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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, 2000
Commission File Number 0-23282
Natural MicroSystems Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-2814586
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Crossing Boulevard, Framingham, Massachusetts 01702
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(Address of principal executive offices) (Zip Code)
(508) 620-9300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 36,418,475 shares of Common
Stock, $.01 par value, outstanding at October 31, 2000.
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The Index to Exhibits appears on Page: 23 Total Number of Pages with Exhibits: 58
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TABLE OF CONTENTS
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<CAPTION>
PART I - FINANCIAL INFORMATION: Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
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2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Natural MicroSystems Corporation
Condensed Consolidated Balance Sheets
(In $000s)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
--------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,994 $ 16,617
Marketable securities 69,355 6,837
Accounts receivable, net of allowance for uncollectable
accounts of $1,197 and $1,408, respectively 22,201 11,604
Inventories 10,048 5,393
Prepaid expenses and other current assets 7,545 5,044
---------------- ----------------
Total current assets 173,143 45,495
Property and equipment, net of accumulated amortization
of $17,053 and $12,384, repectively 18,407 14,871
Other long-term assets 12,923 6,883
Intangible assets, net of accumulated amortization of
$9,965 and $2,152, respectively 128,545 3,460
---------------- ----------------
Total assets $ 333,018 $ 70,709
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 8,736 7,211
Accrued expenses and other liabilities 20,389 9,772
Current portion of long-term obligations 3 2,907
---------------- ----------------
Total current liabilities 29,128 19,890
Long-term obligations, less current portion 385 306
Stockholders' equity 303,505 50,513
---------------- ----------------
Total liabilities and stockholders' equity $ 333,018 $ 70,709
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
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Natural MicroSystems Corporation
Condensed Consolidated Statements of Operations
(In $000s except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 40,536 $ 20,276 $ 100,384 $ 54,462
Cost of revenues 17,450 8,080 40,030 21,658
------------ ------------ ------------ ------------
Gross profit 23,086 12,196 60,354 32,804
Operating expenses:
Selling, general and administrative (excluding non-cash
compensation expense of $7,510) 14,327 9,773 36,711 28,906
Research and development 8,434 6,278 22,357 18,461
Non-cash compensation expense 7,510 -- 7,510 --
Amortization of goodwill and other intangibles 7,003 193 7,436 578
In-process research & development 3,300 -- 3,300 --
------------ ------------ ------------ ------------
Total operating expenses 40,574 16,244 77,314 47,945
Operating loss (17,488) (4,048) (16,960) (15,141)
Other income, net 2,571 50 8,535 33
------------ ------------ ------------ ------------
Loss before income taxes (14,917) (3,998) (8,425) (15,108)
------------ ------------ ------------ ------------
Income tax expense (benefit) 312 (1,156) 766 (4,594)
------------ ------------ ------------ ------------
Net loss $ (15,229) $ (2,842) $ (9,191) $ (10,514)
============ ============ ============ ============
Basic net loss per common share $ (0.42) $ (0.12) $ (0.30) $ (0.47)
============ ============ ============ ============
Weighted average shares outstanding 36,219,233 22,946,370 30,320,127 22,601,459
============ ============ ============ ============
Diluted net loss per common share $ (0.42) $ (0.12) $ (0.30) $ (0.47)
============ ============ ============ ============
Weighted average shares outstanding 36,219,233 22,946,370 30,320,127 22,601,459
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
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Natural MicroSystems Corporation
Condensed Consolidated Statements of Cash Flow
(In $000s)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (9,191) (10,514)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 12,890 4,766
Non-cash compensation paid or accrued 7,510 11
Gain (loss) on sale of marketable securities (68) 43
Purchased in-process research and development 3,300 --
Gain on sale of investments (2,062) --
Deferred tax asset/liability 151 348
Changes in assets and liabilities,
net of effects of acquisition:
Accounts receivable (6,569) 5,595
Inventories 872 2,781
Prepaid expenses and other assets (1,401) 1,298
Income tax receivable (164) (1)
Accounts payable (914) (830)
Accrued expenses and other liabilities 2,475 1,427
----------------- -----------------
Net cash provided by operating activities 6,829 4,924
----------------- -----------------
Cash flow from investing activities:
Additions to property and equipment (7,513) (3,975)
Purchases of marketable securities (146,361) (15,462)
Proceeds from the sale of marketable securities 83,777 12,724
Proceeds from the sale of property & equipment 227 52
Additions to intangible assets -- (515)
Acquisition of IML business, net of cash acquired (65,836) --
Proceeds from the sale of investments 5,562 --
Acquisition of cost investment (7,511) --
Additions to other assets 3 (79)
----------------- -----------------
Net cash used in investing activities (137,652) (7,255)
----------------- -----------------
Cash flow from financing activities:
Receipts on stockholders notes receivable 3 34
Payments of long-term borrowing (309) 1,788
Payments of refundable advances (29) (115)
Repurchase of common stock (623) (1,058)
Issuance of common stock from treasury 68 --
Payments of current portion of long-term debt (2,202) (5)
Issuance of common stock, net of issuance costs of $9,642 174,933 --
Proceeds from issuance of common stock 6,450 1,064
----------------- -----------------
Net cash provided by financing activities 178,291 1,708
----------------- -----------------
Effect of exchange rate changes on cash (91) 321
Net increase (decrease) in cash and cash equivalents 47,377 (302)
Cash and cash equivalents, beginning of period 16,617 12,172
----------------- -----------------
Cash and cash equivalents, end of period $ 63,994 $ 11,870
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
<PAGE>
Natural MicroSystems Corporation
Notes to Condensed Consolidated Financial Statements
A. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 2000 and the
condensed consolidated statements of income, operations and cash flow for the
three month and nine month periods ending September 30, 2000 and 1999 include
the unaudited 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 interim 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
nine month period ended September 30, 2000 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 pursuant to Securities and Exchange Commission
rules and regulations. The financial statements should be read in conjunction
with the consolidated financial statements and notes therein of the Company as
of and for the year ended December 31, 1999.
