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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1994
[NO FEE REQUIRED]
For the transition period from _________ to _________
Commission File No. 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 incorporation (I. R. S. employer
or organization) identification number)
8 Erie Drive
Natick, Massachusetts 01760
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(Address of principal executive office) (Zip code)
Registrant's telephone number,
including area code: 508-650-1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of class on which registered
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Common Stock, $.01 per share Nasdaq National Market
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 report), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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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 the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this FORM 10K or any amendment to this
FORM 10K. [ ]
As of March 12, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $243 million, based on the
closing price on such date of the registrant's Common Stock on The Nasdaq Stock
Market. As of March 12, 1997, 10,265,560 shares of Common Stock, $.01 par value
per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of (i) the registrant's Annual Report for the fiscal year ended
December 31, 1996 are incorporated into Parts II and IV of this FORM 10K and
(ii) the registrant's Proxy Statement relating to the 1996 Annual Meeting of
Stockholders of the registrant are incorporated into Part III of this FORM 10K.
EXHIBIT INDEX ON PAGE 24
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THE FOLLOWING ARE TRADEMARKS AND TRADENAMES OF THE COMPANY INDICATED.
AG, AGAccess, AG-Real Time, CTAccess, Distributed CTAccess, Diva, FMIC, Fusion,
ME Library, ME/2, ME/X, Multi-Line, Multi-Line Engine Library Series,
NaturalFax, NaturalMedia, NaturalPlatforms, NaturalRecognition, NaturalText,
Open Telecommunications, SwitchPath, Telephony Services Architecture, TSA, TX,
and VBX are trademarks, Alliance Generation and Watson are registered trademarks
and Natural MicroSystems is a trade name of the registrant. Multi-Vendor
Integration Protocol and MVIP are trademarks of GO-MVIP, Inc. T-VOX, VOX-PCT2,
VOX-PCMIC, and SR-VOX are trademarks of, and VOX is a trade name of, VOX S. A.,
a wholly owned subsidiary of the registrant. This Form 10K also includes
references to trademarks and trade names of companies other than the registrant,
including OS/2(R), TouchTone(R), UNIX(R), and WindowsNT(R).
This Form 10K, future filings of the registrant, press releases of the
registrant, and oral statements made with the approval of an authorized
executive officer of the registrant may contain forward looking statements. In
connection therewith, please see the cautionary statements and risk factors
contained in Item 1, "Business - Cautionary Statement" and "Business - Risk
Factors", which identify important factors which could cause actual results to
differ materially from those in any such forward-looking statements.
PART I
ITEM 1. BUSINESS.
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Overview
Natural MicroSystems Corporation (the Company) designs, manufactures and markets
integrated hardware and software products which enable its customers to develop
and implement high value telecommunications and computer telephony applications
and systems based on open, standards-based, client-server architectures,
collectively referred to as Open Telecommunications. Use of the Company's
products permits the direct interaction of such applications and systems with
the public switched telephone networks (PSTN) and public or private data
networks (e. g. the Internet), both domestically and internationally, and with
end-users' internal telephone and data processing systems. The principal
functions provided by the Company's products include connection to and
monitoring of the PSTN and data networks, call switching, call control,
recognition and generation of TouchTone signals, digital encoding and decoding
of voice (store and forward and real-time), integration of mixed media resources
(facsimile, speech recognition and text-to-speech), access to computer-based
information, gateways and protocols to data networks including TCP/IP, PPP, SNA,
X.25, SS7, and the codification, framing and transfer of circuit switched
information over packet switched networks.
The Company's customers are primarily original equipment manufacturers (OEMs),
value added resellers (VARs), independent software vendors (ISVs), and systems
integrators, which incorporate enhanced telephony services in a wide variety of
applications and systems; telephony service providers, which offer services to
commercial or other end-users; and international distributors. These customers,
utilizing the Company's enabling technology products, have developed numerous
applications and systems which automate tasks, enhance productivity, reduce
costs and improve customer service. Such applications and systems are generally
in the areas of voice messaging, automated attendant, interactive voice response
(IVR), specialized switching, call centers and computer telephony integration,
enhanced network services, call and data recording, voice-facsimile, wireless
infrastructure, Internet telephony, intelligent network (IN) and data
integration on local-area and wide-area networks (LANs and WANs). Specific
examples of these applications are telephone banking, medical alert and
prescription services, hotel and hospital information systems, transaction card
authorization, telemarketing, help desks, school bulletin boards, long distance
least-cost routing and bypass, cellular and other wireless switching services,
security monitoring, and automated operator services.
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The Company believes it has been and continues to be a technology leader in Open
Telecommunications. It pioneered the use of digital signal processing chips
(DSPs) for PC-based computer telephony applications with its Watson product,
which was introduced in 1984. DSPs provide the processing power required for
signal computing algorithms used for voice encoding and decoding including
compression and for maintaining high quality tone detection, call management,
speech recognition and other mixed media applications, while minimizing
diversion of the host computer's processing resources. In 1993, based on its
long experience in using DSPs in combination with its own proprietary
algorithms, the Company introduced the Alliance Generation (AG) product line,
which the Company believes is the most powerful, fully-featured, PC-based
enabling technology currently available. The AG product line is fully compatible
with Multi-Vendor Integration Protocol (MVIP), a widely-adopted standard for
interoperability and switching among telephony resources, which was introduced
by the Company in 1990 with the support of other industry participants. See
"Standards". The Company's Telephony Services Architecture (TSA) provides a
framework in which cost-effective Open Telecommunications products can form the
basis for high value applications and systems, which the Company believes are
characterized by one or more of the following attributes:
High capacity and performance
Sophisticated software-based switching capabilities
Mixed media support
Global network interconnection
Support for different programming models and platforms
Open architecture support
TSA is designed to be open, standards-based, layered, operating system-
independent, modular and scaleable. It encompasses telephony hardware, software
and media extension products which build upon the structure of the Company's AG
product line. It is comprised of DSP platforms which provide the developer with
algorithm processing capabilities, software-based switching, and telephone
system protocol interfaces (NaturalPlatforms); media extension software which
allows developers to use facsimile processing, speech recognition and text-to-
speech capabilities (NaturalMedia); and software applications programming
interfaces (APIs) and development tools (NaturalAccess). See "Products".
In November 1995, the Company acquired VOX S. A. and an affiliate (VOX), one of
two significant European-based suppliers of computer telephony enabling
technology products. VOX's customers include some of Europe's leading
telecommunications manufacturers and service providers, including Alcatel
Business Systems and France Telecom.
In June 1996, the Company acquired Tek-Nique, Inc. and an affiliate (TEKnique),
a supplier of enabling technology products for the IN and data communication
networks. TEKnique's customers include Transaction Network Systems, Tellabs
Wireless, and California Microwave.
The Open Telecommunications Market
The first systems which integrated telephony and computer functions to produce
computer telephony applications were introduced in the early 1980s. They were
used primarily by Fortune 500 companies for applications such as voice
messaging, automated attendant. These early systems used proprietary hardware
and software. With the increased performance capabilities and general
acceptance of PCs, two trends began to emerge. The first was a shift from
proprietary hardware to open, standards-based PC architectures, making such
applications significantly more cost-effective. The second was a shift from
central office or centralized computing environments to distributed or client-
server computing architectures. As a result of these trends, application
developers have been able to bring their products to market more quickly and at
lower cost, which has increased the overall demand for Open Telecommunications
products and services.
The market for Open Telecommunications systems has grown substantially since it
began in
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the 1980s. In addition to voice messaging/automated attendant, interactive voice
response, and call centers, the market has expanded to include applications such
as call recording and logging, unified messaging, personal number services,
prepaid calling card systems, international call-back, facsimile-based systems
and Internet telephony. These applications are also increasingly being developed
for wireless environments and other service provider networks. Based upon recent
industry surveys of the traditional computer telephony markets in North America
and Europe, the Company estimates these combined markets to be in excess of $7.0
billion annually at the end-user level. Based on these surveys, the Company
believes that by 1998 these markets will increase to more than $12.0 billion at
the end-user level. The Company further believes that the Latin American and
Asia/Pacific markets will account for substantial additional growth.
The market for Open Telecommunications systems and applications has been
extended from single media (voice) to mixed media applications and systems,
where voice is integrated with facsimile, speech recognition, text-to-speech
and/or data. The market has also been extended by the development of digital
and analog wireless and radio telephony networks, and by the spread of data or
packet switched networks (Internet Protocol or IP networks) with voice or
circuit switched networks, and by the emerging interest of traditional computer
software suppliers such as Microsoft Corporation and Novell, Inc. as they
incorporate telephony functions into their products.
The Company is focused on enabling technology which underlies the entire Open
Telecommunications applications and systems market. This enabling technology
segment may be further divided between open, standards-based commercially
available products of the type offered by the Company and proprietary enabling
components used by some application developers. There is a continuing trend
among developers which use proprietary enabling components to shift to
commercially available enabling technology products rather than continuing to
update their proprietary components. The Company believes the enabling
technology market will experience strong growth due to the expansion of the
overall Open Telecommunications market and the continuing shift from proprietary
components to open, standards-based enabling technology products.
Strategy
The Company's strategy is to expand its business by concentrating product
development and marketing efforts in market segments worldwide which are
characterized by high value applications and systems. The Company will
concentrate its marketing efforts on new entrants to these segments and on
specific potential customers currently using their own proprietary components or
products of the Company's competitors.
The Company's strategy requires that it offer a broad range of enabling
technology products not only for applications and systems in the traditional
computer telephony markets but also for the emerging markets in PC-based or open
infrastructure, Internet telephony, and mixed media. Rather than attempting to
develop all such enabling technologies with its own resources, the Company
designs its products based on interoperability and open standards, including
MVIP and others provided by the Enterprise Computer Telephony Forum (ECTF),
International Telecommunications Union (ITU), etc. In addition, the Company
pursues development, supply and licensing arrangements with companies which have
developed complementary technologies. See "Products" and "Standards".
The following are key features of the Company's strategy:
Focus on High Value Applications and Systems
The Company's objective is to provide its customers with a broad range of
technology tools that will enable them to build applications and systems with
the following characteristics:
High capacity and high performance solutions, enabling customers
to develop highly cost-effective applications and systems to
accommodate large numbers of telephone lines in a single
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P.C. slot, in a single computer chassis or through networked
or multi-chassis systems.
Sophisticated software-based switching, providing developers the
ability to easily and automatically route signals to and
effectively utilize the appropriate system resources.
Mixed media support, enabling developers to build complex
applications and systems incorporating different media types such
as voice, facsimile, speech recognition, text-to-speech, and
data.
Global network interconnection, allowing developers to integrate
their applications and systems into a wide variety of public and
private telephone and data networks using products capable of
functioning with various signaling protocols approved for use in
numerous countries.
Support for different programming models and platforms, allowing
developers to build applications and systems utilizing existing
development skills and tools. The Company's product lines are
also designed to support multiple operating systems.
Support for open architectures, allowing developers to utilize
products or components from multiple vendors, thereby reducing
development time and obtaining the advantages of advances made in
complementary technologies.
Pursue High Growth Markets
The Company is focusing its marketing and business development efforts in areas
where significant growth opportunities exist. These include:
Traditional computer telephony systems and applications. This
market accounts for the majority of the Company's current
revenues. The Company believes the transition of computer
telephony applications (such as messaging, IVR, and call centers)
from proprietary to open represents high growth opportunities.
The Company actively pursues new entrants into these segments and
prospects considering moving to open architectures or from
proprietary systems and from competing vendors' products.
Computer telephony in the network. Systems and applications
which are part of a service provider's network.
Wireless Infrastructure. The Company's products are used by a
number of customers developing next generation wireless networks
for mobility, "in-building" or campus networks, and wireless
local loop applications. The Company's products are used for
routing and switching, transcoding of signals, and computer
telephony applications and systems in wireless environments.
The integration of circuit switched and packet switched networks
(Internet telephony). IP (Internet Protocol) networks are
redefining telephony applications and services. The Company's
products offer a scaleable platform for customers developing
applications such as long distance replacement, world wide
web/call center integration and unified messaging over the
Internet or other private IP networks. In addition, data
applications and the LANs and WANs which support them are being
integrated with telephone networks, as corporate customers seek
to expand their connectivity with vendors, customers and other
business partners, including through the Internet and other
inter-networking technologies. The Company will seek to
capitalize on future growth opportunities in this area.
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Leverage Distribution Partners
The Company provides scaleable, open, modular enabling technology products to a
broad network of OEMs, VARs, ISVs, systems integrators and telephony service
providers for incorporation into the products and services they deliver to end-
users. The Company believes this multi-channel distribution strategy leverages
the significant development, marketing, and distribution expertise of its
customers. The Company intends to expand this network with aggressive investment
in training, communications, and marketing programs.
Exploit International Opportunities
International markets present important opportunities due to their high growth
rates, overall size, and because many of the Company's customers distribute
their products globally. The Company aggressively pursues expansion to new
geographic markets, frequently partnering with local distributors. In 1995, the
Company acquired VOX, significantly increasing the Company's presence in Europe.
The Company uses its technological expertise, open architecture, and familiarity
with international regulatory requirements to obtain the approvals required for
use of its products in principal foreign markets. As of the date hereof, the
Company's products have been incorporated into products sold to end-users in
approximately 40 countries around the world.
Products
The Company's products are integrated hardware and resident software, mixed
media extensions, development tools, and communication protocols which enable
its customers to develop and implement Open Telecommunications applications and
systems. The Company's integrated hardware and software products use DSPs
combined with proprietary and third party algorithms and proprietary control
software to optimize computing power. The products are based upon open
architectures and industry standards such as MVIP, the ISA bus (during 1997 the
Company expects to introduce PCI bus products) and the WindowsNT operating
system, certain UNIX and OS/2 operating systems. The products are interoperable
and scaleable, permitting physical expansion of telephone line capacity without
software modification. The combination of high computing power and open,
standards-based and scaleable features enables developers to efficiently produce
applications with high quality speech and other high performance functions. The
Company's platform products consist of printed circuit boards containing DSPs,
analog or digital telephone network interfaces, memory, DSP algorithms,
communications protocols, and other software.
Telephony Services Architecture (TSA), the Company's overall product
architecture, is open, standards-based, layered, operating system-independent,
modular and scaleable. The Company believes TSA saves developers time and
effort when developing sophisticated applications and systems. The elements of
TSA include: the Company's integrated hardware and software platforms which are
referred to collectively as NaturalPlatforms; mixed media extensions for
facsimile, speech recognition and text-to-speech, referred to collectively as
NaturalMedia and including NaturalFax, NaturalRecognition and NaturalText; and a
software product line called NaturalAccess, an API for telephony applications.
The relationship between various elements of TSA are shown in the following
illustration.
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TELEPHONY SERVICES ARCHITECTURE
<TABLE>
<CAPTION>
Product Families Functions Key Products
- -----------------------------------------------------------------------------------
<S> <C> <C>
NaturalAccess ~ Application Programming ~ AGAccess
Software Development Interfaces ~ CTAccess
Environments ~ Development Tools
~ Switching Software
~ Libraries
- -----------------------------------------------------------------------------------
NaturalMedia ~ Facsimile ~ NaturalFax
Mixed Media Extensions ~ Speech Recognition ~ NaturalRecognition
~ Text-to-Speech ~ NaturalText
- -----------------------------------------------------------------------------------
NaturalPlatforms ~ Digital Signal Processing ~ AG T1/E1
DSP Hardware & Software ~ Switching ~ TX-2000/3000
~ Network Interface ~ AGConnect
~ IP network routing ~ QUATTRO-VOX
- -----------------------------------------------------------------------------------
</TABLE>
NaturalPlatforms
NaturalPlatforms are integrated hardware and software products with DSP
resources, telephone network interface technology, and a software-based
switching fabric. The principal product line within NaturalPlatforms is the
AG family.
