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, 1998
[ ] 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 12,299,464 of Common Stock held by
non-affiliates of the Company as of August 25, 1998 is $78,409,083.
The number of shares outstanding of each of the registrant's classes of
common equity as of August 25, 1998 is as follows:
Class of Common Equity Number of Shares
Common Stock 13,519,305
par value $.01
The information required by Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement to be filed with the
Commission on or before September 28, 1998.
<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 products and professional
services for Computer Telephony Integration ("CTI") and for Telecom Enhanced
Network Services using technologies such as interactive voice response ("IVR")
speech input, messaging, fax and web browsers. The Company's products and
services automate call transaction processing, increase call-center agent
productivity, and often can create new revenue streams for its customers.
The Company is a leading supplier of mid-to-large scale call processing
systems - systems handling hundreds to thousands of simultaneous telephone
calls. Systems have been installed in more than 50 countries. The Company's
staff of 866 employees (May 1998) serves customers from Periphonics offices in
Canada, Germany, Hong Kong, Mexico, Singapore, the United Kingdom and the United
States.
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.
The Company's products 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 these 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.
<PAGE>
International sales constitute an important element of Periphonics'
business, and Periphonics believes that international markets will continue to
offer attractive growth potential. See Note 11 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 call
processing systems. In each of fiscal 1996, 1997 and 1998, no single customer
accounted for as much as 10% of the Company's total revenues. In fiscal 1998,
the Company's top ten customers (two of which were new customers) accounted for
approximately 26% of total revenues. Four of these top ten customers were
telecommunications companies, four of them were financial services companies and
two were transportation customers. The Company's system sales to customers
outside the U.S. contributed approximately 37% of total system sales in fiscal
1998.
Although the Company's vertical market focus includes 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.
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 Company-designed voice subsystem that contains one or more
telephony interface boards, voice storage, and optionally one or more Digital
Signal Processing (DSP) 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 kernel 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.
<PAGE>
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 United States, 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 call 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 systems and software application products
for Computer Telephony Integration (CTI) as part of the CallSPONSOR(TM) product
suite. In addition, the Company 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 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 5.3 and has been available since February 1998. Periphonics' call
processing systems are listed below:
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.
<PAGE>
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 optional 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 (LVR) 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(TM) 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(TM) 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(TM) 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.
<PAGE>
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 1996, 1997 and 1998, the Company spent $7.9 million, $10.7
million and $15.1 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, LVR 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 and Maintenance
The Company has established its own call-center facility located in
Bohemia, on Long Island, to provide 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.
<PAGE>
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 United States and in Canada, the 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
total revenues contributed by U.S. and international based customers:
<TABLE>
<CAPTION>
For Fiscal Year Ending May 31
(dollars in thousands)
1996 1997 1998
-------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
U.S. customers $60,561 68.1% $ 74,864 67.3% $ 78,964 67.3%
International customers $28,242 31.9% $ 36,380 32.7% $ 38,335 32.7%
------- ----- --------- ------- --------- -------
Total revenues $88,803 100.0% $ 111,244 100.0% $117,229 100.0%
- -------------- ======= ====== ========= ======= ========= ======
</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.
<PAGE>
Risk Factors
Variability of Quarterly Results; Limited Backlog
The Company's quarterly operating results have fluctuated and may continue
to 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 revenues transactions,
including international revenues, 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 have been and may
continue to be materially adversely affected if revenues fall below the
Company's expectations. 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 the Company's products and professional services 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 call processing 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.
<PAGE>
Highly Competitive Market Environment
The market for the Company's products and professional services 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., Edify, Inc., InterVoice and Syntellect, Inc., whose businesses are
substantially focused on sales of interactive call processing systems, and
large, diversified companies such as Lucent Technologies, and IBM for whom such
systems are a small portion of their overall business. In certain specific
vertical markets, such as higher education or employee-benefit information
systems, the Company faces specialized competition from one or two smaller
companies.
In international markets, Periphonics faces competition primarily from its
U.S. competitors and some 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. The Company believes that it competes favorably
with respect to each of these factors although certain of the Company's
competitors have considerably greater financial, technical and sales and
marketing resources than the Company,
<PAGE>
International Sales
System revenues to customers outside the U.S. accounted for approximately
36%, 37%, and 38% of the Company's total system revenues in the fiscal years
ended May 31, 1996, 1997 and 1998, respectively. System revenues to customers
outside the United States, as a percentage of the Company's overall revenues,
may fluctuate on a quarterly basis, and the percentage of such revenues in a
particular quarter are not indicative of the percentage of international
revenues 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 revenues 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.
<PAGE>
Limited Protection of Proprietary Technology
The Company's success is heavily dependent upon its proprietary software
technology. The Company has no patents; it relies on a combination of copyright,
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 other 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 other
parties (refer to Item 3., Legal Proceedings). The Company believes that its
products and other proprietary rights do not infringe the proprietary rights of
other parties. There can be no assurance, however, that other parties will not
assert infringement claims against the Company 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
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.
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.
<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. Refer to item 5 "Market for Common Equity and Related Stockholder
Matters", on page 15.
Employees
As of May 31, 1998, Periphonics employed 866 persons. Approximately 130
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. 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 offices for professional services and
technical support staff in Pleasanton, CA (11,000 sq. ft) and in Laurence
Harbor, NJ (8,700 sq. ft).
The Company has leased regional sales offices in Atlanta, Charlotte,
Chicago, Dallas, Denver, Grand Rapids, Los Angeles, Minneapolis, Ontario,
Phoenix, 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, professional services and technical support staff
operates out of leased offices in Germany, Hong Kong, Mexico and Singapore.
