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, 1997
[ ] 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 11,559,808 shares of Common Stock held by
non-affiliates of the Company as of August 15, 1997 is $149,555,016.
The number of shares outstanding of each of the registrant's classes of
common equity as of August 25, 1997 is as follows:
Class of Common Equity Number of Shares
Common Stock 13,725,761
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 30, 1997.
<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.
The Company 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. The nature of the Company's business, and the way
many people view the market, is gradually broadening to encompass more than
basic IVR - and is now more appropriately described as: development, marketing
and support of products and services for Computer Telephony Integration ("CTI")
and for Telecom Enhanced Network Services using technologies such as IVR, speech
input, messaging, fax and web browsers. The Company's products and services
automate call and transaction processing, increase call center agent
productivity, and can create new revenue for our customers.
The Company is a leading supplier of mid-to-large scale systems - systems
handling hundreds to thousands of simultaneous telephone calls. Systems have
been installed in more than 50 countries. Our staff of 733 employees (May 1997)
serves customers from Periphonics offices in Canada, Germany, Hong Kong, Mexico,
Singapore, the United Kingdom and the USA.
The Market
The Company's products and services represent an important element in the
telecommunications and data processing infrastructure of many customer
service-oriented organizations. Typical systems enable callers to use a
touch-tone telephone or speech input to access information in an organization's
computer database and to receive that information verbally via high quality
digitally-stored or synthesized speech or via facsimile. In addition, these
systems enable customers to execute certain transactions on-line without the
intervention of customer service personnel. As a result, these 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. These 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 those systems has been due to several factors, including industry-wide
improvements in product features, public acceptance of automated systems to
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
Periphonics has manufactured and delivered systems to customers in the U.S.
and in more than 50 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, 1995, 1996 and 1997, no single customer accounted
for as much as 10% of the Company's total revenues. In fiscal 1997, the
Company's top ten customers (two of which were new customers) accounted for
approximately 36% of total revenues. Six of these top ten customers were
telecommunications companies, three of them were financial services companies
and one was a government customer. The Company's system sales to customers
outside the U.S. contributed approximately 37% of total system sales in fiscal
1997.
Although 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, it
expects that it will continue to derive a substantial percentage of its system
sales from telecommunications and financial services businesses. Accordingly,
unfavorable economic conditions or factors that relate to these industries,
particularly any such conditions that might result in reductions in capital
expenditures by the Company's target customers, could have a material adverse
affect on the Company's results of operations. The Company believes that in
recent periods certain of its competitors have experienced results below their
expectations particularly with respect to certain of their telecommunications
customers. There can be no assurance that the Company will not experience
similar difficulties with its telecommunications or other vertical market
customers.
Some of the representative markets using Periphonics' systems and typical
customer applications in these markets are described below:
<TABLE>
<CAPTION>
Market Typical Applications
<S> <C>
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
</TABLE>
Product Technology
The Company's 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 products' 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 architecture is a 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 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 has been designed to provide a
systems platform that supports capacity growth and technological evolution with
modular upgrades.
The products, like those of several other competitors (such as Lucent
Technologies, formerly part of AT&T, IBM and InterVoice), utilize internally
developed telephony interfaces and speech processing modules. Many other
competitors rely on telephony interface and other modules purchased from third
party component 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").
Products
The Company's products include a family of scalable interactive transaction
processing systems, called the VPS Series, which can be configured for small
(8-24 ports), mid-size (24 to 120 ports), or large scale installations,
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 5.2 and has been available since March 1997.
Periphonics' IVR systems are listed below:
Year of Port
Model Introduction Capacity
VPS/is (digital) 1995 24/30-96/120
VPS/is (analog) 1995 8-120
VPS/mcp 1996 192/240 - 384/480
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 applications, even
at peak loads, and accommodates new feature and performance upgrades through
incremental enhancements.
VPS/mcp. This model provides higher density systems that are optimized for
high volume calling services. The system and application software for these
models are fully compatible with VPS/is systems.
Depending on system configuration, optional features and custom
programming, prices for the Company's systems can range from less than $1,000
per port to more than $4,000 per port, and individual 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 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:
Basic 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.
Large Vocabulary Recognition Devices. This option offers recognition of
hundreds to thousands of spoken words along with standard touch-tone input. In
addition, recognition results can be combined with natural language processing
to allow a very simple and intuitive caller interface for a wide range of
automated interactive services.
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.
Message Transfer Server. This option offers centralized speech storage and
retrieval for a cluster of systems. It includes a highly available and scalable
configuration with fault-tolerant disk storage (using RAID) and redundant LAN
based message storage and playback.
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 interactive 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.
PeriWeb. A software option that permits Periphonics' 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.
Periphonics also develops, markets and supports CTI Products including:
CallSponsor. A CTI server product that integrates one or more PBX/ACD
systems, IVR systems and desktop applications to enable a more productive
environment for call center agents. CallSponsor provides call/data tracking and
delivery of simultaneous voice and data ("screen pop") to the agent desktops.
CallView. A CTI desktop client software product that interfaces with
CallSponsor and enables integration with other desktop applications to provide
seamless call transfers and software based control of PBX/ACD telephone
functions.
Periphonics also develops, markets and supports products for Telecom
Enhanced Network Services including:
Periphonics Calling Card Platform ("PCCP"). This application software
product includes a replicated Oracle database and a wide range of configuration
options that are activated through easily set parameters. It is scalable over a
wide range of sizes - from sizes suitable for small countries as well as large
countries.
Voice Activated Dialing ("VAD"). This application software product includes
speaker dependent recognition technology that is combined with a highly adaptive
application to meet the needs of telecom service providers in a wide range of
configuration.
Common Channel Signaling Service ("CCSS"). This option allows a cluster of
systems to interface to a switching network via SS7 or C7 signaling protocol.
These protocols are used by network service providers to connect enhanced
service equipment with more flexibility. The CCSS includes a highly available
and scalable configuration with redundant servers.
Periphonics also develops, markets and supports 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.
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.
Product Development
Recent product development efforts have resulted in the introduction of new
speech recognition features, new CTI features to increase agent productivity,
Periphonics Calling Card Platform and VAD applications. 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; additional application software products; 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 systems and related features.
