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Previous: NATURAL MICROSYSTEMS CORP, SC 13D, 1999-11-15 |
Next: KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM, 10-Q, 1999-11-15 |
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 September 30, 1999
Commission File Number 0-23282
| Delaware
|
04-2814586
|
|
| |
||
| (State or other
jurisdiction of
incorporation or organization) |
(IRS Employer
Identification Number) |
|
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: 11,196,964 shares of Common Stock, $.01 par value, outstanding at October 31, 1999.
The Index to Exhibits appears on Page 16 Total Number of Pages with Exhibits: 1
TABLE OF CONTENTS
| PART I | FINANCIAL INFORMATION | Page
|
|
| Item 1. Financial Statements and Notes | |||
| Condensed Consolidated Balance Sheets | 3
|
||
| Condensed Consolidated Statements of Operations | 4
|
||
| Condensed Consolidated Statements of Cash Flow | 5
|
||
| Notes to Consolidated Financial Statements | 6 - 8
|
||
| Item 2. Management's Discussion and Analysis of | |||
| Financial Condition and Results of Operations | 9 -
14
|
||
| PART II | OTHER INFORMATION | ||
| Item 6. | Exhibits and Reports on Form 8-K | 15
|
|
| Natural MicroSystems Corporation |
||||||||
| Condensed Consolidated Balance Sheet
|
||||||||
| (In $000's)
|
||||||||
| ASSETS | September 30,
1999 (unaudited) |
December 31,
1998 |
||||||
| |
|
|||||||
| Current assets: | ||||||||
| Cash and marketable securities | $ 20,135
|
$ 17,922
|
||||||
| Accounts receivable, net of allowance for uncollectable | ||||||||
| accounts of $1,446 and $779, respectively | 11,233
|
17,224
|
||||||
| Inventories | 6,832
|
9,773
|
||||||
| Prepaid expenses and other current assets | 5,224
|
6,599
|
||||||
| |
|
|||||||
| Total current assets | 43,424
|
51,518
|
||||||
| Property and equipment, net of accumulated | ||||||||
| depreciation of $11,914 and $8,376, respectively | 13,910
|
13,981
|
||||||
| Other long-term assets | 8,522
|
9,214
|
||||||
| Goodwill, net | 3,705
|
3,925
|
||||||
| |
|
|||||||
| Total assets | $ 69,561
|
$ 78,638
|
||||||
| |
|
|||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 4,670
|
5,662
|
||||||
| Accrued expenses and other liabilities | 8,631
|
7,592
|
||||||
| Current portion of long-term obligations | 96
|
73
|
||||||
| |
|
|||||||
| Total current liabilities | 13,397
|
13,327
|
||||||
| Long-term obligations, less current portion | 32
|
158
|
||||||
| Stockholders' equity | 56,132
|
65,153
|
||||||
| |
|
|||||||
| Total liabilities and stockholders' equity | $ 69,561
|
$ 78,638
|
||||||
| |
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements
Natural MicroSystems Corporation
Condensed Consolidated Statements of Operations
(In $000's except
share and per share data )
(Unaudited)
| For the Three Months Ended
September 30, |
For the Three Months Ended
September 30, |
|||||||
| 1999
|
1998
|
1999
|
1998
|
|||||
| |
|
|
|
|||||
| Revenues | $
20,276
|
$
20,611
|
$
54,462
|
$
59,054
|
||||
| Cost of revenues | 8,080
|
7,678
|
21,658
|
20,373
|
||||
| |
|
|
|
|||||
| Gross profit | 12,196
|
12,933
|
32,804
|
38,681
|
||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 9,778
|
7,975
|
28,952
|
21,444
|
||||
| Research and development | 5,841
|
5,132
|
17,152
|
14,327
|
||||
| Provision for uncollectable receivable | 2,500
|
|||||||
| |
|
|
|
|||||
| Total operating expenses | 15,619
|
13,107
|
46,104
|
38,271
|
||||
| |
|
|
|
|||||
| Operating income (loss) | (3,423
|
) | (174
|
) | (13,300
|
) | 410
|
|
| Other income, net | 120
|
265
|
173
|
719
|
||||
| |
|
|
|
|||||
| Income (loss) before income taxes | (3,303
|
) | 91
|
(13,127
|
) | 1,129
|
||
| |
|
|
|
|||||
| Income tax expense (benefit) | (1,156
