UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-25592
PERIPHONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-2699509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Veterans Memorial Highway, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 468-9000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the 5,101,022 shares of Common Stock held by
non-affiliates of the Company as of August 26, 1996 is $174,710,004.
The number of shares outstanding of each of the registrant's classes of
common equity as of August 26, 1996 is as follows:
Class of Number of
Common Equity Shares
Common Stock 6,809,166
par value $.01
The information required by Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement to be filed with the
Commission on or before September 28, 1996.
<PAGE>
PART I
Item 1. Business
General
Periphonics Corporation (the "Company") was originally incorporated in
Delaware in December 1969. On January 31, 1983, the Company was dissolved and
operated as a division of Gilbarco, Inc., a wholly-owned subsidiary of Exxon
Corporation. On July 26, 1984, the Company was reincorporated in Delaware and in
1986, 4000 VMH Corp., a company owned by persons who were then senior executives
of the Company, purchased all of the outstanding Common Stock of the Company
from Exxon Corporation. In March 1995, the Company completed an initial public
offering ("IPO") of its Common Stock. Effective upon the closing of the IPO,
4000 VMH Corp. was merged with and into the Company.
Periphonics develops, markets and supports high performance, interactive
voice response ("IVR") systems, based on industry-standard, open architecture
computer hardware and operating system software, in combination with its own
proprietary IVR technology, that address the needs of mid-size and large scale
customer installations. The Company is an established leader within the mid-size
and large scale segments of the IVR industry, having installed systems with over
140,000 ports since 1988, and with over 26 years of experience serving the IVR
market.
The IVR Market
IVR systems represent an important element in the telecommunications and
data processing infrastructure of many customer service-oriented organizations.
IVR systems enable callers to use a touch-tone telephone to access information
in an organization's computer database and to receive that information verbally
via high quality digitally-stored or synthesized speech. In addition, these
systems enable customers to execute certain transactions on-line without the
intervention of customer service personnel. As a result, IVR systems permit
businesses and other organizations in both the public and private sectors to
better utilize the capabilities of their telephone and computer systems, to
provide new revenue generating services, to increase the productivity of their
customer support staff, and to offer more services to customers in less time and
at lower cost. IVR systems are used for a variety of transaction specific
applications including accessing data regarding bank, mutual fund or brokerage
accounts; checking the status of insurance claims or tax filings; obtaining loan
or credit card balances and/or rates; registering for college courses; and
retrieving descriptions of particular products or services.
IVR systems constitute a specialized segment of the overall voice
processing/call processing market, which also includes voice messaging/voice
mail systems, automated attendant systems, automated call distribution systems
and outbound predictive dialing systems. The Company believes that the increased
use of IVR systems has been due to several factors, including industry-wide
improvements in product features, public acceptance of IVR systems to
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obtain information or execute transactions and competitive pressures on
organizations to offer improved customer services at lower costs.
International sales constitute an important element of Periphonics'
business, and Periphonics believes that international markets will continue to
offer attractive growth potential. See Note 12 of Notes to Consolidated
Financial Statements for information concerning the Company's operations by
geographic area.
Principal Markets, Customers and Applications
Since 1988, Periphonics has manufactured and delivered IVR systems
containing a total of more than 140,000 ports of capacity to customers in the
U.S. and in more than 40 other countries. Based on its installed customer base,
the Company believes it is a leading supplier of mid-size and large scale IVR
systems. In each of fiscal 1994, 1995 and 1996, no single customer accounted for
as much as 10% of the Company's total revenues. In fiscal 1996, the Company's
top ten customers (three of which were new customers) accounted for
approximately 41% of total revenues. Four of these top ten customers were
telecommunications companies, four of them were financial services companies and
two were government customers. The Company's system sales to customers outside
the U.S. contributed approximately 36% of total system sales in fiscal 1996.
Some of the representative markets using Periphonics IVR systems and
typical customer applications in these markets are described below:
Market Typical Applications
Telecommunications Trouble Reporting, Residential and Business
Customer Services, Business Office and Account
Inquiry, Repair Service, Order Entry, Reverse
Directory Assistance, Paging, Collect Calling and
Calling Card Services
Financial Services Account Inquiry, Transaction History, Current Loan
and Deposit Rates, Available Credit Line, Funds
Transfers, Credit Card Inquiry, Stock Quotes and
Securities Trades, Bill Payment, Coverage
Verification
Government Tax Filing, Employment Services, including Claims
Reporting, Job Openings and Benefits; Driver
License Verification, Taxpayer Information
Higher Education Course Registration, Grade Reporting, Financial
Aid Status, Admission Status
Other Markets Order Entry, Order Status, Frequent Flyer Inquiries,
Flight Information, Outage Reporting, Account
Balance, Payment Scheduling, Dealer Locator
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Product Technology
The Company's VPS Series IVR products generally consist of the following
major elements: (i) an application processor platform with one or more
SPARC-based RISC processors; (ii) a proprietary voice subsystem that contains
one or more telephony interface boards, voice storage, and one or more
tone-detection modules, (iii) Company-designed transaction processing software
modules and (iv) optional application development tools.
The main attributes of the VPS Series' architecture include its internally
distributed client/server processing structure and function specific processing
via dedicated microprocessors. The major advantage of this approach is two fold:
first, it allows for more effective system implementation by tailoring each
function as required; second, it allows for incorporation of new technology in
each function as it becomes available, which is beneficial since technology
relating to different functions improves at different rates over time. The
result of the VPS Series' architecture is an IVR system that can be tailored for
many configurations and adapted to newer technologies in telephony and
transaction-processing. By maintaining an unmodified UNIX kernal and standard
UNIX file system, the Company's VPS Series system software delivers an open and
scalable client/server implementation which can be easily migrated to new UNIX
versions or to other hardware platforms. The architecture of the VPS Series has
been designed to provide a systems platform that supports capacity growth and
technological evolution with modular upgrades.
The VPS Series products, like those of several other competitors (such as
Lucent Technologies, formerly part of AT&T, and InterVoice), utilize internally
developed telephony interfaces and speech processing modules. Many other
competitors rely on telephony interface and other modules purchased from board
level third party suppliers (such as Dialogic Corporation or Natural
Microsystems, Inc.). The Company believes that designing its own telephone and
speech processing modules gives it an advantage in evolving and upgrading its
systems in a logical and compatible manner, thus preserving the customer's
investment in the system over a longer period of time.
The Company's VPS Series products offer a wide range of telephone interface
and data connectivity options. The telephone interface options supported by the
system include standard digital (including ISDN support for countries including
the U.S., Canada and Germany) and analog connections to public switched networks
and to a variety of PBX/ACD systems from vendors including Lucent Technologies,
Northern Telecom, Rolm/Siemens, Rockwell, Aspect, NEC, Fujitsu, Hitachi,
Ericsson and Alcatel. The data connectivity options supported by the system
include interfaces for mainframe-based legacy systems as well as LAN-based
systems. These interfaces can support a variety of databases and Application
Programming Interfaces ("APIs").
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The table below lists the current VPS Series data connectivity options:
Protocols Physical Link Computer System/Database/API
TCP/IP Ethernet UNIX servers running Oracle,
Token-Ring Sybase, Informix, Progress
database systems
SNA SDLC IBM or Compatible Mainframe
BISYNC Systems with CICS, IMS, DB2
Ethernet
Token-Ring
VT100/220 RS232 ASYNC Digital Equipment, Hewlett
Ethernet Packard and Sequent accessed with
Terminal Emulation Interface
X.25 Synchronous Digital Equipment, Hewlett
RS232 Packard and IBM systems accessed
with Application Specific Messages
Uniscope Synchronous UNISYS Mainframe and
Burroughs RS232 Minicomputers accessed with
Terminal Emulation Interface
Products
The Company's products consist of a family of scalable IVR systems, called
the VPS Series, which can be configured for small (4-16 ports), mid-size (20 to
128 ports), or large scale installations (up to 960 ports), including a network
of multiple systems to handle thousands of telephone ports. The Company also
develops and sells software application products and application development
tools that provide customers with various administrative, systems management and
application development capabilities for their systems.
All of the products in the VPS Series share an open, flexible, modular
architecture, and the same system software which allows application software
developed for any system to operate across the Company's entire range of system
configurations. The Company provides periodic software upgrades for its systems
to deliver enhanced features and maintenance updates. The current VPS Series
system software release version is 5.X and has been available since October
1995. Periphonics' IVR systems are listed below:
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Model Year of Port
Introduction Capacity
VPS 7500 1988 8-64
VPS 9500 1988 24/48-30/60
VPS/VAS 1991 8-960
VPS/sp (digital) 1993 24/96-30/120
VPS/sp (analog) 1993 8-128
VPS/is (digital) 1995 24/30-96/120
VPS/is (analog) 1995 8-120
VPS 7500/9500: These systems support capacities of up to 64 analogue
ports or up to 2 T1/E1 telephone connections. The Company believes that when
introduced in 1988, these systems provided the largest available RAM for speech
storage and were at the time the first systems to provide direct T1 interface
support for IVR systems. These models have been enhanced with the availability
of optional features.
VPS/VAS: This model provided the first client/server implementation in
the VPS Series for large scale systems. Upon introduction, the VAS system
supported up to 240 telephone ports by networking VPS systems with an integrated
SPARC-based UNIX processor that provided a single system image for running
application and transaction processing functions. During 1994, the VPS/VAS
models were expanded to provide single system image configuration of up to 960
telephone ports with optional standby redundant processors. The throughput of
these systems is enhanced by using symmetric multi-processing (SMP) within the
application processor platform. The VPS/VAS system supports all the features
available in VPS 7500/9500 models with enhanced LAN connectivity options and the
capability to run applications created in a graphical environment.
VPS/sp: This model provides the client/server implementation, UNIX
software and LAN connectivity features available in VPS/VAS systems to mid-size
(20-128 ports) systems. The software environment for VPS/sp systems is
compatible with VPS/VAS systems.
VPS/is: This model provides enhanced client/server capabilities, within
a UNIX software architecture that features parallel functional processing with
flexible scalability. The VPS/is system is designed to handle multiple
applications, even at peak loads, and can accommodate new feature and
performance upgrades through incremental enhancements.
Depending on system configuration, optional features and custom
programming, prices for the Company's IVR systems can range from less than
$1,000 per port to more than $4,000
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per port, and individual IVR systems can be purchased for as little as $18,000
to more than $1 million.
