<PAGE> 1
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 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __ to__.
Commission File No. 0-20698
BROOKTROUT TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2184792
(State or other (I.R.S. Employer
incorporation or organization) Identification No.)
410 FIRST AVENUE, NEEDHAM, MASSACHUSETTS 02194
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (617) 449-4100
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
--------- ----------
Common Stock Nasdaq
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__
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate 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. [X]
As of March 19, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $154 million, based on the
closing price on such date of the Company's Common Stock on the Nasdaq
("Nasdaq") National Market.
As of March 19, 1997, 10,686,352 shares of Common Stock, $.01 par value per
share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of (i) the Company's Annual Report for the fiscal year ended
December 31, 1996 are incorporated into Part II of this Form 10-K and (ii) the
Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders of
the Company are incorporated into Part III of this Form 10-K.
"TR114", "Universal Port", "QuadraFax", "Show N Tel", "PowerBlock" and
"1P/FaxRouter" are trademarks of Brooktrout Technology, Inc. "TR Series",
"TruFax" is a registered trademark of Brooktrout Technology, Inc. "MVIP" is a
trademark of Natural MicroSystems, Inc. "Touch-Tone" is a registered trademark
and "UNIX"is a trademark of AT&T. "Merlin" is a registered trademark and
"Legend", "Merlin Legend", "Merlin Mail", "Merlin Multi-Lingual Version" and
"Partner Mail" are trademarks of Lucent Technologies, Inc. ("Lucent", formerly a
division of AT&T) "Microsoft" and "MS-DOS" are registered trademarks and
"Microsoft Windows Sound System" and "Windows NT" are trademarks of Microsoft
Corporation. "OS/2" is a registered trademark of International Business Machines
Corp. "UnixWare" is a trademark of Univel. "QNX" is trademark of QNX, Inc.
(ii)
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PART I
BUSINESS
- --------
Brooktrout Technology, Inc. ("Brooktrout" or the "Company") is a
Massachusetts corporation founded in 1984 to design, manufacture and market
computer hardware and software for use in electronic messaging applications in
telecommunications and networking environments. Brooktrout is a supplier of
advanced software and hardware products for system vendors and service providers
in the electronic messaging market. The Company's products enable its customers
to deliver a wide range of solutions for the integration and management of image
(fax), voice and data communications in telecommunications and networking
environments. The Company sells its products primarily to service providers,
original equipment manufacturers ("OEMs") and value added resellers ("VARs")
both domestically and internationally through a direct sales force. The Company
has direct sales offices in California, Colorado, Connecticut and Massachusetts
and has established sales and support offices in Belgium and Singapore. The
Company's international sales efforts, principally exports from the United
States, are primarily initiated from corporate headquarters in the United
States. In addition to direct international sales, significant additional
revenue is derived from international sales by Brooktrout's customers of systems
which incorporate Brooktrout's products. See Notes to Consolidated Financial
Statements.
On April 1, 1993, the Company acquired all of the assets of DAFcom
Corporation ("DAFcom"), a producer of fax routing products for private data
networks. DAFcom, based in Dallas, Texas, is now operating as a wholly owned
subsidiary of the Company under the name "Brooktrout Networks Group, Inc." On
May 29, l996, the Company acquired Technically Speaking, Inc. ("TSI"), a
supplier of graphical, object-oriented software application development tools
for the electronic messaging market.
BROOKTROUT'S PRODUCTS
The Company's first products were voice processing boards and voice mail
systems based on those boards. The Company became a significant supplier of
personal computer-based voice mail systems to OEMs of small telephone systems.
As it developed its voice processing business, the Company began to explore
computer-based fax processing using digital signal processing ("DSP")
technology. DSP is a technology which permits the complex signals transmitted
through the telecommunications network, including voice and fax signals, to be
interpreted and rapidly processed in much the same manner as basic numerical
data. The Company introduced its first TR Series fax processing product in 1987
and followed this with more advanced fax products in subsequent years.
In addition to hardware products, the Company has emphasized the
development of firmware and software development tools that support rapid and
flexible applications development by software developers. Initially the Company
began making software drivers for its hardware products. In August 1991, the
Company introduced a higher-level TR Series Fax & Voice Applications Programming
Interface ("API"). The API provides a development environment which permits
access to the functionality of Brooktrout's TR Series hardware products. Using
the API, a developer of fax or voice software may readily program commands to
direct a TR Series hardware product to carry out any of its signal processing
functions by calling routines within the API that interpret the program's
instructions in the form of detailed hardware commands. In May 1996, the Company
added Show N Tel, a graphical object oriented software application development
tool to the software product line through the acquisition of TSI.
In 1993, the Company formed Brooktrout Networks Group, Inc., through the
acquisition of all of the assets of DAFcom, to develop a new product which
provides fax networking solutions. On May 29, l996, the Company acquired TSI, a
supplier of graphical, object-oriented software application development tools
for the electronic messaging market.
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<TABLE>
The Company has four major product lines, all of which serve the electronic
messaging market: fax and voice processing boards, application development
tools, fax systems and OEM systems. The following table describes Brooktrout's
principal products and the markets which they serve:
<CAPTION>
PRODUCTS DESCRIPTION TARGET CUSTOMERS
FAX AND VOICE PROCESSING BOARDS
<S> <S> <S>
TR114 Series Universal Port Multichannel boards with Service providers, OEMs
Fax & Voice boards advanced fax and voice and VARs implementing
processing capabilities medium to high density
available with 2, 4 or 8 fax and voice systems
channels/board
TruFax Series Fax boards Two channel fax boards with OEMs and VARs
general purpose features implementing low
density, general purpose
fax systems
APPLICATION DEVELOPMENT
TOOLS
TR Series Fax & Voice API C-language application Service providers, OEMs
development software for the and VARs developing
TR Series and TruFax boards high performance fax and
voice applications with
specific custom
requirements
Show N Tel A graphical, object-oriented Service providers, OEMs
development environment for and VARs developing
enterprise-wide voice, fax and enterprise computer
computer telephony telephony systems
applications seeking an easy-to-use
application development
and prototyping tool
FAX SYSTEMS
QuadraFax An embedded system platform OEMs and VARs
for enhanced fax applications. providing solutions for
QuadraFax is available with workgroups in large
fax broadcast and organizations and small
fax-on-demand applications. businesses
IP/FaxRouter An embedded system platform OEMs and VARs
for routing faxes over the providing solutions for
Internet and other IP networks businesses with high fax
transmission expenses
that have access to the
Internet or other IP
network services
OEM SYSTEMS
Lucent Technologies, Inc.'s Voice messaging systems Provided to Lucent on a
("Lucent") MerlinMail and designed for Lucent's Merlin private label basis for sale
PartnerMail systems Partner and Merlin Legend to purchasers of Merlin
telephone switches Partner and Merlin Legend
telephone systems
</TABLE>
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Fax & Voice Processing Boards
TR114 Series. Introduced in 1992 and periodically enhanced since then, the
TR114 Series Universal Port boards are designed for high performance fax and fax
and voice messaging systems, such as those used by telecommunications service
providers, messaging system vendors and network communication server vendors.
The TR114 Series Universal Port boards offer full fax and voice processing on
each channel of a single multi-channel board. Advanced fax and voice features,
such as file conversions and file transfer protocols, are supported on the TR114
Series. Boards are available in a range of configurations, with two, four or
eight channels per board. The TR114 Series boards are designed to be approved by
telecommunications regulatory agencies worldwide and have been approved for use
in 25 countries including the United States, Japan, England, France and Germany.
The range of the TR114 Series configurations allows developers flexibility
in designing systems from small corporate systems to large telephone company
service systems cost effectively. The TR114 Series two and four channel analog
boards support loop start and DID telephone service. The TR114 Series boards are
designed to be used in ISA-bus computers (including PC), which may be used as
platforms for smaller systems, and special purpose computers providing expansion
slots for up to 20 boards to serve the needs of large service providers. TR114
Series four and eight channel digital boards with interfaces for popular Pulse
Code Modulation ("PCM") highways, such as MVIP and PCM Expansion Bus ("PEB"),
offer developers options in designing systems for digital network services (such
as T1, E1 and ISDN) or with other resources, such as voice recognition, from
other vendors.
TruFax Series. Released in January 1995, the TruFax Series fax boards are
fax processing boards designed for small to medium scale, general purpose fax
servers and systems. TruFax Series products incorporate many of the functions
that contribute to the high reliability of TR114 Series products but do not
support many of their advanced fax features, or voice processing. TruFax Series
products are lower-priced than TR Series products. The first TruFax Series
product, the TruFax 200, is a two channel fax board. At the core of each channel
is a fax modem controlled by a microprocessor. The TruFax 200 is available with
analog telephone system interfaces.
Application Development Tools
TR Series Fax & Voice API. The TR Series API, originally introduced in 1991
and periodically enhanced since then, enables developers to quickly develop
sophisticated fax and voice applications. The API is a complete C language
library of fax, voice, tone signaling and call processing function calls. It
also includes time-saving sample applications, fax utilities and debugging
tools. The API is operating-system independent and supports most operating
systems, including Windows NT, UNIX, UnixWare, AIX, Solaris, QNX, OS/2, Windows
95 and MS DOS. Applications developed with the API run on all of the Company's
TR Series and TruFax Series products.
Show N Tel. Show N Tel is a graphical, object-oriented development and
prototyping environment for enterprise-wide, client/server voice, fax, and
computer telephony applications. It is designed to simplify and reduce the time
to develop complex applications. Show N Tel provides a library of over 200
PowerBlocks; graphical icons that represent common operations in
computer-telephony applications. Developers create applications by connecting
these icons on a drag-and-drop template. In addition to the core voice, fax and
computer telephony functions, optional components are available to support
functions such as database access, speech recognition, speech synthesis
(text-to-speech) and fax document creation. Show N Tel is available for Windows
NT and OS/2 platforms.
