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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 1996
Commission File Number 0-23282
Natural MicroSystems Corporation
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 04-2814586
______________________________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
8 Erie Drive, Natick, Massachusetts 01760
______________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(508) 650-1300
______________________________________________________________________________
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,877,928 shares of Common
Stock, $.01 par value, outstanding at April 30, 1996.
The Index to Exhibits appears on Page 10
Total Number of Pages with Exhibits: 12
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TABLE OF CONTENTS
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<S> <C> <C>
PART I FINANCIAL INFORMATION Page
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Item 1. Financial Statements and Notes
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flow 5
Notes to Interim Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
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2
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Natural MicroSystems Corporation
Consolidated Balance Sheets
(Unaudited)
(In $000 except share and per share data)
<TABLE>
<CAPTION>
December 31, 1995 March 31, 1996
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<S> <C> <C>
ASSETS
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Current assets:
Cash and cash equivalents $ 6,729 $ 10,719
Marketable securities 134 26,852
Accounts receivable, net of allowance for uncollectible
accounts of $648 and $623, respectively 10,318 10,598
Inventories 3,704 4,538
Prepaid expenses and other assets 1,018 1,270
Deferred tax asset, net of valuation allowance 541 534
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Total current assets 22,444 $ 54,511
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Property and equipment, net of accumulated depreciation
of $1,968 and $2,227, respectively 2,190 2,542
License agreements, net of accumulated amortization
of $197 and $251, respectively 1,343 1,329
Other assets 223 199
Deferred tax asset, net of valuation allowance 328 328
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$ 26,528 $ 58,909
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LIABILITIES AND STOCKHOLDERS' EQUITY
- - -------------------------------------
Current liabilities:
Bank line of credit - 221
Accounts payable 4,293 5,506
Other liabilities 215 124
Accrued expenses and other liabilities 3,703 2,852
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Total current liabilities 8,211 8,703
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Deferred tax liability 132 1
Capital leases obligations, less current portion 11 9
Long-term debt, less current portion 82 -
Refundable advance 347 338
Commitments and contingencies:
Stockholders' equity:
Preferred stock, 3,000,000 shares authorized, none issued
Common stock; $.01 par value; 15,000,000 authorized,
3,545,317 and 4,855,498 issued and outstanding at
December 31, 1995 and March 31, 1996 35 49
Additional paid-in capital 20,067 51,384
Accumulated deficit (2,556) (1,703)
Other equity 19 19
Foreign currency translation adjustment 180 109
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Total stockholders' equity 17,745 49,858
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Total liabilities & stockholders' equity $ 26,528 $ 58,909
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</TABLE>
See accompanying notes to interim consolidated financial statements
3
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Natural MicroSystems Corporation
Consolidated Statements of Operations
(Unaudited)
(In $000 except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, 1995 March 31, 1996
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<S> <C> <C>
Revenues $ 7,164 $ 10,350
Cost of revenues 2,599 3,992
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Gross profit 4,565 6,358
Operating expenses:
Selling, general and administrative 2,233 3,064
Research and development 1,412 2,089
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Total operating expenses 3,645 5,153
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Operating income 920 1,205
Gain on sale of marketable securities - 2
Interest income 80 84
Interest expense 24 8
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Other income net 56 78
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Income before income taxes 976 1,283
Income tax expense 364 430
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Net income $ 612 $ 853
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Fully diluted:
Net income per Common Share $ 0.17 $ 0.20
============ ============
Weighted average shares outstanding 3,692,539 4,360,159
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
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Natural MicroSystems Corporation
Consolidated Statements of Cash Flow
(Unaudited)
(in $000 except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1996
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<S> <C> <C>
Cash flow from operating activities:
Net income $ 612 $ 853
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 167 301
Gain on sale of marketable securities - 2
Deferred income taxes 12 (131)
Changes in assets and liabilities:
Increase in accounts receivable (1,261) (280)
Increase in inventories (191) (834)
Increase in prepaid expenses and other assets (65) (147)
Decrease (increase) in income tax receivables (18) 8
Decrease in deferred tax asset 100 6
(Decrease) increase in accounts payable (342) 1,215
Decreased in accrued expenses and other liabilities (82) (431)
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Cash provided by (used in) operating activities (1,068) 562
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Cash flow from investing activities:
Additions to property and equipment (277) (728)
Purchases of marketable securities (162) (27,086)
Proceeds from the sale of marketable securities 381 369
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Cash used in investing activities (58) (27,445)
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Cash flow from financing activities:
Payments on capital lease obligations (53) (2)
Payments of dividends by acquired company (260) -
Payments on long-term debt - (380)
Payments on refundable advances - (10)
Proceeds from long-term debt 141 221
Proceeds from bank line of credit 76 221
Proceeds from issuance of common stock related to the Company's
follow-on offering (net of issuance costs) - 30,269
Proceeds from exercise of stock options 23 38
Proceeds from exercise of warrants - 585
Grant of non-statutory stock options 4 5
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Cash used in (provided by) financing activities (69) 30,947
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Effect of exchange rate changes on cash 171 (74)
Net increase (decrease) in cash and cash equivalents (1,024) 3,990
Cash and cash equivalents, beginning of period 7,753 6,729
--------- ---------
Cash and cash equivalents, end of period $ 6,729 $ 10,719
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</TABLE>
See accompanying notes to interim consolidated financial statements
5
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Natural MicroSystems Corporation
Notes to Interim Consolidated Financial Statements
A. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1996 and the consolidated
statements of operations and cash flow for the three month periods ending March
31, 1996 and 1995 include the accounts of Natural MicroSystems Corporation and
its wholly owned subsidiaries (the "Company"). In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows for all
periods presented have been made. The operating results for the three month
period ended March 31, 1996 are not necessarily indicative of the operating
results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted.