Marketable Securities
The Company classifies all of its marketable securities as available-for-sale
securities. Such securities consist primarily of United States government and
federal agency securities, corporate commercial paper and corporate bonds which
are stated at market value, with unrealized gains and losses reflected as other
comprehensive income in stockholders' equity. Realized gains and losses on
marketable securities are included in earnings and are derived using the
specific identification method for determining the cost of securities. Since it
is the Company's intent to maintain a liquid portfolio, at September 30, 2000,
all marketable securities are due to mature within one year.
Goodwill
Goodwill represents the excess of cost over the fair value of net tangible and
identifiable intangible assets acquired and is amortized on a straight-line
basis over its estimated useful life. At January 1, 2000, the Company revised
its estimate of the useful life of existing goodwill from seven to five years.
The net effect of such change was a charge of $260,000 for the nine months ended
September 30, 2000, which is included in the statement of operations
classification, "Amortization of goodwill and other intangibles".
Stock Split
In August 2000, the Company completed a two-for-one common stock split in the
form of a stock dividend. All share information and per share amounts in the
accompanying consolidated financial statements reflect the effect of the stock
split.
6
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B. STOCKHOLDERS' EQUITY: (in 000s)
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<CAPTION>
Notes
Accumulated Receivable
Common Stock Additional Other from
-------------- Paid-in Accumulated Comprehensive Deferred Common Treasury Comprehensive
Shares Amount Capital Deficit Loss Compensation Stockholders Stock Total Loss
-------------- --------- -------- ----------- ---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 12,766 $ 128 $ 72,923 $(21,980) $ (391) $ - $ (99) $ (68) $ 50,513 $(19,031)
====== ===== ========= ======== =========== ========== =========== ======== ======== ========
Two-for-one stock split 12,766 128 (128) -
Exercise of common
stock options 1,187 12 5,524 5,536
Stock issued in follow-on
offering, net of offering
costs of $9,642 6,900 69 174,864 174,933
Stock issued in acquisition
of IML 2,635 26 118,324 118,350
Warrants excerised 12 -
Issuance of common stock
under employee purchase plan 84 1 913 68 982
Foreign currency
translation adjustment (1,971) (1,971) (1,971)
Change in market value of
securities available for sale (93) (93) (93)
Treasury stock acquired (623) (623)
Deferred compensation (39,696) (39,696)
Amortization of deferred
compensation 4,762 4,762
Payment of notes receivable
from common stockholders 3 3
Net loss (9,191) (9,191) (9,191)
Balance at September 30,
------- ----- --------- -------- ----------- ---------- ----------- ------ -------- --------
2000 36,350 $ 364 $ 372,420 $(31,171) $ (2,455) $ (34,934) $ (96) $ (623) $303,505 $(11,255)
======= ===== ========= ======== =========== ========== =========== ====== ======== ========
</TABLE>
C. SUPPLEMENTAL SCHEDULE OF CASH AND NON-CASH FLOW INFORMATION
The following details the supplemental cash and non-cash flow information
of the Company for the nine months ended September 30, 2000 (in 000's):
<TABLE>
<S> <C>
Liabilities assumed in conjunction with acquisitions:
Fair value of assets purchased $ 188,493
Cash paid, net of cash acquired (65,836)
Value of common stock issued (118,350)
-----------
Liabilities assumed $ 4,307
===========
</TABLE>
7
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D. INDEBTEDNESS
The Company established a $7.5 million bank line of credit for working capital
purposes effective on May 14, 1999 and amended on September 15, 2000. Borrowings
under the line of credit bear interest at the bank's floating rate of prime plus
one percent. This interest rate will be reduced to the bank's floating rate of
prime upon completion of a common stock offering by the Company. The Company is
subject to covenants requiring maintenance of certain profitability, equity and
liquidity ratios. The Company is currently compliant with all covenants under
the line, and there are no amounts currently outstanding. This credit agreement
as amended is subject to renewal on May 13, 2001.
