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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, 1997
[_] 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
--------------------------------
(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)
100 Crossing Boulevard, 01702
Framingham, Massachusetts -----
-------------------------- (Zip code)
(Address of principal executive office)
Registrant's telephone number,
including area code: 508-620-9300
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 [_]
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 6, 1998, the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $437 million, based on the
closing price on such date of the registrant's Common Stock on The Nasdaq Stock
Market. As of March 6, 1998, 10,846,163 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, 1997 are incorporated into Parts II and IV of this FORM 10K and
(ii) the registrant's Proxy Statement relating to the 1997 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, AG/2/, 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. 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 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 real-time transport of circuit switched information over packet switched
networks.
The Company's customers are primarily original equipment manufacturers (OEMs),
independent software vendors (ISVs), value added resellers (VARs), and systems
integrators, which incorporate enhanced telecommunications services in a wide
variety of applications and systems; telecommunications 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 messaging, automated attendant,
interactive voice response (IVR), specialized switching, call centers and
computer telephony integration, enhanced network services, call and data
recording, infrastructure, IP (Internet Protocol) telephony, intelligent
networks (IN), toll bypass and IP to PSTN gateways. 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 real-time encoding and decoding of voice,
including compression, maintaining high quality tone detection, call control,
and other mixed media functions, while minimizing the use 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) and H.100 from the Enterprise Computer Telephony Forum (ECTF), widely-
adopted standards for interoperability and switching among telephony resources.
See "Standards". The Company's Telecommunications 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
. Rapid time to market
. High availability
TSA is designed to be open, standards-based, layered, operating system-
independent, modular and scaleable. It encompasses integrated 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 line interfaces (Natural Platforms); media extension software which
allows developers to use facsimile, speech recognition, and text-to-speech
capabilities (Natural Media); and software applications programming interfaces
(APIs) and development tools (Natural Access). See "Products".
The Open Telecommunications Market
The first systems to integrate telephony and computer functions created
"Computer Telephony Integration (CTI) applications in the early 1980s.
Applications such as voice messaging and automated attendant were used primarily
by Fortune 500 companies. These early systems used proprietary hardware and
software. With the increased performance capabilities and general acceptance of
PCs, two trends emerged. The first, the shift from closed proprietary hardware
and software to open, standards-based commodity computing PC architectures and
software, resulted in more cost-effective applications. The second, the shift
from central office or centralized computing environments to distributed or
client-server computing architectures, resulted in more widespread adoption. As
a result of these trends, application developers bring their products to market
more quickly and at lower cost, increasing the overall demand for Open
Telecommunications products and services.
The market for Open Telecommunications systems has grown substantially since it
began in the 1980s. Presently the Company views the telecommunications
equipment market as having four segments:
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APPLICATIONS INFRASTRUCTURE
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NETWORK BASED voice and fax messaging systems wireless and wireline
one number "follow me" systems central office switches
international call back system signaling 7
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prepaid calling card systems
renumbering systems
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ENTERPRISE BASED premise based voice and fax private branch exchanges
mail systems automatic call distributors
interactive voice response IP gateways
systems (IVR)
call centers
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The first segment to adopt Open Telecommunications was enterprise based
applications (sometimes referred to as computer telephony integration),
specifically voice mail and IVR systems. The Company believes that most new
entrants and many existing participants in this segment purchase enabling
technology rather than develop it themselves; accordingly, the segment is
primarily based on Open Telecommunications concepts. The second segment to
adopt Open Telecommunications technology was Network based Applications.
Initial products were primarily messaging platforms for service provider
networks. Other applications soon followed including one number "follow me"
systems, international call back, prepaid calling card systems and renumbering
systems. The Company believes that most new entrants to this market purchase
enabling technology rather than develop it themselves. Open Telecommunications
technology has been little used in the infrastructure segments to date. The
Company believes these segments require high availability systems. The Company
anticipates these segments will accept Open Telecommunications products, in lieu
of proprietary technology, as platforms as high availability product offerings
become available.
The Company is focused on enabling technology which underlies the entire Open
Telecommunications applications and systems market. This enabling technology may
be further divided between open, standards-based commercially available products
of the type offered by the Company and proprietary enabling components developed
and used by some application developers. There is a continuing trend among
developers who use proprietary enabling components to shift to commercially
available enabling technology products in lieu of updating their proprietary
components. The momentum of Open Telecommunications and the pace of improvement
of the Company's offerings frequently surpass the resources and capabilities of
the proprietary component developers. 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 concentrates
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 it to offer a broad range of enabling technology
products not only for applications and systems in Enterprise markets but also
for the emerging markets of Network based Applications as well as Enterprise and
Network Infrastructure. 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 such as H.100
promoted by the ECTF, International Telecommunications Union (ITU), the Voice
over IP Forum of the International Multimedia Consortium's H.323, Microsoft
Windows NT and UNIX. 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:
Provide Open Computing Platforms
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The Company's objective is to support open architectures, allowing developers to
utilize standards-based products or components from multiple vendors, thereby
reducing development time and obtaining the advantages of advances made in
complementary technologies. These products must be accessible to developers and
other third parties allowing them, through the use of the Company's software
development kits, to develop software and algorithms for its platforms. The
Company's products must provide support for different programming models and
platforms, allowing developers to build applications and systems utilizing
existing development skills and tools as well as support multiple operating
systems.
Focus on High Value Applications and Systems
The Company's objective is to provide its customers with a broad range of
enabling technology that support the creation of applications and systems with
the following characteristics:
. High capacity and high performance, enabling developers to build highly cost-
effective applications and systems that accommodate large numbers of telephone
lines in a single P.C. slot, in a single computer chassis or through networked
or multi-chassis systems with the lowest use of host processor resources.
. Mixed media support, enabling developers to build applications and systems
incorporating different media types such as voice, facsimile, speech
recognition, text-to-speech, and data.
. Sophisticated software-based switching, enabling developers to easily and
automatically route signals to and effectively utilize the appropriate system
resources.
. Time to market support, providing developers with an easy to use software
development environment and complementary services that promote a rapid time
to market for our developers products.
. High availability systems, a currently emerging capability, will enable
developers to build Infrastructure applications and systems.
Partnership Based Distribution Model
The Company provides 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
developer support, services, communications, and partner marketing programs.
Global Presence
The Company believes that its products must be developed for global markets,
allowing developers to integrate their applications and systems into a wide
variety of telephone and data networks using Company products which are
compatible with signaling protocols approved for use in numerous countries. The
Company believes that it must have a presence in the fastest growing and largest
international markets. 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 over 40 countries around the world
Pursue High Growth Markets
The Company is focusing its marketing and business development efforts in areas
where significant growth opportunities exist. These include:
. Enterprise based Applications. This market accounts for a significant portion
of the Company's current revenues. The Company continues to believe the
transition of computer telephony applications (such as messaging, IVR, and
call centers) from proprietary to open enabling technology represents a high
growth opportunity. The Company actively pursues new entrants to these
segments as well as existing entities who are considering a move to open
architectures or from competing vendors' products.
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. Network based Applications. Systems and applications which are part of a
service provider's network. Virtually all new offerings are based upon open
enabling technology. This is a high growth opportunity as it supports the
network operators' strategy of differentiating their services offerings.
. Enterprise and Network Infrastructure. The Company's products are currently
used by customers developing next generation wireless and wireline network
equipment, and next generation PBX's (private branch exchanges). The
Company's products are used for routing and switching, and transcoding of
signals. The Company believes this is a large, untapped market that will be
addressable as high availability PC-based systems emerge.
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 PCI and ISA buses and the
WindowsNT and certain UNIX 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.
TSA 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 Natural Platforms; mixed media extensions for facsimile, speech
recognition and text-to-speech, referred to collectively as NaturalMedia and
including Natural Fax, Natural Recognition and Natural Text; and a software
product line called Natural Access, an API for telephony applications. The
relationship between various elements of TSA are shown in the following
illustration.
TELECOMMUNICATIONS SERVICES ARCHITECTURE
<TABLE>
<CAPTION>
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Product Families Functions Key Products
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<S> <C> <C>
Natural Access Application Programming CTAccess
Software Development Interfaces Active AG
Environments Development Tools
Switching Software
Libraries
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Natural Media Facsimile Natural Fax
Mixed Media Extensions Speech Recognition Natural Recognition
Text-to-Speech Natural Text
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Natural Platforms Digital Signal Processing AG Quad T1/E1
DSP Hardware & Switching Fusion
Software Network Interface AG T1/E1
IP network routing TX-2000/3000
SS-7 protocols AGConnect
Unity-4
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</TABLE>
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Natural Platforms
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 Natural Platforms is the AG
family.
The Alliance Generation
Introduced in 1993, the AG family consists of a set of full-function
configurations, including 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 or H.100 interface which
provide switching fabrics and the capability to inter-operate with third party
products.
. The Unity-4 provides call processing for up to four analog network interfaces,
supports NaturalFax and Natural Recognition, and a single chip implementation
of the H.100 circuit . The list price for an Unity-4 is $995.
. The AG-8 provides call processing for up to eight analog network interfaces
and a single chip implementation of the MVIP circuit. 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 at a list price of $5,995 for T1
and $6,495 plus a $750 protocol runtime license for E1.
. The AG-24/30 provides voice processing for T1 or E1 service without on-board
analog or digital network interface at a list price of $4,600 for T1 and
$5,500 plus a $750 protocol runtime license for E1.