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Fax Systems
QuadraFax. QuadraFax is a platform designed to support small to medium
scale enhanced fax applications, such as fax-on-demand and fax broadcast, for
departments of large corporations, small businesses and small office/home office
users. It offers simple installation, easy administration and a low price.
QuadraFax has two major components: a fax and voice processing system unit and a
Windows-based administration program that runs on a personal computer. The
system unit includes DSPs for fax and voice processing, a CPU and a hard disk.
Application software can be embedded on the system unit's hard disk to provide
complete solutions. The PC-based Windows software provides an easy to use
graphical interface for configuring and administering the applications. The
Windows administration software runs on a PC that is connected to the system
unit by a serial port link.
IP/FaxRouter. January, l996 Brooktrout introduced the IP/FaxRouter, an
Ethernet peripheral which allows facsimile traffic to be sent via IP wide area
networks including the Internet. The IP/FaxRouter was developed to address the
escalating costs associated with facsimile transmission. By routing fax traffic
over IP data networks like the Internet, it can reduce or eliminate fax
transmission charges normally incurred from the telephone company. In
organizations with significant international fax traffic, the IP/FaxRouter can
significantly reduce telephone charges by routing faxes over an existing data
network. Configuration Network Management System ("CNMS") software and Account
Data Management System ("ADMS") software are also available with the
IP/FaxRouter for centralized and remote system management as well as tracking
account activity in service organizations.
OEM Systems
Merlin Mail, Partner Mail and Merlin Mail Multi-Lingual Version. Since
1990, Brooktrout has been the supplier of the Merlin Mail voice
messaging/automated attendant system for the Lucent Merlin small business
telephone system. In 1991, the Company introduced a second generation of Merlin
Mail designed for Lucent's Merlin Legend system, a new, small business telephone
system. In 1992, the Company introduced the Partner Mail voice
messaging/automated attendant system for Lucent's Partner small business
telephone system. In 1993, the Company introduced the third generation of Merlin
Mail: Merlin Mail Multi-Lingual Version. This newest Merlin Mail system
incorporates English, Spanish and French languages in one system and is
integrated with Lucent's Merlin Legend system. The Merlin Mail, Partner Mail and
Merlin Mail Multi-Lingual Version products are based on the voice boards
developed and manufactured by the Company. The Company continues to develop
enhancements and new features for these products.
SALES AND MARKETING
The Company markets its products primarily to service providers, OEMs and
VARs. The TR Series, TruFax Series, Show N Tel, QuadraFax and IP/Fax Router
products provide fax and voice processing, computer telephony or fax routing
functionality for systems sold by these customers. The Company's OEM systems
encompassing a complete solution are sold to Lucent as part of that customer's
products sold to end users.
Service Providers and OEMs
Providers of enhanced telecommunications services develop, or purchase from
developers, large, complex systems incorporating the Company's products to
deliver electronic messaging applications. These systems typically require long
development times and result in periodic deployments of large systems. OEMs
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design, manufacture and market electronic messaging systems that include the
Company's products. OEMs generally have long product design and development
processes that precede the release of products.
Making sales to both of these types of customers can be a complex and
time-consuming process which is often focused on technical requirements. To
serve these customers in North America, the Company sells its products through a
direct sales force located in Massachusetts and California.
VARs
VARs typically purchase the Company's products for resale to an end-user
customer together with application software purchased from an ISV. The Company
has established a network of over 150 Brooktrout Authorized Resellers. The
Company employs direct sales people and manufacturers' representatives to
recruit, train and assist VARs.
International
The Company sells its products to service providers, OEMs and VARs
internationally through a direct sales force organized by region. The Company
has established a sales office in Diegem-Brussels, Belgium and expects to open
an office in Asia.
The Company's international sales efforts are primarily initiated from
corporate headquarters in the United States, although the Company maintains a
European sales office. International sales, principally exports from the United
States, accounted for approximately $10.6 million or 18% of revenue for the year
ended December 31, 1996 and $4.3 million or 11% of revenue for the year ended
December 31, 1995. International sales were less than 10% of revenue for the
year ended December 31, 1994. In addition to direct international sales,
significant additional revenue is derived from international sales by
Brooktrout's customers of systems which incorporate Brooktrout's products.
Most countries require technical approvals from their telecommunications
regulatory agencies for products which operate in conjunction with the telephone
system. Obtaining these approvals is generally a prerequisite for sales in a
given jurisdiction. Obtaining requisite approvals may require from two months to
a year or more depending on the product and the jurisdiction. Approval of the
Company's fax products in Germany, France and Japan has taken up to twelve
months or more. The Company does not believe that these delays have had a
material impact on the Company's operations. The Company has not yet encountered
any situation in which it has proved impossible to obtain approval in a foreign
jurisdiction. The Company, its distributors or its customers have received
product approvals for Brooktrout products from agencies in Australia, Canada,
France, Germany, Hong Kong, Italy, Japan, Korea, Malaysia, Netherlands, New
Zealand, Singapore, Sweden, Switzerland, Mexico, Ireland, Norway, Denmark,
India, Czech Republic, the United Kingdom, and the United States.
TECHNICAL SUPPORT
Brooktrout seeks to deliver unmatched support and service to customers. By
listening to customers and thoroughly understanding their requirements, the
Company believes it can provide innovative high-value products which meet or
exceed customer expectations. Beyond delivery, Brooktrout backs its products
with responsive, engineering level support. Generally, the Company's technical
support staff members hold bachelor's degrees in electrical engineering or
computer science. Staff members place the highest priority on providing timely,
accurate information as well as advice on how to take advantage of Brooktrout's
sophisticated product line. Brooktrout's technical support personnel have been a
source of product improvements and new
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features and functions due to close working relationships with customers.
Brooktrout's technical support department reports directly to the Company's
President as further evidence of Brooktrout's commitment to provide
partnership-level support to customers. The Company's technical support
activities represent an integral element of its marketing strategy. The Company
believes that its technical support capability represents a significant
competitive advantage.
The Company warrants its hardware products against defects in materials and
workmanship generally for one year. Extended warranties of up to three years
have been provided to some customers for additional consideration.
The Company ordinarily sells its products on the basis of purchase orders
received from customers. The Company has entered into agreements with many of
its customers which establish terms and conditions for sales made under these
agreements from time to time. These agreements generally do not establish any
long-term fixed purchase or supply commitments for either party.
In 1994, 1995 and 1996, sales to Lucent, the Company's largest customer,
accounted for 53%, 36%, and 33% respectively, of the Company's total revenues.
The Company sells essentially all of its major products to a number of separate
business units within Lucent, although sales of the Merlin Mail, Merlin Mail
Multi-Lingual Version and Partner Mail systems have constituted 83, 81% and 88%
of the revenue from Lucent in 1994, 1995 and 1996, respectively. Merlin Mail,
Merlin Mail Multi-Lingual Version, Partner Mail and other products are sold to
Lucent under purchase orders issued by Lucent on an as-required basis. The
Company and Lucent consult closely with respect to expected future requirements
and timing of orders. No other single customer accounted for more than 10% of
the Company's total sales in 1994, 1995 or 1996.
PRODUCT DEVELOPMENT
The market for electronic messaging products is characterized by rapid
technological change, changes in customer requirements, frequent new product
introductions and enhancements and emerging industry standards. The Company
focuses significant resources on improving its products in response to changes
in operating systems, application software, computer and telephony hardware,
networking software, programming tools and computer language technology. During
the years ended December 31, 1994, 1995 and 1996 the Company spent approximately
$3.5 million, $4.8 million and $7.2 million, or 14%, 12% and 12% of revenue,
respectively, on research and development. Research and development expenses
have generally been charged to operations as incurred. The Company is continuing
its development efforts for its current products, as well as developing next
generation versions of its current products, in particular the TR114 Series
family and its OEM systems. In addition, the Company is developing or has
acquired technology for the development of data modem and ISDN products.
Research and development expenses have generally been charged to operations as
incurred. The Company believes significant investments in product development
are required to remain competitive. As a consequence, the Company intends to
continue to increase the dollar amount of its product development expenditures
in the future, maintaining the level of such expenditures in the range of 13% to
15% of revenue.
The Company believes that its software and hardware development team
provides a significant competitive advantage for the Company. The team is
comprised of members with experience in computer-based fax, voice processing,
telephony, device driver development, object-oriented software development,
graphical user interface ("GUI") development, and computer networking. The
Company believes this assembly of diverse technical expertise contributes to the
highly integrated functionality of its products. The Company's ability to
attract and retain highly qualified employees will be one of the principal
determinants of its success in maintaining technological leadership.
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COMPETITION
The Company is in direct competition with companies offering similar
products or products responsive to similar applications in each of its four
major product lines. In addition, there is always the potential for new entrants
into the Company's markets by other companies in related computer and
communications companies including the Company's customers and suppliers. The
Company believes that the principal competitive factors affecting the market for
the Company's products and services include product functionality and features,
product quality, performance and price, ease of product integration, and quality
of customer support services. The relative importance of each of these factors
depends upon the specific customer environment. Although the Company believes
that its products and services currently compete favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than the Company. The Company's present or future competitors may
be able to develop products comparable or superior to those developed by the
Company, adapt more quickly than the Company to new technologies, evolving
industry trends or customer requirements, or devote greater resources to the
development, promotion and license of their products than the Company.
Accordingly, there can be no assurance that competition will not intensify or
that the Company will be able to compete effectively in its market.
