<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-20698
BROOKTROUT TECHNOLOGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2814792
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(State or other (I.R.S. employer
jurisdiction of identification
incorporation or number)
organization)
410 First Avenue
Needham, Massachusetts 02194
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(Address of principal executive offices) (Zip code)
Registrant's telephone number
including area code: (617) 449-4100
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
--- ---
As of November 1, 1996, 10,504,891 shares of Common Stock, $.01 par value
per share, were outstanding.
Page 1 of 17 pages
Exhibit Index Appears on Page 15
<PAGE> 2
BROOKTROUT TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for the Three Months
Ended September 30, 1996 and September 30, 1995, and the Nine
Months ended September 30, 1996 and September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended September 30, 1996 and 1995 9
Nine Months Ended September 30, 1996 and 1995 10
Liquidity and Capital Resources 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits 13
Signatures 14
Exhibit Index 15
<PAGE> 3
<TABLE>
BROOKTROUT TECHNOLOGY, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ....................................... $28,060 $14,230
Marketable securities ...................................... 7,261 7,924
Accounts receivable (less allowance for doubtful
accounts of $497 in 1996 and $449 in 1995) ............... 6,877 6,097
Inventory .................................................. 5,272 3,878
Deferred tax assets ........................................ 713 454
Prepaid expenses ........................................... 440 366
------- -------
TOTAL CURRENT ASSETS ..................................... 48,623 32,949
------- -------
Equipment and furniture:
Computer equipment ......................................... 2,436 1,346
Furniture and office equipment ............................. 2,101 539
------- -------
Total .................................................... 4,537 1,885
Less accumulated depreciation and amortization ........... (1,239) (852)
------- -------
EQUIPMENT AND FURNITURE - NET ............................ 3,298 1,033
Investment and other assets ................................ 561 599
------- -------
TOTAL .................................................. $52,482 $34,581
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ............................................. $ 50
Current portion of long-term debt .......................... 6
Accounts payable and other accruals ........................ $ 7,903 5,110
Customer deposits .......................................... 395 376
Accrued warranty costs ..................................... 431 336
Accrued compensation and commission ........................ 1,654 1,185
Accrued income taxes ....................................... 331 1,063
------- -------
TOTAL CURRENT LIABILITIES ................................ 10,714 8,126
------- -------
Deferred rent ................................................ 200 10
Stockholders' equity:
Common stock, $.01 par value; authorized, 25,000,000
shares; issued and outstanding 10,504,497 shares in
1996 and 9,683,116 in 1995 ............................... 105 97
Additional paid-in capital ................................. 27,984 16,884
Unrealized gains (losses) on marketable securities ......... (2) 49
Retained earnings .......................................... 13,481 9,415
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STOCKHOLDERS' EQUITY ....................................... 41,568 26,445
------- -------
TOTAL ...................................................... $52,482 $34,581
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
<TABLE>
BROOKTROUT TECHNOLOGY, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE ........................................................ $15,874 $ 9,751 $40,619 $25,881
Cost and expenses:
Cost of product sold ......................................... 7,148 4,177 17,953 11,929
Research and development ..................................... 1,799 1,181 5,047 3,331
Selling, general and administrative .......................... 3,558 2,219 9,796 6,166
Acquisition related charges .................................. 0 0 1,236 0
------- ------- ------- -------
Total cost and expenses .................................. 12,505 7,577 34,032 21,426
------- ------- ------- -------
INCOME FROM OPERATIONS ......................................... 3,369 2,174 6,587 4,455
-------
Interest income, net ........................................... 328 275 837 695
------- ------- ------- -------
Income before income tax provision ............................. 3,697 2,449 7,424 5,150
Income tax provision ........................................... 1,479 619 3,346 1,721
------- ------- ------- -------
NET INCOME ..................................................... $ 2,218 $ 1,830 $ 4,078 $ 3,429
======= ======= ======= =======
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE .............. $ 0.20 $ 0.19 $ 0.38 $ 0.34
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding ......................... 11,135 10,169 10,684 10,008
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
<TABLE>
BROOKTROUT TECHNOLOGY, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $ 4,078 $ 3,429
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ................. 387 412
Amortization of net premium (discount) on
marketable securities ........................ 27 4
Deferred income taxes ......................... (259) (11)
Increase (decrease) in cash from:
Accounts receivable ........................ (780) (1,041)
Inventory .................................. (1,394) (2,092)
Other prepaid expenses ..................... (36) (121)
Accounts payable and accrued expenses ...... 2,784 1,846
------- -------
Cash provided by
operating activities .................. 4,807 2,426
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment and furniture .......... (2,652) (392)
Purchases of marketable securities ................ (1,801) (5,471)
Maturities and sales of marketable securities ..... 2,386 9,366
------- -------
Cash provided by
investing activities .................. (2,067) 3,503
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock ............ 11,108 69
Distributions to stockholders ..................... (12) (2)
Repayment of long-term debt ....................... (6) (18)
------- -------
Cash provided by
financing activities .................. 11,090 49
------- -------
INCREASE IN CASH AND EQUIVALENTS ........................ 13,830 5,978
CASH AND EQUIVALENTS, BEGINNING OF PERIOD ............... 14,230 10,435
------- -------
CASH AND EQUIVALENTS, END OF PERIOD ..................... $28,060 $16,413
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
BROOKTROUT TECHNOLOGY, INC.
