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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, 1997
[ ] 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 jurisdiction of (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: (781) 449-4100
Securities registered pursuant to Section 12(b) of the Act: None
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
--------- ----------
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)
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 20, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $164 million, based
on the closing price on such date of the Company's Common Stock on the Nasdaq
National Market ("Nasdaq").
As of March 20, 1998, 10,753,834 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, 1997 are incorporated into Part II of this Form 10-K and (ii) the
Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders of
the Company are incorporated into Part III of this Form 10-K.
"TR114", "Universal Port", "QuadraFax", "Show N Tel", "BTStack323",
"PowerBlock" and "IP/FaxRouter" are trademarks of Brooktrout Technology, Inc.
"TR Series" and "TruFax" are registered trademarks 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".) "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. "Netaccess"
and "Instant ISDN" are trademarks of Netaccess, Inc. "Instant RAS" is a
registered trademark of Netaccess, Inc.
<PAGE> 3
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, Illinois, Maryland, New Hampshire and
Massachusetts and has established sales and support offices in Belgium, England
and Singapore. The Company's international sales efforts, principally exports
from the United States, are initiated from corporate headquarters in the United
States and internationally located sales and support offices. 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.
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. TSI is now operating as a
division of the Company.
On June 30, 1997, the Company acquired the assets and assumed certain
liabilities of Netaccess, Inc. (Netaccess), a worldwide supplier of Primary Rate
and Basic Rate ISDN network interface products and multiport modem products for
standards-based, open remote access and computer telephony systems. Netaccess is
now operating as a wholly-owned subsidiary of the Company.
During 1997, the Company formed Interspeed, Inc., a new subsidiary that
will focus exclusively on high-speed network access in the data communications
segment.
BROOKTROUT'S PRODUCTS
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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.
In June 1997, the Company added multi-channel Primary Rate ISDN,
multi-channel Basic Rate ISDN, and multiport modem products by acquiring
Netaccess, Inc. These products provide data communications and networking
capabilities for remote access applications and for integration into computer
telephony systems.
In June 1997, the Company introduced the Brooktrout Open System
Telephony architecture (BOSTON), a next generation Universal Port software
architecture for electronic messaging applications. BOSTON will enable the
Company to provide (i) a comprehensive universal port development environment
for electronic messaging applications, (ii) development tools that have the
potential to reduce the time and cost of maintaining application software, and
(iii) cost-effective DSP resource boards for a wide variety of applications and
system configurations.
In September 1997, the Company announced that it would add to its TR
Series product line new software and hardware products for real-time
transmission of voice and fax over packet data networks using the Internet
Protocol (IP). These products include DSP resource boards, firmware,
communication protocol "stacks" and enhancements to the TR Series API, all of
which will be integrated into the BOSTON architecture.
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The Company has six major product lines, all of which serve the
electronic messaging market: fax and voice processing boards, IP telephony
boards, network interface boards, application development tools, fax systems,
and OEM systems. The following table describes Brooktrout's principal products
and the markets which they serve:
<TABLE>
<CAPTION>
Products Description Target Customers
-------- ----------- ----------------
<S> <C> <C>
Fax & Voice Processing Boards
TR114 Series Universal Port Fax & Multichannel boards with Service providers, OEMs
Voice boards advanced fax and voice and VARs implementing
processing capabilities medium to high density
available with 2, 4, 8,12 or 16 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
IP/Telephony Boards
TR2000 Series boards Multichannel boards that Service providers and
support real-time voice and fax OEMs implementing
transmission over IP networks medium and high density
"gateways" and other IP
telephony systems
Network Interface Boards
PRI/BRI WAN Interface boards Multi-span ISDN/T1/E1/BRI OEMs and system
boards for data, voice, video integrators implementing
applications available in data networking and
multiple bus types computer telephony
applications
Instant RAS Open Remote Access A family of remote access VARs and system
Server products software and hardware for integrators providing
industry standard platforms remote access solutions
providing analog and digital for office and
connectivity departmental applications
Application Development Tools
TR Series 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
</TABLE>
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<TABLE>
<S> <C> <C>
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
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
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>
Fax, Voice & Data Messaging
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, eight, twelve or sixteen channels per board. The
TR114 Series boards are designed to be approved by telecommunications regulatory
agencies worldwide and have been approved for use in 32 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, DID, and Basic Rate ISDN telephone service.
The TR114 Series boards are designed to be used in ISA and PCI-bus computers
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, eight, twelve and sixteen channel
digital boards with interfaces for popular Pulse Code Modulation ("PCM")
highways, such as MVIP, SC Bus 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.
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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 loop start telephone system interfaces.
IP/Telephony Boards
TR2000 Series. Announced in September 1997, the TR2000 Series
IP/Telephony boards are designed for systems that send voice and fax
communications over packet data networks based in the Internet Protocol (IP).
These systems are being developed for use by service providers as well as
enterprises that will use IP networks, rather than the public switched telephone
network, for voice and fax communications. TR2000 Series products offer up to 60
channels of real-time voice and fax processing on each channel of a multichannel
board. The boards include integrated interfaces to selected digital telephone
networks. In addition, the boards include interfaces to PCM buses to enable
system developers to connect to digital network interface boards for connection
to networks not supported by the on-board telephone interface.
Network Interface Boards
Netaccess PRI/BRI ISDN/TI/E1 Interfaces. Originally introduced in 1991
and periodically enhanced since then, the Netaccess ISDN interface boards give
OEMs and systems integrators easy to implement digital wide area network
interface solutions. When combined with Netaccess' Instant ISDN Software and
application interface, customers can develop data networking and computer
telephony solutions quickly with certifications in a large number of
jurisdictions throughout the world. Boards are available in several bus formats
including ISA, VME, and PCI with up to four interfaces per board and include
computer telephony interfaces such as MVIP.
Instant Remote Access Server Products. Introduced originally in 1995 as
the Multiport Modem product, the Instant RAS product family provides remote
access capability for industry standard platforms, such as Microsoft's Windows
NT Server. These products are designed for end users requiring economical access
to corporate networks through a variety of connection mechanisms, including
analog modem and digital ISDN interfaces. Instant RAS products provide reliable,
easy to install and maintain, and low price per port connections for small
offices, branch offices, departments of larger corporations, and small Internet
Service Providers. These products leverage Netaccess' expertise in developing
network interface products for its OEM partners.
Application Development Tools
TR Series API. The TR Series API, originally introduced in 1991 and
periodically enhanced since then, enables developers to quickly develop
sophisticated fax and voice applications. It is being enhanced to incorporate
support for Netaccess network interface products and real-time voice and fax on
IP networks. The API is a complete C language library of fax, voice, tone
signaling and call processing function calls. It also includes BTStack323 - an
H.323 protocol stack, time-saving sample applications, utilities and debugging
tools. The API is operating-system independent and will support 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 that support the features.
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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 supports Microsoft's
Windows NT.
Fax Systems
IP/FaxRouter. In June l996, Brooktrout introduced the IP/FaxRouter, an
Ethernet peripheral which sends facsimile traffic 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 Legend Mail and Partner Mail 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 which incorporates
English, Spanish and French languages in one system and is integrated with
Lucent's Merlin Legend system. In 1997, the Company began shipping Merlin Legend
Mail which delivers the Merlin Mail application software in a low-cost board
integrated into the Merlin Legend system. The Merlin Mail, Partner Mail, Merlin
Legend Mail and Merlin Mail Multi-Lingual Version products are based on the
voice boards developed and manufactured by the Company.
SALES AND MARKETING
The Company markets its products primarily to service providers, OEMs
and VARs. The TR Series, TruFax Series, Show N Tel and IP/Fax Router products
provide fax and voice processing, computer telephony or fax routing
functionality for systems sold by these customers. Network interface boards
provide analog and digital connectivity for data, voice and video applications
in multiple bus types. 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
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.
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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, California, Connecticut, Illinois,
Maryland and New Hampshire.
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 resellers, including many who are designated
Brooktrout Authorized Resellers. The Company employs direct sales people and
manufacturers' representatives to recruit, train and assist VARs. The Company
also uses two tier distribution for some of its network interface and multiport
modem products, utilizing national distributors who then sell to 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 sales offices in Belgium, England and Singapore.
The Company's international sales efforts are initiated from corporate
headquarters in the United States and internationally located sales and support
offices. International sales, principally exports from the United States,
accounted for approximately $13.4 million or 19% of revenue for the year ended
December 31, 1997, $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. 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 certain Brooktrout fax and voice products from agencies in
Australia, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia,
Netherlands, New Zealand, Singapore, Sweden, Switzerland, Mexico, Ireland,
Norway, Denmark, India, Czech Republic, the United Kingdom, Austria, Belgium,
Finland, Greece, Luxembourg, Portugal, Spain, China, Thailand, Argentina,
Iceland 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 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.
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The Company warrants its hardware products against defects in materials
and workmanship generally for twelve to eighteen months. 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 1995, 1996 and 1997, sales to Lucent, the Company's largest customer,
accounted for 36%, 33%, and 30% 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 Legend Mail, Merlin
Mail Multi-Lingual Version and Partner Mail systems have constituted 81%, 88%
and 82% of the revenue from Lucent in 1995, 1996 and 1997, respectively. Merlin
Legend Mail and 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 1995, 1996 or 1997.
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, 1995, 1996 and 1997 the Company spent approximately
$4.8 million, $7.2 million and $13.6 million, or 12%, 12% and 19% 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. 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.
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.
COMPETITION
The Company is in direct competition with companies offering similar
products or products responsive to similar applications in each of its six 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.
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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, 1997, the Company's backlog of orders for products and
services was approximately $12,532,000 compared with approximately $11,362,000
at December 31, 1996. All of the backlog is expected to be shipped or provided
before the end of 1998. 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 Salem, New Hampshire facility prior to shipment.
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
<PAGE> 12
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
two patent infringement cases, 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, 1997, the Company had 260 full-time employees, of
which 113 were engaged in engineering and product development, 30 in
administration, 33 in manufacturing and 84 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.
<PAGE> 13
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.
Stephen A. Ide has been Senior Vice President and President of
Interspeed, Inc. since January 1997. Mr. Ide was Senior Vice President of Sales
and Marketing of Brooktrout from January 1993 to December 1996 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.
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 at McKinsey & Company from September 1986 to January
1993. 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 E. 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
Mechanical Engineering from the University of Massachusetts Amherst in l987.
William F. Rosenberger has been a Vice President of Brooktrout
Technology, Inc., since June 1997 and President of Netaccess since 1996. Prior
to becoming president of Netaccess, Mr. Rosenberger held various executive
management positions in communications and networking companies including Wang
Laboratories, ACSYS Incorporated, Netronix Incorporated and the Yankee Group.
Mr. Rosenberger has a Bachelors of Science degree from the State University of
New York.
Mark Flanagan has been the Vice President of Brooktrout Technology, Inc.
and the General Manager of its Software and Systems Division since January 1998.
Prior to joining Brooktrout, Mr. Flanagan was executive vice president of
Lernout & Hauspie's Dictation Division and general manager of its PC
Applications Group. Previously, he held senior management positions with
International Data Group, Lotus Development Corporation and International
Thomson Organisation. Mr. Flanagan holds
<PAGE> 14
a Bachelor of Arts degree from the University of Rochester and he also attended
the School of Management at Boston College.
ITEM 2. PROPERTIES
The Company leases a stand-alone facility in Needham, Massachusetts that
is approximately 38,000 square feet. The lease commenced March 1, 1996 and
expires October 31, 2006. The facility accommodates corporate headquarters as
well as research and development, engineering, manufacturing, sales, marketing
and administration.
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 technical support. The lease for this facility commenced on May
1, 1995 and expires on April 30, 2001.
In 1997, the Company signed an additional lease for space in Needham,
Massachusetts for its manufacturing operations. The stand alone facility is
approximately 31,000 square feet. The lease commenced April 7, 1997 and expires
April 6, 2006.
The Company leases approximately 26,000 square feet in Salem, New
Hampshire, for Netaccess' administrative, sales, marketing, engineering, and
manufacturing operations. This lease commenced on May 1, 1997 and expires on
August 31, 2000. The Company also leases Netaccess sales office space in
Columbia, Maryland and Sunnyvale, California both of which are leased for six
month periods with automatic renewal clauses.
The Company leases Brooktrout Networks Group, Inc. approximately 3,200
square feet in Richardson, Texas for research and development. The Company
signed a new lease for this facility which commenced on February 1, 1998 and
expires on January 31, 2001.
The Company has also signed operating lease commitments for office space
in Belgium, Singapore, California, Connecticut, and Illinois. The Belgium lease
is for a period of 2 years and the California lease is for 5 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
In August 1995, Spectron Miscrosystems, Inc. ("Spectron"), a subsidiary
of Dialogic Corporation ("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. In
February 1996, on motion of the Company, this action was transferred to the
Federal District Court for the District of Massachusetts.
In November, 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 a Settlement Agreement entered into in settlement
of prior litigation, 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.
<PAGE> 15
In December, l996, the Defendants' Motion for Summary Judgment on the
Company's claims for rescission and specific enforcement in the litigation
described above was allowed. The Company's claim for special damages under
Chapter 93A of the Massachusetts General Laws and the Defendants' counterclaims
remain to be litigated.
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. In December, l996, the Company filed a Motion to Dismiss
the action, which was denied in July 1997. In October 1997, the Company filed a
Motion for summary judgment in the action which remains pending. The Company is
reviewing the patents at issue, and intends to defend the case vigorously.
The Company believes that neither the currently pending litigated cases
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
<PAGE> 16
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, 1997, 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, 1997, 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, 1997, which is incorporated in this report by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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, 1997, which is incorporated in
this report by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE> 17
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 1998
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 1998 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 1998 Annual Meeting of Stockholders, which
is incorporated in this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)(1) Financial Statements
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, 1997:
Page No.
- --------------------------------------------------------------------------------
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders Equity (Deficiency) for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
The following are contained on the indicated pages of this report:
Page No.
Independent Auditors' Report on Schedule.........................
Schedule IX Valuation and Qualifying Accounts....................
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.
<PAGE> 19
(a)(3) Exhibits
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.
Exhibit
No. Title
- ----------------------------------------------------------------------------
3.1 Restated Articles of Organization of the Company (1)
3.2 Amended and Restated By-laws of the Company (2)
4.1 Specimen certificate for shares of Common Stock, $.01 par
value, of the Company (2)
10.1 Lease between the Company and Trustees of Needham 152
Second Avenue Trust dated April 7, 1997
11.1 Computation of Earnings Per Share
13.1 1997 Annual Report of Brooktrout Technology, Inc.
21.1 Subsidiaries of the Company (see exhibit 13.1)
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
- ------------------------
(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).
<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 27, 1998
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
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, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997, and have issued our report thereon
dated February 11, 1998; such consolidated financial statements and report are
included in your 1997 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.