The Alliance Generation
Introduced in 1993, the AG family consists of 10 full-function configurations,
including 4 platform or "mother" boards. Each AG mother board includes
connectors for a "daughter" board which either expands the number of ports or
adds mixed media functionality. AG platforms use powerful DSPs characterized by
the capacity to process multiple tasks, including dynamic allocation of ports,
on each DSP. Each AG product includes an Intel x86 family co-processor which
controls the assignment of DSP functions and minimizes diversion of the host
processor. AG products which do not include on-board telephone network
interfaces are deployed with analog or digital network interface cards. All AG
products include an MVIP interface which provides a switching fabric and the
capability to inter-operate with third party MVIP compliant products.
The AG-8 provides call processing for up to eight analog network interfaces and,
as is the case with all AG mother board products, a single chip implementation
of the MVIP circuit called the Flexible MVIP Interface Circuit (FMIC). The list
price for an AG-8 is $2,495. The AG-T1/E1 provides T1 (24 port) or E1 (30
port) service and is configured with an on-board digital network interface, thus
saving one board slot for T1 or E1 service at a list price of $5,995 for T1
and $6,495 plus a $750 protocol runtime license for E1. Using a combination of
an AG-24/30 mother board and a daughter board, the Company offers dual T1 and
dual E1
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configurations at list prices of $11,200 and $12,850 (plus a $1,500
protocol runtime license for E1), respectively, each utilizing only two slots
in the host PC chassis.
The Company offers a series of daughter boards in the AG product line. The DB-51
serves either to increase the number of ports on AG platforms or to provide
increased processing power for other third party algorithms. The AG-Real Time
allows up to 24 lines of transcoding of wireless signals or real-time
compression of voice for packetizing for transport to an IP router for Internet
telephony applications on a low latency board. The Diva I and II daughter
boards, mixed media extension enabling platforms, provide the means to implement
high capacity speech recognition and text-to-speech capabilities by providing
additional DSP resources in AG products. These capabilities are currently being
implemented on the Diva under licenses granted by Voice Control Systems, Inc.
(speech recognition) and Centigram Communications Corporation (text-to-speech).
The DB-51, the AG-Real Time and the Diva I and II have list prices of $3,100,
$8,995, $2,500 and $2,500, respectively.
Network Interfaces
Additional products within the NaturalPlatforms product family include analog
line and station interface boards (AGConnect) for between six and 24 lines with
list prices ranging from $1,850 to $4,195. The Company has implemented the MVIP
multi-chassis standard on its own MC-1 platform for multi-chassis switching with
a list price of $1,795. The MC-1 platform also has a development kit for
implementation of the MVIP multi-chassis standard with a list price of $3,495.
NaturalMedia Extensions
To support mixed media applications, the Company provides facsimile, speech
recognition and text-to-speech conversion technologies through integration of
the following NaturalMedia extension products with NaturalPlatforms:
NaturalFax
NaturalFax is a software-only extension to the Company's
platforms. Applications include fax-back order confirmation,
inquiry response and facsimile broadcasting. NaturalFax lists at
$250 per port for VBX platforms and $375 for AG platforms.
NaturalRecognition
NaturalRecognition is a software extension to the AG platform
line which is implemented on the Diva daughter board pursuant to
a license granted by Voice Control Systems, Inc. Applications
using this technology provide, among other things, speaker
identification and an alternative to TouchTone input.
NaturalRecognition has a list price of $850 per port.
NaturalText
NaturalText is a software extension to the AG platform line
offered by the Company which is implemented on the Diva Daughter
Boards pursuant to a license granted by Centigram Communications
Corporation. Applications include telephone access to e-mail,
stored facsimile messages, or other data. The Company offers
NaturalText at a list price of $875 per port.
NaturalAccess Software
The Company offers and is developing a variety of software APIs and development
tools to facilitate the development of open telecommunications systems and
applications. These tools allow developers, working with common programming
languages and different programming models, independent of host platforms and
operating systems, to incorporate computer telephony functionality without
writing low-level code. The TSA elements in this layer are:
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AGAccess
AGAccess, is a platform level software development tool set for
applications and systems using AG products. It is comprised of
APIs, software libraries and device drivers which when used with
AG products frees application developers from the task of
incorporating platform and telephone network control from the
host processor and application software. AGAccess supports
multiple programming models and is available in WindowsNT,
certain UNIX and OS/2 versions. AGAccess development kits are
available at a list price of $1,195 and run-time licenses are
available at a list price of $225 per platform.
CTAccess
CTAccess, which is currently in beta test, is an advanced
development kit that includes AGAccess plus interfaces to other
platforms, MVIP switching and mixed media extensions. CTAccess is
a layered development toolkit for OEMs, VARs and systems
integrators that build applications and systems using media other
than that available on AG products and third party APIs. CTAccess
development kits are available at a list price of $1,995 and run-
time licenses are available at a list price of $225 per platform.
TX2000/3000 Platforms
The TX2000/3000 are hardware platforms for data communications and networking
applications with a number of protocols, including SS7, X.25, TCP/IP and SNA.
The TX2000/3000 are MVIP compliant, require a single slot, and configurable
network interface protocols including dual T1/E1, Ethernet, and V.24 and V.35.
The TX2000/3000 is available at list prices of $2,375 to $8,450 dependent on
configuration and protocol selected.
Fusion
The Company believes that the Fusion platform, introduced in December of 1996,
is the first enabling technology product for IP telephony also referred to as
"voice over the Internet". Fusion provides developers with the scaleability,
openness and programmability required for building server-based Internet
telephony applications. Fusion is MVIP compliant and comprised of a set of
integrated hardware and software platforms with a Windows-NT based set of APIs.
Fusion is comprised of three existing products - the AG-T1/E1 or AG-8, an AG-
Real Time, and the TX2000/3000.
Since each of Fusion's components contain on board processors, the host PC
processor is freed up to run IP telephony applications. Using Fusion's AG-Real
Time, compressed speech does not use host PC resources, including memory, CPU or
communications bus, reducing latency. Additionally, Fusion is programmable
allowing it to be updated to support emerging industry software standards for
Internet telephony without a requirement to change hardware.
Other Platform and Software Products
Other products of the Company which are compatible with, but not designated as
being within, TSA, include the following:
VBX Platforms
The first multi-line VBX product was introduced in 1989. VBX products utilize
one DSP per port for both signal processing and call control functionality and
are available from one port (VBX 100) to twelve ports (VBX-1200) at list prices
from $385 to $3,495. AG products outperform VBX products for some applications,
especially in higher capacity (8 or more ports) and mixed media applications.
The Company believes, however, that VBX products remain competitive for
applications requiring one to four ports and there are a significant number of
developers who have developed applications and tool-sets which use VBX products.
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ME Library Software & Switchpath
The Company's original software development tool set is the Multi-Line Engine
Library Series (ME Library), available for both OS/2 and multiple versions of
UNIX under the names ME/2 and ME/X, respectively. For applications which
require switching functionality under ME/2 and ME/X, the Company has developed a
switching software package, SwitchPath, which can utilize any MVIP-compliant
interface to switch calls between media resources and between network interfaces
without additional hardware. SwitchPath has a list price of $3,000. The
Company provides software development kits and charges run-time fees on a per
product and per platform basis, ME/2 and ME/X development kits are available at
a list price of $1,195 and ME run-time licenses are listed at $225 per platform.
The VOX Product Line
The VOX product line is compatible and complementary with the AG product line.
Common characteristics include the use of DSPs, open standards-based
architecture, interoperability, MVIP compliance and scaleability. VOX products
complement the Company's product lines by offering cost-effective
implementations of one, two and four port capacities.
The VOX line includes several voice platforms, each with basic call processing
capability, and each available in one, two, four, eight and sixteen port
versions (e.g., four port QUATTRO-VOX). SR-VOX is a platform for supporting
four analog telephone network interfaces combined with speaker independent
speech recognition software, echo-cancellation and word spotting functionality.
T-VOX is a voice processing platform with E1 connectivity with the ability to
support up to 60 lines of switching. VOX-PCT2 and VOX-PCMIC are network
interface cards connecting primary rate access lines to an MVIP switch fabric.
VOX-PCT2 supports E1 using ISDN signaling and channel associated signaling, on a
PSTN. VOX-PCT2 and VOX-PCMIC are MVIP compatible and fully support MVIP
switching. List prices for SR-VOX, VOX-PCT2 and VOX-PCMIC are $8,000, $5,300,
$4,047 and $4,672, respectively.
All of the Company's products, including VOX products, are discounted for volume
purchases. Prices for all VOX products set forth above have been converted from
French francs to United States dollars based on current exchange rates.
Standards
The Company develops its products to support industry standards such as MVIP,
ISA and PCI buses, protocols approved by the ITU and American National Standards
Institute (ANSI), and application programming interfaces such as Telephony
Application Programmer Interface (TAPI) from Microsoft Corporation and ECTF.
The Company was one of the original promoters of MVIP, a widely-adopted standard
for interoperability and switching among computer telephony resources, including
network line interfaces, voice, facsimile, speech recognition, text-to-speech,
video and data.
Customers and Applications
In support of its standards work, the Company participates in GO-MVIP, the ECTF,
the Asynchronous Transfer Mode Forum, Asymmetric Digital Subscriber Line Forum,
Intelligent Network Forum, the International Multimedia Telecommunications
Consortium, PCI Industrial Computer Manufacturers Group and Internet Telephony
Interoperability Consortium. In addition, a number of its employees are members
of the Institute of Electrical and Electronic Engineers and Association for
Computing Machinery and the Company monitors the activities of the ITU, ANSI and
Telecommunications Industry Association.
Customers
The Company has developed strong relationships with a diverse array of
customers, including OEMs, VARs, ISVs, systems integrators, telephony service
providers and international distributors. The following chart lists
representative customers with which the Company has such relationships by the
type of applications and systems each create using the Company's enabling
products.
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<TABLE>
<CAPTION>
Call Centers and
Voice Messaging Interactive Voice Computer Telephony
and Automated Attendant Response Integration
- ---------------------------- ------------------------- -----------------------------
<S> <C> <C>
Aspect Telecommunications
Boston Technology Alcatel Business Systems Computer Talk Technology
Centigram Communications Edify Information Access Technology
Cortelco Systems Map Mobile Communications Ontario Systems
Fujitsu Sandata
Informserve TALX
Wildfire Communications
Enhanced Network
Services Wireless Infrastructure Specialized Switching
- ---------------------------- ------------------------- -----------------------------
Atlas Telecom Ericsson Hammer Technology
Cyberlog Tellabs Wireless Homisco
France Telecom Telos Magnasync
Incomm Uniden America Science Dynamics
Tecnet Teleinformacia
Volt Delta Resources
Internet/Intranet Systems Integrators
Call and Data Recording Systems Distributors
- ---------------------------- ------------------------- -----------------------------
Kreutler Alphanet Telecom Cap Sesa Telecom
Stancil Intertel Nippon Telephone and
TISL Lucent Technologies Telegraph International
Netcentric
Netiphone
</TABLE>
The customers appearing in the above chart accounted in the aggregate for
approximately 56% of the Company's total revenues in 1996.
During 1996, one customer, Centigram Communications Corporation accounted for
13.9% of the Company's revenue. During 1994 and 1995 one customer, Alcatel
Business Systems (Alcatel), accounted for 13.3% and 11.9%, respectively, of the
Company's revenue. For 1994, 1995, and 1996, substantially all revenues from
Alcatel were manufacturing license revenues. The Company currently receives
manufacturing license revenue from another customer and may from time to time
grant manufacturing rights to certain customers.
Developer support, which the Company recognizes as an important element in
maintaining and enhancing customer relationships, is provided by a customer
support group of 13 employees located at the Company's Natick, MA, Antwerp,
Belgium, Hong Kong, Buenos Aires, Argentina, and Paris, France facilities.
These employees assist customers in the development of their products by
providing advice and solutions, not only with respect to the Company's products
but also regarding telephone networks and complementary technology and products.
Sales, Marketing and Distribution
The Company focuses its sales and marketing efforts on OEMs, VARs, ISVs, systems
integrators, telephony service providers and international distributors. The
Company markets its products in North America through a sales and marketing
organization of 35 employees, 23 of whom are located at the Company's
headquarters in Natick, and the others in regional sales offices located in
Atlanta, GA, Dallas, TX, Schaumburg, IL, Los Angeles and San Jose, CA, and
Vienna, VA. The Company markets its products outside North America through
a direct sales and support organization of 20 employees and through
international distributors. The Company has European, Latin American and Asian
subsidiaries, with direct sales offices in Paris, Buenos Aires, Frankfurt,
Germany and Hong Kong. These offices are responsible for
11
<PAGE>
developing customers, including distributors, and for providing customer and
sales support. The Company markets its products in Japan through a distribution
relationship with Nippon Telephone and Telegraph. The Company believes that its
international presence enhances its ability to sell its products and to obtain
necessary regulatory approvals for the interconnection of the Company's products
to foreign telephone networks under applicable government electrical safety
standards and signaling protocols. The Company's current product lines have been
incorporated into products sold to end-users in approximately 40 foreign
countries, including Brazil, France, Germany, Japan, the United Kingdom and
China. During 1996, 31.1% of the Company's revenues were from sales outside
North America, including approximately 24.9% from sales to customers in Europe.
Competition
The market for the products of the type supplied by the Company is highly
competitive. The Company has numerous competitors whose products compete with
one or more of the Company's products. The products of one competitor, Dialogic
Corporation, which is larger than the Company and has greater resources
available to it, compete directly against the Company's full range of products.
As the Company enters new markets, it expects to encounter competition from
additional competitors, some of which may have greater resources than the
Company. In addition, certain large applications and systems developers use
their own proprietary computer telephony enabling components as an alternative
to purchasing commercially available products such as those sold by the Company.
The principal factors affecting competition in Open Telecommunications enabling
technology include reliability, scalability, ease of use, price/performance,
port capacity, quality, network and call management, the ability to accommodate
customer requirements, service, support, engineering expertise, regulatory
approval, and product availability. The Company believes that it currently
competes favorably with respect to these factors.
Research and Development
The Company believes that extension and enhancement of existing products,
development of new products and support of joint product development activities
are critical to its future success. During 1994, 1995, and 1996, the Company
spent $4.3, $6.9 and $10.3 million, respectively, on research and development,
equal to 19.2%, 20.9% and 20.1%, respectively, of its revenues for such years.
The Company's current research and development is conducted by 98 employees
located at its headquarters in Natick, and in Schaumburg and Paris. The
Company's current research and development is focused on NaturalAccess software,
NaturalPlatforms, NaturalMedia extensions, network integration, multi-chassis
switching, internationalization of products, data communications and intelligent
network protocols and platforms and new low cost architectures.
Operations
The Company's manufacturing operations consist primarily of quality control and
testing of completed products. In each of North America and Europe, the Company
relies on a single ISO 9002 certified contract manufacturer to assemble printed
circuit boards of the VBX, AG and VOX product lines. The TX product family is
assembled in North America by a qualified contract manufacturer who is not yet
ISO 9002 certified. In each case the Company has identified a second source for
assembly of its circuit boards, but if any of its current manufacturers became
unable or unwilling to manufacture such boards, the process of transitioning to
an alternative manufacturer would take up to several months which could have a
short-term adverse effect on the Company's business. During 1996, the Company
received ISO 9002 certification for its Natick facility.
