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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 31, 1997
OR
o Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 0-25426
NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 74-1871327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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6504 Bridge Point Parkway Austin, Texas 78730
(address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: (512) 338-9119
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value (Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 26, 1998, was $406,302,450 based upon the last sales
price reported for such date on the NASDAQ National Market System. For purposes
of this disclosure, shares of Common Stock held by persons who hold more than 5%
of the outstanding shares of Common Stock and shares held by officers and
directors of the registrant have been excluded in that such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.
At February 26, 1998, registrant had outstanding 32,743,493 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and Part III incorporate certain information by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 12, 1998 (the "Proxy Statement").
PART I
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than
120 days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.
ITEM 1. BUSINESS
National Instruments Corporation (the "Company" or "National Instruments")
is a leading supplier of computer-based instrumentation hardware and software
products that engineers and scientists use in a wide range of industries. These
industries are spread across two large markets: test and measurement and
industrial automation. The Company provides flexible application software and
modular, multifunction hardware that users combine with industry-standard
desktop computers and workstations to create "virtual instruments."
A virtual instrument consists of an industry standard desktop computer or
workstation equipped with the Company's user-friendly application software,
cost-effective hardware and driver software that together perform the functions
of traditional instruments. Virtual instrumentation represents a fundamental
shift from traditional hardware-centered instrumentation systems to
software-centered systems that exploit the computational, display, productivity
and connectivity capabilities of popular desktop computers and workstations.
Because virtual instruments exploit these computation and display capabilities,
users can define and change the functionality of their instruments, rather than
being restricted by fixed-functions imposed by traditional instrument vendors.
The Company believes that giving users flexibility to create their own virtual
instruments, and making such instruments portable between popular computers and
operating systems, shortens system development time and reduces both short- and
long-term costs of developing, owning and operating instruments.
The Company is based in Austin, Texas and was incorporated under the laws
of the State of Texas in May 1976 and was reincorporated in Delaware in June
1994. On March 13, 1995, the Company completed an initial public offering of
shares of its Common Stock. The Company's Common Stock, $0.01 par value, is
quoted on the NASDAQ National Market System under the trading symbol NATI.
Industry Background
Engineers and scientists have long used instruments to observe, better
understand and manage the real-world phenomena, events and processes related to
their industries or areas of expertise. Instruments measure and control
electrical signals, such as voltage, current and power, and physical phenomena,
such as temperature, pressure, speed, flow, volume, torque and vibration. Common
instruments include voltmeters, signal generators, oscilloscopes, dataloggers,
spectrum analyzers and temperature and pressure monitors and controllers.
Instruments generally perform three basic functions: data acquisition and
control; data analysis; and presentation of results. Instruments are used
pervasively in research, education, manufacturing and service applications in
numerous fields including electronics, automotive, aerospace,
telecommunications, medical research and pharmaceutical, semiconductor and
petrochemical.
Instrument applications can be generally categorized as either test and
measurement ("T&M") or industrial automation ("IA"). In research and development
settings, scientists and engineers use T&M instruments to collect and analyze
experimental data, and IA instruments and instrumentation systems to simulate
manufacturing processes or techniques. In manufacturing systems, engineers use
T&M instruments to test and verify the proper operation of the products being
manufactured while IA instruments and instrumentation systems monitor and
control the manufacturing machines and processes.
Test and Measurement
A typical T&M instrument is a stand-alone unit that has signal input,
output and analysis capabilities; knobs, switches and push buttons for user
operation; and gauges, meters or other displays for visual data presentation.
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Traditionally, most T&M instruments were vendor-defined, fixed-function devices
designed to address specific applications. As a result, users had limited
flexibility to adapt their instruments to changing requirements. In the 1960's,
vendors began to incorporate integrated circuits, including programmable
microcontrollers, to increase instrument flexibility. In the mid-1970's, the
General Purpose Interface Bus ("GPIB" or "IEEE 488") was developed as a standard
interface to connect instruments to external computers. The first computer
controllers for GPIB instruments were based on proprietary hardware
architectures. In the later 1970's, some minicomputers with general purpose but
complex operating systems were equipped for GPIB instrument control. In the
early 1980's, personal computers with limited processing power equipped with
MS-DOS, a standard, character-based operating system, began replacing
minicomputers as the preferred platforms for instrument control applications.
Industrial Automation
IA systems have long included mechanical devices, analog gauges and meters,
and since the 1960's, have also included electronic instruments such as data
loggers and strip chart recorders. In the 1970's, programmable logic controllers
("PLCs"), special-purpose, proprietary stand-alone industrial computers, were
introduced and were used primarily for "discrete" manufacturing applications
such as automobile assembly. PLCs have traditionally had primitive operator
interface panels incorporating buttons, lights and indicators. In parallel,
sophisticated instrumentation systems called distributed control systems
("DCSs") were also adopted to provide computer control of large-scale continuous
processes, such as those found in oil refineries. DCSs integrated a variety of
sensors and control elements using both analog and digital connections, all
controlled by a central computer running proprietary software. In the
mid-1980's, when industrial PC-based IA systems came into use, another approach
became available. These early PC-based systems generally ran proprietary,
vendor-defined software and incorporated plug-in data acquisition boards or
interfaced to PLCs.
Limitations of Traditional Approaches to Instrumentation
Instruments and instrument systems for both the T&M and IA markets have
historically shared common limitations, including: fixed, vendor-defined
functionality; proprietary, closed architectures that were generally difficult
to program and integrate with other systems; and inflexible operator interfaces
that were usually cumbersome to operate and change. These problems have been
further complicated in the IA market because specialized data transfer and
communications standards have not evolved rapidly or been widely adopted. For
example, PLCs, while greatly improving control of individual processes, created
multiple "islands of information" that were generally unable to communicate or
share data with other systems throughout the manufacturing enterprise.
Furthermore, proprietary instrumentation systems have traditionally been very
expensive, with IA system prices ranging as high as several million dollars and
T&M instrumentation system prices often ranging in the hundreds of thousands of
dollars. In addition, the limitations on programmability of traditional systems
means that adopting these systems to changing requirements is both expensive and
time consuming, and users are often required to purchase multiple single-purpose
instruments.
Although desktop computers in the 1980's typically were based on open
architectures, until recently they have lacked higher-level application software
development tools and intuitive graphical user interfaces ("GUIs").
Consequently, the process of creating intuitive operator interface and control
panels was difficult and expensive. These early desktop computers also lacked
the power to rapidly process and analyze the volume of data characteristic of
many high data rate T&M and IA applications. In addition, desktop computers were
difficult to network reliably until standard network operating systems evolved
late in the decade. For all of these reasons, users and vendors were relatively
slow to incorporate desktop computers in their instrumentation systems.
In the 1990's, desktop computers improved significantly in data and
graphics processing power, storage and communication capabilities,
user-friendliness and reliability. Nevertheless, users accustomed to the
flexibility, efficiency, power and open architecture of these later-generation
desktop computers, and the highly evolved application software available for
business computing needs, have been generally frustrated in their efforts to
integrate these computers into instrumentation solutions. Standard desktop
computers were not equipped with the hardware connections required to control
many types of instruments and lacked instrumentation-specific application
development tools, including GUI development environments. Neither standard
programming languages such as C and C++, nor operating systems such as DOS,
Windows and UNIX, are "instrument aware." Without the aid of
instrumentation-specific software to facilitate the integration of various
instrumentation system capabilities and components, engineers and scientists
could not easily utilize the full potential of their modern desktop computers to
meet their instrument requirements.
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The Company's Virtual Instrument Approach
The Company pioneered a new instrumentation approach called virtual
instrumentation in 1986 when it introduced its LabVIEW application software,
which is a graphical programming environment. While a traditional instrument
bundles the data acquisition, analysis and presentation functions in a single,
stand-alone unit, a "virtual instrument" consists of an industry standard
computer or workstation equipped with the Company's user-friendly application
software, cost-effective hardware and driver software that together perform the
functions of traditional instruments. By unbundling the key instrumentation
functions, virtual instruments represent a fundamental shift from traditional
hardware-centered instrumentation systems to software-centered systems that
exploit the computational, display, productivity and connectivity capabilities
of popular desktop computers and workstations. The Company's virtual
instrumentation application software products give users the power and
flexibility to define, implement, modify and control each of the three core
instrumentation functions. Users can mix and match their choice of the Company's
DAQ and instrument control hardware/driver software with GPIB, VXI, PXI, image
acquisition, motion control or serial instruments to create virtual
instrumentation systems that meet their specific instrumentation needs. Because
much of the instrumentation functionality resides in the software, in a
significant sense, the software is the instrument.
User Benefits
Compared with traditional solutions, the Company believes its products and
virtual instrumentation approach provide the following significant customer
benefits:
Ease-of-Use and Efficiency
The Company's virtual instrument application software brings the power and
ease-of-use of desktop computers to the instrumentation market. With features
such as graphical programming, automatic code generation capabilities, graphical
tools libraries, ready-to-use example programs and libraries of specific
instrumentation functions, users can quickly build a virtual instrument system
that meets their individual application needs. For example, a user may build the
data acquisition and analysis functions of an instrument by selecting and
connecting icons representing particular instrumentation functions and may
customize the display on the computer's monitor to reflect the desired
presentation. With faster time to solution, users have more time to optimize
system functionality and performance, and can devote more time to their core
work rather than to programming instruments.
Modularity, Reusability and Reconfigurability
The Company's products include reusable hardware and software modules that
offer considerable flexibility in configuring systems. This ability to reuse and
reconfigure instruments and instrumentation systems allows users to reduce
development time and maximize efficiency by eliminating duplicated programming
efforts and to quickly adapt their instruments to new and changing needs. In
addition, these features help protect both hardware and software investments
against obsolescence.
Mix and Match Capabilities
The flexibility of the Company's virtual instrumentation approach permits
users to mix and match many combinations of GPIB, VXI, DAQ, PXI, image
acquisition, motion control and industrial communications products to build
customized instrument solutions. The Company's open product architecture
provides a high level of integration between the Company's products and other
industry standard instrumentation products. This approach provides users with
the flexibility to mix and match the Company's and third-party hardware
components when developing custom virtual instrumentation systems.
Long-Term Compatibility Across Multiple Computer Platforms
The Company offers a variety of multi-platform software products so users
can choose the platform and programming methodology that best meets their needs
and skills. These software products also have portable, open architectures so
users can move their applications among multiple platforms and operating
systems. In addition, the Company strives to ensure long-term compatibility
between its products and the latest industry-standard computers, operating
systems, programming languages and tools, as well as backward compatibility with
its own product offerings.
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Network and Integrate with Customers' Computing Environments
The Company's products facilitate connectivity of instruments by utilizing
industry communication standards such as Ethernet and TCP/IP. Its products
provide data and file transfer between computers, distributed access to
databases and remote test and measurement and process monitoring capabilities.
In addition, the Company's products are also compatible with a wide variety of
familiar, easy-to-use software applications such as word processors,
spreadsheets, web browsers, and databases. In many cases, a single computer or
workstation can serve both the instrumentation and general purpose computing
needs of scientists and engineers.
Large User Base
The Company supports and encourages the sharing of ideas, derived software
libraries and modules among its broad user base through user groups,
newsletters, conferences and seminars. This large base of users stimulates the
expansion of the Company's network of over 500 third party system integrators
and consultants, who can save users time and money by providing value-added
expertise, software programs and integration of systems for use with the
Company's products.
Lower Total Solution Cost
The Company believes that its virtual instrumentation products and
solutions offer price/performance advantages over traditional instrumentation.
Virtual instrumentation provides users the ability to utilize industry standard
computers and workstations equipped with modular and reusable application
software, cost-effective hardware and driver software that together perform the
instrumentation functions that would otherwise be performed by costly,
proprietary instrumentation systems. In addition, virtual instrumentation gives
users the flexibility and portability to adapt to changing needs, whereas
traditional closed systems are both expensive and time consuming to adapt, if
adaptable at all.
Strategy
The Company's objective is to be a leading supplier of virtual
instrumentation products and solutions to engineers and scientists in both the
T&M and IA markets. To achieve this objective, the Company is pursuing a
strategy that includes the following elements:
Expand Broad Customer Base
Serve Two Large Markets. The Company's products and services are designed
to serve the broad customer bases found in both the T&M and IA markets. The
Company defines product features and capabilities by working closely with
technically sophisticated customers in each of these markets and seeks to
achieve high unit volumes by selling these same products to a large base of
customers.
Support Many Computer and Instrument Options. The Company diversifies its
customer base by accommodating many popular computer platforms and the four
major instrumentation types: GPIB, VXI, DAQ and serial. In addition, the Company
expects to continue to create or adapt products for computer systems that gain
market acceptance, such as Windows NT-based computers. Customers are provided a
range of price/performance options through the Company's extensive line of
products.
Provide Worldwide Marketing and Distribution. The Company uses multiple
coordinated distribution channels in its major world markets. The Company's
distribution channels include direct sales, distributors, OEMS, VARs and systems
integrators and consultants. By using this broad range of channels, the Company
seeks to develop and maintain relations with its customers and prospects and to
provide the levels of support, training and education required by the market.
The Company devotes significant resources to direct sales activities and, as of
December 31, 1997, had 37 sales offices in the United States and 34 sales
offices located in key international markets. To address the range of sales
opportunities, the Company expects to continue to pursue value-added sales
hannels through formal relationships with OEMS, VARS, consultants or other
channels through formal relationships with OEMS, VARS, consultants or other
third parties when such relationships can add significant value to its products
or revenues. The Company intends to expand each of these distribution networks
to take advantage of market opportunities.
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Acquire New Technologies. The Company has in the past acquired companies,
products, and technologies to augment its product offerings, and intends to
continue to seek opportunities to satisfy customer needs and build market
penetration through acquisitions of new products and technologies in the future.
In connection with these acquisitions, the Company has leveraged its established
sales channels in an effort to accelerate the delivery of the acquired product
to the market and build market share.
Target Academic Environments. The Company markets and sells its products to
colleges and universities, increasing the potential for future growth as
students gain experience using the Company's products before entering the work
force.
Maintain High Levels of Customer Satisfaction
Offer Innovative Modular and Integrated Solutions. The Company intends to
continue to deliver innovative, modular software and hardware tools with open,
portable architectures that can be easily integrated to create instrumentation
systems and solutions. The Company solicits regular feedback from its customers,
resulting in the addition of new product features and enhanced performance, to
help ensure that existing and new products meet or surpass customer
expectations.
Provide Comprehensive Customer Support and Education. The Company's sales
and marketing engineers have the technical expertise necessary to understand
customers' instrumentation application needs and work with them to identify
cost-effective solutions using the virtual instrumentation approach. The Company
also offers comprehensive customer support, including technical support via fax
and telephone, electronic mail and world-wide web forums, bulletin boards,
newsletters, warranty service and repair, upgrade programs, free and paid
seminars and technical classes.
Deliver Long-Term Compatibility. The Company emphasizes consistency in the
implementation of its products across different platforms and strives to
maintain a high degree of backward compatibility between existing and new
products, engendering a high degree of customer loyalty.
Leverage External and Internal Technology
Leverage Generally Available Technology. The Company leverages the research
and development efforts of vendors of desktop computers and workstations,
operating systems, programming languages and software development tools, and
their suppliers. These technologies are combined with the Company's products to
achieve advanced solutions at a lower development cost.