. The AG Quad-T1/E1 provides four T1 (96 port) or four E1 (120 port) service
utilizing only one PCI slot in a PC chassis and is configured with an on-board
digital network interface at a list price of $10,100 for T1 and $11,100 plus a
$750 protocol runtime license for E1.
. The Company offers a series of daughter boards in the AG product line. The
Ally 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 low latency transcoding of wireless signals
or real-time compression of voice for packetizing for transport to an IP
router for IP telephony applications. The Diva I and II daughter boards
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 I and II under
licenses granted by Voice Control Systems, Inc. (speech recognition) and
Lernout and Hauspie Communications Corporation (text-to-speech). The Ally, the
AG-Real Time and the Diva I and II have list prices of $3,100, $4,500, $2,500
and $7,995, respectively.
Network Interfaces
Additional products within the NaturalPlatforms product family include analog
line and station interface boards (AGConnect) for between eight and 24 lines
with list prices ranging from $1,735 to $5,625. 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.
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Natural Media 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:
. Natural Fax
Natural Fax is a software-only extension to the AG platforms with a list price
of $375 per port. Applications include fax-back order confirmation, inquiry
response and facsimile broadcasting.
. Natural Recognition
Natural Recognition is a software extension to the AG platform line which is
implemented on the Diva I and II daughter boards pursuant to a license granted
by Voice Control Systems, Inc. with list price of $850 per port. Applications
using this technology provide, among other things, speaker identification and
an alternative to TouchTone input.
. Natural Text
Natural Text is a software extension to the AG platform line offered by the
Company which is implemented on the Diva I and II daughter boards pursuant to
a license granted by Lernout and Hauspie a list price of $875 per port.
Applications include telephone access to e-mail, stored facsimile messages, or
other data.
Natural Access 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:
. CTAccess
CTAccess is an advanced development kit that includes AGAccess plus interfaces
to other platforms, MVIP and H.100 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.
. ActiveAG is an 32-bit ActiveX control exposing the AG telecommunication
features. ActiveX is a Microsoft software technology that simplifies
application development integration, reducing development cost and time when
integrating telephony features with Microsoft's Exchange messaging server and
Outlook client as well as Microsoft's database software products. ActiveAG
also enables telephony features to be seamlessly integrated with horizontal
Rapid Application Development tools such as Microsoft VisualBasic, Sybase
PowerBuilder, and Borland Delphi.
TX2000/3000 Platforms
The TX2000/3000 are single slot 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, 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 is the first open scaleable
enabling technology product for IP telephony also referred to as "voice over the
Internet". Fusion provides
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developers with the scaleability, openness and programmability required for
building server-based IP telephony applications, such as toll by-pass or Web
enabled call centers. 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.
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.
All of the Company's 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. The following chart lists representative customers within the markets
the Company serves as defined above by the type of applications and systems each
create using the Company's enabling products.
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<TABLE>
<CAPTION>
ENTERPRISE APPLICATIONS ENTERPRISE INFRASTRUCTURE
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<S> <C>
Aspect Telecommunications Inter-Tel
Alcatel Business Systems Lucent Technologies
Centigram Communications Netspeak
Edify
Homisco
Ontario Systems
Smart Dial
NETWORK APPLICATIONS NETWORK INFRASTRUCTURE
- -------------------- ----------------------
Atlas Telecom Alphanet Telecom
Boston Technology Clarent
Centigram Communications Inter-Tel
France Telecom Lucent Technologies
Park & View Netspeak
Tecnet Teleinformacia Uniden America
</TABLE>
The customers appearing in the above chart accounted in the aggregate for
approximately 47.6% of the Company's total revenues in 1997.
During 1997, no customer accounted for 10% of the Company's revenue. During
1996 one customer, Centigram Communications Corporation accounted for 13.9% of
the Company's revenue. For 1995, Alcatel Business Systems (Alcatel), accounted
for 11.9% of the Company's revenue. 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 17 employees located at the Company's Framingham, MA, Hong
Kong, 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 57 employees, 47 of whom are located at the Company's
headquarters in Framingham, and the others in regional sales offices located in
Atlanta, GA, Dallas and Houston, TX, Red Bank, NJ, 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 17 employees
and through international distributors. The Company has European, Latin
American and Asian subsidiaries, with direct sales offices in Paris, Frankfurt,
Madrid, Buenos Aires, Tokyo, Singapore, Hong Kong and Cambridge,UK. These
offices are responsible for 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
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sold to end-users in approximately 40 foreign countries, including Brazil,
France, Germany, Japan, the United Kingdom and China. During 1997, 27.9% of the
Company's revenues were from sales outside North America, including
approximately 15.1% 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, scaleability, 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 1997, 1996, and 1995, the Company
spent $14.9, $10.3 and $6.9 million, respectively, on research and development,
equal to 19.7%, 20.1% and 20.9%, respectively, of its revenues for such years.
The Company's current research and development is conducted by 125 employees
located at its headquarters in Framingham as well as in Schaumburg and Paris.
The Company's current research and development is focused on Natural Access
software, the next generation of its NaturalPlatforms product line, the AG-
family, its IP telephony products, Fusion and associated vocoders, network
integration, 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 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 Framingham 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 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.
11
<PAGE>
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, 1997, the Company had 280 full-time employees, including 34
in sales, 23 in marketing, 125 in research and development, 17 in developer
support, 36 in operations, 8 in sales engineering and 37 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 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.
12
<PAGE>
Risk Factors
Variations in Operating Results. The Company's results of operations have
varied from quarter to quarter and, in recent quarters, more than half of its
revenue has 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 would 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 market segments in
Open Telecommunications, 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
proprietay 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 Natural Access software line, Quad
T1, Quatro, Fusion, 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. A recently
concluded standards effort within the Enterprise Computer Telephony Forum (ECTF)
has specified a single interconnection protocol, H.100, which is intended to
unify future products, at least at the level of hardware interconnection and
switching. The Company is an early endorser of the ECTF's H.100 specification
and is designing future products to this specification. There can be no
assurance that H.100 will be widely adopted or that it will be adopted in a time
frame beneficial to the Company. Use of alternative standards or a delay in the
adoption of H.100 could adversely affect the Company's business
Integration of Acquisitions. The successful integration of the operations of
its acquisitions with those of the Company will continue to require, among other
things, the coordination of the respective product offerings of the Company and
those of its acquisitions 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
13
<PAGE>
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. The Company's customers are
primarily original equipment manufacturers (OEMs), value added resellers (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. No
customer accounted for more than 10% of the Company's revenue in 1997. One
customer accounted for 13.9% of the Company's revenue in 1996 and a second
customer accounted for 11.9% of the Company's revenues in 1995. There can be no
assurance that these customers or any customer 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 27.9% of the Company's revenues in
1997. 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 French currency. 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 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.
Possible Volatility of Stock Price. Factors such as announcements of
technological innovations or new products by the Company, its competitors and
other third parties, as well as quarterly
14
<PAGE>
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market in general has recently experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many high technology companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
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 will 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.
Certain Charter Provisions with Anti-Takeover and Other Effects. The Company's
Board of Directors has the power to issue shares of Common Stock and Preferred
Stock which, if issued, could dilute and adversely affect various rights of the
holders of Common Stock and, in addition, could be used to discourage an
unsolicited attempt to acquire control of the Company. The Company's
Certificate of Incorporation also provides for a classified board of directors
and contains other provisions which may also discourage an unsolicited takeover
attempt. These provisions could limit the price that investors might be willing
to pay in the future for shares of Common Stock and could make it more difficult
for stockholders of the Company to effect certain corporate actions.
ITEM 2. PROPERTIES.
-----------
The Company's headquarters are located in Framingham and consist of
approximately 100,000 square feet of space under a lease which expires in May,
2012. Base rent in 1997 for the Framingham headquarters was approximately
$976,000. Annualized base rent for this facility is 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 extension option to January 2001. Base rent in 1997 was approximately
$105,000. 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 1997 was approximately $142,000.
The Company also leases and occupies sales offices in Atlanta, Dallas, Houston,
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
15
<PAGE>
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, 1997, which is incorporated herein by reference.
As of March 6, 1998 the Company had 206 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, 1997, 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, 1997 which is incorporated herein by reference.
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, 1997, 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, 1997, 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, 1997, which is incorporated herein by reference,
except for the audited opinion on the prior year's financial statements, which
were audited by other auditors and whose opinion on those statements is included
below:
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 two year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsiblity 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.
16
<PAGE>
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 its operations and its cash flows for each year in the two year
period ending December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick L.L.P.
Boston, Massachusetts
January 14, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
On April 17, 1997, the Board of Directors of the Company, upon recommendation of
its Audit Committee, approved a change in the Company's independent accountants
from KPMG Peat Marwick L.L.P. to Coopers & Lybrand L.L.P. effective for the
fiscal year ended December 31, 1997. KPMG Peat Marwick L.L.P. served as the
Company's independent accountants for fiscal years 1992 through 1996. During
these periods, the Company did not have any disagreements with KPMG Peat Marwick
L.L.P. on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, nor did any reports issued by KPMG
Peat Marwick L.L.P. contain an adverse opinion or a disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit scope or
accounting principles.
