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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No.: 0-25592
PERIPHONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-2699509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Veterans Memorial Highway, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 468-9000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the 11,426,689 shares of Common Stock held by
non-affiliates of the Company as of August 27, 1999 is $315,662,284.
The number of shares outstanding of each of the registrant's classes of
common equity as of August 27, 1999 is as follows:
Class of Common Equity Number of Shares
---------------------- ----------------
Common Stock 13,250,090
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, 1999.
<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"),
advanced speech processing with large vocabulary recognition (LVR), natural
language processing and text-to-speech conversion as well as interactive
processing via web browsers, messaging and fax. The Company's products and
services automate call transaction processing, increase call-center agent
productivity, reduce operating cost 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 have been installed in more than 50 countries. The Company's
staff of 901 employees (May 1999) serves customers from Periphonics offices in
Canada, Germany, Hong Kong, Korea, 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, speech input or Internet access via a personal computer to
access information in an organization's computer database and to receive that
information verbally via high quality digitally-stored or synthesized speech,
via a browser 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 and managing customer accounts data, ordering of services or
products, providing enhanced telecommunications service such as pre-paid calling
services, 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 call center
and telecommunications call and transaction 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.
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 industry segments
and 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 1997, 1998 and 1999, no single customer
accounted for as much as 10% of the Company's total revenues. In fiscal 1999,
the Company's top ten customers (one of which was a new customer) accounted for
approximately 30% of total revenues. Five of these top ten customers were
telecommunications companies, three of them were financial services companies,
one was a transportation company, and one was a government customer. The
Company's system sales to customers outside the U.S. contributed approximately
41% of total system sales in fiscal 1999.
Although the Company's vertical market focus includes additional industries
such as higher education, healthcare services, 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
processor(s) running UNIX or Intel Pentium processor(s) running Windows NT; (ii)
a computer telephony and/or a telecommunications signaling server; (iii) 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, (iv) company-designed transaction processing software modules and
(v) optional network monitoring and 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 operating system kernel and file system
(for both UNIX or Window NT environments), the Company's system software
delivers an open and scalable client/server implementation which can be easily
migrated to new UNIX or Win NT versions and provides cross-platform support for
operating in a mixed operating system configuration. The architecture has been
designed to provide a systems platform that supports capacity growth and
technological evolution with modular upgrades.
The products, like those of several other competitors (such as Lucent
Technologies, formerly part of AT&T, IBM and InterVoice-Brite Inc.,), 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.
Products
The Company develops and sells systems and software application products
for Computer Telephony Integration (CTI) and Telecom Enhanced Network services.
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 (25 to 120 ports), or large scale installations,
including a network of multiple systems to handle thousands of telephone ports.
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.
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 or DPNSS support for countries
including the United States, Canada, UK, 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 or WAN-based systems. These interfaces can support a variety of
databases and Application Programming Interfaces ("APIs").
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.
Depending on system configuration, optional features and application
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) Services. 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 response, the interaction is provided via a dynamic visual
hypertext display.
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 API level 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.
Periphonics also develops, markets and supports CTI Products including:
CallSPONSOR(R) 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(R) 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(R) 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 relational 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.
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.
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 Common Channel Signaling applications and
support for Microsoft Windows NT operating system for VPS systems . The
Company's present product development activities include integration of new
features for speech recognition and other voice processing functions;
development of additional graphical application development and management
tools; interfaces to additional computer and telephone systems; development of
programmable switching systems with least cost routing options; 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 ECTF and TAPI) as part of its product
development efforts to provide state-of-the-art systems and related features.
During fiscal 1997, 1998 and 1999, the Company spent $10.7 million, $15.1
million and $18.3 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, creating
desktop interface software for screen pop and writing 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, New York, 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.
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 18 cities in the United States and in Canada, the United Kingdom,
Germany, Hong Kong, Korea, Mexico and Singapore. The Company also has agreements
with VARs who purchase the Company's systems for integration into larger systems
as well as with marketing alliance partners, local distributors, and independent
sales representatives in a number of overseas markets.
The Company's marketing and sales efforts also utilize direct mail,
seminars, 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 revenue contributed by U.S. and international based customers:
<TABLE>
<CAPTION>
For Fiscal Year Ending May 31
-----------------------------
(dollars in thousands)
1997 1998 1999
--------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. customers $ 74,864 67.3% $ 78,964 67.3% $ 91,599 64.4%
International customers $ 36,380 32.7% $ 38,335 32.7% $ 50,658 35.6%
-------- ------ -------- ------ -------- ------
Total revenues $ 111,244 100.0% $ 117,229 100.0% $ 142,257 100.0%
- -------------- ======== ====== =-====== ====== ======== ======
</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.
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 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 revenue 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. The Company expects such variations may 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. However, due to strong order bookings during the fourth
quarter of fiscal 1999, the Company's backlog increased significantly entering
fiscal 2000. 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.
The Company's software products, like software programs generally, may
contain undetected errors or bugs when introduced, or as new versions are
released. While the Company's current products have not experienced post-release
software errors that have had a significant financial or operational impact on
the Company, there can be no assurance that such problems will not occur in the
future, particularly as the Company's systems continue to become more complex
and sophisticated. Such defective software may result in loss of or delay in
market acceptance of the Company's products, warranty liability or product
recalls.
Highly Competitive Market Environment
The market for 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, CTI and Telecom enhanced service capabilities to some of
their product offerings and offer such 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 and other forms of
telephone based transactions systems. 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 Aspect
Communications, Inc., InterVoice-Brite Inc., Edify, Inc., Genesys
Telecommunications Laboratories, Inc., and Syntellect, Inc., whose businesses
are substantially focused on sales of interactive call processing systems, and
large, diversified companies such as Lucent Technologies, Geotel/CISCO, 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,
International Sales
System revenues to customers outside the U.S. accounted for approximately
37%, 38%, and 41% of the Company's system revenues in the fiscal years ended May
31, 1997, 1998 and 1999, 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.
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.
<PAGE>
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.
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 13.
Employees
As of May 31, 1999, Periphonics had 901 employees. Approximately 148
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.
Year 2000
The Year 2000 (Y2K) issue exists because many computer systems and
applications have used two-digit date fields to designate a year. As the century
date change occurs, date sensitive systems (if they have not been appropriately
modified) 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.
This issue is discussed below in regard to both the Company's products, the
Company's administrative/internal systems and the possible impact on the timing
of sales of the Company's systems.