Support Open Architecture on Multiple Platforms. The Company approaches the
market with an open architecture so users have the flexibility to combine the
Company's products with those from traditional instrument suppliers, computer
vendors and competitors.
Leverage Core Technologies. The Company designs proprietary ASICs to
optimize performance and reduce production costs. The Company utilizes these
ASICs and its other internally developed hardware and software components in
multiple products to achieve consistency and compatibility between products.
Develop and Support Industry Standards. The Company actively participates
in efforts to standardize key technologies by participating in industry
consortia and serving on standards committees, such as IEEE 488 and VXI for the
T&M market and Fieldbus and OPC for the IA market. The Company's ongoing
strategy is to conform its products to established and emerging standards in
both the general computer and the instrumentation industries.
Products and Technology
The Company offers an extensive line of hundreds of computer-based
products. Engineers, scientists and other users in both the T&M and IA markets
can use these products with desktop computers and workstations to develop
customer-defined virtual instruments. The Company's virtual instrumentation
products consist of application software, which includes LabVIEW,
LabWindows/CVI, ComponentWorks, Measure, BridgeVIEW, Lookout, BioBench and HiQ,
and hardware/driver software, which includes GPIB, VXI, DAQ, PXI, image
acquisition, motion control, and industrial communications. The Company's
products are designed to work either in an integrated solution or separately.
The Company believes that the flexibility, functionality and ease of use of its
application software promotes sales of the Company's other software and hardware
products. There are now several books available on the Company's technology,
both in English and other languages.
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Application Software
The Company offers a variety of application software products for
developing instrumentation applications to meet the different programming and
computer preferences of its customers. LabVIEW, LabWindows/CVI and
ComponentWorks are programming environments with which users can develop GUIs,
control instruments and acquire, analyze and present data. With these software
products, users can design custom virtual instruments by creating a GUI on the
computer screen through which they operate the actual program and control
selected hardware. Users can customize front panels with knobs, buttons, dials
and graphs to emulate control panels of traditional instruments or add custom
graphics to visually represent the control and operation of processes. LabVIEW
and LabWindows/CVI also have ready-to-use libraries for controlling hundreds of
programmable instruments, including serial, GPIB and VXI, and the Company's
plug-in DAQ boards. ComponentWorks has libraries for controlling GPIB
instruments and the Company's plug-in DAQ boards. Once created, virtual
instruments can be modified or used as components of another program by the
original developer or another user.
The principal difference between these products is in the way users develop
programs. With LabVIEW, users program graphically, developing application
programs by connecting icons to create "block diagrams" which are natural design
notations for scientists and engineers. LabVIEW is based on dataflow programming
techniques invented and patented by the Company. LabWindows/CVI is designed for
instrumentation users who are more comfortable programming with the
conventional, text-based language of C, and automatically generates and debugs
code for instrumentation programs. ComponentWorks adds application-specific OLE
or ActiveX controls and libraries to the Microsoft Visual Basic, Visual C++ and
Borland Delphi development environments.
The Company also sells a range of optional add-on products for LabVIEW,
LabWindows/CVI and ComponentWorks, such as advanced analysis libraries, database
tools and Internet integration.
The Company also offers a class of software products, VirtualBench,
BioBench, and Measure, which do not require any programming. VirtualBench is a
collection of "turnkey" virtual instruments that mimic the operation of
traditional benchtop instruments, through the use of a PC and a plug-in DAQ
board. Measure is an instrumentation add-on for Microsoft Excel that lets
engineers and scientists collect instrumentation data directly into a
spreadsheet. BioBench is designed for physiological data acquisition and
analysis in research laboratory and academic environments. BioBench is a turnkey
package for PCs and works with existing instruments already used in the life
sciences as well as with the Company's PC-based data acquisition products.
The Company offers HiQ as a natural companion to its application software
products for modeling, data visualization and report generation. HiQ is bundled
with LabVIEW in a package called LabSuite.
The Company's Lookout and BridgeVIEW products are targeted for the IA
market. Lookout is a non-programming solution. Lookout is a human machine
interface/supervisory control and data acquisition ("HMI/SCADA") software
product that requires no programming or script writing. Lookout provides a
scalable architecture for applications ranging from HMIs to large, sophisticated
SCADA applications. BridgeVIEW industrial automation software offers a new
approach to automation. The graphical programming technology pioneered by the
Company's LabVIEW data acquisition and instrumentation software is core to
BridgeVIEW. In the automation world, LabVIEW has been used for applications
ranging from manufacturing execution systems (MES) in a frame plant to
supervisory control of paper machines. BridgeVIEW builds on LabVIEW with tools
tailored to IA systems.
Hardware/Driver Software
The Company's hardware and driver software products include GPIB, VXI, DAQ,
PXI, image acquisition, motion control, and industrial communications. The
Company believes it can deliver significant cost/performance benefits to users
and clearly distinguish its products from competitive products by designing
proprietary ASICs for use in its hardware products. Software drivers are
necessary to link hardware to the operating system and the Company's application
software. The high level of integration between the Company's products provides
users with the flexibility to mix and match hardware components when developing
custom virtual instrumentation systems.
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GPIB Interfaces/Driver Software. GPIB, also known as the IEEE 488 standard,
has existed since 1975 and defines the protocol for transferring data between
certain instruments and computers over an industry-standard cable. The computer
must be equipped with a GPIB interface board. Driver software controls the board
and the transfer of data between the instrument and the computer. GPIB is
largely used in the T&M market.
The Company began selling GPIB products in 1977 and is a leading supplier
of GPIB interface boards and driver software. The Company's diverse portfolio of
hardware and software products for GPIB instrument control is available for a
wide range of desktop computers, workstations and minicomputers. The Company's
GPIB product line also includes products for portable computers such as a
PCMCIA-GPIB interface card and a product for controlling GPIB instruments using
the computer's standard parallel port.
Portability of GPIB application programs is provided by the Company's
NI-488.2 driver software, considered a de facto industry standard. The Company
offers networking capabilities through its GPIB products. With these products,
users can communicate with and control GPIB instruments from any point on an
Ethernet-based TCP/IP network. The Company also offers a variety of GPIB support
products, including converters, expanders, extenders, data buffers and GPIB
system analyzers as well as cables and other accessories.
VXI Controllers/Driver Software. VXI is an industry standard high-end
instrumentation platform developed in 1987 through an industry consortium to
take advantage of the computation and display capabilities of desktop computers
and workstations. With VXI, the physical size of multiple instrument systems can
be decreased and communication between instruments and computers can be
dramatically improved. Like GPIB, VXI is largely used in the T&M market.
VXI instruments are modular in design and can be inserted into an
industry-standard chassis. Unlike GPIB instruments, VXI modules do not have a
front panel for manual operation or visual data presentation. Therefore,
software is necessary for users to create, define the functionality of and
operate VXI instrumentation systems. Today, VXI is being used primarily to
supplement or replace high-end GPIB products in T&M applications.
The Company is a leading supplier of VXI computer controller hardware and
the accompanying NI-VXI driver software. The VXl plug-and-play Systems Alliance,
an industry group comprised of VXI instrumentation vendors, including
Hewlett-Packard Company, has designated the Company's LabVIEW and LabWindows/CVI
software as core technologies for developing special drivers used to control VXI
instruments.
DAQ Hardware/Driver Software. DAQ hardware and driver software products are
"instruments on a board" that users can combine with sensors, signal
conditioning hardware and software to acquire analog data and convert it into a
digital format that can be accepted by a computer. The Company believes that DAQ
products are typically a lower-cost solution than traditional instrumentation.
The Company believes that applications suitable for automation with DAQ
products are widespread throughout many industries for both T&M and IA
applications, and that many systems currently using traditional instrumentation
(either manual or computer-controlled) could be displaced by DAQ-based systems.
The Company offers a range of DAQ products, including models for digital, analog
and timing input-output, and for transferring data directly to a computer's
random-access memory. In 1997, the Company introduced a family of computer-based
instruments that deliver stand-alone instrument quality and measurement
capabilities with the flexibility and scalability inherent to PC-based virtual
instrumentation solutions. Computer-based instruments deliver features
comparable to stand-alone traditional instruments such as oscilloscopes, DMMs,
and function and arbitrary waveform generators. The Company's DAQ products
provide a range of price/performance options, and include products for high
speed applications such as on-line monitoring and control as well as products
designed for long-term recording of slowly changing data such as temperatures.
The Company offers DAQ hardware/driver software products for numerous desktop
and notebook computers. The Company also offers SCXI (signal conditioning
extensions for instrumentation) hardware, which expands the types and quantity
of sensors that can be connected to the Company's data acquisition boards.
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PXI Modular Instrumentation. The Company's PXI modular instrument platform,
which was also introduced in 1997, is a desktop PC packaged in a small, rugged
form factor with expansion slots. It combines mainstream PC software and PCI
hardware with advanced instrumentation capabilities designed in the VXI
architecture. In essence, PXI is an instrumentation PC - delivering many of the
benefits of VXI in a much smaller package and at much lower prices. The Company
has targeted its PXI products for both the T&M and IA markets.
Image Acquisition. In late 1996, the Company introduced its first image
acquisition hardware and software for the machine vision market. In the past,
building PC-based machine vision systems was reserved for integrators, OEMs, and
vision experts. Today, with the advanced technologies in personal computers and
the Company's vision products, it is cost-effective for end-users to integrate
vision into their T&M and IA applications. The Company's vision software is
designed to work with many different environments, including LabVIEW,
LabWindows/CVI, ComponentWorks and BridgeVIEW.
Motion Control. During 1997, the Company acquired technologies and assets
that resulted in the addition of a line of motion control hardware, software and
peripheral products. This intelligent PC-based motion control hardware is
programmable from industry standard development environments including LabVIEW,
LabWindows/CVI, and BridgeVIEW. Virtual instrument software tools for motion are
easily integrated with the Company's product line, allowing motion to be
combined with image acquisition, test, measurement, data acquisition and
automation. As in many areas, motion control is moving to PC-based systems and
the motion products allow users to leverage standard hardware and software in
measurement and automation applications to create robust, flexible solutions.
Industrial Communications Interfaces.
In mid-1995, the Company began shipping its first interface boards for
communicating with serial devices, such as dataloggers and PLCs targeted for IA
applications, and benchtop instruments, such as oscilloscopes, targeted for T&M
applications. Industrial applications need the same high-quality, easy-to-use
hardware and software tools for communicating with industrial devices such as
process instrumentation, PLCs, single-loop controllers, and a variety of I/O and
DAQ devices. National Instruments offers three hardware and driver software
product lines for communication with industrial devices - Controller Area
Network (CAN), Foundation Fieldbus, and RS-485 and RS-232. The Company's
industrial communication products are designed to work with standard serial
software drivers, and Windows versions of LabVIEW, LabWindows/CVI, Lookout and
BridgeVIEW.
The Company introduced its FieldPoint product for distributed I/O
applications in mid-1997. FieldPoint is an intelligent, distributed, and modular
I/O system that gives industrial system developers an economical solution for
monitoring and control applications. The FieldPoint system includes isolated
analog and digital I/O modules, terminal base options, and network modules.
FieldPoint software includes a server that provides seamless integration into
BridgeVIEW, driver libraries for support under LabVIEW, LabWindows/CVI/CVI, and
Lookout, and an OPC server that provides wide compatibility of FieldPoint
hardware with other industrial automation software packages.
Customer Training Courses
The Company offers fee-based training classes and self-paced course kits
for its LabVIEW, LabWindows/CVI, Lookout, BridgeVIEW, ComponentWorks, GPIB, VXI,
DAQ, image acquisition, and signal processing products. On-site courses are
quoted per customer requests. The Company also offers programs to certify
programmers and instructors for its products.
Markets and Applications
The Company's products are used across many industries in a variety of
applications from research and development to production testing and industrial
control. The Company approaches both the T&M and IA markets with essentially the
same products and sales, marketing and customer support strategies.
-9-
Customers
The Company has a broad customer base, with no customer accounting for more
than 3% of the Company's sales in 1997, 1996 and 1995.
Marketing
Through its worldwide marketing efforts, the Company strives to educate
engineers and scientists about the benefits of the Company's virtual
instrumentation philosophy, products and technology, and to highlight the
performance, ease of use and cost advantages of its products. The Company also
seeks to present its position as a technological leader among producers of
instrumentation software and hardware and to help promulgate industry standards
that will benefit users of computer-controlled instrumentation.
The Company reaches its intended audience through distribution of written
and electronic materials and demonstration disks, participation in tradeshows
and technical conferences and training and user seminars. An in-house staff
develops the advertising, publicity, and promotional materials that the Company
uses worldwide. The primary marketing/sales tool is the Company's catalog,
published annually and distributed worldwide. The 1998 catalog is over 800
pages, with detailed tutorial information that educates readers about the
Company's integrated product architecture and virtual instrumentation concept.
Short-form versions of the catalog are typically also available in languages of
major international markets, including English (anglicized), French, German,
Spanish and Japanese. Product and technical information is also provided through
the Company's World Wide Web site on the Internet and through interactive
CD-ROM. In 1997, the Company began selling some of its products over the
Internet and expects to increase efforts in this area in the future.
The Company also uses two quarterly newsletters to educate current and
prospective customers about its products and technologies: Instrumentation
Newsletter and AutomationVIEW. The Instrumentation Newsletter includes new
product information, feature articles that educate readers about new
instrumentation technology, user solution case studies of real-world
applications, product news from Alliance Program members and key customers, and
event and customer education schedules. The Company's AutomationVIEW Newsletter
is targeted at IA prospects and customers.
The Company actively markets its products in higher education environments,
and identifies many colleges, universities and trade and technical schools as
key accounts. The Company offers special academic pricing and products to enable
universities to utilize Company products in their classes and laboratories. The
Company believes its prominence in the higher education area can contribute to
its future success because students gain experience using the Company's products
before they enter the work force.
Sales and Distribution
The Company distributes its software and hardware products through a direct
sales organization, independent distributors, OEMs, VARs, system integrators and
consultants. As of December 31, 1997, the Company had 37 sales offices in the
United States, 34 sales offices outside the United States and 30 distributors
worldwide. International sales accounted for approximately 41%, 43% and 44% of
the Company's revenues in 1997, 1996 and 1995 respectively. The Company expects
that a significant portion of its total revenues will continue to be derived
from international sales. See Note 12 of Notes to Consolidated Financial
Statements for details concerning the geographic breakdown of the Company's net
sales, operating income and identifiable assets.
Through all of its sales channels, the Company seeks to approach potential
customers with a highly technical sales force. The Company believes that the
majority of sales are made directly to those persons within an organization who
actually use the Company's products to integrate their own systems. The Company
identifies and targets major end-user accounts as those having a large number of
actual or potential end users, and believes that it achieves a high level of
repeat customer sales. The Company targets major accounts with a variety of
targeted sales and marketing campaigns such as seminars, user groups,
newsletters and direct mail.
-10-
Direct Sales
The Company directly markets and sells its products in the United States,
Canada and many European and Asia/Pacific countries. As of December 31, 1997,
the Company had 37 sales offices located in the United States and 34 direct
international sales offices located in Australia, Austria, Belgium, Brazil,
Canada, Denmark, Finland, France, Germany, Hong Kong, India, Israel, Italy,
Japan, Mexico, the Netherlands, Norway, Singapore, South Korea, Spain, Sweden,
Switzerland, Taiwan and the United Kingdom. Many of the Company's international
sales offices employ application engineering technical support specialists as
well as sales, marketing and administrative personnel.