By: /s/ Deloitte & Touche LLP
--------------------------
Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 11, 1998
<PAGE> 22
SCHEDULE IX
BROOKTROUT TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<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, 1995 $364 $157 $(72) $449
For the year ended December 31, 1996 $449 $144 $(69) $524
For the year ended December 31, 1997 $524 $748 $(108) $1,164
ACCRUED WARRANTY COSTS:
For the year ended December 31, 1995 $364 $251 $(278) $337
For the year ended December 31, 1996 $337 $207 $(98) $446
For the year ended December 31, 1997 $446 $672 $(268) $850
</TABLE>
<PAGE> 1
EXHIBIT 10.1
152 SECOND AVENUE, NEEDHAM, MASSACHUSETTS
Lease
by and between
Trustees of Needham 152 Second Avenue Trust
LANDLORD
and
Brooktrout Technology, Inc.
TENANT
dated as of April 7, 1997
<PAGE> 2
TABLE OF CONTENTS
ARTICLE
NUMBER CAPTION PAGE
- ------ ------- ----
ARTICLE I
RENT..................................................................2
1.1...................................................................2
1.2 Additional Rent - Operating Expenses............................3
ARTICLE II
CONDITION OF PREMISES:
DELIVERY OF PREMISES TO TENANT........................................4
2.1...................................................................4
2.2...................................................................4
ARTICLE III
LANDLORD'S INTEREST AND ASSIGNMENT OF WARRANTIES......................4
3.1...................................................................4
3.2...................................................................4
ARTICLE IV
TENANT'S COVENANTS....................................................4
4.1...................................................................5
4.2...................................................................5
4.3...................................................................6
4.4...................................................................6
4.5...................................................................6
4.6...................................................................6
4.7...................................................................7
ARTICLE V
MAINTENANCE AND REPAIRS...............................................7
5.1...................................................................7
5.2...................................................................7
5.3...................................................................7
(i)
<PAGE> 3
ARTICLE VI
SERVICES............................................................. 8
ARTICLE VII
IMPROVEMENTS......................................................... 8
ARTICLE VIII
ALTERATIONS.......................................................... 9
8.1 Non-structural Changes......................................... 9
8.2 Structural Changes............................................. 9
ARTICLE IX
INSPECTION...........................................................10
ARTICLE X
FIRE, EMINENT DOMAIN, ETC............................................11
10.1 Abatement of Rent..............................................11
10.2 Landlord's Right of Termination................................11
10.3 Restoration....................................................11
10.4 Award..........................................................12
ARTICLE XI
INSURANCE............................................................12
11.1 ...............................................................12
11.2 ...............................................................12
11.3 ...............................................................13
11.4 ...............................................................14
ARTICLE XII
TAXES................................................................14
12.1 ...............................................................14
12.2 ...............................................................14
12.3 ...............................................................14
12.4 ...............................................................15
12.5 ...............................................................15
(ii)
<PAGE> 4
ARTICLE XIII
SIGNS................................................................15
ARTICLE XIV
DEFAULT..............................................................15
14.1 ................................................................15
14.2 ................................................................18
ARTICLE XV
NOTICES..............................................................18
ARTICLE XVI
ASSIGNMENT AND SUBLETTING............................................18
16.1 ................................................................18
16.2 ................................................................19
ARTICLE XVII
MISCELLANEOUS PROVISIONS.............................................19
17.1 Extra Hazardous Use............................................19
17.2 Waiver.........................................................20
17.3 Covenant of Quiet Enjoyment....................................20
17.4 Landlord's Liability...........................................20
17.5 Notice to Mortgagee or Ground Lessor...........................21
17.6 Assignment of Rents and Transfer of Title......................21
17.7 Tenant's Indemnity.............................................22
17.8 Additional Charges.............................................22
17.9 Invalidity of Particular Provisions............................22
17.10 Provisions Binding, etc........................................22
17.11 Recording......................................................23
17.12 When Lease Becomes Binding.....................................23
17.13 Paragraph Headings.............................................23
17.14 Rights of Mortgagee or Ground Lessor...........................23
17.15 Status Report..................................................23
17.16 Remedying Defaults.............................................24
17.17 Brokerage......................................................24
17.18 First Option to Extend.........................................24
17.19 Second Option to Extend........................................25
17.20 Governing Law..................................................26
(iii)
<PAGE> 5
LEASE
PARTIES:
THIS LEASE, made as of the 7th day of April, 1997, by and between
ARTHUR G. CARLSON, JR. and WILLIAM J. FORD, JR., as TRUSTEES OF NEEDHAM 152
SECOND AVENUE TRUST under Declaration of Trust dated October 30, 1972, and
registered with the Norfolk Registry District of the Land Court as Document No.
329795 on Certificate of Title No. 94585, having an office c/o William J. Ford,
Jr., 119 Maple Street, Sherbom, MA 01770 (hereinafter, the "Landlord") and
Brooktrout Technology, Inc., a ______ corporation having an office at 410 First
Avenue, Needham, MA 02194 (hereinafter, the "Tenant").
WITNESSETH:
PREMISES:
LANDLORD hereby leases to Tenant and Tenant hereby hires and takes from
Landlord all of the gross floor area in the building (the "Building") known and
numbered as 152 Second Avenue, Needham, Massachusetts (consisting of
approximately 30,888 rentable square feet, subject to verification as
hereinafter provided), and the land upon which the Building is located described
in Exhibit A annexed hereto, together with the appurtenances including but not
limited to all fixtures and equipment therein, including, without limitation,
all underground storage tanks, and all common walkways and driveways necessary
for access to the Building and the exclusive right to use the parking spaces
located in the open parking area adjacent to the Building, and any replacements
thereof (hereinafter, collectively, the "Premises"). The term "Lot" shall mean
all right, title and interest of the Landlord in and to the land described in
Exhibit A plus any additions or deletions thereto resulting from the involuntary
change of any abutting street line. The term "Property" shall mean the Building
and the Lot. At any time prior to the two (2) month anniversary of the
Commencement Date, Tenant may, at its sole cost and expense, have Tenant's
architect measure (utilizing the Boston BOMA standard method of measurement) and
confirm the actual rentable square footage of the Premises ("Premises Rentable
Area"). Tenant shall promptly provide Landlord with a copy of said architects
findings. If Landlord disputes such findings, Landlord shall, at its sole cost
and expense, have Landlord's architect measure (utilizing the Boston BOMA
standard method of measurement) and confirm the actual rentable square footage
of the Premises ("Premises Rentable Area"). If Landlord and Tenant are unable to
agree to the actual Premises Rentable Area, then the matter shall be submitted
to arbitration.
USE:
To be used and occupied by Tenant for general office, research and
development, light manufacturing and warehouse uses, but excluding retail sales
(the "Permitted Uses"). It is specifically understood and agreed that Landlord
is making no representations or warranties
<PAGE> 6
that any or all of the Permitted Uses are allowable as of right under the
Needham Zoning By-Law, or that there are sufficient parking spaces on the Lot
for any or all of Tenant's Permitted Uses pursuant to said Zoning By-Law, or
that the Premises comply with any and all applicable laws, ordinances and
regulations. Tenant acknowledges that it has had an opportunity to examine the
relevant Needham Zoning By-Law and to make its own independent determination as
to the compliance of the Premises with applicable zoning requirements and such
compliance or non-compliance shall not be a condition precedent to Tenant's full
performance of its obligations under this Lease.
TERM:
For a term (the "Term") of five (5) years, commencing on April 7, 1997
(the "Commencement Date") and expiring at the close of the day on April 6, 2002,
unless extended in accordance with Section 17.18, and if so extended then unless
further extended in accordance with Section 17.19 hereof.
As used herein, the term "Lease Year' shall mean the period commencing
on the Commencement Date through and including the close of the day on the
twelve (I 2) month anniversary of the Commencement Date, and each successive
twelve (12) month period during the Term of this Lease.
THIS LEASE is made upon the following additional terms and conditions,
which Landlord and Tenant covenant and agree to keep and perform:
ARTICLE I
RENT
1.1 Tenant shall pay, promptly when due, without notice or demand, the
Annual Fixed Rent calculated as follows:
Lease Year Annual Fixed Rent
---------- -----------------
1 $7.00 per square foot of
Premises Rentable Area
2-5 $7.50 per square foot of
Premises Rentable Area.
Annual Fixed Rent (sometimes hereinafter referred to as "Rent") shall
be paid in equal monthly installments of one-twelfth of such Annual Fixed Rent
in advance on the first day of each full calendar month during the Term, and the
corresponding fraction of said one-twelfth for any period of less than one month
at the beginning or end of the Term.
2
<PAGE> 7
1.2 ADDITIONAL RENT - OPERATING EXPENSES
1.2.1 Tenant shall be responsible for contracting and paying
for all services, including but not limited to utilities, necessary for
the operation and maintenance and repair of the Property, and Tenant
agrees to pay, or cause to be paid, all Operating Expenses for the
Property. Operating Expenses for the Property shall include, without
limitation, the following: (a) premiums for insurance carried with
respect to the Property as set forth in Article M hereinbelow, (b)
reasonable compensation and fringe benefits, workmen's compensation
insurance premiums and payroll taxes paid to, or with respect to all
persons actually engaged by Tenant in the operating, maintaining, or
cleaning of the Building or Lot, (c) steam, water, sewer, electric,
gas, oil, and telephone charges, (d) cost of building and cleaning
supplies and equipment, (e) cost of all maintenance, cleaning and
repairs, except as set forth in Articles V and X below, (f) cost of
snow removal and care of landscaping, and (g) payments under service
contracts with independent contractors, and all other ordinary and
necessary expenses paid or incurred in connection with the operation,
cleaning and maintenance of the Building and Lot.
1.2.2 If any Operating Expense for the Property shall not have
been paid as required hereinabove, then Landlord, after ten (10) days
written notice thereof to Tenant, may, but shall not be required to,
pay the same, and shall thereupon become entitled to repayment of the
substantiated amount thereof by Tenant as Additional Rent.
Notwithstanding the foregoing, if during said ten (10) day notice
period Tenant provides Landlord with written notice that it wishes to
contest all or any part of such Operating Expense, Landlord shall not
pay such Operating Expense while Tenant contests same, but only if such
delay in payment will not affect Landlord's tide to the Property by the
placement of liens thereon or otherwise.
1.2.3 Except as otherwise specifically provided herein, any
sum, amount item or charge designated or considered as Additional Rent
in this Lease shall be paid by Tenant to Landlord on the first day of
the month following the date on which Landlord notifies Tenant in
writing of the amount payable (or on the fifteenth day after the giving
of such notice, whichever shall be later). Any such notice shall
specify in reasonable detail the basis of such Additional Rent.
1.3 Tenant will pay the Rent or Additional Rent due to Landlord,
or to such other person as Landlord may from time to time designate in writing.
3
<PAGE> 8
ARTICLE II
CONDITION OF PREMISES:
DELIVERY OF PREMISES TO TENANT
2.1 The Premises are being leased in their condition as of the
Commencement Date "as is", without representation or warranty of any kind.
Tenant specifically acknowledges that it has inspected the Building and Lot and
has found same, including without limitation all mechanical systems, roof,
structure, parking areas, and ceiling tiles, to be satisfactory to Tenant for
its purposes.
2.2 If Landlord is prevented from delivering possession of the Premises
to Tenant on the Commencement Date because of delays caused by strikes, riots,
fire, acts of God, governmental intervention, refusal of current occupant to
vacate, acts or omissions of Tenant, or other causes which are not within the
reasonable control of Landlord (hereinafter, individually or collectively,
"Excusable Delay"), then the Commencement Date shall be extended by one day for
each day of an Excusable Delay. Notwithstanding the foregoing, in the event such
Excusable Delay shall exceed an aggregate of 75 days, Tenant may, at its option,
terminate this Lease by notice delivered to Landlord not later than twenty (20)
days after the aggregate 75-day period (such right of termination being Tenant's
sole and exclusive remedy at law or in equity against Landlord for Landlord's
failure to so deliver possession of the Premises).
ARTICLE III
LANDLORD'S INTEREST AND ASSIGNMENT OF WARRANTIES
3.1 Landlord represents that it holds its interest in the Premises
pursuant to a duly registered deed, and that it has the right to make this Lease
for the Term aforesaid; that the provisions of this Lease do not conflict with
or violate the provisions of existing agreements between Landlord and third
parties.
3.2 Landlord shall assign to Tenant the benefit of any vendor's or
contractors warranties received by Landlord on the Building or any component
thereof or equipment located or installed therein.
ARTICLE IV
TENANT'S COVENANTS
Tenant covenants during the Term and such further time as Tenant
occupies any part of the Premises:
4
<PAGE> 9
4.1 to pay when due all Annual Fixed Rent and Additional Rent and
all other amounts due hereunder;
4.2 (a) except as otherwise provided in Section 4.2(b) and in
Articles V and X hereof, at Tenant's sole cost and expense to keep the Premises,
including without limitation all underground storage tanks, if any, walks,
drives, exterior walls, mechanical systems and parking area, in good order,
repair and condition, reasonable wear and tear, damage by fire and other insured
casualty and eminent domain only excepted, and all glass windows (except glass
in exterior walls unless the damage thereto is attributable to Tenant's
negligence or misuse) and doors of the Premises whole and in good condition with
glass of the same quality as that injured or broken, damage by fire and other
insured casualty and eminent domain only excepted, and at the expiration or
termination of this Lease peaceably to yield up the Premises and all alterations
and additions thereto in good order, repair and condition, reasonable wear and
tear, damage by fire, insured casualty and eminent domain only excepted, first
removing all goods and effects of tenant and, to the extent specified by
Landlord by notice to Tenant at the time it consents to the installation of
same, all alterations and additions made by Tenant or on behalf of Tenant and
all partitions, and repairing any damage caused by such removal and restoring
the Premises and leaving them clean and neat. If, based upon Tenant's use of the
Premises or upon any incident occurring on or about the Property during the Term
of this Lease, Landlord reasonably believes that the Property may have been
contaminated, then upon Landlord's written request Tenant will furnish to
Landlord, not later than the Termination of this Lease, a report, prepared at
Tenant's expense by an engineering firm qualified to make reports under
Massachusetts General Laws Chapter 21E and reasonably acceptable to Landlord,
stating that the Building and Lot have been examined for oil and hazardous waste
contamination and that no such contamination was found on the Building or Lot
(or that such contamination was found, but cleaned up and disposed of by Tenant
and that the Building and Lot are now free of such substances). Notwithstanding
the foregoing, if Tenant can demonstrate by clear and convincing evidence
(including for example the chemical nature, off-Premises geographical source,
the third-party responsible for, and approximate time of the subject discharges)
that any such contamination or identifiable portion thereof was caused by a
third party for whose conduct Tenant is not legally responsible, Tenant shall
not be liable to Landlord for cleanup or removal or remediation of such
contamination or identifiable portion thereof, as the case may be. If requested
by Landlord, Tenant shall, at its cost, provide Landlord with an analysis by an
environmental engineering from qualified pursuant to Massachusetts General Laws
Chapter 21E to support any conclusion of non-liability advanced by Tenant.