|
) | 31
|
(4,594
|
) | 395
|
||
| |
|
|
|
|||||
| Net income (loss) | $ (2,147
|
) | $
60
|
$
(8,533
|
) | $
734
|
||
| |
|
|
|
|||||
| Basic net income (loss) per common share | $
(0.19
|
) | $
0.01
|
$
(0.77
|
) | $
0.07
|
||
| |
|
|
|
|||||
| Weighted average shares outstanding | 11,069,579
|
10,963,363
|
11,061,190
|
10,873,676
|
||||
| |
|
|
|
|||||
| Diluted net income (loss) per common share | $
(0.19
|
) | $
0.01
|
$
(0.77
|
) | $
0.06
|
||
| |
|
|
|
|||||
| Weighted average shares outstanding |
11,069,579
|
11,156,109
|
11,061,190
|
11,452,343
|
||||
| |
|
|
|
|||||
The accompanying notes are an integral part of these consolidated financial statements
Natural MicroSystems Corporation
Condensed Consolidated Statements of Cash Flow
(In $000's)
(Unaudited)
| For the Nine
Months Ended
September 30, |
|||||||||
| 1999
|
1998
|
||||||||
| |
|
||||||||
| Cash flow from operating activities: | |||||||||
| Net income (loss) | $ (8,533
|
) | $
734
|
||||||
| Adjustments to reconcile net income (loss) to net cash | |||||||||
| provided by (used in) operating activities: | |||||||||
| Depreciation and amortization | 4,723
|
|
3,766
|
||||||
| Provision for bad debts | 1,178
|
|
291
|
||||||
| Deferred tax asset | 348
|
||||||||
| Gain (loss) on sale of marketable securities | 43
|
(2
|
) | ||||||
| Changes in assets and liabilities: | |||||||||
| Accounts receivable | 4,417
|
|
1,410
|
||||||
| Inventories | 2,795
|
(380
|
) | ||||||
| Prepaid expenses and other assets | 1,302
|
(2,360
|
) | ||||||
| Income tax receivable | 125
|
||||||||
| Accounts payable | (896
|
) | 151
|
||||||
| Accrued restructuring charges | (1,270
|
) | |
||||||
| Accrued expenses and other liabilities | 2,525
|
(4,017
|
) | ||||||
| |
|
||||||||
| Cash provided by (used in) operating activities | 6,632
|
|
(282
|
) | |||||
| |
|
||||||||
| Cash flow from investing activities: | |||||||||
| Additions to property and equipment | (3,812
|
) | |
(6,473
|
) | ||||
| Additions to goodwill | (515
|
) | (1,875
|
) | |||||
| Additions to license agreements | (29
|
) | |
(401
|
) | ||||
| Purchases of marketable securities | (15,462
|
) | |
(6,354
|
) | ||||
| Proceeds from the maturity of marketable securities | 12,724
|
24,071
|
|||||||
| Investment in convertible debentures |
(3,000
|
) | |||||||
| Other investing activities | (5)
|
|
16
|
||||||
| |
|
||||||||
| Cash (used in) provided by investing activities | (7,099
|
) | |
5,984
|
|||||
| |
|
||||||||
| Cash flow from financing activities: | |||||||||
| Repurchase of common stock | (1,058
|
) | |
||||||
| Payments of refundable advances | (115
|
) | |
(79
|
) | ||||
| Proceeds from issuance of common stock, net of | |||||||||
| issuance costs | 882
|
2,002
|
|||||||
| Non-statutory stock options | 3
|
||||||||
| |
|
||||||||
| Cash (used in) provided by financing activities | (291
|
) | |
1,926
|
|||||
| |
|
||||||||
| Effect of exchange rate changes on cash | 321
|
|
155
|
||||||
| Net (decrease) increase in cash and cash equivalents | (437
|
) | 7,783
|
||||||
| Cash and cash equivalents, beginning of period | 12,024
|
6,317
|
|||||||
| |
|
||||||||
| Cash and cash equivalents, end of period | $ 11,587
|
|
$
14,100
|
||||||
| |
|
||||||||
The accompanying notes are an integral part of these consolidated financial statements
Natural MicroSystems Corporation
Notes to Condensed Consolidated Financial Statements
A. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 1999 and the condensed consolidated statements of income, operations and cash flow for the three month and nine month periods ending September 30, 1999 and 1998 include the accounts of Natural MicroSystems Corporation and its wholly owned subsidiaries (the "Company").