Periphonics provides a number of optional features to enhance its IVR
systems' capabilities. Most of these option features are configured as
shared-system resources and are utilized only when needed, thus providing a
cost-effective implementation that is scalable to the capacity needs. Each of
the optional features is available for use on each of the VPS Series products,
where appropriate. These features include:
Speech Recognition Devices. This option offers recognition of
spoken numbers and control words by callers along with standard
touch-tone input. In addition, some versions of this option can
recognize individual spoken words or continuous numbers or
multilingual speech.
Caller Message Recording. This option allows the system to record
spoken information such as names and addresses from callers and link
it with touch-tone information from the same caller and with data
retrieved from a host computer for later transcription by the system
operator.
Facsimile Interface. This option allows the system to provide a paper
response, such as a confirmation letter or account statement, via
facsimile transmission, as part of an IVR transaction. The VPS Series
digitally stores graphical fax images, which are dynamically combined
with caller-supplied information and host database information and
transmitted to the caller's facsimile machine under application
control.
Text-to-Speech. This option allows VPS Series products to convert textual
data obtained from a database into synthesized speech.
Automatic Number Identification Support. This option enables the digital
systems to identify the caller and automatically access the caller's database
record for a more efficient response. Alternatively, the system can be
programmed to send the caller to a specialized human operator, or to an agent
with whom the caller has had contact in the past.
Periphonics also develops and markets optional system management and
application software development tools including:
PeriView. A network management system that facilitates control,
administration and monitoring of multiple VPS/is systems from
designated common points in the network.
PeriProducer. An icon-based visual software development tool that
application developers can utilize to construct full-function
production applications for VPS Series systems without the need for
extensive programming experience or the use of conventional computer
languages.
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PeriStudio. A tool that allows users to create, manage, and edit
vocabulary elements for VPS Series systems. PeriStudio employs a
graphical user interface with point-and-click operation. PeriStudio
also supports file interchange with Microsoft Windows, Apple and Sun
Microsystems speech file formats.
PeriWeb. A software option that permits Periphonics' IVR systems to
support a user's web browser in order to accomplish World Wide
Web-based transactions; instead of a voice greeting, the response is
provided via a dynamic visual hypertext display.
VRNA 2000. A network management system that facilitates the control,
administration, and monitoring of multiple VPS, VPS/sp, or VAS cluster
systems from a centralized point in a network.
Product Development
Periphonics has committed substantial resources to enhance and improve its
existing VPS Series systems and to develop new features and functions. Recent
product development efforts have resulted in the introduction of visual
(icon-based) application development tools and an enhanced Network Management
System called PeriView. The Company's present product development activities
include integration of new features for speech recognition and other voice
processing functions; development of additional graphical management tools;
interfaces to additional computer and telephone systems; and cost reducing
design enhancements. The Company's research and development ("R&D") management
is customer oriented and regularly interacts with its major customers. The
Company monitors applicable industry technology developments, including
proposals for new standards from industry groups (such as TSAPI and TAPI) as
part of its product development efforts to provide state-of-the-art IVR systems
and related features.
During fiscal 1994, 1995 and 1996, the Company spent $5.0 million, $5.8
million and $7.9 million, respectively, on R&D. The Company anticipates that R&D
expenditures will continue to represent a significant expense to the Company on
an ongoing basis.
Customer Application Programming Services
Implementing an IVR project usually requires the creation of a script,
recording and digitizing the appropriate words and phrases, and writing custom
application software for the IVR system that links the script and the telephone
network interface and provides access to the appropriate database information.
Periphonics has established a customer project implementation group that
provides customer-specific programming and project management services for
turnkey projects. The Company licenses its application software development
tools to those customers who prefer to carry out this implementation work
themselves, and provides software support, detailed documentation, and a
comprehensive hands-on training program to such customers.
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Support Services; Maintenance
The Company generally offers 24-hour direct support to its customers. The
Company's technical support specialists can access a customer's system via
dial-up modem access and utilize various remote diagnostic and trace functions
which are built into the Company's IVR systems. In addition, the technical
support staff also assists the Company's field service staff in resolving
installation and maintenance issues relating to the Company's products. In
certain instances, technical support and maintenance for international customers
is provided by the Company's distributors.
VPS Series products and services are sold with limited warranties,
generally for 60 days. After the expiration of the warranty, customers may
purchase a renewable 12-month maintenance contract. Under these contracts, the
Company agrees to provide upgrades of standard system software, on-site repair
or replacement of IVR system hardware that does not perform in accordance with
specifications, and telephone consultation.
Sales and Marketing
The Company's sales, marketing and pre-sales technical support personnel
are located in 16 cities in the U.S.A. and in Canada, United Kingdom, Germany,
Mexico and Singapore. The Company also has agreements with several VARs and OEMs
who purchase the Company's systems for integration into larger systems as well
as with local distributors and independent sales representatives in a number of
overseas markets.
The following table illustrates the respective amounts of the Company's
system sales contributed by U.S. and international based customers:
<TABLE>
<CAPTION>
For Fiscal Year Ending May 31
(dollars in thousands)
1994 1995 1996
-------------------------- --------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. customers $27,168 66.0% $33,885 65.0% $45,999 64.1%
International customers $14,024 34.0% $17,862 35.0% $25,811 35.9%
------- ------ ------- ----- ------- ------
Total system sales $41,192 100.0% $51,747 100.0% $71,800 100.0%
- ------------------ ======= ======= ======= ====== ======= ======
</TABLE>
The Company's marketing and sales efforts also utilize direct mail,
participation in numerous trade shows, an active telemarketing program, and
trade publication advertising.
Manufacturing
The Company's manufacturing activities, which consist primarily of material
requirement planning, purchasing, module assembly and testing, system assembly
and quality assurance, are conducted at its Bohemia, New York facility and, for
European and Middle Eastern sales, at its facility in Camberley, U.K.
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Most of the components and parts used in the Company's products are
available from more than one supplier. Certain components that are purchased
from one source can generally be replaced with parts available from other
sources. To date, when components have become unavailable, the Company has been
able to obtain functionally similar substitutes and to accomplish any necessary
redesign without a material interruption in production, although there can be no
assurance that this will remain the case in the future.
Competition
The IVR industry, both in the U.S. and internationally, is highly
competitive and competition may intensify from existing suppliers and new market
entrants. Periphonics' principal competitors in the U.S. include Brite Voice
Systems, Inc., InterVoice and Syntellect, Inc., whose businesses are primarily
focused on sales of IVR systems, and large, diversified companies such as Lucent
Technologies, Digital Equipment and IBM for whom IVR is a small portion of their
overall business. In certain specific vertical markets, such as higher education
or employee-benefit information systems, the Company faces specialized
competition from one or two smaller companies. In addition, many suppliers of
voice mail systems and telecommunications equipment suppliers have added IVR
capabilities to some of their product offerings and generally sell IVR systems
as a component or add-on of an overall sale of a voice mail system or a
telecommunications switch.
Competition for small IVR systems (4-16 ports) is expected to increase over
the next several years from a range of companies offering PC-based systems. This
trend could extend to mid-size and large scale systems.
In international markets, Periphonics faces competition primarily from its
U.S. competitors and several locally based companies.
Periphonics believes that the principal competitive factors in the IVR
market are supplier and product reputation and reliability, system features,
customer service, price and the effectiveness of marketing and sales efforts.
Although certain of the Company's competitors have considerably greater
financial, technical and sales and marketing resources than the Company, the
Company believes that it competes favorably with respect to each of these
factors.
Proprietary Rights
The Company has no patents; consequently it relies on a combination of
copyright, trademark and trade secret laws, employee and third-party
non-disclosure agreements, and license agreements to protect its proprietary
software technology. Nonetheless, there can be no assurance that the steps taken
by the Company to protect its proprietary rights will be adequate to prevent
misappropriation of such rights or that third parties will not independently
develop functionally equivalent or superior software technology. The Company
from time to time receives correspondence alleging that its products may
infringe patents held by third parties. The Company believes that its products
and other proprietary rights do not infringe the
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proprietary rights of third parties. There can be no assurance, however,
that third parties will not assert infringement claims against the Company in
the future or that any such claims will not require the Company to enter into
license arrangements or result in protracted and costly litigation, regardless
of the merits of such claims.
The Company believes that due to the rapid pace of innovation within the
telecommunications industry (including the IVR segment of the market), factors
such as technological and creative skill of personnel, knowledge and experience
of management, reputation, maintenance and support and the ability to develop
and enhance systems, software products and services are more important for
establishing and maintaining a competitive position within the industry than are
patent, copyright and other legal protections for its technology.
Employees
As of May 31, 1996, Periphonics employed 562 persons. Approximately 70
employees are located outside the U.S. None of the Company's employees is
covered by collective bargaining agreements. The Company considers relations
with its employees in general to be excellent.
Item 2. Properties
The Company's corporate headquarters and manufacturing facility is located
in Bohemia, New York, a New York City suburb. This facility consists of a
Company-owned 65,000 squarefoot building located on a 3.9 acre site and an
adjacent 28,000 square foot leased office and warehouse. The headquarters
contain the Company's manufacturing, development, service and administration
departments, as well as a professional-quality recording studio. The Company
believes that suitable additional space will be available in the area as needed
in the future on commercially reasonable terms.
In addition, the Company has leased regional sales offices in Atlanta,
Boston, Charlotte, Chicago, Dallas, Denver, Grand Rapids, Hartford, Los Angeles,
Minneapolis, Montreal, Philadelphia, San Francisco, Seattle, St. Louis, Tampa,
Toronto and Washington D.C.
The Company's European headquarters in Camberley, U.K. is housed in a
10,000 square foot leased building. The Company also leases a maintenance
support office of approximately 1,500 square feet nearby Manchester, England.
Sales, custom application development and on-going maintenance staff operate out
of leased offices in Germany, Mexico and Singapore.
Item 3. Legal Proceedings
The Company is not a party to any litigation that it believes could have a
material adverse effect on the Company or its business.
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Item 4. Submission of Matters to a Vote of Security Holders
On August 10, 1995, the Board of Directors adopted the Periphonics
Corporation 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan"). The
holders of a majority of the shares of Common Stock present, in person or
represented by proxy, entitled to vote at the Annual Meeting on October 27,
1995, approved the 1995 Purchase Plan.