The Company expects that it will face increasing pricing pressures from its
current competitors and new market entrants. The Company's competitors may
engage in pricing practices that cause the Company to reduce the average selling
prices of its products. To offset declining average selling prices, the Company
believes that it must successfully develop and introduce on a timely basis new
products or products that incorporate new features that can be sold at gross
margins comparable to those on existing products. To the extent that such new
products are not developed in a timely manner, do not achieve customer
acceptance or do not generate comparable gross margins, the Company's
profitability may decline.
BACKLOG
At December 31, 1996, the Company's backlog of orders for products and
services was approximately $11,362,000 compared with approximately $7,496,000 at
December 31, 1995. All of the backlog is expected to be shipped or provided
before the end of 1997. All orders believed to be firm for products or services
to be shipped or provided in the future are included in the backlog. The Company
regards all orders as firm orders and has experienced an order cancellation rate
in the past which the Company considers to be immaterial, although no assurance
can be given that adverse effects may not result from order cancellations in the
future. Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of actual sales for any particular future period. The period of
time between placement of an order and delivery of the product varies from one
day for certain TR Series products to ten months for certain OEM systems
products.
MANUFACTURING
Brooktrout's manufacturing operations consist primarily of final assembly
and testing of components, subsystems and systems. The Company tests its
products at various stages in the manufacturing process. Each product undergoes
a final load and functional test at the Company's Needham, Massachusetts or
Southborough, Massachusetts facility prior to shipment.
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The Company uses independent manufacturers, one of which is Lucent, to
perform printed circuit board assembly and testing. The Company believes it has
good relationships with its subcontractors and has generally experienced timely
delivery of products and satisfactory quality with respect to products
manufactured by subcontractors. In December 1995, the Company's Needham,
Massachusetts facility achieved ISO 9002 certification.
PROPRIETARY TECHNOLOGIES
The Company does not hold patents on a large part of its product line. The
Company's software and firmware are protected by copyright laws. Because
on-board and downloadable firmware represent an important element of the value
of the Company's hardware products, the Company believes that it obtains
significant protection for its proprietary interest in its hardware products, as
well as its software products, from copyright laws. Certain design features,
including ASICs (application specific integrated circuits), software and
firmware, receive some protection under trade secret laws. Each employee of the
Company has executed a proprietary information agreement designed to protect the
trade secrets of the Company, inventions created in the course of employment
with the Company and other proprietary information of the Company. There can be
no assurance, however, that copyright and trade secret protection will be
sufficient to prevent competitors from developing software and other technology
similar to the software and other technology upon which the Company relies for a
significant portion of its revenue.
The Company has acquired licenses under certain patents covering aspects of
voice processing technology, and licenses from third parties of software for its
voice and fax products. The Company pays royalties under these licenses with
respect to its sales of certain products. The licenses generally extend for the
life of the patent in question (in the case of patents) or in perpetuity (in the
case of software), and are subject to termination only in the event of a breach.
Royalties constitute a percentage of sales of particular products or product
elements, or a fixed amount per unit of hardware or software distributed, and do
not account for a material part of the Company's cost of product sold.
The Company has periodically received, and may receive in the future,
communications from third parties asserting patent rights with respect to
certain of the Company's products and features. The Company is a defendant in
one patent infringement case which it believes will not have a material effect
on the Company. Except as described under Legal Proceedings below, there is no
pending litigation against the Company regarding any of these claims, nor has
the Company to date believed it necessary to license any patent rights referred
to in such communications, except as described above and except for certain
other minor cases involving no payment of ongoing royalties.
EMPLOYEES
As of December 31, 1996, the Company had 159 full-time employees, of which
65 were engaged in engineering and product development, 21 in administration, 19
in manufacturing and 54 in sales, marketing and technical support. None of the
Company's employees are represented by any labor union and the Company believes
its relations with its employees are good.
EXECUTIVE OFFICERS
The executive officers of Brooktrout as of March 15, 1997 are as follows:
NAME AGE POSITION
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<TABLE>
<S> <C> <C>
Eric R. Giler..................... 41 President and Director
David W. Duehren.................. 39 Vice President of Research and
Development, Clerk and Director
Patrick T. Hynes.................. 38 Vice President of Advanced Product
Engineering and Director
Stephen A. Ide.................... 53 Senior Vice President, President,
Brooktrough Interspeed, Inc.
Robert C. Leahy................... 44 Vice President of Finance and
Operations and Treasurer
David B. Lowe..................... 39 Vice President of Sales
R. Andrew O'Brien................. 38 Vice President of Marketing and
Business Development
Jonathan J. Sirota................ 55 Vice President of Engineering
Michael E. Donoghue............... 34 Vice President of Worldwide Sales
</TABLE>
Eric R. Giler is a Company founder and has been President and a Director of
Brooktrout since the Company's inception in 1984. Prior to founding the Company,
Mr. Giler worked primarily in the area of technical marketing and sales as a
product manager with Teradyne, Inc. and an applications engineer manager for
Intec Corp. Mr. Giler is a board member of the MIT Enterprise Forum, the
Massachusetts Telecommunications Council and the New England-Israel Chamber of
Commerce. Mr. Giler also is a member of the American Electronics Association and
the Massachusetts Computer Software Council. Mr. Giler received a Bachelor of
Science degree in Management Science from Carnegie-Mellon University and a
Master of Business Administration degree from Harvard Business School.
David W. Duehren is a Company founder and has been Vice President of
Research and Development and a Director of Brooktrout since the Company's
inception in 1984. Mr. Duehren is the chairman of the Telecommunications
Industry Association Committee TR29.1, the subcommittee responsible for Group 3
fax enhancements, and also contributes to worldwide International
Telecommunications Union -- Telephony (ITU-T) facsimile standards. Mr. Duehren
is also a member of the Institute of Electrical Electronic Engineers (IEEE) and
has been a member of the SCSA work group on facsimile API standards. Mr. Duehren
received a Bachelor of Science degree and Master of Science degree in Electrical
Engineering from the Massachusetts Institute of Technology.
Patrick T. Hynes is a Company founder and has been Vice President of
Advanced Product Engineering since January 1994 and a Director of Brooktrout
from the Company's inception in 1984. Mr. Hynes was Vice President of
Engineering from the Company's inception to December 1993. Mr. Hynes is a member
of the Institute of Electrical Electronic Engineers (IEEE). Mr. Hynes received a
Bachelor of Science degree in Electrical Engineering from the Massachusetts
Institute of Technology and a Master of Science degree in Electrical Engineering
from Columbia University.
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Stephen A. Ide has been Senior Vice President and President of Brooktrout
Interspeed, Inc. since January 1997. Mr. Ide was Senior Vice President of Sales
and Marketing of Brooktrout from January 1997 to January 1993 and was Vice
President of Sales and Marketing of Brooktrout from July 1987 to December 1992.
Prior to joining the Company, Mr. Ide was co-founder and president of Computer
Telephone Corporation. Mr. Ide also served as vice president of operations for
Rolm of New England Corporation.
Robert C. Leahy has been Vice President of Finance and Operations and
Treasurer of Brooktrout since March 1988. Prior to joining Brooktrout, Mr. Leahy
held the position of corporate controller and treasurer for Cambridge Robotics.
Mr. Leahy is an active member in the Financial Executive Institute. Mr. Leahy
received a Bachelor of Science degree in accounting and a Master of Business
Administration degree from Bentley College.
David B. Lowe has been Vice President of Sales of Brooktrout since January
1993. Mr. Lowe was National Sales Manager of Brooktrout from October 1987 to
December 1992, and Eastern Regional Sales Manager of Brooktrout from November
1986 to September 1987. Prior to joining Brooktrout, Mr. Lowe was the National
Accounts Manager at ITT Business Communications Corporation. Mr. Lowe received a
Bachelor of Arts degree from Bates College and a Master of Business
Administration degree from Northeastern University.
R. Andrew O'Brien has been Vice President of Marketing and Business
Development of Brooktrout since July 1993, and Director of Marketing and
Business Development from January 1993 to June 1993. Prior to joining the
Company, Mr. O'Brien was an Associate at McKinsey & Company from September 1986
to January 1993. Mr. O'Brien is a member of the executive committee of GO-MVIP
and on the board of directors of the Enterprise Computer Telephony Forum. Mr.
O'Brien received a Bachelor of Arts degree from Yale University and a Master of
Business Administration degree from Harvard Business School.
Jonathan J. Sirota has been Vice President of Engineering of Brooktrout
since January 1994. Prior to joining the Company, Mr. Sirota was Senior Vice
President of Engineering and Operations for ERGO Computing, Inc. from March 1989
to January 1994. Mr. Sirota received a Bachelor of Science degree in Electrical
Engineering from Rensselaer Polytechnic Institute and a Master of Science degree
in Electrical Engineering from Massachusetts Institute of Technology.
Michael Donoghue has been Vice President of Worldwide Sales since January
1997. Mr. Donoghue was Director of International Sales from January 1995 to
December 1996 and Managing Director of Brooktrout Technology Europe in Brussels,
Belgium from January 1993 to December l995. He was a National Sales Manager from
January l990 to December l992 and was a Major Account Manager from December l987
to December l989. Mr. Donoghue received a Bachelors of Science in Mechnical
Engineering from the University of Massachusetts Amherst in l987.
ITEM 2. PROPERTIES
Until March 1996, the Company occupied a facility of approximately 21,000
square feet in Needham, Massachusetts which was used for research and
development, engineering, manufacturing and administration. The lease expired on
December 31, 1995 and was extended on a month to month basis.
In 1995, the Company signed a new lease for a stand-alone facility that is
approximately 38,000 square feet. The new lease commenced March 1, 1996 and
expires October 31, 2006. The new facility accommodates research and
development, engineering, manufacturing, sales, marketing and administration.
Operations of the Company were moved to the facility in March 1996.