The Company is in the final stages of a program to inspect, upgrade where
necessary, and verify its internal information systems to address any Y2K
compliance issues. This program includes a focus on internal policies, methods
and tools, as well as coordination with customers and suppliers. The Company has
completed substantially all upgrades to its mission critical information systems
to achieve Y2K compliance. The Company is continuing and will continue to
further test its internal information systems for Y2K compliance and expects to
continue to conduct such tests through October 1999. Because most of the
expenses associated with the Company's Y2K compliance upgrade program have been
made and will be incurred in the ordinary course of business, the Company does
not anticipate that such expenses will have a material impact on the Company's
financial condition.
As a result of the program to upgrade mission critical internal information
systems to Y2K compliance, the Company believes that said systems are already or
will be Y2K compliant prior to the year 2000. The Company cannot be completely
certain that it has identified and will resolve all Y2K compliance issues with
its internal information systems in a timely manner, in which case the expenses
associated with such efforts could become 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 analysis and test 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 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 implemented programs to proactively notify such
customers of the risks associated with using these products and to actively
encourage such customers to upgrade to the Company's current products and
perform applications audits.
The Company's products are generally integrated within a customer's
enterprise system, which usually involves 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 connections 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.
Through discussions with current and potential customers, the Company has
determined that Y2K readiness issues for these companies may influence the
timing of purchase decisions and deployment schedules. Concerns over Y2K
readiness may cause some customers to accelerate the purchase of new, Y2K
compliant systems or upgrades to existing systems to ensure that they have Y2K
compliant systems in place prior to year 2000. Conversely, some customers may
delay purchase decisions and/or deployment schedules due to the diversion of
resources (people and/or budget) to Y2K upgrade projects unrelated to the
Company's products. Similarly, some customers may delay purchase decisions and
or deployment schedules due to the need to stabilize their internal operations
and reduce the risk of introducing new systems immediately prior to the year
2000 conversion occurring during the typical peak business period of the
calendar fourth quarter. If Y2K concerns result in a net reduction in customer
orders and/or delays in deployments, the Company's revenues for the period of a
few months before and after January 1, 2000 could be reduced thereby having a
material adverse effect on the Company's financial results.
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. This facility consists of a Company-owned 65,000 square-foot
building located on a 3.9 acre site and 108,000 square feet leased in two nearby
buildings. The headquarters contain the Company's manufacturing, sales and
marketing, 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 and/or maintenance 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
21,000 square-foot leased space in three adjacent buildings. The Company also
leases a maintenance support office of approximately 1,500 square feet near
Manchester, England. Sales, professional services and technical support staff
operates out of leased offices in Germany, Hong Kong, Korea, Mexico and
Singapore.
Item 3. Legal Proceedings
On July 7, 1998 Lucent Technologies, Inc. filled 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, in
an answer filed on September 24, 1998, denied the substantive elements of
Lucent's lawsuit and set forth affirmative defenses and made counterclaims
against Lucent. There can be no assurance as to the outcome of this legal
action. 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 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 Company's fiscal quarters during fiscal 1997, 1998 and
1999, as reported by NASDAQ:
<TABLE>
<CAPTION>
Sales Price
-----------
Fiscal 1997 High Low
----------- ---- ---
<S> <C> <C>
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 5/16
Fiscal 1999
-----------
Quarter Ended August 31, 1998 12 9/16 5 1/8
Quarter Ended November 30, 1998 11 1/2 4 7/8
Quarter Ended February 28, 1999 14 7/16 10 1/8
Quarter Ended May 31, 1999 11 7/16 6 5/16
</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 27, 1999
is approximately 506. The Company believes that there are a substantially
greater number of beneficial owners of shares of its Common Stock.
(c) The Company currently intends to retain all future earnings for use in
the operations of its business and, therefore, does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent, among other things, upon earnings, capital requirements, financing
agreement covenants, the financial condition of the Company and applicable law.
Item 6. Selected Financial Data
The following selected consolidated financial data as of and for each of
the five fiscal years in the period ended May 31, 1999 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, 1999 and
1998, and for each of the three years in the period ended May 31, 1999 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.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
-----------------------------------------------------
(in thousands except share and per share data)
1999 1998 1997 1996 1995 (1)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
System revenues.................................. $107,364 $87,618 $86,144 $71,800 $51,747
Maintenance revenues............................. 34,893 29,681 25,100 17,003 13,030
------ ------ ------ ------ ------
Total revenues................................... 142,257 117,299 111,244 88,803 64,777
------- ------- ------- ------ ------
Cost of system revenues.......................... 51,646 43,437 38,858 32,798 23,686
Cost of maintenance revenues..................... 18,212 16,988 14,924 10,956 8,387
------ ------ ------ ------ ------
Total cost of revenues........................... 69,858 60,425 53,782 43,754 32,073
------ ------ ------ ------ ------
Gross profit..................................... 72,399 56,874 57,462 45,049 32,704
------ ------ ------ ------ ------
Selling, general and administrative............. 41,650 36,111 27,737 22,587 18,749
Research and development......................... 18,303 15,068 10,698 7,933 5,831
Non-recurring, noncash compensation charge (1)... - - - - 1,250
------ ------ ------ ------ ------
Total operating expenses....................... 59,953 51,179 38,435 30,520 25,830
------ ------ ------ ------ ------
Earnings from operations......................... 12,446 5,695 19,027 14,529 6,874
------ ------ ------ ------ ------
Interest expense................................. - - - - (992)
Interest and other income........................ 1,182 1,272 1,242 885 170
Foreign exchange gain (loss)..................... (332) (547) (49) (345) 88
------ ------ ------ ------ ------
Total other expenses........................... 850 725 1,193 540 (734)
------ ------ ------ ------ ------
Earnings before provision for income taxes ..... 13,296 6,420 20,220 15,069 6,140
Provision for income taxes....................... 4,388 1,990 7,583 5,854 2,956
------ ------ ------ ------ ------
Net earnings..................................... $ 8,908 $4,430 $12,637 $ 9,215 $ 3,184
====== ===== ====== ====== ======
Per share data: (2)
Basic earnings.................................. $ 0.66 $ 0.32 $ 0.93 $ 0.71 $ 0.39
====== ====== ======== ======== =======
Diluted earnings................................ $ 0.65 $ 0.32 $ 0.90 $ 0.70 $ 0.33
====== ====== ======== ======= =======
Weighted average shares:
Basic........................................... 13,443 13,765 13,641 12,890 8,270
====== ====== ====== ====== =====
Diluted......................................... 13,690 13,947 14,020 13,258 9,778
====== ====== ====== ====== =====
Balance Sheet Data:
Working capital................................... $60,781 $58,083 $55,200 $48,476 $27,550
Total assets...................................... 113,047 100,607 93,583 75,103 47,722
Redeemable cumulative convertible preferred stock
issued by subsidiary ........................... - - - - 1,215
Common stockholders' equity....................... 81,210 77,860 72,208 58,781 33,576
<FN>
(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) 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.