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers, difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the dollar value of foreign sales
requiring the Company either to increase its price in the local currency, which
could render the Company's product prices noncompetitive, or to suffer reduced
revenues and gross margins as measured in US dollars. These dynamics have
adversely affected revenue growth in international markets in 1997, and they
could continue to do so. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 11 of Notes to Consolidated
Financial Statements.
Distributors
The Company utilizes distributors primarily to market its products in
geographic areas not served by the Company's direct sales organization. As of
December 31, 1997, the Company had distributors located in 30 countries.
OEMs
The Company utilizes OEMs such as traditional instrument manufacturers who
offer integrated systems and/or services to their customer bases. The Company
approaches OEM accounts with its standard product lines and offers quantity
discounts based on volume commitments and technical support capabilities and
requirements. The Company also promotes its sales and marketing capabilities to
its OEMs by providing specialized product training, documentation, packaging and
part numbers to simplify ordering, flexible shipping and warranty repair options
and joint promotion.
VARs, System Integrators and Consultants
The Company has relationships with third-party VARs, system integrators and
consultants who offer add-on products and system integration services. These
third-party developers expand the Company's market and sales opportunities by
adding value to the Company's standard products, making them suitable for
vertical market applications such as manufacturing automation or image
processing and analysis. The Company maintains a formal third-party
sales/marketing/training program, called the Alliance Program, which it uses to
work with many of the VARs, system integrators and consultants. Applicants must
be sponsored for membership by a Company sales engineer, pass qualification
criteria and pay a nominal annual membership fee. As of December 31, 1997, the
Company's Alliance Program had over 500 members. The Company publishes
directories of third-party Alliance Program member products and services for use
by its sales force and its end users to locate additional products and/or
services compatible with the Company's products. The Company makes available to
qualified third-parties the opportunity to participate in joint marketing and
sales programs, such as trade shows, customer sales events and the
Instrumentation Newsletter.
-11-
Customer Support
The Company believes the ability to provide comprehensive service and
support to its customers is an important factor in its business. The Company
permits customers to return products within 30 days from receipt for a refund of
the purchase price less a restocking charge, and generally provides a two-year
warranty on GPIB hardware products, a one-year warranty on other hardware
products, and a 90-day warranty on software (medium only). Historically,
warranty costs have not been material. Some of the key elements of the Company's
service and support strategy include:Some of the key elements of the Company's
service and support strategy include:
Customer Technical Support
The Company maintains a large staff of application engineers at its
corporate facility, all of whom are highly qualified technical professionals.
Application engineers are also assigned to the Company's major international
offices. These application engineers provide customer support by telephone, fax,
electronic mail and world-wide web forums, and electronic bulletin boards, and
are trained in both instrumentation and computer technology.
Upgrades
The Company typically offers programs in which existing customers can
upgrade to the latest Company products at a reduced cost. Application software
customers have the option of purchasing a one-year renewable maintenance and
support program, which entitles them to new software releases for no additional
charge and priority access to the Company's technical support hotline.
Customer Education
The Company offers a variety of fee-based training classes ranging in scope
from basic and introductory courses for new users to advanced courses for
experienced users.
Competition
The markets in which the Company operates are characterized by intense
competition from numerous competitors, and the Company expects to face further
competition from new market entrants in the future. A key competitor is
Hewlett-Packard Company ("HP"), which has been the leading supplier of
traditional instrumentation solutions for decades. The Company believes HP is
the dominant supplier of GPIB and VXI-compatible instruments and systems in the
T&M market. HP is also a leading supplier of equipment used in data acquisition
and control applications. Although HP offers its own line of proprietary
instrument controllers, HP also offers hardware and software add-on products for
third-party desktop computers and workstations that directly compete with the
Company's virtual instrumentation products. HP is aggressively advertising and
marketing its products and system integration services. Because of HP's
dominance in the instrumentation business, changes in its marketing strategy or
product offerings could have a material adverse affect on the Company. The
Company also faces competition from a variety of other competitors.
Certain of the Company's competitors have substantial competitive
advantages in terms of breadth of technology, sales, marketing and support
capability and resources, including the number of sales and technical personnel
and their ability to cover a geographic area and/or particular account more
extensively and with more complete solutions than the Company can offer, and
more extensive warranty support, system integration and service capabilities
than those of the Company. In addition, large competitors can often enter into
strategic alliances with key customers or target accounts of the Company, which
can potentially have a negative impact on the Company's success with those
accounts.
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: product
pricing, quality and performance; success in developing new products; adequate
manufacturing capacity and supply of components and materials; efficiency of
manufacturing operations; effectiveness of sales and marketing resources and
strategies; strategic relationships with other suppliers; timing of new product
introductions by the Company and its competitors; protection of the Company's
products by effective use of intellectual property laws; general market and
economic conditions; and events related to weather and government actions
throughout the world. There can be no assurance that the Company will be able to
compete successfully in the future.
-12-
The Company is continually designing new and improved products to maintain
its competitive position. Because of the rapidly changing computer technology
for which many of the Company's products are designed, the Company believes that
its future success will depend in part on its ability to continue to improve its
products and technologies. In the past, certain competitors have cloned some of
the Company's hardware products at much lower prices, and promoted these
hardware products as being capable of running the Company's software. The
Company has responded to this tactic in the past by releasing new and improved
versions of its products designed around proprietary ASICs that have improved
performance and functionality in an effort to surpass the competition.
Research and Development
The Company believes that its long-term growth and success depends, in
part, on delivering high quality software and hardware products on a timely
basis. The Company intends to focus its research and development efforts on
enhancing existing products and developing new products that incorporate
appropriate features and functionality to be competitive with respect to
technology and price/performance.
The Company's research and development staff strives to build quality into
products at the design stage in an effort to reduce overall development and
manufacturing costs. The Company's research and development staff also designs
proprietary ASICs, many of which are designed for use in several products. The
goal of the ASIC design program is to further differentiate the Company's
products from competing products, to improve manufacturability and to reduce
costs. The Company seeks to reduce the time to market for new and enhanced
products by sharing its internally developed hardware and software components
across multiple products.
In the past, the Company has experienced significant delays in the
introduction of new products. The Company's strategy of developing products
based primarily on third parties' operating environments is substantially
dependent on the Company's ability to gain pre-release access to, and to develop
expertise in, current and future product developments of such companies. There
can be no assurance that the Company will continue to receive such pre-release
access from any of these companies, or, even with such access, that the Company
will be able to develop products on a timely basis that are compatible with
future releases.
The Company has implemented certain programs, including pre-release bug
analysis measures and enhanced project-tracking efforts, in order to improve the
product development process and to permit more accurate product development
scheduling. Nonetheless, there can be no assurance that the Company's research
and development efforts will not encounter delays or other difficulties, that
development efforts will result in commercially successful products, or that the
Company's products will not be rendered obsolete by changing technology or new
product announcements by other companies.
As of December 31, 1997, the Company employed 373 people in product
research and development. The Company's research and development expenses were
$30.3 million, $24.4 million and $20.0 million for 1997, 1996 and 1995,
respectively.
Intellectual Property
The Company relies on a combination of patent, trade secret, copyright and
trademark law, contracts and technical measures to establish and protect its
proprietary rights in its products. The Company believes that legal protection
through means such as the patent and copyright laws will be less influential on
the Company's ability to compete than such factors as the creativity of its
development staff, its ability to expand its market share, develop new markets
and serve its customers.
-13-
As of December 31, 1997, the Company held 38 United States patents and 10
patents in foreign countries, and had 95 patent applications pending in the
United States and foreign countries. Sixteen of such United States patents are
software patents related to LabVIEW, and cover fundamental aspects of the
graphical programming approach used in LabVIEW. The Company's patents expire
from 2007 to 2015. No assurance can be given that the Company's pending patent
applications will result in the issuance of patents. The Company also owns
certain registered trademarks in the United States and abroad.
Although the Company relies to some extent on trade secret protection for
much of its technology, and regularly obtains confidentiality agreements with
key customers who wish to know more about the Company's product development
philosophy and/or future directions, there can be no assurance that third
parties will not either independently develop the same or similar technology,
obtain unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access.
The laws of certain foreign countries treat the protection of proprietary
rights of the Company in its products differently from those in the United
States, and in many cases the protection afforded by such foreign laws is not as
strong as in the United States. The Company believes that its products and their
use do not infringe the proprietary rights of third parties. There can be no
assurance, however, that infringement claims will not successfully be made.
Manufacturing and Suppliers
The Company manufactures its products at its facilities in Austin, Texas.
Product manufacturing operations at the Company can be divided into four areas:
electronic circuit card and module assembly; cable assembly; technical manuals
and product support documentation; and software duplication. The Company
manufactures most of the electronic circuit card assemblies and modules
in-house, although subcontractors are used from time to time. The Company
manufactures some of its electronic cable assemblies in-house, but many
assemblies are produced by subcontractors. The Company primarily subcontracts
its software duplication and packaging functions. Reliance on contract
manufacturers entails risks of quality problems, less control of product
pricing, and potential unavailability of or delays in delivery of products, any
of which could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company, together with its
third-party manufacturers, will be able to produce sufficient quantities of the
Company's products in a timely manner.
The marketplace dictates that many of the Company's products be shipped
very quickly after an order is received. Since purchased component and
manufacturing lead times are typically much longer than the short order
fulfillment time, the Company is required to keep adequate amounts of finished
goods inventory and must use an accurate system for forecasting demand for those
products in its production planning operations. Fluctuations in demand for the
Company's products typically result from month-to-month variations in the
quantity and mix of products and from normal, seasonal variations. A variety of
circumstances, including inaccurate forecasts of customer demand, poor
availability of purchased components, supplier quality problems, production
equipment problems, carrier strikes or damage to products in manufacturing
operations, could create a buildup of excess finished goods on the one hand or
an inability to timely deliver product on the other. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
-14-
Engineering refinements to the Company's new hardware and software products
are fairly common. These changes can result in the disruption of the
manufacturing operation and concurrent delays in delivery dates. Finished goods
inventory at the Company's international branches typically has a short shelf
life due to engineering changes and product upgrades initiated by the Company's
product development operation, and, if managed incorrectly, can result in
significant quantities of obsolete inventory. This relatively short shelf life,
and the resulting requirement to properly manage the quantity of inventory to
meet customer demand while minimizing inventory obsolescence, has been and
continues to be a challenge to the Company and its branch offices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company obtains most of its electronic components from suppliers
located principally in the United States and Asia. Some of the components
purchased by the Company, including ASICs, are sole-sourced. Any disruption of
the Company's supply of sole or limited source components, whether resulting
from quality, production or delivery problems, could adversely affect the
Company's ability to manufacture its products, which could in turn adversely
affect the Company's business and results of operations.
Backlog
The Company typically ships products shortly following the receipt of an
order. Accordingly, the Company does not view backlog data as an indicator of
future sales.
Employees
As of December 31, 1997, the Company had 1,465 employees, including 373 in
research and development, 674 in sales and marketing and customer support, 224
in manufacturing and 194 in administration and finance. None of the Company's
employees is represented by a labor union and the Company has never experienced
a work stoppage. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company's principal administrative and sales and marketing activities
are conducted at a Company-owned 136,000 square foot building in Austin, Texas.
The Company also leases approximately 27,700 square feet of office space also
located in Austin, Texas to house additional research and development and
marketing personnel.
The Company owns 69 acres of land in north Austin, Texas, at which its
manufacturing, research and development, and certain other operations are
conducted in a 140,000 square foot facility. The Company is currently in the
process of constructing a 232,000 square foot office facility, which is located
next to the manufacturing facility, to be completed in the summer of 1998. In
addition, the Company presently plans to construct other buildings at this site
and to move the balance of its Austin-based operations to this new site.
As of December 31, 1997, the Company also maintained a number of sales and
support offices in the United States and overseas. The Company believes existing
field sales and support facilities are adequate to meet its current
requirements. The Company plans to continue to expand its field sales and
support facilities worldwide where appropriate to further penetrate existing and
new market opportunities. The Company believes that suitable additional or
substitute space will be available in the foreseeable future in the United
States.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
-15-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $0.01 par value, began trading on the Nasdaq
National Market System under the symbol NATI effective March 13, 1995. Prior to
that date, there was no public market for the Common Stock. The following table
sets forth for the periods indicated the high and low closing prices for the
Common Stock, as reported by Nasdaq:
The Company's Common Stock, $0.01 par value, trades on The Nasdaq National
Market under the symbol NATI. The following high and low closing prices for the
Common Stock, as reported by Nasdaq, have been retroactively restated to reflect
the three-for-two stock split declared by the Company's Board of Directors on
October 15, 1997 for holders of record as of the close of business on October
28, 1997.
1997 High Low
First Quarter 1997 25 5/6 20 2/3
Second Quarter 1997 23 1/2 18 1/2
Third Quarter 1997 31 21 5/6
Fourth Quarter 1997 33 1/3 25
1996 High Low
First Quarter 1996 14 1/3 11 1/6
Second Quarter 1996 16 1/3 13 5/6
Third Quarter 1996 19 1/2 14 1/6
Fourth Quarter 1996 21 1/3 17 2/3
As of February 26, 1998, there were approximately 720 holders of record of
the Common Stock and approximately 4,100 shareholders of beneficial interest.
The Company believes factors such as quarterly fluctuations in results of
operations, announcements by the Company or its competitors, technological
innovations, new product introductions, governmental regulations, litigation or
changes in earnings estimates by analysts may cause the market price of the
Common Stock to fluctuate, perhaps substantially. In addition, stock prices for
many technology companies fluctuate widely for reasons that may be unrelated to
their operating results. These broad market and industry fluctuations were most
recently noted during the fourth quarter of 1997 when many technology stocks
declined in price. There can be no assurances that these market concerns will
not continue in the immediate future and may adversely affect the market price
of the Company's Common Stock.
To date, the Company has not paid any cash dividends on its Common Stock.
The Company currently anticipates that it will retain any available funds to
finance the growth and operation of its business and does not anticipate paying
any cash dividends in the immediate future.
-16-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, including the Notes to
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations. The information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Years Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statements of Income Data:
Net sales:...............