(b) Tenant shall, not later than June 15, 1997, furnish
to Landlord a report, prepared at Tenant's expense by an engineering firm
qualified to make reports under Massachusetts General Laws Chapter 21E and
reasonably acceptable to Landlord, stating that environmental testing has been
performed in the vicinity of the existing underground storage tank on the Lot.
Tenant shall indemnify and hold Landlord harmless from any and all damage, cost
and expense incurred by Landlord as a result of the performance of such
environmental testing. If the report indicates that oil and/or hazardous waste
contamination was found on the
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Lot, and any remediation of same is required by applicable laws, Landlord shall
indemnify and hold Tenant harmless from the costs and expenses of remediating
such contamination whether performed by the Landlord or any third party.
Notwithstanding the foregoing, if Landlord can demonstrate by clear and
convincing evidence that any such contamination or identifiable portion thereof
was caused by Tenant or a third party for whose conduct Tenant is legally
responsible, Tenant shall be liable to Landlord for cleanup or removal or
remediation of such contamination or identifiable portion thereof, as the case
may be.
4.3 continuously from the Commencement Date to use and occupy the
Premises for the Permitted Uses, and not to injure or deface the Premises,
Building or Lot, nor permit in the Premises and inflammable fluids or chemicals
(except in accordance with law and with prior written notice to Landlord of
Tenant's intention to use same), or nuisance, or the emission from the Premises
of any objectionable noise or odor, nor use or devote the Premises or any part
thereof for any purpose other than the Permitted Uses, nor any use thereof which
is inconsistent with the maintenance of the Building as an office building of
the first class in the quality of its maintenance, use and occupancy, or which
is improper, offensive, contrary to law or ordinance or which would invalidate
or increase the premiums for any insurance on the Building or its contents or
which would render necessary any alteration or addition to the Building.
Notwithstanding the foregoing, Tenant may vacate all or any part of the Premises
during the Term, provided that (i) Tenant provides Landlord with reasonable
prior written notice, (ii) Tenant continues to pay Rent and all other charges
for the remainder of the Term, and (iii) Tenant takes all measures necessary to
keep the Building secure; 4.4 to comply with all reasonable rules and
regulations now or hereafter made by Landlord of which Tenant has been given
advance written notice, for the care and use of the Building and Lot and their
facilities and approaches;
4.4 in its use of the Premises, to comply with the requirements of
all applicable governmental laws, rules and regulations and to keep the Premises
equipped with all safety appliances required by law or ordinance or any other
regulation of any public authority, and to procure all required licenses and
permits and to comply with such licenses and permits. Without limiting the
generality of the foregoing, Tenant shall be responsible, in connection with
Tenant's use of the Premises, for compliance with the Americans with
Disabilities Act of 1990 (42 U.S.C. ss.12101 ET SEQ.) and the regulations and
Accessibility Guidelines for Buildings and Facilities issued pursuant thereto
(collectively, the "ADA Requirements");
4.5 not to place a load upon the Premises exceeding an average
rate of 75 pounds of live load per square foot of floor area (partitions shall
be considered as part of the live load); and not to move any safe, vault or
other heavy equipment in, about or out of the Premises except in such manner and
at such time as Landlord shall in each instance authorize, such authorization
not to be unreasonably withheld or delayed;
4.6 to pay promptly when due all taxes which may be imposed upon
personal property (including, without limitation, fixtures and equipment) in the
Premises to whomever assessed; and,
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4.7 to vacate the Premises upon the end of the Term should Tenant
hold over after the termination of this Lease, by lapse of time or otherwise,
Tenant shall become a daily tenant at sufferance at a rate equal to the then
fair market rental rate of the Premises but in no event less than 1 1/2 times
the Annual Fixed Rent in effect on the expiration or termination date. Tenant
shall also pay Landlord all direct and foreseeable damages (including any loss
of a tenant or rental income), sustained by reason of any such holding over.
Otherwise, such holding over shall be on the terms and conditions set forth in
this Lease as far as applicable.
ARTICLE V
MAINTENANCE AND REPAIRS
5.1 During the Term of this Lease Tenant shall take reasonable
care of the Premises and Landlord's fixtures and appurtenances therein and
thereon and shall perform all maintenance and make all repairs and replacements
to the Premises not specifically imposed upon Landlord by the express provisions
hereof. All repairs and replacements made by Tenant shall be equal in quality to
that in place on the Commencement Date. Notwithstanding the foregoing, with
respect to the three (3) 200 ton chillers located on the roof of the Building,
and any other mechanical system serving the Premises, Tenant shall repair same
and keep same in good working order throughout the Term of this Lease. Should
any of such chillers or other mechanical system or component thereof require
replacement during the Term of this Lease, Tenant may replace same with a
chiller or mechanical system or component thereof, as the case may be, of size,
capacity, function and quality customarily found in buildings the size and type
of the Building in the Route 128 area, which shall provide the Building with
adequate heat, air conditioning and ventilation (or other mechanical service, as
the case may be) for the Permitted Uses.
5.2 Landlord's obligations under this Article shall consist of
making all structural repairs, replacements and alterations (but excluding
general maintenance and repairs of a non-structural nature) to the exterior and
bearing walls of the Building and support beams, and columns and lateral support
thereto, and to perform all repairs and restoration required by Article X.
Landlord's obligations do not include, without limitation. repairs to or
maintenance or replacement of plumbing or sewer lines, underground storage
tanks, or the repair or replacement of the roof membrane and deck, the HVAC
systems or the primary distribution electrical service equipment, all of which
shall be Tenant's responsibility at Tenant's expense during the Tenant of this
Lease or any extension thereof.
5.3 Landlord reserves the right to stop any service or utility
system, when necessary by reason of accident or emergency, or until necessary
repairs which Landlord is obligated to perform pursuant to the Terms of this
Lease have been completed, but only to the extent that such stoppage is
reasonably necessary under the circumstances; provided, however, that in each
instance of stoppage, Landlord shall exercise reasonable diligence to eliminate
the cause thereof. Except in case of emergency repairs, Landlord will give
Tenant reasonable advance
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notice of any contemplated stoppage and will use reasonable efforts to avoid
unnecessary inconvenience to Tenant by reason thereof.
Landlord shall not be liable to Tenant for any compensation or
reduction of rent by reason of inconvenience or annoyance or for loss of
business arising from the necessity of Landlord or its agents entering the
Premises for any of the purposes in this Lease authorized, or for repairing the
Premises or any portion of the Building however the necessity may occur. In case
Landlord is prevented or delayed from making any repairs, alterations or
improvements, or furnishing any services or performing any other covenant or
duty to be performed on Landlord's part, by reason of any cause reasonably
beyond Landlord's control, Landlord shall not be liable to Tenant therefor, nor,
except as expressly otherwise provided in Section 10.1, shall Tenant be entitled
to any abatement or reduction of rent by reason thereof, nor shall the same give
rise to a claim in Tenant's favor that such failure constitutes actual or
constructive, total or partial, eviction from the Premises.
ARTICLE VI
SERVICES
Landlord shall not be required to furnish any services or utilities to
the Premises during the Term of this Lease, the Tenant hereby assuming full and
sole responsibility for the supply of and payment for such services and
utilities.
ARTICLE VII
IMPROVEMENTS
Subject to compliance with Articles IV and VM hereof, Tenant may place
partitions, trade or other fixtures (including lighting fixtures), personal
property, machinery, equipment and the like in the Premises (collectively,
hereinafter "FF&E') and may make such improvements and alterations therein and
thereon as it may desire at its own expense. All such things heretofore or
hereafter made or installed by or for Tenant and paid for by Tenant shall remain
the property of Tenant and in case of damage or destruction thereto by fire or
other causes, Tenant shall have the right to recover the value thereof as its
own loss from any insurance company with which it has insured the same,
notwithstanding that any of such things might be considered a part of the
Premises. At the expiration or earlier termination of the Term, Tenant shall
remove all of FF&E and, to the extent specified by Landlord at the time it
consents to the installation of same, all alterations and additions made by
Tenant and all partitions, and shall repair any damage to the Premises caused by
such removal. Any of such things which remain in the Premises after the
expiration or termination of this Lease shall be deemed conclusively to have
been abandoned, and either may be retained by Landlord as its property or may be
disposed of in such manner as Landlord may see fit, at Tenant's sole cost and
expense. Notwithstanding the foregoing, Tenant shall not be required to remove
pipes,
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wires and the like from walls, ceilings or floors, provided Tenant properly
cuts, disconnects and caps such pipes and wires and seals them off, if
necessary, in a safe and lawful manner.
ARTICLE VIII
ALTERATIONS
8.1 NON-STRUCTURAL CHANGES. Tenant shall have the right, upon
prior written notice to Landlord, at Tenants sole cost and expense, to make
non-structural changes, alterations, additions, or improvements to or upon the
Premises which do not interfere with any heating, air-conditioning, electrical
or plumbing systems or structural element or the exterior of the Building,
provided Landlord is furnished copies of all working drawings prepared in
connection with such changes at least ten (10) days prior to the commencement of
such work (except as to changes which involve primarily the movement of unfixed
partitions, the configuration of Tenant space, painting, flooring, relocation of
doors, and replacement of hung ceiling panels, in which event Landlord need not
be furnished with copies of working drawings). Non-structural changes,
alterations, additions and improvements shall include, without limitation, the
installation, removal or relocation of light fixtures, trade fixtures and
partitions that are not bearing walls. If any such non-structural changes,
alterations, additions or improvements are not readily adaptable to normal
office and/or engineering and research and development uses at reasonable
expense, Landlord may, by notice delivered within ten (10) days of Landlord's
receipt of plans with respect thereto (or if no plans are required, within ten
(10) days of Landlord's receipt of prior written notice of the installation
thereof), require Tenant, upon expiration of the Lease, to restore those
portions of the Premises containing such modifications to the condition existing
prior to the making of such modifications.
8.2 STRUCTURAL CHANGES. Tenant shall have the right, at Tenant's
sole cost and expense, to make structural changes, alterations, additions or
improvements to or upon the Premises, provided that Tenant obtains the prior
written consent of Landlord, which consent shall not be unreasonably withheld or
delayed. Landlord shall not be deemed unreasonable for withholding approval of
any alterations or additions which (a) affects or might affect any structural or
exterior element of the Building, or (b) will require unusual expense to
re-adapt the Premises to normal office and/or engineering and research and
development uses upon termination of the Lease or increase the cost of insurance
or taxes on the Building unless Tenant first gives assurance acceptable to
Landlord for payment of such increased cost and that such re-adaptation will be
made prior to such termination without expense to Landlord.
8.2.1 At least thirty (30) days prior to commencing such work,
Tenant shall furnish Landlord with copies of the plans and
specifications for such work. Landlord agrees to review such plans and
specifications promptly upon receipt thereof, and to notify Tenant of
its approval or any comments within (30) days of such receipt.
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8.2.2 As a condition of its consent, and simultaneously with
the grant thereof, Landlord may, in its reasonable discretion: (i)
require Tenant, at Tenant's sole cost and expense, to perform certain
additional work if such work is necessary to correct impairments to the
structure of the Building or to mechanical systems which would be
caused by the proposed changes; and/or (ii) notify Tenant that Landlord
will require Tenant, upon expiration of the Lease, to restore portions
or all of the Premises to the condition existing prior to the making of
such modifications if (but only if) such structural changes,
alterations, additions or improvements are unusual in nature or not
readily adaptable to normal engineering and research and development
uses at a reasonable expense.
8.3 With respect to all work by Tenant pursuant to Section 8.1 or
8.2 hereof, Tenant shall secure all licenses and permits necessary therefor,
and, if requested by. Landlord, deliver to Landlord a statement of the names of
all Tenant's contractors and subcontractors and the estimated cost of all labor
and material to be furnished by them. In the course of such work, Tenant agrees
(i) to use labor compatible with that being employed by Landlord for work in or
to the Building, and not to employ or permit the use of any labor or otherwise
take any action which might result in a labor dispute involving personnel
providing services in the Building. Tenant's contractors shall (i) carry general
liability insurance with limits of at lease $1,000,000/$3,000,000, and property
damage insurance with limits of at least $1,000,000 (all insurance to be written
in companies reasonably approved by Landlord and insuring Landlord and Tenant as
well as the contractors), and deliver to Landlord certificates of all such
insurance, and (ii) in the event that the cost of such work exceeds $250,000.00,
have filed with Landlord lien bonds and the like in form acceptable to Landlord.
8.4 Tenant agrees to pay promptly when due the entire cost of work
to be done on the Premises by Tenant, its agents, employees, or independent
contractors, and not to cause or permit any liens for labor or materials
performed or furnished in connection therewith to attach to the Premises and
immediately to discharge any such liens which may so attach.
8.5 All construction work required or permitted by this Lease
shall be done in a good and workmanlike manner and in compliance with all
applicable laws and ordinances, regulations and orders of governmental authority
and insurers of the Building, and shall be coordinated with any work being
performed by Landlord.
ARTICLE IX
INSPECTION
The Landlord shall, upon at least twenty-four (24) hours prior verbal
notice (except in the case of emergency) to Tenant's designated representative,
have the right at all reasonable times during business hours to inspect the
Premises and show the same to prospective mortgagees, purchasers and/or tenants,
and at all times to make repairs or replacements as
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required by this Lease or as may be necessary, provided, however, that Landlord
shall use all reasonable efforts not to disturb Tenant's use and occupancy of
the Premises.
ARTICLE X
FIRE, EMINENT DOMAIN, ETC.
10.1 ABATEMENT OF RENT. If the Premises shall be damaged by fire or
casualty, Annual Fixed Rent and other charges payable by Tenant shall abate
proportionately for the period in which, by reason of such damage, there is
substantial interference with Tenant's use of the Premises, having regard to the
extent to which Tenant may be required to discontinue Tenant's use of all or a
portion of the Premises, but such abatement or reduction shall end upon the date
on which Landlord shall have substantially restored the Premises (excluding any
alterations, additions or improvements made by Tenant) to the condition in which
they were prior to such damage. If the Premises or access thereto shall be
affected by any exercise of the power of eminent domain, Annual Fixed Rent and
other charges payable by Tenant shall be jointly and equitably abated and
reduced according to the nature and extent of the loss of use thereof suffered
by Tenant. In no event shall Landlord have any liability for damages to Tenant
for inconvenience, annoyance, or interruption of business arising from such
fire, casualty or eminent domain.