</FN>
</TABLE>
<PAGE>
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
Overview
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"),
advanced speech processing with Large Vocabulary Recognition (LVR), natural
language processing and text-to-speech conversion as well as interactive
processing via web browsers, messaging and fax. The Company's products and
services automate call transaction processing, increase call-center agent
productivity, reduce operating costs and often can create new revenue streams
for its customers.
Historically, the size and timing of the Company's revenue transactions
have varied substantially from quarter to quarter, and the Company expects such
variations may 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. However, due to strong order bookings during the fourth
quarter of fiscal 1999, the company's backlog increased significantly entering
fiscal 2000.
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 Year Ended May 31, Fiscal 1998 Fiscal 1999
Over Fiscal Over Fiscal
1997 1998 1999 1997 1998
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
System revenues 77.4% 74.7% 75.5% 1.7% 22.5%
Maintenance revenues 22.6 25.3 24.5 18.3 17.6
----- ----- -----
Total revenues 100.0 100.0 100.0 5.4 21.3
----- ----- -----
Cost of system revenues 34.9 37.0 36.3 11.8 18.9
Cost of maintenance revenues 13.4 14.5 12.8 13.8 7.2
----- ----- -----
Total cost of revenues 48.3 51.5 49.1 12.4 15.6
----- ----- -----
Gross profit 51.7 48.5 50.9 (1.0) 27.3
Selling, general and administrative 24.9 30.8 29.3 30.0 15.3
Research and development 9.6 12.8 12.9 40.8 21.5
----- ----- -----
Earnings from operations 17.1 4.9 8.7 (70.1) 118.5
Other income (expense), net 1.1 0.6 0.6 (39.2) 17.2
----- ----- -----
Earnings before provisions for
income taxes 18.2 5.5 9.3 (68.2) 107.1
Provision for income taxes 6.8 1.7 3.1 (73.8) 120.5
----- ----- -----
Net earnings 11.4% 3.8% 6.3% (64.9%) 101.1%
----- ----- -----
</TABLE>
Fiscal Years Ended May 31, 1999 and 1998
Total Revenues. Total revenues for the fiscal year ended May 31, 1999
increased 21.3% to $142.3 million compared with $117.3 million in fiscal 1998.
System revenues for the year increased 22.5% to $107.4 million compared with
$87.6 million in fiscal 1998 primarily due to an increase in volume. System
revenues of the company's newest products and features, including Large
Vocabulary Speech Recognition (LVR), CallSPONSOR(R) call center CTI application
suite, Periphonics Calling Card Platform (PCCP) and the PeriWeb internet
interface feature, continued to grow substantially during 1999. These new
products generated $24.4 million or 22.7% of total system revenues during the
year, compared with $13.3 million or 15.2% of total system revenues in fiscal
1998. Maintenance revenues increased 17.6% to $34.9 million compared with $29.7
million in the prior fiscal year primarily due to the growth in the maintenance
base.
Domestic system revenues for fiscal 1999 increased 17.4% to $63.8 million
compared with $54.4 million in fiscal 1998. Domestic maintenance revenues for
fiscal 1999 increased 12.8% to $27.8 million compared with $24.6 million in
fiscal 1998. International revenues for fiscal 1999 increased 32.1% to $50.7
million or 35.6% of total revenues compared with $38.3 million or 32.7% in
fiscal 1998. Revenues from Europe, the Middle East and Africa increased 109.5%
to $32.9 million offsetting lower revenues from the Pacific Rim and the Americas
(excluding U.S.) which declined 36.7% to $7.9 million and 3.0% to $9.8 million,
respectively, compared with the prior year.
Gross Profit. The Company's gross profit for the year was $72.4 million or
50.9% of total revenues, compared with $56.9 million or 48.5% of total revenues
in the prior year. Gross profit on system revenues increased by $11.5 million to
$55.7 million or 51.9% of system revenues in fiscal 1999 from $44.2 million or
50.4% of system revenues in the prior year. Gross profit on maintenance revenues
increased by $4.0 million to $16.7 million in fiscal 1999 or 47.8% of
maintenance revenue from $12.7 million or 42.8% of maintenance revenue in the
prior fiscal year.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for fiscal 1999 were $41.7 million or 29.3% of
total revenues compared with $36.1 million or 30.8% of total revenues in the
prior year. The increased expense level can be attributed primarily to costs
associated with supporting an increased level of sales volume and an increase in
legal costs due to the Lucent patent litigation.
Research and Development Expenses. Research and development ("R&D")
expenses, primarily for new products and features, increased 21.5% to $18.3
million or 12.9% of total revenues compared with $15.1 million or 12.8% of total
revenues in fiscal 1998. 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 179 from 171
between May 31, 1999 and 1998. 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 12%-13% of total revenues,
though they may fluctuate from quarter to quarter.
Other Income (Expense). Other income was $0.9 million for fiscal 1999
compared with $0.7 million in fiscal 1998. Interest and other income was $1.2
million for fiscal 1999 compared with $1.3 million in fiscal 1998. Foreign
exchange loss decreased to a loss of $0.3 million in fiscal 1999 compared with a
loss of $0.5 million 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 33.0% and 31.0%
for fiscal 1999 and fiscal 1998, respectively.
Foreign Operations. The Company's European subsidiary had an operating
profit of $9.2 million during fiscal 1999 compared with an operating profit of
$0.6 million during fiscal 1998 (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
$2.2 million and $0.8 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 1999 and fiscal 1998, respectively.
Fiscal Years Ended May 31, 1998 and 1997
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(R)
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 despite 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.
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.
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 $7.3 million, $7.2
million and $13.8 million in fiscal 1997, 1998 and 1999, respectively. The
Company's investing activities included purchases of capital expenditures
totaling $10.3 million, $7.7 million and $6.5 million during fiscal 1997, 1998
and 1999, respectively. Financing activities during fiscal 1999 included the
repurchase of 856,800 shares of the Company's common stock at a cost of
approximately $6.5 million, pursuant to authorization by its Board of Directors
during fiscal 1999 to repurchase up to 1,300,000 shares.