10
<PAGE> 13
The Company also occupies approximately 16,515 square feet in Southborough,
Massachusetts, which it took over as a lessee in connection with its acquisition
of TSI. This facility accommodates research and development, engineering and
packaging. The lease for this facility commenced on May 1, 1995 and expires on
April 30, 2001.
Brooktrout Networks Group, Inc. occupies approximately 4,800 square feet in
Richardson, Texas for research and development and administrative facilities.
The Company signed a new lease for this facility which commenced on March 1,
1995 and expires on February 28, 1998.
The Company has also signed operating lease commitments for office space in
Belgium, Singapore, California, Colorado, and Connecticut. The Belgium lease is
for a period of 3 years while the rest of the leases are for 1 year or less.
The Company believes that its present facilities are adequate for its
current needs and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
On September 15, 1992, two manufacturers of fax-on-demand systems, Ibex
Technologies, Inc. ("Ibex") and FaxBack, Inc. ("FaxBack"), filed a lawsuit
against the Company in Federal District court for the Northern District of
California, seeking a declaratory judgment of invalidity with respect to the
Company's fax-on-demand patent. The Company counterclaimed for infringement of
the patent and other damages. See "Business--Proprietary Technologies." The
complaint against the Company in the lawsuit did not seek money damages, but
requested an award of attorneys' fees and costs. It is the Company's
understanding that this lawsuit received significant funding from Dialogic
Corporation ("Dialogic"), a competitor of the Company, through an organization
of which it was a founder.
The lawsuit initiated by Ibex and FaxBack was followed by various
additional litigated cases, including claims filed by the Company in the Federal
District Court for the District of Massachusetts against Dialogic and GammaLink
("GammaLink"), a competitor of the Company which was subsequently acquired by
Dialogic, for infringement of the Company's DID fax patent and for declaratory
relief with respect to a patent controlled by Dialogic; and a further claim in
that Court filed by the Company against Dialogic, GammaLink, FaxBack and Ibex
seeking specific performance and damages arising from the alleged breach of a
prior agreement to settle the litigation among the parties.
In May 1995, the Company and FaxBack entered into a settlement agreement
and FaxBack was dismissed from the pending litigated cases.
In June 1995, the Company executed a Settlement Agreement with Dialogic,
GammaLink and Ibex, and all items of litigation among the parties were
dismissed.
Subsequently, a subsidiary of Dialogic filed a lawsuit against the Company
in Federal District Court for the District of New Jersey, alleging infringement
by the Company's products of patents owned by the plaintiff and seeking damages,
special damages and injunctive relief. The Company has filed an Answer and
Counterclaim asserting noninfringement and further asserting that the patent was
licensed to the Company, and seeking declaratory and monetary relief.
Dialogic has also made certain filings with the U.S. Patent Office directed
at a possible challenge to the Company's fax-on-demand patent.
11
<PAGE> 14
On the basis of these and other actions taken by Dialogic after the
execution of the Settlement Agreement, the Company believes that Dialogic
entered into the Settlement Agreement in bad faith and with fraudulent intent.
Accordingly, on November 1, 1995, the Company filed, in the Federal District
Court for the District of Massachusetts, a lawsuit against Dialogic and certain
affiliated parties, seeking rescission of the Settlement Agreement, damages,
special damages, an order vacating the dismissal of the previously litigated
cases, and specific enforcement of an earlier agreement regarding the
settlement. Dialogic filed an Answer and Counterclaim on January 30, 1996. The
Counterclaim seeks an award of damages and special damages. If the Company
prevails in its claim for rescission of the Settlement Agreement, any or all of
the cases described above may be re-instituted.
On December 20, l996, the Defendants' Motion for Summary Judgment on the
Company's claim of fraud in the litigation described above was allowed. The
Company's Chapter 93A claim and the Defendants' counterclaims remain to be
litigated.
The Company believes that neither the currently pending litigated cases or
the cases that may be reinstituted as a result of the rescission proceeding, nor
an adverse decision in any of such cases will have a material adverse effect on
the Company's business, financial condition or results of operations.
On October 4, l996, 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. On December 16, l996, the Company filed a Motion to
Dismiss the action, which remains pending. The Company is reviewing the patents
at issue, and intends to defend the case vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Information in response to this item appears under the caption "Stock
Market Information" of the Company's Annual Report for the year ended December
31, 1996, which is incorporated in this report by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this item appears under the caption "Selected
Consolidated Financial Data" of the Company's Annual Report for the year ended
December 31, 1996, which is incorporated in this report by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Information in response to this item appears under the caption
"Management's Discussion & Analysis of Financial Condition and Results of
Operations" contained in the Company's Annual Report for the year ended December
31, 1996, which is incorporated in this report by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information in response to this item is contained in the Company's Annual
Report for the year ended December 31, 1996, which is incorporated in this
report by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The information appearing under the caption "Information
Regarding Nominees and Directors" of the Company's Proxy Statement for its 1997
Annual Meeting of Stockholders is incorporated in this report by reference.
EXECUTIVE OFFICERS. Information with respect to executive officers appears
under the caption "Executive Officers" in Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item appears under the caption "Executive
Compensation" of the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which is incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item appears under the captions "Principal
Stockholders" and "Ownership by Management of Equity Securities" of the
Company's Proxy Statement for its 1997 Annual Meeting of Stockholders, which is
incorporated in this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
14
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
<TABLE>
The following is included in Part II of this report, incorporated by
reference from the Company's Annual Report for the year ended December 31, 1996:
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report.............................................................
Consolidated Balance Sheets as of December 31, 1996 and 1995.............................
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994..................................................
Consolidated Statements of Stockholders Equity (Deficiency) for the
Years Ended December 31, 1996, 1995 and 1994......................................
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994......................................
Notes to Consolidated Financial Statements...............................................
</TABLE>
(a)(2) Financial Statement Schedule
<TABLE>
The following are contained on the indicated pages of this report:
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report on Schedule.................................................
Schedule IX Valuation and Qualifying Accounts............................................
</TABLE>
Schedules not listed above are omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
(a)(3) Exhibits
<TABLE>
The following exhibits are filed as part of this report. Where such filing
is made by incorporation by reference to a previously filed statement, such
statement is identified.
<CAPTION>
EXHIBIT
NO. TITLE
- -------- -----
<S> <C>
3.1 Restated Articles of Organization of the Company (1)
3.2 Amended and Restated By-laws of the Company (2)
4 Specimen certificate for shares of Common Stock, $.01 par
value, of the Company (2)
11 Computation of Earnings Per Share
</TABLE>
<PAGE> 18
<TABLE>
<S> <S>
13 1996 Annual Report of Brooktrout Technology, Inc.
21 Subsidiaries of the Company
23 Independent Auditors' Consent
- ------------------------
<FN>
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, as filed on March 31, 1993.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
with respect to its initial public offering of Common Stock as initially filed
on August 28, 1992 (File No. 33-51424).
</TABLE>
(b) Reports on Form 8-K
No reports were filed on Form 8-K by the Company during the quarter ended
December 31, l996.
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders of
Brooktrout Technology, Inc.:
We have audited the consolidated financial statements of Brooktrout Technology,
Inc. as of December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated January
31, 1997; such consolidated financial statements and report are included in your
1996 Annual Report to Stockholders and are incorporated herein by reference. Our
audits also included the financial statement schedules of Brooktrout Technology,
Inc., listed in Item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Boston, Massachusetts
January 31, 1997
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BROOKTROUT TECHNOLOGY, INC.
By: /s/ Eric R. Giler
-----------------------------------
Eric R. Giler
President
Date: March 26, 1997
SIGNATURES
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 in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/
- --------------------------- President and Director (Principal
Eric R. Giler Executive Officer)
/s/
- --------------------------- Vice President of Finance
Robert C. Leahy and Operations and Treasurer
(Principal Financial and
Accounting Officer)
/s/
- --------------------------- Vice President and Director
David W. Duehren
/s/
- --------------------------- Vice President and Director
Patrick T. Hynes
/s/
- --------------------------- Director
Robert G. Barrett
/s/
- --------------------------- Director
David L. Chapman
/s/ Director
- ---------------------------
W. Brooke Tunstall
<PAGE> 21
SCHEDULE IX
<TABLE>
BROOKTROUT TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the year ended December 31, 1994 272 126 (34) 364
For the year ended December 31, 1995 364 157 (72) 449
For the year ended December 31, 1996 449 144 (69) 524
ACCRUED WARRANTY COSTS:
For the year ended December 31, 1994 192 222 (50) 364
For the year ended December 31, 1995 364 251 (278) 337
For the year ended December 31, 1996 337 207 (98) 446
</TABLE>
<PAGE> 1
EXHIBIT 11
BROOKTROUT TECHNOLOGY, INC.
<TABLE>
COMPUTATION OF INCOME PER COMMON SHARE
(In Thousands, Except per Share Data)
<CAPTION>
DECEMBER 31,
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Primary Income Per Share:
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock........................................ 9,947 9,661 9,570
Common equivalent shares resulting from options 954 416 273
------- ------- -------
Total.............................................. 10,901 10,077 9,843
======= ======= ======
Net income.............................................. $ 6,865 $ 5,203 $2,629
======= ======= ======
Net income per Common Share............................. $ 0.63 $ 0.52 $ 0.27
======= ======= ======
Fully Diluted Income Per Share:
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock........................................ 9,947 9,661 9,574
Common equivalent shares resulting from options 1,019 492 267
------- ------- ------
Total.............................................. 10,966 10,153 9,841
======= ======= ======
Net income.............................................. $ 6,865 $ 5,203 $2,629
======= ======= ======
Net income per Common Share............................. $ 0.63 $ 0.51 $0.27
======= ======= ======
</TABLE>
<PAGE> 1
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this annual report are forward-looking statements which involve risk and
uncertainties. The uncertainties include, but are not limited to, economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices, and other factors discussed
in the Company's filings with the Securities and Exchange Commission.
