<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 1998
Commission File Number 0-23282
Natural MicroSystems Corporation
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 04-2814586
______________________________________________________________________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Crossing Boulevard, Framingham, Massachusetts 01702
______________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(508) 620-9300
______________________________________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 10,885,930 shares of Common
Stock, $.01 par value, outstanding at April 30, 1998.
The Index to Exhibits appears on Page 16 Total Number of Pages with Exhibits: 1
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
<TABLE>
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Page
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<S> <C> <C>
Item 1. Financial Statements and Notes
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flow 5
Consolidated Statements of Comprehensive Income 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II OTHER INFORMATION
Item 4. Submission of Matters of Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
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NATURAL MICROSYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN $000's)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1997 1998
- ----------- --------------- -------------
<S> <C> <C>
Current assets:
Cash and marketable securities $33,310 $32,100
Accounts receivable, net 19,519 14,623
Inventories 8,628 8,881
Prepaid expenses and other current assets 2,620 2,350
------- -------
Total current assets 64,077 57,954
Property and equipment, net 9,109 9,880
Other long-term assets 5,636 6,437
Goodwill, net 2,871 4,561
------- -------
$81,693 $78,832
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable 5,359 4,755
Accrued expenses and others liabilities 7,855 4,527
Current portion of long term obligations 94 93
------- -------
Total current liabilities 13,308 9,375
Long-term obligations, less current portion 243 234
Stockholders' equity 68,142 69,223
------- -------
$81,693 $78,832
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN $000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1998
--------------------- ---------------------
<S> <C> <C>
Revenues $ 15,868 $ 20,007
Cost of revenues 5,644 6,066
--------- ---------
Gross profit 10,224 13,941
Operating expenses:
Selling, general and administrative 4,516 6,305
Research and development 3,338 4,583
Provision for doubtful accounts -- 2,500
--------- ---------
Total operating expenses 7,854 13,388
--------- ---------
Operating income 2,370 553
Other income, net 309 223
--------- ---------
Income before income taxes 2,679 776
--------- ---------
Income tax expense 903 272
--------- ---------
Net income $ 1,776 $ 504
========= =========
Basic net income per common share $ 0.18 $ 0.05
========= =========
Weighted average shares outstanding 10,105 10,827
========= =========
Diluted net income per common share $ 0.16 $ 0.04
========= =========
Weighted average shares outstanding 10,905 11,493
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(IN $000's)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1998
-------------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,776 $ 504
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 632 1,074
Loss on sale of marketable securities (4) (1)
Changes in assets and liabilities:
Accounts receivable (1,756) 4,819
Inventories 389 (283)
Prepaid expenses and other assets (819) (639)
Accounts payable (409) (582)
Accrued expenses and other liabilities (406) (3,246)
--------- --------
Cash provided by (used in) operating activities (597) 1,646
--------- --------
Cash flow from investing activities:
Additions to property and equipment (1,874) (1,544)
Additions to license agreements (50) (1,984)
Purchases of marketable securities (8,204) (3,456)
Proceeds from the maturity of marketable securities 8,292 5,565
--------- --------
Cash used in investing activities (1,836) (1,419)
--------- --------
Cash flow from financing activities:
Payments of refundable advances - 1
Net Proceeds from issuance of common stock, net of
issuance costs 859 640
--------- --------
Cash provided by financing activities 859 64
--------- --------
Effect of exchange rate changes on cash 8 44
Net increase (decrease) in cash and cash equivalents (1,566) 912
Cash and cash equivalents, beginning of period 6,578 6,318
--------- --------
Cash and cash equivalents, end of period $ 5,012 $ 7,230
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN $000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
Net income $ 1,776 $ 504
Other comprehensive income (loss) items:
Foreign currency translation adjustment (212) (64)
------- ------
Comprehensive income $ 1,564 $ 440
======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
NATURAL MICROSYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1998 and the consolidated
statements of income, operations and cash flow for the three month periods
ending March 31, 1998 and 1997 include the accounts of Natural MicroSystems
Corporation and its wholly owned subsidiaries (the "Company").