10.2 LANDLORD'S RIGHT OF TERMINATION. If the Premises are substantially
damaged by fire or casualty (the term "substantially damaged" meaning damage of
such a character that the same cannot, in ordinary course, reasonably be
expected to be repaired within two-hundred seventy (270) days from the time the
repair work would commence), or if there is insufficient insurance proceeds
available to restore the Premises and the loss is not covered by insurance
referred to in Section 11.1 hereinbelow, or if any material part of the Building
is taken by any exercise of the right of eminent domain, then Landlord shall
have the right to terminate this Lease (even if Landlord's entire interest in
the Premises may have been divested) by giving notice of Landlord's election so
to do within 90 days after the occurrence of such casualty or the effective date
of such Notice, whereupon this Lease shall terminate thirty (30) days after the
date of such notice with the same force and effect as if such date were the date
originally established as the expiration date hereof.
10.3 RESTORATION. If the Premises shall be damaged by fire or casualty
which is covered by the insurance referred to in Section 11.1 hereinbelow, or a
portion thereof taken by the exercise of the right of eminent domain and if this
Lease shall not be terminated pursuant to Section 10.2, Landlord shall
thereafter use due diligence to restore the Premises (excluding any alterations,
additions or improvements made by Tenant) to proper condition for Tenant's use
and occupation, provided that Landlord's obligation shall be limited to the
amount of insurance proceeds or eminent domain award available therefor. If, for
any reason, such restoration shall not be substantially completed within six
months after the expiration of the 90-day period referred to in Section 10.2
(which six-month period may be extended for such periods of time as Landlord is
prevented from proceeding with or completing such restoration for any cause
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beyond Landlord's reasonable control), Tenant shall have the right to terminate
this Lease by giving notice to Landlord thereof within thirty (30) days after
the expiration of such period (as so extended). Upon the giving of such notice,
this Lease shall cease and come to an end without further liability or
obligation on the part of either party unless, within such 30-day period,
Landlord substantially completes such restoration. Such right of termination
shall be Tenant's sole and exclusive remedy at law or in equity for Landlord's
failure so to complete such restoration.
10.4 AWARD. Landlord shall have and hereby reserves and excepts, and
Tenant hereby grants and assigns to Landlord, all rights to recover for damages
to the Property and leasehold interest hereby created, and to compensation
accrued or hereafter to accrue by reason of such taking, damage or destruction,
and by way of confirming the foregoing, Tenant hereby grants and assigns, and
covenants with Landlord to grant and assign to Landlord, all rights to such
damages or compensation. Nothing contained herein shall be construed to prevent
Tenant from prosecuting in any condemnation proceedings a claim for the value of
any of Tenant's removable property, leasehold improvements or FF&E installed in
the Premises by Tenant at Tenant's expense and for relocation expenses, provided
that such action shall not affect the amount of compensation otherwise
recover-able by Landlord from the taking authority.
ARTICLE XI
INSURANCE
11.1 Tenant shall, from and after the Commencement Date hereof,
maintain insurance covering the Building against loss, damage or destruction
caused by boiler explosion, fire and the perils specified in the standard
extended coverage endorsement, and by vandalism and malicious mischief, and by
earthquake and flood, and for other risks customarily insured against by owners
of similar buildings in the vicinity of the Building. Coverage shall equal one
hundred percent (100%) of the replacement cost of the Building. Tenant shall
also maintain (i) liability insurance in the amount of at least
$1,000,000/$3,000,000, (ii) property damage insurance in the amount of at least
$3,000,000, or such greater amounts as Landlord shall from time to time
reasonably request, and (iii) rent loss insurance covering at least twelve (12)
months of rent. All such policies shall be in form and substance reasonably
acceptable to Landlord and shall name Landlord (and those in privity of estate
with Landlord), Landlord's mortgagee and Tenant as a loss payee, and shall bear
the endorsement that such policies shall not be cancelled until after thirty
(30) days written notice to Landlord. Tenant shall deposit promptly with
Landlord certificates evidencing such coverage. In the event of any casualty or
other insured damage to the Building, all insurance proceeds shall be made
available for the restoration of the Building, and any mortgage covering the
Building shall so provide, subject, however, to the terms and conditions of such
mortgage which govern the application and disbursement of insurance proceeds for
restoration.
11.2 Notwithstanding anything else to the contrary in this Lease
contained, the parties hereto agree that neither party, nor its agents,
employees, contractors or invitees, shall
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be liable to the other for loss or damage caused by any risk covered by any of
the insurance coverages herein described, and in implementation hereof, the
parties hereby agree as follows:
(a) If Landlord shall suffer any loss, damage,
liability or expense for which Tenant shall be obligated to
pay Landlord, Tenant shall have as an offset against said
obligation the greater of (i) the net proceeds of any
insurance that Landlord receives with respect to such loss,
damage, liability or expense or (ii) the amount of insurance
coverage Landlord has agreed to obtain, regardless of whether
Landlord actually has obtained it, if such loss, damage,
liability or expense shall have resulted from a risk or peril
required hereunder to have been covered by such insurance.
(b) If Tenant shall suffer any loss, damage,
liability or expense for which Landlord shall be obligated to
pay Tenant, Landlord shall have as an offset against said
obligation the greater of (i) the net proceeds of any
insurance that Tenant receives with respect to such loss,
damage, liability or expense or (ii) the amount of insurance
coverage Tenant has agreed to obtain, regardless of whether
Tenant actually has obtained it, if such loss, damage,
liability or expense shall have resulted from a risk or peril
required hereunder to have been covered by such insurance.
(c) Notwithstanding the foregoing with respect to the
offset in the amount of insurance proceeds received, the
parties acknowledge that such offset shall not cause the
insurer which has paid the proceeds to declare the governing
policy invalid. The parties therefore mutually agree that each
shall obtain a rider to, endorsement on, or clause in, any
insurance policy covering the Premises and the Building and
personal property, fixtures and equipment located therein by
which their insurers shall waive subrogation. By virtue of
such rider, endorsement, or clause, the parties hereby agree
that they will not make any claim against or seek to recover
from each other for any loss or damage to their own property
or to the property of others by reason of a risk or peril
covered by such insurance.
11.3 Tenant agrees and acknowledges that all of the furnishings,
fixtures, equipment, effects and property of every kind, nature and description
of Tenant and of all persons claiming by, through or under Tenant which, during
the continuance of this Lease or any occupancy of the Premises by Tenant or
anyone claiming under Tenant, may be on the Premises or elsewhere in the
Building or on the Lot, shall be at the sole risk and hazard of Tenant, and if
the whole or any part thereof shall be destroyed or damaged by fire, water or
otherwise, or by the leakage or bursting of water pipes, steam pipes, or other
pipes, by theft or from any other cause, no part of said loss or damage is to be
charged to or be borne by Landlord.
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11.4 Tenant hereby covenants that in the event of any loss, damage
or destruction of the Building and improvements on the Premises which Landlord
is required by the operation of Article X to repair and restore, the proceeds
which are payable under policies of insurance carried by Tenant, together with
the amount of any deductible limits established by Tenant, shall upon request of
Landlord, first be paid over to Landlord to repair and reconstruct the Building
and improvements on the Premises to the extent required by this Lease, before
such proceeds are applied in any other manner including, without limitation, the
satisfaction of Tenant's debts secured by a mortgage or other lien instrument,
or interest thereon.
ARTICLE XII
TAXES
12.1 (a) For the purposes of this Article, the term "Tax Year"
shall mean the twelve-month period commencing on the July 1 immediately pending
the Commencement Date and each twelve-month period thereafter commencing during
the Term of this Lease. The term "Taxes" shall mean real estate taxes and other
taxes, levies and assessments imposed upon the Property; charges, fees,
assessments and payments for transit, housing, police, fire or other
governmental services or purported benefits to the Property; and service or user
payments in lieu of taxes. Betterment assessments and interest thereon shall be
apportioned equally over the longest period permitted by law. Taxes for the
years in which this Lease commences and terminates shall be prorated.
(b) Tenant shall pay all Taxes assessed on the Property
during the Term of this Lease on or before the date upon which they are due to
be paid without interest. Promptly after receipt by Landlord of bills for such
Taxes, Landlord shall advise Tenant of the amount thereof (and shall provide
Tenant with a copy of same) and the computation of Tenant's payment on account
thereof Landlord shall have the same rights and remedies for the non-payment by
Tenant of any payments due on account of Taxes as Landlord has hereunder for the
failure of Tenant to pay Annual Fixed Rent.
12.2 (a) If some method or type of taxation shall replace the
current method of assessment of real estate taxes in whole or in part, or the
type thereof, or if additional types of taxes are imposed upon the Property or
Landlord relating to the Property, Tenant agrees that Tenant shall pay the same
as an additional charge.
(b) If a tax (other than Federal or State income tax) is
assessed on account of the rents or other charges payable by Tenant to Landlord
under this Lease, Tenant agrees to pay the same as an additional charge within
ten (10) days after billing therefor, unless applicable law prohibits the
payment of such tax by Tenant.
12.3 Tenant shall have the right, by appropriate proceedings, to
protest or contest any assessment or re-assessment for Taxes, or any special
assessment, or the validity of either, or of any change in assessments or the
tax rate.
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12.4 In any such contest or proceedings, Tenant may act in its own
name and/or the name of Landlord and Landlord will, at Tenant's request,
cooperate with Tenant in any way Tenant may reasonably require in connection
with such contest or proceedings. Landlord shall sign such consents or other
documents as Tenant may reasonably request. Any contest or proceedings conducted
by Tenant shall be at Tenant's expense and, in the event any penalties, interest
or late charges become payable with respect to the Taxes as a result of such
contest, Tenant shall pay the same. Landlord shall be solely responsible for the
payment of any penalties, interest or late charges which are imposed through no
fault of Tenant.
12.5 Tenant shall be entitled to receive any tax refunds properly
allocable to the Term of this Lease, as it may be extended, and relating to
Taxes paid by Tenant, as a result of any such contests or proceedings.
ARTICLE XIII
SIGNS
Tenant shall have the exclusive right to place its signs anywhere in,
on and about the Building, the Lot and land, provided the same are in compliance
with all applicable laws and ordinances, are in good taste and in keeping with a
quality industrial park, are first approved by Landlord which approval shall not
be unreasonably withheld or delayed, are purchased and installed at the sole
cost and expense of Tenant and are removed from the Premises at the expiration
or earlier termination of the Term hereof.
ARTICLE XIV
DEFAULT
14.1 (a) If at any time subsequent to the date of this Lease
any one or more of the following events (herein referred to as a "Default of
Tenant') shall happen:
(i) Tenant shall fail to pay the Annual Fixed
Rent or other charges hereunder when due and such failure
shall continue for five (5) full business days after Tenant's
receipt of written notice; or
(ii) Tenant shall neglect or fail to perform or
observe any other covenant herein contained on Tenant's part
to be performed or observed, and Tenant shall fail to remedy
the same within thirty (30) days after written notice to
Tenant specifying such neglect or failure, or if such failure
is of such a nature that Tenant cannot reasonably remedy the
same within such thirty (30) day period, Tenant shall fail to
commence promptly to remedy the same and to prosecute such
remedy to completion with diligence and continuity; or
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(iii) Tenant's leasehold interest in the Premises
shall be taken on execution or by other process of law
directed against Tenant; or
(iv) Tenant shall make an assignment for the
benefit of creditors or shall file a voluntary petition in
bankruptcy or shall be adjudicated bankrupt or insolvent, or
shall file any petition or answer seeking any reorganization,
arrangement, composition, readjustment, liquidation,
dissolution or similar relief for itself under any present or
future Federal, State or other statute, law or regulation for
the relief of debtors, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver or
liquidator of Tenant or of all or any substantial part of its
properties, or shall admit in writing its inability to pay its
debts generally as they become due; or
(v) A petition shall be filed against Tenant in
bankruptcy or under any other law seeking any reorganization,
arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under any present or future
Federal, State or other statute, law or regulation and shall
remain undismissed or unstayed for an aggregate of sixty (60)
days (whether or not consecutive), or if any debtor in
possession (whether or not Tenant) trustee, receiver or
liquidator of Tenant or of all or any substantial part of its
properties or of the Premises shall be appointed without the
consent or acquiescence of Tenant and such appointment shall
remain unvacated or unstayed for an aggregate of sixty (60)
days (whether or not consecutive);
then in any such case (1) if such Default of Tenant shall occur prior
to the Commencement Date, this Lease shall IPSO FACTO, and without further act
on the part of Landlord, terminate, and (2) if such Default of Tenant shall
occur after the Commencement Date, Landlord may terminate this Lease by notice
to Tenant, and thereupon this Lease shall come to an end as fully and completely
as if such date were the date herein originally fixed for the expiration of the
Term of this Lease, and Tenant will then quit and surrender the Premises to
Landlord, but Tenant shall remain liable as hereinafter provided.
(b) If this Lease shall be terminated as provided in this
Article, or if any execution or attachment shall be issued against Tenant or any
of Tenant's property whereupon the Premises shall be taken or occupied by
someone other than Tenant, then Landlord may, without notice, re-enter the
Premises, either by summary proceedings, ejectment or otherwise, and remove and
dispossess Tenant and all other persons and any and all property from the same,
as if this Lease had not been made, and Tenant hereby waives the service of
notice of intention to reenter or to institute legal proceedings to that end.
(c) In the event of any termination, Tenant shall pay the
Annual Rent and other sums payable hereunder up to the time of such termination,
and thereafter Tenant, until the end of what would have been the Term of this
Lease in the absence of such termination, and whether or not the Premises shall
have been relet, shall be liable to Landlord for, and shall
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pay to Landlord, as liquidated current damages, the Annual Fixed Rent and other
sums which would be payable hereunder if such termination had not occurred, less
the net proceeds, if any, of any reletting of the Premises, after deducting all
reasonable expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees, advertising, expenses of employees, alteration costs and
expenses of preparation for such reletting. Tenant shall pay such current
damages to Landlord monthly on the days which the Annual Rent would have been
payable hereunder if this Lease had not been terminated.
(d) At any time after such termination, whether or not
Landlord shall have collected any such current damages: as liquidated final
damages and in lieu of all such current damages beyond the date of such demand,
at Landlord's election Tenant shall pay to Landlord an amount equal to the
aggregate of the Annual Fixed Rent and other charges accrued under the Lease in
the twelve (12) months ended next prior to such termination (or such shorter
period of time as would have remained in the Term but for such termination) plus
the amount of Annual Fixed Rent and other charges of any kind accrued and unpaid
at the time of termination.