17
<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 16, 1998; 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 49 President, Chief Executive Officer and
Chairman of the Board of Directors
Ronald J. Bleakney 52 Senior Vice President of Sales
Charles T. Foskett 54 Senior Vice President International Market
Development and Director
Dorothy A. Terrell 52 Senior Vice President of Corporate Operations
and President of the Services Group
R. Brough Turner 51 Senior Vice President of Technology
Dianne L. Callan 52 Vice President and General Counsel
Allen P. Carney 47 Vice President of Marketing
John F. Kennedy 49 Vice President of Finance, Chief Financial
Officer, and Treasurer
George D. Kontopidis, Ph. D. 44 Vice President of Engineering
Deborah K. Louis 45 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, most recently Senior
Vice President International Business Group, and from 1980 to 1987 he was a
partner with Coopers & Lybrand L.L.P. Mr. Schechter is also a director of MRS
Technology, Inc., a developer and manufacturer of steppers for flat panel
displays and Infinium Software Inc., L.L.P. a developer of enterprise-level
business software.
RONALD J. BLEAKNEY has been Senior Vice President of Sales of the Company since
December 1997 and was Senior Vice President of North American Sales of the
Company since December 1995. From 1990 to December 1995 he was Vice President
of Sales and Marketing. 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 Market Development since December 1997 and a Director
since 1983. He was Senior Vice President of International Operations since May
1995. 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.
DOROTHY A. TERRELL has been Senior Vice President of Corporate Operations and
President of the Services Group since February 1998. From 1991 she was
President of Sun Express, Inc. the aftermarketing and online services company of
Sun Microsystems, Inc. Ms. Terrell is also a director of Sears Roebuck and
Company, General Mills, Inc. and Herman Miller, Inc. maker of office furniture.
18
<PAGE>
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 1995. From 1977 to 1983, Mr. Turner was
manager of data systems development at DigiLab.
DIANNE L. CALLAN has been Vice President and General Counsel since April 1997.
She was Deputy General Counsel of Lotus Development Corporation from 1986 to
1996. From 1980 to 1985, Ms. Callan was Corporate Counsel for Interactive Data
Corporation, then a provider of software and services for the financial and
banking industries.
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.
DEBORAH K. LOUIS has been Vice President of Operations since April 1997. From
1986 to 1997, she held a variety of positions at Lotus Development Corporation,
most recently Vice President of Worldwide Customer Operations. From 1983 to
1986, she worked in the materials organization for Wang Laboratories
Corporation.
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 16, 1998 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 16, 1998 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
None
19
<PAGE>
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, 1997, which is
attached here in its entirety as Exhibit 13.1, but not deemed filed except to
the extent that portions thereof are expressly incorporated by reference herein.
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1997.
Consolidated Statements of Operations for the Years Ended December 31, 1995,
1996 and 1997.
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1996 and 1997.
Consolidated Statements of Cash Flow for the Years Ended December 31, 1995, 1996
and 1997.
Notes to the Consolidated Financial Statements.
(a) (2) Financial Statement Schedules
The following are included on the indicated pages of this report:
Page No.
--------
Report of Independent Accountants on Schedule 22
Schedule VIII Valuation and Qualifying Accounts 23
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 24, is incorporated herein by reference.
(a) (4) Reports of FORM 8K
None.
20
<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>
/s/ Robert P. Schechter President, Chief Executive Officer and March 23,1998
- ------------------------------------ Chairman of the Board of Directors
Robert P. Schechter (Principal Executive Officer)
/s/ John F. Kennedy Vice President of Finance, March 23,1998
- ------------------------------------ Chief Financial Officer,
John F. Kennedy (Principal Financial Officer), and Treasurer
/s/ David C. Flynn Corporate Controller March 23,1998
- ------------------------------------ (Chief Accounting Officer)
David C. Flynn
/s/ Charles T. Foskett Senior Vice President of International March 23,1998
- ------------------------------------ Operations and Director
Charles T. Foskett
/s/ Zenas W. Hutcheson III Director March 24,1998
- ------------------------------------
Zenas W. Hutcheson III
/s/ W. Frank King Director March 24,1998
- ------------------------------------
W. Frank King
/s/ David F. Millet Director March 24,1998
- ------------------------------------
David F. Millet
/s/ Pamels D. Reeve Director March 24,1998
- ------------------------------------
Pamela D. Reeve
/s/ Ronald W. White Director March 24,1998
- ------------------------------------
Ronald W. White
</TABLE>
21
<PAGE>
Report of Independent Accountant
The Board of Directors
Natural MicroSystems Corporation:
Our report on the consolidated financial statements of Natural MicroSystems
Corporation has been incorporated by reference in this Form 10-K from page 20 of
the 1997 Annual Report to Shareholders of Natural MicroSystems Corporation. In
connection with our audit of such financial statements, we have also audited the
related financial statement schedule listed in the index on page 24 of this Form
10-K.
In our opinion, such consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 19, 1998
22
<PAGE>
<TABLE>
<CAPTION>
NATURAL MICROSYSTEMS CORPORATION
Valuation and Qualifying Accounts Schedule VIII
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Allowance for Balance at Balance at
doubtful accounts beginning of year Additions Deductions (1) end of year
- ----------------- ----------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
12/31/95 $332,844 $548,892 $233,766 $647,970
12/31/96 $647,970 $285,093 $248,438 $684,625
12/31/97 $684,625 $510,793 $553,500 $641,918
(1) Amounts include write-offs of accounts receivable deemed to be uncollectable
</TABLE>
23
<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.
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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
13.1 1997 Annual Report to Stockholders (which is not deemed to be filed except to the
extent that portions thereof are expressly incorporated by reference herein)
*16.1 Letter Re: Change in Certifying Accountant (filed with the Registrant's Form 8-K,
dated April 17, 1997)
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
* Previously filed with the registration statement or report indicated.
# Management contract or compensatory plan or arrangement.
</TABLE>
24
<PAGE>
Natural
MicroSystems
Corporation
1997 FINANCIAL REPORT
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................14
Independent Auditor's Report.....................................20
Consolidated Balance Sheets......................................21
Consolidated Statements of Operations............................22
Consolidated Statements of Stockholders' Equity..................23
Consolidated Statements of Cash Flow.............................24
Notes to Consolidated Financial Statements.......................26
Selected Financial Information...................................34
Price Range of Common Stock......................................35
Corporate Information............................................36
13
<PAGE>
Natural MicroSystems Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
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,
----------------------------------
1995 1996 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 35.0 35.7 33.6
- -------------------------------------------------------------------------------------------
Gross profit 65.0 64.3 66.4
- -------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 31.3 29.6 29.6
Research and development 20.9 20.1 19.7
Purchased in-process research and development 8.6 7.4
- -------------------------------------------------------------------------------------------
Total operating expenses 52.2 58.3 56.7
- -------------------------------------------------------------------------------------------
Operating income 12.8 6.0 9.7
Merger costs 5.8
- -------------------------------------------------------------------------------------------
Other income, net 1.0 2.3 1.6
- -------------------------------------------------------------------------------------------
Income before income taxes 8.0 8.3 11.3
Income tax expense 4.1 5.1 6.3
- -------------------------------------------------------------------------------------------
Net income 3.9% 3.2% 5.0%
- -------------------------------------------------------------------------------------------
Pro forma net income without acquisition related charges 9.7%/1/ 11.8%/2/ 12.4%/2/
===========================================================================================
</TABLE>
Revenues
Revenues of $75.4 million for the year ended December 31, 1997 ("1997")
increased 46.4% from revenues of $51.5 million for the year ended December 31,
1996 ("1996"). Revenues of $51.5 million for 1996 increased 57.0% from revenues
of $32.8 million for the year ended December 31, 1995 ("1995"). The increase
from 1996 to 1997 is primarily due to increased unit shipments of Alliance
Generation ("AG") and TX intelligent network and data communications products
("TX products") as well as license revenues. The increase from 1995 to 1996 is
primarily due to increased unit shipments of AG products, VOX products, license
revenues and TX products from TEKnique, which was acquired in June, 1996. No
single customer accounted for greater than 10% of revenues in 1997. One customer
accounted for 13.9% of revenues in 1996. Another customer accounted for 11.9% of
revenues in 1995.
Revenues from sales to customers located outside North America were 27.9%
($21.1 million), 31.1% ($16.0 million), and 43.2% ($14.2 million) for 1997,
1996, and 1995, respectively. Increased international revenues in 1997 are
primarily the result of increased unit shipments of AG products in Asia and
Latin America partially offset by a decline in shipment of AG and VOX products
and a decrease in manufacturing license revenues in Europe. Increased
international revenues for 1996 resulted from increased shipments of AG products
in all geographic regions as well as increased shipment of VOX products and
manufacturing license revenues in Europe.
Gross Profit
Gross profit of $50.1 million for 1997 increased 51.4% from $33.1 million for
1996, and represented 66.4% and 64.3% of revenue, respectively. This increase as
a percent of revenues for 1997 is primarily attributable to increased unit sales
of AG products which have higher gross margins, higher license revenues, and
increased sales volume without a corresponding increase in manufacturing
overhead partially offset by increased revenues from larger OEM customers at
lower margins. Gross profit of $33.1 million in 1996 increased 54.7% from $21.4
million for 1995, and represented 64.3% and 65.0% of revenue, respectively. The
decrease in gross profit as a percent of revenues for 1996 is primarily
attributable to increased sales to larger OEM customers at lower margins and the
impact of a sale to a European systems integration customer with lower margins
offset by increased unit sales of AG products, partially offset by higher
overall license revenues, and increased overall sales volume without a
corresponding increase in manufacturing overhead.
/1/ Pro forma net income excludes costs of $1,911 in connection with the VOX
merger.
/2/ Pro forma net income excludes charges to expense for purchased in-process
research and development of $4,426 and $5,601 for 1996 and 1997,
respectively.