E. EARNINGS PER SHARE
The following is a reconciliation of basic to the diluted earning per share
(EPS) computations for net loss (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------------------------------------------------------
2000 1999
------------------------------------- ----------------------------------------
Per Share Per Share
Loss Shares Amount Loss Shares Amount
----------- ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Loss available to all shareholders $ (15,229) 36,219 $ (0.42) $ (2,842) 22,946 $ (0.12)
Effect of dilutive stock options - - - - - -
------------ --------- ---------- --------- --------- ----------
Diluted EPS $ (15,229) 36,219 $ (0.42) $ (2,842) 22,946 $ (0.12)
============ ========= ========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------------------------------------------
2000 1999
------------------------------------- ----------------------------------------
Per Share Per Share
Loss Shares Amount Loss Shares Amount
------------ ---------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Loss available to all shareholders $ (9,191) 30,320 $ (0.30) $ (10,514) 22,601 $ (0.47)
Effect of dilutive stock options - - - - - -
------------ --------- ---------- ---------- --------- ----------
Diluted EPS $ (9,191) 30,320 $ (0.30) $ (10,514) 22,601 $ (0.47)
============ ========= ========== ========== ========= ==========
</TABLE>
The effect of dilutive stock options excludes those stock options for which the
impact would have been antidilutive based on the exercise price of the options.
The number of options that were antidilutive at the three months ended September
30, 2000 and 1999 was 95,250 and 960,850, respectively. The number of options
that were antidilutive at the nine months ended September 30, 2000 and 1999 was
1,780,177 and 2,305,532, respectively.
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 September 30, 2000 and December 31, 1999 were
comprised of the following:
September 30, December 31,
(In $000's) 2000 1999
------------- ------------
Raw materials $ 4,818 $ 517
Work in process 1,153 2,611
Finished goods 2,872 2,265
Write-up of acquired IML inventory 1,205 -
------------- ------------
$ 10,048 $ 5,393
============= ============
G. 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,
2000 1999 2000 1999
--------- -------- --------- ---------
Revenues
North America $ 29,871 $ 15,363 $ 71,717 $ 39,534
Europe 5,159 3,118 13,909 10,070
Other 5,506 1,795 14,758 4,858
--------- -------- --------- ---------
Total revenues $ 40,536 $ 20,276 $ 100,384 $ 54,462
========= ======== ========= =========
Operating Loss
North America $ (20,328) $ (3,489) $ (23,439) (13,862)
Europe 101 (567) 52 (1,293)
Other 2,739 8 6,427 14
--------- -------- --------- ---------
Total operating loss $ (17,488) $ (4,048) $ (16,960) $ (15,141)
========= ======== ========= =========
9
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H. COMPREHENSIVE LOSS
The following table represents the Company's comprehensive income for the stated
periods.
<TABLE>
<CAPTION>
(In $000's) Three Months ended Nine Months ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(15,229) $ (2,842) $ (9,191) $(10,514)
Other comprehensive loss items:
Foreign currency translation adjustment (1,892) (78) (1,971) (312)
Change in market value of securities
Available for sale (93)
-------- -------- -------- --------
Comprehensive loss $(17,121) $ (2,920) $(11,255) $(10,826)
======== ======== ======== ========
</TABLE>
I. BUSINESS COMBINATION
Effective July 7, 2000, the Company acquired 100 percent of the outstanding
stock and assumed all outstanding stock options of InnoMediaLogic (IML) Inc.
("IML"), a privately held Canadian company, in exchange for 2,635,300 shares of
NMS common stock and stock options and $69.1 million of cash. The total cost of
the acquisition, including transaction costs of $2.2 million, was approximately
$189.6 million. For each of the years ended March 31, 2001 and 2002, certain
employees of IML are entitled to additional consideration based on the financial
results of IML for the years then ended. During the quarter ended September 30,
2000, the Company has accrued $3.1 million related to this additional
consideration, which is included in the statement of operations classification,
"Non-cash compensation expense".
The acquisition has been accounted for as a purchase business combination.
Accordingly, the results of operations of IML have been included with those of
the Company for periods subsequent to the date of the acquisition. The following
table presents the currently estimated allocation of the purchase price (in
thousands):
<TABLE>
<CAPTION>
Estimated
Amount Life
-------- ----
<S> <C> <C>
In-process research and development...................................... $ 3,300 -
Acquired technology...................................................... 6,000 4
Customer list............................................................ 6,300 4
Workforce................................................................ 1,600 4
Deferred compensation.................................................... 39,696 2 - 3
Net fair value of tangible assets acquired and liabilities assumed....... 6,242 -
Goodwill................................................................. 126,499 5
--------
Total purchase price allocation.......................................... $189,637
========
</TABLE>
The purchase price allocation is preliminary and is dependent upon the Company's
final analysis. The Company is still in the process of finalizing its business
plan for the exiting of activities and the severance of employees in connection
with the acquisition and integration of IML. Management expects to have this
analysis completed in the fourth quarter of 2000.
The in-process research and development is comprised of a category of products
that provide interface technology consisting of high capacity line interfaces
that convert telephony signals into computer data. These products are used in
media access gateway products to interface aggregate DSL or wireless traffic to
the PSTN (Public Switched Telephone Network) or IP based data networks. At the
date of acquisition, these products were estimated to be 58% complete.
10
<PAGE>
A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired. Significant
risks exist because the Company is unsure of the obstacles it will encounter in
the form of time and cost necessary to produce technologically feasible
products. Should these products fail to become viable, it is unlikely that the
Company would be able to realize any value from the sale of the technology to
another party. The work performed as of the acquisition date on these in-process
products is very specific to the tasks and markets for which it is intended.
There are no alternative uses for the in-process work in the event that the
products are not feasible.