During fiscal, 1995, 1996 and 1997, the Company spent $5.8 million, $7.9
million and $10.7 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 or CTI project usually requires the creation of a
script, recording and digitizing the appropriate words and phrases, and writing
custom application software for the system that links the script and the
telephone network interface and provides access to the appropriate database
information. Periphonics has established customer project implementation groups
that provides customer-specific programming and project management services for
turnkey projects based in the United States (Bohemia, New York, and Pleasanton,
California), Mexico, the United Kingdom, Germany and Singapore.
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.
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 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. Field service staff
are based at many locations around the United States, Canada, Mexico, the United
Kingdom, Germany, Singapore and Hong Kong. Technical support specialists are
based in the United States (Bohemia, New York and Pleasanton, California),
Mexico, the United Kingdom, Germany, Singapore and Hong Kong.
In certain instances, technical support and maintenance for international
customers is provided by the Company's distributors.
Periphonics' 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 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 17 cities in the U.S.A. and in Canada, United Kingdom, Germany,
Hong Kong, Mexico and Singapore. The Company also has agreements with 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 Company's marketing and sales efforts also utilize direct mail,
participation in numerous trade shows, an active telemarketing program, and
trade publication advertising.
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)
1995 1996 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. customers $33,885 65.5% $45,989 64.1% $54,540 63.3%
International customers $17,862 34.5% $25,811 35.9% $31,604 36.7%
------- ----- ------- ------ ------- ------
Total system sales $51,747 100.0% $71,800 100.0% $86,144 100.0%
- ------------------ ======= ====== ======= ====== ======= ======
</TABLE>
The following table illustrates the respective amounts of the Company's
total revenue contributed by U.S. and international based customers:
<TABLE>
<CAPTION>
For Fiscal Year Ending May 31
(dollars in thousands)
1995 1996 1997
----------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. customers $44,757 69.1% $60,561 68.1% $ 74,864 67.3%
International customers $20,020 30.9% $28,242 31.9% $ 36,380 32.7%
------- ----- ------- ------ ------ ------
Total system sales $64,777 100.0% $88,803 100.0% $111,244 100.0%
- ------------------ ======= ====== ======= ====== ======== ======
</TABLE>
Manufacturing
The Company's manufacturing activities, which consist primarily of
production planning, purchasing, module assembly and testing, system assembly
and quality assurance, are conducted at its Bohemia, New York facility and, for
European, Middle Eastern and African sales, at its facility in Camberley, U.K.
Variability of Quarterly Results; Limited Backlog
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. Historically, the size and timing
of the Company's sales transactions, including international sales, have varied
substantially from quarter to 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. The Company is typically
able to deliver systems 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 materially adversely affected if revenues fall
below the Company's expectations. During the fiscal year ended May 31, 1997,
26.7% of the Company's sales from IVR systems and 33.1% of the Company's net
earnings occurred in the Company's fourth fiscal quarter. Generally, the
Company's inventory of computer hardware is determined by the Company's
forecasts of sales during future periods. If management's forecasts of product
sales and product mix prove to be substantially 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.
Risk of Rapid Technological Change and New Product Introduction
The market for IVR, CTI and automated transaction processing systems is
characterized by rapid continual technological change and improvements in
hardware and software technology and in the features and capabilities of these
systems. The Company's future success depends upon its ability to introduce new
products and to add new features and enhancements to its existing systems that
keep pace with technological and market developments, and that address the
increasingly sophisticated and demanding needs of its customers. In order to
remain competitive, the Company expects to continue to expend significant
resources for research and development. There can be no assurance that the
Company will be successful in developing and marketing, on a timely basis,
product modifications or enhancements or new products that respond to
technological advances by others, or that such new or enhanced products or
features will adequately and competitively address the needs of the marketplace.
In addition, there can be no assurances that the Company will properly estimate
costs under fixed price contracts in developing application software and
otherwise tailoring its systems to customer-specific requests.
A portion of sales of the Company's systems depend, in part, upon
customers' belief that the Company's UNIX and RISC-based systems offer more
performance, features and benefits than PC-based systems offered by certain of
the Company's competitors. As PC hardware and operating software become more
powerful, however, the capabilities of PC-based systems are likely to increase
and may become increasingly competitive alternatives to the Company's products
in mid-size and large scale installations.
The Company's software products, like software programs generally, may
contain undetected errors or bugs when introduced, or as new versions are
released. While the Company's current products have not experienced post-release
software errors that have had a significant financial or operational impact on
the Company, there can be no assurance that such problems will not occur in the
future, particularly as the Company's systems continue to become more complex
and sophisticated. Such defective software may result in loss of or delay in
market acceptance of the Company's products, warranty liability or product
recalls.
Highly Competitive Market Environment
The market for IVR, CTI and automated transaction processing systems in the
U.S. and internationally is highly competitive and competition may intensify
from existing suppliers and new market entrants. Certain of the Company's
competitors have substantially greater financial, technical, marketing and sales
resources than the Company. There can be no assurance that the Company's present
or future competitors will not exert increased competitive pressures on the
Company. In particular, the Company may in the future experience pricing
pressures as the markets in which it competes mature, as new technologies are
introduced or for other reasons, and such price competition could adversely
affect the Company's market share and results of operations.
In addition, many suppliers of voice mail systems and telecommunications
systems have added IVR capabilities to some of their product offerings and offer
IVR systems as a component or add-on of an overall sale of a voice mail system
or a telecommunications switch. As internet-based systems are enhanced for
transaction processing applications, they may provide an alternative means of
allowing customers to interact with computer-based information, thereby reducing
the need for IVR. Although the Company believes it has certain marketing,
technical and other advantages over many of its competitors, maintaining such
advantages will require continued investment by the Company in product
innovation and development, as well as in sales, marketing and customer support.
There can be no assurance that the Company will be successful in such efforts.
If the Company is unable to maintain such advantages, it may have a material
adverse effect on the Company's results of operations.
Periphonics' principal competitors in the U.S. include Brite Voice Systems,
Inc., InterVoice and Syntellect, Inc., whose businesses are substantially
focused on sales of IVR systems, and large, diversified companies such as Lucent
Technologies, and IBM for whom IVR and CTI 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.
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 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.
International Sales
System sales to customers outside the U.S. accounted for approximately 35%,
36%, and 37% of the Company's total system sales in the fiscal years ended May
31, 1995, 1996 and 1997, respectively. Systems sales to customers outside the
United States, as a percentage of the Company's overall sales, may fluctuate on
a quarterly basis, and the percentage of such sales in a particular quarter are
not indicative of the percentage of international sales at the end of the fiscal
year.