14
<PAGE>
Selling, General and Administrative
Selling, general and administrative (SG&A) expense increased 45.7% to $22.3
million for 1997 from $15.3 million for 1996, and was 29.6% of revenues for both
years. SG&A expense 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. The
increases in expenses for all three years were due to costs associated with
increased selling activity and increased expenditures for marketing,
international expansion and customer support. In 1997, the Company increased the
number of field sales and support offices from twelve to fifteen, including
Singapore, the United Kingdom, and Spain. In 1996, the Company increased the
number of field sales and support offices from nine to twelve, including Buenos
Aires, Argentina as well as increased expenditures for marketing. The Company
increased the number of North American sales field offices from six to nine in
1995 and invested in marketing and its international operations. The Company
expects that its sales and marketing, customer support and international
operations expenditures will continue to increase, but may vary as a percentage
of revenues for future periods.
Research and Development
Research and development expense increased 43.8% to $14.9 million for 1997 from
$10.3 million for 1996, and was 19.7% and 20.1% of revenues, respectively.
Research and development expense increased 49.3% to $10.3 million for 1996 from
$6.9 million for 1995, and was 20.1% and 20.9% of revenues, respectively. The
increases in expense for all three years were primarily due to increased
personnel and project development costs associated with the AG product line and
associated software tools, implementation of mixed media extension products,
hardware and software products associated with IP Telephony functionality,
development of a new low cost architecture, and products associated with high
availability functionality. The Company expects that its research and
development expense will continue to increase, but may vary as a percentage of
revenues for future periods.
Merger Costs
In connection with the VOX merger, accounted for as a pooling of interest, $1.9
million of merger costs were incurred and were charged to expense for 1995.
Merger costs consisted of legal, accounting, investment banking and transaction
commission fees.
Purchased In-Process Research and Development
The acquisitions of ViaDSP in 1997 and TEKnique in 1996 were accounted for as
purchases and, accordingly, the purchase prices were allocated to assets
purchased and liabilities assumed based on the fair values at the date of
acquisition. In connection with the ViaDSP and TEKnique acquisitions, $5.6
million and $4.4 million of purchased in-process research and development that
had not been established as technologically feasible and had no alternative
future use was charged to expense for 1997 and 1996, respectively.
Other Income, Net
Other income and expense for 1997, 1996 and 1995 was $1.2 million, $1.2 million
and $336,000 (exclusive of merger costs), respectively, reflecting net interest
income and gains from sale of marketable securities for all periods. The
increase in net interest income from 1995 to 1996 was generated from proceeds of
the Company's follow-on equity offering in the first quarter of 1996.
Income Tax Expense
Income tax expense was $4.8 million, $2.6 million, and $1.4 million for 1997,
1996, and 1995, respectively. The tax rates for 1997, 1996 and 1995 differ from
the effective tax 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 and purchased in-process research and development costs.
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 $7.3 million, $3.1
million, and $4.2 million for 1997, 1996, and 1995, respectively, inclusive in
1997 and 1996 of $5.6 million and $4.4 million of purchased in-process research
and development expense associated with the ViaDSP and TEKnique acquisitions,
respectively. Net income was $3.8 million, $1.6 million, and $1.3 million for
the same periods, respectively, inclusive of $1.9 million in 1995 for merger
costs associated with the VOX acquisition. Pro forma net income, without these
acquisition related charges, was $12.9 million, $7.5 million and $6.1 million
for 1997, 1996 and 1995, respectively.
15
<PAGE>
Natural MicroSystems Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Cash provided by operations for the years ended December 31, 1997, 1996 and 1995
was $3.2 million, $3.2 million, and $958,000, respectively. Cash was provided by
operations in all three years from net income and increased accounts payable
partially offset by increased accounts receivable and inventory in support of
higher revenues. The Company from time to time extends payment terms with
customers to close business in a particular reporting period.
Cash used in investing activities in 1997, 1996, and 1995 was $7.8 million,
$34.8 million, and $2.9 million, respectively. Cash of $32.9 million, $52.2
million, and $1.3 million was used to purchase marketable securities with cash
of $32.7 million, $25.6 million, and $1.5 million provided from maturities of
marketable securities for 1997, 1996, and 1995, respectively. Capital
expenditures were $7.2 million, $2.8 million and $1.5 million for 1997, 1996,
and 1995, respectively. Capital expenditures were higher in 1997 primarily
associated with the Company's new headquarters facility. In 1996, $3.2 million
was used to purchase TEKnique and an additional $1.9 million was paid during
January 1998 with an additional $625,000 expected to be paid during January 1999
as contingent purchase consideration for attainment and expected attainment of
certain operating objectives.
Cash provided by financing activities in 1997, 1996 and 1995 was $4.1
million, $31.4 million, and $867,000, respectively. In 1997 $4.2 million was
provided primarily from stock option exercises. In 1996 $30.1 million was
provided primarily from the proceeds of the Company's follow-on stock offering
and $586,000 was provided from the exercise of common stock purchase warrants.
In 1995 cash was provided from borrowing arrangements primarily in Europe and
$533,000 from stock option exercises.
Current assets at December 31, 1997 were $64.6 million, 19.6% greater than
current assets of $54.0 million at December 31, 1996. The increase was due
principally to increased accounts receivable and inventory in support of
increased revenues. Current liabilities at December 31, 1997 were $13.3 million,
41.5% greater than current liabilities of $9.4 million at December 31, 1996,
primarily from increased accounts payable in support of increased revenues.
During June 1997, the Company renewed its bank line of credit for $3.0
million through December 1998 under substantially the same terms as were
previously in effect. The Company had no borrowings outstanding under the line
at December 31, 1997. In December 1997 the company established a $15 million
unsecured foreign exchange line of credit with a bank.
The Company established a $243,000 borrowing relationship with a bank for
its European operations, under which no amounts are outstanding at December 31,
1997. In 1995, the Company also secured a research and development funding grant
from the French government in the amount of $299,000. See Note 10 of the Notes
to the Company's Consolidated Financial Statements.
Quarterly Results
The following tables set forth unaudited selected financial information for the
periods indicated, as well as certain information expressed as a percentage of
total 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 audited or 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.
Revenues have grown relatively steadily over each of the eight quarters in
the period ended December 31, 1997. Operating income exclusive of purchased in-
process research and development during the eight quarters has varied,
increasing as a percent of revenues from quarter to quarter for both years. Cost
of revenues has decreased with the exception of the second quarter of 1996, due
to increased sales of AG products, increased manufacturing license revenues and
overall increased sales volume without a corresponding increase in manufacturing
overhead. During this eight-quarter period, selling, general and administrative
expenses have varied due to costs associated with increased sales activity and
increased expenditures for marketing and international operations. Research and
development remained relatively constant as a percentage of revenues. This trend
is expected to continue.
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 on a relatively
small backlog. Quarterly sales and operating results therefore generally depend
on the volume and timing of orders received during or just before the start of a
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.
16
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
(In thousands except per share data) 1996 1996 1996 1996 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $10,350 $12,203 $13,513 $15,398 $15,868 $18,058 $20,076 $21,361
Cost of revenues 3,992 4,723 4,543 5,136 5,644 6,317 6,902 6,435
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 6,358 7,480 8,970 10,262 10,224 11,741 13,174 14,926
Operating expenses:
Selling, general and
administrative 3,064 3,581 3,940 4,666 4,516 5,235 5,860 6,683
Research and development 2,089 2,265 2,876 3,098 3,338 3,536 3,885 4,092
Purchased in-process research
and development 4,426 5,601
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 5,153 10,272 6,816 7,764 7,854 8,771 9,745 16,376
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,205 (2,792) 2,154 2,498 2,370 2,970 3,429 (1,450)
- ------------------------------------------------------------------------------------------------------------------------------------
Other income, net 78 424 334 372 309 268 357 264
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,283 (2,368) 2,488 2,870 2,679 3,238 3,786 (1,186)
Income taxes expense 430 694 817 702 903 1,095 1,273 1,487
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 853 $(3,062) $ 1,671 $ 2,168 $ 1,776 $ 2,143 $ 2,513 $(2,673)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.11 $ (0.31) $ 0.16 $ 0.20 $ 0.17 $ 0.20 $ 0.23 $ (0.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income without
acquisition charges $ 853 $ 1,364/1/ $ 1,671 $ 2,168 $ 1,776 $ 2,143 $ 2,513 $ 2,928/1/
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma earnings per share without
acquisition charges $ 0.11 $ 0.13/1/ $ 0.16 $ 0.20 $ 0.17 $ 0.20 $ 0.23 $ 0.26/1/
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
(Percent of revenues) 1996 1996 1996 1996 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<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 38.6 38.7 33.6 33.4 35.6 35.0 34.4 30.1
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 61.4 61.3 66.4 66.6 64.4 65.0 65.6 69.9
Operating expenses:
Selling, general and
administrative 29.6 29.3 29.2 30.3 28.5 29.0 29.2 31.3
Research and development 20.2 18.6 21.3 20.1 21.0 19.6 19.4 19.2
Purchased in-process
research and development 36.3 26.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 49.8 84.2 50.5 50.4 49.5 48.6 48.6 76.7
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 11.6 (22.9) 15.9 16.2 14.9 16.4 17.0 (6.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Other income, net 0.8 3.5 2.5 2.4 1.9 1.5 1.8 1.2
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 12.4 (19.4) 18.4 18.6 16.8 17.9 18.8 (5.6)
Income taxes expense 4.2 5.7 6.0 4.6 5.7 6.1 6.3 7.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 8.2% (25.1)% 12.4% 14.0% 11.1% 11.8% 12.5% (12.6)%
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income without
acquisition charges 8.2% 11.2%/1/ 12.4% 14.0% 11.1% 11.8% 12.5% 13.7%/1/
====================================================================================================================================
</TABLE>
/1/ Pro forma net income excludes charges to expense for purchased in-process
research and development of $4,426 and $5,601 for the periods ending June 1996
and December 1997, respectively.
