEMENT AGREEMENT October 2, 1997 Dennis Barsema 18140 Barnard Road Morgan Hill, Ca 95037 Dear Dennis, Pursuant to our discussions, it has been mutually agreed that as of November 3, 1997, your position with Centigram Communications Corporation has been eliminated. Attached you will find a Summary Plan Document outlining the terms and conditions of your separation from Centigram. These outlined benefits will be paid to you provided you sign the General Release and Termination Certificate documents which are also attached. Please review these documents carefully and let me know if you have any questions that I or Carrie Perzow can answer. Dennis, I have appreciated the contributions you have made to Centigram and in particular the leadership role you assumed on the operating committee over these last several months. Once again, I am available to answer any further questions you may have or provide assistance as you approach your next career endeavor. Sincerely, Dean O. Morton Chairman, Centigram Communications Corporation Severance Package Compensation Elements I, Dennis Barsema, understand that upon my consent and affixing of my signature to the attached General Release and Termination Certificate, Centigram agrees to: 1. provide me with 4 weeks of notification commencing November 3, 1997 through December 1, 1997, at my current salary of $3,462 per week and car allowance of $400 per month. 2. pay me a continuous payout for 48 weeks of severance at my current salary of $3,462 per week and car allowance of $400 per month 3. pay me 50% of my FY'98 executive bonus at target of $118,800 ($59,400) after the end of the 1998 fiscal year. Pay me the remaining 50% of my FY'98 executive bonus at target of $118,800 against the following criteria: - $39,800 will be paid against achievement of the FY'97 Q4 revenue at the following percentages and payouts: Minimum of $29M in revenue equals 100% payout, minimum of $28M in revenue equals 50% payout, minimum of $27M in revenue equals 25% payout. - $19,600 will be paid against achievement of the following development criteria: 1) A plan for reengineering 6.0 base software should be presented to CEO by 11/3/97, and 2) by 11/3/97 we will deliver 6.1 to a beta customer, and we will have an agreed to list of at least three (3) beta customers, as well as a beta plan for those customers. 4. continue my vacation until December 1,1997, and pay all unused, accrued vacation at that time. 5. should I elect it, Centigram will pay COBRA premiums for medical dental and vision coverage under the existing Centigram plan through November 2, 1998 or until such time as I secure other coverage, whichever comes first. 6. permit my options to continue to vest through November 2, 1998 and, if vested, to be exercised until 30 days from that date. 7. I agree to execute the attached General Release and Termination Certificate and abide by Centigram's Employee Nondisclosure and Assignment of Inventions Agreement and to refrain from disclosing any non- public information about Centigram or its business that I may have acquired during my period of employment with the company. 8. I understand that I may file for unemployment compensation and that my claim will not be contested by Centigram. 9. I agree to notify Centigram promptly upon the acceptance of other employment, at such time a lump sum payout for remaining severance due will be made and stock options will cease to continue to vest and may be exercised 30 days from that date. 10. I agree that these terms fully satisfy Centigram's obligation to me. ------------------------------------- --------- Dennis Barsema Date ------------------------------------- --------- Dean O. Morton Date Chairman, Centigram Communications Corporation CENTIGRAM COMMUNICATIONS CORPORATION SENIOR OFFICER SEPARATION PAY PLAN AND SUMMARY PLAN DESCRIPTION Amended Plan Effective Date: September 10, 1997 CENTIGRAM COMMUNICATIONS CORPORATION SEPARATION PAY PLAN AND SUMMARY PLAN DESCRIPTION The Centigram Communications Corporation Officer Separation Pay Plan (the "Plan") is primarily designed to provide eligible Senior Officers of Centigram Communications Corporation (the "Company") whose employment is terminated as a result of a work force reduction or job elimination with financial assistance while they are seeking new employment opportunities. The Plan is also intended to satisfy, where applicable, the obligations of the Company under the federal Worker and Retraining Notification ("WARN") Act. The Plan is effective for eligible employees whose employment is terminated on or after September 10, 1997 and not later than April 30, 1998. Centigram Communications Corporation competes within an industry where technology, markets and competition change rapidly. Therefore, one of our sources of competitive advantage is our ability to change more quickly than the competition. This may result in evolving requirements in terms of our financial plan, locations and employee core competencies. This policy is written to define a reduction in workforce, which results in long-term employment losses, motivated by reasons of cost- reduction, efficiency improvement, reorganization, loss of business, plant or department closures, or other reasons unrelated to