-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OJBGy8Pn85CFKprVc9cGOg/A9U+qTzzxA5AYds7UaWNVYhajt3QuUYLgpVtVwHC+ rdohjd0RSqu720wWw2kkXA== 0001009448-99-000086.txt : 19990831 0001009448-99-000086.hdr.sgml : 19990831 ACCESSION NUMBER: 0001009448-99-000086 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERIPHONICS CORP CENTRAL INDEX KEY: 0000937598 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112699509 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25592 FILM NUMBER: 99702875 BUSINESS ADDRESS: STREET 1: 4000 VETERANS MEMORIAL HIGHWAY CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5164670500 MAIL ADDRESS: STREET 1: 4000 VETERANS MEMORIAL HIGHWAY STREET 2: PERIPHONICS CORP CITY: BOHEMIA STATE: NY ZIP: 11716 10-K 1 ANNUAL REPORT 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. 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:
For Fiscal Year Ending May 31 ----------------------------- (dollars in thousands) 1997 1998 1999 --------------------- ---------------------- ----------------------- 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% - -------------- ======== ====== =-====== ====== ======== ======
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. 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 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:
Sales Price ----------- Fiscal 1997 High Low ----------- ---- --- 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
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.
Fiscal Year Ended May 31, ----------------------------------------------------- (in thousands except share and per share data) 1999 1998 1997 1996 1995 (1) ---- ---- ---- ---- ---- 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 (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.
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. 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.
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 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% ----- ----- -----
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. PART IV Item 14. Exhibits, Financial Statement Schedule and reports on Form 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S) Index to Consolidated Financial Statements..........................................................F-1 Independent Auditors' Report........................................................................F-2 Consolidated Balance Sheets as of May 31, 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
(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. 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.
Signature Title Date /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
PERIPHONICS CORPORATION AND SUBSIDIARIES INDEX TO consolidated FINANCIAL STATEMENTS
Page ---- 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
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 PERIPHONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
May 31, ASSETS 1999 1998 - ------ ---------- ---------- CURRENT ASSETS: 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 ======== ========= See notes to consolidated financial statements.
F-3 PERIPHONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands)
Year Ended May 31, 1999 l998 1997 ------------------------------------- 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 ========= ========= ========= See notes to consolidated financial statements.
F-4 PERIPHONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)
Additional Total Common Stock Paid-In Treasury Retained Stockholders' Shares Amount Capital Stock Earnings Equity ------ ------ ------- ----- -------- ------ 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 ============ ==== ======= ======= ======== ========= See notes to consolidated financial statements.
F-5 PERIPHONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended May 31, ------------------ 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: 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 ======== ======== ======= See notes to consolidated financial statements.
F-6 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 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 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
Useful Lives 1999 1998 ------------ ---- ---- (in years) 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 ========== ==========
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
1999 1998 ---- ---- 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 ========== =========
F-9 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:
1999 1998 1997 ---- ---- ---- Current: 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 ========= ======== =======
Domestic and foreign components of income before income taxes for the years ended May 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Domestic $ 4,741 $ 6,513 $ 19,489 Foreign 8,555 (93) 731 --------- -------- -------- Total $ 13,296 $ 6,420 $ 20,220 ========= ======== ========
The difference between the statutory Federal tax rate and the Company's effective tax rate is as follows (as a percentage of pretax earnings):
1999 1998 1997 ---- ---- ---- 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% ==== ==== =====
F-10 At May 31, 1999, 1998 and 1997, the deferred tax assets and liabilities consisted of:
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 -------- ----------- -------- ----------- -------- ----------- 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 ====== ====== ======= ======= ======= ======
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
Weighted Shares Option Price Average Price ------ ------------ ------------- 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 ========= ================ ==========
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Avg. Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (yrs) Price Exercisable Price --------------- ----------- ------------- -------- ----------- -------- $ 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 =========== ===========
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
Weighted Shares Price Range Average Price ------ ----------- ------------- 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 ============ ================ ==========
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Avg. Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (yrs) Price Exercisable Price --------------- ----------- ------------ -------- ----------- -------- $ 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 ========== =========
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 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.
Fiscal Year Ended May 31, ------------------------- 1999 1998 1997 ---- ---- ---- 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
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 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 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.
System Maintenance Corporate Total ------ ----------- --------- ----- 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 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 =========== ========== =========== ============
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:
Year Ended May 31, ------------------ 1999 1998 1997 ---- ---- ---- 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 ========= ========= =========
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 Export sales from the Company's United States operations to unaffiliated customers were as follows:
Year Ended May 31, 1999 1998 1997 ------------- ------------- ------------- 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 ========= ========= =========
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:
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 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 ====== ====== ===== ====== ====== ====== ======= ====== =======
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 SCHEDULE II PERIPHONICS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands)
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 ------------ ---------- ---------- ----------- ------------ --------- 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 ======= ==== === ===== ======= (1) Amounts written off or disposed of.
S-1 EX-23 2 EXHIBIT 23 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 EX-27 3 FDS --
5 0000937598 PERIPHONICS CORPORATION 1,000 12-MOS MAY-31-1999 JUN-01-1998 MAY-31-1999 26,564 1,000 46,970 (1,783) 16,078 92,514 46,607 (26,535) 113,047 31,733 0 0 0 140 87,568 113,047 142,257 142,257 69,858 69,858 59,953 0 0 13,296 4,388 8,908 0 0 0 8,908 0.66 0.65
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