North America.......... $141,783 $114,382 $ 93,001 $ 77,333 $ 65,190
Europe................. 66,318 58,108 51,145 38,505 31,631
Asia Pacific........... 32,777 28,225 20,673 11,165 8,707
-------- -------- -------- -------- --------
Consolidated net sales 240,879 200,715 164,819 127,003 105,528
Cost of sales............ 55,096 49,755 39,525 30,627 25,526
-------- -------- -------- -------- --------
Gross profit........... 185,783 150,960 125,294 96,376 80,002
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.... 87,096 72,067 63,733 49,957 41,571
Research and development 30,296 24,387 19,991 15,163 11,761
General and administrative 18,508 17,129 15,071 11,414 9,370
-------- -------- -------- -------- --------
Total operating expenses 135,900 113,583 98,795 76,534 62,702
-------- -------- -------- -------- --------
Operating income....... 49,883 37,377 26,499 19,842 17,300
Other income (expense):
Interest income........ 3,455 2,405 1,635 240 23
Interest expense....... (502) (844) (875) (542) (681)
Net foreign exchange
(loss) gain........... (2,649) (899) 150 1,556 (785)
-------- -------- -------- -------- --------
Income before income taxes 50,187 38,039 27,409 21,096 15,857
Provision for income taxes 16,562 12,553 9,986 8,129 5,782
-------- -------- -------- -------- --------
Net income $ 33,625 $ 25,486 $ 17,423 $ 12,967 $ 10,075
======== ======== ======== ======== ========
Basic earnings per share $ 1.03 $ 0.79 $ 0.56 $ 0.48 $ 0.37
======== ======== ======== ======== ========
Weighted average shares
outstanding-basic 32,563 32,359 31,158 27,164 27,083
======== ======== ======== ======== ========
Diluted earnings per share $ 1.00 $ 0.77 $ 0.55 $ 0.47 $ 0.37
======== ======== ======== ======== ========
Weighted average shares
outstanding-diluted 33,656 32,943 31,424 27,483 27,434
======== ======== ======== ======== ========
December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 31,943 $ 30,211 $ 12,016 $ 7,526 $ 4,443
Short-term investments.. 51,067 48,956 37,765 --- ---
Working capital......... 112,142 99,294 74,546 26,869 20,016
Total assets............ 204,490 169,225 137,102 70,751 51,275
Long-term debt, net of
current portion....... 5,151 9,175 11,603 9,083 9,137
Total stockholders' equity 161,754 126,953 98,736 40,474 27,379
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this document contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document as a result of a number of
important factors. For a discussion of important factors that could affect the
Company's results, please refer to the risk factors set forth below in Factors
Affecting the Company's Business, in the financial line item discussions below
and elsewhere in this document.
Overview.
National Instruments Corporation engages in the design, development,
manufacture and marketing of instrumentation software and specialty interface
cards for general commercial, industrial and scientific applications. The
Company offers hundreds of products used to create virtual instrumentation
systems. The Company has identified two major markets for its products: test and
measurement and industrial automation. Many of the Company's products may be
used in either environment, and consequently, specific application of the
Company's products is determined by the end-customer and often is not known to
the Company at the time of sale. The Company approaches both markets with
essentially the same products which are used in a variety of applications from
research and development to production testing and industrial control. The
Company sells to a large number of customers in a wide variety of industries. No
single customer accounted for more than 3% of the Company's sales in 1997, 1996
or 1995.
The Company's revenues have grown every year since 1977 and the Company has
been profitable in every year since 1990. There can be no assurance that the
Company's net sales will continue to grow or that the Company will remain
profitable in future periods. As a result, the Company believes historical
results of operations should not be relied upon as indications of future
performance.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of income:
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Net Sales
North America................ 58.9% 57.0% 56.4%
Europe....................... 27.5 29.0 31.1
Asia Pacific................. 13.6 14.0 12.5
-------- -------- --------
Consolidated net sales....... 100.0 100.0 100.0
Cost of sales.................. 22.9 24.8 24.0
-------- -------- --------
Gross profit................. 77.1 75.2 76.0
Operating expenses:
Sales and marketing.......... 36.1 35.9 38.7
Research and development..... 12.6 12.2 12.1
General and administrative... 7.7 8.5 9.1
-------- -------- --------
Total operating expenses.... 56.4 56.6 59.9
-------- -------- --------
Operating income............ 20.7 18.6 16.1
Other income (expense):
Interest income.............. 1.4 1.2 1.0
Interest expense............. (0.2) (0.4) (0.5)
Net foreign exchange (loss)
gain....................... (1.1) (0.4) 0.1
-------- -------- --------
Income before income taxes... 20.8 19.0 16.7
Provision for income taxes..... 6.9 6.3 6.1
-------- -------- --------
Net income................... 13.9% 12.7% 10.6%
======== ======== ========
-18-
Net Sales. In 1997, a continued increase in demand for the Company's
existing and new products generated a 20% increase over 1996 in net sales which
follows a 23% increase from 1995 to 1996. This year marks the fourteenth
consecutive year of annual sales growth of 20% or more. The increase in sales in
these periods is primarily attributable to the introduction of new and upgraded
products in each period, increased market acceptance of the Company's products,
and an expanded customer base. The growth in 1997 sales over 1996 is attributed
to the synergy of focusing the domestic and international efforts on the
Company's main products and on increasing the number of tradeshows and customer
seminars.
In constant dollars, net sales increased 26%, 24%, and 25% for the years
ended December 31, 1997, 1996 and 1995, respectively. The relatively higher
constant dollar growth rate in 1997 is attributed to successful new product
introductions. The decrease in the 1997 U.S. dollar annual growth rate, 20%
compared to 23% in 1996, is the result of the strengthening U.S. dollar as
discussed further in this document.
North American revenue was $141.7 million in 1997, an increase of 24% from
1996, following a 23% increase in 1996 over 1995. The increase in the North
American revenue growth is attributed to new product sales as the direct result
of the Company's investment in research and development. European revenue was
$66.3 million, an increase of 14% over 1996, following a 14% increase in 1996
from 1995. Asia Pacific revenue grew 16% to $32.7 million, following a 37%
increase in 1996 over 1995 levels. International sales (sales to customers
outside of North America) accounted for 41%, 43% and 44% of the Company's
consolidated net sales for 1997, 1996 and 1995, respectively. The decrease in
the Asia Pacific revenue growth rate, in U.S. dollars, during 1997 is attributed
to the weakening of the Japanese yen, Korean won and other Asian currencies. See
the discussion below for more information concerning the impact of foreign
currency fluctuations on sales growth. The growth in 1996 in the Asia Pacific
region was driven by increased customer acceptance of localized Japanese
products and local support and increased penetration in the other Asian
countries. The Company intends to continue to expand its international
operations by increasing market presence in existing markets, and continuing to
use distributors to sell its products in countries in which the sales volume
does not justify direct sales activities. Although international sales as a
percent of total sales decreased in U.S. dollars, the Company has determined
that this is the effect of the strengthening dollar and anticipates that sales
outside of North America will continue to represent a significant and possibly
increasing portion of its revenues.
The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers; difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the U.S. dollar value of foreign
sales requiring the Company either to increase its price in the local currency,
which could render the Company's product prices noncompetitive, or to suffer
reduced revenues and gross margins as measured in U.S. dollars. These dynamics
have adversely affected revenue growth in international markets in 1997 and
1996, and they could continue to do so. In December 1997, the Company expanded
its foreign currency hedging program to include both foreign currency forward
and option contracts to reduce the effect of exchange rate fluctuations.
However, the hedging program will not eliminate all of the Company's foreign
exchange risks. See "Foreign Exchange Gain/Loss" below and Note 11 of Notes to
Consolidated Financial Statements.
-19-
Sales made by the Company's direct sales offices in Europe and Asia Pacific
are denominated in local currencies, and accordingly, the U.S. dollar equivalent
of these sales is affected by changes in the weighted average value of the U.S.
dollar. This weighted average is calculated as the percentage change in the
value of the currency relative to the dollar, multiplied by the proportion of
international sales recorded in the particular currency. Between 1996 and 1997
this weighted average value of the U.S. dollar increased by 11%, causing an
equivalent decrease in the U.S. dollar value of the Company's foreign currency
sales and expenses. If the weighted average value during 1997 had been the same
as that in 1996, the Company's consolidated net sales for 1997 would have been
$252.0 million representing an increase of $51.0 million, which represents 26%
consolidated sales growth. If the weighted average value during 1997 had been
the same as that in 1996, the Company's consolidated operating expenses would
have been $139.7 million, representing an increase of $26.1 million, or 23%. If
the weighted average value during 1996 had been the same as that in 1995, the
comparable sales growth factor would have been 24% growth in 1996 over 1995. The
preceding proforma amounts and percentages are presented for comparison
purposes. If the current trend in exchange rates continue throughout 1998, it
will have the effect of lowering the U.S. dollar equivalent of international
sales and operating expenses.
Gross Profit. As a percentage of sales, gross profit represented 77%, 75%,
and 76% in 1997, 1996, and 1995, respectively. The relatively high software
content of the Company's products is demonstrated in the gross margins achieved
by the Company. The relatively higher margin in 1997 is the result of reduced
direct material costs used in production and the favorable leveraging of our
production overhead expenses against the increase in sales. The lower margin in
1996 can be attributed to increased software duplication outsourcing costs and
inventory reductions. There can be no assurance that the Company will maintain
the historical margin.
The marketplace for the Company's products dictates that many of the
Company's products be shipped very quickly after an order is received. As a
result, the Company is required to maintain significant inventories. Therefore,
inventory obsolescence is a risk for the Company due to frequent engineering
changes, shifting customer demand, the emergence of new industry standards and
rapid technological advances including the introduction by the Company or its
competitors of products embodying new technology. While the Company maintains
valuation allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances, there can be no assurance
that such valuation allowances will be sufficient.
The Company believes its current manufacturing capacity is adequate to meet
current needs. The Company plans to add, if sales dictate, a third production
line in 1998. There can be no assurances that a delay in the implementation of
the third line would not have a material impact on revenues and results of
operations.
Sales and Marketing. Sales and marketing expense in 1997 increased 21% from
1996, which followed an increase of 13% in 1996 from 1995. The increase in the
expense in absolute amounts during 1997 and 1996 is primarily attributable to
programs to increase the Company's international presence in both the European
and Asia Pacific markets, increases in sales and marketing personnel both
internationally and in North America, increased marketing for new products and a
worldwide seminar series. Sales and marketing personnel increased by 37 during
1997 from 272 at December 31, 1996 to 309 at December 31, 1997. Sales and
marketing expense as a percentage of revenue remained steady at 36% of revenue
during 1997 following a decline in 1996 to 36% from 39% in 1995. In 1996, the
Company benefited from reduced promotional costs as a result of converting to
more electronic media such as the Company's World Wide Web server accessed
through the Internet and an interactive CD-ROM application, Instrupedia(TM),
and more cost-effective demonstration disks.
The Company expects sales and marketing expenses in future periods to
increase in absolute dollars, and to fluctuate as a percentage of sales based on
initial marketing and advertising campaign costs associated with major new
product releases, increasing product demonstration costs and the timing of
domestic and international conferences and trade shows.
-20-
Research and Development. Research and development expense as reported in
1997 increased 24% compared to 1996 following an increase of 22% in 1996 over
1995. When adjusted for the acquisition of the products, technology, and assets
of nuLogic during 1997 and the acquisition of Georgetown Systems, Inc. and
another software acquisition during 1996, research and development expense grew
26% in 1997 following a 14% increase in 1996 over 1995. (See Note 8 of Notes to
Consolidated Financial Statements for a description of the Company's
acquisitions.) The increase in research and development expenditures (excluding
the acquisition related charges in 1997 and 1996) in absolute amounts and as a
percentage of sales in each period was primarily due to the hiring of additional
product development engineers. Research and development personnel increased from
300 at December 31, 1996 to 373 at December 31, 1997. The Company believes that
a significant investment in research and development is required to remain
competitive and continue revenue growth.
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." The Company
amortizes such costs over the related product's estimated economic life,
generally three years, beginning when a product becomes available for general
release. Amortization expense totaled $1.5 million, $2.1 million, and $1.2
million during 1997, 1996 and 1995, respectively. The decrease in amortization
expense is due primarily to amortization of $500,000 of development costs
capitalized as a result of a 1996 imaging acquisition software purchase.
Software development costs capitalized during such years were $2.1 million, $3.0
million and $793,000, respectively. The significant items capitalized in 1997
include DAQ, LabVIEW 5.0, LabWindows/CVI/CVI and purchased software development
costs related to the nuLogic acquisition. The levels of capitalization in prior
years are primarily a result of completing significant upgrade projects for
LabVIEW, LabWindows/CVI/CVI, BridgeVIEW and purchased software development
costs.
General and Administrative. General and administrative expense in 1997
increased 8% from 1996, which followed an increase of 14% in 1996 from 1995. The
increased spending in absolute dollars in 1997 was primarily due to the increase
in information systems personnel, costs to train personnel, the use of outside
consultants, and costs to implement the new management information system in
Japan. The increased spending in absolute dollars from 1995 to 1996 was
primarily due to the increased sales volume and the related supporting
activities and also due to the costs of supporting the Company's management
information systems in North America and Europe. General and administrative
expense as a percentage of revenue declined to 8% of revenue during 1997. This
decline is attributable to the efficiencies in North America and Europe achieved
primarily as a result of the implementation of the new management information
system. The Company expects that general and administrative expense in future
periods will increase in absolute amounts and will fluctuate as a percentage of
net sales.
Interest Income and Expense. Interest income in 1997 increased 44% from
1996, which followed an increase of 47% in 1996 from 1995. The primary source of
interest income is from the investment of proceeds from the Company's issuance
of common stock under an initial public offering in March 1995 and cash flow
generated from operations. During 1997, interest income continued to increase
due to the investment of cash generated from operations. Interest expense
decreased 41% from 1996, which followed a decrease of 4% in 1996 from 1995.
Interest expense represents less than one percent of net sales and fluctuates as
a result of bank borrowings and interest terms thereon. The large decrease in
interest expense from 1996 to 1997 is attributed to repayments of the equipment
loan and the Millennium loan during January 1997. See Note 6 of Notes to
Consolidated Financial Statements for a description of the Company's debt.
Foreign Exchange Gain/Loss. The Company experienced net foreign exchange
losses of $2.6 million during 1997, compared to losses of $899,000 in 1996 and
gains of $150,000 in 1995. These results are attributable to movements between
the U.S. dollar and the local currencies in countries in which the Company's
sales subsidiaries are located. The Company recognizes the local currency as the
functional currency of its international subsidiaries. The loss in 1997 is
attributable to the strengthening of the U.S. dollar.
The Company utilizes foreign currency forward exchange contracts against a
majority of its foreign currency-denominated receivables in order to reduce its
exposure to significant foreign currency fluctuations. The Company typically
limits the duration of its foreign exchange forward contracts to 90 days.
-21-
In December 1997, the Company expanded its foreign currency hedging program
to also include foreign currency option contracts in order to reduce its
exposure of future net foreign currency cash flows. The Company's policy allows
for the purchase of 5% "out-of-the-money" foreign currency option contracts for
up to 80% of its risk and limits the duration of these contracts to 12 months.
As a result, the Company's hedging activities only partially address its risks
in foreign currency transactions, and there can be no assurance that this
strategy will be successful. If the strengthening of the U.S. dollar that
occurred throughout 1997 continues in 1998, the Company will continue to
experience significant foreign exchange losses due to the foreign exchange risks
that are not addressed by the Company's hedging strategy.
The Company does not currently invest in contracts for speculative purposes
nor does it intend to do so in the foreseeable future. See Note 11 of Notes to
Consolidated Financial Statements for a description of the Company's forward and
option contracts and hedged positions.
Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 33% in 1997 and 1996 and 36% in 1995. The decrease in the
effective tax rate from 1995 to 1996 resulted from a change in the mix of income
among taxing jurisdictions and utilization of tax credits for taxes paid in
higher tax rate jurisdictions.