<PAGE>
Item 3. Legal Proceedings
On July 7, 1998 Lucent Technologies, Inc. filed a patent infringement
action in the United States District Court for the District of Delaware alleging
that Periphonics infringed some nine patents of Lucent Technologies, Inc. The
Company believes the claims contained in the lawsuit are without merit and
intends to defend the lawsuit vigorously. The Company is involved in certain
other legal matters in the normal course of business. The Company's management
does not believe that resolution of these matters will have a material adverse
effect on the Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) The Company's Common Stock, par value $.01 per share (the "Common
Stock"), trades on the NASDAQ Stock Market under the symbol PERI. The following
table sets forth 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, 1998, as reported by NASDAQ:
<TABLE>
<CAPTION>
Sales Prices
------------ -------
High Low
------------ -------
<S> <C> <C>
Fiscal 1995
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, 1996 ........................................... 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
Fiscal 1998
Quarter Ended August 31, 1997 ............................................. 22 1/4 12 3/4
Quarter Ended November 30, 1997 ........................................... 14 1/2 8 5/8
Quarter Ended February 28, 1998 ........................................... 12 3/4 7 13/16
Quarter Ended May 31, 1998 ................................................ 14 1/8 9 15/16
</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 25 1998 is
approximately 503. The Company believes that there are a substantially greater
number of beneficial owners of shares of its Common Stock.
(c) The Company 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.
<PAGE>
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, 1998 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, 1998 and
1997, and for each of the three years in the period ended May 31, 1998 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.
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(in thousands except share and per share data)
1994 1995 (1) 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
System revenues.................................. $41,192 $51,747 $71,800 $86,144 $87,618
Maintenance revenues............................. 10,293 13,030 17,003 25,100 29,681
------ ------ ------ ------ ------
Total revenues................................... 51,485 64,777 88,803 111,244 117,299
------ ------ ------ ------- -------
Cost of system revenues.......................... 18,653 23,686 32,798 38,858 43,437
Cost of maintenance revenues..................... 7,748 8,387 10,956 14,924 16,988
------ ------ ------ ------ ------
Total cost of revenues........................... 26,401 32,073 43,754 53,782 60,425
------ ------ ------ ------ ------
Gross profit..................................... 25,084 32,704 45,049 57,462 56,874
------ ------ ------ ------ ------
Selling, general and administrative............. 15,249 18,749 22,587 27,737 36,111
Research and development......................... 4,961 5,831 7,933 10,698 15,068
Non-recurring, noncash compensation charge (1)... - 1,250 - - -
------ ------ ------ ------ ------
Total operating expenses....................... 20,210 25,830 30,520 38,435 51,179
------- ------ ------ ------ ------
Earnings from operations......................... 4,874 6,874 14,529 19,027 5,695
------- ------ ------ ------ ------
Interest expense................................. (936) (992) - - -
Interest and other income........................ 159 170 885 1,242 1,272
Foreign exchange (loss) gain..................... (464) 88 (345) (49) (547)
------- ------ ------ ------ ------
Total other expenses........................... (1,241) (734) 540 1,193 725
------- ------ ------ ------ ------
Earnings before provision for income
taxes and cumulative effect of
change in accounting principle ................. 3,633 6,140 15,069 20,220 6,420
Provision for income taxes....................... 1,599 2,956 5,854 7,583 1,990
------- ------ ------ ------ -----
Earnings before cumulative effect
of change in accounting principle .............. 2,034 3,184 9,215 12,637 4,430
Cumulative effect of change
in accounting principle (2) .................... 83 - - - -
------- ------- ------ ------ ------
Net earnings..................................... $ 1,951 $ 3,184 $ 9,215 $12,637 $4,430
======== ======= ======= ======= ======
Per share date: (3) .............................
Basic earnings.................................. $ 0.26 $ 0.39 $ 0.71 $ 0.93 $ 0.32
======== ======= ======= ======= =======
Diluted earnings................................ $ 0.21 $ 0.33 $ 0.70 $ 0.90 $ 0.32
======== ======= ======= ======= =======
Weighted average shares: ........................
Basic........................................... 7,500 8,270 12,890 13,641 13,765
======== ======= ====== ======= =======
Diluted......................................... 9,238 9,778 13,258 14,020 13,947
======== ======= ====== ====== =======
<PAGE>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital................................... $13,837 $27,550 $48,476 $55,200 $58,083
Total assets...................................... 33,714 47,722 75,103 93,583 100,607
Total debt........................................ 10,032 - - - -
Redeemable cumulative convertible preferred stock
issued by subsidiary ............................. 1,215 1,215 - - -
Redeemable cumulative convertible preferred stock. 4,500 - - - -
Common stockholders' equity....................... 6,289 33,576 58,781 72,208 77,860
</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.
(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) In the third quarter of the fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings Per Share". Basic income per
share is determined using the weighted average number of shares of common stock
outstanding during each period. Diluted income per share further assumes the
issuance of common shares for all diluted securities including stock options.
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.
<PAGE>
Management's Discussion and Analysis
The Company develops, markets and supports products and professional
services for Computer Telephony Integration ("CTI") and for Telecom Enhanced
Network Services using technologies such as interactive voice response ("IVR"),
speech input, messaging, fax and web browsers. The Company's products and
services automate call transaction processing, increase call-center agent
productivity, and often can create new revenue streams for its customers.