In the opinion of management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows for all periods
presented have been made. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
The operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the consolidated financial statements of the Company as of and
for the year ended December 31, 1997.
B. STOCKHOLDERS' EQUITY: (IN 000'S)
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment Total
----------------------- ------------ ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 10,788 $108 $65,203 $2,833 $ (2) $68,142
Exercise of common stock options 79 1 640 641
Net Income 504 504
Cumulative translation adjustment (64) (64)
----------------------- ------------ ----------- --------------- ---------
Balance at March 31, 1998 10,867 $109 $65,843 $3,337 $(66) $69,223
======================= ============ =========== =============== =========
</TABLE>
7
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C. INDEBTEDNESS
At March 31, 1998, the Company had a $3.0 million bank line of credit through
December 8, 1998, all of which was available. Borrowings under the line of
credit bear interest at the bank's prime rate plus .25%. The Company is subject
to covenants requiring maintenance of certain profitability and equity levels
and leverage and liquidity ratios. At March 31, 1998, the Company was in
compliance with its debt covenants and no borrowings were outstanding under the
line. The Company believes that the net proceeds from its 1996 follow-on public
stock offering, cash flow from operations and funds available under the line of
credit will be sufficient to fund operations for at least the next 24 months.
At March 31, 1998, the Company had a 2.0 million French franc line of credit
with a bank for its European operations, all of which was available. The
Company also secured a research and development funding grant from a branch of
the French government. This represents an interest-free loan from the French
government repayable from the proceeds of export sales from France. The balance
at March 31, 1998 was $234,000.
D. EARNINGS PER SHARE
The following is a reconciliation of basic to the diluted earning per share
(EPS) computations for net income:
<TABLE>
<CAPTION>
Three months ended March 31, 1998
-------------------------------------------------------------
Income Shares Per Share
(In $000's except per share data) (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS (income available to all shareholders) $504 10,827 $0.05
Effect of dilutive securities (stock options) 666
- ----------------------------------------------------------------------------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $504 11,493 $0.04
- ---------------------------------------------------------------==============================================================
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1997
--------------------------------------------------------------
Income Shares Per Share
(In $000's except per share data) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS (income available to all shareholders) $1,776 10,105 $0.17
Effect of dilutive securities (stock options) 800
- -----------------------------------------------------------------------------------------------------------------------------
Diluted EPS (income available to common
stockholders + assumed conversions) $1,776 10,905 $0.16
- ---------------------------------------------------------------==============================================================
</TABLE>
E. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.130 (SFAS
130), "Reporting Comprehensive Income" for its fiscal year 1998. Currently, the
only adjustment to arrive at comprehensive income for the Company is the
change in the foreign currency translation.
8
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F. INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-out) or
market. Inventories as of December 31, 1997 and, March 31, 1998 were comprised
of the following:
<TABLE>
<CAPTION>
December 31, March 31,
(In $000's) 1997 1998
-------------- --------------
<S> <C> <C>
Raw materials $ 558 $ 1,346
Work In process 4,277 4,277
Finished goods 3,793 3,258
$ 8,628 $ 8,881
======= ========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Natural MicroSystems Corporation 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.
REVENUES
Revenues of $20.0 million for the three months ended March 31, 1998 ("1998"),
increased 26.1% percent from $15.9 million for the three months ended March 31,
1997 ("1997"). The increase from 1997 to 1998 was primarily due to shipment of
greater unit volume of AG products, TX products and manufacturing license
revenues. AG products have supplanted and are expected to continue to supplant
sales of VBX products for higher port count and more sophisticated applications.
Revenues from customers located outside of North America accounted for 24.3%
($4.9 million) and 30.0% ($4.7 million) of revenues for 1998 and 1997,
respectively. The dollar increase in revenues for 1998 over 1997 was due to
increased unit sales of AG products primarily to customers in Asia and Latin
America. These sales represented a 6.0% decrease as a percentage of sales from
the prior year.