The Company assigned values of $3.3 million to in-process research and
development and $6.0 million to existing core technology based upon an
independent appraisal that utilized a modified discounted cash flow model. The
in-process research and development amount of $3.3 million was immediately
expensed under applicable accounting standards. The Company based the cash flow
projections for revenue on the projected incremental increase in revenue that
the Company expected to receive from the completed acquired in-process research
and development. IML expected revenue to commence with each product's release
date, which occur on various dates in the fourth quarter of 2000 and the first
half of 2001, and continue throughout each product's economic life, which range
from three to six years. The Company deducted estimated operating expenses from
estimated revenue to arrive at estimated pre-tax cash flows. Projected operating
expenses included cost of goods sold, selling general and administrative
expense, and research and development expense. The Company estimated operating
expenses as a percent of revenue based on IML's historical results for the years
ended March 31, 1999 to 2000. Projected results for the fiscal years ended March
31, 2001 to 2005 were also used in combination with past operating results and
industry averages. The Company also deducted capital charges, or cash flow
attributable to other assets such as working capital, customer list and
assembled workforce, from pre-tax operating income to isolate the cash flow
solely attributable to the in-process research and development. Income taxes
were then deducted to arrive at after-tax cash flows. The Company discounted the
after-tax cash flow projections using a risk-adjusted rate of return of 23%. In
using the discounted model, the Company excluded the costs to complete the in-
process technology from the research and development expense for 2000, and the
Company reflected the percentage completion of the in-process research and
development in each year's projected cash flow.
The amounts allocated to acquired technology, customer list and workforce were
determined based upon a valuation performed by an independent third party
appraiser and are being amortized over a four-year period. The excess of cost
over fair value of net assets acquired is being amortized over a five-year
period.
The following unaudited pro forma data summarize the combined results of
operations of NMS and IML for the nine months ended September 30, 2000 and 1999
as if the acquisition had been completed as of the beginning of the periods
presented. The pro forma data give effect to actual operating results prior to
the acquisition and include adjustments to interest expense, goodwill and other
intangibles amortization and income taxes. These pro forma amounts do not
purport to be indicative of the results that would have actually been obtained
if the acquisition had occurred at the beginning of the periods presented or
that may be obtained in the future.
Nine months ended September 30,
2000 1999
-------------------------------------
(in thousands, except per share data)
Revenue................................. $ 108,720 $ 59,131
Operating loss.......................... $ (35,331) $ (53,742)
Net loss................................ $ (29,504) $ (44,806)
Basic and diluted net loss per share.... $ (0.98) $ (1.76)
11
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J. STOCK OFFERING
On March 3, 2000, the Company had an additional stock offering of 6.9 million
shares available to the public for $26.75 per share. This offering yielded an
additional $175 million in additional capital for general corporate purposes,
including working capital, capital expenditures and potential acquisitions.
Shares were issued on March 8, 2000 following the sale of all 6.9 million
shares.
K. SUBSEQUENT EVENTS
Effective October 11, 2000, the Company issued $175 million of convertible
subordinated notes (the "notes"). The notes are convertible into shares of NMS
common stock at any time after 90 days following the last day of the original
issuance of the notes and before the close of business on the business day
immediately preceding the maturity date, at a conversion price of $63.125 per
share, subject to specified adjustments. The notes bear interest at a rate of 5%
per year which is payable semiannually. The notes will mature on October 15,
2005, unless previously redeemed or repurchased.
L. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was issued
in June 1998. SFAS No. 137 defers the effective date of SFAS No. 133 to all
fiscal years beginning after June 15, 2000. Accordingly, we will adopt the
provisions of SFAS No. 133 for our fiscal year 2001 which commences on January
1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
will be recorded each period in current earnings or accumulated other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transactions and the type of hedge transaction. We do not expect the
adoption of SFAS No. 133 to have a material impact on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This
bulletin summarizes certain views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The SEC
staff expressed its view that revenue is realized or realizable and earned when
all of the following criteria are met: persuasive evidence of an arrangement
exists; delivery has occurred or services have been rendered; the seller's price
to the buyer is fixed or determinable; and collectability is reasonably assured.
We believe that our current revenue recognition policy complies with the SEC's
guidelines.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
We provide enabling technologies to the world's leading suppliers of networking
and communications equipment. Our customers incorporate our software and
hardware products and technologies into their solutions in order to enable
service providers and enterprises to rapidly, and cost-effectively deploy data,
voice and fax applications and enhanced services in converged networks. Over the
past two years, we have been strategically repositioning our business to address
new, high growth markets resulting from the growth in the converged network
build out. To support this repositioning, we made significant investments in our
sales force, built a service organization, expanded our research and development
and strengthened our management team.
In July 2000, we acquired IML, a privately held company headquartered in Canada.
IML is a leading provider of enabling technology used in VoDSL gateways and
other new network access solutions. In connection with the acquisition, we
issued or reserved for issuance an aggregate of 2,635,300 shares of our common
stock, paid aggregate cash consideration of $69.1 million, and assumed the
obligation to issue up to an additional 318,672 shares of our common stock upon
exercise of outstanding stock options for the purchase of the common stock of
IML. We have accounted for the acquisition as a purchase.
Our revenues consist primarily of product sales and, to a lesser extent,
services provided to our customers. We sell our products worldwide principally
through direct sales focusing on large original equipment manufacturer and
significant system supplier customers. We use indirect channels to focus on all
other customers and prospects. This strategy allows us to focus our resources on
customers that offer us the largest revenue opportunities.