The 1995 Purchase Plan provides eligible employees of the Company and its
designated subsidiaries with an opportunity to acquire shares of the Company's
Common Stock and thereby acquire an interest in the future of the Company. The
Company reserved up to 200,000 shares of its Common Stock for sale under the
1995 Purchase Plan.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) The Company's Common Stock, par value $.01 per share (the "Common
Stock"), trades on the NASDAQ Stock Market under the symbol PERI. The following
table sets forth the closing high and low sales prices for the Common Stock for
the period March 31, 1995, the date of the Company's initial public offering,
through May 31, 1996, as reported by NASDAQ:
<TABLE>
<CAPTION>
Fiscal 1995 Sales Prices
----------- ------------
High Low
---- ---
<S> <C> <C>
Quarter Ended May 31, 1995 17 1/4 14 3/4
Fiscal 1996
-----------
Quarter Ended August 31, 1995 24 1/2 14 3/4
Quarter Ended November 30, 1995 29 1/2 23 1/2
Quarter Ended February 29, 1995 27 3/4 21
Quarter Ended May 31, 1996 36 20 3/4
</TABLE>
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
(b) The number of recordholders of the Common Stock as of August 27, 1996
is 140. The Company believes that there are a substantially greater number of
beneficial owners of shares of its Common Stock.
(c) The Company currently intends to retain all future earnings for use in
the operations of its business and, therefore, does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent, among other things, upon earnings, capital requirements, financing
agreement covenants, the financial condition of the Company and applicable law.
Item 6. Selected Financial Data
The following selected consolidated financial data as of and for each of
the five fiscal years in the period ended May 31, 1996 has been derived from the
consolidated financial statements of the Company, which have been audited by
Deloitte & Touche LLP, independent auditors, whose report as of May 31, 1996 and
1995, and for each of the three years in the period ended May 31, 1996 is
included elsewhere herein. The selected consolidated financial data should be
read in conjunction with and is qualified in its entirety by the Company's
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consolidated financial statements, related notes and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(in thousands except share and per share data)
1992 1993 1994 1995 (1) 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
System sales........................................ $24,787 $29,906 $41,192 $51,747 $71,800
Service revenues.................................... 8,916 9,492 10,293 13,030 17,003
------- ------- ------- ------ ------
Total revenues.................................... 33,703 39,398 51,485 64,777 88,803
------- ------- ------- ------ ------
Cost of system sales................................ 10,055 13,677 18,653 23,686 32,798
Cost of service revenues............................ 6,204 6,750 7,748 8,387 10,956
------- ------- ------- ------ ------
Total cost of revenues............................ 16,259 20,427 26,401 32,073 43,754
------- ------- ------- ------ ------
Gross profit........................................ 17,444 18,971 25,084 32,704 45,049
------- ------- ------- ------ ------
Selling, general and
administrative..................................... 11,309 13,062 15,249 18,749 22,587
Research and development............................ 3,315 4,406 4,961 5,831 7,933
Non-recurring, noncash compensation charge (1)...... - - - 1,250 -
-------- -------- -------- ------- ----
Total operating expenses.......................... 14,624 17,468 20,210 25,830 30,520
------- ------- ------- -------- ------
Earnings from operations............................ 2,820 1,503 4,874 6,874 14,529
------- ------- ------- -------- ------
Interest expense.................................... (617) (673) (936) (992) -
Interest and other income........................... 242 117 159 170 885
Foreign exchange gain (loss)........................ 22 175 (464) 88 (345)
------- ------- -------- ------- -------
Total other expenses.............................. (353) (381) (1,241) (734) 540
------- ------- -------- -------- ------
Earnings before provision for income
taxes and cumulative effect of
change in accounting principle .................... 2,467 1,122 3,633 6,140 15,069
Provision for income taxes.......................... 998 579 1,599 2,956 5,854
------- ------- -------- ------- ------
Earnings before cumulative effect
of change in accounting principle ................. 1,469 543 2,034 3,184 9,215
Cumulative effect of change
in accounting principle (2) ....................... - - 83 - -
--------- --------- --------- ------- -----
Net earnings........................................ $ 1,469 $ 543 $ 1,951 $ 3,184 $ 9,215
======= ======= ======== ======= =======
Earnings per common and common equivalent share (3):
Primary earnings per common share:
Earnings before cumulative effect
of change in accounting principle.................. $ 0.31 $ 0.09 $ 0.44 $ 0.65 $ 1.39
Cumulative effect of change in
accounting principle (2)........................... - - (0.02) - -
--------- --------- --------- ------- -----
Earnings per common share........................... $ 0.31 $ 0.09 $ 0.42 $ 0.65 $ 1.39
======= ======= ======== ======= =======
Fully-diluted earnings per common share:
Earnings before cumulative effect
of change in accounting principle.................. $ 0.31 $ 0.09 $ 0.44 $ 0.65 $ 1.38
Cumulative effect of change in
accounting principle............................... - - (0.02) - -
--------- --------- --------- ------- -----
Earnings per common share........................... $ 0.31 $ 0.09 $ 0.42 $ 0.65 $ 1.38
======= ======= ======== ======= =======
Weighted average number of common
and common equivalent shares:
Primary............................................. 4,665 3,932 4,614 4,889 6,630
======= ======= ======= ===== =====
Fully-diluted....................................... 4,671 3,941 4,619 4,889 6,674
======= ======= ======= ===== =====
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital...................................... $ 9,228 $14,574 $13,837 $27,550 $48,476
Total assets......................................... 21,439 28,460 33,714 47,722 75,103
Total debt........................................... 5,439 11,285 10,032 - -
Redeemable cumulative convertible preferred stock
issued by subsidiary ............................... 1,215 1,215 1,215 1,215 -
Redeemable cumulative convertible preferred stock.... 4,500 4,500 4,500 - -
Common stockholders' equity.......................... 4,729 5,337 6,289 33,576 58,781
</TABLE>
(1) On February 1, 1995, the Company accelerated the vesting of all
outstanding stock options under its 1986 Incentive Stock Option Plan (the
"1986 Plan"), thereby allowing all such options to be fully vested at
such date. The Company also relinquished its right to repurchase shares
obtained by employees under the 1986 Plan. As a result, the Company
recorded a non-recurring, noncash compensation charge of approximately
$1.25 million, or $.26 per share. See Note 10 of notes to consolidated
financial statements.
(2) During fiscal 1994, the Company changed its method of accounting for income
taxes to conform with Statement of Financial Accounting Standards No. 109.
See Note 2 of notes to consolidated financial statements.
(3) Earnings per common and common equivalent share has been computed by
dividing net earnings, after reduction for preferred stock dividends, when
applicable, by the weighted average number of common shares and common
equivalent shares outstanding. Common equivalent shares included in the
computation represent common equivalent shares from convertible preferred
stock, when applicable, and dilutive common equivalent shares from stock
options (using the treasury stock method).
Item 7. Management's Discussion and Analysis
Overview
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors.
The Company's revenues are derived primarily from the sale of IVR systems
and from service revenues related to these products. Historically, the size and
timing of system sales transactions have varied substantially from quarter to
quarter, and the Company expects such variations to continue into the future.
Because a significant portion of the Company's overhead is fixed in the
short-term, the Company's results of operations may be adversely affected if
revenues fall below the Company's expectations. The Company is typically able to
deliver an IVR system within 60 days of receipt of the order and, therefore,
does not customarily have a significant long-term backlog. During the fiscal
year ended May 31, 1996, approximately 30%
-15-
<PAGE>
of the Company's revenues derived from IVR systems sales occurred in the
Company's fourth quarter and 37% of net earnings occurred in the Company's
fourth quarter.
On February 1, 1995, the Company accelerated the vesting of all outstanding
stock options under its 1986 Plan, thereby allowing all such options to be fully
vested at such date. The Company also relinquished its right to repurchase
shares obtained by employees under the 1986 Plan. As a result, the Company
recorded a non-recurring, noncash compensation charge of approximately $1.25
million or $.26 per share during fiscal 1995. See Note 10 of Notes to
consolidated financial statements.
Excluding the effect of the $1.25 million non-recurring, noncash
compensation charge, 55% of net earnings for fiscal 1995 would have occurred in
the Company's fourth quarter.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of earnings, expressed as a
percentage of total revenues, and the percentage change in the dollar amount of
such items compared to the prior comparable period.
<TABLE>
<CAPTION>
Percentage of Total Revenues Percentage Increase (Decrease)
Fiscal 1994 Fiscal 1995 Fiscal 1996
Fiscal Year Ended May 31, over Fiscal over Fiscal over Fiscal
-------------------------------------------------
1993 1994 1995 1996 1993 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings Data:
System sales................. 75.9% 80.0% 79.9% 80.9% 37.7% 25.6% 38.8%
Service revenues............. 24.1 20.0 20.1 19.1 8.4 26.6 30.5
---- ---- ---- -----
Total revenues............. 100.0 100.0 100.0 100.0 30.7 25.8 37.1
----- ----- ----- -----
Cost of system sales......... 34.7 36.2 36.6 36.9 36.4 27.0 38.5
Cost of service revenues..... 17.1 15.0 12.9 12.4 14.8 8.3 30.6
---- ---- ---- ----
Total cost of revenues..... 51.8 51.2 49.5 49.3 29.2 21.5 36.4
---- ---- ---- ----
Gross profit................. 48.2 48.8 50.5 50.7 32.2 30.4 37.7
Selling, general and 20.5
administrative............... 33.2 29.6 28.9 25.4 16.7 23.0
Research and development..... 11.2 9.6 9.0 8.9 12.6 17.5 36.0
Non-recurring, noncash
compensation charge.......... - - 1.9 - - 100.0 (100.0)
---- ---- ----- ----
Earnings from operations..... 3.8 9.6 10.6 16.4 224.3 41.0 111.4
Other income (expense), net.. (1.0) (2.4) (1.1) .6 * 40.9 173.6
----- ----- ----- ----
Earnings before provision for
income taxes and cumulative
effect of change in accounting 2.8 7.2 9.5 17.0 223.8 69.0 145.4
principle....................
Provision for income taxes... 1.5 3.1 4.6 6.6 176.2 84.9 98.0
--- --- --- ---
Earnings before cumulative
effect of change in accounting 1.3% 4.1% 4.9% 10.4% 274.6% 56.5% 189.4%
==== ==== ==== =====
principle....................