(e) In the case of any Default of Tenant, re-entry,
expiration and dispossession by summary proceeding or otherwise, Landlord may
(i) re-let the Premises or any part or parts thereof, either in the name of
Landlord or otherwise, for a term or terms which may at Landlord's option be
equal to or less than or exceed the period which would otherwise have
constituted the balance of the Term of this Lease and may grant reasonable
concessions or free rent-to the extent that Landlord considers advisable and
necessary to re-let the same and (ii) may make such alterations, repairs and
decorations in the Premises as Landlord in its sole judgment considers advisable
and necessary for the purpose of re-letting the Premises; and the making of such
alterations, repairs and decorations shall not operate or be construed to
release Tenant from liability hereunder as aforesaid. Landlord shall in no event
be liable in any way whatsoever for failures to re-let the Premises provided
that Landlord agrees to use commercially reasonable efforts to re-let the
Premises, or, in the event that the Premises are re-let, for inability
reasonably to collect the rent under such re-letting. Tenant hereby expressly
waives any and all rights of redemption granted by or under any present or
future laws in the event of Tenant being evicted or dispossessed, or in the
event of Landlord obtaining possession of the Premises, by reason of the
violation by Tenant of any of the covenants and conditions of this Lease.
(f) The specified remedies to which Landlord may resort
hereunder are not intended to be exclusive of any remedies or means of redress
to which Landlord may at any time be entitled to lawfully, and Landlord may
invoke any remedy (including the remedy of specific performance) allowed at law
or in equity as if specific remedies were not herein provided for.
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(g) All reasonable costs and expenses incurred by or on
behalf of Landlord (including, without limitation, attorneys' fees and expenses)
in enforcing its rights hereunder or occasioned by any Default of Tenant shall
be paid by Tenant.
14.2 Landlord shall in no event be in default of the performance of
any of Landlord's obligations hereunder unless and until Landlord shall have
failed to perform such obligations within thirty (30) days, or such additional
time as is reasonably required to correct any such default, after notice by
Tenant to Landlord specifying wherein Landlord has failed to perform any such
obligations.
ARTICLE XV
NOTICES
Whenever, by the terms of this Lease, notices, consents or approvals
shall or may be given either to Landlord or to Tenant such notices, consents or
approvals shall be in writing and shall be sent by registered or certified mail,
postage prepaid, or by a recognized national courier service ("Courier"):
If intended for Landlord, addressed to Landlord at Landlord's address
first set forth above (or to such other address as may from time to
time hereafter by designated by Landlord by like notice), with a copy
to William S. Abbott, Esq., 50 Congress Street, Suite 925, Boston, MA
02109.
If intended for Tenant, addressed to Tenant at Tenant's address first
set forth above until the Commencement Date and thereafter to the
Premises (or to such other address or addresses as may from time to
time hereafter be designated by Tenant by like notice), Attention:
Robert Leahy, CFO, with a copy to Paul L. Baccari, Esq., Masterman,
Culbert & Tully, One Lewis Wharf, Boston, MA 02110.
All such notices shall be effective when deposited in the United States Mail
within the Continental United States, or the next day if sent by Courier,
provided that the same are received in ordinary course at the address to which
the same were sent.
ARTICLE XVI
ASSIGNMENT AND SUBLETTING
16.1 Tenant may assign this Lease or sublet the Premises or any
portion thereof only with the prior written consent of Landlord, which consent
may be withheld at Landlord's sole discretion except as hereinafter expressly
otherwise provided. Landlord agrees not to withhold its consent to any
subletting of all or any portion of the Premises, provided Tenant requests same
in writing ("Tenant's Request"), and provided (i) at the time thereof Tenant is
not in default under this Lease beyond any applicable cure period; (ii)
Landlord, in its discretion
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reasonably exercised, determines that the proposed sublessee is not financially
irresponsible, and that the reputation, business, proposed use of the Premises
by the proposed sublessee are satisfactory to Landlord; (iii) any sublessee
shall expressly assume all obligations of this Lease on Tenant's part to be
performed; (iv) such consent, if given, shall not release Tenant of any of its
obligations under this Lease (including, without limitation, its obligation to
pay rent) and Tenant's liability after any subletting shall be joint and several
with the sublessee; (v) Tenant shall reimburse Landlord promptly for reasonable
legal and other expenses incurred by Landlord in connection with Tenant's
Request; (vi) Tenant agrees specifically to pay over to Landlord, as additional
rent, fifty percent (50%) of all sums provided to be paid under the terms and
conditions of such sublease which are in excess of the amounts otherwise
required to be paid pursuant to this Lease; and (vii) a consent to one
subletting to any other person shall not be deemed to be a consent to any
subsequent subletting. Any assignment subletting or occupancy without Landlord's
prior consent shall be void and shall, at the option of Landlord, constitute a
default under this therein shall be assignable as to the interest of Tenant by
operation of law without the prior written consent of Landlord, which consent
may be arbitrarily withheld. Tenant agrees that in the event that Landlord
withholds its consent to Tenant's Request contrary to the provisions of this
paragraph, Tenant's sole remedy shall be to seek an injunction in equity to
compel performance by Landlord to give its consent to Tenant's Request, and
Tenant expressly waives any right to damages in the event of such withholding of
consent by Landlord to Tenant's Request.
16.2 The provisions of Section 16.1 shall apply to a transfer (by
one or more transfers) of a majority of the stock or partnership interests, or
other evidences of ownership of Tenant as if such transfer were an assignment of
this Lease; but such provisions shall not apply to transactions with an entity
into or with which Tenant is merged or consolidated or to which substantially
all of Tenant's assets are transferred or to any entity which controls or is
controlled by Tenant or is under common control with Tenant, provided that in
any of such events (i) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles at least equal to the
net worth of Tenant immediately prior to such merger, consolidation or transfer,
(ii) proof satisfactory to Landlord of such net worth shall have been delivered
to Landlord at least 10 days prior to the effective date of any such reaction,
and (iii) the assignee agrees directly with Landlord, by written instrument in
form satisfactory to Landlord, to be bound by all the obligations of Tenant
hereunder including, without limitation, the covenant against further assignment
or subletting; and provided further that this Section 16.2 shall not apply to
the transfer of stock of Tenant so long as the stock of Tenant is publicly
traded on a nationally recognized stock exchange.
ARTICLE XVII
MISCELLANEOUS PROVISIONS
17.1 EXTRA HAZARDOUS USE. Tenant covenants and agrees that Tenant
will not do or permit anything to be done in or upon the Premises, or bring in
anything keep anything therein, which shall increase the rate of property or
liability insurance on the Premises or of
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the Building above the standard rate applicable to premises being occupied for
Permitted Uses unless Tenant notifies Landlord in advance of such event and then
promptly pays to Landlord, on demand, any such increase resulting therefrom
which shall be due and payable as an additional charge hereunder, or provides to
Landlord insurance certificates indicating coverage for same at Tenant's sole
expense protecting Landlord and Tenant.
17.2 WAIVER. (a) Failure on the part of Landlord or Tenant to
complain of any action or non-action on the part of the other, no matter how
long the same may continue, shall never be a waiver by Tenant or Landlord,
respectively, of any of the other's rights hereunder. Further, no waiver at any
time of any of the provisions hereof by Landlord or Tenant shall be construed as
a waiver of any of the other provisions hereof, and a waiver at any time of any
of the provisions hereof shall not be construed as a waiver at any subsequent
time of the same provisions. The consent or approval of Landlord or Tenant to or
of any action by the other requiring such consent or approval shall not be
construed to waive or render unnecessary Landlord's or Tenant's consent or
approval to or of any subsequent similar act by the other.
(b) No payment by Tenant, or acceptance by Landlord, of a
lesser amount than shall be due from Tenant to Landlord shall be treated
otherwise than as a payment on account of the earliest installment of any
payment due from Tenant under the provisions hereof. The acceptance by Landlord
of a check for a lesser amount with an endorsement or statement thereon, or upon
any letter accompanying such check, that such lesser amount is payment in full,
shall be given no effect, and Landlord may accept such check without prejudice
to any other rights or remedies which Landlord may have against Tenant.
17.3 COVENANT OF QUIET ENJOYMENT. Tenant, subject to the terms and
provisions of this Lease, on payment of the Annual Fixed Rent and all other
charges and observing, keeping and performing all of the other terms and
provisions of this Lease on Tenant's part to be observed, kept and performed,
shall lawfully, peaceably and quietly have, hold, occupy and enjoy the Premises
during the term hereof, without hindrance or ejection by any persons lawfully
claiming under Landlord to have title to the Premises superior to Tenant; the
foregoing covenant of quiet enjoyment is in lieu of any other covenant, express
or implied.
17.4 LANDLORD'S LIABILITY. (a) Tenant specifically agrees to look
solely to Landlord's then equity interest in the Property at the time owned, for
recovery of any judgment from Landlord; it being specifically agreed that
Landlord (original or successor) shall never be personally liable for any such
judgment, or for the payment of any monetary obligation to Tenant. The provision
contained in the foregoing sentence is not intended to, and shall not, limit any
right that Tenant might otherwise have to obtain injunctive relief against
Landlord or Landlord's successors in interest, or to take any action not
involving the personal liability of Landlord (original or successor) to respond
in monetary damages from Landlord's assets other than Landlord's equity interest
in the Property.
(b) With respect to any services to be furnished by Landlord
to Tenant, Landlord shall in no event be liable for failure to furnish the same
when prevented from doing
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so by strike, lockout, breakdown, accident, order or regulation of or by any
governmental authority, or failure of supply, or inability by the exercise of
reasonable diligence to obtain supplies, parts or employees necessary to furnish
such services, or because of war or other emergency, or for any cause beyond
Landlord's reasonable control, or for any cause due to any act or neglect of
Tenant or Tenant's servants,, agents, employees, licensees or any person
claiming by, through or under Tenant.
(c) In no event shall Landlord ever be liable to Tenant for
any indirect or consequential damages suffered by Tenant from whatever cause.
(d) With respect to any repairs or restoration which are
required or permitted to be made by landlord, the same may be made during normal
business hours and Landlord shall have no liability for damages to Tenant for
inconvenience, annoyance or interruption of business arising therefrom; provided
that Landlord agrees to use reasonable efforts to minimize interference with
Tenant's business.
17.5 NOTICE TO MORTGAGEE OR GROUND LESSOR. After receiving notice
from any person, firm or other entity that it holds a mortgage or a ground lease
which includes the Premises, no notice from Tenant to Landlord alleging any
default by Landlord shall be effective unless and until a copy of the same is
given to such holder or ground lessor (provided Tenant shall have been furnished
with the name and address of such holder or ground lessor), and the curing of
any of Landlord's defaults by such holder or ground lessor shall be treated as
performance by Landlord.
17.6 ASSIGNMENT OF RENTS AND TRANSFER OF TITLE. (a) With reference
to any assignment by Landlord of Landlord's interest in this Lease, or the rents
payable hereunder, conditional in nature or otherwise, which assignment is made
to the holder of a mortgage on property which includes the Premises, Tenant
agrees that the execution thereof by Landlord, and the acceptance thereof by the
holder of such mortgage, shall never be treated as an assumption by such holder
of any of the obligations of Landlord hereunder unless such holder shall, by
notice sent to Tenant, specifically otherwise elect and that, except as
aforesaid, such holder shall be treated as having assumed Landlord's obligations
hereunder only upon foreclosure of such holder's mortgage and the taking of
possession of the Premises.
(b) In no event shall the acquisition of Landlord's interest
in the Property by a purchaser which, simultaneously therewith, leases
Landlord's entire interest in the Property back to the seller thereof be treated
as an assumption by operation of law or otherwise, of Landlord's obligations
hereunder, but Tenant shall look solely to such seller-lessee, and its
successors from time to time in title, for performance of Landlord's obligations
hereunder. In any such event, this Lease shall be subject and subordinate to the
lease to such purchaser. For all purposes, such seller-lessee, and its
successors in title, shall be the Landlord hereunder unless and until Landlord's
position shall have been assumed by such purchaser lessor. In the event of a
sale or leaseback, the purchaser and the fee holder shall provide to Tenant a
non-disturbance and attornment agreement whereby such purchaser and fee holder,
as the case
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may be, agrees to recognize the Lease (and Tenant agrees to attorn in such
event) in the event that the seller/lessee defaults.
(c) Except as provided in paragraph (b) of this Section, in
the event of any transfer of title to the Property by Landlord, Landlord shall
thereafter be entirely freed and relieved from the performance and observance of
all covenants and obligations hereunder arising after the date of such transfer.
17.7 TENANT'S INDEMNITY. To the maximum extent this agreement may
be made effective according to law, Tenant agrees to defend, indemnify and save
harmless Landlord from and against all claims, loss, liability, costs and
damages of whatever nature arising from any default by Tenant under this Lease
or from the following: (i) from any accident, injury or damage whatsoever to any
person, or to the property of any person, occurring in or about the Building or
Lot (except those due to Landlord's negligence or willful misconduct); or (ii)
in connection with the conduct or management of the Premises or of any business
therein, or any thing or work whatsoever done, or any condition created (other
than by Landlord) in or about the Premises; and, in any case, occurring after
the date of this Lease, until the end of the Term of this Lease, and thereafter
so long as Tenant is in occupancy of the Premises. This indemnity and hold
harmless agreement shall include indemnity against all reasonable costs,
expenses and liabilities incurred in, or in connection with, any such claim or
proceeding brought thereon, and the defense thereof, including, without
limitation, reasonable attorneys' fees and costs at both the trial and appellate
levels.
17.8 ADDITIONAL CHARGES. If Tenant shall fail to pay when due any
sums under this Lease as an additional charge, Landlord shall have the same
rights and remedies as Landlord has hereunder for failure to pay Annual Fixed
Rent.
17.9 INVALIDITY OF PARTICULAR PROVISIONS. If any term or provision
of this Lease, or the application thereof to any person or circumstance shall,
to any extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Lease shall be valid and be
enforced to the fullest extent permitted by Law.
17.10 PROVISIONS BINDING, ETC. Except as herein otherwise provided,
the terms hereof shall be binding upon and shall inure to the benefit of the
successors and assigns, respectively, of Landlord and Tenant and, if Tenant
shall be an individual, upon and to his heirs, executors, administrators,
successors and assigns. Each term and each provision of this Lease to be
performed by Tenant or Landlord shall be construed to be both a covenant and a
condition. The reference contained to successors and assigns of Tenant is not
intended to constitute a consent to assignment by Tenant, but has reference only
to those instances in which Landlord may later give consent to a particular
assignment as provided elsewhere in this Lease.
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17.11 RECORDING. Tenant agrees not to record this Lease, but each
party hereto agrees, on the request of the other, to execute a so-called notice
of lease in form recordable and complying with applicable law and reasonably
satisfactory to Landlord's attorneys. In no event shall such document set forth
the rent or other charges payable by Tenant under this Lease; and any such
document shall expressly state that it is executed pursuant to the provisions
contained in Lease, and is not intended to vary the terms and conditions of this
Lease.