At May 31, 1999, the Company had working capital of $60.8 million,
including $27.6 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.
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. The Company
does not currently have any material commitments for capital expenditures. The
Company has a $15.0 million unsecured line of credit with a bank, which expires
on November 30, 1999. As of May 31, 1999 the Company had no borrowings under
this line of credit. Any borrowings under this line of credit will bear interest
at the prime rate or LIBOR plus 125 basis points.
At May 31, 1999, current assets increased by $11.8 million while current
liabilities increased by $9.1 million as compared to May 31, 1998. Current
assets increased principally as a result of increases in accounts receivable and
inventories due to higher operating levels. Current liabilities increased
primarily due to increased accrued expenses and other current liabilities.
The average days' sales outstanding (calculated by dividing the net
accounts receivable at the balance sheet date) were approximately 111 days, 107
days and 94 days at May 31, 1997, 1998 and 1999, respectively.
Year 2000 Compliance
The Year 2000 (Y2K) issue exists because many computer systems and
applications have used two-digit date fields to designate a year. As the century
date change occurs, date sensitive systems (if they have not been appropriately
modified) 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.
This issue is discussed below in regard to both the Company's products, the
Company's administrative/internal systems and the possible impact on the timing
of sales of the Company's systems.
The Company is in the final stages of a program to inspect, upgrade where
necessary, and verify its internal information systems to address any Y2K
compliance issues. This program includes a focus on internal policies, methods
and tools, as well as coordination with customers and suppliers. The Company has
completed substantially all upgrades to its mission critical information systems
to achieve Y2K compliance. The Company is continuing and will continue to
further test its internal information systems for Y2K compliance and expects to
continue to conduct such tests through October 1999. Because most of the
expenses associated with the Company's Y2K compliance upgrade program have been
made and will be incurred in the ordinary course of business, the Company does
not anticipate that such expenses will have a material impact on the Company's
financial condition.
As a result of the program to upgrade mission critical internal information
systems to Y2K compliance, the Company believes that said systems are already or
will be Y2K compliant prior to the year 2000. The Company cannot be completely
certain that it has identified and will resolve all Y2K compliance issues with
its internal information systems in a timely manner, in which case the expenses
associated with such efforts could become 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 analysis and test 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 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 implemented programs to proactively notify such
customers of the risks associated with using these products and to actively
encourage such customers to upgrade to the Company's current products and
perform applications audits.
The Company's products are generally integrated within a customer's
enterprise system, which usually involves 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 connections 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.
Through discussions with current and potential customers, the Company has
determined that Y2K readiness issues for these companies may influence the
timing of purchase decisions and deployment schedules. Concerns over Y2K
readiness may cause some customers to accelerate the purchase of new, Y2K
compliant systems or upgrades to existing systems to ensure that they have Y2K
compliant systems in place prior to year 2000. Conversely, some customers may
delay purchase decisions and/or deployment schedules due to the diversion of
resources (people and/or budget) to Y2K upgrade projects unrelated to the
Company's products. Similarly, some customers may delay purchase decisions and
or deployment schedules due to the need to stabilize their internal operations
and reduce the risk of introducing new systems immediately prior to the year
2000 conversion occurring during the typical peak business period of the
calendar fourth quarter. If Y2K concerns result in a net reduction in customer
orders and/or delays in deployments, the Company's revenues for the period of a
few months before and after January 1, 2000 could be reduced thereby having a
material adverse effect on the Company's financial results.
Recent Financial Accounting Standards Board Statements
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). Each of these statements
required additional disclosure in the Company's consolidated financial
statements. SFAS 130 had no effect on the Company's financial statements as the
Company had no components of comprehensive income. SFAS 131 did not have a
material effect on the Company's consolidated financial position or results of
operations.
Effective June 1, 1998 and December 15, 1998, respectively, the Company
adopted Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2")
and Statement of Position 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"). The
implementation of these pronouncements did not have a material effect on the
Company's financial statements. 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.
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. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") and Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133" ("SFAS 137"). SFAS 137 is effective for
fiscal years beginning after June 15, 2000. Based upon current data the adoption
of this pronouncement is not expected to have a material impact on the Company's
consolidated financial statements.
Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
Forward Looking Statements
The 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's current Credit Agreement provides for borrowings which bear
interest at the prime rate or LIBOR plus 125 basis points. The Company had no
borrowings outstanding under their line of credit at the end of fiscal 1999. The
Company currently believes that the effect, if any, of changes in interest rates
on the Company's financial position, results of operations, and cash flows would
not be material.
The Company transacts business in various foreign currencies. Accordingly,
the Company is subject to exposure from adverse movements in foreign currency
exchange rates. 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. A 5% hypothetical strengthening or weakening of the U.S. dollar
against those foreign currencies could have had approximately a $0.7 million
impact on the net pre-tax operations of the Company.
Item 8. Consolidated Financial Statements
The information is contained on Pages F-1 through F-17 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<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, 1999 and 1998.............................................F-3
Consolidated Statements of Earnings for the years ended
May 31, 1999, 1998 and 1997.......................................................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended May 31, 1999, 1998 and 1997.................................................................F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 1999, 1998 and 1997.......................................................................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>
(a)(3) EXHIBITS
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
(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, 1999.