the affected individual. This policy does not apply to employment termination for reasons of misconduct or lack of performance. Centigram is an employment at-will employer, meaning both the employee and the employer have the right to terminate the employment relationship at any time. If you are an eligible Officer employee you will receive at least four (4) weeks advance notice of your termination date. In the event the Company does not provide you with the full notice period, you will receive your base Salary (as that term is defined in Section II below) for the four(4) week (as applicable) period, in addition to any benefits that you are eligible to receive under this Plan. This Plan is designed to be an "employee welfare benefit plan," as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This Plan is governed by ERISA and, to the extent applicable, the laws of the State of California. This document constitutes both the official plan document and the required summary plan description under ERISA. I. ELIGIBILITY You will be generally eligible for severance benefits under this Plan if: - you are a regular full-time U.S. employee of the Company with the title of Sr. Vice President or above; - your active employment is involuntarily terminated as a result of work force reduction or job elimination during the term of the Plan; - you execute the General Release Of All Claims, a copy of which is attached as Exhibit A, within forty-five (45) days of your date of termination if you are age forty (40) or older, or you execute the General Release of All Claims, a copy of which is attached as Exhibit B, within seven (7) days of your date of termination if you are under age forty (40); and - you are not in one of the excluded categories listed below. You are not eligible for severance benefits under this Plan if: - you voluntarily terminate employment, unless such voluntary termination occurs after you receive notice of an involuntary termination which would otherwise qualify you for severance benefits and the Plan Administrator determines, in its sole discretion, that your earlier voluntary termination is in the best interests of the Company; - you are employed by, or are offered continued employment with, a successor employer which directly or indirectly acquires (i) all or any portion of the assets or operations of the Company or any subsidiary, (ii) all or any portion of the outstanding capital stock of the Company, or (ii) fifty percent (50%) or more of the capital stock of any subsidiary of the Company; - you are dismissed for a reason other than work force reduction or job elimination (including, but not limited to, poor performance, violation of Company policy or procedures, insubordination, misconduct, the unauthorized use or disclosure of confidential information or trade secrets of the Company or any subsidiary), whether or not you already received notice of an involuntary termination which would otherwise qualify you for severance benefits; - you are a temporary employee or work for the Company solely as an independent contractor, consultant or agent; - you are covered by any other severance or separation pay plan or arrangement with the Company or by an employment agreement with the Company; - you die before you receive any or all of your severance benefits under the Plan; or - you are on a leave of absence (including disability leave), except to the extent the Plan Administrator decides, in its sole discretion, to provide you with severance benefits upon your involuntary termination. II. HOW THE PLAN WORKS If you are eligible for severance benefits under the Plan, you will receive those benefits in continuous payments unless you become employed during the severance period, at which time the remaining severance due would be made in a lump-sum payment . Payment of your severance benefits will be made as soon as administratively practicable after the occurrence of the following events: - your termination of employment as a result of a work force reduction or job elimination; - the Company's receipt of your executed General Release; and - the expiration of any rescission period applicable to your executed General Release. The amount of your severance benefits will generally be determined in accordance with the guidelines set forth below on the basis of the following factors, measured as of the effective date of your termination of active employee status: (i) your Salary, (ii) your Year(s) of Service with the Company, and (iii) your job classification: Severance Benefit Guidelines - Notification Period: 4 weeks - Severance: 48 weeks - Executive Bonus: Paid at target after the end of FY'98 Severance and Executive Bonus may be paid in either a lump sum payment or continuous payout to be chosen or changed at any time during the severance period. If a lump sum payment is chosen, stock vesting ends the date of payout. If continuous payout is chosen, stock will continue to vest until the end of the severance period. - Salary generally means your base salary and does not include, for example, bonuses, overtime compensation, incentive pay, compensation associated with employee stock options, reimbursements, or expense allowances (with the exception of car allowance) - The Plan