The Company seeks to use industry standard components for its products. Many of
these components are generally available from multiple sources; however, certain
custom integrated circuits and other devices which are components on one or more
of the Company's products are acquired by the Company from single-source
suppliers. Although the Company believes it
12
<PAGE>
could develop other sources for each of these custom devices, the process could
take several months, and the inability or refusal of any such sources to
continue to supply devices could have a material adverse effect on the Company
pending the development of an alternative source.
Intellectual Property
The Company's success is dependent upon proprietary technology. The Company has
no patents and depends primarily upon a combination of copyrights and
restrictions on access to its trade secrets to protect its proprietary rights.
The Company distributes its software products under license agreements which
grant customers a non-exclusive license to use the software and contain certain
terms and conditions prohibiting its unauthorized reproduction or transfer. In
addition, the Company generally enters into confidentiality agreements with its
employees and limits access to its proprietary information. Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of the Company's products or to obtain information that the Company regards as
proprietary. The laws of some foreign countries in which the Company sells or
may sell its products do not protect the Company's proprietary rights in the
products to the same extent as do the laws of the United States and France. The
Company believes that, due to the rapid pace of innovation within the industry
in which it participates, factors such as the technological and creative skills
of its personnel and ongoing reliable product maintenance and support are more
important in establishing and maintaining a leadership position within the
industry than are the various legal protections for its technology. There can
be no assurance that the steps taken by the Company to protect its proprietary
rights will be adequate to prevent the misappropriation of its technology or the
independent development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims. If infringement is alleged, there can be no
assurance that the Company would prevail or that any necessary licenses would be
available on acceptable terms, if at all. In any event, patent and other
intellectual property litigation can be extremely protracted and expensive.
The Company depends upon development, supply, marketing, licensing and other
relationships with companies for complementary technologies necessary for the
Company to offer a broad range of products. These relationships are generally
non-exclusive and terminable at will, and there can be no assurance that the
Company will be able to maintain these relationships or to initiate additional
similar relationships.
Employees
As of December 31, 1996, the Company had 221 full-time employees, including 43
in sales, 16 in marketing, 98 in research and development, 13 in developer
support, 22 in operations and 29 in administration and finance. None of the
employees is represented by a labor union. The Company has never experienced a
work stoppage and considers its relations with its employees to be good.
Cautionary Statement
When used anywhere in this Form 10K 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", "are expected to", "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. 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. The Company cautions readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Readers are advised that the various risk factors described below in this
Form 10K could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to
13
<PAGE>
future periods in any current statements. 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 events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Risk Factors
Variations in Operating Results. The Company's results of operations have varied
- -------------------------------
from quarter to quarter and, in recent quarters, approximately half of the
quarterly revenues have been received in the final month. These variations
result from a number of factors, including timing of customer orders,
adjustments of delivery schedules to accommodate customer or regulatory
requirements, availability of components from suppliers, timing and level of
international sales, mix of products sold, and timing and level of expenditures
for sales, marketing and new product development. The Company has historically
operated with little backlog and substantially all of its revenues in each
quarter have resulted from orders received in that quarter. If short-term
demand for the Company's products declines, or if the Company is unable to
secure adequate materials from its suppliers, the Company's results of
operations for that quarter could be adversely affected. No assurance can be
given that these quarterly variations will not occur in the future and,
accordingly, the results of any one quarter may not be indicative of the
operating results for future quarters.
Competition. The market for products of the type supplied by the Company is
- -----------
highly competitive. The Company has numerous competitors whose products compete
with one or more of the Company's products. The products of one competitor,
Dialogic Corporation, which is significantly larger than the Company and has
significantly greater resources available to it, compete directly against the
Company's full range of products. As the Company enters new markets, it expects
to encounter competition from additional competitors, some of whom may have
greater resources than the Company. In addition, certain large applications and
systems developers use their own proprietary computer telephony enabling
components as an alternative to purchasing commercially available products such
as those sold by the Company.
Market Acceptance of Products; Technological Changes. The market for the
- ----------------------------------------------------
Company's products is characterized by rapidly changing technology, evolving
industry standards, and frequent new product introductions. The Company's near
term success and future growth is substantially dependent upon continuing market
acceptance of its products. The Company's future success will in large part
depend on its continued ability to enhance its existing products and to develop
new products to meet changing customer requirements and emerging industry
standards. There can be no assurance that the Company will successfully develop
new products and enhancements, including its NaturalAccess software line, Quad
T1, IP telephony, and SS7 products, on a timely basis or that such products and
enhancements will achieve market acceptance. Delay in the development of these
products and enhancements or their failure to achieve market acceptance could
adversely affect the Company's business. In addition, there can be no assurance
that products or technologies developed by others will not render the Company's
products or technologies noncompetitive or obsolete.
One computer telephony industry standard which has emerged over the last several
years is MVIP, an architecture for interoperability and switching, of which the
Company was the primary developer. Although a substantial number of products are
based on MVIP, a competing architecture for interoperability, Dialogic
Corporation's Signal Computing System Architecture (SCSA), has been introduced
and others may emerge. There is currently a standards effort to unify suppliers
of both enabling products and applications developers under the ECTF which the
Company participates in. There can be no assurance that SCSA or another
architecture will not supercede MVIP, which could adversely affect the Company's
business.
14
<PAGE>
Integration of VOX and TEKnique Operations. The successful integration of the
- ------------------------------------------
operations of VOX and TEKnique, respectively, which were acquired in November
1995 and June 1996 respectively, with those of the Company will continue to
require, among other things, the coordination of the respective product
offerings of the Company and both VOX and TEKnique and related sales, marketing,
development and administrative activities. There can be no assurance that the
Company will not encounter unexpected difficulties in such integrations or that
the expected benefits will be realized. Any unexpected delays or costs incurred
in such integration could have a material adverse effect upon the Company.
Limited Protection of Proprietary Technology. The Company's success is
- --------------------------------------------
dependent upon proprietary technology. The Company currently has no patents and
protects its technology primarily through copyrights and trade secrets. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent the misappropriation of its
technology or the independent development by others of similar technology.
Although the Company believes that its products and technology do not infringe
on any existing proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims. If infringement is alleged,
there can be no assurance that the Company would prevail or that any necessary
licenses would be available on acceptable terms, if at all. In any event,
patent and other intellectual property litigation can be extremely protracted
and expensive.
Dependence on Market Success of Third Parties; Significant Customers. The
- --------------------------------------------------------------------
Company's customers are primarily OEMs, VARs, systems integrators, telephony
service providers, and international distributors. The Company's revenues are
dependent upon the ability of its customers to develop and sell computer
telephony applications and systems to end-users. Factors affecting the ability
of the Company's customers to develop and sell their products include
competition, regulatory restrictions, patent and other intellectual property
issues, and overall economic conditions. One customer accounted for 13.9% of the
Company's revenues in 1996. A second customer accounted for 13.3%, and 11.9% of
the Company's revenues in 1994 and 1995, respectively, but less than 10% in
1996. There can be no assurance that these customers will continue to purchase
similar volumes of the Company's products.
Dependence on Outside Suppliers and Contract Assembly Manufacturers. The
- -------------------------------------------------------------------
Company relies on various suppliers of components for its products. Many of
these components are standard and generally available from multiple sources.
However, certain custom integrated circuits and other devices which are
components of one or more of the Company's products are acquired by the Company
from single source suppliers. Although the Company believes it could develop
other sources for each of these custom devices, the process could take several
months, and the inability or refusal of any such source to continue to supply
devices could have a material adverse effect on the Company pending the
development of an alternative source. The Company also currently relies on a
single contract manufacturer to assemble printed circuit boards for its European
operations. The Company also currently relies on two sole source contract
manufacturers to assemble printed circuit boards for each of its North American
computer telephony and intelligent network operations. Although a number of
such contract manufacturers exist, the interruption or termination of the
Company's current manufacturing relationships could have a short-term adverse
effect on the Company's business.
Risks Associated with International Operations. The Company's sales to customers
- ----------------------------------------------
outside North America accounted for 31.1% of the Company's revenues in 1996. In
addition, the Company believes that a material portion of its domestic sales
ultimately result in the use of the Company's products outside North America.
Accordingly, a significant portion of the Company's revenues are subject to the
risks associated with international sales. The Company has significant assets
denominated in French currency and has denominated a significant portion of its
sales in foreign currencies. Further, customers generally evaluate the purchase
of the Company's products based on the purchase price expressed in the
customer's currency. Therefore, changes in foreign currency exchange rates may
adversely affect the sale of the
15
<PAGE>
Company's products. The Company does not currently engage in currency hedging
transactions to offset the risks associated with variations in currency exchange
rates. In addition, international markets have different regulatory environments
than those of the United States, and the Company is required to obtain approval
for its products prior to their use in other countries. There can be no
assurance that changes will not occur in such regulations or that, if such
changes occur, the Company will be able to continue to sell its products into
the affected markets. In addition, the Company's international business may be
adversely affected by risks such as political instability, trade and tariff
regulations, difficulty in obtaining export licenses, difficulties or delays in
collecting accounts receivable, and difficulties in staffing and managing
international operations.
Dependence on Key Personnel. The Company is highly dependent on certain key
- ---------------------------
executive officers and technical employees, the loss of any of whom could have
an adverse impact on the future operations of the Company. In addition, the
Company may need to hire additional skilled personnel to support the continued
growth of its business and the market for skilled personnel, especially those
with the technical abilities required by the Company, is currently very
competitive. There can be no assurance that the Company will be able to retain
its existing personnel or attract additional qualified employees.
16
<PAGE>
ITEM 2. PROPERTIES.
-----------
The Company's headquarters are located in Natick and consist of approximately
45,000 square feet of space under three leases, two of which expire in December,
1997 and a third in May 1997. Base rent in 1996 for the Natick headquarters was
approximately $340,000. The Company plans to move its headquarters in May 1997
to a 100,000 square foot building currently under construction in Framingham, MA
under a 15 year lease. Annualized base rent for this facility will be
approximately $893,000 initially, increasing to $1.4 million in year 15.
The Company's main European facilities are located in Paris and consist of
approximately 10,600 square feet of space under a lease expiring November 1998
with an extention option to January 2001. Base rent in 1996 was approximately
$118,000. The Company's Schaumburg, IL facilities consist of approximately
10,000 square feet of space leased until the year 2000 with an option to extend
to January 2004. Annualized base rent in 1996 was approximately $75,000.
The Company also leases and occupies sales offices in Atlanta, Dallas, Los
Angeles and San Jose, Schaumburg, Vienna, VA, Buenos Aires, Frankfurt and Hong
Kong. The North American leases are short term. Frankfurt's lease expires in
1999, Hong Kong in 1998, and Buenos Aires in 1999. The Company believes that its
facilities are adequate for its current needs and that suitable space will be
available as needed in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
------------------
The Company is not party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
------------------------------------------------------
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
----------------------------------------------------------------------
Information in response to this item appears under the Caption "Selected
Financial Information" of the Company's Annual Report for the year ended
December 31, 1996, which is incorporated herein by reference.
As of March 12, 1997 the Company had 160 shareholders of record.
The Company has never declared or paid cash dividends on its Common Stock. Prior
to its acquisition by the Company, VOX paid dividends on its common stock. See
the "Consolidated Financial Statements" presented in the Company's Annual Report
for the year ended December 31, 1996, which is incorporated herein by reference.
The Company currently intends to retain all earnings for the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. The Company's existing bank line of credit
agreement contains restrictions limiting the ability of the Company to pay
dividends. See Note 9 of Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" of the Company's Annual Report dated
December 31, 1996 which is incorporated herein by reference.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
Information in response to this item appears under the Caption "Selected
Financial Information" of the Company's Annual Report for the year ended
December 31, 1996, which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
- --------------
Information in response to this item appears under the Caption "Management's
Discussion and Analysis of Financial Condition and the Results of Operations" of
the Company's Annual Report for the year ended December 31, 1996, which is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
Information in response to this item is contained in the Company's Annual Report
for the year ended December 31, 1996, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
None
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
Directors. The information in response to this item appearing under the caption
"Election of Directors" of the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held April 17, 1997; is incorporated herein by reference.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert P. Schechter 48 President, Chief Executive Officer and
Chairman
of the Board of Directors
Ronald J. Bleakney 51 Senior Vice President of North American Sales
Charles T. Foskett 53 Senior Vice President of International
Operations
and Director
R. Brough Turner 50 Senior Vice President of Technology
Allen P. Carney 46 Vice President of Marketing
John F. Kennedy 48 Vice President of Finance, Chief Financial
Officer, and Treasurer
George D. Kontopidis, Ph.D. 43 Vice President of Engineering
John L. Tincler 64 Vice President of Operations
</TABLE>
ROBERT P. SCHECHTER has been President and Chief Executive Officer and a
Director of the Company since April 1995. He has been Chairman of the Board of
Directors since March 1996. From 1987 to 1994, Mr. Schechter held various
senior executive positions with Lotus Development Corporation and from 1980 to
1987 he was a partner with Coopers and Lybrand LLP. Mr. Schechter is also a
director of MRS Technology, Inc., a developer and manufacturer of steppers for
flat panel displays, Infinium Software Inc., a developer of enterprise-level
business software applications, and Raptor Systems, Inc., a developer of
Internet security systems.
RONALD J. BLEAKNEY has been Senior Vice President of North American Sales of the
Company since December 1995 and was Vice President of Sales and Marketing from
1990 to December 1995. From 1989 to 1990, he was national sales manager of
Raytheon Company's Equipment Division. From 1988 to 1989, Mr. Bleakney held
various positions with Pixelogix, Inc., a developer of video digitizers,
including that of president.
CHARLES T. FOSKETT, a co-founder of the Company, has been its Senior Vice
President of International Operations since May 1995. He has been a Director
since 1983. From July 1991 to May 1995 he was Chairman of the Board of
Directors and Vice President of International Operations. From 1984 to 1991, he
was President and Chief Executive Officer of the Company. From 1970 to 1983, he
held various positions at DigiLab, a division of Bio-Rad Laboratories, Inc.
which manufactures analytical and biomedical instruments (DigiLab), serving as
its president from 1977 to 1983.
R. BROUGH TURNER, a co-founder of the Company, has been Senior Vice President of
Technology since 1994. He was Senior Vice President of Operations from 1983 to
1994 and was Treasurer from 1983 to May 1995. From 1977 to 1983, Mr. Turner was
manager of data systems development at DigiLab.
19
<PAGE>
ALLEN P. CARNEY has been Vice President of Marketing since April 1996. From 1992
to 1996 Mr. Carney held various marketing positions including Vice President,
Applications Marketing and Vice President of International Marketing at Lotus
Development Corporation. From 1982 to 1992, Mr. Carney held various marketing
positions including Vice President, European Operations with Atex, Inc., a
turnkey supplier of prepress automation systems.
JOHN F. KENNEDY has been Chief Financial Officer and Vice President of Finance
of the Company since August 1993 and Treasurer since May 1995. From March 1991
to July 1993, he was chief financial officer of Ultimap Corporation, a developer
of geographic information software. From June 1990 to February 1991, he was
chief financial officer of a division of International Business Interiors, Inc.,
a distributor of office furniture. From June 1989 to June 1990, he was chief
financial officer of Kurzweil Music Systems, Inc., a developer and manufacturer
of electronic musical instruments. From June 1988 through May 1989, Mr. Kennedy
was chief financial officer of New England Digital Distribution, Inc., a
provider of telecommunications equipment and services.