17
<PAGE>
Natural MicroSystems Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Other
For U. S. federal income tax purposes the Company has net operating loss
carryforwards available to reduce future income of approximately $3.1 million at
December 31, 1997. These carryforwards expire beginning in 2004. Utilization of
net operating loss carryforwards are subject to an annual limitation of
approximately $750,000 under Internal Revenue Code section 382. In addition, for
U. S. federal income tax purposes, TEKnique has net operating loss carryforwards
available to reduce future income of approximately $873,000 at December 31,
1997. These carryforwards will expire beginning in 2011. Utilization of
TEKnique's net operating loss carryforwards are subject to annual limitations of
approximately $300,000 under Internal Revenue Code section 382 and will be
available to reduce future taxable income of TEKnique only. Further, for U. S.
federal income tax purposes, ViaDSP has net operating loss carryforwards
available to reduce future income of approximately $1.6 million at December 31,
1997. These carryforwards will expire beginning in 2012. Utilization of ViaDSP
net operating loss carryforwards are subject to annual limitations of
approximately $402,000 under Internal Revenue Code section 382 and will be
available to reduce future taxable income of ViaDSP 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 other geographic
regions generally evaluate purchases of products such as those sold by the
Company based 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 adopted Statement of Financial Accounting Standards No. 115
"Accounting for Marketable Securities" ("SFAS 115"), effective January 1, 1995.
The effect of adopting SFAS 115 was not material to the Company's financial
condition or results of operations. Marketable securities are carried at their
fair value at December 31, 1997 and December 31, 1996, respectively, in
accordance with SFAS 115.
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, "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 pro forma impact on earnings and
earnings per share have been disclosed in the footnotes to the financial
statements as required by SFAS 123 for Companies that continue to account for
stock options under APB 25.
The Company has adopted Financial Accounting Standards Board Statement No.
128, "Earnings per Share" ("SFAS 128"), which modifies the way in which earnings
per share (EPS) is calculated and disclosed. The Company has disclosed basic and
diluted EPS for the year ended December 31, 1997 and has restated all prior
period EPS data presented. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.
The Company will adopt Financial Accounting Standards Board Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains and losses from investing and hedging activities and other
transactions. SFAS 130 states all items that are required to be recognized under
accounting standards as components of comprehensive income be displayed with the
same prominence as other financial statements.
The Company will adopt Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for reporting information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes disclosure standards about
products and services, geographic areas and major customers.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the statement of position ("SOP") 97-2, "Software Revenue
Recognition," which will supersede SOP 91-1. SOP 97-2 has not changed the basic
rules of revenue recognition but does provide more guidance particularly
18
<PAGE>
with respect to multiple deliverables and "when and if available" products. SOP
97-2 is effective for transactions entered into for annual periods beginning
after December 15, 1997. The Company will adopt SOP 97-2 effective January 1,
1998, and does not believe its impact will be material.
Cautionary Statement
When used anywhere in this Annual Report to Stockholders 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 in
the Company's Form 10-K as filed with the Securities and Exchange Commission
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to 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.
19
<PAGE>
Natural MicroSystems Corporation
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITOR
Management is responsible for preparing the company's financial statements and
related information that appears in this annual report. Management believes that
the financial statements fairly reflect the form and substance of transactions
and reasonably present the Company's financial condition and results of
operations in conformity with accounting principles generally accepted in the
United States and International Accounting Standards. Management has included in
the Company's financial statements amounts that are based on estimates and
judgments, which it believes are reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures
and controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded.
Coopers & Lybrand L.L.P. audits the Company's financial statements in
accordance with generally accepted auditing standards.
The Natural Microsystems Board of Directors has an Audit Committee composed
of non-management directors. The Committee meets with financial management and
the independent auditors to review internal accounting controls as well as
accounting, auditing and financial reporting matters.
/s/ Robert P. Schechter /s/ John F. Kennedy
Robert P. Schechter John F. Kennedy
Chairman, President and Vice President of Finance,
Chief Executive Officer Treasurer and Chief
Financial Officer
The Board of Directors of Natural MicroSystems Corporation:
We have audited the accompanying consolidated balance sheet of Natural
MicroSystems Corporation as of December 31, 1997, and the related consolidated
statement of operations, stockholders' equity and cash flows for the year ended
December 31, 1997. 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 audit. The
financial statements of Natural MicroSystems Corporation as of December 31, 1996
and for the two years then ended, were audited by other auditors, whose report,
dated January 14, 1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the consolidated financial position of Natural
MicroSystems Corporation as of December 31, 1997 and the consolidated results of
its operations and its cash flow for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 19, 1998
20
<PAGE>
Natural MicroSystems Corporation
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------------------
(In thousands except share and per share data) 1996 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,578 $ 6,318
Marketable securities 26,767 26,992
Accounts receivable, net 13,403 19,519
Inventories 5,419 8,628
Prepaid expenses and other assets 1,487 2,304
Deferred tax asset 306 316
- ----------------------------------------------------------------------------------------------------------------
Total current assets 53,960 64,077
- ----------------------------------------------------------------------------------------------------------------
Property and equipment, net 3,908 9,109
License agreements, net 1,665 1,466
Other assets 1,708 2,432
Goodwill, net 655 2,871
Deferred tax asset 766 1,738
- ----------------------------------------------------------------------------------------------------------------
Total assets $62,662 $81,693
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations 58 94
Accounts payable 5,222 5,359
Accrued expenses and other liabilities 4,108 7,855
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 9,388 13,308
- ----------------------------------------------------------------------------------------------------------------
Long term obligations, less current portion 392 243
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (footnote 13)
Stockholders' equity:
Preferred stock, $0.05 par value; 3,000,000 shares authorized, none issued
Common stock, $0.01 par value; 45,000,000 shares authorized,
9,936,414 and 10,787,915 shares issued and outstanding 99 108
Additional paid-in capital 53,623 65,203
Accumulated (deficit) earnings (926) 2,833
Cumulative translation adjustment 86 (2)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 52,882 68,142
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $62,662 $81,693
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
Natural MicroSystems Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(In thousands except share and per share data) 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 32,835 $ 51,464 $ 75,363
Cost of revenues 11,485 18,394 25,298
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 21,350 33,070 50,065
Operating expenses:
Selling, general and administrative 10,294 15,251 22,294
Research and development 6,856 10,328 14,851
Purchased in-process research and development 4,426 5,601
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 17,150 30,005 42,746
- ---------------------------------------------------------------------------------------------------------------------
Operating income 4,200 3,065 7,319
Merger costs (1,911)
Interest income 363 1,447 1,434
Interest expense (31) (88) (34)
Other 4 (151) (202)
- ---------------------------------------------------------------------------------------------------------------------
Other income (expense), net (1,575) 1,208 1,198
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,625 4,273 8,517
Income tax expense 1,350 2,643 4,758
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 1,275 $ 1,630 $ 3,759
=====================================================================================================================
Basic:
Net income per common share $ 0.18 $ 0.17 $ 0.36
=====================================================================================================================
Weighted average shares outstanding 7,002,132 9,370,202 10,481,340
Diluted:
Net income per common share $ 0.18 $ 0.17 $ 0.34
=====================================================================================================================
Weighted average shares outstanding 7,005,181 9,674,601 11,179,227
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
Natural MicroSystems Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Accumulated Cumulative Total
Common Stock Paid-In Earnings Translation Stockholders'
(In thousands) Shares Amount Capital (Deficit) Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 6,934 $ 70 $19,421 $(3,831) $ 32 $15,692
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 102 1 223 224
Issuance of common stock under employee purchase plan 54 327 327
Tax effect of stock options 87 87
Unrealized holding gains (8) (8)
Foreign currency translation adjustment 148 148
Net income 1,275 1,275
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 7,090 71 20,050 (2,556) 180 17,745
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued in follow-on stock offering,
net of issuance costs 2,480 25 30,088 30,113
Issuance of common stock related to acquisition 113 1 1,765 1,766
Exercise of common stock purchase warrants 100 1 585 586
Exercise of common stock options 106 1 306 307
Issuance of common stock under employee purchase plan 47 599 599
Tax effect of stock options 230 230
Foreign currency translation adjustment (94) (94)
Net income 1,630 1,630
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 9,936 99 53,623 (926) 86 52,882
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 625 6 2,985 2,991
Issuance of common stock under employee purchase plan 67 1 1,194 1,195
Issuance of common stock related to acquisitions 160 2 7,401 7,403
Foreign currency translation adjustment (88) (88)
Net income 3,759 3,759
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 10,788 $108 $65,203 $ 2,833 $ (2) $68,142
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
Natural MicroSystems Corporation
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(In thousands) 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 1,275 $ 1,630 $ 3,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 882 1,778 2,995
Loss (gain) on sale of marketable securities (22) 6 (331)
Purchased in-process research and development 4,426 5,601
Deferred income taxes 100 (335) (1)
Change in operating assets and liabilities:
Accounts receivable (3,434) (3,134) (6,572)
Inventories (862) (1,627) (3,321)
Prepaid expenses and other assets (368) (330) (1,510)
Income tax receivable 238 (83)
Accounts payable 989 528 (305)
Accrued expenses and other liabilities 2,160 383 2,842
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 958 3,242 3,157
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Purchases of property and equipment (1,541) (2,797) (7,207)
Acquisition of intangible assets (606) (267)
Purchases of marketable securities (1,347) (52,202) (32,983)
Proceeds from the maturity of marketable securities 1,465 25,562 32,690
Acquisition, net of cash acquired (3,232)
Additions to other assets (1,447) (1,522) (80)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (2,870) (34,797) (7,847)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Payments on capital lease obligations (33) (23)
Payments on bank line of credit (8)
Payments on long-term debt (66) (101)
Payment of dividends by acquired company (250)
Payments on refundable advances (81) (49)
Proceeds from refundable advances 347
Proceeds from government advances 123
Proceeds from long-term debt 202
Proceeds from issuance of common stock, net of issuance costs 552 31,605 4,187
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 867 31,400 4,138
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Continued next page
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
Natural MicroSystems Corporation
CONSOLIDATED STATEMENT OF CASH FLOW (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(In thousands) 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effect of exchange rate changes on cash and cash equivalents 21 4 292
Net decrease in cash and cash equivalents (1,024) (151) (260)
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 7,753 6,729 6,578
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,729 $ 6,578 $ 6,318
====================================================================================================================
Supplemental cash flow information:
Interest paid $ 2 $ 39 $ 128
Taxes paid 981 2,340 3,748
Noncash transactions, acquisition related:
Issuance of common stock 1,766 6,903
Accrued acquisition expenses 784 236
Assets and liabilities recognized upon acquisition of TEKnique and ViaDSP:
Accounts receivable 122
Inventories 136 22
Other current assets 74 35
Property and equipment 409 105
Purchased in-process research and development 4,426 5,601
Intangibles 757 2,417
Notes payable 55
Accounts payable 264 585
Accrued expenses and other liabilities 250 680
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
Natural MicroSystems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
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.