Administrator may, as it deems appropriate and in its sole discretion, authorize severance benefits in an amount different from the guidelines amount. Under certain circumstances, the Plan Administrator may, in its sole discretion, waive or modify, with respect to one or more classes of employees, the eligibility requirements for severance benefits or modify the method of calculating their severance benefits. - When an eligible employee's termination is deemed covered by the WARN Act, the benefit payable under this Plan shall be considered to be payments required by that Act. If you are an eligible Officer employee, you will also receive the following benefits: - Your existing group health coverage (and, if applicable, the existing group health coverage of your eligible dependents) will end as of your date of termination. You may then be eligible to elect temporary continuation coverage of the Company's group health plan under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). If you are eligible and elect COBRA continuation coverage, then the Company will pay for such coverage for 48 weeks that you will receive severance benefits (pursuant to the guidelines formula specified above). You (and, if applicable, your eligible dependents) will be provided with a COBRA election form and notice which describes your right to continuation coverage under COBRA. In no case, will you or your dependents receive Company-paid or employee-paid group health coverage beyond the period provided under COBRA. III. OTHER IMPORTANT INFORMATION Plan Administration. As the Plan Administrator, the Company has full discretionary authority to administer and interpret the Plan, including discretionary authority to determine eligibility for severance benefits under the Plan. The Plan Administrator hereby delegates to the Vice President of Human Resources all of its administrative duties. Accordingly, the Vice President of Human Resources on behalf of the Plan Administrator, has full discretionary authority to carry out its delegated duties. Any determination by the Vice President of Human Resources will be final and conclusive upon all persons. The Company, as the Plan Administrator, will indemnify and hold harmless the Vice President of Human Resources for carrying out the responsibilities of the Plan Administrator; provided, however, the Vice President of Human Resources does not act with gross negligence or wilful misconduct. Benefits. When benefits are due, they will be paid from the general assets of the Company. The Company is not required to establish a trust to fund the Plan. The benefits provided under this Plan are not assignable. Claims Procedure. If you believe you are incorrectly denied a benefit or are entitled to a greater benefit than the benefit you receive under the Plan, you may submit a signed, written application to the Plan Administrator within ninety (90) days of your termination. You will be notified of the approval or denial of this claim within ninety (90) days of the date that the Plan Administrator receives the claim, unless special circumstances require an extension of time for processing the claim. If your claim is denied, the notification will state specific reasons for the denial and you will have sixty (60) days from receipt of the written notification of the denial of your claim to file a signed, written request for a review of the denial with the Plan Administrator. This request should include the reasons you are requesting a review, facts supporting your request and any other relevant comments. Pursuant to its discretionary authority to administer and interpret the Plan, and to determine eligibility for benefits under the Plan, the Plan Administrator will generally make a final, written determination of your eligibility for benefits within sixty (60) days of receipt of your request for review. Plan Terms. This Plan supersedes and any and all previous existing separation, severance, retention and salary continuation arrangements, programs and plans which were previously offered by the Company to employees eligible to receive benefits under this Plan. Plan Amendment or Termination. The Plan is effective only for employees who are terminated on or after May 1, 1997 and no later than April 30, 1998. The Vice President, Human Resources, on behalf of the Company, reserves the right to terminate or amend the Plan at any time and in any manner. Because the provisions of the Plan are intended to serve as mere guidelines for the payment of severance benefits under certain prescribed circumstances, it is not intended that any employee obtain any vested right to severance benefits. Accordingly, any termination or amendment of the Plan may be made effective immediately with respect to any benefits not yet paid, whether or not prior notice of such amendment or termination has been given to affected employees. In no event, however, will the Plan be effective after April 30, 1998. Taxes. The Company will withhold taxes and other payroll deductions from any severance payment. No Right to Employment. This Plan does not provide you with any right to continue employment with the Company or affect the Company's right, which right is hereby expressly reserved, to terminate the employment of any individual at any time for any reason with or without cause. IV. STATEMENT OF ERISA RIGHTS As a participant in the Centigram Communications Corporation Separation Pay Plan (the "Plan"), you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA provides that all Plan participants shall be entitled to: 1. Examine, without charge, at the Plan Administrator's office, all Plan documents, including all documents filed by the Plan with the U.S. Department of Labor. 