GEORGE D. KONTOPIDIS, Ph. D., has been Vice President of Engineering of the
Company since January, 1989. From 1984 until 1989, he was director of
engineering of the Sea Data Division of Pacer Systems, Inc., a maker of
oceanographic instruments.
JOHN L. TINCLER has been Vice President of Operations since May 1994. He was
Vice President of Manufacturing and Quality Assurance of the Company since
November 1993 and was a consultant to the Company from March to October, 1993.
From 1991 to 1993, he was vice president of product development of Bolt, Beranek
and Newman, Inc., a developer and implementer of networking and software
technologies. From 1987 to 1991, Mr. Tincler was an independent management
consultant. From 1984 to 1987, Mr. Tincler was president of U. S. Design, a
manufacturer of intelligent disk drives.
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The information appearing under the caption "Executive Compensation" (other than
the information appearing under the captions "Compensation Committee Report on
Executive Compensation" and "Comparison of Cumulative Total Stockholder Return")
of the Company's Proxy Statement for its Annual Meeting of Stockholders to be
held April 17, 1997 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information appearing under the caption "Stock Ownership of Directors,
Executive Officers and Principal Stockholders" of the Company's Proxy Statement
for its Annual Meeting of Stockholders to be held April 17, 1997 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
---------------------------------------------------------------
(a) (1) Financial Statements
- -----------------------------
The following are included in Part II of this report, incorporated by reference
from the Company's Annual Report for the year ended December 31, 1996, which is
attached here in its entirety as Exhibit 13.1, but not deemed filed except to
the extent that portions thereof are
20
<PAGE>
expressly incorporated by reference herein.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1995 and 1996.
Consolidated Statements of Operations for the Years Ended December 31, 1994,
1995 and 1996.
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1994, 1995 and 1996.
Consolidated Statements of Cash Flow for the Years Ended December 31, 1994, 1995
and 1996.
Notes to the Consolidated Financial Statements.
(a) (2) Financial Statement Schedules
The following are included on the indicated pages of this report:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report on Schedules 24
Schedule VIII Valuation and Qualifying Accounts 25
</TABLE>
Schedules not listed above are omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes thereto.
(a) (3) Exhibits
The Exhibit Index, appearing after the signature page on sequentially numbered
page 25, is incorporated herein by reference.
(a) (4) Reports of FORM 8K
The Company filed a report on Form 8K on June 28, 1996 relating to its
acquisition of Tek-Nique, Inc. and its affiliate PSR Systems, Inc., both data
communications and intelligent networking firms.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATURAL MICROSYSTEMS CORPORATION
By: /s/ Robert P. Schechter
----------------------------------
Robert P. Schechter
President, Chief Executive Officer
and Chairman of the Board
SIGNATURES
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 in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert P. Schechter President, Chief Executive Officer March 25,1997
- --------------------------- and Chairman of the Board of
Robert P. Schechter Directors (Principal Executive
Officer)
/s/ John F. Kennedy Vice President of Finance, Chief March 25,1997
- --------------------------- Financial Officer,
John F. Kennedy (Principal Financial Officer),
and Treasurer
/s/ David C. Flynn Corporate Controller March 25,1997
- --------------------------- (Chief Accounting Officer)
David C. Flynn
/s/ Charles T. Foskett Senior Vice President of March 28,1997
- --------------------------- International
Charles T. Foskett Operations and Director
/s/ Zenas W. Hutcheson III Director March 28,1997
- ---------------------------
Zenas W. Hutcheson III
/s/ C. William McDaniel Director March 24,1997
- ---------------------------
C. William McDaniel
/s/ David F. Millet Director March 25,1997
- ---------------------------
David F. Millet
/s/ Ronald W. White Director March 24,1997
- ---------------------------
Ronald W. White
</TABLE>
22
<PAGE>
Independent Auditors' Report
The Board of Directors
Natural MicroSystems Corporation:
Under the date of January 14, 1997 we reported on the consolidated balance
sheets of Natural MicroSystems Corporation as of December 31, 1995 and 1996 and
the related consolidated statements of operations, stockholders' equity, and
cash flow for the years ended December 31, 1994, 1995, and 1996. In connection
with our audits of the aforementioned consolidated financial statements we also
have audited the related consolidated financial statement schedule for the years
ended December 31, 1994, 1995 and 1996, in FORM 10K. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
In our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statement schedules taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 14, 1997
23
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts Schedule VIII
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Balance at
Allowance for doubtful accounts beginning of Balance at
year Additions Deductions (1) end of year
------------ --------- ------------- -----------
<S> <C> <C> <C> <C>
12/31/94 $259,704 $275,829 $202,689 $332,844
12/31/95 $332,844 $548,892 $233,766 $647,970
12/31/96 $647,970 $285,093 $248,438 $684,625
</TABLE>
(1) Amounts include write-offs of accounts receivable deemed to be uncollectable
24
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
Exhibit Index
The Company will furnish to any stockholder who so request, a copy of this
Annual Report on FORM 10K, as amended, including a copy of any exhibit listed
below, provided that the Company may require payment of a reasonable fee not to
exceed its cost of furnishing such exhibit.
<TABLE>
<CAPTION>
Exhibit
No. Title Page No.
- ------------------------------------------------------------
<C> <S> <C>
*2.1 Share Exchange Agreement dated as of
September 2, 1995 by and among the
Registrant and Shareholders of VOX S.A.
and MABB Participation S.A. (filed with
Registrant's Form 10-Q for the quarter
ended September 30, 1995).
*2.2 Share Exchange Agreement dated June 14,
1996 by and among the Registrant and
Shareholders of Tek-Nique, Inc. (filed
with Registrant's Form 10-Q for the
quarter ended June 30, 1996)
*2.3 Stock Purchase Agreement dated June 15,
1996 between the Registrant and PSR,
Systems, Inc. (filed with Registrant's
Form 10-Q for the quarter ended June
30, 1996)
* 3.1 Fourth Restated Certificate of
Incorporation of the Registrant (filed
with the Registrant's Form 10K for the
year ended December 31, 1995).
* 3.2 By-Laws of Registrant, as amended
(filed with the Registrant's
registration statement on Form S-1
(#33-72596)).
* 4.1 Specimen Certificate for the Common
Stock (filed with the Registrant's
registration statement on Form S-1
(#33-72596)).
* 10.3 Agreement dated as of February 28, 1992
between Registrant and Eltron
Associates (filed with the Registrant's
registration statement on Form S-1
(#33-72596)).
#* 10.11 1989 Stock Option and Stock Purchase
Plan, as amended (filed with the
Registrant's registration statement on
Form S-1 (#33-72596)).
#* 10.12 1993 Stock Option Plan, as amended
(filed with the Registrant's Form 10-Q
for the quarter ended March 31, 1995).
#* 10.13 1993 Employee Stock Purchase Plan
(filed with the Registrant's
registration statement on Form S-1
(#33-72596)).
#* 10.14 1993 Non-Employee Directors Stock
Option Plan (filed with the
Registrant's registration statement on
Form S-1 (#33-72596)).
*10.18 Lease Amendment between Registrant and
Lillian Greene dated April 4, 1995
(filed with the Registrant's Form 10-Q
for the quarter ended June 31, 1995).
#*10.19 1995 Non-Statutory Stock Option Plan
10.20 Lease Amendment between Registrant and
National Development of New England,
LLC dated October 1996
*10.21 Loan modification Agreement dated May
17, 1996 between Registrant and Silicon
Valley Bank (filed with the
Registrant's Form 10-Q for the quarter
ended June 30, 1996).
*10.22 Turnkey Manufacturing Agreement dated
June 1, 1996 between the Registrant and
Sanmina Corporation
11.1 Computation of Earnings Per Share
13.1 1996 Annual Report to Stockholders
(which is not deemed to be filed except
to the extent that portions thereof are
expressly incorporated by reference
herein)
21.1 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
</TABLE>
* Previously filed with the registration statement or report indicated.
# Management contract or compensatory plan or arrangement.
25
<PAGE>
EXHIBIT 11.1
(in thousands except share and per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Net income $ 1,630 $ 1,275 $ 2,817
======================================
Weighted average shares outstanding 9,382,816 7,003,442 6,569,858
Common shares attributable to
dilutive options and warrants 657,821 692,686 372,168
--------------------------------------
Fully diluted weighted average shares
outstanding 10,040,637 7,696,128 6,942,026
======================================
Fully diluted net income per share $ 0.16 $ 0.17 $ 0.41
======================================
Net income $ 1,630 $ 1,275 $ 2,817
======================================
Weighted average shares outstanding 9,382,816 7,003,442 6,569,858
Common shares attributable to
dilutive options and warrants 411,024 539,902 372,168
Primary weighted average shares
outstanding 9,793,840 7,543,344 6,942,026
======================================
Primary net income per share $ 0.17 $ 0.17 $ 0.41
======================================
</TABLE>
<PAGE>
Open
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
Telecommunications
Natural MicroSystems 1996 Annual Report
<PAGE>
Open
[PLUS SIGN APPEARS HERE]
Telecommunications
<PAGE>
- --------------------------------------------------------------------------------
OPPORTUNITIES
[PHOTO AND WORDS APPEARS HERE]
[PHOTO APPEARS HERE]
Not that long ago, the term "Open Telecommunications" would have been considered
an inherent contradiction. Today, standard computers and telephone networks --
once discrete technologies and markets -- are converging with a force and an
impact that will have lasting repercussions on the way people communicate. The
way companies do business. And the way telecommunications companies compete.
Enabling this convergence is the business of Natural MicroSystems(TM). Since
1983, Natural MicroSystems has offered technologies and standards that bring the
power and flexibility of open computing to high-value telecommunications systems
and applications. We pioneered the first use of a digital signal processor (DSP)
in a standard PC in 1983; the first industry-standard telephony bus in 1990; and
more recently, Fusion -- the first scalable approach to interoperability between
voice and data networks.
Open Telecommunications/TM/ from Natural MicroSystems is making it possible for
our partners to dramatically shorten time-to-market for innovative, high
performance, high capacity, multimedia communications systems and applications.
Like applications platforms that enhance the revenues and competitive position
of service providers. Integrated voice response (IVR) and workflow systems. Call
centers intergrated with websites. Internet fax systems. Gateways that allow
telephone networks to interoperate with data networks. Even the creation of
open, standards-based components of the telephone network infrastructure.
By enabling the merger of open computing and telecommunications platforms,
Natural MicroSystems has helped its partners create new markets, new value for
their customers and new opportunities to grow.
- --------------------------------------------------------------------------------
<PAGE>
[PHOTO APPEARS HERE]
Vision
+
Performance
[BAR GRAPH OF REVENUES APPEARS HERE]
[BAR GRAPH OF OPERATING INCOME APPEARS HERE]
[BAR GRAPH OF RESEARCH & DEVELOPMENT APPEARS HERE]
<PAGE>
An amazing year for Natural MicroSystems.
LETTER TO STOCKHOLDERS
To our stockholders,
1996 was a great year for Natural MicroSystems. We expanded our business into
new and promising market segments, introduced a new technology platform that
quickly earned us several important design wins, and continued to innovate
solutions that expand the capabilities of our valued partners.
In financial terms, it was a year of significant revenue growth, improved
profitability and a stronger balance sheet. Our revenue increased 57 percent to
$51.5 million. Operating income grew by 78 percent due to improved margins, and
we achieved our target 15 percent operating margin. We also strengthened our
balance sheet by achieving a 20-day improvement in our days sales outstanding
and by raising $31 million in a successful secondary offering early in the year.
These accomplishments have created a solid foundation for our future growth.
Strong customer relationships are the core of our success, and in 1996, we
continued to win design awards from important new customers, such as Atlas
Telecom, Boston Technology, Inter-Tel, Lucent Technologies, Netiphone and
Science Dynamics in North America, as well as CVF, Eureka Soft, KUAB, Siemens
Taiwan and Techlight Technology in our international markets. Equally important
are design awards from existing customers, such as Alcatel and Aspect
Telecommunications, which demonstrate a high level of satisfaction with our
products and services.
In June, we vaulted into the leadership position in PC-based Intelligent
Networking (IN) with our acquisition of TEKnique, Inc. TEKnique's products
include Signaling System 7 (SS7), an international standard for network
management, as well as widely-deployed data communications technologies,
including X.25 and TCP/IP routing. IN services are a key growth area for our
customers, and TEKniques's SS7 technology will enable us to satisfy a core
requirement for many existing customers as well as new accounts.
We also launched a major new market initiative in IP (Internet Protocol)
telephony with the introduction of our Fusion platform, which resulted in
several important new-business relationships in 1996.
As the convergence of telephone and data networks transforms the
telecommunications industry, Fusion positions us extremely well to play a
significant role in this major technological shift.
As we pursue new opportunities, its essential that we maintain the highest level
of quality in our products and processes, and in late 1996, we reached a
milestone by successfully completing certification audits under ISO 9002
international quality standards.
1996 was also a year in which we further developed our business outside of North
America. In Europe, we successfully completed the integration of VOX and
implemented a product plan that builds on the considerable engineering strength
we have in Europe. Improved results in the fourth quarter indicate that our
confidence in these markets is well placed. Elsewhere, we significantly expanded
our Hong Kong office and opened a new office in Buenos Aires to take advantage
of growing opportunities in Asia and Latin America.
Looking ahead, Natural MicroSystems will continue to pursue the same four goals
that brought us success in 1996: partnering with our customers; extending our
technology leadership; turning in a solid financial performance; and creating a
work environment where our people can contribute, grow and have fun.
We clearly made progress against each of these goals in 1996. We are a much
stronger company as a result of our achievements, and by extending our
technology into new areas such as IP telephony, we have shown our ability to
reinvent ourselves -- a skill we will continue to practice as we grow and
mature.
The people of Natural MicroSystems can be proud of our accomplishments in 1996.
Their tireless enthusiasm and unwavering customer commitment remain our most
treasured assets. I'd also like to thank our customers and partners. There is no
greater satisfaction for us than to enable their success. And to our
stockholders, we express our gratitude for your continued support and confidence
in us.
Sincerely,
/s/ Bob Schechter
Bob Schechter
Chairman, President and Chief Executive Officer
<PAGE>
[PHOTO APPEARS HERE]
(left) Frank Dick, Engineering (right) Anne Lee, Engineering
Architecture
+
Tools
[PHOTO APPEARS HERE]
(left) Chuck Linton, Engineering (right) Ed Coleman, Engineering
<PAGE>
- --------------------------------------------------------------------------------
Advanced Capabilities
The freedom and power to innovate
[PHOTOGRAPH APPEARS HERE]
Enabling technologies. Building blocks. Telephony engines. Embedded computers.
Hardware and software components. However you describe them, our products are
designed with one goal in mind: to bring to reality the vision of communications
systems designers.
Natural MicroSystems provides a range of technologies that allow developers to
focus on meeting the needs of their customers rather than solving the
intricacies of telephone networks or digital signal processing. This is the
value of open systems; developers can take advantage of standards-based building
blocks, leveraging others' product development efforts to build solutions that
optimize their own knowledge and creativity.
Our family of products provides such fundamental functions as switching; voice
recording and playback; speech recognition; tax reception and transmission; the
conversion of text to speech, voice to data, and data to voice; and physical and
logical interfaces to a wide range of telephone and data networks. And they
adhere to widely-accepted standards for easy integration into communications
networks around the world.
