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Natural
MicroSystems Corporation
GROSS
PROFIT
Gross
profit decreased to $48.4 million for 1998 from $50.1 million
for 1997, representing a decrease of 3.3%. The decrease in
gross profit was directly related to expenses we incurred
for investment in the services and manufacturing departments.
We took additional charges of approximately $1.1 million in
1998 that were related to prepaid technological licenses and
product write-downs due to the discontinuance of certain products.
SELLING,
GENERAL AND ADMINISTRATIVE
Selling,
general and administrative expense increased to $34.0 million
for 1998 from $22.3 million for 1997, representing an increase
of 52.4%. The increases in expenses were due to costs associated
with increased selling activity and increased expenditures
for marketing, international expansion and customer support.
In 1998, we added sales offices in Tokyo and Beijing. These
increased expenditures were in anticipation of increased revenues.
We recorded
a provision in 1998 against a trade receivable of approximately
$2.2 million with a customer that abruptly ceased operations
in April 1998. We recorded revenues of $3.8 million and $2.5
million with this customer in 1997 and 1996, respectively.
RESEARCH
AND DEVELOPMENT
Research
and development expense increased to $21.5 million for 1998
from $14.9 million for 1997, representing an increase of 44.5%.
The increase in expense was primarily due to increased personnel
and project development costs associated with the Alliance
Generation product line and associated software.
PURCHASED
IN-PROCESS RESEARCH AND DEVELOPMENT
At the
time of our acquisition of ViaDSP, Inc. in October 1997, we
allocated the purchase price to the tangible and intangible
assets of ViaDSP based on the fair market value of those assets
using a risk-adjusted discounted cash flow approach. Specifically,
the purchased in-process research and development, consisting
of completed technology and two separate development projects,
was evaluated through interviews. The development projects
were further subjected to analysis of data concerning the
state of the technology and needed developments. The evaluation
of the underlying technology took into account the inherent
difficulties and uncertainties in completing its development,
and thereby achieving technological feasibility, along with
the risks related to the viability of and potential changes
in our target markets. At the time of the acquisition, we
expensed the fair value of $5.6 million of the acquired technology
that had not reached technological feasibility as in-process
research and development and had no alternative future use
to us in other research and development projects or otherwise.
Actual
revenues resulting from the purchased in-process research
and development have not met our expectations. These shortfalls
from expectations have adversely affected the expected return
on our investment in ViaDSP.
OTHER
INCOME, NET
Other
income and expense, reflecting net interest income and foreign
exchange gains and losses, decreased to $1.1 million in 1998
from $1.2 million (exclusive of merger costs) in 1997, reflecting
a decrease of 11.2%.
INCOME
TAX EXPENSE (BENEFIT)
Income
tax expense (benefit) was ($2.9 million) and $4.8 million
for 1998 and 1997, respectively. The tax rates for 1998 and
1997 differ from the effective tax rate due to state income
taxes, net of federal tax benefit; the effect of research
and experimentation federal tax credits; and permanent differences
for nondeductible merger and purchased in-process research
and development costs.
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