2. Obtain copies of all Plan documents and other Plan information upon written request to the Plan Administrator. The Plan Administrator may make a reasonable charge for the copies. 3. Receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each participant with a copy of this summary financial report. 4. File suit in a federal court, if you, as a participant, request materials and do not receive them within thirty (30) days of your request. In such a case, the court may require the Plan Administrator to provide the materials and to pay you a fine of up to $100 for each day's delay until the materials are received, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. In addition to creating rights for certain employees of the Company under the Plan, ERISA imposes obligations upon the people who are responsible for the operation of the Plan. The people who operate the Plan (called "fiduciaries") have a duty to do so prudently and in the interest of the Company's employees who are covered by the Plan. No one, including your employer or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit to which you are entitled under the Plan or from exercising your rights under ERISA. If your claim for a severance benefit is denied or ignored, in whole or in part, you have a right to file suit in a federal or a state court. If Plan fiduciaries are misusing the Plan's assets (if any) or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor or file suit in a federal court. The court will decide who will pay court costs and legal fees. If you are successful in your lawsuit, the court may, if it so decides, order the party you have sued to pay your legal costs, including attorney fees. However, if you lose, the court may order you to pay these costs and fees, for example, if it finds that your claim or suit is frivolous. If you have any questions about the Plan, this statement or your rights under ERISA, you should contact the Plan Administrator or the nearest Area Office of the U.S. Labor-Management Services Administration, Department of Labor. ADDITIONAL PLAN INFORMATION Name of Plan: Centigram Communications Corporation Separation Pay Plan Company Sponsoring Centigram Communications Corporation Plan: Employer Identification 94-2418021 Number: Plan Number: 5B Plan Year: The twelve (12) consecutive month period beginning May 1, 1997. Plan Administrator: Centigram Communications Corporation c/o Vice President, Human Resources 91 East Tasman Drive San Jose, California 95134 (408) 944-0250 Agent for Service of Legal Process: Plan Administrator Type of Plan: Severance Plan/Employee Welfare Benefit Plan Plan Costs: The cost of the Plan is paid by Centigram Communications Corporation GENERAL RELEASE OF ALL CLAIMS In consideration of the benefits offered to me under the Centigram Communications Corporation 1997 Severance Plan (the "Plan") as described in the Summary Plan Description provided to me, and in connection with the termination of my employment as a result of Centigram's reduction in force or job elimination, on behalf of myself, my heirs, executors, administrators, successors, and assigns, I hereby fully and forever RELEASE and DISCHARGE Centigram, its officers, directors, agents, employees, affiliates, representatives, successors and assigns (hereinafter, collectively called the "Company") from any and all claims and causes of action arising out of or relating in any way to my employment with the Company, including, but not limited to, the offer and termination of my employment. 1. I understand and agree that this RELEASE is a full and complete waiver of all claims, including, but not limited to, claims of wrongful discharge, breach of contract, breach of the covenant of good faith and fair dealing, violation of public policy, defamation, personal injury, emotional distress, claims under Title VII of the 1964 Civil Rights Act, as amended, the California Fair Employment and Housing Act, the Equal Pay Act of 1963, California Labor Code Section 1197.5, the Age Discrimination in Employment Act of 1967, as amended, the Americans with Disabilities Act, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any other laws and regulations relating to employment or employment discrimination. The only exceptions are claims I may have for unemployment compensation and workers' compensation. 