COST OF REVENUES
Cost of revenues decreased to 30.3% of revenues in 1998 from 35.6% in 1997. The
decrease as a percent of revenues for 1998 is primarily attributable to
increased unit sales of AG product having higher margins, higher overall
manufacturing license revenues, and increased overall sales volume without a
corresponding increase in manufacturing overhead. In 1997 the Company had sales
to a European customer with lower margins associated with a system contract.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 39.6% to $6.3 million for
1998 from $4.5 million for 1997 and were 31.5% of total revenues for 1998 versus
28.5% in 1997. These increases were due to costs associated with increased
selling activity as well as increased expenditures for marketing, international
operations, and technical support. The Company expects that its selling,
general and administrative expenditures will continue to increase, but may vary
as a percentage of future product revenues in future periods.
RESEARCH AND DEVELOPMENT
Research and development expenditures increased 37.3% to $4.6 million for 1998
from $3.3 million for 1997, and were 22.9% of total revenues for 1998 versus 21%
in 1997. The increases were due to increased personnel and development project
related costs for both periods. The Company expects that its research and
development expenditures will continue to increase, but may vary as a percentage
of future product revenues in future periods.
PROVISION FOR UNCOLLECTABLE RECEIVABLE
The Company recorded a provision against a trade receivable from a customer that
ceased operations in April 1998. The Company had revenue of $3.8 million and
$2.5 million with this customer in 1997 and 1996 respectively.
OTHER INCOME, NET
Other income, net for 1998 and 1997 was $223,000 and $309,000, respectively.
The decrease was due to the investment of excess cash reserves in tax-free
securities that produce lower yields.
10
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INCOME TAX EXPENSE
Income tax expense of $272,000 and $903,000 for 1998 and 1997, respectively, was
based on an effective tax rate which differed from the U. S. federal statutory
rate primarily due to state and foreign income taxes and income tax credits.
OPERATING AND NET INCOME
As a result of the foregoing, operating income was $553,000 and $2.4 million for
1998 and 1997, respectively. Net income was $504,000 and $1.8 million for the
same periods, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by (used in) operations for 1998 and 1997 was $1.6 million and
($597,000) respectively. Cash was provided by operations in 1998 due to a
reduction in accounts receivable partially offset by decreased net income,
accrued expenses and other liabilities. Cash was used in operations in 1997 from
increased accounts receivable in conjunction with increased revenues, increased
inventory and a reduction in accrued expenses.
Cash was used in investing activities for 1998 and 1997 of $1.4 million and $1.8
million, respectively. For both 1998 and 1997 cash of $1.5 million and $1.9
million, respectively, was used for purchases of property and equipment. In
1998, the Company made a $2.0 million investment in technology licensing
agreements. In 1998, the Company realized net proceeds of $2.1 million from the
maturities of marketable securities.
Cash provided by financing activities in 1998 and 1997 was $641,000 and
$859,000, respectively. The proceeds for both periods are primarily from the
issuance of common stock upon the exercise of common stock options.
Current assets at March 31, 1998 were $58.0 million, 9.6% less than current
assets of $64.1 million at December 31, 1997. The reduction in current assets
was due primarily to a one-time increase in the provision for doubtful accounts
of $2.5 million and a reduction in accounts receivable before provision of $3.7
million. Current liabilities at March 31, 1998 were $9.4 million, 29.6% less
than current liabilities of $13.3 million at December 31, 1997. Lower
compensation, accounts payable and tax related accruals totaling $3.7 million
accounted for the decrease in liabilities in 1998.
For U. S. federal income tax purposes the Company has net operating loss
carryforwards available to reduce future income of approximately $6.0 million at
March 31, 1998. These carryforwards expire beginning in 2004. Utilization of
net operating loss carryforwards are subject to an annual limitation of
approximately $1.0 million under Internal Revenue Code section 382.