- -------------------
*Not Meaningful
</TABLE>
-16-
<PAGE>
Fiscal Years Ended May 31, 1995 and 1996
Total Revenues. Total revenues increased by 37.1%, from $64.8 million in
fiscal 1995 to $88.8 million in fiscal 1996. System sales increased by 38.8%,
from $51.7 million in fiscal 1995 to $71.8 million in fiscal 1996. The increase
in system sales was due to a 35.8% increase in domestic sales and a 44.5%
increase in international sales and was in part related to the introduction of
the VPS/is system, a new RISC and UNIX based product. The increase in system
sales was primarily due to increases in unit sales volume. Service revenues
increased by 30.5%, from $13.0 million in fiscal 1995 to $17.0 million in fiscal
1996, primarily due to the addition of units to the service base, as well as an
increase in installation revenues.
Gross Profit. The Company's gross profit increased by $12.3 million from
$32.7 million in fiscal 1995 to $45.0 million in fiscal 1996. Gross profit as a
percentage of total revenues increased from 50.5% in fiscal 1995 to 50.7% in
fiscal 1996. Gross profit on system sales increased by $10.9 million, or 39.0%,
from $28.1 million in fiscal 1995 to $39.0 million in fiscal 1996. Gross margin
on system sales increased from 54.2% in fiscal 1995 to 54.3% in fiscal 1996.
Gross profit on service revenues increased by $1.4 million, or 30.2%, from $4.6
million in fiscal 1995 to $6.0 million in fiscal 1996. Gross margin on service
revenues was 35.6% in both fiscal 1995 and fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses were $18.7 million and $22.6 million for fiscal
1995 and 1996, respectively, or 28.9% and 25.4% of total revenues, respectively.
The increase in the dollar amount of the SG&A expenses was primarily due to
expansion of the sales effort in both domestic and international markets,
increased sales commissions due to the significant increase in revenues and
increases in expenses to support the increased level of sales. SG&A expenses
decreased as a percentage of total revenues due to the Company's ability to
leverage certain fixed expenses over its growing revenue base.
Research and Development Expenses. Research and development ("R&D")
expenses were $5.8 million and $7.9 million for fiscal 1995 and 1996,
respectively, or 9.0% and 8.9% of total revenues, respectively. The increase in
the dollar amount of research and development expense reflects the continued
expansion of the Company's R&D staff which increased from 69 to 101 between May
31, 1995 and 1996. R&D expenses are charged to operations as incurred, and
software development costs have not been capitalized. The Company expects such
expenditures to continue to increase, although such expenses as a percentage of
total revenues may vary from period to period.
Non-recurring Noncash Stock Option Compensation Expense. On February 1,
1995, the Company accelerated the vesting on all outstanding stock options under
its 1986 Incentive Stock Option Plan ("the 1986 Plan"), thereby allowing all
such options to be fully vested at such date. The Company also relinquished its
right to repurchase shares obtained by employees under the 1986 Plan. As a
result, the Company recorded a non-recurring noncash compensation charge of
approximately $1.25 million, equal to the difference between the formula price
as of February
-17-
<PAGE>
1, 1995 (which was calculated utilizing a formula based upon the book value
of the Company's Common Stock) of all outstanding stock options issued
subsequent to January 28, 1988 and their estimated value on February 1, 1995
(based upon the initial public offering price of the Company's Common Stock).
Other Income (Expense). Other income was $.5 million for fiscal 1996 as
compared to other expense of $.7 million in fiscal 1995. Interest expense
decreased from $1.0 million in fiscal 1995 to $0 in fiscal 1996, due to the
elimination of debt by the use of proceeds from the Company's initial public
offering. Interest income was $0.2 million and $0.9 million in fiscal 1995 and
fiscal 1996. Foreign exchange gain (loss) decreased from a gain of $.1 million
in fiscal 1995 to a loss of $.4 million in fiscal 1996.
Income Taxes. Variations in the customary relationship between the
provision for income taxes and the statutory income tax rate primarily result
from foreign subsidiaries' net operating losses which did not produce current
tax benefits, the utilization of research and development tax credits and state
and local income taxes. The Company's effective income tax rates were 48.1% and
38.8% for fiscal 1995 and fiscal 1996, respectively. Excluding the effect of the
non-recurring noncash compensation charge the effective income tax rate for
fiscal 1995 would have been 40.0%. See Note 8 of notes to consolidated financial
statements.
Foreign Operations. The Company's European subsidiary had an operating
profit of $.8 million during fiscal 1996 as compared to an operating loss of $.2
million during fiscal 1995 (see Note 12 of notes to consolidated financial
statements). The increase in profitability was primarily due to an increase in
the gross margin on increased system sales. Transfers from the Company's North
American operations to its European subsidiary are accounted for at cost, plus a
reasonable profit. The cost of revenues for the Company's European subsidiary
includes approximately $.9 million and $.6 million of intercompany gross profit
earned by the Company's North American operations on system sales by the
European subsidiary to third parties during fiscal 1995 and fiscal 1996,
respectively.
Fiscal Years Ended May 31, 1994 and 1995
Total Revenues. Total revenues increased by 25.8%, from $51.5 million in
fiscal 1994 to $64.8 million in fiscal 1995. System sales increased by 25.6%,
from $41.2 million in fiscal 1994 to $51.7 million in fiscal 1995. The increase
in system sales was due to a 24.7% increase in domestic sales and a 27.4%
increase in international sales and was in part related to the introduction of
the VPS/sp system, a new RISC and UNIX based product. The increase in system
sales was primarily due to increases in unit sales volume. Service revenues
increased by 26.6%, from $10.3 million in fiscal 1994 to $13.0 million in fiscal
1995, primarily due to the addition of units to the service base, as well as an
increase in installation revenues.
Gross Profit. The Company's gross profit increased by $7.6 million from
$25.1 million in fiscal 1994 to $32.7 million in fiscal 1995. Gross profit as a
percentage of total revenues increased from 48.8% in fiscal 1994 to 50.5% in
fiscal 1995. Gross profit on system sales
-18-
<PAGE>
increased by $5.5 million, or 24.5%, from $22.5 million in fiscal 1994 to
$28.1 million in fiscal 1995. Gross margin on system sales decreased from 54.7%
in fiscal 1994 to 54.2% in fiscal 1995. The Company attributes this decrease
primarily to the product mix during fiscal 1995 and a $.5 million increase in
the provision for inventory reserves relating to potentially excess quantities
on hand. Gross profit on service revenues increased by $2.1 million, or 82.4%,
from $2.5 million in fiscal 1994 to $4.6 million in fiscal 1995. Gross margin on
service revenues increased from 24.7% in fiscal 1994 to 35.6% in fiscal 1995.
This increase was attributable to growth in the service base and the spreading
of fixed personnel service costs over its growing service base, as well as an
increase in installation revenues.
Selling, General and Administrative Expenses. SG&A expenses were $15.2
million and $18.7 million for fiscal 1994 and 1995, respectively, or 29.6% and
28.9% of total revenues, respectively. The increase in the dollar amount of the
SG&A expenses was primarily due to the expansion of the sales effort in both
domestic and international markets, increased sales commissions due to the
significant increase in revenues and increases in expenses to support the
increased level of sales. SG&A expenses decreased as a percentage of total
revenues due to the Company's ability to leverage certain fixed expenses over
its growing revenue base.
Research and Development Expenses. R&D expenses were $4.9 million and $5.8
million for fiscal 1994 and 1995, respectively, or 9.6% and 9.0% of total
revenues, respectively. The increase in the dollar amount of research and
development expense reflects the continued expansion of the Company's R&D staff
which increased from 62 to 69 between May 31, 1994 and 1995. R&D expenses are
charged to operations as incurred, and no software development costs have been
capitalized. The Company expects the dollar amount of such expenditures to
continue to increase, although such expenses as a percentage of total revenues
will vary from period to period.
Non-recurring Noncash Stock Option Compensation Expense. On February 1,
1995, the Company accelerated the vesting on all outstanding stock options under
its 1986 Incentive Stock Option Plan ("the 1986 Plan"), thereby allowing all
such options to be fully vested at such date. The Company also relinquished its
right to repurchase shares obtained by employees under the 1986 Plan. As a
result, the Company recorded a non-recurring noncash compensation charge of
approximately $1.25 million, equal to the difference between the formula price
as of February 1, 1995 (which was calculated utilizing a formula based upon the
book value of the Company's Common Stock) of all outstanding stock options
issued subsequent to January 28, 1988 and their estimated value on February 1,
1995 (based upon the initial public offering price).
Other Income (Expense). Other expenses were $1.2 million and $.7 million
for fiscal 1994 and 1995, respectively. Interest expense increased from $0.9
million in fiscal 1994 to $1.0 million in fiscal 1995, primarily due to
increased borrowings which more than offset the effect of lower borrowing rates.
Interest and other income was $0.2 million in fiscal 1994 and fiscal 1995.
Foreign exchange gain (loss) increased from a loss of $0.5 million in fiscal
1994 to a gain of $.1 million in fiscal 1995.
-19-
<PAGE>
Income Taxes. Variations in the customary relationship between the
provision for income taxes and the statutory income tax rate primarily result
from foreign subsidiaries' net operating losses which did not produce current
tax benefits, the utilization of research and development tax credits and state
and local income taxes. The Company's effective income tax rates were 44.0% and
48.1% for fiscal 1994 and fiscal 1995, respectively. The increase in the
effective tax rate was primarily caused by a non-recurring noncash compensation
charge of $1.25 million which is not deductible for tax purposes. Excluding the
effect of the non-recurring noncash compensation charge the effective income tax
rate for fiscal 1995 would have been 40.0%. See Note 9 of notes to consolidated
financial statements.
Foreign Operations. The Company's European subsidiary incurred operating
losses of $1.1 million during fiscal 1994 as compared to losses of $.2 million
during fiscal 1995 (see Note 13 of notes to consolidated financial statements).
The decrease in such losses was primarily due to an increase in the gross margin
on increased system sales. Transfers from the Company's North American
operations to its European subsidiary are accounted for at cost, plus a
reasonable profit. The cost of revenues for the Company's European subsidiary
includes approximately $1.2 million and $.9 million of intercompany gross profit
earned by the Company's North American operations on system sales by the
European subsidiary to third parties during fiscal 1994 and fiscal 1995,
respectively.
Quarterly Results of Operations.
The Company's quarterly operating results may fluctuate as a result of a
variety of factors, including the length of the sales cycle, the timing of
orders from and shipments to customers, delays in development and customer
acceptance of custom software applications, product development expenses, new
product introductions or announcements by the Company or its competitors, levels
of market acceptance for new products and the hiring and training of additional
staff as well as general economic conditions. The size and timing of the
Company's sales transactions have historically varied substantially from quarter
to quarter, and the Company expects such variations to continue in future
periods. The Company is typically able to deliver an IVR system within 60 days
of receipt of the order and therefore, does not customarily have a significant
long-term backlog. Because a significant portion of the Company's overhead is
fixed in the short-term, the Company's results of operations may be adversely
affected if revenues fall below the Company's expectations.