2. I understand and agree that the Company will not provide me with any enhanced severance benefits, as outlined in the Plan, unless I execute this RELEASE. I further understand that I have received or will receive, regardless of the execution of this RELEASE, all salary owed to me together with any accrued but unused vacation pay, less deductions, in my final paycheck earned through my termination date. 3. In addition, and in further consideration of the foregoing, I acknowledge that I may hereafter discover facts different from or in addition to those which I now know or believe to be true and that this RELEASE shall be and remain effective in all respects notwithstanding such different or additional facts or the discovery thereof. Furthermore, in consideration of the foregoing, I hereby expressly waive any and all rights and benefits conferred upon me by the provisions of Section 1542 of the Civil Code of the State of California and/or any analogous law of any other state, which states as follows: A general release does not extend to claims which the creditor [employee] does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor [Company]. 4. As part of my existing and continuing obligation to the Company, I have returned or, within seven (7) days of my termination will return to the Company all Company Information, including files, records, computer access codes and instruction manuals, as well as any Company assets or equipment that I have in my possession or under my control. I further agree not to keep any copies of Company Information. I affirm my obligation to keep all Company Information confidential and not to disclose it to any third party in the future. I understand that the term "Company Information" includes, but is not limited to, the following: (a) Confidential information, including information received from third parties under confidential conditions; and (b) Other technical, scientific, marketing, business, product development or financial information, the use or disclosure of which might reasonably be determined to be contrary to the interests of the Company, including solicitation of employees. The Company's Proprietary Information Agreement is incorporated herein by this reference. 5. I agree to keep this RELEASE confidential and not to reveal its contents to anyone except my lawyer, my spouse and/or my financial consultant. 6. All disputes under this RELEASE will be settled by arbitration in the County of Santa Clara, in accordance with the rules of the American Arbitration Association, or its successor, and judgment upon the award rendered may be entered in any court with jurisdiction. If there is a dispute with respect to this RELEASE, the prevailing party will be entitled to its reasonable attorney fees and other costs and expenses incurred in resolving the dispute. 7. This RELEASE contains the entire agreement between the Company and me with respect to any matters referred to in the RELEASE and supercedes any previous oral or written agreements. I understand and agree that this RELEASE shall not be deemed or construed at any time as an admission of liability or wrongdoing by either myself or the Company. 8. If any one or more of the provisions contained in this RELEASE is, for any reason, held to be unenforceable, that holding will not affect any other provision of this RELEASE, but, with respect only to that jurisdiction holding the provision to be unenforceable, this Release shall then be construed as if such unenforceable provision or provisions had never been contained therein. 9. Before executing this RELEASE, I obtained sufficient information to intelligently exercise my own judgment about the terms of the RELEASE. I understand that I may discuss this RELEASE with an attorney of my own choosing before signing this RELEASE. The Company has also given me forty-five (45) days in which to consider this RELEASE, if I wish. I also understand for a period of seven (7) days after I sign this RELEASE, I may revoke this RELEASE and that the RELEASE will not become effective until seven (7) days after I sign it, and only then if I do not revoke it. In order to revoke this RELEASE, I must deliver to the Company's Vice President of Human Resources, by no later than seven (7) days after I execute this RELEASE, a letter stating that I am revoking it. 10. The Plan provides that enhanced severance pay may be paid in a lump-sum payment as soon as administratively feasible but not earlier than seven (7) days following my execution of this RELEASE. If I choose to revoke this RELEASE within seven (7) days after I sign it, any enhanced severance benefits to which I was otherwise entitled to receive, will not be due and payable, and the RELEASE will have no effect. If I do not elect to sign this RELEASE, I will receive the basic severance pay and I will not be eligible to receive the enhanced severance benefits as outlined in the Plan. 11. The following information is attached to this RELEASE and has been provided to me: (a) Attachment "A" to this RELEASE is a copy of the Plan which contains the eligibility requirements and time limits applicable to the Plan. EMPLOYEE'S ACCEPTANCE OF RELEASE BEFORE SIGNING MY NAME TO THIS RELEASE, I STATE THAT: I HAVE READ IT; I UNDERSTAND IT AND KNOW THAT I AM GIVING UP IMPORTANT RIGHTS; I AM AWARE OF MY RIGHT TO CONSULT WITH AN ATTORNEY BEFORE SIGNING IT; AND I HAVE SIGNED IT KNOWINGLY AND VOLUNTARILY. Date delivered to employee , 199 . Executed this day of , 199 . Employee's Signature Printed Name and Employee No. EX-10.25 6 TERMINATION TO BUILD AGREEMENT January 9, 1998 CENTIGRAM COMMUNICATIONS CORPORATION 91 East Tasman Drive San Jose, CA. 95134 