<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 30, 1999
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 30, 1999
- ------------------- Executive Officer (Principal Operating Officer)
Peter J. Cohen
/s/ Richard A. Daniels Senior Vice President, Treasurer and Director August 30, 1999
- ----------------------
Richard A. Daniels
/s/ Kevin J. O'Brien Chief Financial Officer, Vice President-Finance August 30, 1999
- -------------------- and Administration (Principal Accounting and
Kevin J. O'Brien Financial Officer), Secretary and Director
/s/ Jayandra Patel Sr. Vice President-Product Development, Assistant August 30, 1998
- ------------------- Treasurer and Director
Jayandra Patel
/s/ Edward H. Blum Director August 30, 1999
- ------------------
Edward H. Blum
/s/ Peter Breitstone Director August 30, 1999
- --------------------
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, 1999 and 1998 F-3
Consolidated Statements of Earnings for the years
ended May 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for
the years ended May 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years
ended May 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-18
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, l999 and 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended May 31, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1999 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 8, 1999
F-2
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 31,
ASSETS 1999 1998
- ------ ---------- ----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $26,564 $14,810
Short-term investments 1,000 11,033
Accounts receivable, less allowance for doubtful accounts
of $1,783 and $1,266, respectively (Note 3) 45,187 37,721
Inventories (Note 4) 16,078 14,066
Deferred income taxes (Note 8) 1,852 1,687
Prepaid expenses and other current assets 1,833 1,367
-------- -------
Total Current Assets 92,514 80,684
PROPERTY, PLANT AND EQUIPMENT, net
(Note 5) 20,072 19,498
OTHER ASSETS 461 425
-------- -------
$113,047 $100,607
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,250 $ 8,273
Accrued expenses and other current liabilities (Note 6) 23,483 14,328
-------- ---------
Total Current Liabilities 31,733 22,601
DEFERRED INCOME TAXES (Note 8) 104 146
-------- ---------
31,837 22,747
-------- ---------
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, 30,000,000
shares authorized, 13,999,190 issued and 13,142,390
shares outstanding as of May 31, 1999; 13,843,305
shares issued and outstanding as of May 31, 1998 140 138
Additional paid-in capital 44,718 43,780
Retained earnings 42,850 33,942
-------- ---------
87,708 77,860
Treasury stock at cost, 856,800 shares (6,498) -
-------- ---------
81,210 77,860
-------- ---------
$113,047 $ 100,607
======== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
1999 l998 1997
-------------------------------------
<S> <C> <C> <C>
System revenues $ 107,364 $ 87,618 $ 86,144
Maintenance revenues 34,893 29,681 25,100
--------- --------- ---------
Total revenues 142,257 117,299 111,244
--------- --------- ---------
Cost of system revenues 51,646 43,437 38,858
Cost of maintenance revenues 18,212 16,988 14,924
--------- --------- ---------
Cost of revenues 69,858 60,425 53,782
--------- --------- ---------
Gross profit 72,399 56,874 57,462
--------- --------- ---------
Operating expenses:
Selling, general and administrative 41,650 36,111 27,737
Research and development 18,303 15,068 10,698
--------- --------- ---------
59,953 51,179 38,435
--------- --------- ---------
Earnings from operations 12,446 5,695 19,027
--------- --------- ---------
Other income (expense):
Interest and other income 1,182 1,272 1,242
Foreign exchange loss (332) (547) (49)
--------- --------- ---------
850 725 1,193
--------- --------- ---------
Earnings before provision for income taxes 13,296 6,420 20,220
Provision for income taxes (Note 8) 4,388 1,990 7,583
--------- --------- ---------
Net earnings $ 8,908 $ 4,430 $ 12,637
========= ========= =========
Per share data (Note 12):
Basic earnings $ 0.66 $ 0.32 $ 0.93
========= ======== =========
Diluted earnings $ 0.65 $ 0.32 $ 0.90
========= ======== =========
Weighted average shares (Note 12):
Basic 13,443 13,765 13,641
========= ========= =========
Diluted 13,690 13,947 14,020
========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
------ ------ ------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 1, 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
Net earnings - - - - 8,908 8,908
Exercise of stock options and
stock issued under employee
stock purchase plan (Note 9) 155,885 2 902 - - 904
Tax benefit relating to
employee stock options - - 36 - - 36
Purchase of Treasury stock -
net - - - (6,498) - (6,498)
------------ ---- ------- ------- -------- ---------
BALANCE, May 31, 1999 13,999,190 $140 $44,718 $(6,498) $ 42,850 $ 81,210
============ ==== ======= ======= ======== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings $ 8,908 $ 4,430 $12,637
Adjustments to reconcile net earnings to net cash
and cash equivalents provided by operating activities:
Depreciation and amortization 5,983 5,128 3,725
Provision for losses on accounts receivable 565 266 110
Provision for inventory reserves 1,454 449 418
Deferred income taxes (207) (506) (183)
Changes in operating assets and liabilities:
Increase in accounts receivable (8,031) (2,252) (12,016)
Increase in inventories (3,466) (1,657) (2,179)
Increase in prepaid expenses and other current assets (466) (156) (276)
Increase in other assets (71) (68) (90)
Increase in accounts payable and accrued expenses and
other current liabilities 9,132 1,548 5,140
-------- -------- -------
Net cash and cash equivalents provided by
operating activities 13,801 7,182 7,286
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (6,522) (7,653) (10,251)
Purchases of short-term investments (17,785) (21,723) (6,283)
Proceeds from the sale of short term investments 27,818 10,690 14,886
-------- -------- -------
Net cash and cash equivalents provided by (used in)
investing activities 3,511 (18,686) (1,648)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (6,498) - -
Proceeds from stock options exercised including related
tax benefits 940 1,222 790
-------- -------- -------
Net cash and cash equivalents (used in) provided
by financing activities (5,558) 1,222 790
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,754 (10,282) 6,428
CASH AND CASH EQUIVALENTS, beginning of year 14,810 25,092 18,664
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $ 26,564 $ 14,810 $ 25,092
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 2,106 $ 3,976 $ 5,211
======== ======== =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
PERIPHONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
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 transaction
processing, increase call-center agent productivity, and often create new
revenue streams for its customers.
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 revenues
(including postcontract customer support) and other revenues (including revenues
relating to insignificant obligations at the time sales are recorded) are
recognized ratably over applicable contractual periods or as service is
performed.
Standard products and custom software are sold with limited warranties,
generally for 60 days. Warranty expense for the fiscal years ended May 31, 1999,
1998 and 1997 was not material.
c. Inventories - Inventories are valued at the lower of cost (first-in,
first-out method) or market. Reserves are established to record provisions for
excess and obsolete inventories in the period in which it becomes reasonably
evident that the product is not 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, 1999 and 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.
F-7
<PAGE>
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. No
impairment losses have been recognized in the accompanying 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 - 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 the dilutive effect of options and warrants outstanding during the
period, computed in accordance with the treasury stock method.
l. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
m. Fair Value of Financial Instruments - Financial instruments consist
primarily of investments in cash equivalents, short-term investments, trade
accounts receivable, accounts payable and accrued expenses. At May 31, 1999 and
1998, the carrying amount for each of these financial instruments is assumed to
approximate fair value because of the short maturities of these instruments.
F-8
<PAGE>
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").
o. Comprehensive Income - In fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). This statement establishes rules for the reporting of comprehensive
income and its components. The adoption of SFAS 130 had no impact on the
Company's consolidated financial statements.