Liquidity and Capital Resources.
The Company's principal cash requirement to date has been to fund working
capital and capital expenditures in order to support the growth of revenues. The
Company has financed this requirement primarily through cash flow from
operations and bank borrowings. Cash flow from operations was $2.9 million, $.2
million and $9.6 million in fiscal 1994, 1995 and 1996, respectively. At May 31,
1996, the Company had working capital of $48.5 million, including $27.3 million
of cash and cash equivalents and short term investments. The Company expects its
working capital needs to increase along with future revenue growth.
-20-
<PAGE>
At May 31, 1996 current assets increased by $24.3 million while current
liabilities increased by $3.4 million as compared to May 31, 1995. Current
assets increased principally as a result of increases in cash, cash equivalents
and short term investments resulting from proceeds from the secondary public
offering and increases in inventories and accounts receivable due to higher
operating levels.
The average days' sales outstanding (calculated by dividing the net
accounts receivable at the balance sheet date for each period by the average
sales per day during the quarter immediately preceding the balance sheet date)
were approximately 71 days, 98 days and 83 days at May 31, 1994, 1995 and 1996,
respectively. The Company attributes the decrease in days' sales outstanding to
a decrease in accounts receivable from government agencies which generally have
longer payment terms.
In January 1995, the Company increased its line of credit to $8.0 million
with interest charged at the prime rate plus 0.25%. The line of credit expires
on November 30, 1996. As of May 31, 1996, the Company had no borrowings under
this line of credit. The Company is presently negotiating to increase and
restructure the line of credit to a revolving line of credit, with a term loan
option.
The Company made capital expenditures totalling $2.3 million, $2.4 million
and $5.9 million during fiscal 1994, 1995 and 1996, respectively.
Recent Financial Accounting Standards Board Statements
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date, include Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
which are effective for fiscal years beginning after December 15, 1995 and SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which is effective for
transactions occurring after December 31, 1996. The Company adopted SFAS 121 in
the fourth quarter of fiscal 1996 and SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" during the third quarter of fiscal
1996. The adoption of the recent FASB pronouncements did not have material
impact on the Company's Consolidated Financial Statements. SFAS 123 and SFAS 125
are not expected to have a material impact on the Company's Consolidated
Financial Statements.
Foreign Currency Transaction
The Company does not currently engage in international currency hedging
transactions to mitigate its foreign currency exposure. Included in the foreign
exchange gain (loss) are unrealized foreign exchange gains and losses resulting
from the currency remeasurement of the financial statements (primarily
inventories, accounts receivable and intercompany debt) of the foreign
subsidiaries of the Company into U.S. dollars. To the extent the Company is
unable to
-21-
<PAGE>
match revenue received in foreign currencies with expenses paid in the same
currency, it is exposed to possible losses on international currency
transactions.
Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
Item 8. Consolidated Financial Statements
The information is contained on Pages F-1 through F-17 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-22-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and reports on Form 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
Index to Consolidated Financial Statements.............................F-1
Independent Auditors' Report...........................................F-2
Consolidated Balance Sheets as of May 31, 1996 and 1995................F-3
Consolidated Statements of Earnings for the years ended
May 31, 1996, 1995 and 1994..........................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended May 31, 1996, 1995 and 1994....................................F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 1996, 1995 and 1994..........................................F-6
Notes to Consolidated Financial Statements......................F-7 - F-17
(a)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts........................S-1
(a)(3) EXHIBITS
*3.1 Form of Amended and Restated Certificate of Incorporation
*3.2 Form of Amended and Restated By-Laws
*4.1 Form of Common Stock Certificate
*10.1 1986 Incentive Stock Option Plan
*10.2 1995 Stock Option Plan
*10.3 1995 Non-Employee Director Stock Option Plan
*10.13 Performance Incentive Plan
-23-
<PAGE>
11 Computation of Earnings Per Common Share
*22.1 List of Significant Subsidiaries
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
--------------- *Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Registration Number 33-89294.
(b)(1) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last quarter
of its fiscal year ended May 31, 1996.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PERIPHONICS CORPORATION
Registrant
By:\s\ Peter J. Cohen
-------------------------
Peter J. Cohen, President
Dated: August 29, 1996
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\ Peter J. Cohen Chairman of the Board, President August __, 1996
- ----------------------- and Chief Executive Officer
Peter J. Cohen Principal Operating Officer)
\s\ Richard A. Daniels Senior Vice President-Sales, August __, 1996
- ----------------------- Treasurer and Director
Richard A. Daniels
\s\ Kevin J. O'Brien Chief Financial Officer, Vice August __, 1996
- ----------------------- President-Finance and Administration
Kevin J. O'Brien (Principal Accounting and Financial
Officer), Secretary and Director
\s\ Jayandra Patel
- ----------------------- Vice President-Research and August __, 1996
Jayandra Patel Development, Assistant Treasurer
and Director
- ----------------------- Director August __, 1996
Edward H. Blum
- ----------------------- Director August __, 1996
Peter Breitstone
-25-
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of May 31, 1996 and 1995 F-3
Consolidated Statements of Earnings for the years
ended May 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for
the years ended May 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended May 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 - F-17
Schedule II - Valuation and Qualifying Accounts S-1
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Periphonics Corporation
Bohemia, New York
We have audited the accompanying consolidated balance sheets of Periphonics
Corporation and subsidiaries as of May 31, l996 and 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1996. Our audits also
included the financial statement schedule listed in the Index at item 14(a)2.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
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, such consolidated financial statements present fairly, in
all material respects, the financial position of Periphonics Corporation and
subsidiaries as of May 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 8 to the consolidated financial statements, in fiscal
1994 the Company changed its method of accounting for income taxes to conform
with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Jericho, New York
July 15, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
May 31,
ASSETS 1996 1995
- ------ ---------- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $18,664 $ 8,753
Short-term investments 8,603 -
Accounts receivable, less allowance for doubtful accounts
of $890 and $750, respectively (Note 3) 23,829 22,077
Inventories (Note 4) 11,097 7,443
Deferred income taxes (Note 8) 1,261 911
Prepaid expenses and other current assets 935 915
------- -------
Total Current Assets 64,389 40,099
PROPERTY, PLANT AND EQUIPMENT, net
(Note 5) 10,426 7,377
OTHER ASSETS 288 246
------- -------
$75,103 $47,722
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,247 $ 3,283
Accrued expenses and other current liabilities (Notes 6 and 8) 11,666 9,266
------- -------
Total Current Liabilities 15,913 12,549
DEFERRED INCOME TAXES (Note 8) 409 382
------- -------
16,322 12,931
------- -------
REDEEMABLE CUMULATIVE CONVERTIBLE
PREFERRED STOCK ISSUED BY SUBSIDIARY,
900,000 shares authorized and 625,999 shares
outstanding, stated at (Note 9) - 1,215
------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 7, 9 and 11)
STOCKHOLDERS' EQUITY (Notes 10 and 11):
Preferred stock, par value $.01 per share, 1,000,000
shares authorized, none issued - -
Common stock, par value $.0l per share; authorized: 15,000,000
shares, outstanding: 6,799,082 and 6,025,000 shares, respectively 68 60
Additional paid-in capital 41,838 25,856
Retained earnings 16,875 7,660
------- -------
58,781 33,576
------- -------
$75,103 $47,722
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
Year Ended May 31,
1996 l995 1994
<S> <C> <C> <C>
System sales $ 71,800 $ 51,747 $ 41,192
Service revenues 17,003 13,030 10,293
--------- --------- ---------
Total revenues 88,803 64,777 51,485
--------- --------- ---------
Cost of system sales 32,798 23,686 18,653
Cost of service revenues 10,956 8,387 7,748
--------- --------- ---------
Cost of revenues 43,754 32,073 26,401
--------- --------- ---------
Gross profit 45,049 32,704 25,084
--------- --------- ---------
Operating expenses:
Selling, general and administrative (Note 10) 22,587 18,749 15,249
Research and development 7,933 5,831 4,961
Nonrecurring, non-cash compensation charge (Note 10) - 1,250 -
--------- --------- ----
30,520 25,830 20,210
--------- --------- ---------
Earnings from operations 14,529 6,874 4,874
--------- --------- ---------
Other income (expense):
Interest expense - (992) (936)
Interest and other income 885 170 159
Foreign exchange (loss) gain (345) 88 (464)
--------- --------- ----------
540 (734) (1,241)
--------- --------- ---------
Earnings before provision for income taxes and
cumulative effect of change in accounting principle 15,069 6,140 3,633
Provision for income taxes (Note 8) 5,854 2,956 1,599
--------- --------- ---------
Earnings before cumulative effect of change in
accounting principle 9,215 3,184 2,034
Cumulative effect of change in accounting principle (Note 8) - - 83
--------- --------- ---------
Net earnings $ 9,215 $ 3,184 $ 1,951
========= ========= =========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary earnings per common share:
Earnings before cumulative effect of change in
accounting principle $ 1.39 $ 0.65 $ 0.44
Cumulative effect of change in accounting principle - - (0.02)
--------- --------- ---------
Earnings per common share $ 1.39 $ 0.65 $ (0.42)
========= ========== =========
Fully-diluted earnings per common share:
Earnings before cumulative effect of change
in accounting principle $ 1.38 $ 0.65 $ 0.44
Cumulative effect of change in accounting principle - - (0.02)
--------- --------- ---------
Earnings per common share $ 1.38 $ 0.65 $ 0.42
========= ========== =========
Weighted average number of common and common equivalent shares:
Primary 6,630 4,889 4,614
========= ========== =========
Fully-diluted 6,674 4,889 4,619
========= ========== =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock Additional Retained Treasury Stock Total
Shares Amount Paid-In Earnings Shares Amount Stockholders'
Capital Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 1, 1993 3,750,000 $37 $ 1,594 $ 3,706 $ - $ - $ 5,337
Book value stock
options (Note 10) - - 36 - - - 36
Net earnings - - - 1,951 - - 1,951
Dividends declared on
preferred stock (Note 9) - - - (1,035) - - (1,035)
--------- --- ------- -------- ------- -------- --------
BALANCE, May 31, 1994 3,750,000 37 1,630 4,622 - - 6,289
Book value stock
options (Note 10) - - 1,274 - - - 1,274
Net earnings - - - 3,184 - - 3,184
Conversion of Series A
preferred stock (Note 9) 750,000 8 4,492 - - - 4,500
Purchase of treasury
stock (Note 9) - - - - (770,000) (8,862) (8,862)
Initial public offering of
common stock (Note 1) 1,400,000 14 18,301 - 750,000 8,789 27,104
Exercise of stock options 145,000 1 232 - - - 233
Retirement of treasury
stock (20,000) - (73) - 20,000 73 -
Dividends declared and
paid on preferred stock
(Note 9) - - - (146) - - (146)
