UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ______________
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, New York 11716
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 468-9000
Check 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(s), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: October 6, 1997
Class of Number
Common Equity of Shares
Common Stock, 13,725,261
par value $.01
<PAGE>
PERIPHONICS CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - August 31, 1997 and May 31, 1997 3
Consolidated Statements of Earnings - Three Months
Ended August 31, 1997 and August 31, 1996 4
Consolidated Statements of Cash Flows - Three Months
Ended August 31, 1997 and August 31, 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-12
Part II. Other Information 13
Signatures 14
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1997
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $15,961 $25,092
Short-term investments.................................. 10,788
Accounts receivable, less allowance for doubtful
accounts of $1,000 and $1,000 respectively 25,996 35,735
Inventories............................................. 13,749 12,858
Deferred income taxes................................... 1,457 1,357
Prepaid expenses and other current assets 1,108 1,211
------ ------
Total Current Assets.............................. 69,059 76,253
Property, Plant and Equipment, net 17,366 16,952
Other Assets........................................... 442 378
------ ------
$86,867 $93,583
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 3,230 $ 5,928
Accrued expenses and other current liabilities 10,656 15,125
------ ------
Total Current Liabilities......................... 13,886 21,053
Deferred Income Taxes................................... 265 322
------ ------
14,151 21,375
------ ------
Stockholders' Equity:
Preferred stock, par value $.01 per share,
1,000,000 shares authorized, none issued --- ---
Common stock, par value $.01 per share,
30,000,000 shares authorized 137 137
13,725,261 shares outstanding as of August 31, 1997
13,693,758 shares outstanding as of May 31, 1997
Additional Paid-in Capital.............................. 42,985 42,559
Retained Earnings...................................... 29,594 29,512
------ ------
Total Stockholder's Equity 72,716 72,208
------ ------
$86,867 $93,583
======= =======
</TABLE>
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
System sales................................................................... $ 15,416 $ 17,755
Service revenues............................................................... 7,144 5,504
------ -------
Total revenues............................................................. 22,560 23,259
------ -------
Cost of system sales........................................................... 7,857 8,022
Cost of service revenues....................................................... 4,009 3,304
------ -------
Cost of revenues........................................................... 11,866 11,326
------ -------
Gross profit................................................................... 10,694 11,933
------ -------
Operating expenses:
Selling, general and administrative.......................................... 7,449 6,165
Research and development................................................... 3,213 2,420
------ -------
10,662 8,585
------ -------
Earnings from operations....................................................... 32 3,348
------ -------
Other income (expense):
Interest and other income.................................................. 379 329
Foreign exchange (loss) gain .............................................. (280) 118
------ -------
99 447
------ -------
Earnings before provision for income taxes..................................... 131 3,795
Provision for income taxes..................................................... 49 1,480
------ -------
Net earnings . . . . . . . . . . . . . ........................................ $ 82 $ 2,315
====== =======
Net earnings per common and common equivalent share. . . . .................... $ 0.01 $ 0.17
====== =======
Weighted average number of common and common equivalent shares.................
13,957 13,982
====== =======
</TABLE>
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................................. $ 82 $ 2,315
Adjustments to reconcile net earnings to net cash and cash
equivalents used in operating activities:
Depreciation and amortization.......................................... 1,266 823
Deferred income taxes.................................................. (157) (128)
Changes in operating assets and liabilities:
Decrease in accounts receivable . . . . . .......................... 9,739 371
Increase in inventories............................................. (891) (2,005)
Decrease (increase) in prepaid expenses and other current
assets........................................................... 103 (120)
Increase in other assets............................................ (64) (7)
(Decrease) increase in accounts payable and accrued expenses and
other current liabilities........................................ (7,167) 1,183
------ ------
Net cash and cash equivalents provided by operating activities...... 2,911 2,432
====== ======
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......................... (1,680) (1,473)
Proceeds from sales of short-term investments....................... --- 4,876
Purchases of short-term investments................................. (10,788) ( 970)
------ ------
Net cash and cash equivalents used in investing activities.......... (12,468) 2,433
------ ------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 426 126
------ ------
Net cash and cash equivalents provided by financing activities 426 126
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....................... (9,131) 4,991
CASH AND CASH EQUIVALENTS, beginning of period............................. 25,092 18,664
------ ------
CASH AND CASH EQUIVALENTS, end of period................................... $ 15,961 $23,655
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................................ $ --- ---
Income Taxes............................................................. $ 2,490 $ 593
</TABLE>
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of Periphonics Corporation and subsidiaries (the "Company"),
the accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position, the results of operations, and the cash
flows at August 31, 1997 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements should be read in conjunction with
the Consolidated Financial Statements and Notes included in the Company's May
31, 1997 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
The results of operations for the three months ended August 31, 1997 and
August 31, 1996 are not necessarily indicative of the results to be expected for
the full year. Dollar amounts are presented in thousands except per share
amounts.