Our revenue is recognized from product sales upon delivery, provided that
collection is deemed probable. Service revenues are recognized ratably over
applicable contract periods or as the services are performed.
Our cost of revenues consists primarily of product cost, cost of services
provided to our customers and the overhead associated with testing and
fulfillment operations.
Sales, general and administrative expenses consist primarily of salaries,
commissions and related personnel expenses for those engaged in our sales,
marketing, promotional, public relations, executive accounting and
administrative activities and other general corporate expenses. As we add
personnel, launch new products and incur additional costs related to the growth
of our business, we expect these expenses to increase.
Research and development expenses consist primarily of salaries, personnel
expenses and prototype fees related to the design, development, testing and
enhancement of our products. As of September 30, 2000, all research and
development costs have been expensed as incurred. We believe that continued
investment in research and development is critical to attaining our strategic
product and cost reduction objectives, and that these expenses will increase in
the future.
Results of Operations
Revenues
Revenues of $40.5 million for the three months ended September 30, 2000
("2000"), increased 99.9% percent from $20.3 million for the three months ended
September 30, 1999 ("1999"). Revenues of $100.4 million for the nine months
ended September 30, 2000 increased 84.3% from $54.5 million for the nine months
ended September 30, 1999. The increase from 1999 to 2000 was attributable to
increased revenues in North America, Europe and Asia, $3.0 million of revenue
generated by IML, and increased revenues from our strategic, major and emerging
accounts.
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Revenues from customers located outside of North America of $10.7 million for
the three months ended September 30, 2000 increased 117.1% from $4.9 million for
the three months ended September 30, 1999 and represented 26.3% and 24.2% of
revenues for 2000 and 1999, respectively. The increase was attributed primarily
to growth in Asia, where revenues increased 234.1% from $1.6 million to $5.4
million. Revenues from customers located outside of North America of $28.7
million for the nine months ended September 30, 2000 increased 92.0% from $14.9
million for the nine months ended September 30, 1999. The increase was due to
larger sales volume in both the European and Asian markets.
Gross Profit
Gross profit for the three months ended September 30, 2000 of $23.1 million,
increased 89.3% from $12.2 million for the three months ended September 30,
1999, and represented 57.0% and 60.1% of revenues for 2000 and 1999,
respectively. The percentage decrease was created by the amortization of IML
completed technology of $375,000 for the three and nine month period ended
September 30, 2000 and IML inventory fair value adjustment of $2.6 million for
the three and nine month period ended September 30, 2000 to cost of goods sold.
Had these charges been excluded from cost of goods sold, gross profit for the
three months and nine months ended September 30, 2000 would have been 64.2% and
63.1%, respectively. The inventory fair value adjustment was booked so that only
the selling profit on inventory we acquired from IML would be included in our
consolidated statement of operations. This adjustment will only be booked again
in the fourth quarter of 2000. Gross profit for the nine months ended September
30, 2000 of $60.4 million increased 84.0% from $32.8 million for the nine months
ended September 30, 1999. The increase in gross profit is directly related to
the additional revenue growth.
Selling, General and Administrative
Selling, general and administrative expenses of $14.3 million for the three
months ended September 30, 2000 increased 46.6% from $9.8 million for the three
months ended September 30, 1999, and represented 35.3% and 48.2% of total
revenues for 2000 and 1999, respectively. Selling, general and administrative
expenses of $36.7 million for the nine months ended September 30, 2000 increased
27.0% from $28.9 million for the nine months ended September 30, 1999 and
represented 36.6% and 53.1% of revenues, respectively. The increase in expenses
was due to costs associated with increased selling activity and other revenue
based expenses, and increased tax expense incurred on the exercise of stock
options by employees. We expect that our selling, general and administrative
expenditures will vary as a percentage of product revenues in future periods.
Research and Development
Research and development expenditures of $8.4 million for the three months ended
September 30, 2000 increased 34.3% from $6.3 million for the three months ended
September 30, 1999, and were 20.8% and 31.0% of total revenues for 2000 and
1999, respectively. Research and development expenditures of $22.4 million for
the nine months ended September 30, 2000 increased 21.1% from $18.5 million for
the nine months ended September 30, 1999 and represented 22.3% and 33.9% of
revenues, respectively. The increases were due to increased personnel and
development project related costs associated with the Convergence Generation and
Alliance Generation product lines and associated software development costs.
We expect that our research and development expenditures will continue to
increase, but may vary as a percentage of product revenues in future periods.
Non-Cash Compensation Expense
Non-cash compensation expense of $7.5 million for the three months and nine
months ended September 30, 2000 is the result of the amortization of $39.7
million of deferred compensation expense booked in relation to the IML
acquisition. This deferred compensation is being amortized over a period of 2-3
years.
Amortization of Goodwill and Other Intangibles
Amortization expense of goodwill and other intangibles of $7.0 million for the
three months ended September 30, 2000 increased from $193,000 for the three
months ended September 30, 1999.
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Amortization expense of goodwill and other intangibles of $7.4 million for the
nine months ended September 30, 2000 increased from $578,000 for the nine months
ended September 30, 1999. The increases are due to the amortization of customer
list, work force in place and goodwill related to the acquisition of IML. These
intangibles are being amortized over a period of 4 - 5 years.