Historically, the size and timing of system sales transactions have varied
substantially from quarter to quarter, and the Company expects such variations
to continue into the future. Because a significant portion of the Company's
overhead is fixed in the short-term, the Company's results of operations may be
adversely affected if revenues fall below the Company's expectations. The
Company is typically able to deliver a system within 60 days of receipt of the
order and, therefore does not customarily have a significant long-term backlog.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of earnings, expressed as a
percentage of total revenues, and the percentage change in the dollar amount of
such items compared to the prior comparable period.
<TABLE>
<CAPTION>
Percentage of Total Revenues Percentage Increase (Decrease)
Fiscal 1997 Fiscal 1998
Fiscal Year Ended May 31, Over Fiscal Over Fiscal
------------ ----------------- --------------- ----------------- ---------------
1996 1997 1998 1996 1997
------------ ----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
System revenues 80.9% 77.4% 74.7% 20.2% 1.7%
Maintenance revenues 19.1 22.6 25.3 47.6 18.3
------------- ---------------- --------------
Total revenues 100.0 100.0 100.0 25.3 5.4
------------- ---------------- --------------
Cost of system revenues 36.9 34.9 37.0 18.5 11.8
Cost of maintenance revenues 12.4 13.4 14.5 36.2 13.8
------------- ---------------- --------------
Total cost of revenues 49.3 48.3 51.5 22.9 12.4
------------- ---------------- --------------
Gross profit 50.7 51.7 48.5 27.6 (1.0)
Selling, general and administrative 25.4 24.9 30.8 22.8 30.0
Research and development 8.9 9.6 12.8 34.9 40.8
------------- ---------------- --------------
Earnings from operations 16.4 17.1 4.9 31.0 (70.1)
Other income (expense), net 0.6 1.1 0.6 120.9 (39.2)
------------- ---------------- --------------
Earnings before provisions for
income taxes and cumulative
effect of change in accounting 17.0 18.2 5.5 34.2 (68.2)
principal
Provision for income taxes 6.6 6.8 1.7 29.5 (73.8)
------------- ---------------- -------------
Earnings before cumulative effect
of change in accounting principle 10.4% 11.4% 3.8% 37.1% (64.9%)
============= ================ =============
</TABLE>
<PAGE>
Fiscal Years Ended May 31, 1997 and 1998
Total Revenues. Total revenues for the fiscal year ended May 31, 1998
increased 5.4% to $117.3 million compared with $111.2 million in fiscal 1997.
System revenues for the year increased 1.7% to $87.6 million compared with $86.1
million in fiscal 1997. System revenues of the Company's newest products and
features, including Large Vocabulary Speech Recognition (LVR), CallSPONSOR(TM)
call center CTI application suite, Periphonics Calling Card Platform (PCCP) and
the PeriWeb internet interface feature, continued to grow substantially during
1998. These new products generated $13.3 million or 15% of total system revenues
during the year, compared with $5.9 million or 7% of total system revenues in
fiscal 1997. Maintenance revenues increased 18.3% to $29.7 million compared with
$25.1 million in the prior fiscal year primarily due to the growth in the
maintenance base.
Domestic system revenues for fiscal 1998 remained relatively unchanged at
$54.4 million compared with $54.6 million in fiscal 1997. Domestic maintenance
revenues for fiscal 1998 increased 21.0% to $24.6 million compared with $20.3
million in fiscal 1997. International revenues for fiscal 1998 increased 5.4% to
$38.3 million or 32.7% of total revenues compared with $36.4 million or 32.7% in
fiscal 1997. Revenues from Europe, the Middle East and Africa increased 38.4% to
$15.7 million offsetting lower revenues from the Pacific Rim and the Americas
(excluding U.S.) which declined 8.4% to $12.5 million and 11.4% to $10.1 million
respectively compared with the prior year.
Gross Profit. The Company's gross profit for the year was $56.9 million or
48.5% of total revenues, compared with $57.5 million or 51.7% of total revenues
in the prior year. Gross profit on system revenues decreased by $3.1 million to
$44.2 million or 50.4% of system revenues in fiscal 1998 from $47.3 million or
54.9% of systems revenues in the prior year. The lower gross profit margin
primarily reflects product mix, including a higher percentage of lower margin
custom programming revenue and the continued investments in application
development resources to pursue growth opportunities in all markets. Gross
profit on maintenance revenues increased by $2.5 million to $12.7 million in
fiscal 1998 or 42.8% of maintenance revenue from $10.2 million or 40.5% of
maintenance revenue in the prior fiscal year.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for fiscal 1998 were $36.1 million or 30.8% of
total revenues compared with $27.7 million or 24.9% of total revenues in the
prior year. The increased expense level can be attributed primarily to the
Company's expansion of its sales and marketing efforts designed to increase its
market penetration and market share on a global basis.
Research and Development Expenses. Research and development ("R&D")
expenses, primarily for new products and features, increased 40.8% to $15.1
million or 12.8% of total revenues compared with $10.7 million or 9.6% of total
revenues in fiscal 1997. The increase in the dollar amount of research and
development expense reflects the continued expansion of the Company's R&D
efforts to broaden the scope of its product offerings in order to address growth
opportunities in the market place. The R&D staff increased to 171 from 128
between May 31, 1998 and 1997. R&D expenses are charged to operations as
incurred, and no software development costs have been capitalized. The Company
expects such expenditures to remain at approximately 13% of total revenues,
though it may fluctuate from quarter to quarter.