2. STOCK SPLIT AND CHANGES IN AUTHORIZED CAPITAL
On September 20, 1996, the Board of Directors approved a two-for-one split
of its common stock effected as a stock dividend on October 31, 1996 to
shareholders of record at the close of business on October 15, 1996. After
giving effect to the stock split, the shares outstanding increased from
approximately 6,812,566 to approximately 13,625,132.
All historical share and per share data appearing in the consolidated
financial statements and notes thereto have been retroactively adjusted for the
stock split.
Also, on September 20, 1996, the Board of Directors determined it advisable
to amend the Company's Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 15,000,000 shares to 30,000,000 shares.
The proposed amendment to the Amended and Restated Certificate of Incorporation
was submitted for shareholder approval. Shareholder approval was announced on
November 8, 1996 at the 1996 Annual Meeting of Stockholders.
<PAGE>
3. INVENTORIES
Inventories consist of the following:
August 31, 1997 May 31, 1997
Raw materials $ 8,324 $ 7,624
Work-in-process 5,425 5,234
------ ------
$ 13,749 $ 12,858
====== ======
4. SECONDARY PUBLIC OFFERING
On November 17, 1995, the Company consummated a secondary public offering
of 2,510,000 shares of common stock at a price of $12.75 per share. Of the
shares offered, 1,200,000 were sold by the Company and 1,310,000 shares were
sold by shareholders of the Company.
Also in November 1995, the underwriters of the secondary offering exercised
their over-allotment option to purchase an additional 376,500 shares from the
selling stockholders. The Company did not receive any of the proceeds from the
exercise of the over-allotment option.
The net proceeds to the Company from the sale of the 1,200,000 shares of
common stock offered was approximately $14.10 million (after deducting the
underwriting discount and offering expenses payable by the Company). The net
proceeds to the Company were used to repay indebtedness of $14.2 million and to
redeem 1,500,000 shares of its common stock from Exxon Corporation for
approximately $8.8 million (plus the payment to Exxon of approximately $0.2
million of accumulated dividends on the Series A Preferred Stock which was
converted into such common stock). The balance of the net proceeds,
approximately $3.9 million, was used for general corporate purposes, including
working capital.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended August 31, 1997 compared to Three Months Ended August
31, 1996
Total Revenues. Total revenues decreased by 3.0% to $22.6 million in the
first three months of fiscal 1997 from $23.3 million in the comparable period of
the prior fiscal year. System sales decreased by 13.2% to $15.4 million in the
first three months of fiscal 1998 from $17.8 million in the comparable period of
the prior fiscal year. The decrease in system sales was due to a 22.9% decrease
in domestic sales and offset by a 14.6% increase in international sales. The
decrease in system sales was primarily due to a decrease in unit sales volume.
Service revenues increased by 29.8% to $7.1 million in the first three months of
fiscal 1998 from $5.5 million in the comparable period of the prior fiscal year,
primarily due to the addition of more units to the service base.
Gross Profit. The Company's gross profit decreased by $1.2 million to $10.7
million in the first three months of fiscal 1998 from $11.9 million in the
comparable period of the prior fiscal year. Gross profit as a percentage of
total revenues decreased to 47.4% in the first three months of fiscal 1998 from
51.3% in the comparable period of the prior year. Gross profit on system sales
decreased by $2.2 million to $7.6 million in the first three months of fiscal
1998 from $9.7 million in the comparable period of the prior fiscal year. The
gross margin on system sales decreased to 49.0% in the first three months of
fiscal 1998 from 54.8% in the comparable period of the prior fiscal year. The
Company attributes this decrease primarily to the product mix during the current
three month period, with more programming revenue and lower hardware revenue
which has a higher margin. Gross profit on service revenues increased by $.9
million, or 42.5%, to $3.1 million in the first three months of fiscal 1998 from
$2.2 million in the comparable period of the prior fiscal year. Gross margin on
service revenues increased to 43.9% in the first three months of fiscal 1998
from 40.0% in the comparable period of the prior fiscal year. This increase in
margin was attributed to the addition of more units to the service base.