In the opinion of management, all adjustments, which are of a normal recurring nature, 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 and nine month periods ended September 30, 1999 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, 1998.
B. STOCKHOLDERS' EQUITY: (In $000's)
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
Total
|
|||||||||||||
| Common Stock
|
Additional
Paid-in
Capital
|
||||||||||||||
| |
Accumulated
Deficit
|
Treasury
Stock
|
|||||||||||||
| Shares
|
Amount
|
||||||||||||||
| |
|
|
|
|
|
||||||||||
| Balance at December 31, 1998 |
11,018
|
$
110
|
$
67,585
|
$
(2,494
|
) | $
(48
|
) | $
65,153
|
|||||||
| Exercise of common |
103
|
1
|
645
|
646
|
|||||||||||
| stock options |
|||||||||||||||
| Employee stock purchase plan |
54
|
1
|
235
|
236
|
|||||||||||
| Stock repurchase |
(100
|
) |
(1,058
|
) |
(1,058
|
) | |||||||||
| Net loss |
(8,533
|
) |
(8,533
|
) | |||||||||||
| Foreign currency |
(312
|
) | (312
|
) | |||||||||||
| translation adjustment |
|||||||||||||||
| |
|
|
|
|
|
|
|||||||||
| Balance at September 30, 1999 |
11,075
|
$
112
|
$
68,465
|
$
(11,027
|
) | $
(1,058
|
) | $
(360
|
) | $
56,132
|
|||||
| |
|
|
|
|
|
|
|||||||||
C. INDEBTEDNESS
The Company established a new $7.5 million bank line of credit for working capital purposes effective May 14, 1999. Borrowings under the line of credit bear interest at the bank's floating rate of prime plus one percent. The Company is subject to covenants requiring maintenance of certain profitability, equity and liquidity ratios. As of September 30, 1999 the Company is currently compliant with all covenants under the line, and there are no amounts currently outstanding. This agreement is subject to renewal on May 13, 2000.