Principles of Consolidation
The consolidated financial statements include the accounts of Natural
MicroSystems Corporation and its wholly-owned subsidiaries. Intercompany
balances and transactions have been eliminated.
Classification
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign Currency Translation
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 other
foreign subsidiaries' operations are measured in their local currency.
Adjustments resulting from translating these subsidiaries' financial statements
to the U.S. dollar are accumulated in a separate component of consolidated
stockholders' equity.
Revenue Recognition
Revenue from product sales are recorded upon shipment to the customer provided
that no significant vendor obligations remain outstanding and collection of the
related receivable is deemed probable by management. If insignificant vendor
obligations remain after shipment of the product, the Company accrues for the
estimated costs of such obligations. Service revenues are recognized ratably
over applicable contract periods or as the services are performed. For certain
contracts eligible under AICPA Statement of Position No. 81-1, revenue is
recognized using the percentage-of-completion accounting method based upon an
efforts-expended method or the completion of measurable milestones in the case
of separately priced installation. In all cases, changes to total estimated
costs and anticipated losses, if any, are recognized in the period in which
determined.
Cash Equivalents
Cash equivalents include short-term investments with remaining maturities of
three months or less at date of purchase.
Marketable Securities
Marketable securities are classified as "available for sale" and are carried at
fair market value.
Allowance for Accounts Receivable
The Company has established an allowance for doubtful accounts, in the amounts
of $685,000 and $642,000 at December 31, 1996 and 1997, respectively.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is based on the
following estimated useful lives of the assets using the straight-line method:
Machinery and equipment 3 years
Computer equipment 3-5 years
Furniture and fixtures 5 years
Telecommunications computer equipment 5 years
Leasehold improvements Shorter of the lease
term or economic life
Expenditures for additions, renewals and betterments of property and equipment
are capitalized. Expenditure for repairs and maintenance are charged to expense
as incurred. As assets are retired or sold, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the results of operations.
26
<PAGE>
Goodwill
Goodwill is amortized on a straight line basis over seven years. Amortization
was $102,000 and $302,000 for the years ended December 31, 1996 and 1997,
respectively.
License Agreements
License agreements are stated at cost. Amortization of licenses is computed
on the shorter of a per unit sold basis or over the estimated useful lives of
these licenses.
Research and Development
All research and development costs are expensed as incurred.
Software Development Costs
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
Financial instruments, primarily cash and cash equivalents, marketable
securities, accounts receivable, and long term debt, are carried at amounts
which approximate their fair value.
Income Taxes
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.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which is effective for both interim and annual periods ending after
December 15, 1997. The statement requires restatement of all prior period
earnings on per share data presented after the effective date. SFAS No. 128
specifies the computation, presentation and disclosure requirements for earnings
per share and is substantially similar to the standards recently issued by the
International Accounting Standards Committee entitled "International Accounting
Standards, Earnings Per Share." The Company has adopted SFAS No. 128 in the
period ending December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. The statement will be effective for annual periods
beginning after December 15, 1997 and the Company will adopt its provisions in
fiscal 1998. Reclassification for earlier periods is required for comparative
purposes. The Company is currently evaluating the impact this statement will
have on its financial statements; however, because the statement requires only
additional disclosure, the Company does not expect the statement to have a
material impact on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for annual periods beginning after December 15, 1997
and the Company will adopt its provisions in fiscal 1998. Reclassification for
earlier periods is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the company does not expect the statement to have a material impact
on its financial position or results of operations.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the statement of position ("SOP") 97-2 "Software Revenue
Recognition," which will supersede SOP 91-1. SOP 97-2 has not changed the basic
rules of revenue recognition but does provide more guidance particularly with
respect to multiple deliverables and "when and if available" products. SOP 97-2
is effective for transactions entered into for annual periods beginning after
December 15, 1997. The Company will adopt SOP 97-2 effective January 1,
1998 and does not believe its impact will be material.
<PAGE>
Natural MicroSystems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2
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 certain 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.
3
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 interest and accordingly, the
Company's consolidated financial statements for 1995 have been restated to
include the accounts and results of VOX. In connection with the transaction,
$1.9 million of costs associated with the acquisition were charged to expense
for the year ended December 31, 1995.
On June 14, 1996, the Company paid $3.6 million in cash and issued 82,958
shares of its common stock for all the outstanding shares of Tek-Nique, Inc. and
an affiliate ("TEKnique"). Costs associated with the transaction were $284,000
for a total initial purchase price of $5.7 million. 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 Company's consolidated financial statements for 1996 include
the accounts and results of TEKnique from the date of acquisition. In connection
with the transaction, $4.4 million of purchased in-process research and
development costs were charged to operations for the year ended December 31,
1996. The technological feasibility of the purchased in-process technology had
not yet been established and the technology had no alternative future use.
During the year ended December 31, 1997, $1.9 million of additional purchase
price consideration was earned and included in goodwill at that date. Additional
consideration of $625,000 is payable for 1998 based upon future revenues and
operating results.
Total purchase price was allocated as follows:
Working capital $ 81
Property and equipment 409
In-process research and development 4,426
Goodwill 2,632
- --------------------------------------------------------------------------------
$7,548
================================================================================
On October 31, 1997, the Company issued 144,562 shares of its common stock for
all of the outstanding shares of ViaDSP, Inc. ("ViaDSP"). Costs associated with
the transactions were $236,000 for a total purchase price of $7.1 million. 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 Company's consolidated financial
statements for 1997 include the accounts and results of ViaDSP from the date of
acquisition. In connection with the transaction, $5.6 million of purchased in-
process research and development costs were charged to operations for the year
ended December 31, 1997. The technological feasibility of the purchased in-
process technology had not yet been established and the technology had no
alternative future use.
Total purchase price was allocated as follows:
Working capital $ (984)
Property and equipment 105
In-process research and development 5,601
Goodwill 2,417
- --------------------------------------------------------------------------------
$7,139
================================================================================
4
BUSINESS AND CREDIT CONCENTRATION
No customer accounted for 10.0% of the Company's revenues for the year ended
December 31, 1997. One customer accounted for 13.9% and another for 11.9% of the
Company's revenues for the years ended December 31, 1996 and 1995, 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.
28
<PAGE>
5
MARKETABLE SECURITIES
Marketable securities categorized as "available for sale" are carried at their
fair value of $134,000, $26.8 million and $27.0 million at December 31, 1995,
1996 and 1997, respectively. Proceeds and gross realized gains (losses) from
sale of securities for the years ended December 31, 1995, 1996 and 1997,
were 1.5 million, $25.6 million and $32.7 million and $22,000, ($6,000) and
$331,000, respectively.