Attn: Tom Brunton Re: Termination of Build to Suit Leases and Loan to Sobrato Interests III Dear Mr. Brunton: As you are aware, under that certain Option to Terminate Certain Leases dated March, 1997 (the "Option Agreement") between Sobrato Interests III ("Sobrato III") and Centigram Communications Corporation ("Centigram"), Sobrato was granted the option to terminate the leases referred to therein. This letter serves to notify Centigram that Sobrato Interests III has elected to terminate the two build to suit leases that Sobrato, as landlord, and Centigram, as tenant, previously entered into covering certain property located at the corner of Guadalupe Parkway and North First Street (and which leases are referred to in the aforementioned Option Agreement). This letter further serves to confirm that, as of the date of this letter, Sobrato and Centigram each waive and release the other from all right, obligations, costs, damages, liabilities and claims under, relating to or arising out of the aforementioned two build to suit leases. The preceding to the contrary notwithstanding, Sobrato agrees to promptly return to Centigram the letter of credit or letters of credit that Centigram previously delivered to Sobrato in the total principal amount of $280,000 as a security deposit under the aforementioned two build to suit leases. In consideration of Sobrato terminating the two build to suit leases referred to above, Centigram agrees to make an unsecured loan to Sobrato in the amount of Two Million Two Hundred Fortytwo Thousand Six Hundred Twenty Dollars ($2,242,620). The loan shall bear interest at the rate of nine percent (9%) per annum and shall be fully amortized over a ten year term, with monthly principal and interest payments to be in the amount of $28,408.56 (or more at Sobrato's election). Such principal and interest payments shall commence to be made on the first day of March, 1998 and continue to be paid by Sobrato Interests III on the first day of each month thereafter for one hundred nineteen successive months, with the entire balance of principal and interest due and payable on February 1, 2008. The loan shall be evidenced by an Unsecured Promissory Note in the form and content of Exhibit A attached hereto. A copy of the amortization schedule applicable to the loan is attached hereto as Exhibit B. The loan is scheduled to fund on February 1, 1998 and Sobrato agrees to execute and deliver the Unsecured Promissory Note in favor of Centigram concurrently with or prior to the funding of the loan. Sobrato and Centigram shall coordinate the execution and delivery of the Unsecured Promissory Note and the funding of the loan. If Centigram is in agreement with the foregoing, please execute a copy of this letter attached and return the same to me as soon as possible. Thank you for your cooperation in this matter. Very truly yours, SOBRATO ITERESTS III, a California limited partnership By: John Michael Sobrato 1985 Separate Property Trust Its: Trustee AGREED AND ACCEPTED: CENTIGRAM COMMUNICATIONS CORPORATION, a Delaware corporation By: Tom Brunton Its: VP Controller & Treasurer UNSECURED PROMISSORY NOTE $2,242,620 San Jose, California February 1, 1998 For value received, the undersigned, SOBRATO INTERESTS III, a California limited partnership ("Borrower"), promises to pay to CENTIGRAM COMMUNICATIONS CORPORATION, a Delaware corporation, or order ("Lender") at 91 East Tasman Drive, San Jose, CA 95134 Attn: Accounts Receivable, or at such other place as may be designated in writing by Lender, the principal sum of TWO MLLION TWO HUNDRED FORTY-TWO THOUSAND SIX HUNDRED TWENTY DOLLARS ($2,242,620), with interest thereon rate of nine percent (9%) per annum until fully paid. Interest shall be calculated on a 360 day year consisting of twelve months containing thirty days each. The principal amount owing hereunder shall be fully amortized over a ten year period at the interest rate set forth above, and Borrower shall pay to Lender on the first day of each month, commencing on March 1, 1998, and continuing on the first day of each month thereafter for one hundred nineteen successive months, the sum of Twenty-eight Thousand Four Hundred Eight and 56/100 Dollars ($28,408.56) or more. On February 1, 2008 (the "Maturity Date"), the entire balance of principal and interest unpaid shall be due and payable. All sums owing hereunder are payable in lawful money of the United States of America If Borrower shall fail to make any payment required hereunder on or before ten (10) days following the date on which it becomes due, Borrower shall pay, at Lender's option, a late or collection charge equal to four percent (4%) of the amount of such unpaid payment. From and after the Maturity Date, or such earlier date on which all sums owing under this Note become due and payable by acceleration or otherwise, all sums owing under this Note shall bear interest until paid in full at a rate equal to five percent (5%) per annum in excess of the rate of interest specified above (based on a 360 day year consisting of twelve (12) months containing thirty (30) days each). All payments on this Note shall be applied first to the payment of any costs, fees, late charges or other charges incurred in connection with