<PAGE>
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, 1997
Commission File Number 0-23282
Natural MicroSystems Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-2814586
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
8 Erie Drive, Natick, Massachusetts 01760
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(Address of principal executive offices) (Zip Code)
(508) 650-1300
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(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: 10,325,077 shares of Common
Stock, $.01 par value, outstanding at April 30, 1997.
The Index to Exhibits appears on Page 13 Total Number of Pages with Exhibits:14
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Page
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<S> <C> <C>
Item 1. Financial Statements and Notes
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flow 5
Notes to 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 4. Submission of Matters of Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
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Natural MicroSystems Corporation
Consolidated Balance Sheets
(Unaudited)
(In 000 except per share data)
<TABLE>
<CAPTION>
ASSETS December 31, 1996 March 31, 1997
------ ----------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,578 $ 5,012
Marketable securities 26,767 26,639
Accounts receivable, net of allowance for uncollectible
accounts of $685 and $711, respectively 13,403 14,885
Inventories 5,419 4,962
Prepaid expenses and other assets 1,357 1,917
Income tax receivable 130 251
Deferred tax asset, net of valuation allowance 306 298
---------- ---------
Total current assets 53,960 53,964
---------- ---------
Property and equipment, net of accumulated depreciation
of $3,305 and $3,763, respectively 3,908 5,215
License agreements, net of accumulated amortization
of $245 and $324, respectively 1,665 1,622
Other assets 1,708 1,909
Excess of purchase price over net assets acquired, net of accumulated
amortization of $102 and $138, respectively 655 619
Deferred tax asset, net of valuation allowance 766 773
---------- ---------
$ 62,662 $ 64,102
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long term debt $ 58 $ 53
Government advances 45 41
Accounts payable 5,222 4,721
Accrued expenses and other liabilities 4,108 3,660
---------- ---------
Total current liabilities 9,433 8,475
---------- ---------
Refundable advance 347 320
Commitments and contingencies:
Stockholders' equity:
Preferred stock, 3,000,000 shares authorized, none issued
Common stock; $.01 par value; 15,000,000 authorized,
9,936,414 and 10,276,961 issued and outstanding at
December 31, 1996 and March 31, 1997 99 102
Additional paid-in capital 53,604 54,462
Retained earnings (accumulated deficit) (926) 850
Other equity 19 19
Foreign currency translation adjustment 86 (126)
---------- ---------
Total stockholders' equity 52,882 55,307
---------- ---------
---------- ---------
$ 62,662 $ 64,102
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
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Natural MicroSystems Corporation
Consolidated Statements of Operations
(Unaudited)
(In 000 except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1997
---------- ----------
<S> <C> <C>
Revenues $10,350 $15,868
Cost of revenues 3,992 5,644
---------- ----------
Gross profit 6,358 10,224
Operating expenses:
Selling, general and administrative 3,064 4,516
Research and development 2,089 3,338
---------- ----------
Total operating expenses 5,153 7,854
---------- ----------
Operating income 1,205 2,370
Interest income and other 86 320
Interest expense and other 8 11
---------- ----------
Other income, net 78 309
---------- ----------
Income before income taxes 1,283 2,679
Income tax expense 430 903
---------- ----------
Net income $ 853 $ 1,776
========== ==========
Net income per common share $ 0.10 $ 0.17
========== ==========
Weighted average shares outstanding 8,720 10,741
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
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Natural MicroSystems Corporation
Consolidated Statements of Cash Flow
(Unaudited)
(In $000)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1997
------ ------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 853 $ 1,776
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 301 632
Gain (loss) on sale of marketable securities 2 (4)
Purchased in-process research and development (131) -
Changes in assets and liabilities:
Accounts receivable (280) (1,756)
Inventories (834) 389
Prepaid expenses and other asset (147) (697)
Income tax receivable 8 (122)
Deferred tax asset 6 -
Accounts payable 1,215 (409)
Accrued expenses and other liabilities (431) (406)
-------- -------
Cash provided by (used in) operating activities 562 (597)
-------- -------
Cash flow from investing activities:
Additions to property and equipment (728) (1,874)
Additions to license agreements - (50)
Purchases of marketable securities (27,086) (8,204)
Proceeds from the sale of marketable securities 369 8,292
-------- -------
Cash used in investing activities (27,445) (1,836)
-------- -------
Cash flow from financing activities:
Payments on capital lease obligations (2) -
Payments on long-term debt (380) -
Payments on government advances (10) -
Proceeds from long-term debt 221 -
Proceeds from bank line of credit 221 -
Proceeds from issuance of common stock 30,892 854
Non-statutory stock options 5 5
-------- -------
Cash (used in) provided by financing activities 30,947 859
-------- -------
Effect of exchange rate changes on cash (74) 8
Net increase (decrease) in cash and cash equivalents 3,990 (1,566)
Cash and cash equivalents, beginning of period 6,729 6,578
-------- -------
Cash and cash equivalents, end of period $ 10,719 $ 5,012
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
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Natural MicroSystems Corporation
Notes to Interim Consolidated Financial Statements
(in $000 except per share data)
A. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1997 and the consolidated
statements of operations and cash flow for the three month periods ending March
31, 1997 and 1996 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
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 dates of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates. The operating results for the
three month period ended March 31, 1997 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, 1996.