INTRODUCTION
On May 29, 1996, the Company acquired Technically Speaking, Inc. (TSI), which
develops and markets an object-oriented development environment for
enterprise-wide, client/server voice, fax and computer telephony applications.
In connection with the acquisition, the Company issued approximately 713,000
shares of common stock to TSI stockholders in exchange for all of their interest
in TSI. The acquisition was accounted for as a pooling of interests and the
accounts of the Company have been retroactively restated to include TSI for all
periods presented.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue during the year ended December 31, 1996 increased by approximately 52%,
to $58.8 million, up from $38.7 million in 1995. The increase in 1996 revenue
was attributable to increased shipments of TR Series products, OEM voice systems
and fax 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 $26.1 million, or 44% of revenue in 1996, compared
to $17.8 million, or 46% of revenue, in 1995. Gross profit percentage was 56%
for 1996 and 54% for 1995. This increase in gross profit percentage was the
result of a higher proportion of TR Series product shipments, which carry a
comparatively higher gross margin than OEM systems.
Research and development expense was $7.2 million, or 12% of revenue in
1996, compared with $4.8 million, or 13% of revenue in 1995. 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 a higher dollar increase in the Company's
revenues, however, the percentage decreased. 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 $13.7 million in 1996,
compared with $9.1 million in 1995. This higher expense level resulted from
increased staffing, promotional activities and travel. The Company's promotional
activities in 1996 were directed primarily towards increased levels of
advertising in industry publications and participation in trade shows. As a
percentage of revenue, selling, general and administrative expense was 23% of
revenue for 1996 and 24% of revenue for 1995.
During the year ended December 31, 1996, the Company incurred approximately
$1.2 million in costs related to the acquisition of and merger with TSI. 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. Interest and other income was $1.3 million in 1996, compared
with $967,000 in 1995, reflecting higher investable cash balances coupled with
higher interest rates.
The Company's effective tax rate was 43% for the year ended December 31,
1996 and 34% for the year ended December 31, 1995. The effective rate for 1996
increased due primarily to certain merger related costs which are not deductible
for tax purposes.
14
<PAGE> 2
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue during the year ended December 31, 1995 increased by approximately 55%,
to $38.7 million, up from $24.9 million in 1994. The increase in 1995 revenue
was attributable to increased shipments of TR Series products, OEM systems and
fax systems, and increased consulting activity. Increased sales in 1995 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 voice systems for sale to OEMs,
telephone companies and other service companies, together with steps taken by
the Company in 1994 and 1995 to develop a reseller sales channel and to
implement Windows NT capability for its TR Series products. Revenue from
software related products during the year ended December 31, 1995 increased by
approximately 210%, to $4.5 million, up from $1.5 million in 1994. The increase
in revenue was primarily attributable to increased revenue from software
licensing (a $1.7 million increase), consulting service activity (a $760,000
increase) and hardware sales (a $572,000 increase).
Cost of product sold was $17.8 million, or 46% of revenue in 1995, compared
to $12.1 million, or 48% of revenue, in 1994. Gross profit percentage was 54%
for 1995 and 52% for 1994. This increase in gross profit percentage was the
result of a higher proportion of TR Series product shipments coupled with
decreases in product costs on OEM systems. In addition, there was a higher
proportion of software revenue related to source code licenses and consulting,
both of which have a relatively low incremental cost of product sold.
Research and development expense was $4.8 million, or 13% of revenue in
1995, compared with $3.5 million, or 14% of revenue in 1994. The dollar increase
in 1995 reflects the Company's continuing development efforts for its TR Series
product family, its fax and OEM systems development, as well as its computer
telephony development tools. As a result of a higher percentage increase in the
Company's revenue, however, the percentage decreased.
Selling, general and administrative expense was $9.1 million in 1995,
compared with $5.7 million in 1994. This higher expense level resulted from
increased staffing, promotional activities and travel. Selling, general and
administrative staff levels increased from 26 employees on December 31, 1994 to
35 employees on December 31, 1995. The Company's promotional activities in 1995
were directed primarily towards increased levels of advertising in industry
publications and participation in trade shows. As a percentage of revenue,
selling, general and administrative expense was 24% of revenue for 1995 and 23%
of revenue in 1994.
Interest and other income was $967,000 in 1995 compared with $604,000 in
1994, reflecting higher interest rates coupled with higher investable cash
balances. Interest expense for 1995 decreased to $7,000 from the 1994 expense of
$10,000 because of lower levels of debt outstanding.
The Company's effective tax rate was 34% for the year ended December 31,
1995 and 38% for the year ended December 31, 1994. The effective rate for 1995
decreased primarily due to a significant increase in TSI income, which was not
subject to tax due to TSI's status as a Subchapter S corporation, offset
slightly by shifts in the Company's state tax position and reduced availability
of credits at the federal and state level.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, 1995 and 1994, the Company funded its operations primarily 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. The Company expects to renew the line of credit on similar
15
<PAGE> 3
RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
terms as those in place at present. Any amounts borrowed under the line would be
subject to interest at the bank's prime rate. On December 31, 1996 commitments
outstanding on letters of credit totaled $84,000 which are to be used for future
inventory purchases; no borrowings have been made during any period presented.
The Company's working capital increased from $24.8 million at December 31,
1995 to $43.4 million at December 31, 1996. The increase was primarily
attributable to higher cash and equivalent and marketable securities balances as
a result of increased profitability and the successful completion of a public
offering of stock in August 1996 which raised approximately $11.1 million.
During 1996, 1995 and 1994, the Company purchased approximately $3,400,000,
$646,000, and $269,000, respectively, in equipment. The Company currently has no
material commitments for additional capital expenditures.
The pricing of the Company's products and costs of its goods are generally
determined by current market conditions. Market conditions can be impacted by
inflation, however, the Company believes that inflation has not had a
significant effect on its operations to date.
The Company has an operating lease commitment for an office and
manufacturing facility. The lease agreement expires in October, 2006 and the
Company has the option to extend the lease for up to 10 years. The lease
agreement requires the Company to pay all of the building's taxes, insurance and
maintenance costs (see Note 7 to the consolidated financial statements). The
Company has also signed operating lease commitments for office space in Belgium,
Singapore, California, Colorado and Connecticut. The Belgium lease is for a
period of 3 years, while the rest of the leases are for 1 year or less.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which
will be effective for fiscal 1997. SFAS 128 will require the Company to restate
amounts previously reported as earnings per share to comply with the
requirements of the new standard; while the Company is in the process of
evaluating the impact of SFAS 128, it does not expect that adoption will have a
dilutive effect on previously reported earnings per share.
FOOTNOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
(1) All financial information herein has been restated to reflect the
acquisition of Technically Speaking, Inc. (TSI) by the Company on May 29,
1996, in a transaction accounted for as a pooling-of-interests. The
accompanying financial information now includes the accounts of TSI for
all periods presented.
(2) Includes effect of change in accounting for income taxes of $337,000 for
1993. Includes extraordinary item representing a reduction of income taxes
(due to carryforward of prior years' operating losses) of $456,000 for
1992.
(3) Pro forma income per common share is based upon reported net income
adjusted for pro forma tax charges of $5,000, $424,000, $34,000, and
$42,000 for the years ended December 31, 1996, 1995, 1994 and 1993,
respectively, on TSI income. TSI had elected to be taxed as a Subchapter S
corporation for income tax purposes. Under this election, income was taxed
directly to TSI stockholders. Accordingly, TSI's historical financial
statements did not include a charge for income taxes.
16
<PAGE> 4
BROOKTROUT TECHNOLOGY, INC.
================================================================================
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data) YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA(1)
<S> <C> <C> <C> <C> <C>
Revenue ................................... $58,827 $38,673 $24,888 $18,060 $12,365
Costs and expenses:
Cost of product sold .................. 26,059 17,759 12,055 8,734 5,800
Research and development ............... 7,175 4,822 3,523 2,584 1,852
Selling, general and administrative .... 13,666 9,144 5,686 4,294 2,804
Acquisition related charges ............ 1,236 -- -- -- --
------- ------- ------- ------- -------
Income from operations .................... 10,691 6,948 3,624 2,448 1,909
Other income (expense):
Interest/other income .................. 1,283 967 604 494 140
Interest expense ....................... (1) (7) (10) (15) (22)
------- ------- ------- ------- -------
Total other income ................ 1,282 960 594 479 118
------- ------- ------- ------- -------
Income before income tax provision and
extraordinary and other items ........... 11,973 7,908 4,218 2,927 2,027
Income tax provision ...................... 5,108 2,705 1,589 986 810
Income before extraordinary and other items 6,865 5,203 2,629 1,941 1,217
Extraordinary and other items(2) .......... -- -- -- 337 456
------- ------- ------- ------- -------
Net income ................................ $ 6,865 $ 5,203 $ 2,629 $ 2,278 $ 1,673
======= ======= ======= ======= =======
Income per common share:
Before extraordinary and other items ... $ 0.63 $ 0.52 $ 0.27 $ 0.20 $ 0.19
Net income ............................. 0.63 0.52 0.27 0.23 0.26
Pro forma income per common share(3):
Before extraordinary and other items ... 0.63 0.47 0.26 0.19 0.19
Net income ............................. $ 0.63 $ 0.47 $ 0.26 $ 0.23 $ 0.26
Weighted average number of common and
common equivalent shares outstanding .... 10,901 10,077 9,843 9,783 6,530
DECEMBER 31,
========================================================================================================================
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET DATA(1)
Working capital ........................... $ 43,408 $ 24,823 $ 19,825 $ 17,217 $ 15,384
Total assets .............................. 58,366 34,581 25,461 20,903 18,322
Long-term debt, less current portion ...... -- -- 6 30 50
Stockholders' equity ...................... $ 47,592 $ 26,445 $ 20,898 $ 18,241 $ 15,616
</TABLE>
17
<PAGE> 5
BROOKTROUT TECHNOLOGY, INC.