<PAGE>
Other Income (Expense). Other income was $0.7 million for fiscal 1998
compared with $1.2 million in fiscal 1997. Interest and other income was $1.3
million for fiscal 1998 compared with $1.2 million in fiscal 1997. Foreign
exchange gain (loss) increased to a loss of $0.5 million in fiscal 1998 compared
with no gain or (loss) in the prior year.
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 result from the utilization of research and development tax
credits, state and local income taxes and exempt income of the Company's foreign
sales corporation. The Company's effective income tax rates were 31.0% and 37.5%
for fiscal 1998 and fiscal 1997, respectively.
Foreign Operations. The Company's European subsidiary had an operating
profit of $0.6 million during fiscal 1998 compared with an operating profit of
$0.4 million during fiscal 1997 (see Note 11 of notes to consolidated financial
statements). 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
$0.8 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 both fiscal 1998 and fiscal 1997, respectively.
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 revenues increased by
20.0%, from $71.8 million in fiscal 1996 to $86.1 million in fiscal 1997. The
increase in system revenues was due to an 18.6% increase in domestic revenues
and a 22.4% increase in international revenues primarily due to continued growth
in new and upgraded system requirements. The increase in system revenues was
primarily due to increases in unit sales volume. Maintenance 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 maintenance 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 revenues 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 revenues increased from 54.3% in fiscal 1996 to 54.9% in fiscal
1997. Gross profit on maintenance 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 maintenance 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.
<PAGE>
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 11 of notes to consolidated financial
statements). The decline in profitability was primarily due to lower gross
margins on system revenues 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 revenues by the European subsidiary to third parties during
both fiscal 1996 and fiscal 1997, 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 $9.6 million, $7.3
million and $7.2 million in fiscal 1996, 1997 and 1998, respectively. At May 31,
1998, the Company had working capital of $58.1 million, including $25.8 million
of cash and cash equivalents, and short-term investments. The Company expects
its working capital needs to increase along with planned future revenue growth.
At May 31, 1998, current assets increased by $4.4 million while current
liabilities increased by $1.5 million as compared to May 31, 1997. Current
assets increased principally as a result of increases in accounts receivable and
inventories due to higher operating levels.
The average days' sales outstanding (calculated by dividing the net
accounts receivable at the balance sheet date) were approximately 83 days, 111
days and 107 days at May 31, 1996, 1997 and 1998, respectively.
<PAGE>
In November 1997, the Company increased its line of credit to $15.0 million
with interest charged at the prime rate. The line of credit expires on November
30, 1998. As of May 31, 1998, the Company had no borrowings under this line of
credit.
The Company made capital expenditures totalling $5.9 million, $10.3 million
and $7.7 million during fiscal 1996, 1997 and 1998, 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.
Year 2000 Compliance
The Year 2000 issue exists because many computer systems and applications
use two-digit date fields to designate a year. As the century date change
occurs, date sensitive systems may not be able to recognize the year 2000 or may
do so incorrectly as the year 1900. This inability to recognize or properly
interpret the year 2000 may result in the incorrect processing of financial and
operational information.
The Company has initiated a program to upgrade its internal information
systems to address any year 2000 compliance issues. This program includes a
focus on internal policies, methods and tools, as well as coordination with
customers and suppliers. The Company expects its Year 2000 program to be
completed on a timely basis. However, there is no assurance that the Company
will identify and resolve any and all Year 2000 compliance issues with its
information systems in a timely manner, that the expenses associated with such
efforts will not be significant, or that such issues will not have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company has made a thorough review and testing of its products and
believes that its current products are Year 2000 compliant. The Company's
assessment of its current products is partially dependent upon the accuracy of
representations concerning Year 2000 compliance made by its suppliers, such as
Sun and Microsoft, among others. Many of the Company's customers are, however,
using earlier versions of the Company's products, which may not be Year 2000
compliant. The Company has initiated programs to proactively notify such
customers of the risks associated with using these products and to actively
encourage such customers to migrate to the Company's current products.
In addition, the Company's products are generally integrated within a
customer's enterprise system, which may involve products and systems developed
by other vendors. A customer may mistakenly believe that Year 2000 compliance
problems with its enterprise system are attributable to products provided by the
Company. The Company may, in the future be subject to claims based on Year 2000
compliance issues related to a customer's enterprise system or other products
provided by third parties, custom modifications to the Company's products made
by third parties, or issues arising from the integration of the Company's
products with other products. The Company has not been involved in any
proceeding involving its products or services in connection with Year 2000
compliance, however, there is no assurance that the Company will not, in the
future, be required to defend its products or services in such proceedings
against claims of Year 2000 compliance issues, and any resulting liability of
the Company for damages could have a material adverse effect on the Company's
business, operating results and financial condition.
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") and
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 131, SFAS
130 and SFAS 132 are effective for fiscal years beginning after December 15,
1997. The adoption of these pronouncements is not expected to have a material
impact on the Company's consolidated financial statements.
<PAGE>
In October of 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"). This statement provides
guidance on applying generally accepted accounting principles in recognizing
revenues on software transactions. This Statement supercedes Statement of
Position 91-1 "Software Revenue Recognition". This Statement is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Based upon Periphonics' reading and interpretation of SOP 97-2, the Company
believes that the implementation of SOP 97-2 will not have a material adverse
affect on expected revenues or earnings. However, detailed implementation
guidelines for this standard have not yet been issued. Once issued, such
detailed guidance could lead to unanticipated changes in the Company's current
revenue accounting practices and material adverse changes in the Company's
reported revenues and earnings. In the event implementation guidance is contrary
to the Company's revenue accounting practices, the Company believes it may be
possible to change its current business practices to comply with this guidance
and avoid any material adverse effect on reported revenues and earnings.