At December 31, 1997, six of the Company's subsidiaries had available, for
income tax purposes, foreign net operating loss carryforwards of approximately
$1.1 million of which $568,000 expire between 2000 and 2007. The remaining
$503,000 of loss carryforwards may be carried forward indefinitely to offset
future taxable income in the related tax jurisdictions. See Note 7 of Notes to
Consolidated Financial Statements for further discussion of the Company's income
tax provision.
Liquidity and Capital Resources
The Company is currently financing its operations and capital expenditures
through cash flow from operations. Historically, the Company financed its
capital expenditures, such as the new manufacturing facility constructed in
1995, through borrowings from financial institutions. At December 31, 1997, the
Company had working capital of approximately $112.1 million compared to $99.3
million at December 31, 1996.
Accounts receivable increased to $37.4 million at December 31, 1997 from
$33.4 million at December 31, 1996, as a result of higher sales levels.
Receivable days outstanding of 54 days at December 31, 1997 represent an
improvement over 57 days outstanding at December 31, 1996. Consolidated
inventory balances have increased to $15.5 million at December 31, 1997 from
$11.8 million at December 31, 1996. Inventory turns of 4.1 per year represent an
improvement over turns of 3.7 per year at December 31, 1996 and reflect
improvements in inventory management occurring at the Company's manufacturing
facility in Austin, Texas as well as at the centralized European warehouse in
Amsterdam.
Cash used for investing activities in 1997 includes $22.0 million for the
purchase of property and equipment, including construction in process,
capitalization of software development costs of $2.1 million, net short-term
investment purchases of $2.1 million and acquisition costs of $2.0 million for
the purchase of nuLogic during 1997. The Company expects to complete an office
building located next to its manufacturing facility in Austin, Texas in the
summer of 1998. The Company estimates the total cost for the new building,
including furniture, fixtures and equipment, will range from $35.0 million to
$40.0 million. The Company has incurred approximately $16.0 million in
construction costs as of December 31, 1997 with the remainder becoming payable
in the first half of 1998.The remaining portion of the construction costs and
costs of furniture, fixtures and equipment will be paid out of existing working
capital and future cash flows. Upon completion of the new building the Company
anticipates additional quarterly operating expenses of $1.5 million.
The Company currently expects to fund expenditures for capital requirements
as well as liquidity needs created by changes in working capital from a
combination of available cash and short-term investment balances, internally
generated funds, and financing arrangements with its current financial
institutions. The Company has a $16.5 million credit agreement with NationsBank
of Texas, N.A. which consists of (i) an $8.0 million revolving line of credit,
and (ii) an $8.5 million manufacturing facility loan. As of December 31, 1997,
the Company had no outstanding balance on the line of credit and a balance of
$6.0 million on the manufacturing facility loan. The revolving line of credit
expires on June 30, 1998. The Company's credit agreements contain certain
financial covenants and restrictions as to various matters, including the bank's
prior approval of significant mergers and acquisitions. Borrowings under the
line of credit are collateralized by substantially all of the Company's assets.
See Note 6 of Notes to Consolidated Financial Statements for additional
information regarding the Company's borrowing activity.
-22-
The Company believes that the cash flow from operations, if any, existing
cash balances and short-term investments and credit available under the
Company's existing credit facilities, will be sufficient to meet its cash
requirements for at least the next twelve months. Cash requirements for periods
beyond the next twelve months depend on the Company's profitability, its ability
to manage working capital requirements and its rate of growth.
Factors Affecting the Company's Business
Fluctuations in Quarterly Results. The Company's quarterly operating
results have fluctuated in the past and may fluctuate significantly in the
future due to a number of factors, including: changes in the mix of products
sold; the availability and pricing of components from third parties (especially
sole sources); the timing of orders; level of pricing of international sales;
fluctuations in foreign currency exchange rates like the recent devaluation in
certain Asian currencies; the difficulty in maintaining margins, including the
higher margins traditionally achieved in international sales; and changes in
pricing policies by the Company, its competitors or suppliers. Specifically, if
the Asian currencies continue to weaken against the U.S. dollar, and if the
local sales prices cannot be raised, the Company will experience a deterioration
of its Asian profit margin. As has occurred in the past and as may be expected
to occur in the future, new software products of the Company or new operating
systems of third parties on which the Company's products are based, often
contain bugs or errors that can result in reduced sales and/or cause the
Company's support costs to increase, either of which could have a material
adverse impact on the Company's operating results. Furthermore, the Company
serves a number of industries such as semiconductors, telecommunications,
aerospace, defense and automotive which are cyclical in nature. Downturns in
these industries could have a material adverse effect on the Company's operating
results.
In recent years, the Company's revenues have been characterized by
seasonality, with revenues typically being relatively constant in the first,
second and third quarters, growing in the fourth quarter and being relatively
flat or declining from the fourth quarter of the year to the first quarter of
the following year. If this historical pattern continues, revenues for the first
quarter of 1998 may not exceed revenues from the fourth quarter of 1997. The
Company's results of operations in the third quarter of 1998 may be adversely
affected by lower sales levels in Europe which typically occur during the summer
months. The Company believes the seasonality of its revenue results from the
international mix of its revenue and the variability of the budgeting and
purchasing cycles of its customers throughout each international region.
New Product Introductions and Market Acceptance. The market for the
Company's products is characterized by rapid technological change, evolving
industry standards, changes in customer needs and frequent new product
introductions, and is therefore highly dependent upon timely product innovation.
The Company's success is dependent in part on its ability to successfully
develop and introduce new and enhanced products on a timely basis to replace
declining revenues from older products, and on increasing penetration in
international markets. In the past, the Company has experienced significant
delays between the announcement and the commercial availability of new products.
Any significant delay in releasing new products could have a material adverse
effect on the ultimate success of a product and other related products and could
impede continued sales of predecessor products, any of which could have a
material adverse effect on the Company's operating results. There can be no
assurance that the Company will be able to introduce new products in accordance
with announced release dates, that new products will achieve market acceptance
or that any such acceptance will be sustained for any significant period.
Failure of new products to achieve or sustain market acceptance could have a
material adverse effect on the Company's operating results. Moreover, there can
be no assurance that the Company's international sales will continue at existing
levels or grow in accordance with the Company's efforts to increase foreign
market penetration.
Operation in Intensely Competitive Markets. The markets in which the
Company operates are characterized by intense competition from numerous
competitors, and the Company expects to face further competition from new market
entrants in the future. A key competitor is Hewlett-Packard Company ("HP"),
which has been the leading supplier of traditional instrumentation solutions for
decades. Although HP offers its own line of proprietary instrument controllers,
HP also offers hardware and software add-on products for third-party desktop
computers and workstations that provide solutions that directly compete with the
Company's virtual instrumentation products. HP is aggressively advertising and
marketing products that are competitive with the Company's products. Because of
HP's strong position in the instrumentation business, changes in its marketing
strategy or product offerings could have a material adverse effect on the
Company's operating results.
-23-
The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: new product
introductions by competitors; product pricing; quality and performance; success
in developing new products; adequate manufacturing capacity and supply of
components and materials; efficiency of manufacturing operations; effectiveness
of sales and marketing resources and strategies; strategic relationships with
other suppliers; timing of new product introductions by the Company; protection
of the Company's products by effective use of intellectual property laws;
general market and economic conditions; and government actions throughout the
world. There can be no assurance that the Company will be able to compete
successfully in the future.
Management Information Systems. During 1997, the Company completed its
implementation of new management information systems in Europe and Japan. As
with any new management information system, unforeseen post implementation
issues may arise that could affect management's ability to receive adequate,
accurate and timely financial information which in turn could inhibit effective
and timely decisions. Furthermore, it is possible that one or more of the
Company's three regional information systems could experience a complete or
partial shutdown. If this shutdown occurred near the end of a quarter it could
impact the Company's product shipments and revenues as product distribution is
heavily dependent on the integrated management information systems in each
region. Accordingly, operating results in that quarter would be adversely
impacted due to the shipments which would not occur until the following period.
The Company is working to achieve reliable regional management information
systems to control costs and improve the ability to deliver its products in
substantially all of its direct markets worldwide. No assurance can be given
that the Company's efforts will be successful. The failure to receive adequate,
accurate and timely financial information could inhibit management's ability to
make effective and timely decisions. For further information related to the
management information system see the discussion of the Impact of Year 2000
included in this document.
Risks Associated with International Operations and Foreign Economies.
International sales are subject to inherent risks, including fluctuations in
local economies, difficulties in staffing and managing foreign operations,
greater difficulty in accounts receivable collection, costs and risks of
localizing products for foreign countries, unexpected changes in regulatory
requirements, tariffs and other trade barriers, difficulties in the repatriation
of earnings and the burdens of complying with a wide variety of foreign laws.
The regulatory environment in some emerging countries is very restrictive as
their governments try to protect their local economy and value of their local
currency against the U.S. dollar. Sales made by the Company's direct sales
offices in Europe and Asia Pacific are denominated in local currencies, and
accordingly, the U.S. dollar equivalent of these sales is affected by changes in
the weighted average value of the U.S. dollar. This weighted average is
calculated as the percentage change in the value of the currency relative to the
dollar, multiplied by the proportion of international sales recorded in the
particular currency. Between 1996 and 1997 this weighted average value of the
U.S. dollar increased by 11%, causing an equivalent decrease in the U.S. dollar
value of the Company's foreign currency sales and expenses. If the weighted
average value during 1997 had been the same as that in 1996, the Company's
consolidated net sales for 1997 would have been $252.0 million representing an
increase of $51.0 million, which represents 26% consolidated sales growth. If
the weighted average value during 1997 had been the same as that in 1996, the
Company's consolidated operating expenses would have been $139.7 million,
representing an increase of $26.1 million, or 23%. If the strengthening of the
U.S. dollar continues in the future, it could have a materially adverse effect
on the operating results of the Company.
Dependence on Key Suppliers. The Company's manufacturing processes use
large volumes of high-quality components and subassemblies supplied by outside
sources. Several of these components are available through sole or limited
sources. Sole-source components purchased by the Company include
application-specific integration circuits ("ASICS") and other components. The
Company has in the past experienced delays and quality problems in connection
with sole-source components, and there can be no assurance that these problems
will not recur in the future. Accordingly, the failure to receive sole-source
components from suppliers could result in a material adverse effect on revenues
and results of operations.
Proprietary Rights and Intellectual Property Litigation. The Company's
success depends in part on its ability to obtain and maintain patents and other
proprietary rights relative to the technologies used in its principal products.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may have in the past infringed or violated certain of the Company's
intellectual property rights. As is typical in the industry, the Company from
time to time may be notified that it is infringing certain patent or
intellectual property rights of others. While no actions are currently pending
by or against the Company, there can be no assurance that litigation will not be
initiated in the future which may cause significant litigation expense,
liability and a diversion of management's attention which may have a material
adverse affect on results of operations.
-24-
Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, research and development and operational personnel
including Dr. Truchard, Mr. Kodosky and other members of senior management and
key technical personnel. The Company has no agreements providing for the
employment of any of its key employees for any fixed term and the Company's key
employees may voluntarily terminate their employment with the Company at any
time. The loss of the services of one or more of the Company's key employees in
the future could have a material adverse affect on operating results. The
Company also believes its future success will depend in large part upon its
ability to attract and retain additional highly skilled management, technical,
marketing, research and development, product development and operational
personnel with experience in managing large and rapidly changing companies as
well as training, motivating and supervising the employees. In addition, the
recruiting environment for engineering and other technical professionals is very
competitive. Competition for qualified software engineers is particularly
intense. The Company also recruits and employs foreign nationals to achieve its
hiring goals primarily for entry-level engineering and software positions. There
can be no guarantee that the Company will continue to be able to recruit foreign
nationals to the current degree if government requirements for temporary and
permanent residence becomes increasingly restrictive. These factors further
intensify competition for key personnel, and there can be no assurance that the
Company will be successful in retaining its existing key personnel or attracting
and retaining additional key personnel.
Risk of Product Liability Claims. The Company's products are designed in
part to provide information upon which the users may rely. The Company attempts
to assure the quality and accuracy of the processes contained in its products,
and to limit its product liability exposure through contractual limitations on
liability, including disclaimers in its "shrink wrap" license agreements with
end-users. If future products contain errors that produce incorrect results on
which users rely, customer acceptance of the Company's products could be
adversely affected. Further, the Company could be subject to liability claims
that could have a material adverse effect on the Company's operating results or
financial position. Although the Company maintains liability insurance, there
can be no assurance that such insurance or the contractual provisions used by
the Company to limit its liability will be sufficient.
Impact of Year 2000. Many computer systems experience problems handling
dates beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional.
Based on a recent assessment, the Company believes that its products are
Year 2000 compliant. While the Company is not currently aware of any Year 2000
compliance issues with its products, no assurances can be made that problems
will not arise such as customer problems with other software programs, operating
systems or hardware that disrupt their use of the Company's products. There can
be no assurances that such disruption would not negatively impact costs and
revenues in future years.
The Company has been assured by Oracle Corporation that all of the
Company's Oracle-based management information systems ,which include the
manufacturing, distribution, finance, and order entry systems, are Year 2000
compliant with the exception of the management information system in Japan. The
Company expects to upgrade the Japanese system during 1998. The Company plans to
begin internal year 2000 testing of the major management information systems
during 1998 as well as assess any additional year 2000 issues worldwide. The
Company is aware that the current customer marketing database and customer
support software are not Year 2000 compliant. However, the Company expects to
upgrade both systems prior to year 2000 as part of on-going system upgrades.
The Company presently believes that with modifications to existing software
and conversions to new software, the year 2000 issue can be mitigated. It is not
anticipated that there will be a significant increase in costs as much of the
year 2000 activities will be a continuation of the on-going process to improve
all the Company's systems. The Company plans to complete the year 2000 project
by mid 1999. However, if such modifications and conversions are not made, or are
not completed timely, the year 2000 issue could have a material impact on the
operations of the Company. Specific factors that might cause a material impact
include, but are not limited to, availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes,
failure by third parties to timely convert their systems, and similar
uncertainties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-20 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-25-
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than
120 days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the heading
"Election of Directors."
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the Company's Proxy Statement under
the heading "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-26-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. Financial Statements. See Index to Consolidated Financial
Statements at page F-1 of this Form 10-K and the Financial
Statements and Notes thereto which are included at pages
F-2 to F-20 of this Form 10-K.
2. Exhibits
Exhibit
Number Description
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen of Common Stock certificate of the Company.
4.2* Rights Agreement dated as of May 19, 1994, between the
Company and The First National Bank of Boston.
10.1* Form of Indemnification Agreement.
10.2* 1994 Incentive Plan.
10.3* 1994 Employee Stock Purchase Plan.
10.4* Loan Agreement dated as of July 6, 1993, between the
Company and NationsBank of Texas, N.A., as amended and
supplemented.
10.5** Loan Agreements dated as of June 27, 1996, between the
Company and NationsBank of Texas, N.A., as amended and
supplemented.
10.6*** Construction Contract for Phase 2 Building between
National Instruments Corporation and White Construction
Company.
11.1 Computation of Earnings Per Common Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Public Accountants.
24 Power of Attorney (see page 28).
* Incorporated by reference to the Company's
Registration Statement on Form S-1 (Reg. No. 33-88386)
declared effective March 13, 1995.
** Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
*** Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(b) Reports on Form 8-K.
Not Applicable.