17.12 WHEN LEASE BECOMES BINDING. The submission of this document
for examination and negotiation does not constitute an offer to lease, or a
reservation of, or option for, the Premises, and this document shall become
effective and binding only upon the execution and delivery hereof by both
Landlord and Tenant. All negotiations, considerations, representations and
understandings between Landlord and Tenant are incorporated herein and this
Lease expressly supersedes any proposals or other written documents relating
hereto. This Lease may be modified or altered only by written agreement between
Landlord and Tenant and no act or omission of any employee or agent of Landlord
shall alter, change or modify any of the provisions hereof.
17.13 PARAGRAPH HEADINGS. The paragraph headings throughout this
instrument are for convenience and reference only, and the words contained
therein shall in no way be held to explain, modify, amplify or aid in the
interpretation, construction, or meaning of the provisions of this Lease.
17.14 RIGHTS OF MORTGAGEE OR GROUND LESSOR. This Lease shall be
subordinate to any mortgage or ground lease from time to time encumbering the
Premises, whether executed and delivered prior to or subsequent to the date of
this Lease, if the holder of such mortgage or ground lease shall so elect
provided that the holder of such mortgage or ground lease shall provide Tenant
with a subordination, non-disturbance and attornment agreement (the "Agreement")
in form and substance reasonably acceptable to Tenant (it being agreed that the
form and substance of the Subordination, Non-Disturbance and Attornment
Agreement attached hereto as Exhibit ND is reasonably acceptable to Tenant). If
this Lease is subordinate to any mortgage or ground lease and the holder thereof
(or successor) shall succeed to the interest of Landlord, Tenant shall attorn to
such holder (or successor) and this Lease shall continue in full force and
effect between such holder (or successor) and Tenant in accordance with the
terms of the Agreement. Tenant agrees to execute such Agreement in confirmation
of the foregoing provisions as such holder may request, and Tenant hereby
appoints such holder (or successor) as Tenant's attorney-in-fact to execute such
Agreement upon default of Tenant in complying with such holder's (or
successor's) request.
17.15 STATUS REPORT. Recognizing that both parties may find it
necessary to establish to third parties, such as accountants, banks, mortgagees,
ground lessors, or the like, the then current status of performance hereunder,
either party, on the request of the other made from time to time, will promptly
furnish to the Landlord, or the holder of any mortgage or ground lease
encumbering the Premises, or to Tenant, as the case may be, a statement of the
status of
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any matter pertaining to this Lease, including, without limitation,
acknowledgment that (or the extent to which) each party is in compliance with
its obligations under the terms of this Lease.
17.16 REMEDYING DEFAULTS. Landlord shall have the right, but shall
not be required, to pay such sums or to do any act which requires the
expenditure of monies which may be necessary or appropriate by reason of the
failure or neglect of Tenant to perform any of the provisions of this Lease, and
in the event of the exercise of such right by Landlord, Tenant agrees to pay to
Landlord forthwith upon demand all such sums, together with interest thereon at
a rate equal to 4% over the prime rate in effect from time to time at the First
National Bank of Boston as an additional charge. Any payment of Annual Fixed
Rent or other sums payable hereunder not paid when due shall, at the option of
Landlord, bear interest at a rate equal to 4% over the prime rate in effect from
time to time at the First National Bank of Boston from the due date thereof and
shall be payable forthwith on demand by Landlord, as an additional charge.
17.17 BROKERAGE. Tenant warrants and represents that Tenant has
dealt with no broker in connection with the consummation of this Lease other
than Lynch, Murphy, Walsh & Partners Incorporated (the "Broker") and, in the
event of any brokerage claims against Landlord predicated upon prior dealings
with Tenant, Tenant agrees to defend the same and indemnify Landlord against any
such claim (except any claim by the Broker). Landlord shall hold Tenant harmless
with respect to any brokerage commissions due to the Broker in connection with
the consummation of this transaction, except to the extent that Tenant has
breached the foregoing warranty.
17.18 FIRST OPTION TO EXTEND. Tenant shall have the option to extend
the initial Term as to the entire Premises for one (1) period of four (4) years
(the "First Extension Period"), upon the same terms and conditions then in
effect with respect to the Premises, except for Annual Fixed Rent, which shall
be determined as provided hereinbelow, provided that at the time such option to
extend is exercised and at the expiration of the initial Term Tenant shall not
be in default under this Lease beyond any applicable cure period.
The Annual Rent for the First Extension Period payable with respect to
the Premises shall be the greater of (i) 90% of the prevailing fair market
rental rate for the Premises as of the date of commencement of the First
Extension Period, as determined as hereinafter set forth, or (ii) the Annual
Fixed Rent payable by Tenant with respect to the Premises for the last Lease
Year during the initial Term.
At any time after November 15, 2000 and prior to February 1, 2001,
Tenant may request Landlord to inform Tenant of the prevailing fair market
rental rate for the Premises which will be in effect for the First Extension
Period, and in such event Landlord shall within thirty (30) days thereafter
notify Tenant as to the prevailing fair market rental rate for the First
Extension Period as of the commencement of the First Extension Period, as
determined by Landlord.
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If Tenant elects to exercise the First Option to Extend, Tenant shall
do so by written notice to Landlord ("Tenant's Exercise") given not later than
March 14, 2001. If Tenant fails to exercise the First Option to Extend within
the aforesaid time period, Tenant's right to any extension of the Term of this
shall expire. Tenant's Exercise shall contain a statement from Tenant that it
either accepts or rejects Landlord's determination of the prevailing fair market
rental rate for the Premises. If Tenant rejects Landlord's determination of the
prevailing fair market rental rate for the Premises. then Tenant's Exercise
shall also contain the name of one qualified appraiser. In such event Landlord
shall, within thirty (30) days of Landlord's receipt of Tenant's Exercise,
provide Tenant with written notice of a second qualified appraiser, and these
two qualified appraisers shall name a third. It shall then be the duty of the
appraisers to ascertain the prevailing fair market rental rate for the Premises,
and if any appraiser shall neglect or refuse to appear at any meeting appointed
by the appraisers, a majority may act in the absence of such appraiser. An
appraisers' determination of the prevailing fair market rental rate for the
Premises shall be conclusive and shall be binding upon Landlord and Tenant.
Landlord and Tenant shall each be responsible for the costs of their respective
appraiser, and Landlord and Tenant shall each be responsible for fifty percent
(50%) of the costs of the third appraiser. An appraiser hereunder shall be
deemed qualified if a member in good standing of the American Institute of Real
Estate Appraisers or a comparable recognized professional organization and such
appraiser has at least five years experience in providing fair market rental
value appraisals of commercial real estate in Route 128 area. The third
appraiser that is selected by the two appraisers that are appointed by Landlord
and Tenant respectively must not have undertaken appraisal or other such work on
behalf of either party or any affiliates of either party during the firm year
period before such third appraiser's selection.
17.19 SECOND OPTION TO EXTEND. Tenant shall have the option to
further extend the Term as to the entire Premises for one (1) period of five (5)
years (the "Second Extension Period"), upon the same terms and conditions then
in effect with respect to the Premises, except for Annual Fixed Rent, which
shall be determined as provided hereinbelow, provided that (i) Tenant has
exercised its First Option to Extend in a. timely manner in accordance with
Section 17.18, and (ii) at the time such option to extend is exercised and at
the expiration of the First Extension Period Tenant shall not be in default
under this Lease beyond any applicable cure period.
The Annual Rent for the Second Extension Period payable with respect to
the Premises shall be the greater of (i) 90% of the prevailing fair market
rental rate for the Premises as of the date of commencement of the Second
Extension Period, as determined as hereinafter set forth, or (ii) the Annual
Fixed Rent payable by Tenant with respect to the Premises for the last Lease
Year during the First Extension Period.
At any time after November 15, 2004 and prior to February 1, 2005,
Tenant may request Landlord to inform Tenant of the prevailing fair market
rental rate for the Premises which will be in effect for the Second Extension
Period, and in such event Landlord shall within thirty (30) days thereafter
notify Tenant as to the prevailing fair market rental rate for
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the Second Extension Period as of the commencement of the Second Extension
Period, as determined by Landlord.
If Tenant elects to exercise the Second Option to Extend, Tenant shall
do so by written notice to Landlord ("Tenant's Exercise") given not later than
March 14, 2005. If Tenant fails to exercise the Second Option to Extend within
the aforesaid time period, Tenant's right to any extension of the Tenant of this
Lease shall expire. Tenant's Exercise shall contain a statement from Tenant that
it either accepts or rejects Landlord's determination of the prevailing fair
market rental rate for the Premises. If Tenant rejects Landlord's determination
of the prevailing fair market rental rate for the Premises, then Tenant's
Exercise shall also contain the name of one qualified appraiser. In such event
Landlord shall, within thirty (30) days of Landlord's receipt of Tenant's
Exercise, provide Tenant with written notice of a second qualified appraiser,
and these two qualified appraisers shall name a third. It shall then be the duty
of the appraisers to ascertain the prevailing fair market rental rate for the
Premises, and if any appraiser shall neglect or refuse to appear at any meeting
appointed by the appraisers, a majority may act in the absence of such
appraiser. The appraisers' determination of the prevailing fair market rental
rate for the Premises shall be conclusive and shall be binding upon Landlord and
Tenant Landlord and Tenant shall each be responsible for the costs of their
respective appraiser, and Landlord and Tenant shall each be responsible for
fifty percent (50%) of the costs of the third appraiser. An appraiser hereunder
shall be deemed qualified if a member in good standing of the American Institute
of Real Estate Appraisers or a comparable recognized professional organization
and such appraiser has at least five years experience in providing fair market
rental value appraisals of commercial real estate in Route 128 area. The third
appraiser that is selected by the two appraisers that are appointed by Landlord
and Tenant respectively must not have undertaken appraisal or other such work on
behalf of either party or any affiliates of either party during the three year
period before such third appraisers selection.
17.20 GOVERNING LAW. This Lease shall be governed exclusively by the
provisions hereof and by the laws of the Commonwealth of Massachusetts, as the
same may from time to time exist.
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<PAGE> 31
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
duly executed, under seal, by persons hereunto duly authorized, in multiple
copies, each to be considered an original hereof, as of the date first set forth
above.
NEEDHAM 152 SECOND AVENUE TRUST
By:
------------------------------------------
Arthur G. Carlson, Jr., as Trustee but
not individually
By:
------------------------------------------
William J. Ford, Jr., as Trustee but not
individually
TENANT:
BROOKTROUT TECHNOLOGY, INC.
By:
------------------------------------------
Hereunto duly authorized
Title:
27
<PAGE> 32
Exhibit A
Description of Premises
The following described real property, together with the buildings and
improvements constructed thereon, situated on Second Avenue in the New England
Industrial Center, in Needham, County of Norfolk, Massachusetts, bounded and
described as follows:
PARCEL I (Registered Land):
SOUTHWESTERLY by Second Avenue, two hundred twenty six and 56/100
(226.56) feet;
NORTHWESTERLY by lot numbered 29, as indicated on plan hereinafter
referred to, two hundred thirty nine and 80/100
(239.80) feet;
NORTHEASTERLY by lands now or formerly of Christopher Kalinowski et
al and of John Mroczka et al, one hundred forty six
and 51/100 (146.51) feet;
NORTHERLY by land now or formerly of said John Mroczka et al,
eighty six and 31/100 (86.31) feet;
SOUTHEASTERLY one hundred eight and 89/100 (108.89) feet;
NORTHEASTERLY seventy seven and 03/100 (77.03) feet, by land now or
formerly of Chester Mickowski;
SOUTHEASTERLY by lot numbered 36, as shown on said plan, one
hundred sixty eight and 02/100 (168.02) feet; and
SOUTHERLY by land now or formerly of Orono Corporation, one
hundred eighteen and 97/100 (118.97) feet.
Said parcel is shown as lot numbered 37 on a plan drawn by William S.
Crocker Inc., Civil Engineer, dated April 22, 1957, as approved by the Land
Court, filed in the Land Registration Office as No. 24606H, a copy of a portion
of which is filed in Norfolk Registry District with Certificate No. 59771, Sheet
1, Book 299.
So much of the above described land as is included within the limits of
said Second Avenue is subject to such highway easements as were taken therein by
the Town of Needham under instrument dated April 13, 1954 and duly recorded in
Book 3253, Page 315; to such easement for sewer, water and drainage purposes as
set forth in a grant made by Gerald W. Blakeley, Jr., et al, Trustees to the
Town of Needham, dated May 18, 1954, duly recorded in
<PAGE> 33
Book 3263, Page 57; and to such private rights and easements as may exist in,
under or over the same at date of original decree.
So much of the above described land as is included within the area
marked "The New York, New Haven and Hartford Railroad Company Easement" on said
plan is subject to rights and easements as set forth in a grant made by Gerald
W. Blakeley, Jr., et al, Trustees to the New York, New Haven and Hartford
Railroad Company, dated March 26, 1954, duly recorded in Book 3252., Page 421.
The above described land is subject to rights and easements as set
forth in a grant made by Gerald W. Blakeley, Jr., et al, Trustees to the
Company and New England Telephone and Telegraph Company, dated March 12, 1954,
duly recorded in Book 3248, Page 3.
The above described land is subject also to and has the benefit of the rights,
restrictions etc., as set forth or referred to in Document No. 194917.
PARCEL 2 (Recorded Title not registered)
SOUTHWESTERLY by Second Avenue, 16 feet;
NORTHWESTERLY 28 feet on a line in said Second Avenue and by a
curved line by said lot 37,79.21 feet;
SOUTHWESTERLY 77.27 feet and 28 feet on a line in said Second
Avenue by land now or formerly of Orono Corporation;
Or however otherwise said premises may be bounded and described and be
all or any of said measurements and contents more or less.
Said parcel is shown as Lot I on said Plan 24606H, filed in the
Engineer's Office of the Land Court and contains 774 square feet to side line of
Second Avenue according thereto. Title to said parcel is not registered. This
Parcel is Parcel 2 described in three deeds, one to each of the Grantor Trusts
which are the Landlord's predecessors in title, and recorded with the Norfolk
Registry of Deeds in Book, 3598, Page 417-419. These Premises are subject to and
with the benefit of rights, covenants and restrictions referred to therein.
Parcels 1 and 2 are also subject to a mortgage to the Provident
Institution for Savings in the Town of Boston, Registered as Document No.
329796, and recorded in Book 4892, Page 181.
2
<PAGE> 34
EXHIBIT ND
SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT, dated as
of , is made among , a corporation with
a principal place of business at , (hereinafter, the "Tenant"),
, having an address , (hereinafter,
collectively the "Borrower"), and having a usual place
of business at (hereinafter, the "Bank"), the Mortgagee under
a certain Mortgage and Security Agreement granted by the Borrower to the Bank
dated on the date hereof and filed for registration herewith (hereinafter, the
"MORTGAGE".