the indebtedness evidenced hereby; next to the payment of accrued interest; then to the reduction the principal balance; or in such other order as Lender shall require. If Borrower shall fail to pay when due any part or installment of principal or interest or other sums payable hereunder and such failure continues for fourteen (14) days following delivery of written notice to Borrower that such payment is past due, then Lender, at its sole option, shall have the right to declare all sums owing under this Note immediately due and payable. Borrower shall have the right to pay, without penalty or premium, all or any portion of the outstanding principal amount of this Note. Lender shall apply all such prepayments first to the payment of any costs, fees, late charges or other charges incurred in connection with the indebtedness evidenced hereby; next to the payment of accrued interest; then to the outstanding principal amount of this note in inverse order of maturity, or, at the option of Lender, in the regular order of maturity; or in such other order as Lender shall require. Borrower shall pay to Lender all sums owing under this Note without deduction, offset or counterclaim of any kind. Lender shall have the right to assign this Note and any or all payments owing hereunder to a third party or parties without the consent of Borrower. If any attorney is engaged by Lender to enforce any provision of this Note, or as a consequence of any default or breach hereunder, with or without the filing of any legal action or proceeding, then Borrower shall immediately pay to Lender on demand all attorneys' fees and other costs incurred by Lender, together with interest thereon from the date of such demand until paid at the rate applicable to the principal owing hereunder as if such unpaid attorneys' fees and costs had been added to the principal No previous waiver and no failure or delay by Lender in acting with respect to the terms of this Note shall constitute a waiver of any breach, default or failure of condition under this note. A waiver of any term of this Note must be made in writing and shall be limited to the express written terms of such waiver. Borrower waives presentment; demand; notice of dishonor, notice of default or delinquency; notice of acceleration; notice of protest and nonpayment; notice of costs, expenses or losses and interest thereon; notice of interest on interest and late charges; and diligence in taking any action to collect any sums owing under this Note. Time is of the essence with respect to every provision hereof this Note shall be construed and enforced in accordance with the laws of the State of California, except to the extent that Federal laws preempt the laws of the State of California, and all persons and entities in any manner obligated under this Note consent to the jurisdiction of any Federal or State Court in the State of California having proper venue and also consent to service of process by any means authorized by California or Federal law. BORROWER: SOBRATO INTERESTS III, a California limited partnership By: John Michael Sobrato 1985 Separate Property Trust EX-11.1 7 EX-11.1 EXHIBIT 11.1 CENTIGRAM COMMUNICATIONS CORPORATION STATEMENT OF COMPUTATION OF EARNINGS PER SHARE FOR THE YEARS ENDED NOVEMBER 1, 1997, NOVEMBER 2, 1996 AND OCTOBER 28, 1995 (in thousands, except per share data)
For the Years Ended ------------------------------------- November 1, November 2, October 28, 1997 1996 1995 ----------- ----------- ----------- Net income (loss)......................... ($1,678) $1,000 ($4,134) =========== =========== =========== Computation of common and common equivalent shares outstanding: Common stock............................ 6,943 6,824 6,560 Options and warrants.................... -- 157 -- ----------- ----------- ----------- Common and common equivalent shares used in computing per share amounts...... 6,943 6,981 6,560 =========== =========== =========== Net income (loss) per share............... ($0.24) $0.14 ($0.63) =========== =========== ===========
Fully diluted computation not presented since such amount differs by less than 3% of the net income per share amounts shown above EX-21.1 8 EX-21.1 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 EX-23.1 9 EX-23-1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 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 Agreement of Centigram Communications Corporation of our report dated December 1, 1997, except for the second and sixth paragraphs of "Commitments and Contingencies" and the note "Subsequent Events" as to which the date is January 9, 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 November 1, 1997. /s/ Ernst & Young LLP ERNST & YOUNG LLP San Jose, California January 16, 1998 EX-27.1 10 ARTICLE 5 FIN. DATA SCHEDULE FOR 10-K
5 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 November 1, 1997 and is qualified in its entirety by reference to such Financial Statements. 1,000 Nov-01-1997 Nov-03-1996 Nov-01-1997 12-MOS 19,791 32,262 23,361 1,724 9,060 85,120 43,195 30,302 99,920 18,296 0 0 0 90,724 (9,100) 99,920 108,836 108,836 45,661 45,661 70,134 160 103 (845) 833 (1,678) 0 0 0 (1,678) ($0.24) ($0.24)
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