D. EARNINGS PER SHARE
The following is a reconciliation of basic to the diluted earning per share (EPS) computations for net income (loss). The shares outstanding calculation for the three months and nine months ended September 30, 1999 do not include 2,852,285 anti-dilutive shares:
| Three months ended September 30, 1999 |
|||||||
| |
|||||||
| Income |
Shares |
Per Share |
|||||
| (In $000's except per share data) |
(loss) |
Amount |
|||||
| |
|
||||||
| Basic EPS (income available to all shareholders) |
$ (2,147 |
) | 11,070 |
$ (0.19 |
) | ||
| Effect of dilutive securities (stock options) |
|||||||
| |
|
||||||
| Diluted EPS (income available to common |
|||||||
| stockholders + assumed conversions) |
$ (2,147 |
) | 11,070 |
$ (0.19 |
) | ||
| |
|||||||
| Three months ended September 30, 1998 |
|||||||
| |
|||||||
| Income |
Shares |
Per Share |
|||||
| (In $000's except per share data) |
(loss) |
Amount |
|||||
| |
|
||||||
| Basic EPS (income available to all shareholders) |
$ 60 |
10,963 |
$ 0.01 |
||||
| Effect of dilutive securities (stock options) |
193 |
||||||
| |
|
||||||
| Diluted EPS (income available to common |
|||||||
| stockholders + assumed conversions) |
$ 60 |
11,156 |
$ 0.01 |
||||
| |
|||||||
| Nine months ended September 30, 1999 |
|||||||
| |
|||||||
| Income |
Shares |
Per Share |
|||||
| (In $000's except per share data) |
(loss) |
Amount |
|||||
| |
|
||||||
| Basic EPS (income available to all shareholders) |
$ (8,533 |
) | 11,061 |
$ (0.77 |
) | ||
| Effect of dilutive securities (stock options) |
|||||||
| |
|
||||||
| Diluted EPS (income available to common |
|||||||
| stockholders + assumed conversions) |
$ (8,533 |
) | $ 11,061 |
$ (0.77 |
) | ||
| |
|||||||
| Nine months ended September 30, 1998 |
|||||||
| |
|||||||
| Income |
Shares |
Per Share |
|||||
| (In $000's except per share data) |
(loss) |
Amount |
|||||
| |
|
||||||
| Basic EPS (income available to all shareholders) |
$ 734 |
10,874 |
$ 0.07 |
||||
| Effect of dilutive securities (stock options) |
578 |
||||||
| |
|
||||||
| Diluted EPS (income available to common |
|||||||
| stockholders + assumed conversions) |
$ 734 |
11,452 |
$ 0.06 |
||||
| |
|||||||
E. INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories, as of September 30, 1999 and December 31, 1998 were comprised of the following:
| September 30, |
December 31, |
|||
| (In $000's) |
1999 |
1998 |
||
| |
|
|||
| Raw materials |
$ 589 |
$ 967 |
||
| Work in Process |
3,245 |
5,747 |
||
| Finished goods |
2,998 |
3,059 |
||
| |
|
|||
|
|
$ 6,832 |
$ 9,773 |
||
| |
|
|||
F. SEGMENT INFORMATION
The following table presents the Company's revenues and operating income by geographic segment:
| (In $000's) |
Three Months ended |
Nine Months ended |
|||||||
| September 30, |
September 30, |
||||||||
| 1999 |
1998 |
1999 |
1998 |
||||||
| |
|
|
|
||||||
| Revenues |
|||||||||
| North America |
$ 15,363 |
$ 15,475 |
$ 39,534 |
$ 43,513 |
|||||
| Europe |
3,118 |
2,839 |
10,070 |
8,225 |
|||||
| Other |
1,795 |
2,297 |
4,858 |
7,316 |
|||||
| |
|
|
|
||||||
| Total revenues |
$ 20,276 |
$ 20,611 |
$ 54,462 |
$ 59,054 |
|||||
| |
|
|
|
||||||
| Operating Income (loss) |
|||||||||
| North America |
$ (2,864 |
) | $ (485 |
) | $ (12,021 |
) | $ (1,682 |
) | |
| Europe |
(567 |
) | (281 |
) | (1,293 |
) | (1,011 |
) | |
| Other |
8 |
592 |
14 |
3,103 |
|||||
| |
|
|
|
||||||
| Total operating income (loss) |
$ (3,423 |
) | $ (174 |
) | $ (13,300 |
) | $ 410 |
||
| |
|
|
|
||||||
G. COMPREHENSIVE INCOME
The following table represents the Company's comprehensive income for the stated periods.