Selling, General and Administrative Expenses. Selling, General and
Administrative ("SG&A") expenses were $7.4 million and $6.2 million for the
first three months of fiscal 1998 and 1997, respectively, or 33.0% and 26.5% of
total revenues, respectively. The increase in the dollar amount of SG&A expenses
was primarily related to the continued expansion of the Company's sales and
marketing efforts in domestic and international markets and to increases in SG&A
expenses necessary to support the increased level of sales.
Research and Development Expenses. Research and Development ("R&D")
expenses were $3.2 million and $2.4 million for the first three months of fiscal
1998 and 1997, respectively, or 14.2% and 10.4% of total revenues, respectively.
The increase in the dollar amount of R&D expenses reflects the continued
expansion of the Company's R&D staff which increased to 143 from 105 between
August 31, 1997 and August 31, 1996. R&D expenses are charged to operations as
<PAGE>
incurred, and no software development costs have been capitalized. The
Company expects the dollar amount of R&D expenditures to continue to increase,
although such expenses as a percentage of total revenues will vary from period
to period.
Other Income (Expense). Other income was $0.1 million and $0.4 million for
the three months ended August 31, 1997 and August 31, 1996 respectively.
Interest and other income increased to $0.4 million in the three months ended
August 31, 1997 from $0.3 million in the three months ended August 31, 1996 .
The Company had a foreign exchange loss of $0.3 million in the three months
ended August 31, 1997 compared to a foreign exchange gain of $0.1 million for
the three months ended August 31, 1996. To the extent the Company is unable to
match revenue received in foreign currencies with expenses paid in the same
currency, it is exposed to fluctuations in international currency transactions.
Income Taxes. Variations in the customary relationship between the
provision for income taxes and the statutory income tax rate primarily result
from the utilization of research and development tax credits, state and local
income taxes, and exempt income of the Company's foreign sales corporation. The
Company's effective income tax rates were 37.5 % and 39.0% for the three months
ended August 31, 1997 and August 31, 1996, respectively.
Foreign Operations. The Company's European subsidiary operated at
approximately a $1.1 million loss during the three months ended August 31, 1997
as compared to a loss of $0.4 million during the three months ended August 31,
1996. The increase in such losses was attributed to a decrease in the gross
margin and an increase in the dollar amount of SG&A expenses to support the
expansion of the sales and marketing effort. 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 $0.1 million of intercompany gross profit earned by the
Company's North American operations on system sales by the European subsidiary
to third parties during the three months ended August 31, 1997 and 1996
respectively.
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.
Historically, the Company has primarily financed this requirement through cash
flow from operations, bank borrowings and two public offerings for the Company's
common stock in 1995, which resulted in an aggregate of $41.1 million of net
proceeds to the Company. Cash flow from operations was $2.9 million and $2.4
million for the three months ended August 31, 1997 and August 31, 1996,
respectively. At August 31, 1997, the Company had working capital of $55.2
million, including $26.7 million of cash and cash equivalents and short-term
investments. The Company expects its working capital needs to increase along
with future revenue growth.
<PAGE>
At August 31, 1997, current assets and current liabilities decreased by
$7.2 million and $7.2 million, respectively, compared to May 31, 1997. Current
assets decreased principally as a result of a decrease in accounts receivable.
During the period ended August 31, 1997, current liabilities decreased primarily
due lower income tax and accounts payable and reduced levels of accrued
expenses.
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) for this
period were approximately 106 days. The average days sales outstanding were 111
days, 83 days, and 98 days at May 31, 1997, 1996 and 1995 respectively.
The Company's inventory increased to $13.7 million as of August 31, 1997
from $12.9 million as of May 31, 1997 due to lower than anticipated system
sales.
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, 1997. As of August 31, 1997, the Company had no borrowings under
this line of credit.