However, there can be no assurance this will be the case.
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.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for certain forward-looking statements. The Annual Report contains
forward-looking statements that reflect the Company's current news with respect
to future events and financial performance, including, without limitation,
statements containing the words "believes," "anticipates," "expects," "intends,"
"should," "seeks to" and similar words. These forward-looking statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
<PAGE>
Item 8. Consolidated Financial Statements
The information is contained on Pages F-1 through F-17 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<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, 1998 and 1997.............................................F-3
Consolidated Statements of Earnings for the years ended
May 31, 1998, 1997 and 1996.......................................................................F-4
Consolidated Statements of Stockholders' Equity for the years
Ended May 31, 1998, 1997 and 1996.................................................................F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 1998, 1997 and 1996.......................................................................F-6
Notes to Consolidated Financial Statements....................................................F-7 - F-17
(a)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts.....................................................S-1
</TABLE>
<PAGE>
(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
*22.1 List of Subsidiaries
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- ---------------
*Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Registration Number 33-89294.
(b)(1) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last quarter
of its fiscal year ended May 31, 1998.
<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 31, 1998
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 August 31, 1998
- --------------------- Executive Officer (Principal Operating Officer)
Peter J. Cohen
/s/Richard A. Daniels Senior Vice President, Treasurer and Director August 31, 1998
- ---------------------
Richard A. Daniels
/s/Kevin J. O'Brien Chief Financial Officer, Vice President-Finance August 31, 1998
- -------------------- and Administration (Principal Accounting and
Kevin J. O'Brien Financial Officer), Secretary and Director
/s/Jayandra Patel Sr. Vice President-Product Development, Assistant August 31, 1998
- --------------------
Jayandra Patel Treasurer and Director
/s/Edward H. Blum Director August 31, 1998
- --------------------
Edward H. Blum
/s/Peter Breitstone Director August 31, 1998
- --------------------
Peter Breitstone
</TABLE>
<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, 1998 and 1997 F-3
Consolidated Statements of Earnings for the years
ended May 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for
the years ended May 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended May 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-17
Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
<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, l998 and 1997, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1998 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, 1998
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 31,
----------------------------
ASSETS 1998 1997
- ------ ---------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $14,810 $25,092
Short-term investments 11,033 -
Accounts receivable, less allowance for doubtful accounts
of $1,266 and $1,000, respectively (Note 3) 37,721 35,735
Inventories (Note 4) 14,066 12,858
Deferred income taxes (Note 8) 1,687 1,357
Prepaid expenses and other current assets 1,367 1,211
-------- -------
Total Current Assets 80,684 76,253
PROPERTY, PLANT AND EQUIPMENT, net
(Note 5) 19,498 16,952
OTHER ASSETS 425 378
-------- -------
$100,607 $93,583
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,273 $ 5,928
Accrued expenses and other current liabilities (Note 6) 14,328 15,125
-------- -------
Total Current Liabilities 22,601 21,053
DEFERRED INCOME TAXES (Note 8) 146 322
-------- -------
22,747 21,375
-------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 9 and 10):
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: 13,843,305 and 13,693,758 shares, respectively 138 137
Additional paid-in capital 43,780 42,559
Retained earnings 33,942 29,512
-------- -------
77,860 72,208
-------- -------
$100,607 $93,583
======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
1998 l997 1996
-------- --------- ---------
<S> <C> <C> <C>
System revenues $ 87,618 $ 86,144 $ 71,800
Maintenance revenues 29,681 25,100 17,003
--------- --------- ---------
Total revenues 117,299 111,244 88,803
--------- --------- ---------
Cost of system revenues 43,437 38,858 32,798
Cost of maintenance revenues 16,988 14,924 10,956
--------- --------- ---------
Cost of revenues 60,425 53,782 43,754
--------- --------- ---------
Gross profit 56,874 57,462 45,049
--------- --------- ---------
Operating expenses:
Selling, general and administrative (Note 9) 36,111 27,737 22,587
Research and development 15,068 10,698 7,933
--------- --------- ---------
51,179 38,435 30,520
--------- --------- ---------
Earnings from operations 5,695 19,027 14,529
--------- --------- ---------
Other income (expense):
Interest and other income 1,272 1,242 885
Foreign exchange loss (547) (49) (345)
--------- --------- ---------
725 1,193 540
--------- --------- ---------
Earnings before provision for income taxes 6,420 20,220 15,069
Provision for income taxes (Note 8) 1,990 7,583 5,854
--------- --------- ---------
Net earnings $ 4,430 $ 12,637 $ 9,215
========= ========= =========
Per share data (Note 12):
Basic earnings $ 0.32 $ 0.93 $ 0.71
======== ========= =========
Diluted earnings $ 0.32 $ 0.90 $ 0.70
======== ========= =========
Weighted average shares (Note 12):
Basic 13,765 13,641 12,890
========= ========= =========
Diluted 13,947 14,020 13,258
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ --------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 1, 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 9) 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 9) 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
Net earnings - - - 4,430 4,430
Exercise of stock options and
stock issued under employee
stock purchase plan (Note 9) 149,547 1 1,175 - 1,176
Tax benefit relating to
employee stock options - - 46 - 46
------------ ---- ------- ------- ---------
BALANCE, May 31, 1998 13,843,305 $138 $43,780 $ 33,942 $ 77,860
============ ==== ======= ======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,430 $ 12,637 $ 9,215
Adjustments to reconcile net earnings to net cash
and cash equivalents provided by operating activities:
Depreciation and amortization 5,128 3,725 2,867
Provision for losses on accounts receivable 266 110 140
Provision for inventory reserves 449 418 450
Deferred income taxes (506) (183) (323)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,252) (12,016) (1,892)
Increase in inventories (1,657) (2,179) (4,104)
Increase in prepaid expenses and other current assets (156) (276) (20)
Increase in other assets (68) (90) (76)
Increase in accounts payable and accrued expenses and
other current liabilities 1,548 5,140 3,364
-------- -------- -------
Net cash and cash equivalents provided by
operating activities 7,182 7,286 9,621
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (7,653) (10,251) (5,882)
Purchases of short-term investments (21,723) (6,283) (8,603)
Proceeds from the sale of short term investments 10,690 14,886 -
-------- -------- -------
Net cash and cash equivalents used in
investing activities (18,686) (1,648) (14,485)
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering of common stock - - 13,959
Proceeds from stock options exercised including related
tax benefits 1,222 790 816
-------- -------- -------
Net cash and cash equivalents provided
by financing activities 1,222 790 14,775
-------- -------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,282) 6,428 9,911
CASH AND CASH EQUIVALENTS, beginning of year 25,092 18,664 8,753
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $ 14,810 $ 25,092 $18,664
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 3,976 $ 5,211 $ 6,079
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND SECONDARY STOCK OFFERING
Periphonics Corporation and subsidiaries (the "Company") develops, markets
and supports products and professional services for Computer Telephony
Integration ("CTI") and for Telecom Enhanced Network Services using technologies
such as interactive voice response ("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 often create new
revenue streams for its customers.