B. STOCKHOLDERS' EQUITY:
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Foreign
------------------- Paid In (Accumulated Translation Other
Shares Amount Capital Deficit) Adjustment Equity Total
------------------- ----------- ------------ -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 9,936 $ 99 $ 53,604 $ (926) $ 86 $ 19 $ 52,882
Exercise of common stock options 341 3 853 856
Grant of Non-statutory options 5 5
Net Income for three months
ended March 31, 1997 1,776 1,776
Foreign Translation Adjustment (212) (212)
------------------- ----------- ------------ -------------- -------- -------------
Balance at March 31, 1997 10,277 $ 102 $ 54,462 $ 850 $ (126) $ 19 $ 55,307
=================== =========== ============ ============== ======== =============
</TABLE>
At the Company's Annual Meeting of Stockholders on April 17, 1997, the
Stockholders approved an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of the Common Stock from 15,000 to
45,000.
6
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C. INDEBTEDNESS
At March 31, 1997, the Company had a $2.5 million bank line of credit through
June 1997, all of which was available. Borrowings under the line of credit bear
interest at the bank's prime rate. The Company is subject to covenants
requiring maintenance of certain profitability and equity levels and leverage
and liquidity ratios. At March 31, 1997, 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.
At March 31, 1997, the Company had a 2.0 million French franc line of credit
with a bank for its European operations, all of which was available. 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 the
proceeds of export sales from France. The balance at March 31, 1997 was
$113,000.
D. NET INCOME PER COMMON SHARE
Fully diluted net income per common share is computed based upon the weighted
average number of common shares and common share equivalents outstanding using
the treasury stock method.
The Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" SFAS 128, which modifies the way in which earnings per share (EPS) is
calculated and disclosed. Currently, the Company discloses fully diluted EPS.
Upon adoption of this standard for the fiscal year ending December 31, 1997, the
Company will disclose basic and diluted EPS for fiscal 1997 and will restate all
prior period EPS data presented. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS, similar to fully
diluted EPS, reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. If the Company had adopted SFAS 128 for the three
months ended March 31, 1996 and 1997, basic and diluted EPS would have been as
follows:
<TABLE>
<CAPTION>
For the period ended March 31,
1996 1997
----------------------------------------
<S> <C> <C>
Basic Earnings per Share $0.11 $0.18
Diluted Earnings per Share $0.11 $0.17
</TABLE>
7
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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 the first quarter of 1997 include the results of
Tek-Nique, Inc. and an affiliate (TEKnique), which were acquired by the Company
in June 1996 in a transaction accounted for as a purchase. Prior thereto,
TEKnique was a privately held firm.
Revenues
Revenues of $15.9 million for the three months ended March 31, 1997 ("1997"),
increased 53% percent from $10.4 million for the three months ended March 31,
1996 ("1996"). The increase from 1996 to 1997 was primarily due to shipment of
greater unit volume of AG and VOX and manufacturing license revenues. 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 customers located outside of North America accounted for 30% ($4.7
million) and 41% ($4.3 million) of revenues for 1997 and 1996, respectively.
The dollar increase in revenues for 1997 over 1996 was due to continuing
increases in unit sales primarily to customers in Asia and Latin America. The
percentage decrease in international sales from 1996 to 1997 was attributable to
more rapid growth in the North American market.
Cost of Revenues
Cost of revenues decreased to 36% of revenues in 1997 from 39% in 1996. The
decrease as a percent of revenues for 1997 is primarily attributable to
increased unit sales of AG product having higher margins, higher overall
manufacturing license revenues, and increased overall sales volume without a
corresponding increase in manufacturing overhead. Cost of revenues for 1996
were reduced from sales to a European customer with lower margins associated
with a system contract.
Selling, General and Administrative
Selling, general and administrative expenses increased 47% to $4.5 million for
1997 from $3.1 million for 1996 and were 28% of total revenues for 1997 versus
30% in 1996. These increases were due to costs associated with increased
selling activity as well as increased expenditures for marketing, international
operations, and technical support. 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 60% to $3.3 million for 1997
from $2.1 million for 1996, and were 21% of total revenues for 1997 versus 20%
in 1996. The increases were due to increased personnel and development project
related costs for both periods and the acquisition of TEKnique whose personnel
are predominantly engaged in technical functions. 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 1997 and 1996 was $309,000 and $78,000, respectively,
reflecting increased interest income from higher cash balances as a result of
the Company's February 1996 follow-on stock offering.