================================================================================
CONSOLIDATED BALANCE SHEETS
<TABLE>
(In thousands, except share data) DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
NOTES 1996 1995
----- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents .................. 1 $30,738 $14,230
Marketable securities ................. 1 8,976 7,924
Accounts receivable (less allowance
for doubtful accounts of $524 and
$449 in 1996 and 1995, respectively) 1 7,107 6,097
Inventory ............................. 1 5,504 3,878
Deferred tax assets ................... 1,4 726 454
Prepaid expenses ...................... 899 366
------- -------
Total current assets ............... 53,950 32,949
------- -------
Equipment and furniture: .................... 1
Computer equipment ....................... 2,822 1,346
Furniture and office equipment ........... 2,476 539
Total .............................. 5,298 1,885
Less accumulated depreciation
and amortization ................. (1,438) (852)
------- -------
Equipment and furniture - net ...... 3,860 1,033
Investment and other assets ................. 1 556 599
------- -------
Total .............................. $58,366 $34,581
======= =======
</TABLE>
18
<PAGE> 6
<TABLE>
DECEMBER 31,
===================================================================================================
<CAPTION>
NOTES 1996 1995
----- ---- ----
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ......................... 3 $ -- $ 50
Current portion of long-term debt ...... -- 6
Accounts payable and other accruals .... 7,633 5,110
Accrued compensation and commissions ... 1,996 1,185
Customer deposits ...................... 263 376
Accrued warranty costs ................. 1 446 336
Accrued income taxes ................... 4 204 1,063
------- -------
Total current liabilities ........... 10,542 8,126
------- -------
Deferred rent .............................. 7 232 10
Commitments and contingencies .............. 7,9 -- --
Stockholders' equity: ...................... 1,5
Preferred stock, $1.00 par value;
authorized 100,000 shares; issued
and outstanding, none ............... -- --
Common stock, $.01 par value; authorized
25,000,000 shares; issued and
outstanding, 10,683,352 and 9,683,116
in 1996 and 1995, respectively ...... 107 97
Additional paid-in capital ............. 31,785 16,884
Unrealized gains (losses) on
marketable securities ............... (8) 49
Retained earnings ...................... 15,708 9,415
------- -------
Total stockholders' equity ............. 47,592 26,445
------- -------
Total ............................... $58,366 $34,581
======= =======
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 7
BROOKTROUT TECHNOLOGY, INC.
===============================================================================
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(In thousands, except per share data) YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
NOTES 1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Revenue .................................. 1,6,8 $58,827 $38,673 $24,888
Cost and expenses:
Cost of product sold ................. 26,059 17,759 12,055
Research and development ............. 1 7,175 4,822 3,523
Selling, general and administrative .. 13,666 9,144 5,686
Acquisition related charges3 ......... 2 1,236 -- --
------- ------- -------
Total cost and expenses ............ 48,136 31,725 21,264
------- ------- -------
Income from operations ................... 10,691 6,948 3,624
Other income (expense):
Interest and other income ............ 1,283 967 604
Interest expense ..................... (1) (7) (10)
------- ------- -------
Total other income ................. 1,282 960 594
------- ------- -------
Income before income tax provision ....... 11,973 7,908 4,218
Income tax provision ..................... 1,4 5,108 2,705 1,589
------- ------- -------
Net income ............................... $ 6,865 $ 5,203 $ 2,629
======= ======= =======
Net income per common share .............. 1 $ 0.63 $ 0.52 $ 0.27
======= ======= =======
Pro forma net income per common share .... 1 $ 0.63 $ 0.47 $ 0.26
======= ======= =======
Weighted average number of common and
common equivalent shares outstanding ... 1 10,901 10,077 9,843
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 8
BROOKTROUT TECHNOLOGY, INC.
================================================================================
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
UNREALIZED
GAINS
COMMON STOCK ADDITIONAL (LOSSES) ON
--------------------- PAID-IN MARKETABLE RETAINED
(In thousands, except share data) SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ....................... 9,550,910 $ 96 $16,561 $(21) $ 1,605 $18,241
Issuances of common stock for cash ............. 55,212 -- 78 -- -- 78
Tax benefit of stock options ................... -- -- 24 -- -- 24
Unrealized losses on marketable securities ..... -- -- -- (74) -- (74)
Net income ..................................... -- -- -- -- 2,629 2,629
---------- ---- ------- ---- ------- -------
Balance, December 31, 1994 ..................... 9,606,122 96 16,663 (95) 4,234 20,898
Issuances of common stock for cash ............. 76,994 1 114 -- -- 115
Tax benefit of stock options ................... -- -- 107 -- -- 107
Unrealized gains on marketable securities ...... -- -- -- 144 -- 144
Distributions to stockholders .................. -- -- -- -- (22) (22)
Net income ..................................... -- -- -- -- 5,203 5,203
---------- ---- ------- ---- ------- -------
Balance, December 31, 1995 ..................... 9,683,116 97 16,884 49 9,415 26,445
Issuances of common stock for cash ............. 1,000,236 10 12,718 -- -- 12,728
Tax benefit of stock options ................... -- -- 2,183 -- -- 2,183
Unrealized losses on marketable securities ..... -- -- -- (57) -- (57)
Distributions to stockholders .................. -- -- -- -- (572) (572)
Net income ..................................... -- -- -- -- 6,865 6,865
---------- ---- ------- ---- ------- -------
Balance, December 31, 1996 ..................... 10,683,352 $107 $31,785 $ (8) $15,708 $47,592
========== ==== ======= ==== ======= =======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 9
BROOKTROUT TECHNOLOGY, INC.
================================================================================
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(In thousands) YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ......................................... $ 6,865 $ 5,203 $ 2,629
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization .................. 586 648 260
Amortization of discount on marketable
securities ................................... 18 21 9
Deferred income taxes .......................... (272) (50) (157)
Increase (decrease) in cash from:
Accounts receivable .......................... (1,010) (3,026) (187)
Inventory .................................... (1,626) (2,237) 263
Prepaid expenses ............................. (533) (123) (9)
Accounts payable and other accruals .......... 2,694 3,547 1,987
------- ------- -------
Cash provided by operating activities .... 6,722 3,983 4,795
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment and furniture ....... (3,413) (646) (269)
Other assets ................................... 43 (11) 10
Investment ..................................... -- (500) --
Purchases of marketable securities ............. (4,532) 10,801) (617)
Maturities and sales of marketable securities .. 3,405 11,544 1,700
------- ------- -------
Cash provided by (used for)
investing activities ................... (4,497) (414) 824
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock ......... 12,728 115 78
Tax benefit of stock options ................... 2,183 107 --
Distributions to stockholders .................. (572) (22) --
Net proceeds from (repayments of) line of credit (50) 50 --
Repayment of long-term debt .................... (6) (24) (20)
------- ------- -------
Cash provided by financing activities ..... 14,283 226 58
------- ------- -------
Increase in cash and equivalents ............... 16,508 3,795 5,677
Cash and equivalents, beginning of year ............ 14,230 10,435 4,758
------- ------- -------
Cash and equivalents, end of year .................. $30,738 $14,230 $10,435
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 10
BROOKTROUT TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Brooktrout Technology, Inc. (the Company) supplies computer software
and hardware products to system vendors and service providers in the electronic
messaging market. The Company's products enable its customers to deliver a wide
range of solutions for the integration and cost effective management of image
(fax), voice and data communications. The Company conducts business on a
worldwide basis, with manufacturing, research and sales operations centered in
Massachusetts and Texas. The Company sells its products to service providers,
original equipment manufacturers, and value-added resellers.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Technically
Speaking, Inc. (TSI), Brooktrout Securities Corporation, Brooktrout Technology
(Europe) Limited (U.K.), Brooktrout Technology Europe, Ltd. (U.S.), Brooktrout
Technology Foreign Sales Corporation, Brooktrout Interspeed, Inc. and Brooktrout
Networks Group, Inc. All significant intercompany balances and transactions have
been eliminated.
STOCK SPLITS - All share and per share data have been restated to
retroactively reflect the impact of two three-for-two stock splits effected by
50% stock dividends during 1996.
<TABLE>
INVENTORY - Inventory is carried at the lower of cost (first-in, first-out
basis) or market and consisted of the following:
<CAPTION>
(in thousands) DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Raw materials . $3,740 $2,979
Work in process 1,104 605
Finished goods 660 294
------ ------
Total ......... $5,504 $3,878
====== ======
</TABLE>
EQUIPMENT AND FURNITURE - Purchased equipment and furniture is recorded at
cost. Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the related assets (five years).
INVESTMENT - The Company has an investment in the common stock of a company
operating in the computer telephony industry. The Company's investment
aggregated $500,000 at December 31, 1996 and represents less than 20% of the
voting interest. Because the common stock is not readily marketable, the
investment is carried at cost and periodically assessed for potential impairment
in value.
REVENUE RECOGNITION - Revenue from product or software sales is recognized
upon the shipment or delivery of product when no significant obligations remain.
Revenue from maintenance and support contracts is deferred and recognized as the
services are performed. Maintenance and support revenue included with an initial
license fee is unbundled and recognized as the services are performed.
CONCENTRATION OF CREDIT RISK - The Company sells its products to various
customers in several industries. The Company generally requires no collateral;
however, to control credit risk the Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. On
December 31, 1996 and 1995, 35% and 32%, respectively, of the Company's accounts
receivable were from one customer (Note 6).