WITNESSETH:
WHEREAS, the Borrower is the owner of real property with buildings and
improvements thereon located at , Needham, Massachusetts (hereinafter,
the "Premises") as further described in Certificate of Title No. filed with the
Norfolk District Land Registry Office (hereinafter, the "Registry"); and
WHEREAS, the Tenant and the Borrower have entered into a certain Lease
Agreement dated June 18, 1996 (hereinafter, said Lease Agreement shall be
referred to as the "LEASE") with respect to the Premises, Notice of which Lease
is filed herewith; and
WHEREAS, the Borrower has entered into a loan arrangement with the Bank
pursuant to which the Borrower has granted the Mortgage to the Bank and
collaterally assigned the Borrower's interest in the Lease to the Bank, as
provided in the Collateral Assignment of Leases and Rents dated on the date
hereof filed for registration herewith (the "Collateral Assignment"); and
WHEREAS, the Bank has indicated that the Bank requires as a condition
to the establishment of such loan arrangement an agreement with the Tenant as to
the priority of the Lease and the relative rights of the Bank and Tenant
thereto,
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants hereinafter contained, the Tenant, the Borrower, and the Bank hereby
agree as follows:
1. REPRESENTATIONS BY TENANT AND BORROWER. The Tenant and the
Borrower hereby represent and warrant the following to be true as of the date
hereof.
(a) That the Lease is a complete statement of the agreement
between the parties thereto with respect to the letting of the
Premises;
<PAGE> 35
(b) That the Lease is currently in full force and in effect
according to its terms and is a binding obligation of the Tenant and
the Borrower as of the date hereof; and
(c) That the Tenant is not now in default (beyond applicable
notice and cure periods) under any term or terms of the Lease and that,
to the best of the Tenant's present knowledge, there is no default or
claim of default on the pail of, or claim of offset against the rent or
any other sum or sums payable under the terms of the Lease to, the
Borrower under the Lease.
(d) That the Tenant has not made any assignment for the
benefit of creditors nor filed any petitions or instituted any
proceedings under the bankruptcy or similar laws of the United States
or of any state, and that there are currently no such petitions or
proceedings pending or threatened against the Tenant.
2. CONSENT TO ASSIGNMENT BY TENANT. The Tenant hereby consents to
the assignment of the Lease and the rents thereunder to the Bank pursuant to the
Mortgage and the Collateral Assignment. Upon notification by the Bank to the
Tenant of the exercise of the Bank's rights under the Mortgage and/or the
Collateral Assignment, the Tenant shall pay rent and any other sums payable
under the terms of the Lease directly to the Bank. Without limiting the
foregoing, the Tenant hereby acknowledges and agrees that the Bank shall have no
duties or obligations with respect to the Lease until the Bank has notified the
Tenant of the Bank's assumption of the Borrower's obligations under the Lease,
or until the Bank has made entry under or foreclosed upon the Mortgage or has
taken actual possession of the Premises and Landlord shall hold Tenant harmless
from following such directions by Bank to Tenant.
3. COVENANTS. Regardless of whether or not the Bank has notified
the Tenant of the exercise by the Bank of its rights under the Mortgage and/or
the Collateral Assignment, the -Tenant hereby agrees as follows:
(a) Except as otherwise provided in the Lease, not to cancel
terminate, surrender, amend or modify the Lease or any term thereof,
nor consent to or accept any such cancellation, termination, surrender,
amendment or modification thereof, nor permit any event reasonably
within the Tenant's control which would operate to terminate,
surrender, or cancel the Lease provided that Tenant is so obligated
under the terms of the Lease;
(b) Except as otherwise provided in the Lease, or as
previously approved by Landlord, not, without prior written consent of
the Bank, to make or cause to be made, any structural additions,
alterations, or improvements, to the Premises.
4. BANK'S OPPORTUNITY TO CURE DEFAULT. Regardless of whether the
Bank has notified the Tenant of the Bank's exercise of its rights under the
Mortgage and/or the Collateral Assignment, the Tenant shall notify the Bank of
any default on the part of the
2
<PAGE> 36
Borrower under the Lease. Except as otherwise provided in the Lease, no such
default shall entitle or allow the Tenant to cancel or terminate the Lease, or
abate the rent or any other sums owing thereunder, or exercise any other remedy
afforded by the Lease or applicable law, unless the Bank fails to cure or cause
to be cured, the specified default within 30 days of receipt of such notice, or
within such longer time as may be required for cure due to the nature of such
default, provided the cure is commenced within said 30-day period and thereafter
diligently prosecuted to completion, and provided that said notice is duly
given.
5. SUBORDINATION OF LEASE. The Tenant hereby agrees and
acknowledges that the Lease and any extensions of said Lease or its terms shall
be subordinate and subject to the lien of the Mortgage and any renewals,
extensions, modifications or replacements thereof as though the Mortgage and any
such renewal, extension, modification, or replacement thereof had been executed,
acknowledge and delivered prior to the Lease and recorded prior to the Lease or
any notice of the Lease.
6. ATTORNMENT BY TENANT. The Tenant further attorn to the Bank
and agrees that, in the event of the exercise by the Bank of its rights under
the Mortgage, and the taking of possession or the acquisition of tide by the
Bank, pursuant to the Mortgage, whether through foreclosure proceedings or
otherwise, the Tenant shall recognize the Bank and its successors, whether
through foreclosure sale or otherwise, as the landlord under the Lease and the
Lease shall continue in full force and effect in accordance with its terms and
the Bank and Tenant shall be bound thereby. The Tenant agrees that any person to
which the Tenant shall attorn hereunder shall not be liable for any action or
omission of any prior landlord under the Lease including the Borrower, nor shall
such person be subject to any offsets or claims thereof or defenses which the
Tenant may have against any prior landlord, including the Borrower, except as
expressly provided under the Lease.
7. NONDISTURBANCE BY BANK. The Bank hereby agrees that for so
long as the Tenant duly and promptly performs all its obligations under the
Lease (within applicable notice and cure periods), the Bank will not, in taking
possession of or acquiring tide to the Premises or otherwise exercising its
rights under the Mortgage and/or the Collateral Assignment, whether through
foreclosure or otherwise, disturb the possession or other rights of the Tenant
under the Lease and shall recognize Tenant's rights under the Lease and accept
the Tenant as lessee under the terms and conditions and for the entire duration
of the term of the Lease. The Bank shall not, however, be bound by any
amendments or modifications of the Lease made without the written consent of the
Bank (which consent shall not be unreasonably withheld or delayed), or by any
liabilities of the Borrower arising under the Lease prior to the date the Tenant
has given notice thereof to the Bank nor shall the Bank be bound by any
representations or warranties given by Landlord under the Lease;
Anything to the contrary herein notwithstanding, Tenant may not recover
from the taking award, or from any taking authority, except for moving expenses
separately awarded to Tenant which do not reduce Landlord's award, until the
Bank has been paid in full. In addition, the provisions of the Mortgage shall
control* with respect to the disposition and
3
<PAGE> 37
application of insurance proceeds in the event of a casualty and disposition of
the taking award in the event of a taking of all or any portion of the Property.
*provided they are consistent with the provisions of Section 11.1 of the Lease,
8. EXTENSIONS AND RENEWALS. This Agreement shall include and
apply to any extensions and renewals of the term permitted by the Lease.
9. AMENDMENTS. This Agreement may not be waived, changed, or
discharged orally, but only by agreement in writing and signed by the Bank, the
Borrower, and the Tenant, and any oral waiver, change, or discharge of this
Agreement or any provision hereof shall be without authority and shall be of no
force and effect.
10. CAPTIONS. Paragraph captions are included herein for reference
only, and shall in no way constitute any part of this Agreement nor define or
limit any of the provisions hereof.
11. SEVERABILITY. The invalidity of any provision of this
Agreement, as determined by a court of competent jurisdiction, shall in no way
affect the validity of any other provisions hereof .
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
each party's respective heirs, executors, administrators, representatives,
successors, and assigns and shall inure to the benefit of each party's
successors and assigns.
13. NOTICES. All notices, demands and other communications made in
this Agreement shall be made to the following addresses (each of which may be
changed upon seven (7) days written notice to all others) given by hand, or by
certified or registered mA return receipt requested, or by Federal Express or
other recognized same-day or overnight courier with receipt, as follows:
If the Bank:
with a copy to:
If to the Tenant:
4
<PAGE> 38
with a copy to:
If to the Borrower:
With a copy to:
Any such notice shall be deemed received the earlier of (i) two (2) days after
the mailing of such notice in accordance with the terms and conditions and to
the addresses provided above, or (ii) the date on which the notice is delivered
by hand or by telegram to the address and to the individual provided above, or
(iii) one business day following delivery of such notice to such overnight
courier and addressed to the individual as provided above.
14. APPLICABLE LAW. This Agreement and all rights and obligations
hereunder, including matters of construction, validity and performance, shall be
governed by the laws of the Commonwealth of Massachusetts. The Tenant submits
itself to the jurisdiction of the courts of said Commonwealth for all purposes
with respect to this Agreement and the Tenant's relationship with the Bank.
Witness the execution hereof under seal the day and year first above
written.
5
<PAGE> 1
EXHIBIT 11.1
BROOKTROUT TECHNOLOGY, INC.
COMPUTATION OF INCOME PER COMMON SHARE
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic Income Per Share:
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock .................................. 10,702 9,947 9,661
Common equivalent shares resulting from options -- -- --
------- ------- -------
Total ........................................ 10,702 9,947 9,661
======= ======= =======
Net income ........................................ $ 2,651 $ 6,865 $ 5,203
======= ======= =======
Basic income per Common Share ..................... $ 0.25 $ 0.69 $ 0.54
======= ======= =======
Diluted Income Per Share:
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock .................................. 10,702 9,947 9,661
Common equivalent shares resulting from options 598 954 416
------- ------- -------
Total ........................................ 11,300 10,901 10,077
======= ======= =======
Net income ........................................ $ 2,651 $ 6,865 $ 5,203
======= ======= =======
Diluted income per Common Share ................... $ 0.23 $ 0.63 $ 0.52
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13.1
Brooktrout had an excellent year in 1997. The company finished the year
very strong and turned in record revenues for the last six months and for the
year as a whole. It was also a year in which we were able to strengthen our
market leadership in LAN fax and expand that leadership into the fast-growing
field of data communications and Internet telephony. Revenues for the year rose
by nearly 23 percent to more than $72 million, while our overall gross margin
continued at a healthy 55 percent.
EXPANSION INTO DATA COMMUNICATIONS
The acquisition of Netaccess, Inc. of Salem, New Hampshire, was an
important step in our strategy to position Brooktrout as a world leader in
electronic messaging -- providing fax, voice, and data communications
technology. Netaccess is a leading supplier of Primary Rate ISDN telephone
network interface products and multiport modems in the data communications
segment and is already proving to be an outstanding addition to the company.
Earlier in the year, Brooktrout formed a wholly owned subsidiary to address
this data communications segment. Interspeed, Inc. was established to develop
hardware and software that can meet the growing needs for high-speed network
access in the telecommunications industry. As new uses emerge for private data
networks and the Internet, more companies and organizations will provide their
employees with network connections, driving the need for faster, higher-volume
access to these data networks. Together, Netaccess and Interspeed complement our
overall business strategy by giving Brooktrout a major position in the
fast-growing market for high-speed, high-density data communications and network
access.
A FOCUS ON INTERNET GROWTH
Although Internet telephony -- using packet data networks such as the
Internet instead of conventional phone lines for voice, fax, and data -- is
still in its infancy, it is already having a significant effect on the
telecommunications industry. At Brooktrout, we see
<PAGE> 2
opportunities in several businesses. The most notable example is the Internet. A
growing portion of our shipments are now related to Internet technologies,
particularly in the fax segment. We expect this growth to continue as companies
and service providers migrate their voice, fax, and data traffic from public
phone lines to more economical private data networks or the Internet.
To address this developing market, this fall we introduced the TR2000(TM)
Series, an important new line of IP telephony products. Based on our
open-systems BOSTON architecture, the TR2000 Series is a suite of
standards-based software and hardware products that enable our customers to
develop Internet voice and Internet fax applications as well as more traditional
electronic messaging applications using common software and hardware platforms.
BOSTON OPEN SYSTEMS ARCHITECTURE
The introduction of BOSTON, the Brooktrout Open System Telephony
architecture, was a major event during the year and one that brings significant
long-term value to our customers. BOSTON is Brooktrout's first open system
architecture developed exclusively for computer telephony. It establishes a
standard development architecture as the foundation for current and future
telephony applications. BOSTON will enable a host of hardware and software
products that Brooktrout customers will use to develop their own unique
messaging solutions. Its Universal Port(TM) approach makes it possible to
combine voice and fax on the same platform, eliminating the need for separate
system components for each function. And most important, BOSTON offers seamless
migration from customers' existing applications, allowing customers to enhance
their existing applications without abandoning their software investment.
Developers can also use the company's intuitive Show N Tel(R) software to
create custom applications using more than 300 graphical icons that represent
common operations in computer telephony applications. Show N Tel runs on
Brooktrout boards as
<PAGE> 3
well as on other major brands and is considered the industry's best and
easiest-to-use tool for developing computer telephony applications.
NEW INTELLIGENT FAX PRODUCTS
DRIVE A GROWING MARKET
In the area of network fax and enhanced fax services, Brooktrout's major
share of the market reflects its position as a leading developer of intelligent
fax platforms worldwide. In keeping with our tradition of expanding the market
through product innovation, the company introduced several industry firsts
during the year. Among these is the TR Series(TM) PCI product line, the first
commercially available multichannel fax and voice boards for the new PCI bus
computers. The PCI version provides the same functionality, robustness, and
reliability as the current ISA bus versions of Brooktrout's industry-leading
TR114(TM) fax and voice boards. Because the TR Series PCI line mirrors the
existing TR114 Series ISA boards, no changes are required to existing software
applications.
In addition, Brooktrout became the first company to offer a multichannel
fax platform with on-board ISDN capabilities when it introduced the TR114 ISDN
Series for direct connection to high-speed ISDN lines. This is particularly
valuable and cost-effective in Europe, where ISDN is widely used. Our existing
products also continue to enjoy strong market acceptance. Lucent Technologies
remains our largest customer, with Brooktrout supplying Lucent's popular Merlin
Legend Mail and Partner Mail automated voice messaging systems.
THE FUTURE IS BRIGHT
Looking ahead to 1998 and beyond, we believe that Brooktrout is a company
in the right markets, with the right technologies, at exactly the right time.
Our strategy of bringing together the three key segments of the electronic
messaging business -- voice, fax, and data -- is giving Brooktrout a unique
position in the marketplace. Our reputation
<PAGE> 4
for delivering the best, most reliable technology of the highest quality
continues to win us new business and new customers. And our belief that market
success is forged from strong partnerships with suppliers and customers alike is
allowing Brooktrout to set the technical pace in electronic messaging.