The Company's international business is subject to a number of risks,
including compliance with special national telecommunications standards and
regulatory requirements, export regulations, currency exchange rates, tariffs
and other barriers, difficulties in staffing and managing foreign subsidiary
operations, potentially adverse tax consequences, longer payment cycles, greater
difficulty in accounts receivable collections and specialized inventory
requirements applicable to particular foreign countries. There can be no
assurance that these factors will not have an adverse impact on the Company's
future international sales or operating results. The Company does not currently
engage in international currency hedging transactions. 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.
Dependence on Suppliers
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, after some re-engineering or design changes.
In certain instances, despite the availability of multiple supply sources,
the Company elects to procure certain components or parts from a single source
to maintain quality control or to develop a strategic relationship with a
supplier. Although the Company has entered into long-term supply contracts with
certain of its vendors, the Company has no assurance that components and parts
will be available as required, or that prices of such components and parts will
not increase. In certain instances the manufacture of components used by the
Company in its products has been discontinued by suppliers and the Company has
been required to seek functionally similar substitutes or substantially increase
its inventories of these discontinued components for its future use. To date,
when components have become unavailable, the Company has been able to obtain
either sufficient inventory for its own use or other 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. If the Company were to experience significant
delays, interruptions, discontinuations or reductions in the supply of certain
components and parts purchased from suppliers, the Company's results of
operations could be materially adversely affected.
Limited Protection of Proprietary Technology
The Company's success is heavily dependent upon its proprietary software
technology. 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 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. There
also can be no assurance that the Company will be able to obtain licenses to
disputed third party technology or that such licenses, if available, would be
available on commercially reasonable terms. The Company is aware that certain
segments of the voice processing industry, particularly voice mail/voice
messaging systems, are affected by active and costly litigation. There can be no
assurance that as the Company's interactive transaction processing systems
evolve and provide features which extend their uses and capabilities, possibly
to include certain voice mail/voice messaging and/or additional internet-related
features, the Company will not become involved in, or otherwise be affected by,
litigation which may or may not be meritorious.
The Company believes that due to the rapid pace of innovation within the
telecommunications industry (including the IVR and CTI segments 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.
Dependence on Key Personnel
The Company's success during the foreseeable future will depend largely
upon the continued services of its executive officers, each of whom has entered
into an employment agreement with the Company. Each employment agreement
contains non-competition covenants that extend for a period of up to two years
following termination of employment. The Company does not have key-man life
insurance on its executive officers. The Company's success also depends in part
on its ability to attract and retain qualified managerial, technical and sales
and marketing personnel in a timely fashion. The Company's results of operations
could be materially adversely affected if the Company were unable to attract,
hire, assimilate and train these personnel in a timely manner.
Anti-Takeover Provisions and Rights Plan
Certain "anti-takeover" provisions of the Delaware General Corporation Law,
among other matters, restrict the ability of certain stockholders to effect a
merger or business combination or obtain control of the Company. In addition,
the Company's By-Laws provide for a classified Board of Directors with staggered
three-year terms. The Company has an authorized class of 1,000,000 shares of
preferred stock, which may be issued by the Board of Directors on such terms and
with such rights, preferences and designations as the Board of Directors may
determine, without further stockholder action. Issuance of such preferred stock,
depending upon the rights, preferences and designations thereof, may have the
effect of delaying, deferring or preventing a change in control of the Company.
On July 15, 1996, the Board of Directors of the Company approved a Rights Plan
designed to protect stockholders in the event of an unsolicited attempt to
acquire the Company, including a gradual accumulation of shares in the open
market, a partial or two-tier tender offer that does not treat all stockholders
equally, and other takeover tactics which the Board of Directors believes may be
abusive and not in the best interests of stockholders. The implementation of the
Rights Plan increases the Board of Directors' power in the event of an
unsolicited proposal by giving the Board of Directors more time and the
opportunity to evaluate an offer and exercise its good faith business judgment
to take appropriate steps to protect and advance stockholder interests by
negotiating with the bidder, auctioning the Company, implementing a
recapitalization or restructuring designed as an alternative to the offer, or
taking other action.
12
<PAGE>
Potential Volatility of Stock Price
The market price of the shares of the Company's Common Stock may be highly
volatile. Factors such as fluctuations in the Company's quarterly operating
results, announcements of technological innovations or new commercial products
by the Company or its competitors, and conditions in the markets in which the
Company and its customers compete may have a significant effect on the market
price and marketability of the Common Stock. Prices for many technology company
stocks, including the Common Stock, may fluctuate widely as a result of the
factors cited above or for reasons that are not directly related to the
operating performance of such companies, including general fluctuations in stock
prices and changes in earnings estimates or recommendations by securities
analysts. See "Price Range of Common Stock."
Employees
As of May 31, 1997, Periphonics employed 733 persons. Approximately 100
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.
Disclosures Regarding Forward Looking Statements
This report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10- K including, but
not limited to, statements contained in this "Business," "Management's
Discussion and Analysis" and "Notes to Consolidated Financial Statements,"
located elsewhere herein regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations, and industry conditions, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove correct.
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 square-foot building located on a 3.9 acre site and 89,000
square feet leased in two nearby buildings (including an additional 7,000 square
feet which the Company leased during August 1997). The headquarters contain the
Company's manufacturing, development, service and administration departments, as
well as a professional-quality recording studio. The Company also owns
approximately 3.4 acres of vacant land for future development adjacent to its
headquarters. 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,
Charlotte, Chicago, Dallas, Denver, Grand Rapids, Los Angeles, Minneapolis,
Ontario, Pleasanton, Providence, San Francisco, Seattle, Tampa, Toronto and
Washington D.C.
The Company's European headquarters in Camberley, U.K. is housed in a
17,000 square-foot leased space in two adjacent buildings. 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 operates out of leased offices in Germany, Hong Kong, 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.
Item 4. Submission of Matters to a Vote of Security Holders
None
13
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
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 for each period indicated the high and low closing prices for the
Common Stock for the period March 31, 1995, the date of the Company's initial
public offering, through May 31, 1997, as reported by NASDAQ:
<TABLE>
<CAPTION>
Fiscal 1995 Sales Prices
----------- ------------
High Low
---- ---
<S> <C> <C>
Quarter Ended May 31, 1995 8 5/8 7 3/8
Fiscal 1996
-----------
Quarter Ended August 31, 1995 12 1/4 7 3/8
Quarter Ended November 30, 1995 14 3/4 11 3/4
Quarter Ended February 29, 1995 13 7/8 10 1/2
Quarter Ended May 31, 1996 18 10 3/8
Fiscal 1997
-----------
Quarter Ended August 31, 1996 20 1/8 12 7/8
Quarter Ended November 30, 1996 21 17 1/4
Quarter Ended February 28, 1997 34 3/4 11 1/4
Quarter Ended May 31, 1997 19 1/2 11
</TABLE>
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.