In-Process Research and Development Expense
In-process research and development expense for the three months and nine months
ended September 30, 2000 is the result of the immediate expensing of these costs
that were acquired in the IML transaction related to the in-process research and
development efforts of IML's interface technology. We assigned a value of
$3.3 million to in-process research and development based upon an independent
appraisal that utilized a modified discounted cash flow model.
The in-process research and development is comprised of a category of products
that provide interface technology consisting of high capacity line interfaces
that convert telephony signals into computer data. These products are used in
media access gateway products to interface aggregate DSL or wireless traffic to
the PSTN (Public Switched Telephone Network) or IP based data networks. At the
date of acquisition, these products were estimated to be 58% complete.
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A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired.
Significant risks exist because we are unsure of the obstacles we will encounter
in the form of time and cost necessary to produce technologically feasible
products. Should these products fail to become viable, it is unlikely that we
would be able to realize any value from the sale of the technology to another
party. The work performed as of the acquisition date on these in-process
products is very specific to the tasks and markets for which it is intended.
There are no alternative uses for the in-process work in the event that the
products are not feasible.
We based the cash flow projections for revenue on the projected incremental
increase in revenue that we expected to receive from the completed acquired in-
process research and development. IML expected revenue to commence with each
product's release date, which occur on various dates in the fourth quarter of
2000 and the first half of 2001, and continue throughout each product's economic
life, which range from three to six years. We deducted estimated operating
expenses from estimated revenue to arrive at estimated pre-tax cash flows.
Projected operating expenses included cost of goods sold, selling general and
administrative expense, and research and development expense. We estimated
operating expenses as a percent of revenue based on IML's historical results for
the years ended March 31, 1999 to 2000. Projected results for the fiscal years
ended March 31, 2001 to 2005 were also used in combination with past operating
results and industry averages. We also deducted capital charges, or cash flow
attributable to other assets such as working capital, customer list and
assembled workforce, from pre-tax operating income to isolate the cash flow
solely attributable to the in-process research and development. Income taxes
were then deducted to arrive at after-tax cash flows. We discounted the after-
tax cash flow projections using a risk-adjusted rate of return of 23%. In using
the discounted model, the we excluded the costs to complete the in-process
technology from the research and development expense for 2000, and we reflected
the percentage completion of the in-process research and development in each
year's projected cash flow.
Restructuring and Other Special Charges
In the fourth quarter of 1998, in response to changes in our business
environment we took several actions to create efficiency, to decrease cash
outflows and to manage our business more effectively that resulted in
restructuring and other special charges. To eliminate payroll and other related
expenditures, we reduced our headcount by three senior international managers.
The accrued cost to implement this reduction was approximately $951,000 (of
which approximately $65,000 was paid in 1998). We also committed to reduce
future lease commitments for a new corporate office and engineering space,
neither of which will be occupied. The accrued cost to reduce or terminate these
lease commitments was approximately $2.1 million, with a projected avoidance of
future costs of approximately $10.2 million over ten years.
We were able to buy out the lease commitment at one of the locations and
sublease the other location at
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an aggregate cost of approximately $958,000, resulting in a savings of
approximately $1.1 million from our original estimate. These savings resulted in
credits against our accruals in 1999. There is no remaining balance for the
lease accruals at December 31, 1999.
In the first quarter of 1999, we completed our management reorganization and
terminated two additional senior managers. The severance costs were
approximately $441,000, with an anticipated savings of approximately $327,000 a
year. In addition, in the fourth quarter of 1999, we incurred a special charge
of approximately $557,000 for payroll-related taxes on an option exercise by one
of the terminated managers. At September 30, 2000 the aggregate severance
accruals have a remaining accrued balance of approximately $68,000, which will
be fully paid in the fourth quarter of 2000.
Operating Income (Loss)
As a result of the foregoing, operating income (loss), for the three months
ended September 30, was ($17.5) million and ($4.0) million for 2000 and 1999,
respectively. Net income (loss) was ($15.2) million and ($2.8) million for the
same periods, respectively. Operating income (loss) for the first nine months
ended September 30, was ($17.0) million and ($15.1) million for 2000 and 1999,
respectively. Net income (loss) for the nine months ended September 30, was
($9.2) million and ($10.5) million for 2000 and 1999, respectively.
Other Income (Expense), Net
Other income (expense), net for the three months ended September 30, 2000 and
1999 was $2.6 million and $50,000, respectively. Other income (expense) for the
nine months ended September 30, 2000 and 1999 was $8.5 million and $33,000,
respectively. The increase was due to both investment income on cash raised in
conjunction with our follow-on stock offering in January, 2000 as well as the
gain on the sale of two investments that we had in various privately held
companies. There was a recognized gain of $982,000 in the first quarter,
$916,000 in the second quarter and $164,200 in the third quarter of our fiscal
year to date.
Income Tax Expense (Benefit)
Income tax expense (benefit) for the three months ended September 30, was
$312,000 and ($1.2) million, respectively. Income tax expense (benefit) for the
nine months ended September 30, was $766,000 and ($4.6) million, respectively.