The Company made capital expenditures totaling $1.7 million and $1.5
million during the three months ended August 31, 1997 and August 31, 1996. The
increase in expenditures is primarily due to the purchase of computer equipment
required for staff and product development efforts and also for continued
facilities expansion.
The Company believes that its existing sources of working capital and
borrowings available under its revolving line of credit will be sufficient to
fund its operations and capital expenditures for at least 12 months.
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 of the Company's
foreign subsidiaries into U.S. dollars. To the extent the Company is unable to
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.
<PAGE>
Recent Financial Accounting Standards Board Statements
Recent pronouncements if the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at this date include, Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
Statement of Financial Accounting Standards No 129, "Disclosure of Information
about Capital Structure" ("SFAS 129") , and Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 131 and SFAS 130 are
effective for fiscal years beginning after December 15, 1997 and SFAS 129 and
128 are effective for fiscal years ending December 31, 1997. The adoption of
these pronouncements is not expected to have a material impact on the Company's
consolidated financial statements.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q) may contain statements which are
so-called "forward-looking statements" and not historical facts. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, risks in product and technology development and other
risk factors detailed from time to time in the Company's Securities and Exchange
Commission reports including this Form 10-Q for the fiscal quarter ended August
31, 1997 and its Form 10-K for the fiscal year ended May 31, 1997.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
With particular regard to the possible variability of quarterly results,
fluctuations may occur as a result of factors including the length of the sales
cycle, the timing of orders from shipments to customers, delays in developments
and customer acceptance of custom software applications, new product
introductions or announcements by the products and the hiring and training of
additional staff as well as general economic conditions.
Historically, the size and timing of the Company's sales transactions have
varied substantially from quarter, with a substantial percentage of orders and
deliveries occurring in the final weeks of a quarter, and the Company expects
such variations to continue in future periods. Because a significant portion of
the Company's overhead is fixed in the short-term, the Company's results of
operations may be materially adversely affected if revenues fall below the
Company's expectations. Generally, the Company's inventory of computer and
telephony hardware is determined by the Company's forecast of sales during the
future periods. If management's forecasts of product sales and product mis prove
<PAGE>
to be inaccurate the Company may not have the necessary inventory available
to deliver systems in a timely manner which may have a material adverse effect
on the Company's results of operations during such period.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April, 1997, Lucent Technologies, Inc. ("Lucent") notified the Company
that certain of the Company's products were, in Lucent's opinion, infringing
certain Lucent patents. The Company has reviewed the information which Lucent
furnished concerning these patents, and the Company currently believes that its
products do not violate any valid claims of the identified patents. In
September, 1997, Lucent advised the Company that in Lucent's opinion additional
Lucent patents were being infringed by the Company's products and offered a
license on the identified patents. The Company is currently evaluating these
additional patents, and has not made a determination as to the validity of
Lucent's assertions.
If the Company does determine that, for business or legal reasons, it needs
to obtain licenses from Lucent for the use of one or more patents, there can be
no assurance that the terms of such licenses, including payments to Lucent for
products previously sold and for future sales, would not have a material adverse
affected on the Company's financial condition or results of operations. In the
event the Company decides not to seek such licenses, or if the Company cannot
reach a satisfactory agreement with Lucent as to the terms of one or more
licenses, the Company could become involved in litigation which could be costly
and distracting to its management. There can be no assurance as to the ultimate
outcome of any litigation, or that the costs and effects of such litigation
would not have a material adverse affect on the Company's business, financial
condition or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERIPHONICS CORPORATION
Registrant
By:_______________________________
Peter J. Cohen
Chairman of the Board, President
and Chief Executive Officer
(Principal Operating Officer)
By:________________________________
Kevin J. O'Brien
Chief Financial Officer, Vice
President-Finance and Administration
(Principal Accounting Officer),
Secretary and Director
Dated: , 1997
<TABLE> <S> <C>
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<NAME> Periphonics Corporation
<S> <C>
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<FISCAL-YEAR-END> May-31-1998
<PERIOD-START> Jun-1-1997
<PERIOD-END> Aug-31-1997
<CASH> 15,961
<SECURITIES> 10,788
<RECEIVABLES> 26,996
<ALLOWANCES> (1,000)
<INVENTORY> 13,749
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