Prices for the shares have been adjusted to reflect a two for one split of
the Company's Common Stock effected as a stock dividend paid on October 31,
1996.
(b) The number of recordholders of the Common Stock as of August 26, 1997
is approximately 349. 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, 1997 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, 1997 and
1996, and for each of the three years in the period ended May 31, 1997 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
consolidated financial statements, related notes and other financial information
included elsewhere herein.
Fiscal Year Ended May 31,
(in thousands except share and per share data)
<TABLE>
<CAPTION>
1993 1994 1995 (1) 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
System sales........................................ $29,906 $41,192 $51,747 $71,800 $86,144
Service revenues.................................... 9,492 10,293 13,030 17,003 25,100
------- ------- ------ ------ -------
Total revenues.................................... 39,398 51,485 64,777 88,803 111,244
------- ------- ------ ------ -------
Cost of system sales................................ 13,677 18,653 23,686 32,798 38,858
Cost of service revenues............................ 6,750 7,748 8,387 10,956 14,924
------- ------- ------ ------ -------
Total cost of revenues............................ 20,427 26,401 32,073 43,754 53,782
------- ------- ------ ------ -------
Gross profit........................................ 18,971 25,084 32,704 45,049 57,462
------- ------- ------ ------ -------
Selling, general and
administrative..................................... 13,062 15,249 18,749 22,587 27,737
Research and development............................ 4,406 4,961 5,831 7,933 10,698
Non-recurring, noncash compensation charge (1)...... - - 1,250 - -
-------- -------- ------- ------ -------
Total operating expenses.......................... 17,468 20,210 25,830 30,520 38,435
------- ------- -------- ------ -------
Earnings from operations............................ 1,503 4,874 6,874 14,529 19,027
------- ------- -------- ------ -------
Interest expense.................................... (673) (936) (992) - -
Interest and other income........................... 117 159 170 885 1,242
Foreign exchange gain (loss)........................ 175 (464) 88 (345) (49)
------- -------- ------- ------- -------
Total other expenses.............................. (381) (1,241) (734) 540 1,193
------- -------- -------- ------ -------
Earnings before provision for income
taxes and cumulative effect of
change in accounting principle .................... 1,122 3,633 6,140 15,069 20,220
Provision for income taxes.......................... 579 1,599 2,956 5,854 7,583
------- -------- ------- ------ -------
Earnings before cumulative effect
of change in accounting principle ................. 543 2,034 3,184 9,215 12,637
Cumulative effect of change
in accounting principle (2) ....................... - 83 - - -
--------- --------- ----------- ------------ -------
Net earnings........................................ $ 543 $ 1,951 $ 3,184 $ 9,215 $12,637
======= ======== ======= ======= =======
Earnings per Common and Common Equivalent Share:
Earnings before cumulative effect
of change in accounting principle.................. $ 0.05 $ 0.22 $ 0.33 $ 0.69 $ 0 .90
Cumulative effect of change in
accounting principle............................... - (0.01) - - -
--------- --------- ---------- ----------- -------
Earnings per common share........................... $ 0.05 $ 0.21 $ 0.33 $ 0 .69 $ 0 .90
======= ======== ======= ======== =======
Weighted average number of common
and common equivalent shares....................... 7,864 9,228 9,778 13,260 14,005
======= ======== ======= ======== =======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital...................................... $14,574 $13,837 $27,550 $48,476 $55,200
Total assets......................................... 28,460 33,714 47,722 75,103 93,583
Total debt........................................... 11,285 10,032 - - -
Redeemable cumulative convertible preferred stock
issued by subsidiary 1,215 1,215 1,215 - -
Redeemable cumulative convertible preferred stock.... 4,500 4,500 - - -
Common stockholders' equity.......................... 5,337 6,289 33,576 58,781 72,208
</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 $0.13 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 to Statement of Financial Accounting Standards No. 109.
(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). See Note 2 of notes to consolidated financial
statements.
Item 7. Management's Discussion and Analysis
Overview
Disclosures Regarding Forward Looking Statements
This report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10- K including, but
not limited to, statements contained in this "Management's Discussion and
Analysis," "Business" and "Notes to Consolidated Financial Statements," located
elsewhere herein regarding the Company's financial position, business strategy,
plans and objectives of management of the Company for future operations, and
industry conditions, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove correct.
Fiscal Years Ended May 31, 1996 and 1997
Total Revenues. Total revenues increased by 25.3%, from $88.8 million in
fiscal 1996 to $111.2 million in fiscal 1997. System sales increased by 20.0%,
from $71.8 million in fiscal 1996 to $86.1 million in fiscal 1997. The increase
in system sales was due to a 18.6% increase in domestic sales and a 22.4%
increase in international sales primarily due to continued growth in new and
upgraded system requirements. The increase in system sales was primarily due to
increases in unit sales volume. Service revenues increased by 47.6%, from $17.0
million in fiscal 1996 to $25.1 million in fiscal 1997, 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 $12.4 million from
$45.0 million in fiscal 1996 to $57.5 million in fiscal 1997. Gross profit as a
percentage of total revenues increased from 50.7% in fiscal 1996 to 51.7% in
fiscal 1997. Gross profit on system sales increased by $8.3 million, or 21.2%,
from $39.0 million in fiscal 1996 to $47.3 million in fiscal 1997. Gross margin
on system sales increased from 54.3% in fiscal 1996 to 54.9% in fiscal 1997.
Gross profit on service revenues increased by $4.1 million, or 68.3%, from $6.0
million in fiscal 1996 to $10.2 million in fiscal 1997. Gross margin on service
revenues was 35.6% and 40.5% in fiscal years 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses were $22.6 million and $27.7 million for fiscal
1996 and 1997, respectively, or 25.4% and 24.9% 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 higher 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 $7.9 million and $10.7 million for fiscal 1996 and 1997,
respectively, or 8.9% and 9.6% 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 101 to 128 between May
31, 1996 and 1997. 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.