6
INVENTORIES
Inventories consist of the following:
1996 1997
- --------------------------------------------------------------------------------
Raw materials $1,231 $ 558
Work in process 2,390 4,277
Finished goods 1,798 3,793
- --------------------------------------------------------------------------------
$5,419 $8,628
================================================================================
7
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1996 1997
- --------------------------------------------------------------------------------
Computer equipment $ 4,164 $ 6,537
Computer software 872 1,775
Furniture and fixtures 805 1,577
Machinery and equipment 864 1,019
Evaluation units 70 70
Leasehold improvements 438 3,195
- --------------------------------------------------------------------------------
7,213 14,173
- --------------------------------------------------------------------------------
Less accumulated depreciation and amortization (3,305) (5,064)
- --------------------------------------------------------------------------------
$ 3,908 $ 9,109
================================================================================
8
INCOME TAXES
The components of income tax expense consist of the following:
1995 1996 1997
- --------------------------------------------------------------------------------
Current income tax expense:
Federal $ 898 $2,410 $4,161
State 174 358 361
Foreign 178 166 237
- --------------------------------------------------------------------------------
1,250 2,934 4,759
Charge in lieu of tax 44
Deferred income tax expense (benefit):
Federal (65) (298) 252
State (17) (70) 61
Foreign 182 33 (314)
- --------------------------------------------------------------------------------
100 (335) (1)
- --------------------------------------------------------------------------------
$1,350 $2,643 $4,758
================================================================================
Deferred tax assets consist of the following:
1996 1997
- --------------------------------------------------------------------------------
Net operating loss carryforward $1,803 $1,877
Tax credit carryforwards 271
Bad debts 129 75
Accrued vacation 45 55
Inventories 127 201
Other 18 19
- --------------------------------------------------------------------------------
2,393 2,227
- --------------------------------------------------------------------------------
Valuation allowance (1,266)
- --------------------------------------------------------------------------------
1,127 2,227
Deferred tax liabilities consist of the following:
Book income on foreign fixed price contracts in
excess of tax 52 56
Fixed Assets 117
Other 3
- --------------------------------------------------------------------------------
$ 1,072 $ 2,054
================================================================================
29
<PAGE>
Natural MicroSystems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For U.S. federal income tax purposes, the Company has net operating loss
carryforwards of approximately $3.1 million. These carryforwards expire
beginning in 2004 and a portion of such carryforwards are subject to an annual
limitation under Internal Revenue Code section 382. The Company also has a
foreign net operating loss carryforward of approximately $1.8 million.
The difference between the total expected income tax expense computed by
applying the federal income tax rate of 34.0% to income before income taxes and
the reported income tax expense is as follows:
Year Ended December 31, 1995 1996 1997
- --------------------------------------------------------------------------------
Computed expected tax expense at
U.S. federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of U.S. federal tax benefit 3.9 4.5 5.8
Rate differential of foreign operations 0.4 1.1
Utilization of federal net operating loss
carryforwards (6.0)
U.S. federal research and development credits (3.2) (3.0) (2.0)
Change in valuation allowance (6.2) (3.4) (6.0)
Non-deductible merger costs 24.9
Goodwill 0.6
Other (2.4) 0.2
- --------------------------------------------------------------------------------
Effective tax rate before in-process research and
development charge 51.4% 26.1% 33.7%
Impact of charge for in-process research
and development 35.8 22.2
- --------------------------------------------------------------------------------
Effective tax rate 51.4% 61.9% 55.9%
================================================================================
The domestic and foreign components of earnings
before income tax were:
Year Ended December 31, 1995 1996 1997
- --------------------------------------------------------------------------------
Domestic $2,047 $3,850 $9,157
Foreign 578 423 (640)
- --------------------------------------------------------------------------------
$2,625 $4,273 $8,517
================================================================================
9
ACCRUED EXPENSES AND OTHER LIABILITIES
Components of accrued expenses and other liabilities consist of the following:
1996 1997
- --------------------------------------------------------------------------------
Compensation and related expenses $2,516 $3,577
Income taxes payable 547 1,443
Other liabilities 1,045 2,835
- --------------------------------------------------------------------------------
$4,108 $7,855
================================================================================
10
INDEBTEDNESS
Bank Lines of Credit
At December 31, 1997, the Company has an unsecured $3.0 million bank line of
credit for working capital purposes. At December 31, 1997 there were no
borrowings outstanding under the line and the full line was available.
Borrowings under this line bear interest at the bank's prime rate plus .25%
(8.50% at December 31, 1997). The line of credit has an expiration date of
December 8, 1998. 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, 1997, the Company was in
compliance with its debt covenants.
The Company has a 2.0 million French franc line of credit with a European
bank. At December 31, 1997, there were no borrowings outstanding under 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. In September 1997 the Company established a $15.0 million
unsecured foreign exchange line of credit with a bank.
Included in long term obligations is a government advance of $349,000 and
$299,000 at December 31, 1996 and 1997, respectively. This represents an
interest free loan from the French government repayable from the proceeds of
export sales from France. The Company also had $38,000 of capital leases.
30
<PAGE>
11
EARNINGS PER SHARE
The following is a reconciliation of basic and diluted EPS computations for net
income, pursuant to SFAS 128:
<TABLE>
<CAPTION>
Year Ended 1997
------------------------------------------------
Income Shares Per Share
(In thousands except for share and per share data) (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS (income available to all shareholders) $3,759 10,481,340 $0.36
Effect of dilutive securities (stock options) 697,887
- ----------------------------------------------------------------------------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $3,759 11,179,227 $0.34
============================================================================================================================
<CAPTION>
Year Ended 1996
------------------------------------------------
Income Shares Per Share
(In thousands except for share and per share data) (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS (income available to all shareholders) $1,630 9,370,202 $0.17
Effect of dilutive securities (stock options) 304,399
- ----------------------------------------------------------------------------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $1,630 9,674,601 $0.17
============================================================================================================================
<CAPTION>
Year Ended 1995
------------------------------------------------
Income Shares Per Share
(In thousands except for share and per share data) (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS (income available to all shareholders) $1,275 7,002,132 $0.18
Effect of dilutive securities (stock options) 3,049
Diluted EPS (income available to common
stockholders + assumed conversions) $1,275 7,005,181 $0.18
============================================================================================================================
</TABLE>
12
STOCK OPTIONS AND STOCK PURCHASE PLANS
1989 Stock Option and Stock Purchase Plan
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.
1993 Employee Stock Option Plan
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 1.5 million (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.
1995 Employee Stock Option Plan
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.
The following table presents the activity for options under the Plans:
31
<PAGE>
Natural MicroSystems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1996
-------------------------------- --------------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginining of period 772,312 $2.41 1,548,867 $ 6.57
Granted 875,400 9.78 656,440 17.79
Exercised (82,727) 1.80 (104,596) 2.86
Forfeited or expired (16,118) 5.58 (13,554) 8.12
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 1,548,867 6.63 2,087,157 10.32
- -------------------------------------------------------------------------------------------------------------------
Exerciseable at end of period 411,091 $1.64 713,616 $ 4.83
===================================================================================================================
<CAPTION>
Year Ended December 31, 1997
--------------------------------
Weighted Average
Options Exercise Price
- -------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginining of period 2,087,157 $10.28
Granted 338,155 28.66
Exercised (622,772) 4.77
Forfeited or expired (36,289) 15.89
- -------------------------------------------------------------------------------
Outstanding at end of period 1,766,251 15.68
- -------------------------------------------------------------------------------
Exerciseable at end of period 609,092 $10.76
===============================================================================
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options as of December 31, 1997:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$0.17-$10.00 585,827 10.5 6.68 329,460 6.01
$10.01-$20.00 720,739 8.1 14.42 229,873 14.17
$20.01-$30.00 348,935 6.7 24.69 49,759 26.45
$30.01-$40.00 40,050 9.3 34.68
$40.01-$50.00 70,700 9.8 47.88
- --------------------------------------------------------------------------------
1,766,251 8.8 609,092 15.68
================================================================================
1993 Non-Employee Directors Stock Option Plan
In October 1993, the Company's Board of Directors adopted the 1993 Non-Employee
Directors Stock Option Plan (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, 1997, 92,500 shares
had been granted at prices ranging from $4.88 to $49.25 per share.
1993 Employee Stock Purchase Plan
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, 1997, 171,781 shares have been
issued under the Purchase Plan at purchase prices ranging from $3.71 to $17.85
per share.
Other Stock Option Information
The Company has granted certain employees and consultants non-statutory stock
options to purchase 218,136 shares of the Company's common stock at exercise
prices ranging from $0.17 to $21.50, the fair market value on the date of grant.
The options vest from one to four years. At December 31, 1997, 141,091 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 plan.
The weighted average fair value at date of grant for stock options granted
during the years ended December 31, 1995, 1996 and 1997 was $4.64, $9.04 and
$14.95, respectively. The fair value of each option granted during the years
ended December 31, 1995, 1996 and 1997 is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: an
expected life of five years, no dividend yield, 50.0% expected volatility, and a
risk free interest rate of 6.2% for 1995 and 1996 and 6.6% for 1997.
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates, as calculated in accordance
32
<PAGE>
with SFAS No. 123, the Company's net income (loss) and net income (loss) per
diluted common share for the years ended December 31, 1995, 1996 and 1997, are
estimated to be $449,000, ($432,000) and $571,000 and $0.06, ($0.04) and $0.05,
respectively, using the Black-Scholes option pricing model.
The effects of applying SFAS No. 123 in this disclosure are not indicative of
future amounts. SFAS No. 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.
13
COMMITMENTS
The Company leases its current manufacturing and office facilities under
noncancelable leases extending to April 30, 2012. The Company occupies other
facilities under leases which expire within one year. Rental expense under all
operating lease agreements in effect during December 31, 1995, 1996 and 1997
amounted to approximately $317,000, $569,000, and $1.2 million, respectively.
The Company entered into an additional lease in January 1998 for expansion to
an adjacent facility under construction. The lease term is 10 years beginning in
January 1999, with an annual rent of $630,000 in the initial year, increasing to
$684,000 in the last year of occupancy and requires payment of operating
expenses and taxes.
At December 31, 1997, commitments under operating leases for minimum future
payments consist of the following:
Year ending December 31, Leases
- --------------------------------------------------------------------------------
1998 $ 1,161
1999 1,761
2000 1,976
2001 1,870
2002 1,898
Thereafter 16,293
- --------------------------------------------------------------------------------
$24,959
================================================================================
14
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.