We make these technologies available in a cohesive, forward-looking framework
which we call Telephony Services Architecture/TM/(TSA). TSA encompasses the
hardware required to deliver these functions, as well as the software tools used
to incorporate them into communications systems. And because TSA is an open
architecture, it also provides open interfaces, thereby giving designers access
to technologies from other companies. We offer these capabilities on standard
computing platforms such as PCs so that developers can take full advantage of
the wealth of products, tools and support that open systems provide, maximizing
their usability and minimizing development time and effort.
To our partners, this means something very important: the ability to create
solutions as unique and comprehensive as their markets demand. As far-reaching
as their customers' aspirations. And as quickly as the market-place changes.
This is the essence of Open Telecommunications.
- --------------------------------------------------------------------------------
<PAGE>
[PHOTO APPEARS HERE]
Voice
+
Data
[PHOTO APPEARS HERE]
<PAGE>
The reinvention of telecommunications
THE FUTURE
[PHOTO APPEARS HERE]
http://www.nmss.com
IP Telephony: any telephony application (voice, fax, etc.) that can be enabled
across a packet-switched data network via the Internet Protocol.
Until recently, voice and data networks have existed in parallel -- sometimes
sharing clients, facilities and often resources and support staff -- but
literally insulated from each other.
But the environment is changing rapidly. Increasingly, communications that have
been traditionally supported by telephone networks -- voice, fax and
videoconferencing -- will be hosted on data networks. The convergence of
telephone and data networks, both public and private, will profoundly change not
only the way we communicate, but also the fundamental economics of
telecommunications. The most enduring and beneficial impact of this breakthrough
is nothing less than the transformation of business processes -- from more
efficient electronic commerce to rich applications that integrate telephone
calls and data in more affordable and widely available communications services.
It's already happening. Leading telecommunications systems suppliers are
creating long distance bypasses that can save corporations millions of dollars.
Web-enabled call centers are providing customers with richer, more rewarding
communications. And Internet Service Providers (ISP) are preparing to offer a
range of enhanced services, including voice, fax and videoconferencing. All of
these solutions generate tremendous value by solving new problems -- or by
solving existing problems in innovative ways.
Natural MicroSystems has led the way in making these solutions possible with the
introduction of Fusion - our gateway technology for IP telephony. It's
intriguing to imagine how existing applications can be adapted to take advantage
of the convergence of voice and data. But it's even more exciting to speculate
about the as-yet-unimagined applications that will emerge as the capabilities of
Natural MicroSystems technology are fully exploited.
<PAGE>
[PHOTO APPEARS HERE] John Tincler, Operations
Products
+
Support
Marty Dutton, Developer Support [PHOTO APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
Customer Satisfaction
HIGH VALUE SOLUTIONS AND FASTER TIME TO MARKET
[PHOTOGRAPH APPEARS HERE]
One of the things that distinguishes Natural MicroSystems is the quality of our
relationships with our partners. We understand that a customer's decision to
build on our platform represents a strategic choice. So we put in whatever
effort it takes to make our partners successful - because that's the best way to
ensure our own success. This has proved to be a potent competitive advantage.
That's why we invest heavily in developer support. In fact, we more than
doubled our investment in developer support in 1996 alone. Within our
engineering organization, we have a group specifically dedicated to working with
our partners on systems-level issues. We've built a worldwide, field-based
engineering group to work with customers on issues such as application
prototyping, installation and configuration. And the telephone support we offer
in North America and Europe will be extended to around-the-clock worldwide
coverage during 1997.
Because we've organized ourselves around the total support of our customers,
we're able to take time and risk out of our partners' projects, significantly
improving their ability to win.
This offers obvious benefits to our customers. But it offers benefits to Natural
MicroSystems, too. By working hand in glove with our partners, we explore the
boundaries of our products.
We learn first-hand about the demands of new applications and markets. And we
gain insights that help direct our future research and development activities.
But most importantly, we earn the loyalty that turns customers into true
partners.
- --------------------------------------------------------------------------------
<PAGE>
[PHOTO APPEARS HERE] John Emery, Alliance Partners Program
NMS
+
Partners
Dave Frasier, Sales [PHOTO APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
Accelerated Solution
Superior solutions to a growing global marketplace
[PHOTOGRAPH APPEARS HERE]
Stephen Miles, International Sales
The relationship between Natural MicroSystems and its partners is a
complementary one, where we provide core technologies and our partners provide
applications and systems expertise, and a deep understanding of their markets.
Together, we're working to deliver the value of Open Telecommunications in
creative, unique solutions for growing markets.
Alcatel, the largest telecommunications equipment supplier in France, has
developed and introduced the 4625, a next-generation client-server platform for
easily customized IVR and voice mail applications.
Atlas Telecom of North America created the PCS Messenger, a scalable platform
for wireless and wireline voicemail systems throughout Europe and Asia, proving
that PC-based systems have the capacity and reliability needed for networks of
this scale.
Hammer Technologies, the leader in the computer telephony application test
market, designed and built the Hammer IT, the first system for testing entire
integrated telecom systems, exposing hidden problems by simulating real callers,
measuring and evaluating the responses, and taking actions.
Informserve, based in Hong Kong, has developed an enhanced services platform for
deployment by PTTs in the Asia/Pacific region. This platform supports voicemail,
faxmail, audiotex, directory services, calling card services and more -- all
built on the scalable, open platform.
Inter-Tel in the US has created the Vocal 'Net Server, designed to create a
bridge between the public telephone network and a data network such as the
internet or private intranets, enabling two-way voice communications for a
fraction of the regular long distance cost.
Lucent Technologies is integrating call centers with the World Wide Web,
creating an entirely new application from the convergence of telephony and data.
For example, consumers will be able to browse an online catalog, click on a
button, and talk to a live sales agent.
NetCentric has created POPware, an enabling technology that allows ISPs to
rapidly deploy, meter, monitor, and manage a host of advanced services on the
internet, including fax, voice messaging, videoconferencing, multicasting,
gaming, content distribution and file management.
- --------------------------------------------------------------------------------
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
Open Telecommunications is clearly a great place to be. Changes in the global
telecommunications market -- in particular, deregulation and the resulting
increased competition -- have stimulated greater demand for tools like ours that
accelerate the development of high-value applications.
At the same time, technological advances in microprocessors, memory, band-width
availability, standards development and distributed computing tools are
expanding the power, effectiveness, reach and flexibility of our products.
Natural MicroSystems is bringing open computing solutions into the heart of the
telecommunications world, and as we do, we expect the opportunities ahead to be
stronger than ever.
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
<TABLE>
<CAPTION>
1996 Financials
<S> <C>
Management's Discussion and
Analysis of Financial Condition and Results of Operations...................16
Independent Auditors' Report................................................22
Consolidated Balance Sheets
as of December 31, 1995 and 1996............................................23
Consolidated Statements of Operations
for the Years Ended December 31, 1994, 1995, and 1996.......................24
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1994, 1995, and 1996.......................25
Consolidated Statements of Cash Flow
for the Years Ended December 31, 1994, 1995, and 1996.......................26
Notes to the Consolidated Financial Statements..............................28
</TABLE>
15
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The results of operations for all years presented include the results of VOX S.
A., and an affiliate ("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 company. The results for the year ended December 31, 1996
include the results of Tek-Nique, Inc. and an affiliate, ("TEKnique") from the
date of their acquisition, June 14, 1996 in a transaction which has been
accounted for as a purchase. Prior thereto, TEKnique was a privately held
company.
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations as a percentage of revenues.
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0 100.0 100.0
Cost of revenues 38.6 35.0 35.7
- ---------------------------------------------------------------------------------
Gross profit 61.4 65.0 64.3
Operating expenses:
Selling, general and administrative 32.3 31.3 29.6
Research and development 19.2 20.9 20.1
Purchased in-process research and
development 8.6
- ---------------------------------------------------------------------------------
Total operating expenses 51.5 52.2 58.3
- ---------------------------------------------------------------------------------
Operating income 9.9 12.8 6.0
Merger costs 5.8
Other income, net 1.0 1.0 2.3
- ---------------------------------------------------------------------------------
Income before income taxes 10.9 8.0 8.3
Income taxes expense (benefit) (1.7) 4.1 5.1
- ---------------------------------------------------------------------------------
Net income 12.6 3.9 3.2
- ---------------------------------------------------------------------------------
</TABLE>
Revenues
Revenues of $51.5 million for the year ended December 31, 1996 (1996) increased
57.0% from revenues of $32.8 million for the year ended December 31, 1995
(1995). The increase from 1995 to 1996 is primarily due to increased unit
shipments of Alliance Generation(R) (AG) and VOX products, manufacturing license
revenues, and intelligent network and data communications products from
TEKnique. Revenues of $32.8 million for 1995 increased 46.4% percent from
revenues of $22.4 million for the year ended December 31, 1994 (1994). The
increase from 1994 to 1995 is primarily due to increased unit shipments of AG,
VBX(TM) and VOX products. AG products have and are expected to continue to
supplant sales of VBX products for high value systems and applications.
One customer accounted for 13.9% of revenues in 1996. A second customer
accounted for 11.9% and 13.3% of revenues in 1995 and 1994, respectively.
Revenues from sales to customers located outside North America were 31.1% ($16.0
million), 43.3% ($14.2 million), and 41.1% ($9.2 million) for 1996, 1995, and
1994, respectively. The increase from 1995 to 1996 is primarily the result of
increased unit shipments of AG products, primarily in Asia, offset by slightly
reduced AG and VOX product shipments as well as manufacturing license revenues
in Europe. The increase from 1994 to 1995 is the result of increased unit
shipments of AG and VOX products and manufacturing license revenues which are
primarily from Europe.
Cost of Revenues
Cost of revenues consists of costs associated with components, subcontracted
manufacturing, labor and overhead for quality control, warehousing and shipping
of the Company's products.
Cost of revenues increased to 35.7% of revenues in 1996 from 35.0% for 1995. The
slight increase in cost of revenues for 1996 is primarily attributable to
increased sales to OEM customers at lower margins and the sale of products to a
major customer in the first half of 1996 at lower than average margins,
partially offset by increased overall sales volume without a corresponding
increase in manufacturing overhead, and increased sales of AG products which
have a higher margin than
16
<PAGE>
[LOGO NATURAL MICROSYSTEMS APPEARS HERE]
VBX products. Cost of revenues decreased to 35.0% of revenues in 1995 from 38.6%
for 1994. The decrease is attributable to increased sales of AG products,
increased manufacturing license revenues, and overall increased sales volume
without a corresponding increase in manufacturing overhead.
Selling, General and Administrative
Selling, general and administrative expenses increased 48.5% to $15.3 million
for 1996 from $10.3 million for 1995, but decreased to 29.6% of revenues for
1996 from 31.3% for 1995. Selling, general and administrative expenses increased
43.1% to $10.3 million for 1995 from $7.2 million for 1994, but decreased to
31.3% of revenues for 1995 from 32.3% for 1994. These increases were due to
costs associated with increased selling activity as well as increased
expenditures for marketing and international operations. In 1996, the Company
increased the number of sales offices from nine to twelve, including Buenos
Aires, Argentina, and staffed all but one with a systems engineer. In 1995, the
Company increased the number of sales offices from six to nine, all in North
America. The Company expects its expenditures in sales, marketing, customer
support and international operations to increase, but the amount of such
expenditures may vary as a percentage of revenues.
Research and Development
Research and development expenditures increased 49.3% to $10.3 million for 1996
from $6.9 million for 1995, and were 20.1% of revenues for 1996 versus 20.9% in
1995. Research and development expenditures increased 60.5% to $6.9 million for
1995 from $4.3 million for 1994, and were 20.9% of revenues for 1995 versus
19.2% in 1994. The increases are primarily due to increased personnel and
project development costs associated with the AG product line and associated
software tools; VOX software development; implementation of mixed media
extensions such as facsimile, text-to-speech, and speech recognition; 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 revenues for future
periods.
Purchased In-Process Research and Development
The acquisition of TEKnique was accounted for as a purchase and, accordingly,
the purchase price was allocated to assets purchased and liabilities assumed
based on the fair values at the date of acquisition. In connection with the
transaction, $4.4 million of purchased in-process research and development costs
were charged to expense for the year ended December 31, 1996.
Merger Costs
In connection with the VOX merger, $1.9 million of merger costs were incurred
and were charged to expense for the year ended December 31, 1995. The merger
costs consisted of legal, accounting, investment banking and transaction
commission fees.
Other Income, Net
Other income and expenses for 1996, 1995 and 1994 were $1.2 million, $336,000
(exclusive of merger costs) and $228,000, respectively, reflecting net interest
income and gains from sale of marketable securities for all periods. The
increase in net interest income was generated from proceeds of the Company's
follow-on offering in the first quarter of 1996 and its initial public offering
in the first quarter of 1994 and retirement of nearly all the Company's debt.
Income Tax Expense (Benefit)
Income tax expense of $2.6 million and $1.4 million for 1996 and 1995 was based
on an effective tax rate which differed from the U.S. federal statutory rate due
to state income taxes net of federal tax benefit, a reduction in the valuation
reserve for deferred tax assets, the effect of research and experimentation
federal tax credits, and permanent differences for non-deductible merger costs
(including purchased in-process research and development). Income tax benefit of
$383,000 for 1994 reflects a $684,000 reduction in the valuation reserve for
deferred tax assets.
17
<PAGE>
[LOGO NATURAL MICROSYSTEMS APPEARS HERE]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company continuously re-evaluates the recoverability of its deferred tax
assets.
Net Income
As a result of the foregoing, operating income, that is income before income
taxes, merger costs, interest and other income, net was $3.1 million, $4.2
million, and $2.2 million, for 1996, 1995 and 1994, respectively, inclusive of
$4.4 million in 1996 of in-process research and development expense associated
with the TEKnique acquisition. Net income was $1.6 million, $1.3 million and
$2.8 million for the same periods, respectively, inclusive of $1.9 million in
1995 for merger costs associated with the VOX acquisition.
Liquidity and Capital Resources
Cash provided by (used in) operations for the years ended December 31, 1996,
1995 and 1994 was $3.2 million, $958,000 and ($407,000), respectively. Cash was
provided by operations in 1996 and 1995 from net income and increased accounts
payable, partially offset by increased accounts receivable and inventory
associated with increased revenues. The use of cash in 1994 was primarily due to
increased accounts receivable and inventory in support of increased revenues,
partially offset by increased net income and accounts payable.
Cash provided by (used in) investing activities in 1996, 1995 and 1994 was
($34.8 million), ($2.9 million) and $87,000 respectively. Cash was used in 1996
for the purchase of marketable securities, the purchase of property and
equipment, the acquisition of technology licenses, and issuance of a note
receivable related to the lease of the Company's new headquarters facility. Cash
used in 1995 was primarily for increased purchases of property and equipment and
acquisition of technology licenses. Cash was provided by investing activities
during 1994 from the sale of marketable securities offset by purchases of
property and equipment. The Company's capital expenditures were $2.8 million,
$1.5 million and $1.1 million during 1996, 1995, and 1994, respectively. During
June 1996, the Company acquired all of the outstanding shares of TEKnique and an
affiliate by payment of $3.2 million, net of cash acquired and issuance of
shares of common stock and paid $284,000 in transaction costs.
During September 1996, the Company entered into a lease for a new headquarters
facility which it expects to occupy in the second quarter of 1997. The lease
term is 15 years with an annual base rent of $892,500 in the initial year
increasing to $1.4 million in the last year of occupancy and requires payment of
operating expenses and taxes. The Company expects to expend approximately $2.8
million between December 1996 and the date of occupancy to complete the interior
of the building.