| (In $000's) |
Three Months ended |
Nine Months ended
|
||||||
| September 30, |
September 30, |
|||||||
| 1999 |
1998 |
1999 |
1998 |
|||||
| |
|
|
|
|||||
| Net income (loss) |
$ (2,147 |
) | $ 60 |
$ (8,533 |
) | $ 734 |
||
| Other comprehensive income (loss) Items: |
||||||||
| Foreign currency translation adjustment |
(78 |
) | 295 |
(312 |
) | 230 |
||
| |
|
|
|
|||||
| Comprehensive income (loss) |
$ (2,225 |
) | $ 355 |
$ (8,845 |
) | $ 964 |
||
| |
|
|
|
|||||
ITEM 2. Management's Discussion and Analysis of Financial Condition and 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 solutions that operate globally. The Company's state-of-the-art technologies are based on open, standards-based, PC platforms, collectively referred to as Open TelecommunicationsTM. Use of these state-of-the-art hardware and software products, combined with the Company's consulting and support services, enable customers to shorten time to market for computer telephony systems including Internet/IP voice and fax systems, web-enabled call centers, network-based enhanced services, integrated voice response (IVR), speech recognition, wireless, SS7, and CompactPCI. Specific examples of these applications include long distance least-cost routing and bypass, cellular and other wireless switching services, telephone banking, medical alert and prescription services, hotel and hospital information systems, transaction card authorization, telemarketing, help desks, school bulletin boards, security monitoring, and automated operator services.
Results of Operations
Revenues
Revenues of $20.3 million for the three
months ended September 30, 1999, decreased 1.6% percent from $20.6
million for the three months ended September 30, 1998. Revenues of
$54.5 million for the nine months ending September 30, 1999
decreased 7.8% from $59.1 million for the nine months ended
September 30, 1998. The decreases from 1998 to 1999 were the result
of lower sales volume in North America, Asia and Latin America
partially offset by higher European and service contract revenues.
Revenues from customers located outside of North America of $4.9 million for the three months ended September 30,1999 decreased 4.3% from $5.1 million for the three months ended September 30, 1998 and represented 24.2% and 24.9% of total revenues, respectively. Revenues from customers located outside of North America of $14.9 million for the nine months ended September 30, 1999 decreased from $15.5 million for the nine months ended September 30, 1998, and represented 27.4% and 26.3% of total revenues, respectively. The decrease in revenues for 1999 over 1998 was due to lower sales in North and Latin America, stagnant sales in Asia, partially offset by increased sales in Europe.
Cost of Revenues
Cost of revenues of $8.1 million for the
three months ended September 30, 1999 increased 5.2% from $7.7
million for the three months ended September 30, 1998, and
represented 39.9% and 37.3% of total revenues, respectively. The
increase is directly related to expenses incurred for investment in
the services and manufacturing departments. Cost of revenues of
$21.7 million for the nine months ended September 30, 1999 increased
6.3% from $20.4 million for the nine months ended September 30,1998
and represented 39.8% and 34.5% of total revenues, respectively.
Investment in the service and manufacturing departments were also
responsible for the overall increase.
Selling, General and Administrative
Selling, general and administrative expenses of $9.8 million for the
three months ended September 30, 1999 increased 22.6% from $8.0
million for the three months ended September 30, 1998 and
represented 48.2% and 38.7% of total revenues, respectively. These
increases were due to costs associated with increased selling
activities in Japan, China, Spain and Italy, as well as increased
expenditures for international marketing, service administration and
marketing programs. The Company expects that its selling, general
and administrative expenditures will vary as a percentage of product
revenues in future periods.
Selling, general and administrative expenses of $29.0 million for the nine months ended September 30,1999 increased 35.0% from $21.4 million for the nine months ended September 30, 1998 and represented 53.2% and 36.3% of revenues, respectively. These increases were due to an increase in both the sales and development support personnel in both the European and Asian markets.
Research and Development
Research and development expenditures of $5.8 million for the three
months ended September 30, 1999 increased 13.8% from $5.1 million
for the three months ended September 30,1998, and represented 28.8%
and 24.9% of total revenues, respectively. The increases were due to
increased personnel and development project related costs related to
IP Telephony functionality and software tools. Research and
development expenditures of $17.2 million for the nine months ended
September 30, 1999 increased 19.7% from $14.3 million for the nine
months ended September 30, 1998, and were 31.5% and 24.3% of total
revenues, respectively. The Company expects that its research and
development expenditures will continue to increase, but may vary as
a percentage of product revenues in future periods.