The financial statements should be read in conjunction with the consolidated
financial statements of the Company as of and for the year ended December 31,
1995.
B. STOCKHOLDERS' EQUITY:
(In $000)
<TABLE>
<CAPTION>
Additional Foreign
Common Stock Paid In Accumulated Translation Other
Shares Amount Capital Deficit Adjustment Equity Total
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,542 $ 35 $20,067 $ (2,556) $ 180 $ 19 $ 17,745
Proceeds from issuance
of common stock, net of
issuance costs 1,313 14 31,317 31,331
Net Income for three months
ended March 31, 1996 853 853
Foreign Translation Adjustment (71) (71)
----------------- ------- -------- --------- ------ --------
Balance at March 31, 1996 4,855 $ 49 $51,384 $ (1,703) $ 109 $ 19 $ 49,858
================= ======= ======== ========= ====== ========
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By unanimous written consent dated as of January 29, 1996, the Company's Board
of Directors authorized a follow-on offering of 1,240,000 shares of the
Company's Common Stock. The proceeds from the follow-on offering were
approximately $30.3 million after issuance costs.
C. INDEBTEDNESS
At March 31, 1996, the Company had a $2.5 million bank line of credit through
June 1996, all of which was available. Borrowings under the line of credit bear
interest at the bank's prime rate plus .25%. The Company is subject to certain
covenants such as maintaining certain profitability and equity levels and
maintaining certain leverage and liquidity ratios. At March 31, 1996, the
Company was in compliance with its debt covenants and no borrowings were
outstanding under the line. The Company believes that the net proceeds from its
1996 follow-on public stock offering, cash flow from operations and funds
available under the line of credit will be sufficient to fund operations for at
least the next 24 months.
During 1995, the Company established a borrowing relationship with a bank for
its European operations under which $221,000 was outstanding at March 31, 1996.
The Company also secured a research and development funding grant from a branch
of the French government in the amount of $338,000. In addition, the Company
has received interest-free advances from the French government repayable from
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the proceeds of export sales from France, the balance of which advances at March
31, 1996 was $113,000.
D. FULLY DILUTED INCOME PER COMMON SHARE
Fully diluted net income per common share is computed based upon the weighted
average number of common shares outstanding using the treasury stock method.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results Of Operations
The results of operations for both first quarters of 1996 and 1995 include the
results of VOX S. A. (VOX), which was acquired by the Company in November 1995
in a transaction accounted for as a pooling of interests. Prior thereto, VOX
was a privately held firm.
Revenues
Revenues of $10.4 million for the three months ended March 31, 1996 ("1996"),
increased 44.4% percent from $7.2 million for the three months ended March 31,
1995 ("1995"). The increase from 1995 to 1996 was primarily due to shipment of
greater unit volume of AG and VOX products. AG products have supplanted and are
expected to continue to supplant sales of VBX products for higher port count and
more sophisticated applications.
Revenues from sales to customers located outside of North America accounted for
41.3% ($4.3 million) and 50% ($3.6 million) of revenues for 1996 and 1995,
respectively. The dollar volume increase of 1996 over 1995 was due to
continuing increases in unit sales primarily to customers in Europe and Asia.
The percentage decrease in international sales from 1995 to 1996 was
attributable to delays in ordering by certain European customers in 1996.
Cost of Revenues
Cost of revenues consists of costs associated with components, subcontracted
manufacturing, labor and overhead of quality control, warehousing and shipping
of the Company's products.
Cost of revenues increased to 38.5% of revenues in 1996 from 36.1% in 1995. The
increase was primarily attributable to a change in the product mix and lower
license revenues from a European customer, and an increase in lower margin
system contract revenue.
Selling, General and Administrative
Selling, general and administrative expenses increased 40.9% to $3.1 million for
1996 from $2.2 million for 1995 and were 29.8% of total revenues for 1996 versus
30.5% in 1995. In addition to increased spending to support growth, the Company
increased expenditures in marketing and technical support in 1996. The Company
expects that its selling, general and administrative expenditures will continue
to increase, but may vary as a percentage of future product revenues in future
periods.