Cash provided by financing activities in 1996, 1995 and 1994 was $31.4 million,
$861,000, and $7.6 million, respectively. During 1996 cash was provided
primarily from the proceeds of the Company's follow-on stock offering and
exercise of common stock options and warrants. In 1995 cash was provided by
borrowings under a bank line of credit and other borrowing arrangements. In 1994
cash was provided primarily by proceeds from its initial public offering, net of
offering costs, offset by the repayment of amounts under borrowing arrangements
and other notes payable.
Current assets at December 31, 1996 were $54.0 million, 141% greater than
current assets of $22.4 million at December 31, 1995, due principally to
proceeds from the Company's 1996 follow-on stock offering and increased accounts
receivable and inventory associated with increased revenues. Current liabilities
at December 31, 1996 were $9.4 million, 14.6% greater than current liabilities
of $8.2 million at December 31, 1995, principally due to increased accounts
payable associated with increased business activity. During June 1996 the
Company renewed its bank line of credit through June 1997 on substantially the
same terms as previously in effect.
18
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
During 1995 the Company established a borrowing relationship with a bank for its
European operations. The availability is 2.0 million French francs and no
borrowings are outstanding at December 31, 1996. In 1995, the Company also
secured a research and development refundable advance from a branch of the
French government in the amount of $405,000, all of which is still outstanding
at December 31, 1996, which will be repaid with the proceeds from certain
product sales.
Quarterly Results (unaudited)
The following tables set forth unaudited selected financial information for the
periods indicated, as well as certain of such information expressed as a
percentage of revenues for the same periods. This information has been derived
from unaudited consolidated financial statements which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. This
information has not been reviewed by the Company's independent accountants in
accordance with standards established for such reviews. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
----------------------------------------------
Quarter Ended March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
(in thousands) 1995 1995 1995 1995 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $7,164 $7,243 $8,597 $9,831 $10,350 $12,203 $13,513 $15,398
Cost of revenues 2,599 2,646 2,961 3,279 3,992 4,723 4,543 5,136
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 4,565 4,597 5,636 6,552 6,358 7,480 8,970 10,262
Operating expenses:
Selling, general and administrative 2,233 2,476 2,794 2,791 3,064 3,581 3,940 4,666
Research and development 1,412 1,537 1,695 2,212 2,089 2,265 2,876 3,098
Purchased in-process
research and development 4,426
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,645 4,013 4,489 5,003 5,153 10,272 6,816 7,764
Operating income (loss) 920 584 1,147 1,549 1,205 (2,792) 2,154 2,498
Merger costs (1,911)
Other income, net 56 79 110 91 78 424 334 372
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 976 663 1,257 (271) 1,283 (2,368) 2,488 2,870
Income tax expense 364 235 459 292 430 694 817 702
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $612 $428 $798 $(563) $853 $(3,062) $1,671 $2,168
=================================================================================================================================
</TABLE>
19
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<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------
Quarter Ended March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
(percent of revenues) 1995 1995 1995 1995 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues 36.3 36.5 34.4 33.4 38.6 38.7 33.6 33.4
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 63.7 63.5 65.6 66.6 61.4 61.3 66.4 66.6
Operating expenses:
Selling, general and
administrative 31.2 34.2 32.5 28.4 29.6 29.3 29.2 30.3
Research and development 19.7 21.2 19.7 22.5 20.2 18.6 21.3 20.1
Purchased in-process
research and development 36.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 50.9 55.4 52.2 50.9 49.8 84.2 50.5 50.4
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 12.8 8.1 13.4 15.7 11.6 (22.9) 15.9 16.2
Merger costs (19.4)
Other income, net 0.8 1.1 1.3 0.9 0.8 3.5 2.5 2.4
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 13.6 9.2 14.7 (2.8) 12.4 (19.4) 18.4 18.6
Income taxes 5.1 3.2 5.3 3.0 4.2 5.7 6.0 4.6
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 8.5 6.0 9.4 (5.8) 8.2 (25.1) 12.4 14.0
=================================================================================================================================
</TABLE>
Revenues have grown relatively steadily over each of the eight quarters in the
period ended December 31, 1996. Operating income during the eight quarters
presented has varied, but less significantly after the quarter ended June 30,
1995 when selling, general and administrative expenses increased at a faster
rate than revenues. Cost of revenues has decreased as a percentage of revenues,
with the exception of the first and second quarter of 1996 and the second
quarter of 1995, due to increased sales of AG and VOX products, increased
manufacturing license revenues and overall increased revenues without a
corresponding increase in manufacturing overhead. During this period selling,
general and administrative expenses have increased due to costs associated with
selling activity and expenditures for marketing and international operations.
The Company's quarterly operating results may fluctuate as a result of
a number of other factors, including timing of customer orders, adjustments of
delivery schedules to accommodate customer or regulatory requirements,
availability of components from suppliers, timing and level of international
sales, mix of products sold, and timing and level of expenditures for sales,
marketing and new product development. The Company operates with a relatively
small backlog. Quarterly revenues and operating results therefore generally
depend on the volume and timing of orders received during the quarter. The
Company's expense levels are based in part on its forecasts of future revenues
and, if such revenues were to be below expectations, the Company's operating
results could be adversely affected. Accordingly, there can be no assurance that
the Company will be profitable in any particular quarter.
20
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
OTHER
For U. S. federal income tax purposes the Company has net operating loss
carryforwards available to reduce future income of approximately $3.6 million at
December 31, 1996. These carryforwards expire beginning in 2003. In addition,
for U. S. federal income tax purposes, TEKnique has net operating loss
carryforwards available to reduce future income of approximately $790,000 at
December 31, 1996. These carryforwards expire beginning in 2010. Utilization of
these net operating loss carry-forwards are subject to annual limitations of
approximately $770,000 and $205,000 for the Company and TEKnique, respectively,
under Internal Revenue Code section 382 and will be available to reduce future
taxable income of the respective entities only.
A significant portion of the Company's revenues are subject to the risks
associated with international sales. Although most of the Company's product
prices are denominated in United States currency, customers in foreign countries
generally evaluate purchases of products such as those sold by the Company on
the purchase price expressed in the customer's currency. Therefore, changes in
foreign currency exchange rates may adversely affect the demand for the
Company's products.
The Company believes that its revenues and results of operations
have not been significantly impacted by inflation during the past three fiscal
years.
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). The effect of adopting SFAS 121 was not material
to the Company's financial condition or results of operations. The Company
reviews the recoverability of long-lived assets each reporting period.
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by SFAS
123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees". Therefore, the adoption of SFAS 123 was not material to the
Company's financial condition or results of operations; however, the proforma
impact on earnings and earnings per share have been disclosed in the Notes to
the Consolidated Financial Statements as required by SFAS 123 for companies that
continue to account for stock options under APB 25.
21
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<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Natural MicroSystems Corporation:
We have audited the accompanying consolidated balance sheets of Natural
MicroSystems Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flow for
each of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Natural
MicroSystems Corporation as of December 31, 1995 and 1996, and the consolidated
results of their operations and their cash flow for each of the years in the
three year period ending December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 14, 1997
22
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------
December 31, 1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,729 $ 6,578
Marketable securities 134 26,767
Accounts receivable, net of allowance for uncollectible accounts of $648 and $685, respectively 10,318 13,403
Inventories 3,704 5,419
Prepaid expenses and other assets 1,010 1,357
Income tax receivable 8 130
Deferred tax asset, net of valuation allowance 541 306
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 22,444 53,960
- --------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of $1,968 and $3,305, respectively 2,190 3,908
License agreements, net of accumulated amortization of $8 and $245, respectively 1,197 1,665
Other assets 369 1,708
Excess of purchase price over net assets acquired, net of accumulated amortization of $102 in 1996 655
Deferred tax asset, net of valuation allowance 196 766
- --------------------------------------------------------------------------------------------------------------------------------
$ 26,396 $62,662
- --------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long term debt $ 77 $ 58
Government advances 126 45
Accounts payable 4,293 5,222
Current portion of capital lease obligations 12
Accrued expenses and other liabilities 3,703 4,108
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,211 9,433
- --------------------------------------------------------------------------------------------------------------------------------
Capital lease obligations, less current portion 11
Long-term debt, less current portion 82
Refundable advance 347 347
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.05 par value, 3,000,000 shares authorized, none issued
Common stock; $0.01 par value; 15,000,000 shares authorized,
7,090,634 and 9,936,414 shares issued and outstanding 71 99
Additional paid-in capital 20,031 53,604
Accumulated deficit (2,556) (926)
Other equity 19 19
Foreign currency translation adjustment 180 86
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,745 52,882
- --------------------------------------------------------------------------------------------------------------------------------
$ 26,396 $ 62,662
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------
Year Ended December 31, 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $22,383 $32,835 $51,464
Cost of revenues 8,636 11,485 18,394
- ----------------------------------------------------------------------------------------------------------------
Gross profit 13,747 21,350 33,070
Operating expenses:
Selling, general and administrative 7,236 10,294 15,251
Research and development 4,305 6,856 10,328
Purchased in-process research and development 4,426
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 11,541 17,150 30,005
- ---------------------------------------------------------------------------------------------------------------
Operating income 2,206 4,200 3,065
Merger costs (1,911)
Interest income 207 363 1,447
Interest expense (56) (31) (88)
Other 77 4 (151)
- ---------------------------------------------------------------------------------------------------------------
Other income (expense), net 228 (1,575) 1,208
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 2,434 2,625 4,273
Income tax expense (benefit) (383) 1,350 2,643
- ---------------------------------------------------------------------------------------------------------------
Net income $ 2,817 $ 1,275 $ 1,630
- ---------------------------------------------------------------------------------------------------------------
Primary:
Net income per common share $0.41 $0.17 $0.17
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 6,942,026 7,543,344 9,793,840
Fully diluted:
Net income per common share $0.41 $0.17 $0.16
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 6,942,026 7,696,128 10,040,637
----------------
</TABLE>
24
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Additional Currency
Common Stock Paid-In Accumulated Translation
Shares Amount Capital Deficit Adjustment
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 1,914 $20 $6,809 $(6,190) $(148)
- -----------------------------------------------------------------------------------------------------------------------------
Conversion of senior cumulative convertible preferred stock 2,188 22 2,796
Conversion of subordinated notes to related parties 368 4 503
Common stock issued in initial public offering,
net of issuance costs 2,210 22 9,082
Exercise of common stock purchase warrants 38 52
Exercise of common stock options 194 2 42
Grant of non-statutory stock options 14
Issuance of common stock under employee purchase plan 22 96
Dividends of acquired company (458)
Unrealized holding loss
Foreign currency translation adjustment 180
Net income 2,817
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 6,934 70 19,394 (3,831) 32
- -----------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 102 1 204
Grant of non-statutory stock options 19
Issuance of common stock under employee purchase plan 54 327
Tax effect of stock options 87
Unrealized holding gains
Foreign currency translation adjustment 148
Net income 1,275
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 7,090 71 20,031 (2,556) 180
- -----------------------------------------------------------------------------------------------------------------------------
Common stock issued in follow-on public offering,
net of issuance costs 2,480 25 30,088
Issuance of common stock related to acquisition 113 1 1,765
Exercise of common stock purchase warrants 100 1 585
Exercise of common stock options 106 1 287
Grant of non-statutory stock options 19
Issuance of common stock under employee purchase plan 47 599
Tax effect of stock options 230
Foreign currency translation adjustment (94)
Net income 1,630
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 9,936 $99 $53,604 $(926) $86
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total
Other Stockholders'
Equity Equity
--------------------
<S> <C> <C>
Balance, December 31, 1993 $19 $510
- -------------------------------------------------------------------------------------
Conversion of senior cumulative convertible preferred stock 2,818
Conversion of subordinated notes to related parties 507
Common stock issued in initial public offering,
net of issuance costs 9,104
Exercise of common stock purchase warrants 52
Exercise of common stock options 44
Grant of non-statutory stock options 14
Issuance of common stock under employee purchase plan 96
Dividends of acquired company (458)
Unrealized holding loss 8 8
Foreign currency translation adjustment 180
Net income 2,817
- -------------------------------------------------------------------------------------
Balance, December 31, 1994 27 15,692
- -------------------------------------------------------------------------------------
Exercise of common stock options 205
Grant of non-statutory stock options 19
Issuance of common stock under employee purchase plan 327
Tax effect of stock options 87
Unrealized holding gains (8) (8)
Foreign currency translation adjustment 148
Net income 1,275
- -------------------------------------------------------------------------------------
Balance, December 31, 1995 19 17,745
- -------------------------------------------------------------------------------------
Common stock issued in follow-on public offering,
net of issuance costs 30,113
Issuance of common stock related to acquisition 1,766
Exercise of common stock purchase warrants 586
Exercise of common stock options 288
Grant of non-statutory stock options 19
Issuance of common stock under employee purchase plan 599
Tax effect of stock options 230
Foreign currency translation adjustment (94)
Net income 1,630
- -------------------------------------------------------------------------------------
Balance, December 31, 1996 $19 $52,882
- -------------------------------------------------------------------------------------
</TABLE>
25
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $2,817 $1,275 $1,630
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization 461 882 1,778
Loss (gain) on sale of marketable securities (58) (22) 6
Purchased in-process research and development 4,426
Deferred income taxes (810) 100 (335)
Change in assets and liabilities:
Accounts receivable (1,965) (3,434) (3,134)
Inventories (1,287) (862) (1,627)
Prepaid expenses and other assets (458) (368) (330)
Income tax receivable 238 (83)
Accounts payable 986 989 528
Accrued expenses and other liabilities (93) 2,160 383
- -----------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by operating activities (407) 958 3,242
- -----------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Purchases of property and equipment (1,071) (1,541) (2,797)
Acquisition of intangible assets (606)
Purchases of marketable securities (1,017) (1,347) (52,202)
Proceeds from the maturity of marketable securities 2,345 1,465 25,562
Purchase of TEKnique, net of cash acquired (3,232)
Additions to other assets (170) (1,447) (1,522)
- -----------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by investing activities 87 (2,870) (34,797)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Payments on capital lease obligations (31) (33) (23)
Payments on license note payable (374)
Payments on bank line of credit (1,201) (8)
Payments on long-term debt (66) (101)
Payment of dividends by acquired company (225) (250)
Payments on government advances (81)
Proceeds from refundable advances 347
Proceeds from government advances 123
Proceeds from long-term debt 202
Proceeds from bank line of credit 70
Proceeds from issuance of common stock, net of issuance costs 9,298 533 31,586
Grant of non-statutory stock options 14 19 19
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 7,551 867 31,400
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
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- --------------------------------------------------------------------------------
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
<TABLE>
<CAPTION>
------------
Year Ended December 31, 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effect of exchange rate changes on cash and cash equivalents 16 21 4
Net increase (decrease) in cash and cash equivalents 7,247 (1,024) (151)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 506 7,753 6,729
Cash and cash equivalents, end of year $7,753 $6,729 $6,578
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 55 $ 2 $ 39
Taxes paid 660 981 2,340
Noncash transactions:
Conversion of subordinated convertible notes payable to related parties into common stock 505
Conversion of senior preferred stock into common stock 2,818
Issuance of common stock for acquisitions 1,766
Accrued acquisition expenses 784
Assets and liabilities recognized upon acquisition of TEKnique:
Accounts receivable 122
Inventories 136
Other current assets 74
Property and equipment 409
Purchased in-process research and development 4,426
Excess of purchase price over net assets acquired 757
Notes payable 55
Accounts payable 264
Accrued expenses and other liabilities 250
------------
</TABLE>
27
- --------------------------------------------------------------------------------
<PAGE>
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Natural MicroSystems Corporation (the "Company"), designs, manufactures and
markets integrated hardware and software products which enable others to develop
and implement Open Telecommunications applications and systems.