OTHER
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Internal Use Software," which provides
guidance on the accounting for the costs of software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. Management does not expect the statements to have a material impact on
its financial position or results of operations.
CAUTIONARY STATEMENT
When used anywhere in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "the company expects", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. Such statements are
subject to certain risks and
11
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uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Such risk
factors are set forth in Part I of the Company's annual report on Form 10-K for
the year ended December 31, 1997. The Company specifically declines any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
12
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1 - 3
NOT APPLICABLE.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 16, 1998, the Company held its Annual Meeting of Stockholders. The
matters considered at the meeting consisted of the following:
1. Election of W. Frank King and Pamela D.A. Reeve as directors for a three
year term. The results of the voting were as follows:
<TABLE>
<CAPTION>
Number of Shares
Withhold Broker
For Against Authority Non-votes
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
W. Frank King 8,923,658 6,878
Pamela D.A. Reeve 8,923,638 6,898
</TABLE>
2. Proposal (not approved) to change the Company's state of incorporation from
Delaware to Massachusetts by merging the Company into a wholly-owned
subsidiary incorporated in Massachusetts.
<TABLE>
<CAPTION>
Number of Shares
Withhold Broker
For Against Authority Non-votes
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3,646,254 3,651,166 3,775 1,629,341
</TABLE>
3. Approval of an amendment to the 1993 Stock Option Plan to increase the
maximum aggregate number of shares available for issuance thereunder by
440,000, from 1,460,000 to 1,900,000 shares.
<TABLE>
<CAPTION> Number of Shares
Withhold Broker
For Against Authority Non-votes
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6,854,590 437,927 6,475 1,631,544
</TABLE>
4. Approval of an amendment to the 1993 Employee Stock Purchase Plan to increase
the number of shares issuable thereunder from 200,000 to 400,000 shares
<TABLE>
<CAPTION> Number of Shares
Withhold Broker
For Against Authority Non-votes
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8,554,663 3,758 4,465
</TABLE>
13
<PAGE>
5. Approval of an amendment to the 1993 Non-Employee Director Stock Option Plan
to accelerate the vesting of all options granted under the Plan if a change-
in-control occurs.
<TABLE>
<CAPTION>
Number of Shares
Withhold Broker
For Against Authority Non-votes
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8,554,663 364,124 11,749
</TABLE>
6. Ratification of the selection of Coopers & Lybrand L.L.P. as the Company's
independent certified public accountants.
<TABLE>
<CAPTION>
Number of Shares
Withhold Broker
For Against Authority Non-votes
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8,922,313 3,758 4,465
</TABLE>
ITEM 5.
NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS
No. 27.1 - Financial Data Schedule
B. REPORTS ON FORM 8-K
A report on Form 8-K was filed on May 12, 1998 related to a news
release disclosing a charge taken by the Company pursuant to a
provision recorded against a trade receivable.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Natural Microsystems Corporation
Dated: May 14, 1998 By: /s/ Robert P. Schechter
------------------------------
Robert P. Schechter
President and Chief Executive Officer
Dated: May 14, 1998 By: /s/ John F. Kennedy
---------------------------------
John F. Kennedy
Chief Financial Officer
15
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NATURAL MICROSYSTEMS CORPORATION
EXHIBIT INDEX
Page
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No. 27.1 Financial Data Schedule 16
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,230
<SECURITIES> 24,870
<RECEIVABLES> 15,340
<ALLOWANCES> 717
<INVENTORY> 8,881
<CURRENT-ASSETS> 57,954
<PP&E> 15,621
<DEPRECIATION> 5,741
<TOTAL-ASSETS> 78,832
<CURRENT-LIABILITIES> 9,375
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 78,832
<SALES> 20,007
<TOTAL-REVENUES> 20,007
<CGS> 6,066
<TOTAL-COSTS> 6,066
<OTHER-EXPENSES> 13,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 776
<INCOME-TAX> 272
<INCOME-CONTINUING> 504
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