Notes to Condensed Consolidated Financial Statements - Unaudited
1. Basis of presentation
On May 29, 1996, Brooktrout Technology, Inc. (the "Company") acquired
Technically Speaking, Inc. ("TSI") in a transaction which was accounted for as a
pooling-of-interests. All financial data of the Company, including the Company's
previously issued financial statements for the periods presented in this Form
10-Q, have been restated to include the historical financial information of TSI.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the interim periods presented.
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles and should be read in conjunction
with the audited consolidated financial statements incorporated by reference in
or included in the Company's 1995 Annual Reports on Form 10K and 10K/A and to
the audited supplemental consolidated financial statements included in the
Company's registration statement on Form S-3 dated August 6, 1996.
The operating results for the interim periods presented are not necessarily
indicative of the results which could be expected for the full year.
2. Net income per share
Net income per common and per common equivalent share are computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares represent
shares issuable upon exercise of stock options, calculated using the treasury
stock method.
<PAGE> 7
3. Inventory
<TABLE>
Inventory is carried at the lower of cost (first-in, first-out basis) or
market and consisted of the following:
<CAPTION>
September 30, December 31,
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1996 1995
---- ----
<S> <C> <C>
Raw materials $3,400,000 $2,979,000
Work in process 1,172,000 605,000
Finished goods 700,000 294,000
------- -------
Total $5,272,000 $3,878,000
========= =========
</TABLE>
4. Major Customers
One customer accounted for approximately 38% and 32% of net revenue for the
three months ended September 30, 1996 and 1995, respectively, and 31% and 41%
for the nine months ended September 30, 1996 and 1995, respectively.
5. Marketable Securities
Marketable securities consist mainly of U.S. government securities
purchased with remaining maturities in excess of three months.
The amortized cost of these securities at September 30, 1996 was
$7,262,000. Net unrealized holding losses of $1,700 were comprised of unrealized
gains of $7,800 and unrealized losses of $9,500 at September 30, 1996.
6. Income Taxes
<TABLE>
A reconciliation of the statutory federal rate to the effective rate is as
follows:
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory tax rate 34% 34% 34% 34%
State taxes, net of
federal benefit 6 7 6 6
Permanent item
TSI income not subject
to tax (15) (6)
Other - (1) 5 (1)
-- -- -- --
Effective tax rate 40% 25% 45% 33%
== == == ==
</TABLE>
<PAGE> 8
7. International Sales
International sales, principally exported from the United States, accounted
for approximately 16% for the three months ended September 30, 1996 and less
than 10% for the three months ended September 30, 1995. International sales were
approximately 18% and 10% for the nine months ended September 30, 1996 and 1995,
respectively.
8. Business Combinations
On May 29, 1996, the Company acquired TSI by issuing approximately 713,000
shares of its common stock in exchange for all the outstanding stock of TSI. TSI
is the developer of Show N Tel, a leading application development tool for
enterprise computer telephony applications. The acquisition was accounted for as
a pooling-of-interests. All financial data of the Company has been restated to
include the historical financial information of TSI. No significant adjustments
were required to conform the accounting policies of the Company and TSI.
In connection with the acquisition, the Company recorded charges related to
the merger with TSI totaling $1.2 million in the second quarter of fiscal 1996.
9. Equity Issuance
In August 1996, the Company sold 649,632 shares of common stock generating
proceeds to the Company of approximately $11.1 million.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995
Revenue during the three months ended September 30, 1996 increased by
approximately 63% to $15,874,000, up from $9,751,000 during the three months
ended September 30, 1995. This growth was primarily attributable to increased
shipments of TR Series products combined with increased shipments of OEM voice
systems. Increased sales reflect the growth of the principal market segments
served by the Company's products, especially the manufacture and sale of fax
products for use on local area networks and the manufacture and sale of fax and
OEM systems.
Cost of product sold was $7,148,000, or 45% of revenue, during the three
months ended September 30, 1996, compared to $4,177,000, or 43% of revenue, for
the same period in 1995. Gross profit percentage was approximately 55% and 57%
for the three months ended September 30, 1996 and 1995, respectively. The
decrease in gross profit percentage is the result of a lower proportion of
software relating to Show N Tel products which has a relatively low cost of
product sold.