The consolidated financial statements include the accounts of Natural
MicroSystems Corporation and its wholly owned subsidiaries. Intercompany
balances and transactions have been eliminated.
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.
The Company's Hong Kong and Belgian subsidiaries' operations are measured by
reflecting financial results of operations as if they had taken place within a
U.S. dollar based economic environment. Gains and losses resulting from
transactions denominated in foreign currencies are included in income. Such
gains and losses are not material for all periods presented. The Company's
French subsidiary's operations are measured in their local currency, the French
franc. Adjustments resulting from translating the French subsidiary's financial
statements to the U.S. dollar are accumulated in a separate component of
consolidated stockholders' equity until a sale, if any, in whole or in part of
the net investment in the French subsidiary takes place.
Revenues from product sales are recognized upon shipment to customers. Revenues
received from the licensing of technology are recognized when the licenses are
sublicensed by the licensee, as defined in the license agreement. Revenues under
fixed price contracts are recorded as work is performed using the percentage of
completion method. Losses on contracts are provided for when identified.
Cash equivalents include short-term investments with remaining maturities of
three months or less at date of purchase.
Marketable securities are categorized as "available for sale" and are carried at
fair market value.
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Property and equipment are stated at cost. Depreciation is provided by charges
to operations over the estimated useful lives of the assets, generally three to
ten years, using the straight-line or declining balance method.
License agreements are stated at cost. Amortization of licenses is charged to
operations on the shorter of a per unit sold basis or over the estimated useful
lives of these licenses, not to exceed 10 years.
28
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<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
All research and development costs are expensed as incurred.
Costs associated with the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time costs are
capitalized in accordance with Statement of Financial Accounting Standards No.
86. Capitalized development costs have not been significant for any periods
presented.
Financial instruments, primarily cash and cash equivalents, marketable
securities, accounts receivable, and long term debt, are carried at amounts
which approximate their fair market value.
During 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). The effect of adopting SFAS 121 was not
material to the Company's financial condition, results of operations or
liquidity. The Company reviews the recoverability of long-lived assets each
reporting period.
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by SFAS
123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations; however, the proforma impact on earnings per
share has been disclosed in the Notes to Consolidated Financial Statements as
required by SFAS 123 for companies that continue to account for stock options
under APB 25.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted statutory
tax rates in effect in the year in which the differences are expected to
reverse. A deferred tax asset is established for the expected future benefit of
net operating loss and credit carryforwards. A valuation reserve against net
deferred tax assets is required, if, based upon available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Primary and fully diluted net income per share of common stock are computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during the period. Common share equivalents
comprise the dilutive effect of the assumed exercise of outstanding stock
options and warrants using the treasury stock method. Computation of net income
per common share does not give effect to common share equivalents if their
inclusion would have the effect of increasing the net income per share amount
otherwise computed.
(2) Mergers and Acquisitions
On November 29, 1995, the Company issued 1,440,000 shares of its common stock in
exchange for all of the outstanding shares of VOX S.A. and an affiliate ("VOX").
The transaction was accounted for as a pooling of interests and accordingly, the
Company's consolidated financial statements have been restated to include the
accounts and operations of VOX for all periods presented prior to the merger.
29
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[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Separate revenues, operating income, and net income of the two entities are
presented in the following table.
<TABLE>
<CAPTION>
1994 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
NMS $16,957 $24,610
VOX 5,426 8,225
- --------------------------------------------------------------------------------
$22,383 $32,835
- --------------------------------------------------------------------------------
Operating income:
NMS $ 2,124 $ 3,451
VOX 82 749
- --------------------------------------------------------------------------------
$ 2,206 $ 4,200
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net income:
<S> <C> <C>
NMS $ 2,752 $ 1,245
VOX 65 30
- --------------------------------------------------------------------------------
$ 2,817 $ 1,275
- --------------------------------------------------------------------------------
</TABLE>
In connection with the transaction $1,911 of costs were incurred and were
charged to expense in the fourth quarter of 1995. These costs consisted of
legal, accounting, investment banking, and transaction commission fees.
On June 14, 1996, the Company acquired all of the outstanding shares of
Tek-Nique, Inc. and an affiliate ("TEKnique") and paid $3,600 in cash and issued
82,958 shares of its common stock. Costs associated with the transactions were
$284 for a total purchase price of $5,673. The transaction was accounted for as
a purchase and accordingly, the purchase price was allocated to assets purchased
and liabilities assumed based on their fair values at the date of acquisition.
The excess of purchase price over the fair value of the net assets acquired was
$757 and was recorded as goodwill, which is being amortized over seven years.
The Company's consolidated financial statements include the accounts and
operations of TEKnique for the period from the date of its acquisition to
December 31, 1996. In connection with the acquisition $4,426 of purchased
in-process research and development costs were charged to expense in the year
ended December 31, 1996.
Additional consideration of $2,500 in cash is payable based upon future product
deliveries, revenues and operating results for periods through December 31,
1998. The contingent cash consideration is not included in the purchase price,
but will be recorded if and when the above requirements are met.
<TABLE>
<CAPTION>
The total purchase price was allocated as follows:
<S> <C>
Working capital $ 81
Property and equipment 409
In-process research and development 4,426
Excess of purchase price over net assets acquired 757
- --------------------------------------------------------------------------------
$5,673
- --------------------------------------------------------------------------------
</TABLE>
Separate unaudited pro forma presentation of the two entities are presented in
the following table as if the acquisition had taken place at the beginning of
1995. Excluded from the proforma information are costs associated with in-
process research and development, certain compensation charges related directly
to the acquisition, and decreased interest income resulting from the reduction
of cash and cash equivalents.
<TABLE>
<CAPTION>
(unaudited)
---------
1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
NMS $32,835 $49,346
TEKnique 2,771 3,588
- --------------------------------------------------------------------------------
$35,606 $52,934
- --------------------------------------------------------------------------------
Operating income:
NMS $ 4,092 $ 6,706
TEKnique 64 433
- --------------------------------------------------------------------------------
$ 4,156 $ 7,139
- --------------------------------------------------------------------------------
Net income:
NMS $ 1,050 $ 5,156
TEKnique 32 528
- --------------------------------------------------------------------------------
$ 1,082 $ 5,684
- --------------------------------------------------------------------------------
Fully diluted earnings per share: $ .14 $ .56
- --------------------------------------------------------------------------------
</TABLE>
30
================================================================================
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
(3) BUSINESS AND CREDIT CONCENTRATION
One customer accounted for 13.9% of the Company's revenues for the year ended
December 31, 1996. Another customer accounted for 11.9% and 13.3% of the
Company's revenues for the years ended December 31, 1995 and 1994, respectively.
As is customary in the Company's industry, the Company does not require
collateral on accounts receivable. The Company routinely evaluates its
customers' creditworthiness before extending credit. Expected credit losses are
reserved for and actual losses have been within management's expectations.
(4) MARKETABLE SECURITIES
Marketable securities categorized as "available for sale" are carried
at their fair market value of $134 and $26,767 at December 31, 1995 and 1996,
respectively. Proceeds and gross realized gains (losses) from sale of securities
for the year ended December 31, 1995 and 1996, were $1,465 and $22 and $25,562
and ($6), respectively.
(5) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,173 $1,231
Work in progress 945 2,390
Finished goods 1,586 1,798
- ---------------------------------------------------------------------------------
$3,704 $5,419
=================================================================================
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment $2,262 $4,164
Computer software 290 872
Furniture and fixtures 592 805
Machinery and equipment 678 864
Evaluation units 70 70
Leasehold improvements 266 438
- ---------------------------------------------------------------------------------
4,158 7,213
- ---------------------------------------------------------------------------------
Less accumulated depreciation and amortization (1,968) (3,305)
- ---------------------------------------------------------------------------------
$2,190 $3,908
- ---------------------------------------------------------------------------------
</TABLE>
(7) INCOME TAXES
The components of income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $191 $898 $2,410
State 30 174 358
Foreign 206 178 166
- ---------------------------------------------------------------------------------
427 1,250 2,934
Charge in lieu of tax 44
Deferred income tax expense (benefit):
Federal (534) (65) (298)
State (149) (17) (70)
Foreign (127) 182 33
- ---------------------------------------------------------------------------------
(810) 100 (335)
- ---------------------------------------------------------------------------------
($383) $1,350 $2,643
=================================================================================
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $1,680 $1,803
Tax credit carryforwards 405 271
Bad debts 169 129
Accrued vacation 32 45
Inventories 88 127
Other 11 18
- ---------------------------------------------------------------------------------
2,385 2,393
- ---------------------------------------------------------------------------------
Valuation allowance (1,516) (1,266)
- ---------------------------------------------------------------------------------
869 1,127
Deferred tax liabilities consist of the following:
Book income on foreign fixed
price contracts in excess of tax 132 52
Other 3
- ---------------------------------------------------------------------------------
$ 737 $1,072
=================================================================================
</TABLE>
31
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For U.S. federal income tax purposes, the Company has net operating
losscarryforwards, available to reduce future income, of approximately $3,600
and general business credits of $271 at December 31, 1996. These carryforwards
expire beginning in 2003 and 2001, respectively. In addition, for U.S. federal
income tax purposes, TEKnique has net operating loss carryforwards available to
reduce future income of approximately $790 at December 31, 1996. These
carryforwards expire beginning in 2010. Utilization of these net operating loss
and general business credit carryforwards are subject to annual limitations of
approximately $770 and $205 for the Company and TEKnique, respectively, under
Internal Revenue Code section 382 and will be available to reduce future tax and
taxable income of the respective entitities only.
The amount recorded as net deferred tax assets as of December 31, 1995 and 1996
represent the amount of tax benefits of existing deductible temporary
differences or carryforwards that are more likely than not to be realized
through the generation of sufficient future taxable income within the
carryforward period. The Company believes that the net deferred tax asset of
$1,072 at December 31, 1996 will more likely than not be realized in the
carryforward period. The Company continuously evaluates the recoverability of
deferred tax assets.
The difference between the total expected income tax expense (benefit) computed
by applying the Federal income tax rate of 34% to income before income taxes and
the reported income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
--------
Year Ended December 31, 1994 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax expense at
U.S. federal statutory rate $ 828 $ 893 $1,453
State income taxes
(net of U.S. federal tax benefit) (79) 102 191
Rate differential of foreign operations 30 10
Utilization of federal net operating
loss carryforwards (735) (256)
U. S. federal research and
development credits (84) (130)
Non-deductible loss of foreign subsidiary 2
Change in valuation allowance (534) (163) (147)
Non-deductible merger costs 653
Non-deductible purchased in-process
research and development costs 1,531
Other 105 (61) 1
- ---------------------------------------------------------------------------------
$(383) $1,350 $2,643
- ---------------------------------------------------------------------------------
</TABLE>
The domestic and foreign components of earnings before income tax were:
<TABLE>
<CAPTION>
--------
Year Ended December 31, 1994 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $2,331 $2,047 $3,850
Foreign 103 578 423
- ---------------------------------------------------------------------------------
$2,434 $2,625 $4,273
=================================================================================
</TABLE>
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
--------
Year Ended December 31, 1994 1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations $(383) $1,350 $2,643
Shareholders' equity, for compensation
expense for tax purposes in excess
of amounts recognized for financial
statement purposes (87) (230)
- ---------------------------------------------------------------------------------
$(383) $1,263 $2,413
- ---------------------------------------------------------------------------------
</TABLE>
In future years, recognizing tax benefits relating to the valuation allowance
for the deferred tax assets of TEKnique as of December 31, 1996 will be
allocated to goodwill and other non-current assets.
32
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
(8) ACCRUED EXPENSES AND OTHER LIABILITIES
Components of accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
--------
1995 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Compensation and related expenses $1,591 $2,516
Income taxes 343 547
Contingent purchase liability 500
Other liabilities 1,769 545
- ---------------------------------------------------------------------------------
$3,703 $4,108
=================================================================================
</TABLE>
(9) INDEBTEDNESS
At December 31, 1996, the Company has an unsecured $2,500 bank line of credit
for working capital purposes. The Company can borrow under the line of credit up
to the lesser of $2,500 or an amount based on the Company's accounts receivable.
At December 31, 1996 there were no borrowings against the line and the full line
was available. Borrowings under this line bear interest at the bank's prime rate
(8.25% at December 31, 1996). The line of credit has an expiration date of June
1997. The Company is subject to certain covenants such as profitability and
equity levels, leverage and liquidity ratios, and may not pay dividends without
the bank's consent. At December 31, 1996, the Company was in compliance with its
debt covenants.
The Company has a 2,000 French franc line of credit with a European bank. At
December 31, 1996, there were no borrowings against this line and the full line
was available. Borrowings under this line bear interest at rates ranging from
7.5% to 8.95%. Borrowings are secured by certain of the Company's assets.
Amounts classified as "government advance" at December 31, 1995 and 1996
represent interest-free advances from the French government repayable from the
proceeds of export sales from France.
(10) STOCKHOLDERS' EQUITY
In 1994, the Company authorized the issuance of up to 3,000,000 shares of
preferred stock, $0.05 par value per share which was undesignated as to series
at that time. Any series of such preferred stock will have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges, and liquidation privileges, as
shall be determined by the Board of Directors.
During October 1996, the Company's Board of Directors declared a
2 for 1 stock split in the form of a stock dividend effective in November 1996.
All share and per share data have been restated in these consolidated financial
statements for all periods presented to reflect this split.
French legislation requires companies to appropriate a percentage of net profits
per the statutory accounts to a legal reserve until the amount of such reserve
is equal to 10% of nominal capital. Such reserve may not be distributed.
33
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) STOCK OPTIONS AND STOCK PURCHASE PLANS
In July 1989, the Company's Board of Directors adopted the 1989 Stock Option and
Stock Purchase Plan (the "1989 Plan"), which permitted both incentive and
non-statutory options exercisable for the purchase of shares of common stock to
be granted to employees, directors and consultants of the Company. In October
1993, the Board of Directors amended the 1989 Plan to provide that no further
options were to be granted under the 1989 Plan after the effective date of the
Company's initial public offering. The exercise price of incentive and
non-statutory options could not be less than 100% and 50%, respectively, of the
fair market value of the Company's common stock on the date of grant.
In October 1993, the Company's Board of Directors adopted the 1993 Stock Option
Plan (the "1993 Plan"). The 1993 Plan permits both incentive and non-statutory
options to be granted to employees, directors and consultants. In March 1996,
the Board of Directors adopted and in May 1996 the Company's stockholders
approved (i) an increase in the number of shares available under the 1993 Plan
from 980,000 to 1,460,000 (ii) a requirement that the exercise price of options
granted under the 1993 Plan be at least equal to the fair market value of the
Company's common stock on the date of grant.
In October 1995, the Company's Board of Directors adopted the 1995 Employee
Stock Option Plan (the "1995 Plan"). The 1995 Plan permits non-statutory options
to be granted to non-executive officer employees and consultants of the Company.
In December 1996, the Board of Directors amended the plan to increase the number
of shares available to purchase to 800,000 shares of common stock. The exercise
price of non-statutory options may not be less than 100% of the fair market
value of the Company's common stock on the date of grant.