--------- --- ------- -------- ------- ------ --------
BALANCE, May 31, 1995 6,025,000 60 25,856 7,660 - - 33,576
Net earnings - - - 9,215 - - 9,215
Secondary public offering
of common stock (Note 1) 600,000 6 13,953 - - - 13,959
Exercise of stock options
and stock issued under
employee stock purchase
plan (Note 10) 134,957 2 444 - - - 446
Tax benefit relating to
employee stock options - - 370 - - - 370
Conversion of preferred
stock held by subsidiary
(Note 9) 39,125 - 1,215 - - - 1,215
-------- --- ------- ------- ------- ------ -------
BALANCE, May 31, 1996 6,799,082 $68 $41,838 $16,875 - $ - $58,781
========= ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended May 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 9,215 $ 3,184 $ 1,951
Adjustments to reconcile net earnings to net cash
and cash equivalents provided by operating activities:
Cumulative effect of change in accounting principle - - 83
Depreciation and amortization 2,867 2,216 1,935
Provision for losses on accounts receivable 140 484 125
Provision for inventory reserves 450 765 175
Deferred income taxes (323) (253) (203)
Stock option compensation expense - 1,274 36
Changes in operating assets and liabilities:
Increase in accounts receivable (1,892) (8,459) (3,156)
Increase in inventories (4,104) (490) (2,774)
Increase in prepaid expenses and other current assets (20) (262) (177)
(Increase) decrease in other assets (76) (189) 6
Increase in accounts payable and accrued expenses and
other current liabilities 3,364 1,896 4,881
-------- -------- -------
Net cash and cash equivalents provided by
operating activities 9,621 166 2,882
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property, plant and equipment, net (5,882) (2,449) (2,281)
Purchases of short-term investments (8,603) - -
-------- -------- -------
Net cash and cash equivalents used in
investing activities (14,485) (2,449) (2,281)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering of common stock 13,959 27,104 -
Purchase of treasury stock - (8,862) -
Proceeds from long-term debt - 11,045 -
Principal repayments of long-term debt - (21,077) (1,253)
Payment of dividends - (1,181) -
Proceeds from stock options exercised including related
tax benefits 816 233 -
-------- -------- -------
Net cash and cash equivalents provided
by (used in) financing activities 14,775 7,262 (1,253)
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,911 4,979 (652)
CASH AND CASH EQUIVALENTS, beginning of year 8,753 3,774 4,426
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $ 18,664 $ 8,753 $ 3,774
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ 992 $ 936
======== ======== =======
Income taxes $ 6,079 $ 2,150 $ 842
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND INITIAL PUBLIC
OFFERING
Periphonics Corporation and subsidiaries (the "Company") develops, markets
and supports high performance interactive voice response ("IVR") systems, based
on industry-standard, open architecture hardware and operating system software,
in combination with its own proprietary IVR technology that address the needs of
mid-size and large-scale customer installations. During l986, the Company became
a wholly-owned subsidiary of 4000 VMH Corp. as a result of the purchase of all
of the Company's outstanding common stock from Exxon Corporation ("Exxon") by
4000 VMH Corp. The transaction was accounted for using the purchase method of
accounting. The aggregate purchase price of $5,542 approximated the net assets
of the Company at the closing date. Effective March 30, 1995, 4000 VMH Corp. was
merged into the Company (the "Merger"). The accompanying consolidated financial
statements have been prepared giving effect to the Merger. The financial
position and results of operations of 4000 VMH Corp. are not material to the
accompanying consolidated financial statements.
On March 30, 1995, the Company consummated an initial public offering of
common stock (the "Public Offering"). In the Public Offering, the Company sold
2,150,000 shares of common stock and selling stockholders sold 600,000 shares of
common stock at $14.00 per share. The Company did not receive any of the
proceeds from the sale of common stock by the selling stockholders. Net proceeds
of $27,104 (after underwriters discounts of $2,107 and offering expenses of
$889) were received by the Company and were used to repay borrowings totaling
$14,248 pursuant to various credit agreements and to reacquire 750,000 shares of
its common stock from Exxon for approximately $8,789 (plus the payment to Exxon
of approximately $207 of accumulated dividends) with the balance of $3,860 to be
used for general corporate purposes.
In April 1995, the underwriters exercised their over-allotment option to
purchase an additional 412,500 shares from the selling stockholders. The Company
did not receive any of the proceeds.
On November 17, 1995, the Company consummated a secondary public offering
of common stock (the "Secondary Offering"). In the Secondary Offering, the
Company sold 600,000 shares of common stock and selling stockholders sold
655,000 shares of common stock at $25.50 per share. The Company did not receive
any of the proceeds from the sale of common stock by the selling stockholders.
Net proceeds of approximately $13,959 (after underwriting discounts of $876 and
offering expenses of $465) were received by the Company and are to be used for
general corporate purposes, including working capital, facilities expansion, and
possible acquisitions of businesses, products, or technologies complementary to
the Company's business.
F-7
<PAGE>
On November 22, 1995, the underwriters exercised their over-allotment
option to purchase an additional 188,250 shares from the selling shareholders.
The Company did not receive any of the proceeds.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation - The consolidated financial statements
include the accounts of Periphonics Corporation and subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
b. Revenue recognition - Sales of standard products are recognized when
products are shipped. Sales of custom software (either as a portion of system
orders or as add-on orders) are recognized upon customer acceptance. For both
standard products and custom software, sales are recorded only after it is
determined that the Company has no significant remaining obligations and
collectibility of the resulting receivable is probable. Service revenues
(including postcontract customer support) and other revenues (including revenues
relating to insignificant obligations at the time sales are recorded) are
recognized ratably over applicable contractual periods or as service is
performed.
Standard products and custom software are sold with limited warranties,
generally for 60 days. Warranty expense for the fiscal years ended May 31, 1996,
1995 and 1994 was not material.
c. Inventories - Inventories are valued at the lower of cost (first-in,
first-out method) or market. Reserves are established to record provisions for
excess and obsolete inventories in the period in which it becomes reasonably
evident that the product is not saleable or the market value is less than cost.
d. Cash and cash equivalents - The Company considers all cash and
investments with original maturity dates of three months or less to be
components of cash and cash equivalents.
e. Investments - During the year ended May 31, 1996, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting For Certain
Investments In Debt and Equity Securities". At May 31, 1996, the Company's
investments consisted of U.S. Government and Agency bonds with original
maturities of greater than three months and remaining maturities of less than
six months. Such debt securities are classified as held-to-maturity because the
Company has the positive intent and ability to hold the investments to maturity.
Held-to-maturity investments are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts.
f. Property, plant and equipment - Property, plant and equipment is stated
at cost less accumulated depreciation and is depreciated on the straight-line
method over the estimated useful lives of related assets. Leasehold improvements
are amortized over the life of the lease or the estimated life of the asset,
whichever is less.
g. Software development costs - The development of new software products
and enhancements to existing products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs would be capitalized in accordance with
Statement of Financial
F-8
<PAGE>
Accounting Standards No. 86, "Accounting For the Cost of Computer Software
To Be Sold, Leased or Otherwise Marketed." To date, no internal software
development costs have been capitalized as the Company believes its current
process for developing this software is essentially completed concurrently with
the establishment of technological feasibility.
h. Impairment of Long-Lived Assets - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting For the Impairment of Long-Lived Assets and
For Long-Lived Assets To Be Disposed Of." SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of.
In accordance with SFAS 121, the Company reviews its long-lived assets,
including property, plant and equipment, identifiable intangibles and software
development costs for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets may not be fully recoverable.
To determine recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows, without interest charges,
will be less than the carrying amount of the assets. Impairment is measured at
fair value. The adoption of SFAS 121 had no effect on the Company's consolidated
financial statements.
i. Foreign currency translation - The functional currency of the Company's
foreign subsidiaries is the US dollar. Therefore, assets and liabilities of the
foreign subsidiaries are remeasured using a combination of current and
historical rates. Income and expense accounts are remeasured primarily using
average rates in effect during the year. Unrealized foreign exchange gains and
losses resulting from the remeasurement of these entities are included in the
results of operations. The Company does not currently engage in international
currency hedging transactions.
j. Income taxes - During fiscal 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109") which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the Company's financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial accounting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Prior to fiscal 1994, the Company provided for deferred taxes based upon
timing differences arising from differences between income reported for
financial reporting and income tax purposes. Prior year financial statements
have not been restated.
Tax credits are accounted for under the flow-through method.
k. Earnings per common and common equivalent share - Earnings per common
and common equivalent share has been computed by dividing net earnings, after
reduction for preferred stock dividends, when applicable, by the weighted
average number of
F-9
<PAGE>
common shares and common share equivalents outstanding. Common share
equivalents included in the computation represent common share equivalents from
convertible preferred stock, when applicable, and dilutive common equivalent
shares from stock options (using the treasury stock method).
l. 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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
m. Fair Value of Financial Instruments - Financial instruments consist
primarily of investments in cash, short-term investments, trade accounts
receivable, and accounts payable. At May 31, 1996 and 1995, the fair value of
the Company's financial instruments approximated the carrying value.
n. Reclassifications - Certain prior years' balances have been reclassified
to conform with current year classifications.
3. ACCOUNTS RECEIVABLE
1996 1995
---- ----
Billed $ 16,055 $ 13,244
Unbilled 7,774 8,833
---------- ----------
$ 23,829 $ 22,077
========== ==========
Unbilled receivables primarily relate to sales recorded on standard
products which have been shipped, but have not yet been finally accepted by the
customer. The Company has no significant remaining obligations relating to these
unbilled receivables and collectibility is probable (see Note 2b). Substantially
all unbilled receivables as of May 31, 1995 were collected during fiscal 1996.
All unbilled receivables as of May 31, 1996 are expected to be collected in less
than one year.