(c) Exhibits
See Item 14(a)(2) above.
-27-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Registrant
NATIONAL INSTRUMENTS CORPORATION
March 25, 1998 BY: /s/ James J. Truchard
Dr. James J. Truchard
Chairman of the Board and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Dr. James J. Truchard and
Alexander M. Davern, jointly and severally, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that each of said
attorneys-in-fact, or his substitute or substitutes, any do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
- --------------------------------------------------------------------------------
Signature Capacity in Which Signed Date
- --------------------------------------------------------------------------------
/s/ James J. Truchard Chairman of the Board and
Dr. James J. Truchard President (Principal Executive March 19, 1998
Officer)
- --------------------------------------------------------------------------------
/s/ Alexander M. Davern Chief Financial March 19, 1998
Alexander M. Davern Officer and Treasurer (Principal
Financial and Accounting Officer)
- --------------------------------------------------------------------------------
/s/ Jeffrey L. Kodosky Director March 19, 1998
Jeffrey L. Kodosky
- --------------------------------------------------------------------------------
/s/ William C. Nowlin, Jr. Director March 19, 1998
William C. Nowlin, Jr.
- --------------------------------------------------------------------------------
/s/ L. Wayne Ashby Director March 19, 1998
L. Wayne Ashby
- --------------------------------------------------------------------------------
/s/ Donald M. Carlton Director March 23, 1998
Dr. Donald M. Carlton
- --------------------------------------------------------------------------------
/s/ Ben G. Streetman Director March 19, 1998
Ben G. Streetman
- --------------------------------------------------------------------------------
/s/ Gerald T. Olson Director March 19, 1998
Gerald T. Olson
- --------------------------------------------------------------------------------
-28-
NATIONAL INSTRUMENTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page No.
Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the Three Years Ended
December 31, 1997 F-4
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1997 F-5
Consolidated Statements of Stockholders' Equity for the Three
Years Ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedules:
For the Three Years Ended December 31, 1997
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of National Instruments Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and stockholders'
equity, present fairly, in all material respects, the financial position of
National Instruments Corporation and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Austin, Texas
January 26, 1998
F-2
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
--------------------
Assets 1997 1996
-------- --------
Current assets:
Cash and cash equivalents................... $ 31,943 $ 30,211
Short-term investments...................... 51,067 48,956
Accounts receivable, net.................... 37,411 33,442
Inventories................................. 15,505 11,778
Prepaid expenses and other current assets... 5,387 2,059
Deferred income tax, net.................... 7,900 5,139
-------- --------
Total current assets....................... 149,213 131,585
Property and equipment, net................... 46,805 32,184
Intangibles and other assets.................. 8,472 5,456
======== ========
Total assets............................... $204,490 $169,225
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt........... $ 851 $ 1,517
Accounts payable............................ 16,946 11,430
Accrued compensation........................ 8,219 6,367
Accrued expenses and other liabilities...... 2,455 2,993
Income taxes payable........................ 4,871 6,823
Other taxes payable......................... 3,729 3,161
-------- --------
Total current liabilities.................. 37,071 32,291
Long-term debt, net of current portion........ 5,151 9,175
Deferred income taxes, net.................... 514 806
-------- --------
Total liabilities.......................... 42,736 42,272
-------- --------
Commitments and contingencies --- ---
Common stock: par value $.01; 60,000,000
shares authorized; 32,656,473 and
32,463,361 shares issued and outstanding,
respectively................................ 326 325
Additional paid-in capital.................... 47,160 44,287
Retained earnings............................. 116,215 82,590
Other......................................... (1,947) (249)
-------- --------
Total stockholders' equity.................. 161,754 126,953
-------- --------
Total liabilities and stockholders' equity.. $204,490 $169,225
The accompanying notes are an integral part of these financial statements.
F-3
Consolidated Statements of Income
(In thousands, except per share data)
For the Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Net sales....................... $ 240,879 $ 200,715 $ 164,819
Cost of sales................... 55,096 49,755 39,525
---------- ---------- ----------
Gross profit.................. 185,783 150,960 125,294
---------- ---------- ----------
Operating expense:
Sales and marketing........... 87,096 72,067 63,733
Research and development...... 30,296 24,387 19,991
General and administrative.... 18,508 17,129 15,071
---------- ---------- ----------
Total operating expenses...... 135,900 113,583 98,795
---------- ---------- ----------
Operating income.............. 49,883 37,377 26,499
Other income (expense):
Interest income............... 3,455 2,405 1,635
Interest expense.............. (502) (844) (875)
Net foreign exchange (loss) gain (2,649) (899) 150
---------- ---------- ----------
Income before income taxes.... 50,187 38,039 27,409
Provision for income taxes...... 16,562 12,553 9,986
========== ========== ==========
Net income.................... $ 33,625 $ 25,486 $ 17,423
========== ========== ==========
Basic earnings per share........ $ 1.03 $ 0.79 $ 0.56
========== ========== ==========
Weighted average shares 32,563 32,359 31,158
outstanding-basic............. ========== ========== ==========
Diluted earnings per share $ 1.00 $ 0.77 $ 0.55
========== ========== ==========
Weighted average shares 33,656 32,943 31,424
outstanding-diluted........... ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Cash flow from operating activities:
Net income........................... $ 33,625 $ 25,486 $ 17,423
Adjustments to reconcile net income to
cash provided by operating activities:
Charges to income not requiring cash
outlays:
Depreciation and amortization.... 8,715 9,210 7,006
Benefit for deferred income taxes (3,072) (779) (3,547)
Purchase of in-process research &
development...................... 1,400 1,000 ---
Changes in operating assets and
liabilities:
Increase in accounts receivable.. (4,059) (4,715) (5,204)
(Increase) decrease in inventory. (4,335) 3,275 (5,351)
Increase in prepaid expenses and
other assets.................... (5,753) (402) (1,733)
Increase in accounts payable..... 4,741 2,582 1,305
Increase in accrued expenses and
other liabilities............... 1,199 4,620 5,020
---------- ---------- ----------
Net cash provided by operating activities 32,461 40,277 14,919
---------- ---------- ----------
Cash flow from investing activities:
Purchases of short-term investments. (48,408) (68,790) (70,202)
Sales of short-term investments..... 46,298 57,619 32,506
Capital expenditures................ (21,998) (6,811) (16,162)
Additions to capitalized software... (2,102) (1,568) (1,103)
Payments for acquisitions, net of
cash received...................... (2,000) (1,200) ---
---------- ---------- ----------
Net cash used in investing activities (28,210) (20,750) (54,961)
---------- ---------- ----------
Cash flow from financing activities:
Borrowings from long-term debt...... --- --- 5,161
Repayments of long-term debt........ (4,640) (3,017) (1,704)
Net proceeds from issuance of common
stock under initial public offering --- --- 39,567
Net proceeds from issuances of common
stock under employee plans......... 2,874 1,891 1,310
---------- ---------- ----------
Net cash (used in) provided by financing
activities.......................... (1,766) (1,126) 44,334
---------- ---------- ----------
Effect of translation rate changes on cash (753) (206) 198
---------- ---------- ----------
Net increase in cash and cash equivalents 1,732 18,195 4,490
Cash and cash equivalents at beginning
of period........................... 30,211 12,016 7,526
========== ========== ==========
Cash and cash equivalents at end of period $ 31,943 $ 30,211 $ 12,016
========== ========== ==========
Cash paid for interest and income taxes
Interest............................ $ 451 $ 904 $ 1,084
========== ========== ==========
Income taxes........................ $ 21,490 $ 11,135 $ 10,173
The accompanying notes are an integral part of these financial statements.
F-5
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Other Total
---------- ------ ---------- -------- -------- ---------
Balance at
December 31,
1994............. 27,494,784 $ 275 $ 340 $ 39,681 $ 178 $ 40,474
Net income..... --- --- --- 17,423 --- 17,423
Issuance of
common stock
under initial
public offering 4,515,000 45 39,522 --- --- 39,567
Issuance of
common stock
under employee
plans.......... 198,060 2 1,308 --- --- 1,310
Foreign currency
translation
adjustment..... --- --- --- --- (107) (107)
Unrealized gain
on short-term
investments.... --- --- --- --- 69 69
---------- ------ ---------- -------- -------- ---------
Balance at
December 31,
1995............. 32,207,844 322 41,170 57,104 140 98,736
Net income..... --- --- --- 25,486 --- 25,486
Issuance of
common stock in
connection with
acquisition.... 91,374 1 1,228 --- --- 1,229
Issuance of
common stock
under employee
plans.......... 164,143 2 1,889 --- --- 1,891
Foreign currency
translation
adjustment..... --- --- --- --- (410) (410)
Unrealized gain
on short-term
investments.... --- --- --- --- 21 21
---------- ------ ---------- -------- -------- ---------
Balance at
December 31,
1996............. 32,463,361 325 44,287 82,590 (249) 126,953
Net income..... --- --- --- 33,625 --- 33,625
Issuance of
common stock
under employee
plans.......... 193,112 1 2,873 --- --- 2,874
Foreign currency
translation
adjustment..... --- --- --- --- (1,713) (1,713)
Unrealized gain
on short-term
investments.... --- --- --- --- 15 15
---------- ------ ---------- -------- -------- ---------
Balance at
December 31,
1997............. 32,656,473 $ 326 $ 47,160 $116,215 $(1,947) $161,754
========== ====== ========== ======== ======== =========
The accompanying notes are an integral part of these financial statements.
F-6
Notes to Consolidated Financial Statements
Note 1: Operations and summary of significant accounting policies
National Instruments Corporation (the "Company") was incorporated on May
14, 1976 under the laws of the State of Texas. On June 10, 1994, the Company was
reincorporated in Delaware. On March 13, 1995, the Company completed an initial
public offering of shares of its common stock. The offering and the exercise of
the over-allotment option by the underwriters generated net cash proceeds of
$39.6 million.
The Company engages in the design, development, manufacture and marketing
of instrumentation software and specialty interface cards for general
commercial, industrial and scientific applications. The Company offers hundreds
of products used to create virtual instrumentation systems. The Company has
identified two major markets for its products: test and measurement and
industrial automation. The Company's products may be used in either environment,
and consequently, specific application of the Company's products is determined
by the customer and often is not known to the Company at the time of sale. The
Company approaches both markets with essentially the same products which are
used in a variety of applications from research and development to production
testing and industrial control. The following industries and applications are
served worldwide by the Company: advanced research, automotive, commercial
aerospace, computers and electronics, continuous process manufacturing,
education, government/defense, medical research/pharmaceutical, power/energy,
semiconductors, telecommunications and others.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of estimates
Judgments and estimates by management are required in the preparation of
financial statements to conform with generally accepted accounting principles.
The estimates and underlying assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingencies at the balance sheet date and
the reported revenues and expenses for the period. Actual results could differ
from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments with
maturities of three months or less at the date of acquisition.
Short-term investments
Short-term investments consist of state and municipal securities with
readily determinable fair market values and original maturities in excess of
three months. The Company's investments are classified as available-for-sale and
accordingly are reported at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. Unrealized losses are
charged against income when a decline in fair value is determined to be other
than temporary. The specific identification method is used to determine the cost
of securities sold.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximate the first in, first out (FIFO) method.
Cost includes the acquisition cost of purchased components, parts and
subassemblies, in-bound freight costs, labor and overhead. Market, with respect
to raw materials, is replacement cost and, with respect to work-in-process and
finished goods, is net realizable value.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from twenty to thirty years for buildings and three to five years for
equipment. Leasehold improvements are depreciated over the shorter of the life
of the lease or the asset.
F-7
Intangible assets
The Company has capitalized costs related to the development and
acquisition of certain software products. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization is
computed on an individual product basis for those products available for market
and has been recognized based on the product's estimated economic life,
generally three years. Intangible assets are periodically assessed for
impairment of value and any loss is recognized upon impairment.
Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of foreign currency forward
and option contracts, cash and cash equivalents, short-term investments and
trade accounts receivable. In management's opinion, no significant concentration
of credit risk exists for the Company.
The Company's counterparties in its foreign currency forward and option
contracts are major financial institutions. The Company does not anticipate
nonperformance by these counterparties. The Company maintains cash and cash
equivalents with various financial institutions located in many countries
worldwide. Company policy is to limit exposure in foreign countries by
transferring cash to the U.S. The Company's short-term investments are
diversified among and limited to high-quality securities with high credit
ratings. Concentration of credit risk with respect to trade accounts receivable
is limited due to the large number of customers and their dispersion across many
countries and industries worldwide. The amount of sales and trade accounts
receivable to any individual customer was not significant for the periods
presented.
Revenue recognition
Sales revenue is recognized on the date the product is shipped to the
customer. Provision is made for estimated sales returns. Revenue related to the
sale of extended service contracts is deferred and amortized on a straight-line
basis over the service period.
Accounts receivable are net of allowances for doubtful accounts of $4.0
million and $2.4 million at December 31, 1997 and 1996, respectively.
Warranty expense
The Company offers a one-year limited warranty on most hardware products
and a 90-day warranty on software products which is included in the sales price
of many of its products. Provision is made for estimated future warranty costs
at the time of sale.
Advertising expense
The Company expenses its costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997, 1996 and 1995 is $27.1 million,
$22.2 million and $16.5 million, respectively.
Foreign currency translation
The functional currency for the Company's international operations is the
applicable local currency. The assets and liabilities of these operations are
translated at the rate of exchange in effect on the balance sheet date; sales
and expenses are translated at average rates. The resultant gains or losses from
translation are included in a separate component of stockholders' equity. Gains
and losses resulting from remeasuring monetary asset and liability accounts that
are denominated in a currency other than a subsidiary's functional currency are
included in determining net income.
F-8
Foreign currency hedging instruments
The Company enters into foreign currency forward contracts to hedge its
exposure on material foreign currency receivables. The Company does not hold or
issue financial instruments for trading purposes. These financial instruments
are carried at market value, which is measured on the basis of spot rates on the
balance sheet date. Realized and unrealized gains and losses on the forward
contracts are netted against the related foreign currency loss or gain and
included in other income for the period.
In December 1997, the Company expanded its foreign currency hedging
program. The Company's 1998 hedging program will also include the use of foreign
currency purchased option contracts to hedge anticipated transactions for
periods not exceeding twelve months. Realized and unrealized gains and premiums
of foreign currency purchased option contracts that are designated and effective
as hedges of anticipated transactions are deferred and recognized in income in
the same period as the hedged transaction. The risk of loss associated with
purchased options is limited to premium amounts paid for the contracts, which
could be significant.
Income taxes
The provision for income taxes is based on pretax financial accounting
income. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts which are more likely
than not to be realized.
Earnings per share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." The new standard, which is effective for
financial statements issued for periods ending after December 15, 1997,
establishes standards for computing and presenting earnings per share (EPS) and
requires restatement of all prior-period EPS data. The Company adopted this
standard in the fourth quarter of 1997. The implementation of the standard has
resulted in the presentation of a basic EPS calculation in the consolidated
financial statements as well as a diluted EPS calculation. Basic EPS is computed
by dividing net income by the weighted average number of common shares
outstanding during each period. Diluted EPS is computed by dividing net income
by the weighted average number of common shares and common share equivalents
outstanding (if dilutive) during each period. Common share equivalents include
stock options. The number of common share equivalents outstanding relating to
stock options is computed using the treasury stock method.
The reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 1997, 1996 and 1995, respectively
is as follows (in thousands):
December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Weighted average shares outstanding-basic $ 32,563 $ 32,359 $ 31,158
Plus: Common share equivalents
Stock options.......................... 1,093 584 266
========== ========== ==========
Weighted average shares outstanding-diluted $ 33,656 $ 32,943 $ 31,424
========== ========== ==========
Stock-based compensation plans
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed by SFAS No. 123, the
Company continues to apply the provisions of APB Opinion No. 25 "Accounting for
Stock issued to Employees" and related interpretations in accounting for its
plans. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
F-9
Future accounting requirements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which the Company will be required to adopt for fiscal year 1998. This
statement will require the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including, as
applicable, foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity services.
Upon adoption, the Company will also be required to reclassify financial
statements for earlier periods provided for comparative purposes. The Company
currently expects that the effect of adoption of SFAS No. 130 may be primarily
from foreign currency translation adjustments and the unrealized gains and
losses on certain investments in debt and equity securities and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which the Company will be required to
adopt for fiscal year 1998. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Under SFAS
No. 131, operating segments are to be determined consistent with the way that
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The adoption of this new
accounting standard is not expected to have a material impact on the
consolidated balance sheet or statement of income.
Note 2: Short-term investments
Short-term investments at December 31, 1997 and 1996, consisting of state
and municipal securities, were acquired at an aggregate cost of $51.1 million
and $48.9 million, respectively. The contractual maturities of these securities,
which are classified as available-for-sale and carried at fair value, are as
follows (in thousands):
December 31,
--------------------
1997 1996
-------- --------
90 days to one year $ 38,724 $ 26,218
One year through two years 12,343 22,738
======== ========
$ 51,067 $ 48,956
======== ========
Note 3: Inventories
Inventories consist of the following (in thousands):
December 31,
--------------------
1997 1996
-------- --------
Raw materials $ 6,985 $ 5,324
Work-in-process 1,315 864
Finished goods 7,205 5,590
======== ========
$ 15,505 $ 11,778
======== ========
F-10
Note 4: Property and equipment
Property and equipment consist of the following (in thousands):
December 31,
---------------------
1997 1996
-------- ---------
Land $ 4,006 $ 4,006
Buildings 16,873 16,077
Furniture and equipment 40,839 36,468
-------- ---------
61,718 56,551
Accumulated depreciation (30,922) (25,459)
Construction in process 16,009 1,092
-------- ---------
$ 46,805 $ 32,184
======== =========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995,
is $7.1 million, $7.1 million and $5.8 million, respectively. Construction in
process represents an office building the Company expects to complete in the
summer of 1998. See Note 13 for future commitments.
Note 5: Intangibles and other assets
Intangibles and other assets at December 31, 1997 and 1996 include
capitalized software development costs of $3.4 million and $2.7 million,
respectively, which are net of accumulated amortization of $7.1 million and $5.6
million, respectively. Amortization of software development costs totaled $1.5
million, $2.1 million and $1.2 million during the years ended December 31, 1997,
1996 and 1995, respectively.
Note 6: Debt
Debt consists of the following (in thousands): December 31,
------------------
1997 1996
-------- --------
Short-term debt: Revolving line, lender's prime
(8.5% at December 31, 1997) less 1/2%,
$8,000,000 commitment, June 30, 1998......... $ --- $ ---
======== ========
Long-term debt: Equipment loan, 6.5%, due in
equal quarterly payments of principal and
interest through June 30, 1997............... $ --- $ 488
Millennium loan, 6.45%, quarterly payments of
principal and interest beginning September 30,
1994, 14 year amortization, seven-year term.. --- 3,324
Manufacturing facility loan, LIBOR (6.7% at
December 31, 1997), $8,480,000 commitment,
half the principal is payable, together with
interest, in equal quarterly installments
over a five-year term, beginning September
1995, remainder due at maturity.............. 6,002 6,847
Other.......................................... --- 33
-------- --------
Total debt.......................................... 6,002 10,692
Less current portion.............................. 851 1,517
======== ========
Long-term portion................................... $ 5,151 $ 9,175
======== ========
The terms of the Company's debt agreements include various covenants which
require, among other things, a minimum tangible net worth of $65.0 million plus
one-half of the Company's net income for completed fiscal years after 1995.
First security interests vary among the notes, but the loans are
cross-collateralized by essentially all of the Company's assets.
Long-term debt maturing in years 1998 through 2000 is $848,000 per year and
$3.5 million in 2001.
F-11
Note 7: Income taxes
The components of income before the provision for income taxes are as
follows (in thousands):
December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Domestic..................... $42,400 $35,108 $22,908
Foreign...................... 7,787 2,931 4,501
-------- -------- --------
$50,187 $38,039 $27,409
======== ======== ========
The provision for income taxes charged to operations is as follows (in
thousands):
Years Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Current tax expense
U.S. federal............... $15,140 $10,234 $11,805
State...................... 1,468 985 703
Foreign.................... 3,026 2,113 1,025
-------- -------- --------
Total current................ 19,634 13,332 13,533
-------- -------- --------
Deferred tax expense (benefit)
U.S. federal............... (2,719) (201) (3,914)
State...................... (227) (180) (239)
Foreign.................... (126) (398) 606
-------- -------- --------
Total deferred............... (3,072) (779) (3,547)
======== ======== ========
Total provision.............. $16,562 $12,553 $ 9,986
======== ======== ========
Deferred tax liabilities (assets) at December 31, 1997 and 1996 are as
follows (in thousands):
December 31,
--------------------
1997 1996
-------- --------
Capitalized software......................... $ 735 $ 708
Depreciation................................. --- 59
-------- --------
Gross deferred tax liabilities............. 735 767
-------- --------
Depreciation and amortization................ (842) ---
Operating loss carryforwards................. (272) (249)
Vacation and other accruals.................. (1,385) (1,242)
Inventory valuation and warranty provisions.. (2,225) (1,666)
Doubtful accounts and sales provisions....... (1,362) (1,320)
Unrealized exchange loss..................... (649) (111)
Intercompany profit.......................... (762) (510)
Undistributed earnings of foreign subsidiaries (364) (28)
Other........................................ (615) (290)
-------- --------
Gross deferred tax assets.................. (8,476) (5,416)
-------- --------
Valuation allowance.......................... 269 245
======== ========
Net deferred tax asset....................... $(7,472) $(4,404)
======== ========
The increase in the deferred tax assets valuation allowance in 1997 of
$24,000 is attributable to the increase in operating losses in foreign
jurisdictions the benefits of which are not assured of realization at December
31, 1997.
F-12
A reconciliation of income taxes at the U.S. federal statutory income tax
rate to the effective tax rate follows:
Years Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
U.S. federal statutory tax rate............... 35 % 35 % 35 %
Foreign sales corporation benefit............. (1) (2) (2)
Loss from unconsolidated foreign subsidiaries --- 1 (3)
Foreign income taxes in excess of U.S.
federal statutory rate........................ --- --- 3
Foreign tax credits utilized.................. (1) (2) ---
Tax exempt interest........................... (2) (2) (1)
State income taxes, net of federal tax benefit 2 2 2
Other......................................... --- 1 2
------ ------ ------
Effective tax rate.......................... 33 % 33 % 36 %
====== ====== ======
As of December 31, 1997, six of the Company's subsidiaries have available,
for income tax purposes, foreign net operating loss carryforwards of
approximately $1.1 million, of which $568,000 expire during the years 2000-2007
and $503,000 of which may be carried forward indefinitely.
A deferred income tax benefit of $336,000 was provided in 1997 for the
estimated foreign tax credits that will be utilized upon the anticipated future
repatriation of approximately $1.9 million of foreign undistributed earnings in
the form of dividends. The Company has not provided for U.S. federal income and
foreign withholding taxes on approximately $1.1 million of non-U.S.
subsidiaries' undistributed earnings as of December 31, 1997, because such
earnings are intended to be reinvested indefinitely. These earnings would become
subject to U.S. tax and foreign withholding tax, if they are actually or deemed
to be remitted to the parent company as dividends or if the Company should sell
its stock in these subsidiaries. If these earnings were distributed, foreign tax
credits should become available under current law to reduce or eliminate the
resulting U.S. income tax and foreign withholding tax liabilities.
Note 8: Acquisitions
On September 30, 1997, the Company acquired the products, technology and
net assets of nuLogic, Inc. for a purchase price of approximately $2.0 million
in cash. The acquisition was accounted for as a purchase. The results of
nuLogic's operations have been combined with those of the Company since the date
of acquisition. The Company recorded a $1.4 million pre-tax charge against
earnings during the third quarter of 1997 for the write-off of in-process
nuLogic research and development technology that had not reached the working
model stage. If this charge had not been taken, net income for the year ended
December 31, 1997 would have been $34.6 million or $1.03 per share-diluted. The
Company also recorded $612,000 of capitalized software development costs related
to the acquisition, which are included in intangibles and other assets and are
being amortized on a straight line basis over three years.
On April 1, 1996, the Company acquired all of the issued and outstanding
shares of common stock of Georgetown Systems, Inc. ("GSI") for an aggregate
purchase price of approximately $2.0 million, paid with 91,374 unregistered
shares of the Company's common stock and $764,000 in cash. The acquisition was
accounted for as a purchase. The results of GSI's operations have been combined
with those of the Company since the date of acquisition. The Company recorded a
$1.0 million charge against earnings during the second quarter of 1996 for the
write-off of in-process research and development technology purchased from GSI
that had not reached the working model stage. The Company also recorded $920,000
of capitalized software development costs related to the acquisition, which are
included in intangibles and other assets and are being amortized on a straight
line basis over three years.
During the third quarter of 1996, the Company purchased imaging acquisition
software technology. The purchased software was amortized over the third quarter
of 1996, resulting in an expense of $500,000. This amortization period was
utilized due to the nature of this rapidly developing technology and the
revisions to be made to the software in the near future. Excluding the effect of
the charge for the GSI acquisition and the amortization of intangible assets
related to the imaging acquisition software technology purchase, net income for
the year ended December 31, 1996 would have been $26.5 million or $0.80 per
share-diluted.
F-13
Note 9: Stockholders' equity
Common stock
The Company's reincorporation into Delaware on June 10, 1994 resulted in a
change in par value from no par to $.01 par value per share. All outstanding
stock was exchanged on a one-for-one basis as of the date of reincorporation.
The reincorporation increased the Company's authorized stock to 60,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock. Additionally,
the Company effected a six-for-one stock split on January 11, 1995, the date of
filing the Company's initial registration statement with the Securities and
Exchange Commission.
On October 15, 1997, the Company declared a stock split effected in the
form of a dividend of one share of common stock for each two shares outstanding.
The dividend was paid on November 12, 1997 to holders of record as of the close
of business on October 28, 1997.
All share information included in the accompanying consolidated financial
statements and notes has been retroactively adjusted to reflect the exchange and
stock splits.
Stock-based compensation plans
At December 31, 1997, the Company has two active stock-based compensation
plans and one inactive plan. No compensation cost has been recognized in the
Company's financial statements for the fixed stock option plans and the stock
purchase plan. If compensation cost for the Company's two active stock-based
compensation plans were determined based on the fair value at the grant date for
awards under those plans consistent with the method established by SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below (in thousands, except per share data).
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Net income As reported $ 33,625 $ 25,486 $ 17,423
Pro-forma 29,829 23,458 16,317
Basic earnings per share As reported $ 1.03 $ 0.79 $ 0.56
Pro-forma 0.92 0.72 0.52
Diluted earnings per share As reported $ 1.00 $ 0.77 $ 0.55
Pro-forma 0.89 0.71 0.52
Stock option plans
The Company had a 1983 Incentive Stock Option Plan under which options were
granted to certain key employees pursuant to award agreements executed in 1983
(exercisable at $.05 per share), 1985 (exercisable at $.11 per share), and 1989
(exercisable at $1.55 per share). This plan terminated on November 30, 1993.
Under the plan, options were granted at a price not less than fair market value
on the date of grant. All options must be exercised within ten years of the date
of grant.
The stockholders of the Company approved the 1994 Incentive Stock Option
Plan on May 9, 1994. At the time of approval, 4,050,000 shares of the Company's
Common Stock were reserved for issuance under this plan. In 1997, an additional
3,150,000 shares of the Company's common stock were reserved for issuance under
this plan. The 1994 Plan, administered by the Compensation Committee of the
Board of Directors, provides for granting of incentive awards in the form of
stock options to directors, executive officers and employees of the Company and
its subsidiaries. Awards under the plan must be granted within ten years of the
effective date of the 1994 Plan. Options granted may be either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code or
nonqualified options. The right to purchase shares vests over a five to ten year
period, beginning on the date of grant. Stock options must be exercised within
ten years from date of grant. Stock options are issued at market price at the
grant date. Shares available for grant at December 31, 1997 were 4,180,124.
F-14
Transactions under all plans are summarized as follows:
Number of shares Weighted average
under option exercise price
---------------- ----------------
Outstanding at December 31, 1994.... 144,180 $ 1.55
Exercised......................... (49,362) 1.79
Canceled.......................... (43,473) 9.79
Granted........................... 977,100 9.85
---------------- ----------------
Outstanding at December 31, 1995.... 1,028,445 9.07
Exercised......................... (13,763) 10.14
Canceled.......................... (88,976) 11.57
Granted........................... 1,081,725 13.58
---------------- ----------------
Outstanding at December 31, 1996.... 2,007,431 11.39
Exercised......................... (62,754) 11.52
Canceled.......................... (151,898) 15.47
Granted........................... 1,245,402 22.10
---------------- ----------------
Outstanding at December 31, 1997.... 3,038,181 $ 15.57
================ ================
Options exercisable at December 31:
1995.............................. 140,003 $ 7.22
1996.............................. 410,841 9.98
1997.............................. 801,970 12.07
Weighted average, grant date fair value Weighted average
of options granted during: fair value
1995.............................. 977,100 $ 4.58
1996.............................. 1,081,725 6.25
1997.............................. 1,245,402 10.15
December 31, 1997
- -------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ----------------------------------------------------- ------------------------
Weighted
Weighted average Weighted
Number of average remaining Number of average
Exercise options exercise contractual options exercise
price outstanding price life (yrs) exercisable price
- -------------- ----------- -------- ----------- ----------- --------
$ 1.55 - 1.55 96,300 $ 1.55 2 60,300 $ 1.55
9.67 - 13.17 793,736 9.85 7 359,491 9.83
13.33 - 21.08 987,442 13.77 8 275,696 13.58
21.67 - 21.67 1,042,103 21.67 9 105,999 21.67
22.25 - 32.00 118,600 26.64 10 484 26.55
- -------------- ----------- -------- ----------- ----------- --------
$ 1.55 - 32.00 3,038,181 15.57 8 801,970 12.07
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 1997, 1996 and 1995: dividend expense yield
of 0%; an expected life of 7.2 years; expected volatility of 30.6%; and a
risk-free interest rate of 6.3%.