Research and development expense was $1,799,000, or 11% of revenue,
compared with $1,181,000, or 12% of revenue, for the three months ended
September 30, 1996 and 1995, respectively. The dollar increase in 1996 reflects
the Company's continuing development efforts for its TR Series product family
and computer telephony development tools, as well as fax and OEM systems
development. The Company intends to continue to commit significant resources to
product development and expects that research and development expenditures will
be approximately 13% to 15% of revenue for the foreseeable future.
Selling, general and administrative expense was $3,558,000 during the three
months ended September 30, 1996, compared with $2,219,000 during the same period
in 1995. This higher expense level resulted from increased staffing, promotional
activities and travel expenses. As a percentage of revenue, selling, general and
administrative expense for the third quarter of 1996 was 22% of revenue,
compared with 23% for the third quarter of 1995.
<PAGE> 10
For the three months ended September 30, 1996, interest and other income
was $328,000, compared with $275,000 for the same period in 1995.
The Company's effective tax rate, adjusted for significant permanent or
other differences occurring within a quarter, was 40% for the third quarter of
1996, based on the Company's estimated effective tax rate for the full year, and
25% for the third quarter of 1995. In 1995, TSI amounts included in income were
not subject to tax at the corporate level and accordingly, the effective tax
rate in 1995 was reduced.
Nine Months Ended September 30, 1996 and 1995
Revenue during the nine months ended September 30, 1996 increased by
approximately 57% to $40,619,000, up from $25,881,000 during the nine months
ended September 30, 1995. This revenue increase was attributable to increased TR
Series products coupled with increased shipments of OEM voice systems. Increased
sales reflect the growth of the principal market segments served by the
Company's products, especially the manufacture and sale of fax products for use
on local area networks and the manufacture and sale of fax and OEM systems.
Cost of product sold was $17,953,000, or 44% of revenue, during the nine
months ended September 30, 1996, compared to $11,929,000, or 46% of revenue in
1995. Gross profit percentage was 56% and 54% for the nine months ended
September 30, 1996 and 1995, respectively. The increase in gross profit
percentage is the result of a much higher proportion of TR Series product
shipments, which carry a comparatively higher gross margin than OEM systems,
coupled with decreases in product costs on OEM systems.
Research and development expense was $5,047,000, or 12% of revenue,
compared with $3,331,000, or 13% of revenue, for the nine months ended September
30, 1996 and 1995, respectively. The dollar increase in 1996 reflects the
Company's continuing development efforts for its TR Series product family and
computer telephony development tools, as well as fax and OEM systems
development. As a result of the increase in the Company's revenue base, however,
the percentage remained comparable.
Selling, general and administrative expense was $9,796,000 during the nine
months ended September 30, 1996, compared with $6,166,000 during the same period
in 1995. This higher expense level resulted from increased staffing, travel
expenses and promotional activities. As a percentage, selling, general and
administrative expense was 24% of revenue in 1996 and 1995.
<PAGE> 11
During the nine months ended September 30, 1996, the Company incurred
approximately $1.2 million in costs related to the acquisition of and merger
with Technically Speaking, Inc. These costs related to professional fees for
legal and accounting advice, investment banking fees, and certain costs related
to the integration of the operations of the two companies.
For the nine months ended September 30, 1996, interest and other income was
$837,000, compared with $695,000 for the same period in 1995.
The Company's effective tax rate was 45% and 33% for the nine months ended
September 30, 1996 and 1995, respectively. In 1995, TSI amounts included in
income were not subject to tax at the corporate level and accordingly, the
effective tax rate in 1995 was reduced.
<PAGE> 12
Liquidity and Capital Resources
For the nine months ended September 30, 1996, the Company funded its
operations principally through operating revenue. In July 1996, the Company
renewed its working capital line of credit. Under the renewed line of credit,
the Company may borrow up to $7,500,000 on an unsecured basis, all of which may
be used for issuance of letters of credit, subject to compliance with certain
covenants. The line of credit will expire in July 1997 and at that time any
outstanding balances would be payable in full. Any amounts borrowed under the
line would be subject to interest at the bank's prime rate. At September 30,
1996 there were no commitments outstanding on letters of credit; no borrowings
have been made during any period presented.
The Company's working capital increased from $24.8 million at December 31,
1995 to $37.9 million at September 30, 1996. The increase was attributable, in
part, to higher cash balances and investments, accounts receivable, inventory,
deferred tax asset, and prepaid expense balances which were partially offset by
higher accounts payable and accrued compensation and commission balances. The
Company's aggregate cash, cash equivalents and marketable securities position
increased as a result of cash flows from operations and the proceeds from the
sale of stock offset by an increase in working capital and expenditures for
equipment and furniture.