Stock option transactions were as follows::
<TABLE>
<CAPTION>
Weighted average
Shares of exercise price of
common stock shares under plan
- ---------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 681,492 $ .68
- ---------------------------------------------------------------------------------
Granted 291,199 5.28
Exercised (196,672) .20
Canceled (3,707) 3.12
- ---------------------------------------------------------------------------------
Outstanding at December 31, 1994 772,312 2.53
- ---------------------------------------------------------------------------------
Granted 875,400 9.69
Exercised (75,853) 1.46
Canceled (16,755) 5.58
- ---------------------------------------------------------------------------------
Outstanding at December 31, 1995 1,555,104 6.58
- ---------------------------------------------------------------------------------
Granted 656,190 17.80
Exercised (104,596) 2.86
Canceled (13,554) 8.12
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Outstanding at December 31, 1996 2,093,144 $ 10.27
- ---------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
- ---------------------------------------------------------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.17-$5.00 406,324 6.9 $ 1.33 345,984 $ 1.11
$5.01-$10.00 734,704 8.3 7.23 291,538 6.94
$10.01-$20.00 751,716 8.2 13.77 77,409 13.64
$20.01-$30.00 200,400 7.3 26.43
- ---------------------------------------------------------------------------------
2,093,144 714,931
- ---------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
In October 1993, the Company's Board of Directors adopted the 1993 Non Employee
Directors Stock Option (the "Directors Plan") which provides for the purchase of
up to 120,000 shares of common stock pursuant to the grant of non-statutory
stock options to directors who are not employees of the Company. In March 1996
the Board of Directors adopted and in May 1996 the Company's stockholders
approved (i) an increase in the number of shares for which options shall be
granted to newly elected non-employee directors from 10,000 to 15,000 and (ii)
an increase in the number of shares for which options shall be granted to
incumbent non-employee directors from 2,000 to 5,000. The exercise price of the
options may not be less than 100% of the fair market value of the Company's
Common Stock on the date of the grant. As of December 31, 1996, 35,000 shares
had been granted at prices ranging from $4.88 to $17.63 per share, and all of
the options were vested.
The 1993 Employee Stock Purchase Plan ("Purchase Plan") which was adopted by the
Board of Directors in 1993 and amended by the Company's stockholders in 1996,
permits employees and officers of the Company to participate in periodic plan
offerings, in which payroll deductions may be used to purchase shares of common
stock. The purchase price is 85% of the lower of the fair market value at the
date the offering commences or terminates. The Company has reserved 200,000
shares for the Purchase Plan. As of December 31, 1996, 63,417 shares have been
issued under the Purchase Plan at purchase prices ranging from $4.36 to $12.75
per share.
The Company has granted certain employees and consultants non-statutory stock
options to purchase 161,476 shares of the Company's common stock at exercise
prices ranging from $0.17 to $13.75, the fair market value on the date of grant.
The options vest from one to three years. At December 31,1996, 81,476 options
were vested.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees" and related interpretations in
accounting for its stock option and employee stock purchase plans, accordingly,
no compensation expense has been recognized in the Consolidated Financial
Statements for such plans. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed under SFAS 123,
"Accounting for Stock-based Compensation", the Company's net income (loss) and
earning (loss) per share for 1995 and 1996 are estimated as $449 and $(432) and
$0.06 and $(0.05), respectively using the Black-Scholes option-pricing model.
The fair value of the options granted on date of grant for 1995 and 1996 is
$3,545 and $5,403. The following assumptions were used in the calculation of
these values for 1995 and 1996, respectively: dividend yield of .01%, risk free
interest rate of 6.21%, assumed forfeiture rate of 5%, and expected life of 5
years. The pro forma effect on net income for 1995 and 1996 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
(12) Commitments
The Company leases its current manufacturing and office facilities under
noncancelable leases extending to December 31, 1997. The Company occupies other
facilities under leases which expire within two years. Rental expense under all
operating lease agreements in effect during December 31, 1994, 1995 and 1996
amounted to approximately $259, $317, and $569, respectively.
In September 1996, the Company entered into a lease agreement for
a new headquarters facility which it expects to occupy in the second quarter of
1997. The lease term is 15 years with annual rent of $893 in the initial
occupancy year increasing to $1,440 in the last year of
35
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
occupancy and requires payment of operating expenses and taxes. The Company
expects to expend approximately $2,800 between September 1996 and the date of
occupancy to complete the interior of the building.
At December 31, 1996, commitments under operating leases for minimum future
payments consist of the following:
<TABLE>
<CAPTION>
Years ending December 31, Leases
- --------------------------------------------------------------------
<S> <C>
1997 $ 1,189
1998 1,161
1999 1,131
2000 1,346
2001 1,240
Thereafter 14,307
- --------------------------------------------------------------------
$20,374
====================================================================
</TABLE>
During December 1995, the Company received funding from a French governmental
agency to conduct a research and development project. Total funding was $405.
Upon successful completion of the project the Company must repay the funding as
follows:
<TABLE>
<CAPTION>
Years ending December 31,
- --------------------------------------------------------------------
<S> <C>
1997 $ 58
1998 81
1999 123
2000 143
- --------------------------------------------------------------------
$405
====================================================================
</TABLE>
(13) Segment and Geographic Information
The company operates in one industry segment: the design, manufacture and
marketing of integrated hardware and software products which enable others to
develop and implement Open Telecommunication applications.
<TABLE>
<CAPTION>
North America Europe Other Corporate Total
- -------------------------------------------------------------------------------
Net Sales to Unaffiliated Customers:
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $35,454 $12,794 $3,216 $51,464
1995 18,656 11,742 2,437 32,835
1994 13,222 8,209 952 22,383
<CAPTION>
Income from Operations:
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 $ 1,446 $ 118 $1,501 $ 3,065
1995 3,401 615 184 4,200
1994 1,424 350 432 2,206
<CAPTION>
Identifiable Assets:
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $28,138 $ 5,956 $ 729 $27,839 $62,662
1995 11,468 6,927 1,002 7,131 26,528
1994 7,563 5,057 329 7,800 20,749
</TABLE>
(14) Dependence on Outside Suppliers
and Contract Assembly Manufacturers
The Company relies on various suppliers of components for its products. Many of
these components are standard and generally available from multiple sources.
However, certain custom integrated circuits and other devices which are
components of one or more of the Company's products are acquired from single
source suppliers to the Company. Although the Company believes it could develop
other sources for each of these custom devices, the process could take several
months, and the inability or refusal of any such source to continue to supply
devices could have a material adverse effect on the Company pending the
development of an alternative source. The Company also currently relies on a
single contract manufacturer to assemble printed circuit boards for each of its
North American and European operations. Although a number of such contract
manufacturers exist, the interruption or termination of the Company's current
manufacturing relationships could have a short-term adverse effect on the
Company's business.
36
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31, 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $10,290 $16,101 $22,383 $32,835 $51,464
Cost of revenues 3,801 6,041 8,636 11,485 18,394
- --------------------------------------------------------------------------------------------------------------------
Gross profit 6,489 10,060 13,747 21,350 33,070
Operating expenses:
Selling, general and administrative 3,654 5,247 7,236 10,294 15,251
Research and development 1,624 2,320 4,305 6,856 10,328
Purchased in-process research and development 4,426
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 5,278 7,567 11,541 17,150 30,005
- --------------------------------------------------------------------------------------------------------------------
Operating income 1,211 2,493 2,206 4,200 3,065
Merger costs (1,911)
Other income (expense), net (51) (51) 228 336 1,208
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,160 2,442 2,434 2,625 4,273
Income tax expense (benefit) 300 560 (383) 1,350 2,643
- --------------------------------------------------------------------------------------------------------------------
Net income $ 860 $ 1,882 $ 2,817 $ 1,275 $ 1,630
====================================================================================================================
Net income per common share $0.37 $0.41 $0.17 $0.16
====================================================================================================================
Fully diluted weighted average common shares outstanding 5,076 6,942 7,696 10,041
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 240 $ 506 $ 7,753 $ 6,729 $ 6,578
Marketable securities 223 134 26,767
Working capital 1,494 2,564 13,650 14,233 44,528
Total assets 4,876 9,245 20,749 26,396 62,662
Long-term obligations, less current portion 178 105 27 93
Redeemable senior convertible preferred stock 2,254 2,818
Total stockholders' equity (deficit) (529) 510 15,692 17,745 52,882
</TABLE>
37
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "NMSS". The following table sets forth for the fiscal periods indicated
the high and low closing sale prices of the Company's Common Stock as reported
on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
- ------------------------------------------------------------------------------
1995
<S> <C> <C>
First Quarter $8.50 $6.63
Second Quarter 9.88 7.00
Third Quarter 13.69 9.25
Fourth Quarter 15.25 11.50
<CAPTION>
- ------------------------------------------------------------------------------
1996
<S> <C> <C>
First Quarter $16.00 $11.13
Second Quarter 20.75 15.00
Third Quarter 25.00 13.75
Fourth Quarter 32.00 21.50
</TABLE>
38
- --------------------------------------------------------------------------------
<PAGE>
[LOGO OF NATURAL MICROSYSTEMS APPEARS HERE]
CORPORATE INFORMATION
Robert P. Schechter
Chairman of the Board,
President and Chief Executive Officer,
Natural MicroSystems Corporation
Charles T. Foskett
Senior Vice President of
International Operations,
Natural MicroSystems Corporation
Zenas W. Hutcheson III
President,
Hutcheson & Company, Inc.
Dr. Frank King
Chief Executive Officer
PSW Technologies, Inc.
C. William McDaniel
Principal,
CWM Associates
David F. Millet
Chief Executive Officer
Chatham Venture Corporation
Ronald W. White
General Partner,
Advanced Technology Development Fund
Robert P. Schechter
Chairman and CEO
Ronald J. Bleakney
Senior Vice President of
North American Sales
Charles T. Foskett
Senior Vice President of
International Operations
R. Brough Turner
Senior Vice President of Technology
Wendell E. Bishop
Chief Scientist
Allen P. Carney
Vice President of Marketing
and Business Development
John F. Kennedy
Vice President of Finance,
Chief Financial Officer and Treasurer
George D. Kontopidis, Ph.D.
Vice President of Engineering
Kay J. Meckes
Vice President of Human Resources
John L. Tincler
Vice President of Operations
Critz Chan
General Manager
Natural MicroSystems (Asia), Ltd.
Herve Manceron
General Manager
Natural MicroSystems Europe S.A.
Herbert L. Pavey
General Manager
Natural MicroSystems Intelligent
Network Division
Guillermo M. J. Redondo
Director General
Natural MicroSystems Latin America S.A.
Stock Trading Information
Nasdaq National Market
Symbol: NMSS
Transfer Agent
State Street Bank & Trust Company
Box 8200
Boston, MA 02266-8200
Counsel
Choate, Hall & Stewart
53 State Street
Exchange Place
Boston, MA 02109
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
Annual Meeting of Stockholders
The Annual Meeting of Stockholders
of Natural MicroSystems Corporation
will be held on Thursday, April 17 1997
at 1:00 PM, at the offices of Choate,
Hall & Stewart, 53 State Street,
Exchange Place, Boston, MA 02109.
FORM 10-K
Stockholders wishing a copy of
FORM 10-K may receive one free of
charge by contacting Investor Relations
at (508)650-1305.
Trademark Information
Natural MicroSystems, Fusion, Open Telecommunications,
Telephony Services Architecture and VBX are trademarks
of Natural MicroSystems Corp. Alliance Generation is a
registration trademark of Natural MicroSystems Corp.
All other product or corporate references are trademarks
or registered trademarks of their respective companies.
================================================================================
<PAGE>
<TABLE>
CORPORATE ADDRESSES
<S> <C> <C>
Natural MicroSystems Natural MicroSystems Natural MicroSystems Latin
Corporation (Asia), Ltd. America S.A.
100 Crossing Blvd. 614 Concordia Plaza Soldado de la Independencia 1130
Framingham, MA 01701 USA 1 Science Museum Road Pisos 8 y 9
+508-620-9300 Tsim-Sha-Tsui East (1426) Buenos Aires, Argentina
Kowloon, Hong Kong +54-1-778-7007
Natural MicroSystems +852-2926-1820
Europe S.A.
Immeuble Copernic Natural MicroSystems
Parc Technologique Intelligent Network Division
18-22, Rue Edouard-Herriot - 92356 911 North Plum Grove Road
LE PLESSIS ROBINSON Cedex Schaumburg, IL 60173
France +847-706-9700
+33-1-46-01-40-00
SALES OFFICES
Antwerp, Belgium Chicago, IL Paris, France
Atlanta, GA Dallas, TX Seattle, WA
Boston, MA Frankfurt, Germany San Jose, CA
Buenos Aires, Argentina Kowloon, Hong Kong Vienna, VA
Los Angeles, CA
</TABLE>
NATURAL
100 Crossing Blvd., Framingham, MA 01701
http://www.nmss.com . e-mail: [email protected]
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
Natural MicroSystems N.V.
Division ATEA 5-94.00
Industriepark Klein Gent
B-2200 Herentals
Belgium
Natural MicroSystems Asia Ltd.
614 Concordia Plaza
1 Science Museum Road
Tsim-Sha-Tsui East
Kowloon, Hong Kong
Natural MicroSystems Europe S.A.
Immeuble Copernic
Parc Technologique
18-22, Avenue
Edouard-Herriot - F - 92356
LE PLESSIS ROBINSON Cedex
France
Natural MicroSystems Latin America S.A.
Soldado de la Independencia 1130
Pisos 8 y 9
(1426) Buenos Aires, Argentina
NMS International, Inc.
100 Crossing Blvd.
Framingham, MA 01701
NMS Europe, Inc.
100 Crossing Blvd.
Framingham, MA 01701
Natural MicroSystems FSC Ltd.
69 A Kronprindsens Gade
P.O. Box 301858-UDS
Charlotte Amilie
St. Thomas
US Virgin Islands 00803
Natural MicroSystems Securities Corporation
100 Crossing Blvd.
Framingham, MA 01701
Natural MicroSystems
Intelligent Network Division
911 North Plum Grove Road
Schaumburg, IL 60173
<PAGE>
EXHIBIT 23.1
The Board of Directors
Natural MicroSystems Corporation:
We consent to incorporation by reference in the registration statement (No.
333-09135) on Form S-8 of Natural MicroSystems Corporation of our report dated
January 14, 1997, relating to the consolidated balance sheets of Natural
MicroSystems Corporation as of December 31, 1996, and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flow for
each of the years in the three-year period ended December 31, 1996, which
report appears in the December 31, 1996, annual report on Form 10-K of Natural
MicroSystems Corporation.
KPMG PEAT MARWICK LLP
Boston, MA
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDING 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,578
<SECURITIES> 26,767
<RECEIVABLES> 14,088
<ALLOWANCES> 685
<INVENTORY> 5,419
<CURRENT-ASSETS> 53,960
<PP&E> 7,213
<DEPRECIATION> 3,305
<TOTAL-ASSETS> 62,662
<CURRENT-LIABILITIES> 9,433
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 19
<TOTAL-LIABILITY-AND-EQUITY> 52,882
<SALES> 51,464
<TOTAL-REVENUES> 51,464
<CGS> 18,394
<TOTAL-COSTS> 18,394
<OTHER-EXPENSES> 30,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (88)
<INCOME-PRETAX> 4,273
<INCOME-TAX> 2,643
<INCOME-CONTINUING> 1,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,630
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