4. INVENTORIES
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 6,218 $ 3,790
Work-in-process 4,879 3,653
---------- ---------
$ 11,097 $ 7,443
========== =========
</TABLE>
F-10
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT, net
<TABLE>
<CAPTION>
Useful Lives 1996 1995
------------ ---- ----
(in years)
<S> <C> <C> <C>
Land $ 156 $ 156
Building and improvements 40 3,891 3,298
Machinery, equipment, furniture
and fixtures 3-10 13,948 9,865
Customer service equipment 5 4,927 4,175
--------- ----------
22,922 17,494
Less accumulated depreciation 12,496 10,117
---------- ----------
$ 10,426 $ 7,377
========== ==========
</TABLE>
Depreciation expense relating to property, plant and equipment amounted to
approximately $2,833, $2,063 and $1,794 for the years ended May 31, 1996,
1995 and 1994, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Customer advance payments $ 6,130 $ 3,815
Accrued payroll, commissions, bonuses,
fringe benefits and payroll taxes 3,257 2,950
Income taxes payable 610 976
Other accrued expenses 1,669 1,525
---------- --------
$ 11,666 $ 9,266
========== ========
</TABLE>
7. BANK LOAN PAYABLE
The Company has an $8,000 unsecured line of credit with a bank which
expires on November 30, 1996. There were no borrowings against such line of
credit at May 31, 1996 or 1995. Any borrowings on this line of credit will bear
interest at the prime rate (8.25 percent at May 31, 1996) plus one-quarter
percent. The Company is currently renegotiating the terms of this line of
credit.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 4,574 $ 2,410 $ 1,589
State and local 1,596 799 213
Foreign 7 - -
------- ------- -------
6,177 3,209 1,802
-------- ------- -------
Deferred:
Federal (240) (200) (199)
State and local (83) (53) (4)
-------- -------- -------
(323) (253) (203)
-------- -------- -------
Total $ 5,854 $ 2,956 $ 1,599
======== ======== =======
</TABLE>
F-11
<PAGE>
As described in Note 2, the Company adopted SFAS 109 during fiscal 1994.
This change in accounting principle required a restatement of the Company's
deferred tax accounts as of June 1, 1993, which resulted in a charge of $83
which is reflected as a cumulative effect of change in accounting principle in
the Company's consolidated statement of earnings. The utilization of SFAS 109
did not have a material effect on fiscal 1994 earnings before cumulative effect
of change in accounting principle.
The difference between the statutory Federal tax rate and the Company's
effective tax rate is as follows (as a percentage of pretax earnings):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
Foreign subsidiaries' net operating losses not producing
current tax benefit - 2.6 10.8
State and local income taxes (net of Federal tax benefit) 6.6 8.0 3.8
Exempt income of foreign sales corporation (1.8) (1.2) (1.2)
Research and development tax credits - (2.2) (5.3)
Non-deductible stock option compensation expense - 7.1 -
Other - (.2) 1.9
----- --- -----
Effective tax rate 38.8% 48.1% 44.0%
===== ===== =====
</TABLE>
At May 31, 1996, 1995 and 1994, the deferred tax assets and liabilities
consisted of:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ------------------------- ------------------
Net Net Net Net Net Net
Current Long-term Current Long-term Current Long-term
Deferred Deferred Deferred Deferred Deferred Deferred
Tax Tax Tax Tax Tax Tax
Assets Liabilities Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable $ 310 $ - $ 302 $ - $ 108 $ -
Inventories 691 - 483 - 366 -
State tax credit
carryforwards 32 - 32 - 27 -
Unrealized foreign
exchange losses 228 - 94 - 139 -
Property, plant, and
equipment - 419 - 323 - 339
Other 67 (10) 75 (10) 2 25
Net operating loss carry-
forwards of foreign
subsidiaries 404 - 625 - 747 -
-------- -------- ------- ------- ------- -------
1,732 409 1,611 313 1,389 364
Less valuation allowance 471 - 700 69 749
-------- --------- ------- ------- ------- -------
Total $ 1,261 $ 409 $ 911 $ 382 $ 640 $ 364
======== ========= ======== ======= ======= =======
</TABLE>
The valuation allowance decreased by approximately $298 and $49 during
fiscal 1996 and 1995, respectively, primarily as a result of the utilization of
net operating loss carryforwards of foreign subsidiaries.
9. REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
a. Series A Preferred Stock Issued to Exxon - In May 1994, the Company and
Exxon, the former holder of the Company's Series A Preferred Stock (the
"Preferred
F-12
<PAGE>
Stock"), entered into an agreement which restructured certain conversion,
dividend and redemption rights relating to the Preferred Stock. Pursuant to the
terms of such agreement, the Company was required to pay all unpaid accrued
cumulative dividends as of May 31, 1994 ($1,035) in five quarterly installments
of $207 beginning June 1, 1994 and to pay all future dividends as they are
incurred. The redemption price, as well as liquidation value, of the Preferred
Stock under the agreement was $1,000 per share. Dividends on this Preferred
Stock, which were cumulative, were payable at $10 per share per quarter.
On March 30, 1995, the effective date of the Public Offering, the Company
and Exxon executed a Stock Redemption Agreement pursuant to which (i) the
Company paid Exxon approximately $207 in accumulated dividends on the Preferred
Stock; (ii) Exxon converted all of its shares of Preferred stock into 750,000
shares of the Company's Common Stock pursuant to existing conversion rights; and
(iii) the Company reacquired such shares of Common Stock at a price equal to
$11.72 per share. The Stock Redemption Agreement further provided that upon the
completion of the Company's reacquisition of the Common Stock held by Exxon, all
of Exxon's rights as a stockholder of the Company were terminated and the
Company and Exxon released and discharged all obligations to the other party
arising out of Exxon's ownership of the Preferred Stock.
b. Preferred Stock Issued By Subsidiary - The Company's preferred stock
issued by a subsidiary of the Company, consisted of 900,000 authorized shares,
625,999 shares of which were issued in conjunction with the purchase of certain
assets of Autophon U.K. in July 1990. This preferred stock was stated at $1,215
based upon the fair market value of the assets acquired. The preferred stock was
convertible into either common stock of Periphonics Voice Processing Systems
Limited (a subsidiary of the Company) at a ratio of 1,000 to 1, or into 39,125
shares of common stock of the Company through the exercise of a warrant.
Effective May 31, 1996, the holder of this preferred stock exercised the warrant
to convert such shares into 39,125 shares of common stock of the Company.
10. STOCKHOLDERS' EQUITY
a. Stock option plans - The l986 Incentive Stock Option Plan (the "1986
Plan") allowed for the issuance of options to purchase 500,000 shares of common
stock by employees. Options were issued at an exercise price which was
calculated utilizing a formula based upon the book value of the Company's common
stock at the date of grant (the "Formula Price"). Options under the 1986 Plan
are exercisable in 25 percent increments beginning one year after the date of
grant and expire up to ten years after the date of grant. While the Company was
privately held, it maintained the right, under certain conditions, to repurchase
shares obtained by employees under the 1986 Plan at the Formula Price calculated
at the date of repurchase. As of the date of the Public Offering, the Company no
longer has the right to repurchase such shares. The Company's Board of Directors
(the "Board") has determined not to make further grants under the 1986 Plan and
to make any future grants from the 1995 Stock Option Plan (the "1995 Plan").
F-13
<PAGE>
For those options issued under the 1986 Plan subsequent to January 28,
1988, compensation expense has been recognized for the difference in the Formula
Price at the date of grant and the Formula Price calculated at the end of each
reporting period through February 1, 1995. Such compensation expense was $24 and
$36 for the years ended May 31, 1995 and 1994, respectively, and is included in
selling, general and administrative expenses on the accompanying consolidated
statements of operations. On February 1, 1995, the Company accelerated the
vesting on all outstanding stock options under the 1986 Plan thereby allowing
all such options to be fully vested at such date. The Company also relinquished
its right to repurchase shares obtained by employees under the Plan. As a
result, the Company recorded a nonrecurring, non-cash compensation charge of
approximately $1,250, equal to the difference between the Formula Price of all
outstanding stock options issued subsequent to January 28, 1988 and their
estimated value on February 1, 1995 (based upon the expected initial public
offering price).
In February 1995, the Board adopted and the stockholders approved, the 1995
Plan. The 1995 Plan has 400,000 shares of common stock reserved for issuance
upon the exercise of options designated as either [i] incentive stock options
("ISOs") under the Internal Revenue Code, or [ii] non-qualified options. ISOs
may be granted under the 1995 Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company. Each option vests in
four annual installments of 25 percent each on the first, second, third and
fourth anniversary of the date of grant. Options granted under the 1995 Option
Plan may not be granted at a price less than the fair market value of the
Company's common stock on the date of grant (or 110 percent of fair market value
in the case of persons holding 10 percent or more of the voting stock of the
Company) and expire not more than ten years from the date of grant (five years
in the case of ISOs granted to persons holding 10 percent or more of the voting
stock of the Company).
In February 1995, the Board adopted and the stockholders approved, a
Non-Employee Director Stock Option Plan (the "Directors Plan"). The Directors
Plan has 100,000 shares of common stock reserved for issuance from which grants
of non-qualified stock options covering 7,500 shares and 5,000 shares of common
stock are automatically made on the election of a non-employee Director to the
Board and the date of each annual meeting of shareholders to certain
non-employee Directors of the Company, respectively. The exercise price under
each option is the fair market value of the Company's common stock on the date
of grant. Each option has a five-year term and vests in four annual installments
of 25 percent each on the first, second, third and fourth anniversary of the
date of grant. The non-vested portion of an option terminates if the Director
ceases to be a member of the Board.