During the first nine months of 1996, the Company invested approximately
$2.7 million in capital equipment. The Company currently has no material
commitments for additional capital expenditures.
The Company anticipates that cash flows from operations, together with
current cash and marketable securities balances and funds available under the
Company's line of credit, will be sufficient to meet the Company's working
capital and capital equipment expenditure requirements for the foreseeable
future.
<PAGE> 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 4, 1996, Syntellect Technology Corp. ("Syntellect") filed a
Complaint against the Company in the United States District Court for the
Northern District of Texas, alleging infringement of certain patents held by
Syntellect relating to certain aspects of "automated attendant" technology.
Syntellect's Complaint does not identify the products of the Company which
allegedly infringe Syntellect's patents. The Complaint seeks injunctive relief,
damages in an unspecified amount, and multiple damages on account of alleged
willful infringement. The Company is reviewing the patents at issue, and intends
to defend the case vigorously.
Items 2. through 5.
None
Item 6. Exhibits
(a) Exhibits
11. Computation of earnings per share
<PAGE> 14
SIGNATURES
Pursuant to the requirements 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.
BROOKTROUT TECHNOLOGY, INC.
Date: November 11, 1996 By:/s/ Eric R. Giler
---------------------------------
Eric R. Giler
President
(Principal Executive Officer)
Date: November 11, 1996 By:/s/ Robert C. Leahy
---------------------------------
Robert C. Leahy
Vice President of Finance and
Operations and Treasurer
(Principal Financial and
Accounting Officer)
<PAGE> 15
EXHIBIT INDEX
Sequentially
Exhibit Number Exhibit Numbered Page
11 Computation of Earnings
Per Share
-For the three months ended 16
September 30, 1996 and 1995
-For the nine months ended 17
September 30, 1996 and 1995
<PAGE> 1
Exhibit 11
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BROOKTROUT TECHNOLOGY, INC.
<TABLE>
COMPUTATION OF INCOME PER COMMON SHARE
(In thousands, except per share data, unaudited)
<CAPTION>
Three Months Ended
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Primary Income Per Share:
Weighted average number of common
and common equivalent shares outstanding:
Common Stock 10,180 9,671
Common equivalent shares
resulting from options 955 498
------- -------
Total 11,135 10,169
======= =======
Net income $ 2,218 $ 1,830
======= =======
Net income per common share $ 0.20 $ 0.19
======= =======
Fully Diluted Income Per Share:
Weighted average number of common
and common equivalent shares
outstanding
Common stock 10,180 9,671
Common equivalent shares
resulting from options 1,174 525
------- -------
Total 11,354 10,196
======= =======
Net income $ 2,218 $ 1,830
======= =======
Net income per common share $ 0.20 $ 0.19
======= =======
</TABLE>
<PAGE> 2
Exhibit 11
BROOKTROUT TECHNOLOGY, INC.
<TABLE>
COMPUTATION OF INCOME PER COMMON SHARE (In
thousands, except per share data, unaudited)
<CAPTION>
Nine Months Ended
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Primary Income Per Share:
Weighted average number of common
and common equivalent shares outstanding:
Common Stock 9,733 9,652
Common equivalent shares
resulting from options 951 356
------- -------
Total 10,684 10,008
======= =======
Net income $ 4,078 $ 3,429
======= =======
Net income per common share $ 0.38 $ 0.34
======= =======
Fully Diluted Income Per Share:
Weighted average number of common
and common equivalent shares
outstanding
Common stock 9,733 9,652
Common equivalent shares
resulting from options 1,065 408
------- -------
Total 10,798 10,060
======= =======
Net income $ 4,078 $ 3,429
======= =======
Net income per common share $ 0.38 $ 0.34
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BROOKTROUT
TECHNOLOGY, INC.'S CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME
FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BROOKTROUT TECHNOLOGY, INC.'S 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 28,060
<SECURITIES> 7,261
<RECEIVABLES> 7,374
<ALLOWANCES> 497
<INVENTORY> 5,272
<CURRENT-ASSETS> 48,623
<PP&E> 4,537
<DEPRECIATION> 1,239
<TOTAL-ASSETS> 52,482
<CURRENT-LIABILITIES> 10,714
<BONDS> 0
<COMMON> 105
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 52,482
<SALES> 15,874
<TOTAL-REVENUES> 15,874
<CGS> 7,148
<TOTAL-COSTS> 7,148
<OTHER-EXPENSES> 5,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,697
<INCOME-TAX> 1,479
<INCOME-CONTINUING> 2,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,218
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