Other Income (Expense). Other income was $1.2 million for fiscal 1997 as
compared to $0.5 million in fiscal 1996. Interest income was $0.9 million and
$1.2 million in fiscal 1996 and fiscal 1997, respectively. Foreign exchange gain
(loss) decreased from a loss of $0.4 million in fiscal 1996 to no loss in fiscal
1997.
Income Taxes. Variations in the customary relationship between the
provision for income taxes and the statutory income tax rate during the past two
years primarily resulted 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 38.8% and 37.5%
for fiscal 1996 and fiscal 1997, respectively.
Foreign Operations. The Company's European subsidiary had an operating
profit of $0.4 million during fiscal 1997 as compared to an operating profit of
$0.8 million during fiscal 1996 (see Note 12 of notes to consolidated financial
statements). The decline in profitability was primarily due to lower gross
margins on system sales and higher SG&A expenses associated with infrastructure
growth. 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 $0.6
million of intercompany gross profit earned by the Company's North American
operations on system sales by the European subsidiary to third parties during
both fiscal 1996 and fiscal 1997, respectively.
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 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 $0.5 million for fiscal 1996 as
compared to other expense of $0.7 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 $0.1 million
in fiscal 1995 to a loss of $0.4 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 $0.8 million during fiscal 1996 as compared to an operating loss of
$0.2 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 $0.9 million and $0.6 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.
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 and bank borrowings and two Public Offerings of 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 $0.2 million, $9.6
million and $7.3 million in fiscal 1995, 1996 and 1997, respectively. At May 31,
1997, the Company had working capital of $55.2 million, including $25.1 million
of cash and cash equivalents. The Company expects its working capital needs to
increase along with future revenue growth.
At May 31, 1997, current assets increased by $11.9 million while current
liabilities increased by $5.1 million as compared to May 31, 1996. Current
assets increased principally as a result of 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) were approximately 98 days, 83
days and 111 days at May 31, 1995, 1996 and 1997, respectively.
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 May 31, 1997, the Company had no borrowings under
this line of credit
The Company made capital expenditures totalling $2.4 million, $5.9 million
and $10.3 million during fiscal 1995, 1996 and 1997, respectively.
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.
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 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.
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 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-19 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and reports on Form 8-K
<TABLE>
<CAPTION>
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
<S> <C>
Index to Consolidated Financial Statements................................................................F-1
Independent Auditors' Report..............................................................................F-2
Consolidated Balance Sheets as of May 31, 1997 and 1996...................................................F-3
Consolidated Statements of Earnings for the years ended
May 31, 1997, 1996 and 1995.............................................................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended May 31, 1997, 1996 and 1995.......................................................................F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 1997, 1996 and 1995.............................................................................F-6
Notes to Consolidated Financial Statements.........................................................F-7 - F-19
(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
11 Statement re computation of per share earnings
*22.1 List of Subsidiaries
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
- ---------------
*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, 1997.
18
<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 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Peter J. Cohen Chairman of the Board, President and Chief
- ------------------------ Executive Officer (Principal Operating Officer) August 28, 1997
Peter J. Cohen
/s/Richard A. Daniels Senior Vice President, Treasurer and Director August 28, 1997
- ------------------------
Richard A. Daniels
/s/Kevin J. O'Brien Chief Financial Officer, Vice President-Finance August 28, 1997
- ------------------------ and Administration (Principal Accounting and
Kevin J. O'Brien Financial Officer), Secretary and Director
/s/Jayandra Patel Sr. Vice President-Product Development, Assistant August 28, 1997
- ------------------------ Treasurer and Director
Jayandra Patel
Director August __, 1997
- ------------------------
Edward H. Blum
Director August __, 1997
- ------------------------
Peter Breitstone
</TABLE>
19
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of May 31, 1997 and 1996 F-3
Consolidated Statements of Earnings for the years
ended May 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for
the years ended May 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years
ended May 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-19
Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
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, l997 and 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1997 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.
DELOITTE & TOUCHE LLP
Jericho, New York
July 14, 1997
F-2
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 31,
ASSETS 1997 1996
- ------ ---------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $25,092 $18,664
Short-term investments - 8,603
Accounts receivable, less allowance for doubtful accounts
of $1,000 and $890, respectively (Note 3) 35,735 23,829
Inventories (Note 4) 12,858 11,097
Deferred income taxes (Note 8) 1,357 1,261
Prepaid expenses and other current assets 1,211 935
------- -------
Total Current Assets 76,253 64,389
PROPERTY, PLANT AND EQUIPMENT, net
(Note 5) 16,952 10,426
OTHER ASSETS 378 288
$93,583 $75,103
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,928 $ 4,247
Accrued expenses and other current liabilities (Note 6) 15,125 11,666
------- -------
Total Current Liabilities 21,053 15,913
DEFERRED INCOME TAXES (Note 8) 322 409
------- -------
21,375 16,322
------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 7 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: 30,000,000
shares, outstanding: 13,693,758 and 13,598,164 shares, respectively 137 136
Additional paid-in capital 42,559 41,770
Retained earnings 29,512 16,875
------- -------
72,208 58,781
------- -------
$93,583 $75,103
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------
1997 l996 1995
<S> <C> <C> <C>
System sales $ 86,144 $ 71,800 $ 51,747
Service revenues 25,100 17,003 13,030
--------- --------- ---------
Total revenues 111,244 88,803 64,777
--------- --------- ---------
Cost of system sales 38,858 32,798 23,686
Cost of service revenues 14,924 10,956 8,387
--------- --------- ---------
Cost of revenues 53,782 43,754 32,073
--------- --------- ---------