SOFTWARE DEVELOPMENT COSTS - Certain software costs are capitalized
following attainment of technological feasibility. No such costs were incurred
in 1994, 1995 or 1996.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs, other than
software development costs, are expensed as incurred.
23
<PAGE> 11
BROOKTROUT TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
WARRANTY COSTS - Estimated costs of warranty repairs are provided at the
time of sale of the related product.
INCOME TAXES - Deferred tax assets and liabilities are provided to
recognize temporary differences between the book and tax bases of the Company's
assets and liabilities. These assets and liabilities are measured using
currently enacted rates.
CASH FLOW INFORMATION - Cash equivalents include highly liquid securities
with remaining maturities of three months or less at the time of purchase.
<TABLE>
Supplemental disclosure of cash flow information:
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash paid
for interest $ 1 $ 7 $ 10
Cash paid for
income taxes $3,702 $2,219 $1,217
</TABLE>
MARKETABLE SECURITIES - Marketable securities are classified as
available-for-sale and are carried at fair market value using current market
quotes. Unrealized gains or losses are recorded as a separate component of
stockholders' equity.
Marketable securities consist primarily of U.S. Treasury securities, with
some funds held in investment grade corporate notes. On December 31, 1996 and
1995, the amortized cost of these securities was $8,984,000 and $7,874,000,
respectively. Gross unrealized gains on December 31, 1996 were $3,000 and gross
unrealized losses were ($11,000). Since the Company generally holds securities
to maturity, during the three years ended December 31, 1996, there were no
significant realized gains or losses from sales of these securities.
INCOME PER COMMON SHARE - Income per common share is computed using the
weighted average number of common and common equivalent shares outstanding
during each year. The weighted average number of shares outstanding during each
period has been adjusted to reflect the three-for-two stock splits referred to
above. Common equivalent shares consist of stock options using the treasury
stock method.
PRO FORMA INCOME PER COMMON SHARE - Pro forma income per common share is
based upon reported net income, adjusted for pro forma tax charges of $5,000,
$424,000 and $34,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, on TSI income. TSI had elected to be taxed as a Subchapter S
corporation for income tax purposes. Under this election, income was taxed
directly to TSI stockholders. Accordingly, TSI's historical financial statements
did not include a charge for income taxes. The pro forma tax charge was based
upon TSI reported income using an estimated effective rate of 40% (Note 2).
USE OF ESTIMATES - The preparation of financial statements requires, of
necessity, the use of estimates to determine the appropriate carrying value of
certain assets and liabilities. Each of these estimates requires the Company to
carefully assess past history and to attempt to estimate probable outcomes in
the future. While uncertainties are always present in the estimation process and
changes in underlying assumptions could occur, the Company believes that the
assumptions used to develop these estimates are reasonable.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments held or used by
the Company consist of cash, marketable securities, accounts receivable,
accounts payable and letters of credit issued under the Company's line of credit
(Note 3). Marketable securities are carried at fair value at each balance sheet
date. Management estimates that carrying value approximates fair value for all
other financial instruments.
STOCK-BASED COMPENSATION - Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value method of
Accounting Principles Board Opinion No. 25 (Note 5).
24
<PAGE> 12
- --------------------------------------------------------------------------------
2. ACQUISITION OF TECHNICALLY SPEAKING, INC. (TSI)
On May 29, 1996, the Company acquired TSI. In connection with the acquisition,
the Company issued 713,000 shares of common stock to TSI stockholders in
exchange for all of their interest in TSI. The acquisition qualified for pooling
of interests accounting treatment and, accordingly, the Company's consolidated
financial statements have been retroactively restated to include the accounts of
TSI for all periods presented.
<TABLE>
Information regarding the separate revenue and net income of the combined
companies through the merger date is presented below. There were no adjustments
required to conform accounting policies of the two companies.
<CAPTION>
(In thousands) TO MAY 29, DECEMBER 31,
1996 1995 1994
--------- ------- --------
Revenues:
<S> <C> <C> <C>
Brooktrout $19,413 $34,392 $23,462
TSI ....... 1,472 4,541 1,464
Elimination (13) (260) (38)
------- ------- -------
Combined .. $20,872 $38,673 $24,888
======= ======= =======
Net income:
Brooktrout $ 2,040 $ 4,144 $ 2,544
TSI ....... 25 1,059 85
------- ------- -------
Combined .. $ 2,065 $ 5,203 $ 2,629
======= ======= =======
</TABLE>
In connection with the acquisition, the Company recorded a charge of $1,236,000
representing costs associated with this transaction.
3. LINE OF CREDIT
The Company has a line of credit with a bank. 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 and foreign exchange contracts, subject to compliance with
certain covenants. On December 31, 1996, commitments outstanding on letters of
credit totaled $84,000 to be used for future inventory purchases; no borrowings
have been made during any period presented. Any amounts outstanding under the
line of credit would bear interest at the bank's prime rate. The line is subject
to annual renewal and expires in July 1997.
4. INCOME TAXES
<TABLE>
The provision for income taxes is approximately as follows:
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Federal-current $2,428 $1,935 $1,245
State-current 769 713 477
Federal-deferred (207) (37) (112)
State-deferred (65) (13) (45)
Other(1) 2,183 107 24
- ----- ------ ------
Provision $5,108 $2,705 $1,589
====== ====== ======
<FN>
(1) Tax benefit related to disqualifying dispositions of stock
options
</TABLE>
<TABLE>
A reconciliation of the statutory federal rate to the effective tax rate is as
follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Statutory tax rate 34% 34% 34%
State taxes, net of
federal benefit 6 7 7
Acquisition
related charges 3 -- --
TSI (income) loss not
subject to taxation -- (5) 1
Other -- (2) (4)
--- --- ---
Effective tax rate 43% 34% 38%
=== === ===
</TABLE>
25
<PAGE> 13
BROOKTROUT TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
<TABLE>
The tax effects of significant items comprising the Company's net deferred tax
asset as of December 31, 1996 and 1995 are as follows:
<CAPTION>
(In thousands) 1996 1995
--------- ---------
DEFERRED TAX ASSETS:
<S> <C> <C>
Allowance for
doubtful accounts $201 $154
Inventory allowances 165 125
Warranty accrual 174 138
Other, principally
vacation accrual
and deferred rent 206 82
---- ----
Deferred tax assets 746 499
Deferred tax liabilities -
equipment and furniture,
principally depreciation
methods (20) (45)
---- ----
Net deferred tax asset $726 $454
==== ====
</TABLE>
TAX ATTRIBUTES OF TSI - TSI and its stockholders had elected to be treated
as a Subchapter S corporation under the Internal Revenue Code. As a result,
TSI's income was taxed at the stockholder level and no provision for income
taxes was made. This election terminated effective on the date of consummation
of the merger, and TSI is subject to corporate income taxes on a prospective
basis.
Although not subject to corporate income tax, differences arose between the
reported amounts of assets and liabilities and the related tax bases of these
items due to the use of the cash method of accounting for income tax purposes by
TSI. On December 31, 1995, these differences were approximately as follows:
(IN THOUSANDS)
Accounts receivable $ 820
Accounts payable
and other accruals (317)
-----
Gross temporary differences $ 503
=====
Effective for tax year 1995, TSI and its stockholders elected to change
their tax accounting method to the accrual basis. The effect of this change
flowed through to the stockholders of TSI in tax years 1996 and 1995. As a
result, the tax attributes of TSI on the date of consummation did not have a
material impact on the combined Company's deferred or current tax positions.
5. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS - The Company has three stock option plans, providing for
the granting of options to purchase up to 2,325,000 shares of common stock: the
1984 Plan, the Executive Plan and the 1992 Plan. No further options are being
granted under the 1984 Plan and the Executive Plan. Options to purchase a total
of 1,509,363 shares are outstanding under these Plans. Exercise prices are at
fair value at the date of grant, in the case of incentive stock options, or at
the discretion of the Board of Directors in the case of nonqualified options.
Options generally vest over five years; in some instances, vesting can
accelerate upon the completion of certain defined milestones set by the
Compensation Committee at the date of grant. There have been no option grants at
exercise prices different from fair value.
<TABLE>
The following is a summary of stock option activity under all plans:
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
-------------------------------
<S> <C> <C>
Outstanding at
January 1, 1994 532,429 $ 2.73
Granted 704,813 6.33
Exercised (42,064) 0.58
Expired (5,738) 2.15
---------
Outstanding at
December 31, 1994 1,189,440 $ 4.90
Granted 184,430 6.67
Exercised (61,280) 0.66
Expired (337) 6.33
---------
Outstanding at
December 31, 1995 1,312,253 $ 5.31
Granted 565,875 22.50
Exercised (367,078) 5.63
Expired (1,687) 4.56
---------
Outstanding at
December 31, 1996 1,509,363 $11.61
=========
</TABLE>
26
<PAGE> 14
<TABLE>
The following table sets forth information regarding options outstanding at
December 31, 1996:
<CAPTION>
WEIGHTED
RANGE OF NUMBER WEIGHTED WEIGHTED AVERAGE EXERCISE
NUMBER OF EXERCISE CURRENTLY AVERAGE AVERAGE PRICE FOR CURRENTLY
OPTIONS PRICES EXERCISABLE EXERCISE PRICE REMAINING LIFE EXERCISABLE
=============================================================================================================
<S> <C> <C> <C> <C> <C>
216,364 $ 0.20-$ 4.95 198,131 $ 1.30 2.27 $ 1.13
29,100 $ 5.39-$ 6.11 25,875 $ 5.56 3.70 $ 5.53
586,179 $ 6.33 225,054 $ 6.33 8.95 $ 6.33
164,345 $ 6.44-$17.83 56,155 $10.22 9.53 $ 6.91
487,500 $22.50 121,875 $22.50 10.47 $22.50
21,875 $27.25-$29.91 3,281 $27.86 4.56 $27.25
4,000 $31.50 -- $31.50 11.92 --
--------- ------------- ------- ------ ----- ------
1,509,363 $ 0.20-$31.50 630,371 $11.61 8.39 $ 7.95
========= ============= ======= ====== ===== ======
</TABLE>
At December 31, 1995 and 1994, 563,199 and 345,641 options were currently
exerciseable.