Income tax expense is primarily due to state and foreign taxes and the
maintenance of a full valuation allowance on the net deferred tax asset. For
U.S. federal income tax purposes, we have net operating loss carryforwards
available to reduce income of approximately $16.4 million at December 31, 1999.
These carryforwards will begin to expire in 2004 and $2.9 million of such
carryforwards are subject to an annual limitation of $772,000 under Internal
Revenue Code Section 382. There may be further Section 382 limitations as a
result of changes in ownership. We also have a foreign net operating loss
carryforward of approximately $845,000. We have $1.5 million of tax credits
which are composed of federal research and development credits and state and
local credits. These credits expire beginning in 2004. Under applicable
accounting standards, we believe that the realization of the net deferred tax
asset is more unlikely than not and, accordingly, a full valuation has been
established.
Liquidity and Capital Resources
Cash provided by operations for the nine months ended September 30, 2000 and
1999 was $6.8 million and $4.9 million, respectively. The net loss for the nine
months ended September 30, 2000 included non-cash charges for depreciation and
amortization of $17.7 million and acquired in-process research and development
costs of $3.3 million. The increase in accounts receivable of $6.6 million
resulted from higher sales and cash flow from operating activities also
benefited from increases in prepaid expenses and other assets and accrued
expenses and other liabilities. The net loss for the nine months ended September
30, 1999 included non-cash charges for depreciation and amortization of $4.8
million. The reduction in accounts receivable was generated by better
collection rates and the reduction in inventory resulted from
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better management. Cash flow from operating activities also benefited from
increases in accrued expenses and other liabilities.
Cash used in investing activities for the nine months ended September 30, 2000
and 1999 was ($137.7) million and ($7.3) million, respectively. Cash was used in
2000 and 1999 for purchases of property and equipment of $7.5 million and $4.0
million respectively. In 2000, we used $65.8 million, net of cash acquired, to
fund part of the purchase price of IML. In 2000, we purchased additional
marketable securities totaling $146.4 million and sold marketable securities for
proceeds of $83.8 million. In 1999, we purchased additional marketable
securities totaling $15.5 million and sold marketable securities for proceeds of
$12.7 million.
Cash provided by financing activities in 2000 and 1999 was $178.3 million and
$1.7 million, respectively. In 2000, cash was provided by issuance of stock
pursuant to a follow-on offering of $174.9 million. An additional $6.5 million
was raised from issuance of common stock upon the exercise of common stock
options and the employee stock purchase plan. Cash was used in the amount of
$2.5 million, for the same period, to repay debt incurred in connection with the
acquisition of QWES.com. In 1999, cash proceeds were from borrowings and the
issuance of common stock upon the exercise of common stock options.
Current assets at September 30, 2000, were $173.1 million, 280.6% more than
current assets of $45.5 million at December 31, 1999. Issuance of common stock
and the acquisition of IML accounted for the majority of this increase. Current
liabilities at September 30, 2000 were $29.1 million, 46.4% more than current
liabilities of $19.9 million at December 31, 1999. The acquisition of IML off-
set by the payment of QWES.com short-term notes accounted for the increase in
liabilities in 2000.
We established a $7.5 million bank line of credit for working capital purposes
effective in May 1999 and amended on September 15, 2000. Borrowings under our
line of credit bear interest at the bank's floating rate of prime plus one
percent. This interest rate will be reduced to the bank's floating rate of prime
upon completion of a common stock offering by us. We are subject to covenants
requiring maintenance of certain profitability, equity and liquidity ratios. As
of September 30, 2000, we were in compliance with all of those covenants, and
there were no amounts outstanding. This credit agreement as amended is subject
to renewal on May 13, 2001.
Public Stock Offering
On March 3, 2000 we had an additional stock offering of 6.9 million shares
available to the public for $26.75 per share. This offering yielded an
additional $175 million in additional capital for general corporate purposes,
including working capital, capital expenditures and potential acquisitions.
Shares were issued on March 8, 2000 following the sale of all 6.9 million
shares.
Debt Offering
Effective October 11, 2000, we issued $175 million of convertible subordinated
notes (the "notes"). The notes are convertible into shares of NMS common stock
at any time after 90 days following the last day of the original issuance of the
notes and before the close of business on the business day immediately preceding
the maturity date, at a conversion price of $63.125 per share, subject to
specified adjustments. The notes bear interest at a rate of 5% per year which is
payable semiannually. The notes will mature on October 15, 2005, unless
previously redeemed or repurchased.
Business Combination
Effective July 7, 2000 we acquired 100 percent of the outstanding stock and
assumed all outstanding stock options of IML, a privately held Canadian company,
in exchange for 2,635,300 shares of NMS common stock and stock options and $69.1
million of cash. The total cost of the acquisition, including transaction costs
of $2.2 million, was approximately $189.6 million. IML is a leading provider of
enabling technology used in Voice over Digital Subscriber Line (VoDSL) gateways
and other new network solutions. The acquisition has been accounted for as a
purchase business combination. Accordingly, the results of operations of IML
have been included with those of NMS for periods subsequent to the date of the
acquisition.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
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Activities" which was issued in June 1998. SFAS No. 137 defers the effective
date of SFAS No. 133 to all fiscal years beginning after June 15, 2000.