Gross profit 57,462 45,049 32,704
--------- --------- ---------
Operating expenses:
Selling, general and administrative (Note 10) 27,737 22,587 18,749
Research and development 10,698 7,933 5,831
Nonrecurring, non-cash compensation charge (Note 10) - - 1,250
--------- --------- ---------
38,435 30,520 25,830
--------- --------- ---------
Earnings from operations 19,027 14,529 6,874
--------- --------- ---------
Other income (expense):
Interest expense - - (992)
Interest and other income 1,242 885 170
Foreign exchange (loss) gain (49) (345) 88
--------- --------- ---------
1,193 540 (734)
--------- --------- ---------
Earnings before provision for income taxes 20,220 15,069 6,140
Provision for income taxes (Note 8) 7,583 5,854 2,956
--------- --------- ---------
Net earnings $ 12,637 $ 9,215 $ 3,184
========= ========= =========
Net earnings per common and common
equivalent share $ 0.90 $ 0.69 $ 0.33
======== ========= =========
Weighted average number of common and
common equivalent shares (Note 10c) 14,005 13,260 9,778
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 1, 1994 7,500,000 $ 75 $ 1,592 $ 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) 1,500,000 15 4,485 - - - 4,500
Purchase of treasury
stock (Note 9) - - - - (1,540,000) (8,862) (8,862)
Initial public offering of
common stock (Note 1) 2,800,000 28 18,287 - 1,500,000 8,789 27,104
Exercise of stock options 290,000 2 231 - - - 233
Retirement of treasury stock (40,000) - (73) - 40,000 73 -
Dividends declared and paid
on preferred stock (Note 9) - - - (146) - - (146)
---------- ---- -------- ------- ------------ ------- --------
BALANCE, May 31, 1995 12,050,000 120 25,796 7,660 - - 33,576
Net earnings - - - 9,215 - - 9,215
Secondary public offering
of common stock (Note 1) 1,200,000 12 13,947 - - - 13,959
Exercise of stock options and
stock issued under employee
stock purchase plan (Note 10) 269,914 4 442 - - - 446
Tax benefit relating to
employee stock options - - 370 - - - 370
Conversion of preferred
stock held by subsidiary
(Note 9) 78,250 - 1,215 - - - 1,215
------------ ----- -------- ------- ------------ ----------- --------
BALANCE, May 31, 1996 13,598,164 136 41,770 16,875 - - 58,781
Net earnings - - - 12,637 - - 12,637
Exercise of stock options
and stock issued under
employee stock purchase
plan (Note 10) 95,594 1 622 - - - 623
Tax benefit relating to
employee stock options - - 167 - - - 167
------------ ------ -------- ------- ------------ --------- ---------
BALANCE, May 31, 1997 13,693,758 $ 137 $ 42,559 $29,512 - $ - $72,208
============ ====== ======== ======= ============ ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 12,637 $ 9,215 $ 3,184
Adjustments to reconcile net earnings to net cash
and cash equivalents provided by operating activities:
Depreciation and amortization 3,725 2,867 2,216
Provision for losses on accounts receivable 110 140 484
Provision for inventory reserves 418 450 765
Deferred income taxes (183) (323) (253)
Stock option compensation expense - - 1,274
Changes in operating assets and liabilities:
Increase in accounts receivable (12,016) (1,892) (8,459)
Increase in inventories (2,179) (4,104) (490)
Increase in prepaid expenses and other current assets (276) (20) (262)
Increase in other assets (90) (76) (189)
Increase in accounts payable and accrued expenses and
other current liabilities 5,140 3,364 1,896
-------- -------- -------
Net cash and cash equivalents provided by
operating activities 7,286 9,621 166
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property, plant and equipment, net (10,251) (5,882) (2,449)
Purchases of short-term investments (6,283) (8,603) -
Proceeds from the sale of short term investments 14,886 - -
-------- -------- -------
Net cash and cash equivalents used in
investing activities (1,648) (14,485) (2,449)
--------- -------- --------
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)
Payment of dividends - - (1,181)
Proceeds from stock options exercised including related
tax benefits 790 816 233
-------- -------- -------
Net cash and cash equivalents provided
by financing activities 790 14,775 7,262
-------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,428 9,911 4,979
CASH AND CASH EQUIVALENTS, beginning of year 18,664 8,753 3,774
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $ 25,092 $ 18,664 $ 8,753
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ - $ 992
======== ======== =======
Income taxes $ 5,211 $ 6,079 $ 2,150
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
(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 1986, 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
4,300,000 shares of common stock and selling stockholders sold 1,200,000 shares
of common stock at $7.00 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 1,500,000 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 825,000 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 1,200,000 shares of common stock and selling stockholders sold
1,310,000 shares of common stock at $12.75 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,
F-7
<PAGE>
products, or technologies complementary to the Company's business.
On November 22, 1995, the underwriters exercised their over-allotment
option to purchase an additional 376,500 shares from the selling shareholders.
The Company did not receive any of the proceeds.
Amounts of shares and per share amounts in this note have been adjusted to
reflect the stock split (See Note 10c).
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, 1997,
1996 and 1995 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 - The Company follows the provisions of 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
F-8
<PAGE>
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 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 accordance with 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", 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.
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 - The Company follows 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.
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 by the
weighted average number of 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).
F-9
<PAGE>
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 equivalents, short-term investments, trade
accounts receivable, and accounts payable. At May 31, 1997 and 1996, the fair
value of the Company's financial instruments approximated the carrying value.
n. Stock-based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
3. ACCOUNTS RECEIVABLE
1997 1996
---- ----
Billed $ 27,003 $ 16,055
Unbilled 8,732 7,774
---------- ----------
$ 35,735 $ 23,829
========== ==========
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, 1996 were collected during fiscal 1997.
All unbilled receivables as of May 31, 1997 are expected to be collected in less
than one year.
4. INVENTORIES
1997 1996
---- ----
Raw materials $ 7,624 $ 6,218
Work-in-process 5,234 4,879
---------- ---------
$ 12,858 $ 11,097
========== =========
5. PROPERTY, PLANT AND EQUIPMENT, net
<TABLE>
<CAPTION>
Useful Lives 1997 1996
------------ ---- ----
(in years)
<S> <C> <C> <C>
Land $ 906 $ 156
Building and improvements 40 5,446 3,891
Machinery, equipment, furniture and fixtures 3-10 20,093 13,948
Customer service equipment 5 6,796 4,927
---------- ----------
33,241 22,922
Less accumulated depreciation 16,289 12,496
---------- ----------
$ 16,952 $ 10,426
========== ==========
</TABLE>
F-10
<PAGE>
Depreciation expense relating to property, plant and equipment amounted to
approximately $3,702, $2,833 and $2,063 for the years ended May 31, 1997, 1996
and 1995, respectively.