F-14
<PAGE>
Additional information with respect to the Company's stock option plans is
as follows:
<TABLE>
<CAPTION>
Shares Option Price
<S> <C> <C>
Balance, June 1, 1993 360,000 $1.50 - $3.35
Options cancelled 20,000 $2.00
------- ---------------
Balance, May 31, 1994 340,000 $1.50 - $3.35
Options granted 104,000 $ 14.00
Options exercised (145,000) $1.50 - $2.50
Options cancelled (2,000) $ 14.00
------- ---------------
Balance, May 31, 1995 97,000 $1.50 - $14.00
Options granted 134,000 $17.75 - $28.25
Options exercised (128,500) $1.50 - $14.00
Options cancelled (15,000) $14.00 - $24.00
------- ---------------
Balance, May 31, 1996 287,500 $1.50 - $28.25
======= ===============
</TABLE>
At May 31, 1996, options to purchase approximately 96,375 shares were
exercisable at prices ranging from $1.50 to $14.00.
b. Changes in authorized capital - In February 1995, the Board authorized
an increase in the number of common shares authorized from 5,039,125 to
15,000,000. In February 1995, the Board approved the authorization of 1,000,000
shares of preferred stock, which may be issued by the Board on such terms and
with such rights, preferences and designations as the Board may determine,
without further stockholder action.
c. Employee Stock Purchase Plan - During 1996, the Company adopted an
Employee Stock Purchase Plan to provide eligible employees an opportunity to
purchase shares of its common stock through payroll deductions during two
offering periods, December 1 through May 31 and June 1 through November 30. The
purchase price is an amount equal to 85% of the fair market value of a share of
common stock on the first or last day of the offering period, whichever is
lower. The aggregate number of shares purchased by an employee may not exceed a
number of shares determined by dividing $12,500 by the fair market value of a
share of the Company's common stock on the first day of the offering period. The
stock purchase plan expires on August 10, 2005. A total of 200,000 shares are
available for purchase under the plan. 6,457 shares were issued under the plan
during fiscal 1996 at $21.46.
11. COMMITMENTS AND CONTINGENCIES
a. Deferred compensation plan - The Company maintains a 40l(k) deferred
compensation plan for all employees meeting certain service requirements. The
Company has made no matching contribution to amounts deferred by employees. The
Company pays the administrative costs of the plan.
b. Employment contracts - The Company had entered into employment contracts
with seven officers expiring through December 31, 1996. These agreements allowed
for aggregate annual base compensation of $1,698 as well as bonuses based
primarily on the profit growth of the Company, as defined in the Company's
performance incentive plan. On March 30, 1995, the Company terminated certain of
the employment contracts and replaced them with revised contracts. The revised
contracts terminate
F-15
<PAGE>
on May 31, 1998 and allow for aggregate annual base compensation consistent
with the previous agreements as well as annual bonuses to be determined in
accordance with the provisions of the Company's performance incentive plan. In
addition, these revised employment contracts automatically self renew for
consecutive two year terms unless at least one year prior to the expiration of
the existing term either party gives notice of cancellation.
c. Stock repurchase agreements - The Company had entered into stock
repurchase agreements with the stockholders of 4000 VMH Corp. The agreements
required the Company to repurchase, from the estate of a deceased stockholder or
from a disabled stockholder, all of the shares owned by the stockholder. The
purchase price for the shares would be determined and paid as provided for in
the agreements. To fully fund its obligations under these agreements, the
Company had acquired certain disability income and life insurance policies on
its stockholders. On March 30, 1995, the Company terminated the agreements. The
Company entered into new agreements with certain stockholders of the Company.
The new agreements require the Company to maintain life insurance on the life of
each of the specified stockholders in amounts as defined in the agreement and
grant the estate of a deceased stockholder a put option which would require the
Company to redeem a portion of the shares of common stock owned by the estate.
The maximum number of such shares to be redeemed shall be determined by dividing
the fair market value of a share on the date of death into the net life
insurance proceeds received by the Company upon the death of such deceased
stockholder.
d. Legal matters - The Company is involved in certain legal matters in the
normal course of business. The Company's management does not believe that
resolution of these matters will have a materially adverse effect on the
Company's consolidated financial statements.
e. Concentration of industry and credit risk - The Company grants credit to
geographically diversified customers primarily in the telecommunications and
financial services industry. The Company is broadening its vertical market focus
to include additional industries such as government, higher education,
healthcare services, transportation, electric and water utilities and
distribution companies. No one customer accounted for more than 10 percent of
total revenues during fiscal 1996, 1995 and 1994.
f. Lease agreements - The Company has entered into operating leases for
certain sales and service locations, automobiles and office equipment. Future
minimum annual lease payments under noncancellable operating leases are:
<TABLE>
<CAPTION>
Year Ending May 31,
<S> <C> <C>
1997 $ 1,233
1998 866
1999 467
2000 243
2001 222
Thereafter 1,716
--------
$ 4,747
========
</TABLE>
Rental expense was $1,045, $740 and $671 during the years ended May 31,
1996, 1995 and 1994, respectively.
F-16
<PAGE>
12. OPERATIONS BY GEOGRAPHIC AREA
The Company is engaged in only one segment and line of business, the
design, manufacture and service of interactive voice response systems.
<TABLE>
<CAPTION>
Year Ended May 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
System Sales and Service Revenues:
Sales to unaffiliated customers from:
North America $ 79,997 $ 57,488 $ 45,408
Europe 8,806 7,289 6,077
-------- -------- --------
Total revenues to unaffiliated customers 88,803 64,777 51,485
-------- -------- --------
Transfers between geographic areas from:
North America 3,665 2,635 4,227
Europe - - -
-------- -------- --------
Total transfers between geographic areas 3,665 2,635 4,227
-------- -------- --------
Eliminations (3,665) (2,635) (4,227)
-------- -------- --------
Total revenues $ 88,803 $ 64,777 $ 51,485
========= ========= ========
Earnings from Operations:
North America $ 13,696 6,791 $ 6,097
Europe 840 (256) (1,118)
Eliminations (7) 339 (105)
--------- --------- --------
Total earnings from operations $ 14,529 $ 6,874 $ 4,874
========= ========= ========
Identifiable Assets:
North America $ 78,393 $ 50,778 $ 37,638
Europe 8,051 5,580 4,861
Eliminations (11,341) (8,636) (8,411)
--------- --------- --------
Total identifiable assets $ 75,103 $ 47,722 $ 34,088
======== ========= ========
</TABLE>
The activities of the Company's Mexican operation, which are not material
for separate disclosure, are included in North America.
Transfers between geographic areas are accounted for at cost, plus a
reasonable profit. European cost of revenues for the years ended May 31, 1996,
1995 and 1994 includes approximately $565, $928 and $1,237, respectively, of
intercompany gross profit earned by North America on system sales by Europe to
third parties.
Total revenues to customers outside the U.S. were $28,242, $20,020 and
$16,248 for the years ended May 31, 1996, 1995, and 1994, respectively.
Export Sales from the corporation's United States operations to
unaffiliated customers were as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Pacific Rim $ 15,907 $ 7,278 $ 5,372
The Americas (Excluding the
United States 2,836 4,892 3,773
Total $ 18,743 $ 12,170 $ 9,145
============= ============= =============
</TABLE>
F-17
<PAGE>
SCHEDULE II
PERIPHONICS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
-------------------------
Charged to
Balance at Charged to Other Balance
beginning Cost and Accounts Deductions at end of
Descriptions of Period Expenses - describe - describe Period
------------ --------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1996:
Allowance for doubtful accounts $ 750 $140 $ - $- $ 890
====== ==== === ===== =======
Reserve for excess and
obsolete inventory $ 950 $450 $ - $(300)(1) $ 1,100
====== ==== === ====== =======
Year ended May 31, 1995:
Allowance for doubtful accounts $ 266 $484 $ - $- $ 750
====== ==== === ===== =======
Reserve for excess and
obsolete inventory $ 185 $765 $ - $- $ 950
====== ==== === ===== =======
Year ended May 31, 1994:
Allowance for doubtful accounts $ 225 $125 $ - $(84)(1) $ 266
====== ==== === ==== =======
Reserve for excess and
obsolete inventory $ 150 $175 $ - $(140)(1) $ 185
====== ==== === ===== =======
</TABLE>
(1) Amounts written off.
S-1
EXHIBIT 11
PERIPHONICS CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended May 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
COMPUTATION OF ADJUSTED NET EARNINGS:
Earnings before cumulative effect of change in accounting
principle $ 9,215 $ 3,184 $ 2,034
Cumulative effect of change in accounting principle - - (83)
------- ------- --------
Net earnings for primary and fully diluted earnings per
common share computation $ 9,215 3,184 $ 1,951
======= ======= ========
COMPUTATION OF ADJUSTED WEIGHTED AVERAGE
SHARES OUTSTANDING:
Weighted average shares outstanding 6,445 4,135 3,750
Add: Shares assumed to be issued upon conversion of Series A
preferred stock - 623 750
Add: Shares assumed to be issued upon conversion of preferred
stock issued by subsidiary through exercise of a warrant 39 39 39
Add: Effect of stock options outstanding 146 92 75
------- ------- --------
Weighted average shares and common equivalent shares used
for primary earnings per common share computation 6,630 4,889 4,614
Add: Effect of additional stock options outstanding for fully
diluted computation 44 - 5
------- ------ -
Weighted average shares and common equivalent shares used
for fully diluted earnings per common share computation 6,674 4,889 4,619
======== ======= ========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
PRIMARY:
Earnings before cumulative effect of change in
accounting principle $ 1.39 $ .65 $ 0.44
Cumulative effect of change in accounting principle - - (0.02)
------- ------ ---------
Net earnings $ 1.39 $ .65 $ 0.42
======= ====== =========
FULLY DILUTED:
Earnings before cumulative effect of change in
accounting principle $ 1.38 $ .65 $ 0.44
Cumulative effect of change in accounting principle - - (0.02)
------- -------- ----------
Net earnings $ 1.38 $ .65 $ 0.42
======= ======== =========
</TABLE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration State Nos.
33-99408 and 333-1544 of Periphonics Corporation each on Form S-8 of our report
dated July 15, 1996, appearing in this Annual Report on Form 10-K of Periphonics
Corporation for the year ended May 31, 1996.
DELOITTE & TOUCHE LLP
Jericho, New York
August 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000937598
<NAME> Periphonics Corporation
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> May-31-1996
<PERIOD-START> Jun-1-1995
<PERIOD-END> May-31-1996
<CASH> 18,664
<SECURITIES> 8,603
<RECEIVABLES> 24,719
<ALLOWANCES> (890)
<INVENTORY> 11,097
<CURRENT-ASSETS> 64,389
<PP&E> 22,922
<DEPRECIATION> (12,496)
<TOTAL-ASSETS> 75,103
<CURRENT-LIABILITIES> 15,913
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 58,713
<TOTAL-LIABILITY-AND-EQUITY> 75,103
<SALES> 88,803
<TOTAL-REVENUES> 88,803
<CGS> 43,754
<TOTAL-COSTS> 74,274
<OTHER-EXPENSES> 345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,069
<INCOME-TAX> 5,854
<INCOME-CONTINUING> 9,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,215
<EPS-PRIMARY> $1.39
<EPS-DILUTED> $1.38
</TABLE>