Accordingly, we will adopt the provisions of SFAS No. 133 for our fiscal year
2001 which commences on January 1, 2001. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in current
earnings or accumulated other comprehensive income, depending on whether a
derivative is designated as part of a hedge transactions and the type of hedge
transaction. We do not expect the adoption of SFAS No. 133 to have a material
impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This
bulletin summarizes certain views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The SEC
staff expressed its view that revenue is realized or realizable and earned when
all of the following criteria are met: persuasive evidence of an arrangement
exists; delivery has occurred or services have been rendered; the seller's price
to the buyer is fixed or determinable; and collectability is reasonably assured.
We believe that our current revenue recognition policy complies with the SEC's
guidelines.
Year 2000 Readiness Disclosure
We believe that all of our current major product offerings are Year 2000
compliant. Certain older legacy products, which we no longer sell, may not be
Year 2000 compliant. We have addressed the issue of legacy products by
publishing on our external website a notice to the effect that certain of these
products may not be Year 2000 compliant and that each customer who purchased
these products should test and, as needed, repair or replace any of them to the
extent that they are still in use. We spent approximately $1.0 million during
1999 in addressing Year 2000 compliance issues. To this date, we are not aware
of any material problems resulting from Year 2000 issues, either with our
products, our internal systems or the products and services of third parties.
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.
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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, 1999. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in interest rates and foreign
currency exchange rates has not changed materially from its exposure as provided
in the Company's 1999 Annual Report on Form 10-K.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are the defendant in an action filed by Connectel, LLC in August 2000 in
the U.S. District Court for the Eastern District of Virginia. This action is
being transferred to the U.S. District Court for the District of Massachusetts
pursuant to a court order. The plaintiff alleges that one or more of our
products infringe upon a United States patent owned by it and seeks injunctive
relief and damages in an unspecified amount. The patent relates to a specific
routing protocol. We have reviewed the allegations with our patent counsel and
believe that none of our products infringe upon the patent. We intend to deny
the allegation of infringement and defend against the claim vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
No. 2.6* Merger Agreement dated as of May 18, 2000 by and among
the Registrant, NMS 3758982 Canada Inc., Michel
Laurence, Michel Brule, Stephane Tremblay, and
Investissements Novacap Inc. (filed with the
Registrant's Form 8-K dated July 20, 2000)
No. 10.12*# 1993 Stock Option Plan, as amended and restated (filed
with the Registrant's registration statement on Form
S-8 (333-40940))
No. 10.13*# 1993 Employee Stock Purchase Plan, as amended and
restated (filed with the Registrant's registration
statement on Form S-8 (333-40940))
No. 10.14*# 1993 Non-Employee Directors Stock Option Plan, as
amended and restated (filed with Registrant's
registration statement on Form S-8 (333-40940))
No. 10.19*# 1995 Non-Statutory Stock Option Plan, as amended and
restated (filed with Registrant's registration
statement on Form S-8 (333-40940))
No. 10.23*# 2000 Equity Incentive Plan (filed with Registrant's
registration statement on Form S-8 (333-40940))
No. 10.24 Loan and Security Agreement dated May 14, 1999 between
Registrant and Silicon Valley Bank. Pursuant to Item
601 (b) (2) of Regulation S-K, the schedules and
exhibits referred to in the Agreement are omitted. The
Registrant hereby undertakes to furnish supplementally
a copy of any omitted schedule or exhibit to the
Commission upon request.
No. 10.25 First Loan Modification Agreement dated March 8, 2000
between Registrant and Silicon Valley Bank. Pursuant to
Item 601 (b) (2) of Regulation S-K, the schedules and
exhibits referred to in the Agreement are omitted. The
Registrant hereby undertakes to furnish supplementally
a copy of any omitted schedule or exhibit to the
Commission upon request.
No. 10.26 Second Loan Modification Agreement dated September 15,
2000 between Registrant and Silicon Valley Bank.
Pursuant to Item 601 (b) (2) of Regulation S-K, the
schedules and exhibits referred to in the Agreement are
omitted. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.
No. 27.1 Financial Data Schedule
* Previously filed with the registration statement or report indicated.
# Management contract or compensatory plan or arrangement.
B. Reports on Form 8-K
A Current Report on Form 8-K was filed by the registrant on July 20,
2000 regarding the acquisition of IML, which was consummated on July
6, 2000.
An amended Current Report on Form 8-K/A was filed by the registrants
on August 22, 2000 to submit the financial statements of IML and pro
forma financial information as of June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Natural MicroSystems Corporation
Dated: November 13, 2000 By: /s/ Robert P. Schechter
------------------------
Robert P. Schechter
President and Chief Executive Officer
And Chairman of the Board of Directors
Dated: November 13, 2000 By: /s/ Robert E. Hult
-------------------
Robert E. Hult
Vice President of Finance and Operations,
Chief Financial Officer and Treasurer
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Natural MicroSystems Corporation
Exhibit Index
Page
----
No. 10.24 Loan and Security Agreement dated May 14, 1999
between Registrant and Silicon Valley Bank. 24
No. 10.25 First Loan Modification Agreement dated
March 8, 2000 between Registrant and
Silicon Valley Bank. 45
No. 10.26 Second Loan Modification Agreement dated
September 15, 2000 between Registrant
and Silicon Valley Bank. 53
No. 27.1 Financial Data Schedule 58
23