F-11
<PAGE>
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Customer advance payments $ 6,173 $ 6,130
Accrued payroll, commissions, bonuses,
fringe benefits and payroll taxes 4,211 3,257
Income taxes payable 2,864 610
Other accrued expenses 1,877 1,669
---------- ---------
$ 15,125 $ 11,666
========== =========
</TABLE>
7. LINE OF CREDIT
The Company has an $8,000 unsecured line of credit with a bank which
expires on November 30, 1997. There were no borrowings against such line of
credit at May 31, 1997 or 1996. Any borrowings on this line of credit will bear
interest at the prime rate (8.50 percent at May 31, 1997) plus one-quarter
percent.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 5,880 $ 4,574 $ 2,410
State and local 1,827 1,596 799
Foreign 59 7 -
-------- -------- -------
7,766 6,177 3,209
-------- -------- -------
Deferred:
Federal (136) (240) (200)
State and local (47) (83) (53)
-------- -------- -------
(183) (323) (253)
-------- -------- -------
Total $ 7,583 $ 5,854 $ 2,956
======== ======== =======
</TABLE>
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>
1997 1996 1995
---- ---- ----
<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
State and local income taxes (net of Federal tax benefit) 5.8 6.6 8.0
Exempt income of foreign sales corporation (1.4) (1.8) (1.2)
Research and development tax credits (1.9) - (2.2)
Non-deductible stock option compensation expense - - 7.1
Other 1.0 - (.2)
----- ----- ------
Effective tax rate 37.5% 38.8% 48.1%
===== ===== ======
</TABLE>
F-12
<PAGE>
At May 31, 1997, 1996 and 1995, the deferred tax assets and liabilities
consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------- ------------------
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 $ 397 $ - $ 310 $ - $ 302 $ -
Inventories 710 - 691 - 483 -
State tax credit
carryforwards 32 - 32 - 32 -
Unrealized foreign
exchange losses 218 - 228 - 94 -
Property, plant, and
equipment - 332 - 419 - 323
Other 53 (10) 67 (10) 75 (10)
Net operating loss carry-
forwards of foreign
subsidiaries 366 - 404 - 625 -
-------- ---------- ------- ------- ------- -----
1,776 322 1,732 409 1,611 313
Less valuation allowance 419 - 471 - 700 69
-------- ---------- ------- ------- ------- -----
Total $ 1,357 $ 322 $ 1,261 $ 409 $ 911 $ 382
======== ========= ======= ======= ======= =======
</TABLE>
The valuation allowance decreased by approximately $52 and $298 during
fiscal 1997 and 1996, 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 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 1,500,000
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
$5.86 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.
F-13
<PAGE>
b. Preferred Stock Issued By Subsidiary - The Company had preferred stock
issued by a subsidiary of the Company, which 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
78,250 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 78,250 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
1,000,000 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").
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 for
the year ended May 31, 1995, 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).
The 1995 Plan has 1,200,000 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
F-15
<PAGE>
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).
<TABLE>
<CAPTION>
Weighted
Shares Option Price Average Price
<S> <C> <C> <C>
Balance, June 1, 1994 680,000 $ 0.75 - $ 1.68 $ 0.93
Options granted 208,000 $ 7.00 $ 7.00
Options exercised (290,000) $ 0.75 - $ 1.25 $ 0.80
Options canceled (4,000) $ 7.00 $ 7.00
------------ ------------------- -----------
Balance, May 31, 1995 594,000 $ 0.75 - $ 7.00 $ 3.12
Options granted 218,000 $ 8.53 - $14.13 $ 10.54
Options exercised 257,000) $ 0.75 - $ 7.00 $ 1.19
Options canceled (30,000) $ 7.00 - $12.00 $ 9.92
------------ ------------------- -----------
Balance, May 31, 1996 525,000 $ 0.75 - $14.13 $ 6.76
Options granted 241,000 $ 11.50 - $31.00 $ 16.47
Options exercised (77,800) $ 0.75 - $10.13 $ 4.97
Options canceled (24,000) $ 7.00 - $15.50 $ 13.79
------------ ------------------- -----------
Balance, May 31, 1997 664,200 $ 1.00 - $31.00 $ 10.23
============ =================== ===========
Options exercisable at
May 31, 1997 200,700 $ 1.00 - $14.13 $ 4.57
============ =================== ===========
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 1.00 - $1.67 108,000 5.86 $ 1.63 108,000 $ 1.63
$ 7.00 164,000 2.83 $ 7.00 68,000 $ 7.00
$8.53 - $10.13 137,200 3.15 $ 10.03 17,200 $ 9.94
$11.25 - $13.00 32,000 4.12 $ 12.15 5,000 $ 11.93
$14.00 - $15.50 188,000 4.14 $ 15.21 2,500 $ 14.13
$17.06 - $19.50 15,000 4.24 $ 17.86 - -
$26.25 - $31.00 20,000 4.65 $ 28.83 - -
----------- -----------
664,200 200,700
=========== ===========
</TABLE>
There are 591,000 shares available for future grant under the 1995
plan.
In February 1995, the Board adopted and the stockholders approved, a
Non-Employee Director Stock Option Plan (the "Directors Plan"). The Directors
Plan has 200,000 shares of common stock reserved for issuance from which grants
of non-qualified
F-16
<PAGE>
stock options covering 15,000 shares and 10,000 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.
<TABLE>
<CAPTION>
Weighted
Shares Price Range Average Price
<S> <C> <C> <C>
Balance, June 1, 1995 - $ - -
Options granted 50,000 $ 8.88 - $13.25 $ 10.63
------------ ----------------- -----------
Balance, May 31, 1996 50,000 $ 8.88 - $13.25 $ 10.63
Options granted 20,000 $19.25 $ 19.25
Options exercised (3,750) $ 8.88 $ 8.88
------------ ------------------- ------------
Balance, May 31, 1997 66,250 $ 8.88 - $19.25 $ 13.33
============ =============== ===========
Options exercisable at
May 31, 1997 8,750 $ 8.88 - $13.25 $ 11.38
============ ================= ===========
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 8.88 26,250 3.07 $ 8.88 3,750 $ 8.88
$13.25 20,000 3.41 $13.25 5,000 $13.25
$19.25 20,000 4.44 $19.25 - -
---------- ---------
66,250 8,750
========== =========
</TABLE>
There are 130,000 shares available for future grants under the Directors
Plan. No options have been canceled under this plan.
b. Additional Stock Plan Information - As discussed in Note 2, the Company
continues to account for its stock-based awards using the intrinsic value method
in accordance with APB 25 and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock options awards. These models also require
F-17
<PAGE>
subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions for 1996 and 1997: expected
life, 1.25 years following vesting; stock volatility, 78 percent, risk free
interest rate of 6.0 percent and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. The weighted average fair value of
options granted during 1997 and 1996 were $9.22 and $5.43, per option,
respectively. If the computed fair values of the 1997 and 1996 awards had been
amortized to expense over the vesting period of the awards, pro forma net income
would have been approximately $11,872 ($0.85 per share) and $8,927 ($0.67 per
share), respectively. However, the impact of outstanding non-vested stock
options granted prior to June 1, 1995 has been excluded from the pro forma
calculation; accordingly, the 1996 and 1997 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation will
apply to all applicable stock options.
c. 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. All historical share and per share data
appearing in the consolidated financial statements and notes thereto have been
retroactively adjusted for the stock split, unless otherwise noted.