3. ACCOUNTS RECEIVABLE
1999 1998
---- ----
Billed $ 34,558 $ 23,957
Unbilled 10,629 13,764
---------- ----------
$ 45,187 $ 37,721
========== ==========
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, 1998 were collected during fiscal 1999.
All unbilled receivables as of May 31, 1999 are expected to be collected in less
than one year.
4. INVENTORIES
1999 1998
---- ----
Raw materials $ 8,730 $ 8,528
Work-in-process 7,348 5,538
---------- ---------
$ 16,078 $ 14,066
========== =========
5. PROPERTY, PLANT AND EQUIPMENT, net
<TABLE>
<CAPTION>
Useful Lives 1999 1998
------------ ---- ----
(in years)
<S> <C> <C> <C>
Land $ 906 $ 906
Building and improvements 40 7,877 7,156
Machinery, equipment, furniture and fixtures 3-10 30,370 25,674
Customer service equipment 5 7,454 7,157
---------- ----------
46,607 40,893
Less accumulated depreciation 26,535 21,395
---------- ----------
$ 20,072 $ 19,498
========== ==========
</TABLE>
Depreciation expense relating to property, plant and equipment amounted to
approximately $5,948, $5,107 and $3,702 for the years ended May 31, 1999,
1998 and 1997, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Customer advance payments $ 9,929 $ 7,611
Accrued payroll, commissions, bonuses,
fringe benefits and payroll taxes 4,970 2,661
Income taxes payable 3,792 1,337
Other accrued expenses 4,792 2,719
---------- ---------
$ 23,483 $ 14,328
========== =========
</TABLE>
F-9
<PAGE>
7. LINE OF CREDIT
In November 1997, the Company increased its unsecured line of credit from
$8 million to $15 million. There were no borrowings against such line of credit
at May 31, 1999 or 1998. Any borrowings on this line of credit will bear
interest at the prime rate (7.75 percent at May 31, 1999) or the LIBOR rate plus
1.25 percent. The line of credit expires on November 30, 1999.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $ 1,331 $ 1,809 $ 5,880
State and local 365 596 1,827
Foreign 2,899 45 59
--------- -------- -------
4,595 2,450 7,766
--------- -------- -------
Deferred:
Federal (197) (368) (136)
State and local (10) (92) (47)
--------- -------- -------
(207) (460) (183)
--------- -------- -------
Total $ 4,388 $ 1,990 $ 7,583
========= ======== =======
</TABLE>
Domestic and foreign components of income before income taxes for the years
ended May 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic $ 4,741 $ 6,513 $ 19,489
Foreign 8,555 (93) 731
--------- -------- --------
Total $ 13,296 $ 6,420 $ 20,220
========= ======== ========
</TABLE>
The difference between the statutory Federal tax rate and the Company's
effective tax rate is as follows (as a percentage of pretax earnings):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State and local income taxes (net of Federal tax benefit) 1.8 6.1 5.8
Exempt income of foreign sales corporation (1.3) (1.0) (1.4)
Research and development tax credits (5.1) (11.6) (1.9)
Other 3.6 3.5 1.0
----- ----- -----
Effective tax rate 33.0% 31.0% 37.5%
==== ==== =====
</TABLE>
F-10
<PAGE>
At May 31, 1999, 1998 and 1997, the deferred tax assets and liabilities
consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------- ----------------------
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 $ 618 $ - $ 467 $ - $ 397 $ -
Inventories 725 - 751 - 710 -
State tax credit
carryforwards 32 - 32 - 32 -
Unrealized foreign
exchange losses 477 - 391 - 218 -
Property, plant, and
equipment - 104 - 156 - 332
Other - - 53 (10) 53 (10)
Net operating loss carry-
forwards of foreign
subsidiaries 175 - 100 - 366 -
------ ------ ------ ------- ------ ------
2,027 104 1,794 146 1,776 322
Less valuation allowance 175 - 107 - 419 -
------ ------ ------ ------- ------ ------
Total $1,852 $ 104 $ 1,687 $ 146 $ 1,357 $ 322
====== ====== ======= ======= ======= ======
</TABLE>
The valuation allowance increased by approximately $68 during fiscal 1999
and decreased by $312 in fiscal 1998. This is primarily the result of the change
in net operating loss carryforwards of a foreign subsidiary.
9. STOCKHOLDERS' EQUITY
a. Stock option plans - 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 Stock Option Plan (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).
On September 23, 1998, the Board of Directors approved a plan to offer to
the holders of certain outstanding stock options, excluding all executive
officers and members of the Board of Directors, the opportunity to cancel their
existing options and receive new options for the same number of shares but with
an exercise price per share at the then current fair market value and with new
vesting requirements. As a result as of October 8, 1998, approximately 576,700
options with exercise prices ranging from $7.00 to $31.00 per share were
exchanged for new options with an exercise price of $6.75 per share.
F-11
<PAGE>
<TABLE>
<CAPTION>
Weighted
Shares Option Price Average Price
------ ------------ -------------
<S> <C> <C> <C> <C>
Balance, June 1, 1997 670,900 $ 1.00 - $31.00 $ 10.23
Options granted 278,000 $ 8.75 - $20.50 $ 12.80
Options exercised (46,000) $ 7.00 - $15.50 $ 8.22
Options canceled 22,500 $ 8.75 - $15.50 $ 12.10
------- ---------------- ----------
Balance, May 31, 1998 880,400 $ 1.00 - $31.00 $ 11.38
Options exercisable at
May 31, 1998 302,200 $ 1.00 - $31.00 $ 8.08
Options granted 1,159,200 $ 6.63 - $12.63 $ 7.28
Options exercised (14,000) $ 1.68 - $ 7.00 $ 4.34
Options canceled (637,700) $ 6.75 - $31.00 $ 12.44
--------- ---------------- ----------
Balance, May 31, 1999 1,387,900 $ 1.68 - $15.50 $ 7.72
========= ================ ==========
Options exercisable at
May 31, 1999 276,700 $ 1.68 - $15.50 $ 7.39
========= ================ ==========
</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 68,000 3.89 $ 1.68 68,000 $ 1.68
$ 6.63 - $ 6.76 568,700 4.37 $ 6.75 0 $ -
$ 6.94 - $ 7.63 537,000 3.78 $ 7.43 120,500 $ 7.00
$ 8.53 - $ 11.75 86,200 2.64 $ 10.15 34,950 $ 9.94
$ 12.63 - $ 12.88 67,000 3.03 $ 12.63 20,250 $ 12.80
$ 14.00 - $ 14.13 35,000 2.59 $ 14.43 20,000 $ 14.05
$ 15.50 26,000 2.03 $ 15.50 13,000 $ 15.50
----------- -----------
1,387,900 276,700
=========== ===========
</TABLE>
There are 813,000 shares available for future grant under the 1995 plan.