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, 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 9c).
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. Maintenance revenue
(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, 1998,
1997 and 1996 was not material.
In October of 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 Software Revenue Recognition ("SOP 97-2"). This statement provides guidance
on applying generally accepted accounting principles in recognizing revenues on
software transactions. This Statement supercedes Statement of Position 91-1
Software Revenue Recognition and is applicable for transactions entered into in
fiscal years beginning after December 15, 1997. This Statement has been adopted
by the Company effective June 1, 1998 and management does not anticipate that
the implementation of the guidance set forth in SOP 97-2 will have a material
impact on its current revenue recognition policies.
<PAGE>
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 salable 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, 1998, 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 one year. Such
debt securities are classified as held-to-maturity because the Company has the
positive intent and ability to hold the investments to maturity.
Held-to-maturity investments are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts.
f. Property, plant and equipment - Property, plant and equipment is stated
at cost less accumulated depreciation and is depreciated on the straight-line
method over the estimated useful lives of related assets. Leasehold improvements
are amortized over the life of the lease or the estimated life of the asset,
whichever is less.
g. Software development costs - The development of new software products
and enhancements to existing products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs would be capitalized in accordance with
Statement of Financial 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 share - The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), which
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share is based on the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is based on the weighted average number of shares of common
stock and common stock equivalents (options and warrants) outstanding during the
period, computed in accordance with the treasury stock method.
<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, 1998 and 1997, 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
1998 1997
---- ----
Billed $ 23,957 $ 27,003
Unbilled 13,764 8,732
--------- ---------
$ 37,721 $ 35,735
========= =========
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, 1997 were collected during fiscal 1998.
All unbilled receivables as of May 31, 1998 are expected to be collected in less
than one year.
4. INVENTORIES
1998 1997
----- -----
Raw materials $ 8,528 $ 7,624
Work-in-process 5,538 5,234
----- ---------
$ 14,066 $ 12,858
========== =========
5. PROPERTY, PLANT AND EQUIPMENT, net
<TABLE>
<CAPTION>
Useful Lives 1998 1997
------------ ---- ----
(in years)
<S> <C> <C> <C>
Land $ 906 $ 906
Building, building improvements and
leasehold improvements 3-40 7,156 5,446
Machinery, equipment, furniture and fixtures 3-10 25,674 20,093
Customer service equipment 5 7,157 6,796
---------- ----------
40,893 33,241
Less accumulated depreciation 21,395 16,289
---------- ----------
$ 19,498 $ 16,952
========== ==========
</TABLE>
<PAGE>
Depreciation expense relating to property, plant and equipment amounted to
approximately $5,107, $3,702 and $2,833 for the years ended May 31, 1998, 1997
and 1996, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Customer advance payments $ 7,611 $ 6,173
Accrued payroll, commissions, bonuses,
fringe benefits and payroll taxes 2,661 4,211
Income taxes payable 1,337 2,864
Other accrued expenses 2,719 1,877
---------- ---------
$ 14,328 $ 15,125
========== =========
</TABLE>
7. LINE OF CREDIT
In November 1997, the Company increased its unsecured line of credit from
$8M to $15M. There were no borrowings against such line of credit at May 31,
1998 or 1997. Any borrowings on this line of credit will bear interest at the
prime rate (8.50 percent at May 31, 1998) or the LIBOR rate plus 1.25 percent.