Research and Development
Research and development expenditures increased 50% to $2.1 million for 1996
from $1.4 million for 1995, and were 20.2% of total revenues for 1996 versus
19.4% in 1995. These increases were primarily due to increased personnel and
development project related costs for 1996. Research and development expenses
decreased slightly in 1996 from the three months ended December 31, 1995 due to
the conclusion of a major customer contract at the beginning of 1996. The
Company expects that its research and development expenditures will continue to
increase, but may vary as a percentage of future product revenues in future
periods.
Other Income, Net
Other income, net for 1996 and 1995 was $78,000 and $56,000, respectively,
reflecting net interest income and gains from the sale of marketable securities
for both periods. The increase in net interest income was generated from
proceeds of the Company's 1996 follow-on public stock offering. The Company
expects net interest income to increase in future quarters from first
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quarter since the follow-on offering net proceeds will be available to earn
interest for the full quarterly periods.
Income Tax Expense
Income tax expense of $430,000 and $364,000 for 1996 and 1995, respectively was
based on an effective tax rate which differed from the U. S. federal statutory
rate primarily due to state and foreign income taxes.
Operating and Net Income
As a result of the foregoing, operating income was $1.2 million and $920,000 for
1996 and 1995, respectively. Net income was $853,000 and $612,000 for the same
periods, respectively.
Liquidity And Capital Resources:
Cash provided by (used in) operations in 1996 and 1995 was $562,000 and $(1.1)
million, respectively. Cash was used in 1996 and 1995 to fund increases in
accounts receivable and inventory to support increased revenue for both periods.
In 1996 accounts payable and accrued expenses combined increased by $784,000 due
to increases in inventory purchases to support increased revenue.
Cash used in investing activities for 1996 was $27.4 million versus $58,000 in
1995, primarily due to increased purchases of property and equipment, and in
1996 by net purchases of marketable securities, including investment of follow-
on offering proceeds.
Cash provided by financing activities in 1996 was $30.9 million compared to cash
used in financing activities in 1995 of $69,000. The increase in 1996 was due to
proceeds from the Company's 1996 follow-on stock offering of approximately $30.3
million, net of costs of $2.4 million; and proceeds of $585,000 from the
exercise of warrants.
Current assets at March 31, 1996 were $54.5 million, 143.3% more than current
assets of $22.4 million at December 31, 1995, due primarily to cash provided
from the Company's 1996 follow-on offering. Current liabilities at March 31,
1996 were $8.7 million, 6.1% more than current liabilities of $8.2 million at
December 31, 1995.
For U. S. federal income tax purposes the Company has net operating loss
carryforwards available to reduce future income of approximately $4.4 million at
March 31, 1996. These carryforwards expire beginning in 2002. Utilization of
net operating loss carryforwards are subject to an annual limitation of
approximately $750,000 under Internal Revenue Code section 382.
Cautionary Statement
When used anywhere in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "the company expects", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Such risk factors are set forth in Part I of the Company's annual
report on Form 10-K for the year ended December 31, 1995. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-
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looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
PART II - OTHER INFORMATION
ITEMS 1 - 5
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
A. Exhibits
No. 11.1 - Statement of Computation of Earnings Per Share
No. 27.1 - Financial Data Schedule
B. Reports on Form 8-K
None
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Natural MicroSystems Corporation
Dated: May 14, 1996 By: /s/ Robert P. Schechter
-------------------------------
Robert P. Schechter
President and Chief Executive Officer
Dated: May 14, 1996 By: /s/ John F. Kennedy
----------------------------------
John F. Kennedy
Chief Financial Officer
11
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Natural MicroSystems Corporation
Exhibit Index
No. 11.1 Statement of Computation of Earnings Per Share
(In $000 except per share data)
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<CAPTION>
3 Months Ended
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March 31, 1995 March 31, 1996
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<S> <C> <C>
Net income $ 612 $ 853
============== ==============
Weighted average common shares outstanding 3,467 3,946
Common shares attributable to
dilutive options and warrants 226 414
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Weighted average shares 3,693 4,360
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Net income per share $ 0.17 $ 0.20
============== ==============
</TABLE>
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<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 10,719
<SECURITIES> 26,852
<RECEIVABLES> 11,221<F1>
<ALLOWANCES> 623
<INVENTORY> 4,538
<CURRENT-ASSETS> 54,511
<PP&E> 4,769<F2>
<DEPRECIATION> 2,227
<TOTAL-ASSETS> 58,909
<CURRENT-LIABILITIES> 8,703
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 19
<TOTAL-LIABILITY-AND-EQUITY> 58,909
<SALES> 10,350
<TOTAL-REVENUES> 10,350
<CGS> 3,992
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 1,283
<INCOME-TAX> 430
<INCOME-CONTINUING> 853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 853
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<FN>
<F1>GROSS A/R
<F2>GROSS PP&E
</FN>
</TABLE>