In February 1995, the Board adopted and the stockholders approved, a
Non-Employee Director Stock Option Plan (the "Directors Plan"). The Directors
Plan has 200,000 shares of common stock reserved for issuance from which grants
of non-qualified 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.
F-12
<PAGE>
<TABLE>
<CAPTION>
Weighted
Shares Price Range Average Price
------ ----------- -------------
<S> <C> <C> <C>
Balance, May 31, 1997 66,250 $ 8.88 - $ 19.25 $ 13.33
Options granted 20,000 $9.50 $ 9.50
------------ ---------------- ----------
Balance, May 31, 1998 86,250 $ 8.88 - $ 19.25 $ 12.44
Options granted 20,000 $ 7.88 $ 7.88
------------ ---------------- ----------
Balance, May 31, 1999 106,250 $ 7.88 - $ 19.25 $ 11.58
============ ================ ==========
Options exercisable at
May 31, 1999 48,750 $ 8.88 - $ 19.25 $ 12.41
============ ================ ==========
</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>
$ 7.88 20,000 4.40 $ 7.88 0 $ 7.88
$ 8.88 26,250 1.07 $ 8.88 18,750 $ 8.88
$ 9.50 20,000 3.45 $ 9.50 5,000 $ 9.50
$ 13.25 20,000 1.41 $ 13.25 15,000 $ 13.25
$ 19.50 20,000 2.44 $ 19.50 10,000 $ 19.50
---------- ---------
106,250 48,750
========== =========
</TABLE>
There are 90,000 shares available for future grants under the Directors
Plan. No options have been canceled under this plan.
b. Additional Stock Plan Information - As discussed in Note 2, the Company
continues to account for its stock-based awards using the intrinsic value method
in accordance with APB 25 and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock options awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions for 1999, 1998 and 1997: expected life,
1.25 years following vesting; stock volatility of 77 percent in 1999, 73 percent
in 1998 and 78 percent in 1997, risk free interest rate of 5.4 percent in 1999
and 6.0 percent in 1998 and 1997 and no dividends during the expected term. The
F-13
<PAGE>
Company's calculations are based on a multiple option in 1999 and 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,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ 8,908 $ 4,430 $ 12,637
Pro forma $ 7,645 $ 3,238 $ 11,872
Basic earnings per share:
As reported $ 0.66 $ 0.32 $ 0.93
Pro forma $ 0.57 $ 0.24 $ 0.87
Diluted earnings per share:
As reported $ 0.65 $ 0.32 $ 0.90
Pro forma $ 0.56 $ 0.23 $ 0.85
</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 through 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 800,000 shares are available for purchase under
the plan. 141,885 shares, 103,609 shares and 14,744 shares were issued under the
plan during fiscal years 1999, 1998 and 1997 at an average price of $6.03, $9.84
and $14.24, respectively.
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 price of $0.01 per Right.
F-14
<PAGE>
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 has employment contracts with five
officers. The contracts terminate on May 31, 2002 and allow for aggregate annual
base compensation as well as annual bonuses to be determined in accordance with
the provisions of the Company's performance incentive plan. In addition, these
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. The stock repurchase agreements were
terminated subsequent to year-end.
d. Legal matters - On July 7, 1998, Lucent Technologies, Inc. ("Lucent")
filed a patent infringement action in the United States District Court in the
District of Delaware alleging that the Company infringed some nine patents of
Lucent. The Company believes the claims contained in the lawsuit are without
merit and, in an answer filed on September 24, 1998, denied the substantive
elements of Lucent's lawsuit and set forth affirmative defenses and made
counterclaims against Lucent. 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.
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 1999, 1998 and 1997.
f. Lease agreements - The Company has entered into operating leases for
certain sales and service locations, automobiles and office equipment. Future
minimum annual lease payments under noncancelable operating leases are:
Year Ending May 31,
-------------------
2000 $ 3,152
2001 2,291
2002 2,108
2003 1,597
2004 968
Thereafter 4,100
------
$ 14,216
======
F-15
<PAGE>
Rental expense was $3,098, $2,860 and $1,065 during the years ended May 31,
1999, 1998 and 1997, respectively.
11. INDUSTRY SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
established standards for the way in which public business enterprises report
information about operating segments in annual financial statements.
The Company operates in two reportable segments: sales and maintenance of
interactive voice response systems. Summarized financial information concerning
the Company's reportable segments is shown in the following table. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The "Corporate" Column includes
corporate related items not allocated to reportable segments and the elimination
of intercompany transactions. Identifiable assets are those tangible and
intangible assets used in operations in each reportable segment.