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.
d. 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 thru May 31 and June 1 thru 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 400,000 shares are
available for purchase under the plan. 14,744 shares were issued under the plan
during fiscal 1997 at $14.24.
e. Stock Purchase Rights - In July 1996, the Company adopted a Stockholder
Rights Plan (the "Plan") and declared a dividend distribution of one preferred
share purchase right (the "Right") at the rate of one Right for each share of
common stock held as of the close of business on July 31, 1996. Each Right
entitles the holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share, at a
price of $100 per one one-hundredth
F-18
<PAGE>
of a preferred share. The Rights are not exercisable until certain events
occur, as defined in the Plan, and expire on July 31, 2006. The Rights are also
redeemable, under certain circumstances, by the Board of Directors at a price of
$0.01 per Right.
F-19
<PAGE>
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 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 1997, 1996 and 1995.
F-20
<PAGE>
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:
Year Ending May 31,
1998 $ 2,336
1999 1,763
2000 979
2001 379
2002 344
Thereafter 2,980
--------
$ 8,781
========
Rental expense was $2,003, $1,045 and $740 during the years ended May 31,
1997, 1996 and 1995, respectively.
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.
Year Ended May 31,
1997 1996 1995
---- ---- ----
System Sales and Service Revenues:
Sales to unaffiliated customers from:
North America $ 99,895 $ 79,997 $ 57,488
Europe 11,349 8,806 7,289
--------- --------- ---------
Total revenues to unaffiliated customers 111,244 88,803 64,777
--------- --------- ---------
Transfers between geographic areas from:
North America 3,815 3,665 2,635
Europe - - -
--------- --------- ---------
Total transfers between geographic areas 3,815 3,665 2,635
--------- --------- ----------
Eliminations (3,815) (3,665) (2,635)
--------- --------- ---------
Total revenues $ 111,244 $ 88,803 $ 64,777
========= ========= ==========
Earnings from Operations:
North America $ 18,686 $ 13,696 $ 6,791
Europe 428 840 (256)
Eliminations (87) (7) 339
--------- --------- --------
Total earnings from operations $ 19,027 $ 14,529 $ 6,874
========= ========= =========
Identifiable Assets:
North America $ 99,038 $78,393 $ 50,778
Europe 10,279 8,051 5,580
Eliminations (15,734) (11,341) (8,636)
--------- --------- ---------
Total identifiable assets $ 93,583 $ 75,103 $47,722
========= ========= ==========
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, 1997,
1996 and 1995 includes approximately $589, $565 and $928, respectively, of
intercompany gross profit earned by North America on system sales by Europe to
third parties.
F-21
<PAGE>
Total revenues to customers outside the U.S. were $36,380, $28,242 and
$20,020 for the years ended May 31, 1997, 1996, and 1995, respectively.
Export sales from the Company's United States operations to unaffiliated
customers were as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
1997 1996 1995
------------- ------------- ---------
<S> <C> <C> <C>
Pacific Rim $ 13,532 $ 15,907 $ 7,278
The Americas (excluding the
United States) 11,499 2,836 4,892
------------- --------- ---------
Total $ 25,031 $ 18,743 $ 12,170
============= ========= =========
</TABLE>
* * * * *
F-22
<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, 1997:
Allowance for doubtful accounts $ 890 $110 $ - $- $ 1,000
======= ==== === ===== =======
Reserve for excess and
obsolete inventory $ 1,100 $418 $ - $(368)(1) $ 1,150
======= ==== === ===== =======
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
======= ==== === ===== =======
</TABLE>
(1) Amounts written off or disposed of.
EXHIBIT 11
PERIPHONICS CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
May 31,
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
NET EARNINGS: $ 12,637 $ 9,215 $ 3,184
========= ======== =========
COMPUTATION OF ADJUSTED WEIGHTED AVERAGE
SHARES OUTSTANDING:
Weighted average shares outstanding 13,641 12,890 8,270
Add: Shares assumed to be issued upon conversion of Series A
preferred stock - - 1,246
Add: Shares assumed to be issued upon conversion of preferred
stock issued by subsidiary through exercise of a warrant - 78 78
Add: Effect of stock options outstanding 364 292 184
--------- -------- ---------
Weighted average shares and common equivalent shares used
for primary earnings per common share computation 14,005 13,260 9,778
Add: Effect of additional stock options outstanding for fully
diluted computation - 88 -
--------- -------- ---------
Weighted average shares and common equivalent shares used
for fully diluted earnings per common share computation 14,005 13,348 9,778
========= ======== =========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
PRIMARY: $ 0.90 $ 0.69 $ 0.33
========= ======== =========
FULLY DILUTED: $ 0.90 $ 0.69 $ 0.33
========= ======== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000937598
<NAME> Periphonics Corportion
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> May-31-1997
<PERIOD-START> Jun-1-1996
<PERIOD-END> May-31-1997
<CASH> 25,092
<SECURITIES> 0
<RECEIVABLES> 36,735
<ALLOWANCES> (1,000)
<INVENTORY> 12,858
<CURRENT-ASSETS> 1,211
<PP&E> 33,241
<DEPRECIATION> (16,289)
<TOTAL-ASSETS> 93,583
<CURRENT-LIABILITIES> 21,053
<BONDS> 0
0
0
<COMMON> 137
<OTHER-SE> 72,071
<TOTAL-LIABILITY-AND-EQUITY> 93,583
<SALES> 111,244
<TOTAL-REVENUES> 111,244
<CGS> 53,782
<TOTAL-COSTS> 53,782
<OTHER-EXPENSES> 38,435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,220
<INCOME-TAX> 7,583
<INCOME-CONTINUING> 12,637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,637
<EPS-PRIMARY> $0.90
<EPS-DILUTED> $0.90
</TABLE>