F-15
Employee stock purchase plan
The Company's stock purchase plan became effective March 13, 1995 upon the
first date of registration of the Company's Common Stock. The plan permits
substantially all employees to acquire the Company's Common Stock at a purchase
price of 85% of the lower of the market price at the beginning or the end of the
participation period. The semi-annual periods begin on October 1 and April 1 of
each year. Employees may designate up to 15% of their compensation for the
purchase of Common Stock. Common Stock reserved for future employee purchases
aggregated 2,001,133 shares at December 31, 1997. Shares issued under this plan
were 130,358 in 1997. The fair value of the employees' purchase rights was
estimated using the Black-Scholes model with the following assumptions:
1997 1996 1995
-------- -------- --------
Dividend expense yield........ 0% 0% 0%
Expected life................. 6 months 6 months 6 months
Expected volatility........... 50% 60% 60%
Risk-free interest rate....... 5.22% 5.22% 5.22%
Weighted average, grant date,
fair value of purchase rights
granted under the Employee Stock Number of Weighted average
Purchase Plan: shares fair value
--------- ----------------
1995........................ 226,808 $ 3.37
1996........................ 140,403 4.77
1997........................ 117,373 7.68
Stockholders' rights plan
The Board of Directors and stockholders approved and adopted the Rights
Agreement prior to the Company's initial public offering (the offering). On
March 13, 1995, the effective date of the offering, the Board of Directors
declared a dividend distribution of one common share purchase right for each
outstanding share of Common Stock. The rights become exercisable under certain
conditions involving acquisition of the Company's Common Stock. Under certain
other conditions where the Company is consolidated or merged, each holder of a
right shall have the right to receive, upon exercise of the right, shares of
Common Stock of the Company, or acquiring company, having a value of twice the
exercise price of the right. The rights expire on March 13, 2005, and may be
redeemed in whole by the Company for $.01 per right. The rights are excluded
from earnings per share computations because they qualify as contingent shares
and therefore are excluded as long as the conditions that require issuance of
the shares are not imminent.
Note 10: Employee retirement plan
The Company has a defined contribution retirement plan pursuant to Section
401(k) of the Internal Revenue Code. Substantially all domestic employees with
at least one year of continuous service are eligible to participate and may
contribute up to 15% of their compensation. The Board of Directors has elected
to make matching contributions equal to 50% of employee contributions, which may
be applied to a maximum of 6% of each participant's compensation. Company
contributions vest immediately. Company contributions charged to expense were
$799,000, $686,000 and $606,000 in 1997, 1996 and 1995, respectively.
F-16
Note 11: Financial instruments
Fair value of financial instruments
The estimated fair value amounts disclosed below have been determined by
the Company using available market information and valuation methodologies
described below. However, considerable judgment is required in interpreting
market data to develop these estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the company
could realize in a current market exchange. The use of different market
assumptions could have a significant effect on the estimates. For certain
financial instruments of the Company, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, the carrying
amount approximates fair value due to the short-term maturity of these
instruments. The estimated fair values of the other assets (liabilities) of the
Company's remaining financial instruments at December 31, 1997 and 1996 are as
follows (in thousands):
December 31,
-------------------------------------------
1997 1996
-------------------- --------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Short-term investments.... $51,067 $ 51,067 $48,956 $ 48,956
Other assets:
Forward contracts....... 662 662 134 134
Options................. 740 816 --- ---
Long-term debt............ (5,151) (4,379) (9,175) (8,962)
The fair values of short-term investments were estimated based upon quotes
from brokers. Foreign exchange forward contracts fair values are estimates using
quoted exchange rates at the applicable balance sheet date. Foreign exchange
option contracts fair values were estimated based upon quotes from brokers as of
the applicable balance sheet date. The fair value of long-term debt was
estimated by discounting the future cash flows using rates currently available
for debt of similar terms and maturity.
Foreign currency hedging
The Company enters into foreign currency forward exchange contracts to
hedge its exposure on material foreign currency receivables. The following table
summarizes the activity of the Company's foreign currency hedging program for
the year ended December 31, 1997. The amounts exchanged between the Company and
the financial institution are derived from the underlying foreign currency
amounts and the exchange rates. Accordingly, these amounts are not a measure of
the exposure of the Company through its use of forward contracts. The activity
for the year ended December 31, 1997 is as follows (in local currency in
thousands):
Exchange
Rate
(per U.S.
Balance at Balance at Dollar) at
December 31, Contracts Transactions/ December 31, December 31,
1996 Purchased Maturities 1997 1997
------------ --------- ------------- ------------ ------------
Austrian Schilling 3,400 13,600 13,600 3,400 12.63
British Pound..... 850 1,610 2,460 --- .61
Danish Kroner..... 2,000 5,800 6,700 1,100 6.85
Dutch Guilder..... 650 1,650 2,300 --- 2.03
French Franc...... 9,500 56,785 51,360 14,925 6.01
German Deutsche Mark 1,300 1,300 2,600 --- 1.80
Italian Lire...... 1,950,000 8,975,000 8,750,000 2,175,000 1,768.00
Japanese Yen...... 475,000 3,330,000 2,950,000 855,000 130.57
Norwegian Kroner.. 3,500 14,800 14,600 3,700 7.36
Singapore Dollar.. 400 1,500 1,550 350 1.68
Spanish Peseta.... 69,500 198,500 268,000 --- 152.33
Swedish Krona..... 3,100 8,400 11,500 --- 7.94
Swiss Franc....... --- 2,650 1,950 700 1.46
The outstanding contracts mature on January 23, 1998.
F-17
For those currencies in which the Company has a material foreign currency
exposure, the following represents the hedged and unhedged portions of the
Company's foreign currency receivables at December 31, 1997 (expressed in
thousands of U.S. dollars at the December 31, 1997 exchange rates):
Amount Unhedged
Receivable Hedged Exposure
---------- -------- --------
Austrian Schilling............ $ 346 $ 274 $ 72
French Franc.................. 2,488 2,488 ---
Hong Kong Dollar.............. 562 --- 562
Italian Lire.................. 1,203 1,203 ---
Japanese Yen.................. 6,853 6,853 ---
Korean Won.................... 506 --- 506
Norwegian Kroner.............. 643 520 123
Spanish Peseta................ 415 --- 415
Swiss Franc................... 438 438 ---
Taiwanese Dollar.............. 649 --- 649
---------- -------- --------
$ 14,103 $11,776 $ 2,327
========== ======== ========
In addition to this unhedged exposure, the Company has unhedged receivables
aggregating $1.0 million which is comprised of individual balances less than
$300,000 (U.S. dollars) at December 31, 1997.
Foreign currency forward contracts reduced the Company's net foreign
exchange loss for December 31, 1997 and 1996 by $2.0 million and $674,000,
respectively, and reduced the net foreign exchange gain by $405,000 for the year
ended December 31, 1995.
In December 1997, the Company expanded its foreign currency hedging
program. In addition to utilizing forward contracts to hedge the Company's
foreign currency receivables, the Company has entered into purchased foreign
currency option contracts to hedge a percentage of planned net foreign currency
cash flows. The maturities on these instruments are 12 months or less. At
December 31, 1997, the amount of premiums deferred was $740,000. The notional
amount of the options outstanding at December 31, 1997 is as follows (in local
currency in thousands):
Exchange Rate
Local Currency (per U.S. Dollar)
-------------- -----------------
French Franc............. 41,700 6.01
German Deutsche Mark..... 16,875 1.80
Italian Lire............. 9,520,000 1,768.00
Japanese Yen............. 1,641,000 130.57
British Pound............ 5,165 0.61
F-18
Note 12: Geographic area information
The Company operates in one segment across geographically diverse markets.
Net sales, operating income and identifiable assets, classified by the major
geographic areas in which the Company operates, are as follows (in thousands):
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net sales
North America:
Unaffiliated customer sales......... $141,180 $114,382 $ 93,001
Geographic transfers................ 29,128 26,388 36,659
--------- --------- ---------
170,308 140,770 129,660
--------- --------- ---------
Europe:
Unaffiliated customer sales......... 66,318 58,108 51,145
--------- --------- ---------
Asia Pacific:
Unaffiliated customer sales......... 33,381 28,225 20,673
--------- --------- ---------
Eliminations.......................... (29,128) (26,388) (36,659)
--------- --------- ---------
$240,879 $200,715 $164,819
========= ========= =========
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Operating income:
North America................... $ 47,452 $ 32,058 $ 22,286
Europe.......................... 1,337 3,034 2,478
Asia Pacific.................... 1,094 2,285 1,735
--------- --------- ---------
$ 49,883 $ 37,377 $ 26,499
========= ========= =========
December 31,
--------------------
1997 1996
-------- --------
Identifiable assets:
North America................... $169,895 $137,334
Europe.......................... 22,472 22,953
Asia Pacific.................... 12,123 8,938
-------- --------
$204,490 $169,225
======== ========
F-19
Note 13: Commitments and contingencies
The Company has commitments under noncancelable operating leases primarily
for office facilities and equipment. Future minimum lease payments as of
December 31, 1997, for each of the next five years are as follows (in
thousands):
1998............................ $ 1,022
1999............................ 751
2000............................ 552
2001............................ 444
2002............................ 443
Thereafter...................... 126
---------
$ 3,338
The Company expects to complete an office building located next to its
manufacturing facility in Austin, Texas in the summer of 1998. The Company
estimates the total cost for the new building, including furniture, fixtures and
equipment, will range from $35.0 million to $40.0 million. The Company has
incurred approximately $16.0 million in construction costs as of December 31,
1997 with the remainder becoming payable in the first half of 1998.
Rent expense under operating leases was approximately $5.0 million, $4.2
million and $3.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Note 14: Quarterly Results (unaudited)
The following quarterly results have been derived from unaudited
consolidated financial statements that, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period. The unaudited quarterly financial data for each of the eight
quarters in the two years ended December 31, 1997 are as follows (in thousands,
except per share data):
Three Months Ended
----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
---------- ---------- ---------- ----------
Net sales.............. $ 54,571 $ 60,092 $ 60,595 $ 65,621
Gross profit........... 42,278 46,083 46,381 51,041
Operating income....... 11,569 12,401 10,717 15,196
Net income............. 7,568 8,581 7,599 9,877
Basic earnings per share $ 0.23 $ 0.26 $ 0.23 $ 0.30
Weighted average shares
outstanding-basic..... 32,475 32,552 32,572 32,651
Diluted earnings per share $ 0.23 $ 0.26 $ 0.23 $ 0.29
Weighted average shares
outstanding-diluted... 33,450 33,435 33,750 34,003
Three Months Ended
----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
---------- ---------- ---------- ----------
Net sales.............. $ 46,408 $ 50,241 $ 49,679 $ 54,387
Gross profit........... 35,142 37,479 37,056 41,283
Operating income....... 8,428 8,162 8,777 12,010
Net income............. 5,483 5,405 6,358 8,240
Basic earnings per share $ 0.17 $ 0.17 $ 0.20 $ 0.25
Weighted average shares
outstanding-basic..... 32,208 32,380 32,386 32,462
Diluted earnings per share $ 0.17 $ 0.16 $ 0.19 $ 0.25
Weighted average shares
outstanding-diluted... 32,499 32,907 33,092 33,302
F-20
SCHEDULE II
NATIONAL INSTRUMENTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS(1)
(In thousands)
Allowance for doubtful accounts
Balance Provision Balance
at for Write-Offs at
Year Description Beginning Bad Debt Charged to End of
of Period Expense Allowances Period
- ---- ---------------------- ---------- ---------- ---------- ----------
1995 Allowance for doubtful
accounts $ 1,293 $ 705 $ 397 $ 1,601
1996 Allowance for doubtful
accounts 1,601 1,490 671 2,420
1997 Allowance for doubtful
accounts 2,420 1,914 334 4,000
Valuation allowances for excess and obsolete inventory
Balance Provision Balance
at Charged to Write-Offs at
Year Description Beginning Cost of Charged to End of
of Period Sales Allowances Period
- ---- ---------------------- ---------- ---------- ---------- ----------
1995 Valuation allowances
for excess and
obsolete inventory $ 970 $ 1,419 $ 588 $ 1,801
1996 Valuation allowances
for excess and
obsolete inventory 1,801 1,138 1,093 1,846
1997 Valuation allowances
for excess and
obsolete inventory 1,846 1,829 515 3,160
(1) Deferred tax assets valuation is omitted as required information. This
information is shown in Note 7 to the consolidated financial statements.
EXHIBIT 11.1
NATIONAL INSTRUMENTS CORPORATION AND SUBSIDIARIES
STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Net Income $ 33,625 $ 25,486 $ 17,423
========== ========== ==========
Basic earnings per share $ 1.03 $ 0.79 $ 0.56
========== ========== ==========
Weighted average shares outstanding-basic 32,563 32,359 31,158
========== ========== ==========
Diluted earnings per share $ 1.00 $ 0.77 $ 0.55
========== ========== ==========
Weighted average shares 33,656 32,943 31,424
outstanding-diluted
========== ========== ==========
Calculation of Weighted Average Shares:
Weighted Average Common Stock
Outstanding-basic 32,563 32,359 31,158
Weighted Average Common Stock Options,
utilizing the treasury stock method 1,093 584 266
---------- ---------- ----------
Weighted average shares 33,656 32,943 31,424
outstanding-diluted
========== ========== ==========
The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings per Share" in the year ended December 31, 1997. All historical
earnings per share data has been restated to conform to this presentation.
Additionally, all share and per share data has been restated to reflect the
three-for-two stock split declared by the Company's Board of Directors on
October 15, 1997 for holders of record as of the close of business on October
28, 1997. See Note 9: Stockholders' equity.
EXHIBIT 21.1
Subsidiaries of the Company
(Unless noted as a Texas corporation, all subsidiaries are formed under local
law.)
NI/GSI, Inc., a Texas corporation
N.I. Export (Barbados) Ltd., Barbados
National Instruments (Ireland) Limited, Ireland
National Instruments (Korea) Corporation, Korea
National Instruments Australia Corporation, a Texas corporation
National Instruments Belgium N.V., Belgium
National Instruments Brazil, Brazil
National Instruments Canada Corporation, a Texas corporation
National Instruments Corporation (UK) Limited, United Kingdom
National Instruments de Mexico, S.A. de C.V., Mexico
National Instruments Europe Corporation, a Texas corporation
National Instruments Finland Oy, Finland
National Instruments France Corporation, a Texas corporation
National Instruments Germany GmbH, Germany
National Instruments Gesellschaft m.b.H., Salzburg, Austria
National Instruments Hong Kong Limited, Hong Kong
National Instruments India Corporation, a Texas corporation
National Instruments International Distribution B.V., Netherlands
National Instruments Israel Ltd., Israel
National Instruments Italy s.r.l., Italy
National Instruments Japan Kabushiki Kaisha, Japan
National Instruments Netherlands B.V., Netherlands
National Instruments Netherlands Investment B.V., Netherlands
National Instruments Scandinavia Corporation, a Texas corporation
National Instruments Singapore (PTE) Ltd, Singapore
National Instruments Spain, S.L., Spain
National Instruments Sweden A.B., Sweden
National Instruments Switzerland Corporation, a Texas corporation
National Instruments Taiwan Corporation, a Texas corporation
NI Cayman Islands, Cayman Islands
Travis Investments C.V. (a limited partnership), Amsterdam
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-91608 and No. 33-91610) of National Instruments
Corporation of our report dated January 26, 1998, appearing on page F-2 of the
Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Austin, TX
March 23, 1998