<TABLE>
<CAPTION>
System Maintenance Corporate Total
------ ----------- --------- -----
<S> <C> <C> <C> <C>
Year Ended May 31, 1999
Total Revenues $ 107,364 $ 34,893 $ - $ 142,257
=========== ========== =========== ============
Interest Income $ - $ - $ 1,182 $ 1,182
=========== ========== =========== ============
Depreciation and amortization expense $ 2,366 $ 1,741 $ 1,876 $ 5,983
=========== ========== =========== ============
Earnings before provision for income taxes $ 11,447 $ 12,192 $ (10,343) $ 13,296
=========== ========== =========== ============
Income Tax Expense $ 3,778 $ 4,024 $ (3,414) $ 4,388
=========== ========== =========== ============
Capital Expenditures $ 2,597 $ 1,622 $ 2,303 $ 6,522
=========== ========== =========== ============
Identifiable assets $ 57,617 $ 11,570 $ 43,860 $ 113,047
=========== ========== =========== ============
Year Ended May 31, 1998
Total Revenues $ 87,618 $ 29,681 $ - $ 117,299
=========== ========== =========== ============
Interest Income $ - $ - $ 1,272 $ 1,272
=========== ========== =========== ============
Depreciation and amortization expense $ 1,847 $ 1,476 $ 1,805 $ 5,128
=========== ========== =========== ============
Earnings before provision for income taxes $ 6,594 $ 8,880 $ (9,054) $ 6,420
=========== ========== =========== ============
Income Tax Expense $ 2,044 $ 2,753 $ (2,807) $ 1,990
=========== ========== =========== ============
Capital Expenditures $ 2,766 $ 1,225 $ 3,662 $ 7,653
=========== ========== =========== ============
Identifiable assets $ 49,299 $ 9,873 $ 41,435 $ 100,607
=========== ========== =========== ============
Year Ended May 31, 1997
Total Revenues $ 86,144 $ 25,100 $ - $ 111,244
=========== ========== =========== ============
Interest Income $ - $ - $ 1,242 $ 1,242
=========== ========== =========== ============
F-16
<PAGE>
Depreciation and amortization expense $ 1,471 $ 1,173 $ 1,081 $ 3,725
=========== ========== =========== ============
Earnings before provision for income taxes $ 19,678 $ 7,792 $ (7,220) $ 20,220
=========== ========== =========== ============
Income Tax Expense $ 7,380 $ 2,911 $ (2,708) $ 7,583
=========== ========== =========== ============
Capital Expenditures $ 3,224 $ 2,565 $ 4,462 $ 10,251
=========== ========== =========== ============
Identifiable assets $ 47,360 $ 8,864 $ 37,359 $ 93,583
=========== ========== =========== ============
</TABLE>
Information about the Company's operations in different geographic areas at
May 31, 1999, 1998 and 1997, and the years then ended is presented below:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
System Revenue and Maintenance Revenue:
Sales to unaffiliated customers from:
North America $ 109,339 $ 101,590 $ 99,895
Europe 32,918 15,709 11,349
--------- --------- ---------
Total revenues to unaffiliated customers 142,257 117,299 111,244
--------- --------- ---------
Transfers between geographic areas from:
North America 13,122 4,167 3,815
Europe - - -
--------- --------- ---------
Total transfers between geographic areas 13,122 4,167 3,815
--------- --------- ---------
Eliminations (13,122) (4,167) (3,815)
---------- --------- ---------
Total revenues $ 142,257 $ 117,299 $ 111,244
========= ========= =========
Earnings from Operations:
North America $ 3,350 $ 5,030 $ 18,686
Europe 9,240 625 428
Eliminations (144) 40 (87)
---------- --------- ---------
Total earnings from operations $ 12,446 $ 5,695 $ 19,027
========= ========= =========
Identifiable Assets:
North America $ 113,534 $ 109,057 $ 99,038
Europe 21,113 13,919 10,279
Eliminations (21,600) (22,369) (15,734)
--------- --------- ---------
Total identifiable assets $ 113,047 $ 100,607 $ 93,583
========= ========= =========
</TABLE>
The activities of the Company's Mexican operation, which are not material
for separate disclosure, are included in North America.
Transfers between geographic areas are accounted for at cost, plus a
reasonable profit. European cost of revenues for the years ended May 31, 1999,
1998 and 1997 includes approximately $2,165, $769 and $589, 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 $50,658, $38,335 and
$36,380 for the years ended May 31, 1999, 1998, and 1997, respectively.
F-17
<PAGE>
Export sales from the Company's United States operations to unaffiliated
customers were as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Pacific Rim $ 7,900 $ 12,477 $ 13,532
The Americas (excluding the
United States) 9,840 10,149 11,499
--------- --------- ---------
Total $ 17,740 $ 22,626 $ 25,031
========= ========= =========
</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)
1999 1998 1997
------------------------- ------------------------ ---------------------------
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 8,908 13,443 $0.66 $4,430 13,765 $ 0.32 $12,637 13,641 $ 0.93
Effect of dilutive securities:
Options/warrants - 247 (0.01) - 182 - - 379 (0.03)
----- ------ ------ ----- ------ ---- ------- ------ -------
Diluted EPS:
Income available to
common stockholders
plus assumed
exercises 8,908 13,690 $0.65 $4,430 13,947 $ 0.32 $12,637 14,020 $ 0.90
====== ====== ===== ====== ====== ====== ======= ====== =======
</TABLE>
13. SUBSEQUENT EVENT (UNAUDITED)
On August 24, 1999, the Company and Nortel Networks Corp. ("Nortel")
entered into a definitive merger agreement, pursuant to which Nortel would
acquire the common stock of the Company and the Company would become a wholly
owned subsidiary of Nortel.
The consideration will consist of newly issued Nortel common stock, having
an aggregate market value of approximately $436 million. Under the terms of the
agreement, each share of the Company will be converted into a fraction of a
share of Nortel. The exchange ratio is equal to $29.23 divided by the average
price of a Nortel share during a certain period before closing, in a range of
0.62 to 0.76. During this time, if the average Nortel share price is above
$47.15, the exchange ratio will be 0.62. If the average share price is below
$38.46, the exchange ratio will be 0.76.
The Company's Board of Directors has approved the agreement. The completion
of the transaction is subject to approval of the Periphonics' shareholders, and
the receipt of all necessary regulatory approvals.
F-18
<PAGE>
SCHEDULE II
PERIPHONICS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
---------
Charged to
Balance at Charged to Other Balance
beginning Cost and Accounts - Deductions - at end of
Descriptions of Period Expenses describe describe Period
------------ ---------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1999:
Allowance for doubtful accounts $ 1,266 $ 565 $- $ (48)(1) $ 1,783
======= ======= === ====== =======
Reserve for excess and
obsolete inventory $ 1,232 $1,454 $- $(166)(1) $ 2,520
======= ====== === ====== =======
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
======= ==== === ===== =======
<FN>
(1) Amounts written off or disposed of.
</FN>
</TABLE>
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 8, 1999, appearing in this Annual Report on Form 10-K of
Periphonics Corporation for the year ended May 31, 1999.
DELOITTE & TOUCHE LLP
Jericho, New York
August 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000937598
<NAME> PERIPHONICS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 26,564
<SECURITIES> 1,000
<RECEIVABLES> 46,970
<ALLOWANCES> (1,783)
<INVENTORY> 16,078
<CURRENT-ASSETS> 92,514
<PP&E> 46,607
<DEPRECIATION> (26,535)
<TOTAL-ASSETS> 113,047
<CURRENT-LIABILITIES> 31,733
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 87,568
<TOTAL-LIABILITY-AND-EQUITY> 113,047
<SALES> 142,257
<TOTAL-REVENUES> 142,257
<CGS> 69,858
<TOTAL-COSTS> 69,858
<OTHER-EXPENSES> 59,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,296
<INCOME-TAX> 4,388
<INCOME-CONTINUING> 8,908
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,908
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.65
</TABLE>