The line of credit expires on November 30, 1998.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,809 $ 5,880 $ 4,574
State and local 596 1,827 1,596
Foreign 45 59 7
-------- -------- -------
2,450 7,766 6,177
-------- -------- -------
Deferred:
Federal (368) (136) (240)
State and local (92) (47) (83)
-------- -------- -------
(460) (183) (323)
-------- -------- -------
Total $ 1,990 $ 7,583 $ 5,854
======== ======== =======
The difference between the statutory Federal tax rate and the Company's
effective tax rate is as follows (as a percentage of pretax earnings):
1998 1997 1996
---- ---- ----
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State and local income taxes (net of Federal tax benefit) 6.1 5.8 6.6
Exempt income of foreign sales corporation (1.0) (1.4) (1.8)
Research and development tax credits (11.6) (1.9) -
Other 3.5 1.0 -
------ ------ ------
Effective tax rate 31.0% 37.5% 38.8%
===== ===== =====
</TABLE>
<PAGE>
At May 31, 1998, 1997 and 1996, the deferred tax assets and liabilities
consisted of:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------- -----------------------
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 $ 467 $ - $ 397 $ - $ 310 $-
Inventories 751 - 710 - 691 -
State tax credit
carryforwards 32 - 32 - 32 -
Unrealized foreign
exchange losses 391 - 218 - 228 -
Property, plant, and
equipment - 156 - 332 - 419
Other 53 (10) 53 (10) 67 (10)
Net operating loss carry-
forwards of foreign
subsidiaries 100 - 366 - 404 -
------ ------ ------- ------- ------- -----
1,794 146 1,776 322 1,732 409
Less valuation allowance 107 - 419 - 471 -
------ ------ ------- ------- -------- ------
Total $1,687 $ 146 $ 1,357 $ 322 $ 1,261 $ 409
====== ====== ======= ======= ======= ======
</TABLE>
The valuation allowance decreased by approximately $312 and $52 during
fiscal 1998 and 1997, respectively, primarily as a result of the
utilization of net operating loss carryforwards of foreign subsidiaries.
9. 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 Company's 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").
Currently, the Company maintains two stock option plans pursuant to which
an aggregate of approximately 2,400,000 shares of common stock may be granted.
The 1995 Plan has 2,200,000 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 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).
<PAGE>
<TABLE>
<CAPTION>
Weighted
Shares Option Price Average Price
<S> <C> <C> <C>
Balance, June 1, 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 granted 279,000 $ 8.75 - $20.50 $ 12.80
Options exercised (46,000) $ 1.00 - $15.50 $ 3.41
Options canceled (24,500) $ 8.75 - $15.50 $ 12.10
------------ ---------------- -----------
Balance, May 31, 1998 872,700 $ 1.68 - $31.00 $ 11.44
============ ================ ===========
Options exercisable at
May 31, 1996 192,750 $ .75 - $ 7.00 $ 2.80
======= ================== ===========
May 31, 1997 200,700 $ 1.00 - $14.13$ $ 4.57
======= ================== ===========
May 31, 1998 302,200 $ 1.68 - $31.00$ $ 8.25
======= ================== ===========
</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> <C>
$ 1.68 75,000 5.00 $ 1.68 75,000 $ 1.68
$ 7.00 153,500 1.83 $ 7.00 105,500 $ 7.00
$ 8.53 - $10.13 137,200 2.34 $ 9.96 52,200 $ 10.00
$11.00 - $13.06 276,000 4.07 $ 12.72 13,000 $ 12.06
$14.00 - $15.50 185,000 3.17 $ 15.17 46,750 $ 15.14
$17.06 - $20.50 22,000 3.50 $ 18.05 3,750 $ 17.86
$26.25 - $31.00 24,000 3.65 $ 29.19 6,000 $ 29.19
----------- -----------
872,700 302,200
=========== ===========
</TABLE>
There are 1,336,500 shares available for future grant under the 1995 plan.
<PAGE>
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 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 granted 20,000 $9.50 $ 9.50
Options exercised - $ - $ -
------------ ------------------- ------------
Balance, May 31, 1998 86,250 $ 8.88 - $ 19.25 $ 12.44
============ =================== ============
Options exercisable at:
May 31, 1996 - $ - $ -
============ ================= ============
May 31, 1997 8,750 $ 8.88 - $13.25 $ 11.38
============ ================= ============
May 31, 1998 26,250 $ 8.88 - $19.25 $ 12.52
============ ================= ============
</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 2.07 $ 8.88 11,250 $ 8.88
$ 9.50 20,000 4.45 $ 9.50 - -
$13.25 20,000 2.41 $13.25 10,000 $13.25
$19.25 20,000 3.44 $19.25 5,000 $19.25
---------- ---------
86,250 26,250
========== =========
</TABLE>
There are 110,000 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.
<PAGE>
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
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: expected life, 1.25 years following
vesting; stock volatility, 73 percent in 1998 and 78 percent in 1997 and 1996,
risk free interest rate of 5.5 peecent in 1998 and 6.0 percent in 1997 and 1996
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 impact of outstanding non-vested stock options granted prior to June
1, 1995 has been excluded from the pro forma calculation; accordingly, pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ 4,430 $ 12,637 $ 9,215
Pro forma $ 3,238 $ 11,872 $ 8,927
Basic earnings per share:
As reported $ 0.32 $ 0.93 $ 0.71
Pro forma $ 0.24 $ 0.87 $ 0.69
Diluted earnings per share:
As reported $ 0.32 $ 0.90 $ 0.70
Pro forma $ 0.23 $ 0.85 $ 0.67
</TABLE>
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 through May 31 and June 1 through November 30.
During 1998, the Company revised the offering periods to October 1 through March
31 and April 1 to September 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. 103,609 and
14,744 shares were issued under the plan during fiscal years 1998 and 1997 at an
average price of $9.84 and $14.24, respectively.
<PAGE>
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 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 pric of $0.01 per Right.
f. 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. 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, 2001 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 has agreements with certain
stockholders of the Company. The 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 - On July 7, 1998, Lucent Technologies, Inc. ("Lucent")
filed a patent infringement action in the United States District Court for the
District of Delaware alleging that the Company infringed some nine patents of
Lucent. The Company believes that the claims contained in the lawsuit are
without merit and intends to defend the lawsuit vigorously. The Company is
involved in certain other 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.