Provision for Uncollectable Receivable
The Company recorded a provision against
a trade receivable in 1998 from a customer that abruptly ceased
operations in April of that same year.
Restructuring Charges
During the last quarter of the Company's
fiscal year, in an effort to create efficiencies and manage its
business more effectively a restructuring was implemented. The
balance of accrued restructuring charges at of the beginning of the
year amounted to $3.0 million. The Company has paid $247,000 during
the current quarter and $1.3 million in 1999, leaving approximately
$1.7 million in accrued charges outstanding. The Company expects to
have these charges paid by June 30, 2000. Additionally, the Company
experienced more favorable terms than anticipated in the termination
of existing lease commitments pertaining to its new corporate office
space. These savings, however, were offset in the same reporting
period by other restructuring charges related to a reduction in
force of certain executives.
Operating and Net Income (Loss)
As a result of the foregoing, operating
income (loss), for the three months ended September 30, was ($3.4)
million and ($174,000) for 1999 and 1998, respectively. Net income
(loss) was ($2.1) million and $60,000 for the same periods,
respectively. Operating income (loss) for the first nine months
ended September 30, was ($13.3) million and $410,000 for 1999 and
1998, respectively. Net income (loss) for the nine months ended
September 30, was ($8.5) million and $734,000 for 1999 and 1998,
respectively.
Income Tax Expense (Benefit)
Income tax expense (benefit), for the
three months ended September 30, was ($1.2) million and $31,000 for
1999 and 1998, respectively. Income tax expense (benefit), for the
nine months ended September 30, was ($4.6) million and $395,000 for
1999 and 1998, respectively. Income tax expense is 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. The Company's current effective tax rate is 35.0%, on a
worldwide basis. For U.S. federal income tax purposes the Company
has net operating loss carryforwards available to reduce income of
approximately $3.5 million at December 31, 1998. These carryforwards
will begin to expire 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. In addition,
ViaDSP, a wholly owned subsidiary, has net operating loss
carryforwards available to reduce future income of approximately
$1.6 million at December 31, 1998. These 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.
The Company continuously re-evaluates the
recoverability of its deferred tax asset. The amount of the deferred
tax asset considered realizable could be significantly or completely
reduced if income is not generated in the near term periods.
Although realization is not assured, management believes it is more
likely than not the net deferred tax asset will be realized. The
Company will continue to assess the valuation of the deferred tax
asset each quarter.
Other Income (Expense), Net
Other income, net for the three months
ended September 30, 1999 and 1998 was $120,000 and $265,000,
respectively. Other income, net for the nine months ended September
30, 1999 and 1998 was $173,000 and $719,000 respectively. The
decrease in both periods was due to a combination of both foreign
exchange losses and lower cash balances.
Liquidity and Capital Resources
Cash provided by (used in) operations
for the nine months ended September 30,1999 and 1998 was $6.6
million and ($282,000) respectively. Cash provided by operations in
1999 was largely due to reductions in inventory and accounts
receivable generated through better collection rates, improved
inventory management and increases in accrued expenses. Cash was
used in operations during 1998 through decreased accrued expenses,
prepaid expenses and other assets and liabilities.
Cash (used in) provided by investing activities for the nine months ended September 30, 1999 and 1998 was ($7.1) million and $6.0 million, respectively. During 1999, $3.8 million was utilized to purchase property and equipment. An additional $515,000 was used for additions to goodwill associated with the acquisition of Teknique, Inc. In 1998, cash of $6.5 million was used for purchases of property and equipment and $401,000 was invested in license agreements to support new product offerings.
Cash (used in) provided by financing activities for the nine months ended September 30, 1999 and 1998 was ($291,000) and $1.9 million, respectively. During August 1999, $1.1 million was utilized to repurchase a portion of the Company's own outstanding common stock. In both years cash proceeds were from the issuance of common stock upon the exercise of common stock options as well as the employee stock purchase plan.