STOCK PURCHASE PLAN - In August 1992, the Board of Directors adopted and
the stockholders approved the Company's 1992 Employee Stock Purchase Plan (the
Purchase Plan). The Purchase Plan provides for sales to participating employees
of up to 112,500 shares of common stock, at prices of not less than 85% of fair
market value on the beginning or ending date of the six month offering period
provided for purchase, whichever is lower. Through December 31, 1996, 55,292
shares had been issued.
PRO FORMA DISCLOSURE - As described in Note 1, the Company uses the
intrinsic value method to measure compensation expense associated with grants of
stock options or awards to employees. Had the Company used the fair value method
to measure compensation, reported net income and net income per share would have
been $5,078,000 or $0.47 per share in 1996 and $5,050,000 or $0.50 per share in
1995.
27
<PAGE> 15
<TABLE>
For purposes of determining the above disclosure required by Statement of
Financial Accounting Standards No. 123, the fair value of options on their grant
date was measured using the Black/Scholes option pricing model. Key assumptions
used to apply this pricing model were as follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Risk-free interest rate 5.6% 6.1%
Expected life of option grants 5.0 5.0
Expected volatility of underlying stock 68% 66%
</TABLE>
The pro forma presentation only includes the effects of grants made subsequent
to January 1, 1995. The estimated weighted average fair value of option grants
made during 1995 and 1996 was $3.95 and $13.71, respectively, per option. The
estimated weighted average fair value of grants made under the Purchase Plan
during 1995 and 1996 was $1.71 and $7.61, respectively, computed using the
assumptions described above with an expected life of 6 months for the option
feature present in the Purchase Plan awards.
RESERVED SHARES - The Company has reserved 2,217,623 shares of common stock
for issuance upon the exercise of stock options and purchase of stock under the
Purchase Plan.
DISTRIBUTIONS TO STOCKHOLDERS - TSI's policy prior to the acquisition was
to distribute annually to its stockholders an amount sufficient to pay the
income taxes on the Subchapter S income reported on their personal income tax
returns. In 1996 and 1995, distributions of $572,000 and $22,000 were made based
upon 1996, 1995 and 1994 taxable income, respectively.
EQUITY OFFERING - In August 1996, the Company sold 649,632 shares of common
stock to the public generating proceeds of approximately $11.1 million.
6. MAJOR CUSTOMER
One customer accounted for 33%, 36% and 53% of net revenue for the years ended
December 31, 1996, 1995 and 1994, respectively.
7. LEASE COMMITMENTS
<TABLE>
The Company has an operating lease commitment for an office and manufacturing
facility. The lease agreement expires in October 2006 and the Company has the
option to extend the lease for up to 10 years. The lease agreement requires the
Company to pay all taxes, insurance and maintenance costs. In addition, the
Company leases other office facilities under noncancelable operating leases.
These leases contain rent holiday and escalation clauses. Rent expense under
these leases is recognized on a straight-line basis. Rent expense under all
operating leases aggregated $660,000, $511,000 and $412,000 for each of the
years ended December 31, 1996, 1995 and 1994, respectively.
Minimum Lease Payments
Under Non-Cancelable Operating Leases
<CAPTION>
YEARS ENDED
(IN THOUSANDS) DECEMBER 31,
-----------
<S> <C>
1997 $ 451
1998 437
1999 420
2000 346
2001 308
Thereafter 1,654
------
Total $3,616
======
</TABLE>
8. INTERNATIONAL SALES
International sales, principally exports from the United States, accounted for
approximately 18% and 11% of revenue for the years ended December 31, 1996 and
1995. International sales were less than 10% of revenue in 1994.
9. CONTINGENCIES
The Company is a party to a number of legal actions, which arise in the normal
course of business. The Company, taking into account advice of counsel, does not
believe the eventual outcome of these matters will have a material effect on the
Company's consolidated financial condition or results of operations.
28
<PAGE> 16
10. RETIREMENT PLANS
The Company has a 401(K) retirement plan available to qualified employees.
Employees are allowed to contribute up to 18% of their salary to the plan. The
Company may contribute to the plan, however, no contributions were made in 1996,
1995 and 1994.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
=======================================================================================================
<S> <C> <C> <C> <C>
1996
Revenue $11,300 $13,445 $15,874 $18,208
Gross profit 6,203 7,737 8,726 10,102
Income from operations 1,663 1,555 3,369 4,104
Net income 1,166 694 2,218 2,787
Net income per common share 0.11 0.07 0.20 0.24
Pro forma net income per common share $ 0.11 $ 0.07 $ 0.20 $ 0.24
1995
Revenue $ 7,167 $ 8,963 $ 9,751 $12,792
Gross profit 3,673 4,705 5,574 6,962
Income from operations 866 1,416 2,174 2,492
Net income 632 967 1,830 1,774
Net income per common share 0.06 0.11 0.18 0.17
Pro forma net income per common share $ 0.07 $ 0.10 $ 0.14 $ 0.16
</TABLE>
29
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF BROOKTROUT TECHNOLOGY, INC.:
We have audited the accompanying consolidated balance sheets of Brooktrout
Technology, Inc. and its subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries on December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the
accompanying consolidated financial statements give retroactive effect to
the Company's acquisition of Technically Speaking, Inc. on May 29, 1996,
which has been accounted for as a pooling of interests.
/s/ Deloitte & Touche LLP
-------------------------------
Deloitte & Touche LLP
Boston, Massachusetts
January 31, 1997
30
<PAGE> 18
<TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
<CAPTION>
DIRECTORS EXECUTIVE OFFICERS
<S> <C> <C>
ERIC R. GILER ERIC R. GILER MICHAEL DONOGHUE
President President Vice President of Worldwide Sales
Brooktrout Technology, Inc.
DAVID W. DUEHREN DAVID B. LOWE
DAVID W. DUEHREN Vice President Of Research Vice President of Sales
Vice President of Research and Development
& Development RICHARD CARBEAU
Brooktrout Technology, Inc. STEPHEN A. IDE Vice President of Channel Sales
Senior Vice President,
PATRICK T. HYNES President, Brooktrout Interspeed, Inc. RAYMOND PHILLIPS
Vice President of Advanced Vice President of Premier Accounts
Product Engineering ROBERT C. LEAHY
Brooktrout Technology, Inc. Vice President of Finance ANDREW FOX
And Operations, and Treasurer Vice President
ROBERT G. BARRETT
General Partner JONATHAN J. SIROTA
Battery Ventures, Inc. Vice President of Engineering
W. BROOKE TUNSTALL R. ANDREW O'BRIEN
President Vice President of Marketing
Brooke Tunstall Associates And Business Development
DAVID L. CHAPMAN PATRICK T. HYNES
President and CEO and Vice President of Advanced
NorthPoint Software Product Engineering
Ventures, Inc.
</TABLE>
31
<PAGE> 19
STOCK MARKET INFORMATION
<TABLE>
STOCK PRICE INFORMATION
<CAPTION>
1996 1995
===========================================================================================================================
QUARTER ENDED HIGH LOW CLOSE QUARTER ENDED HIGH LOW CLOSE
<S> <C> <C> <C> <C> <C> <C> <C>
March 31 $24.83 $11.11 $23.00 March 31 $ 7.78 $ 7.22 $ 7.78
June 30 $32.66 $15.50 $28.00 June 30 $ 6.67 $ 6.44 $ 6.67
September 30 $38.00 $14.00 $36.50 September 30 $ 9.00 $ 8.67 $ 8.89
December 31 $42.25 $25.00 $28.00 December 31 $12.89 $12.33 $12.67
</TABLE>
GENERAL COUNSEL
Goodwin, Procter & Hoar
Boston, Massachusetts
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Boston, Massachusetts
TRANSFER AGENT
Fleet National Bank
Providence, Rhode Island
INFORMATION REQUESTS
A copy of the Form 10-K filed with the Securities and Exchange Commission may be
obtained without charge upon written request to the Company.
PLEASE ADDRESS REQUESTS TO:
Investor Relations
Robert C. Leahy
Vice President of Finance & Operations
Brooktrout Technology, Inc.
410 First Avenue
Needham, Massachusetts
02194-2703
ANNUAL MEETING
Thursday, May 15, 1997
Fleet Bank
75 State Street
Boston, MA 02109
32
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-55708 on Form S-8, and in Registration Statement No. 33-55900 on Form S-8 of
our reports dated January 31, 1997, appearing in and incorporated by reference
in the Annual Report on Form 10-K of Brooktrout Technology, Inc. for the year
ended December 31, 1996.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
BROOKTROUT TECHNOLOGY, INC.'S CONDENSED CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) BROOKTROUT TECHNOLOGY, INC.'S, 10-K FOR
THE PERIOD ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,738
<SECURITIES> 8,976
<RECEIVABLES> 7,107
<ALLOWANCES> 524
<INVENTORY> 5,504
<CURRENT-ASSETS> 53,950
<PP&E> 5,298
<DEPRECIATION> 1,438
<TOTAL-ASSETS> 58,366
<CURRENT-LIABILITIES> 10,542
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 58,366
<SALES> 58,827
<TOTAL-REVENUES> 58,827
<CGS> 26,059
<TOTAL-COSTS> 26,059
<OTHER-EXPENSES> 22,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,973
<INCOME-TAX> 5,108
<INCOME-CONTINUING> 6,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,865
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