<PAGE>
The Company is involved in certain other legal matters in the normal course
of business. The Company's management does not believe that resolution of these
other 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 1998, 1997 and 1996.
f. Lease agreements - The Company has entered into operating leases for
certain facilities, automobiles and office equipment. Future minimum annual
lease payments under noncancellable operating leases are:
Year Ending May 31,
1999 $ 2,904
2000 2,294
2001 1,936
2002 1,696
2003 983
Thereafter 2,745
------
$ 12,558
Rental expense was $2,860, $2,003 and $1,045 during the years ended May 31,
1998, 1997 and 1996, respectively.
11. OPERATIONS BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Year Ended May 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
System Revenues and Maintenance Revenues:
Sales to unaffiliated customers from:
North America $ 101,590 $ 99,895 $ 79,997
Europe 15,709 11,349 8,806
--------- --------- ---------
Total revenues to unaffiliated customers 117,299 111,244 88,803
--------- --------- ---------
Transfers between geographic areas from:
North America 4,167 3,815 3,665
Europe - - -
--------- --------- ---------
Total transfers between geographic areas 4,167 3,815 3,665
--------- --------- ---------
Eliminations (4,167) (3,815) (3,665)
--------- --------- ---------
Total revenues $ 117,299 $ 111,244 $ 88,803
========= ========= =========
Earnings from Operations:
North America $ 5,030 $ 18,686 $ 13,696
Europe 625 428 840
Eliminations 40 (87) (7)
--------- --------- ---------
Total earnings from operations $ 5,695 $ 19,027 $ 14,529
========= ========= =========
Identifiable Assets:
North America $ 109,057 $ 99,038 $ 78,393
Europe 13,919 10,279 8,051
Eliminations (22,369) (15,734) (11,341)
--------- --------- ---------
Total identifiable assets $ 100,607 $ 93,583 $ 75,103
========= ========= =========
</TABLE>
<PAGE>
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, 1998,
1997 and 1996 includes approximately $769, $589 and $565, respectively, of
intercompany gross profit earned by North America on system sales by Europe to
third parties.
Total revenues to customers outside the U.S. were $38,335, $36,380 and
$28,242 for the years ended May 31, 1998, 1997, and 1996, respectively.
Export sales from the Company's United States operations to unaffiliated
customers were as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
Pacific Rim $ 12,477 $ 13,532 $ 15,907
The Americas (excluding the
United States) 10,149 11,499 2,836
------------- --------- ---------
Total $ 22,626 $ 25,031 $ 18,743
============= ========= =========
</TABLE>
12. RECONCILIATION OF BASIC EARNINGS PER SHARE
In accordance with SFAS No. 128, basic earnings per common share are
computed based on the weighted-average number of common shares outstanding
during each period. Diluted earnings per common share are computed based on the
weighted-average number of common shares, after giving effect to diluted common
stock equivalents outstanding during each period. The following table provides a
reconciliation between basic and diluted earnings per share:
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
(In thousands, except per share amounts)
1998 1997 1996
-------------------------- ---------------------------- ---------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
------ ------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders $4,430 13,765 $ 0.32 $12,637 13,641 $ 0.93 $9,215 12,890 $ 0.71
Effect of dilutive securities:
Options/warrants - 182 - - 379 (0.03) - 368 (0.01)
----- ------ ------- ------ ------ ------- ------ ----- ------
Diluted EPS:
Income available to common
stockholders plus assumed
exercises $4,430 $13,947 $ 0.32 $12,637 14,020 $ 0.90 $9,215 13,258 $ 0.70
====== ======= ======= ======= ====== ======= ====== ====== =======
</TABLE>
<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
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Additions
---------
Charged to
Balance at Charged to Other Balance
beginning Cost and Accounts - Deductions - at end of
Descriptions of Period Expenses describe describe Period
------------ -------- -------- --------- ---------- -------
Year ended May 31, 1998:
Allowance for doubtful accounts $ 1,000 $266 $ - $ - $ 1,266
======= ==== ==== ===== =======
Reserve for excess and
obsolete inventory $ 1,150 $449 $ - $(367)(1) $ 1,232
======= ==== ==== ===== =======
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
======= ==== === ===== =======
</TABLE>
(1) Amounts written off or disposed of.
S-1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-99408 and 333-1544 of Periphonics Corporation, each on Form S-8, of our
report dated July 14, 1998, appearing in this Annual Report on Form 10-K of
Periphonics Corporation for the year ended May 31, 1998.
DELOITTE & TOUCHE LLP
Jericho, New York
August 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000937598
<NAME> Periphonics Corporation
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 14,810
<SECURITIES> 11,033
<RECEIVABLES> 38,987
<ALLOWANCES> (1,266)
<INVENTORY> 14,066
<CURRENT-ASSETS> 80,684
<PP&E> 40,893
<DEPRECIATION> (21,395)
<TOTAL-ASSETS> 100,607
<CURRENT-LIABILITIES> 22,601
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 77,722
<TOTAL-LIABILITY-AND-EQUITY> 100,607
<SALES> 117,299
<TOTAL-REVENUES> 117,299
<CGS> 60,425
<TOTAL-COSTS> 60,425
<OTHER-EXPENSES> 51,179
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,420
<INCOME-TAX> 1,990
<INCOME-CONTINUING> 4,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,430
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