North America Europe Other Corporate Total
- --------------------------------------------------------------------------------
Net Sales to unaffiliated
Customers:
1997 $54,358 $11,393 $9,612 $75,363
1996 35,454 12,794 3,216 51,464
1995 18,656 11,742 2,437 32,835
Income from operations:
1997 $ 7,900 $(1,876) $1,295 $ 7,319
1996 1,446 118 1,501 3,065
1995 3,401 615 184 4,200
Identifiable assets:
1997 $45,242 $ 7,616 $ 800 $28,035 $81,693
1996 28,138 5,956 729 27,839 62,662
1995 11,468 6,927 1,002 7,131 26,528
33
<PAGE>
Natural MicroSystems Corporation
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
(In thousands except per share data) 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $16,101 $22,383 $32,835 $51,464 $75,363
Gross profit 10,060 13,747 21,350 33,070 50,065
Operating income 2,493 2,206 4,200 3,065 7,319
Income before income taxes 2,442 2,434 2,625 4,273 8,517
Income tax expense (benefit) 560 (383) 1,350 2,643 4,758
Net income 1,882 2,817 1,275 1,630 3,759
Diluted income per common share $ 0.39 $ 0.40 $ 0.18 $ 0.17 $ 0.34
Diluted weighted average common shares outstanding 4,864 6,998 7,005 9,675 11,179
Pro forma diluted income per share without acquisition charges $ 0.39 $ 0.40 $ 0.45/1/ $ 0.63/2/ $ 0.84/2/
Pro forma diluted weighted average shares outstanding without
acquisition charges 4,864 6,998 7,005/1/ 9,675/2/ 11,179/2/
Total assets $ 9,245 $20,749 $26,396 $62,662 $81,693
Long term obligations less current portion 105 27 93 392 243
</TABLE>
/1/ Pro forma net income and net income per common share exclude the effect of
costs of $1,911 in connection with the VOX merger.
/2/ Pro forma net income and net income per common share exclude the charges to
expense for purchased in-process research and development of $4,426 and $5,601
for 1996 and 1997, respectively.
34
<PAGE>
Natural MicroSystems Corporation
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 sale prices of the Company's Common Stock as reported on the
Nasdaq National Market.
High Low
- --------------------------------------------------------------------------------
1996
First quarter $16.00 $11.00
Second quarter 21.50 14.38
Third quarter 25.00 13.13
Fourth quarter 32.75 21.50
1997
First quarter $37.25 $19.25
Second quarter 36.00 19.00
Third quarter 42.50 32.87
Fourth quarter 53.50 36.00
As of February 16, 1998, the Company had 206 stockholders of record and
approximately 2,500 beneficial holders.
35
<PAGE>
CORPORATE INFORMATION [PHOTOS APPEAR
HERE]
<TABLE>
<CAPTION>
BOARD OF DIRECTORS CORPORATE OFFICERS STOCKHOLDERS' INFORMATION
<S> <C> <C> <C>
Robert P. Schechter Robert P. Schechter John F. Kennedy Stock Trading Information
CHAIRMAN OF THE BOARD CHAIRMAN, PRESIDENT VICE PRESIDENT OF Nasdaq National Market
PRESIDENT AND CHIEF AND CEO FINANCE Symbol NMSS
EXECUTIVE OFFICER OF CHIEF FINANCIAL
NATURAL MICROSYSTEMS Ronald J. Bleakney OFFICER AND Transfer Agent
CORPORATION SENIOR VICE PRESIDENT TREASURER State Street Bank and Trust
SALES Box 8200
Charles T. Foskett George D. Konlopidis, Ph.D. Boston, MA 02266
SENIOR VICE PRESIDENT Charles T. Foskett VICE PRESIDENT OF
INTERNATIONAL MARKET SENIOR VICE PRESIDENT ENGINEERING Counsel
DEVELOPMENT INTERNATIONAL MARKET Choate, Hall, & Stewart
NATURAL MICR0SYSTEMS DEVELOPMENT Deborah K. Louis 53 State Street
CORPORATION VICE PRESIDENT OF Exchange Place
Dorothy A. Terrell OPERATIONS Boston, MA 02109
Zenas W. Hutcheson III SENIOR VICE PRESIDENT
GENERAL PARTNER OF CORPORATE Kay J. Meckes Independent Auditors
ST. PAUL VENTURE OPERATIONS AND VICE PRESIDENT OF Coopers and Lybrand L.L.P.
CAPITAL PRESIDENT OF HUMAN RESOURCES One International Place
SERVICES GROUP Boston, MA 02110
W. Frank King, Ph.D. Robert M. Stack
CHIEF EXECUTIVE R. Brough Turner VICE PRESIDENT OF Annual Meeting of Stockholders
OFFICER SENIOR VICE PRESIDENT INFORMATION TECHNOLOGY The Annual Meeting of
PSW TECHNOLOGIES, INC. TECHNOLOGY Stockholders of Natural
Critz Chan MicroSystems Corporation will be
Pamela D. A. Reeve Wendell E. Bishop GENERAL MANAGER held on Thursday, April 16, 1998
CHIEF EXECUTIVE OFFICER CHIEF SCIENTIST NATURAL MICROSYSTEMS at 1:00 PM, at the Company's
LIGHTBRIDGE, INC. (ASIA) LTD. headquarters, 100 Crossing
Dianne L. Callan Boulevard, Framingham,
Ronald W. White VICE PRESIDENT AND Herve Manceron MA, 01702
GENERAL PARTNER GENERAL COUNSEL GENERAL MANAGER
GSM CAPITAL NATURAL MICROSYSTEMS Form 10-K
Allen P. Carney EUROPE S.A. Stockholders wishing a copy of
VICE PRESIDENT Form 10-K may receive one free
OF MARKETING AND Guillerrmo M. J. Redondo of charge by contacting investor
BUSINESS DEVELOPMENT GENERAL MANAGER relations at (508) 271-1204
LATIN AMERICA S.A. NATURAL MICROSYSTEMS or by email at [email protected]
</TABLE>
[PHOTOS APPEAR HERE]
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
CORPORATE HEADQUARTERS REGIONAL OFFICES
<S> <C>
Natural MicroSystems United States
100 Crossing Blvd.
Framingham, MA 01702-5406 Campbell, California
Tel: +1 800 533 6120 Los Angeles, California
Tel: +1 508 620 9300
Fax: +1 508 620 9313 Marietta, Georgia
www.nmss.com Schaumburg, Illinois
Red Bank, New Jersey
Dallas, Texas
Annandale, Virgina
International
Natural MicroSystems Latin America S.A.
Buenos Aires, Argentina
Houston, Texas
Natural MicroSystems Europe S.A.
Paris, France
Natural MicroSystems Europe GmbH
Frankfurt, Germany
Natural MicroSystems
Iberica
Madrid, Spain
Natural MicroSystems, Ltd.
Cambridge, England U.K.
Natural MicroSystems (Asia), Ltd.
Kowloon, Hong Kong
Natural MicroSystems Japan K.K.
Tokyo, Japan
Natural MicroSystems Singapore Pte., Ltd.
Singapore
Natural MicroSystems PRC
Beijing, China
</TABLE>
Natural MicroSystems, Open Telecommunications, CT Access, Fusion, and TX are
trademarks of Natural MicroSystems Corp. Alliance Generation and Watson are
registered trademarkes of Natural MicroSystems Corp. MVP is a trademark of
GO-MVIP, Inc. All other product or corporate references may be trademarks or
registered trademarks of their respective companies.
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
Natural MicroSystems Asia Ltd.
614 Concordia Plaza
1 Science Museum Road
Tsim-Sha-Tsui Esat
Kowloon, Hong Kong
Natural MicroSystems Europe S.A.
Immeuble Copernic
Parc Techologique
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 Boulevard
Framingham, MA 01702
NMS Europe, Inc.
100 Crossing Boulevard
Framingham, MA 01702
Natural MicroSystems FSC Ltd.
69 A Kronprindsens Gade
P.O. Box 301858-UDS
Cherlotte Amilie
St. Thomas
US Virgin Islands 00803
Natural MicroSystems Securities Corporation
100 Crossing Boulevard
Framingham, MA 01702
Natural Microsystems
Intelligent Network Division
911 North Plum Grove Road
Schaumburg, IL 60173
NMS Korea, Inc.
100 Crossing Boulevard
Framingham, MA 01702
Natural MicroSystems (Singapore) Pte Ltd.
7 Temasek Boulevard
#44-01, Suntec Tower One
Singapore 038983
Natural MicroSystems Australia Pty Ltd.
Tower Three
580 George Street
Sidney, New South Whales 1171
Australia
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDING 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,318
<SECURITIES> 26,992
<RECEIVABLES> 20,161
<ALLOWANCES> 642
<INVENTORY> 8,628
<CURRENT-ASSETS> 64,077
<PP&E> 14,173
<DEPRECIATION> 5,064
<TOTAL-ASSETS> 81,693
<CURRENT-LIABILITIES> 13,308
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 68,142
<SALES> 75,363
<TOTAL-REVENUES> 75,363
<CGS> 25,298
<TOTAL-COSTS> 25,298
<OTHER-EXPENSES> 42,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (34)
<INCOME-PRETAX> 8,517
<INCOME-TAX> 4,758
<INCOME-CONTINUING> 3,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,759
<EPS-PRIMARY> .36
<EPS-DILUTED> .34
</TABLE>