Current assets at September 30, 1999, were $43.4 million, 15.7% less than current assets of $51.5 million at December 31, 1998. Current liabilities at September 30, 1999 were $13.4 million, 0.5% more than current liabilities of $13.3 million at December 31, 1998. Higher accrued expenses and other liabilities partially offset by a decrease in accounts payable accounted for the increase in liabilities in 1999.
The Company established a new $7.5 million bank line of credit for working capital purposes effective May 14,1999. Borrowings under the line of credit bear interest at the bank's floating rate of prime plus one percent. The Company is subject to covenants requiring maintenance of certain profitability, equity and liquidity ratios. As of June 30,1999 the Company is currently compliant with all covenants under the line, and there are no amounts currently outstanding. This agreement is subject to renewal on May 13, 2000.
Repurchase of Common Stock
On July 30, 1999, the Board of Directors authorized the Company to repurchase up to 400,000 shares of its own common stock over the next 12 months. The timing and amount of shares repurchased will be determined by the Company's management and will be based on its evaluation of market and economic conditions. The Company took advantage of favorable stock prices and sufficient cash reserves to purchase 100,000 shares of its common stock for $1.1 million during the month of August. This common stock will be utilized for the Company's current employee stock purchase program, stock option plans and for general corporate purposes.
Recent Accounting Pronouncements
In December 1998, the AICPA issued
Statement of Position No. 98-9, "Modification of SOP no. 97-2,
Software Revenue Recognition, with Respect to Certain Transactions
" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to require
recognition of revenue using the "residual method" in
circumstances outlined in SOP 98-9. Under the residual method,
revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor specific objective
evidence, is deferred and subsequently recognized in accordance with
the relevant sections of SOP 97-2 and (2) the difference between the
total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the
delivered elements. SOP 98-9 is effective for transactions entered
into in fiscal years beginning after March 15, 1999. Also, the
provisions of SOP 97-2 that were deferred by SOP 98-4 will continue
to be deferred until the date 98-9 becomes effective. The Company
does not expect the adoption of 98-9 will have a significant impact
on the Company's results of operations or financial position.
Year 2000 Readiness Disclosure
The Year 2000 issue encompasses the
inability of certain computer programs and equipment that utilize
embedded chips to perform accurately after the year 2000. Concerns
relating to the Year 2000 issue generally arise out of the potential
that this issue will affect business operations on an ongoing basis,
as well as the costs to correct possible system failures.
The Company has been implementing a Year 2000 compliance program to address the Year 2000 issue. This program is designed to ensure that the Company's current product offerings are Year 2000 compliant, that Year 2000 disruptions of vendors and other third party relationships will not materially affect the Company's operations, and that the Company's internal systems will continue to function properly. As part of this implementation, since February 1998, the Company has been publishing on its external web site Year 2000 information concerning the Company's product offerings and other information relating to the Company's Year 2000 compliance program. Furthermore, an external consulting firm has completed its report on the Company's Year 2000 readiness and has provided assistance for the Company to comply with the Year 2000 requirements.
The Company has been pursuing its Year 2000 compliance program in accordance with the following five phases: (1) conduct an inventory to determine all potential Year 2000 problem areas having a material impact on the Company; (2) prioritize the identified Year 2000 problem areas; (3) formally test or assess material items for Year 2000 readiness; (4) repair or replace material items determined not to be Year 2000 compliant; and (5) design and implement a contingency and business continuation plan for any reasonably likely worst case scenarios that the Company becomes aware of.
The Company has tested 100% of its major product offerings and 80% of its legacy products. The Company does not plan to test any additional products. All current major Company product offerings are already Year 2000 compliant. Certain older legacy products, which the Company no longer sells, may not be Year 2000 compliant. The Company has published the specific Year 2000 compliance status of NMS' products on its external web site. The Company has addressed this issue of legacy products by publishing in this external web site that certain of these products may not be Year 2000 compliant, and that each customer who purchased these products should test, repair and/or replace any of these products if they are still in use.