Income Tax Expense
Income tax expense of $903,000 and $430,000 for 1997 and 1996, 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, income tax credits and the
effect of net operating loss carry forwards.
8
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Operating and Net Income
As a result of the foregoing, operating income was $2.4 million and $1.3 million
for 1997 and 1996, respectively. Net income was $1.8 million and $853,000 for
the same periods, respectively.
Liquidity And Capital Resources:
Cash (used in) provided by operations for 1997 and 1996 was ($597,000) and
$562,000, respectively. Cash was used in 1997 due to increased accounts
receivable associated with increased revenues and decreases in accounts payable
and prepaid and accrued expenses, offset by increased net income and
depreciation and a reduction in inventories. Cash was provided by operations
in 1996 from increased net income and accounts payable offset by increased
accounts receivable and inventory and a reduction in accrued expenses.
Cash used in investing activities for 1997 and 1996 was $1.8 million and $27.4
million, respectively. For both periods cash was used to purchases of property
and equipment, and for 1996 marketable securities were purchased using proceeds
from the follow-on stock offering.
Cash provided by financing activities in 1997 and 1996 was $859,000 and $30.9
million, respectively. The increase in 1996 was due to proceeds from the
Company's follow-on stock offering of approximately $30.3 million, net of costs
of $2.4 million; and exercise of warrants of $585,000.
Current assets at March 31, 1997 were $54.3 million, 1% more than current assets
of $53.9 million at December 31, 1996. Current liabilities at March 31, 1997
were $8.5 million, 11% less than current liabilities of $9.4 million at December
31, 1996.
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, 1997. 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.
Other
The Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" SFAS 128, which modifies the way in which earnings per share (EPS) is
calculated and disclosed. Currently, the Company discloses fully diluted EPS.
Upon adoption of this standard for the fiscal year ending December 31, 1997, the
Company will disclose basic and diluted EPS for fiscal 1997 and will restate all
prior period EPS data presented. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS, is similar to fully
diluted EPS, reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.
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
9
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report on Form 10-K for the year ended December 31, 1996. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
10
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PART II - OTHER INFORMATION
ITEMS 1 - 3
Not applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders
On April 17, 1997, the Company held its Annual Meeting of Stockholders. The
matters considered at the meeting consisted of the following:
1. Election of Robert P. Schechter and Ronald W. White as directors for a three
year term. The results of the voting were as follows:
<TABLE>
<CAPTION>
Number of Shares
Withhold
For Against Authority
-------------------------------------
<S> <C> <C>
Robert P. Schechter 8,623,832 78,588
Ronald W. White 8,623,832 78,588
</TABLE>
2. Approval of an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of the Common Stock from 15,000,000 to
45,000,000.
<TABLE>
<CAPTION>
Number of Shares
Withhold Broker
For Against Authority Non-votes
---------------------------------------------------
<S> <C> <C> <C>
6,008,348 2,685,222 8,450 400
</TABLE>
ITEM 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
The Company filed a Form 8-K dated April 24, 1997 regarding
Item 4 Change in Registrant's certifying accountants.
11
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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 9, 1997 By: /s/ Robert P. Schechter
-----------------------
Robert P. Schechter
President and Chief Executive Officer
Dated: May 9, 1997 By: /s/ John F. Kennedy
-------------------
John F. Kennedy
Chief Financial Officer
12
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Natural MicroSystems Corporation
Exhibit Index
<TABLE>
<CAPTION>
Page
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<S> <C>
No. 11.1 Statement of Computation of Earnings Per Share 14
No. 27.1 Financial Data Schedule
</TABLE>
13
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Natural MicroSystems Corporation
Exhibits
No. 11.1 Statement of Computation of Earnings Per Share
(In $000 except per share data)
<TABLE>
<CAPTION>
3 Months Ended
--------------
March 31, 1996 March 31, 1997
-------------- --------------
<S> <C> <C>
Net Income $ 853 $ 1,776
============== ==============
Weighted average common shares 7,902 10,107
outstanding
Common shares attributable to
dilutive options and warrants 818 634
-------------- --------------
Weighted average shares 8,720 10,741
============== ==============
Net income per share $ 0.10 $ 0.17
============== ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,012
<SECURITIES> 26,639
<RECEIVABLES> 15,596
<ALLOWANCES> 711
<INVENTORY> 4,962
<CURRENT-ASSETS> 53,964
<PP&E> 8,978
<DEPRECIATION> 3,763
<TOTAL-ASSETS> 64,102
<CURRENT-LIABILITIES> 8,475
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 19
<TOTAL-LIABILITY-AND-EQUITY> 64,102
<SALES> 15,868
<TOTAL-REVENUES> 15,868
<CGS> 5,644
<TOTAL-COSTS> 5,644
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 2,679
<INCOME-TAX> 903
<INCOME-CONTINUING> 1,776
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776
<EPS-PRIMARY> 0
<EPS-DILUTED> .17
</TABLE>