The Company's enterprise-wide business system is the Company's primary internal management information system. This system is warranted to be Year 2000 compliant by the vendor. The Company believes that its internal systems and equipment will not pose a significant operational problem from a Year 2000 standpoint. All information technology production servers have been upgraded to date. Internal desktop computers have been tested and are in compliance with Year 2000 specifications to the extent that they may have a material affect on the Company.
The Company has verified the readiness of its suppliers by issuing questionnaires relating to Year 2000 issues. The Company has audited the responses of top tier suppliers and any other supplier which could have a material impact on the Company's operations. Where the Company believes that a particular supplier poses an unacceptable risk, the Company has identified an alternative source. The mailing of questionnaires to suppliers has been completed, and the Company has reviewed the responses. It has been determined that all the Company's major suppliers are Year 2000 compliant.
The Company has addressed the Year 2000 readiness of significant customers. On an on-going basis, the Company has been reviewing their publicly available published information relating to their Year 2000 status. The Company has not encountered any material concerns with its significant customers to date.
Costs incurred in the Company's Year 2000 effort will be expensed as incurred. The Company's final evaluation of total costs has been determined to be approximately $1 million for external services, upgrades and other compliance related expenditures. Should these estimates prove to be correct, it is believed that the expense will not have a material impact on its business, operating results or ongoing operations resulting from Year 2000 issues.
The Company has addressed concerns relating to its products, internal facilities and material relationships with third parties. At this time, the Company cannot assure that there will not be any material effect on the Company's business, results of operations or financial condition as a result of (i) products from third parties that have not become Year 2000 compliant or (ii) currently unknown information. However, the Company has been reducing its risks relating to the Year 2000 issue by implementing its Year 2000 program, and will develop contingency plans to any reasonably likely worst case scenario that it may become aware of.
Readers should be cautioned that forward-looking statements contained in the Year 2000 update should be read in conjunction with the Company's disclosure under the heading " Cautionary Statement" for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act.
European Union Currency Conversion
On January 1, 1999, eleven member
nations of European Economic and Monetary Union began using a common
currency, the Euro. For a three-year transition period ending June
30, 2002, both the Euro and each of the currencies for such member
nations will remain in circulation. After June 30, 2002, the Euro
will be the sole legal tender for those countries. The adoption of
the Euro will affect many financial systems and business
applications as the commerce of those countries will be transacted
in the Euro and the existing national currency during the transition
period. Of the eleven currently using the Euro, the Company has
subsidiary operations in France, Germany and Italy, and branch
operations in Spain. The Company has assessed the potential impact
of the Euro conversion in a number of areas, particularly including
the potential impact upon pricing and other marketing strategies,
and upon product development. Although the Company does not
currently expect that the conversion, either during or after the
transition period, will adversely affect its operations of financial
condition, the conversion has only recently been implemented and
there can be no assurance that it will not have some unexpected
adverse impact.
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.
Cautionary Statement
When used anywhere in this Form 10-Q and
in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "
the company expects", "will continue", "is
anticipated", "estimated", "project", or
"outlook" or similar expressions (including confirmations
by an authorized executive officer of the Company of any such
expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date
made. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. Such risk
factors are set forth in Part I of the Company's annual report on
Form 10-K for the year ended December 31, 1998. 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.
|
PART II - OTHER INFORMATION
|
|||
| ITEMS 1-5
|
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 | ||
|
Not applicable. |
|||
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: November 15, 1999 | By: /S/ Robert P. Schechter ___ | ||
| Robert P. Schechter | |||
| President and Chief Executive Officer | |||
| And Chairman of the Board of
Directors |
|||
| Dated: November 15, 1999 | By: /S/ Robert E. Hult | ||
| Robert E. Hult | |||
| Senior Vice President of
Finance and
Operations, Chief Financial Officer and Treasurer |
|||
| Natural MicroSystems Corporation
Exhibit Index |
||
| Exhibit No. |
Title |
Page |
| 27.1 |
Financial Data Schedule |
17 |
|
|