At Brooktrout, we're excited about the challenges and opportunities that
lie ahead. Our markets are expanding, our customers are growing, our products
are at the leading edge of innovation, and our employees are the best in the
business. We look forward to shaping the future of electronic messaging.
Sincerely,
Eric Giler, President
<PAGE> 5
THE REVOLUTION HAS BEGUN.
ELECTRONIC MESSAGING IS TRANSFORMING THE WORKPLACE AND REDEFINING VIRTUALLY
EVERYTHING WE DO THERE.
Although it might seem like another age, it was just a few short years ago when
terms like electronic mail, broadcast faxing, file transfer, and even voice mail
were unknown to most people. In business, the challenge of keeping up with the
pace of change is difficult and risky. Every decision has an impact on
productivity across the organization as well as its ability to compete in its
marketplace. Which technologies to adopt? How quickly to proceed across the
enterprise? How much change is feasible? And, at what cost?
At Brooktrout, the answers to these questions are the foundation of what we do.
Our business is electronic messaging. Our hardware and software products enable
corporations, network systems vendors, and telecommunications service providers
to centralize and streamline their voice, fax, and data communication systems.
They help customers build cost-effective and integrated messaging systems, and
help to pave the way for even more advanced systems in the years to come.
LEADING THE MARKET IN NETWORK FAXING
Brooktrout laid the groundwork for the network fax market nearly a decade ago
and has led the market ever since, both in developing new innovations and
capturing new business. The problem was basic then and for many companies,
remains so even today -- how to use the local area network(LAN) to stem the
rising cost of proliferating fax machines. Brooktrout engineers pioneered a
solution that can deliver faxes directly to individual users while keeping those
faxes secure. Today, networked employees around the world have their own private
fax numbers made possible by Brooktrout multichannel fax boards. Using Direct
Inward Dialing technology, Brooktrout is providing corporations with a
centralized and cost-effective solution to handle the growing corporate appetite
for fax capability -- and giving users a time-saving and increasingly productive
communications tool. In addition, Brooktrout has established close working
relationships with the development teams of each of the leading makers of
network fax software -- including Alcom, Cheyenne/Computer Associates,
CommercePath, Symantec Delrina Group, Equisys, Fenestrae, Global Village, Lotus,
Microsoft, Mitek, Open Port Technology, Optus, Omtool, RightFAX, T4 Systems,
Traffic Software, and Teubner. This ensures that Brooktrout hardware runs
smoothly with whichever major LAN fax or network fax software package our
customers might select.
ENABLING ENHANCED FAX MESSAGING
Enhanced fax service is the marriage of computers with high-density, high-volume
fax capabilities. It includes such applications as fax broadcasting, sending a
fax to many
<PAGE> 6
addresses at once; fax-on-demand, which allows callers to request faxes for
transmission; never-busy fax, which can successfully send faxes on the first try
without regard for busy signals; personal fax needs, mailboxes, which allow
users to receive and store faxes for later use; and store-and-forward faxing,
which can hold faxes for transmission during off-peak hours when the toll
charges are lower. These services are rapidly becoming more available in the
marketplace and each is made possible by Brooktrout TR Series fax and voice
boards.
This range of services has also attracted a variety of companies that are
bringing these specialized services to end users. Brooktrout provides its
products and services to customers in several categories: original equipment
manufacturers (OEMs), value-added resellers (VARs), corporate customers, and
telecommunications service providers. These customers range from such well-known
commercial names as Deutsche Telekom, Lucent Technologies, MCI, Nortel, and PR
Newswire to more specialized firms such as Applied Voice Technology, Centigram,
Glenayre, and Voicetek.
A REPUTATION FOR QUALITY AND TECHNICAL INNOVATION
In every case, our success is based on a reputation for unmatched quality,
reliability, and performance. Brooktrout products, led by the flagship TR114(TM)
Universal Port multichannel fax and voice boards, enjoy a reputation for
delivering the best and most reliable performance of any in the electronic
messaging marketplace. The TR114 Series is the company's most extensive product
line. TR Series boards are in use at customer locations worldwide and meet the
requirements for use in more than 32 countries. For the smaller company or
general purpose customer, the lower-cost TruFax(R) Series has many of the same
features and is designed to appeal to network administrators and MIS managers
installing general purpose network fax systems.
The Brooktrout TR Series Universal Port boards were the first in the industry to
combine full fax and voice processing on a single multichannel board. This
eliminates the need for the customer to maintain separate dedicated fax and
voice systems and the hardware that goes with them. It enables a single system
to operate on the same incoming and outgoing phone line and moves the network
closer to the goal of totally integrated messaging. At the heart of each board
are software-controlled digital signal processors that provide fax and voice
processing to each channel independently and support board-level functions
through downloadable firmware. For telecommunications service providers and
developers, the Universal Port technology enables them to be more competitive by
offering their customers a variety of enhanced fax and voice services.
USING THE INTERNET TO CUT COMMUNICATION COSTS
Another important factor driving change across the telecommunications
marketplace is, of course, the Internet. Virtually overnight, the Internet has
become an indispensable part of our daily lives. It has rapidly provided
business with new ways to reach markets and
<PAGE> 7
promote products. Today, Brooktrout is pioneering the technology that is
allowing customers to use the Internet to make worldwide communications among
facilities, partners, and customers more efficient and less costly.
Now, the company has introduced a new line of products and application
development tools designed specifically to help customers develop voice and fax
services over IP (Internet Protocol) data networks such as the Internet.
Brooktrout's new IP product line, the TR2000 Series, supports the full spectrum
of IP telephony applications for both voice and fax. The TR2001 provides up to
60 channels of real-time IP voice and fax processing on a single DSP resource
board. It also includes integrated telephone and data network interfaces which
reduce cost and increase system performance. Since all of Brooktrout's IP
telephony products are based on a common software base, customers can upgrade
and grow with Brooktrout products as their needs change and new technology
becomes available.
BOSTON -- AN OPEN ARCHITECTURE FOR SYSTEM GROWTH
The Brooktrout Open System Telephony architecture, known as BOSTON, is the
technology that makes this design flexibility possible. BOSTON provides a
foundation technology that developers can use to create applications without
fear that their investment of programming time and resources will be lost when
the next generation of product is introduced. Products based on BOSTON will be
backward compatible and fully scaleable well into the next century. It is
providing the foundation for the company's next generation of application
development tools as well as Universal Port voice, fax and data communication
platforms. New products based on BOSTON will operate on a range of hardware
platforms and will support a wide variety of applications including Internet
telephony, network communication, and unified messaging. This provides system
integrators and developers with a reliable, expandable, and completely
predictable development environment where they can create innovative products
and bring them to market far more quickly.
PROVIDING A USER-FRIENDLY INTERFACE FOR THE CUSTOMER
Even the best technology will miss the mark if its user interface just isn't
friendly. It's a pretty simple concept really, but one that eludes all too many
high-tech manufacturers. For Brooktrout customers, the Show N Tel(R) graphical
user interface allows them to create their own computer telephony applications
including audiotext, Interactive Voice Response (IVR), fax-on-demand, fax
broadcast, voice and fax messaging, and intelligent call routing. Using Show N
Tel's award-winning development methods, customers can drag and drop more than
300 icons to create and quickly deploy a variety of messaging applications. Each
icon represents a separate operation that can be strung together into powerful
finished applications. This innovative, easy-to-master approach gives companies
and organizations of all sizes the flexibility to customize applications that
<PAGE> 8
would be too expensive and time-consuming to handle any other way. Since its
introduction in 1995, Show N Tel has become the industry's premier computer
telephony development platform for Microsoft Windows NT.(R)
STRENGTHENING THE DATA COMMUNICATIONS BUSINESS
During the year, Brooktrout moved boldly on the third segment of its electronic
messaging strategy -- increasing its presence in the emerging data
communications segment of the business. The company's data strategy during the
year has taken on three forms: entrepreneurship, acquisition, and internal
development. The first came with the company's establishment of a new
subsidiary, Interspeed, Inc., to pursue new data communications opportunities.
As new uses for the Internet and other digital data networks continue to develop
and grow and organizations bring more and more of their people on-line using
more and more data, high-speed network access technology will become an even
greater critical need. To serve precisely that need, Interspeed was established
as an independent venture-style subsidiary with a separate management team and a
unique charter -- to develop and market carrier-class communications hardware
and software products that can address the high-speed data access needs in the
rapidly expanding telecommunications industry.
The second stage of Brooktrout's data strategy came when it acquired Netaccess,
Inc. from Xircom, Inc. Netaccess is a leading supplier of Primary Rate ISDN
telephone network interface products and multiport modems. The acquisition
expands Brooktrout's leadership as a provider of value-added software and
hardware products for electronic messaging by adding a full line of network
interface products and high-density data modems. Netaccess ISDN interface
products are used by data communication equipment makers such as Motorola and
3Com and by telephony system vendors such as Lucent Technologies. The
acquisition expands Brooktrout's global offerings to customers who create
computer telephony products and standards-based remote access servers for the
Windows NT and Novell(R) operating systems.
The third part of the data strategy is an ongoing commitment to internal product
development. Early in 1997, Brooktrout introduced the TR Series Network
Interface Card, which provides customers with a seamless way to connect
Brooktrout's TR114 fax and voice boards to T1 digital telephone lines for up to
24 fax and voice channels. Now, with the acquisition of Netaccess in June,
product development teams are working on the next-generation of network
interface cards and high-density modem products.
CRAFTING A STRATEGY FOR THE NEW MILLENNIUM
The business of electronic messaging requires cutting-edge technology, a clear
understanding of the changes taking place in the marketplace, and a healthy dose
of vision to appreciate the opportunities of tomorrow and where they will lead.
For Brooktrout, success in the future comes down to a handful of fundamental
ideas -- ideas
<PAGE> 9
that form the basis for everything the company has done during the past year and
shape the strategy that will carry us well into the next century. This is our
blueprint for growth and leadership as we approach the new millennium:
OPEN ARCHITECTURE -- The concept of open systems architecture is proven. It
encourages broader development efforts, lowers investment risk, and speeds the
pace of new applications. Brooktrout's BOSTON architecture promises to launch
new and existing developers into the millennium by empowering them with easy
software migration, full scaleability, and rapid time-to-market.
INTEGRATED HARDWARE -- Systems that incorporate a range of technologies into a
unified and easily managed network and the direction for the future in both
corporate customers and telecommunications service providers. Brooktrout's
Universal Port technology will serve as the foundation for those integrated
applications.
VALUE-ADDED SOFTWARE -- The competitive and fast-changing nature of today's
marketplace requires every software developer to react to market needs more
quickly than ever before. Products like Show N Tel and the Brooktrout
Application Programmers Interface give developers the tools to shorten
development time and get their products to market fast.
PRODUCT BREADTH -- To become the leading technology provider for our customers'
fax, voice, and data communications needs, our product line must continue to be
the most extensive available in market segments offering the broadest range of
products covering the full spectrum of fax, voice, and data. Brooktrout is an
acknowledged leader in providing the tools to bring these functions together.
MULTI-LEVEL PARTNERSHIPS -- Brooktrout is committed to developing close working
relationships with its customers, resellers, suppliers, and technology partners.
We believe that this mission-driven business philosophy will continue to produce
the best results.
CUTTING-EDGE TECHNOLOGY -- The foundation of any successful technology company
is to innovate, adapt, and innovate again. Brooktrout was built on being the
first with the best technology. It's a tradition that will continue to be our
beacon as we navigate the future.
<PAGE> 10
Brooktrout Technology, Inc.
Selected Consolidated Financial Data
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31.
STATEMENT OF OPERATIONS DATA 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenue................................... $72,192 $58,827 $38,673 $24,888 $18,060
Costs and expenses:
Cost of product sold ................... 32,381 26,059 17,759 12,055 8,734
Research and development.................. 13,627 7,175 4,822 3,523 2,584
Purchased research and development........ 3,746 -- -- -- --
Selling, general and administrative....... 19,970 13,666 9,144 5,686 4,294
Merger related charges.................... -- 1,236 -- -- --
------- ------- ------- ------- -------
Income from operations.................... 2,468 10,691 6,948 3,624 2,448
Other income (expense):
Interest/other income..................... 1,688 1,283 967 604 494
Interest expense.......................... (11) (1) (7) (10) (15)
------- -------- ------- ------- -------
Total other income..................... 1,677 1,282 960 594 479
------- ------- ------- ------- -------
Income before income tax provision and
extraordinary item........................ 4,145 11,973 7,908 4,218 2,927
Income tax provision...................... 1,494 5,108 2,705 1,589 986
------- ------- ------- ------- -------
Income before extraordinary item........... 2,651 6,865 5,203 2,629 1,941
Extraordinary item (1)..................... -- -- -- -- 337
------- ------- ------- ------- -------
Net income................................. $2,651 $6,865 $5,203 $2,629 $2,278
======= ======= ======= ======= =======
Basic income per common share:
Before extraordinary item................. $0.25 $0.69 $0.54 $0.27 $0.20
Net income................................ $0.25 $0.69 $0.54 $0.27 $0.24
Shares for basic.......................... 10,702 9,947 9,661 9,570 9,483
Diluted income per common share:
Before extraordinary item................. $0.23 $0.63 $0.52 $0.26 $0.19
Net income................................ $0.23 $0.63 $0.52 $0.26 $0.23
Shares for diluted........................ 11,300 10,901 10,077 9,843 9,783
DECEMBER 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA
Cash and marketable securities............. $36,378 $39,714 $22,154 $18,951 $14,468
Working capital............................ 41,741 43,408 24,823 19,825 17,217
Total assets............................... 65,415 58,366 34,581 25,461 20,903
Long-term debt, less current portion....... -- -- -- 6 30
Stockholders' equity....................... $50,444 $47,592 $26,445 $20,898 $18,241
</TABLE>
(1) Effect of change in accounting for income taxes of $337,000 in 1993.
<PAGE> 11
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 June 30, 1997, the Company acquired the assets of Netaccess, Inc.
(Netaccess), a manufacturer of Primary Rate ISDN equipment. The acquisition was
accounted for as a purchase, and accordingly, the results of operations of
Netaccess are included with those of the Company from the date of acquisition.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenue during the year ended December 31, 1997 increased by approximately
23%, to $72.2 million, up from $58.8 million in 1996. The increase in 1997
revenue was primarily attributable to an increase in Primary Rate ISDN telephone
network interface products sold.
Cost of product sold was $32.4 million, or 45% of revenue in 1997, compared
to $26.1 million, or 44% of revenue, in 1996. Gross profit percentage was 55%
for 1997 and 56% for 1996. The decrease in the gross profit percentage was
related to product mix caused by an increased proportion of lower margin network
interface cards. The decrease was partially offset by margin improvements
obtained through cost reduction programs instituted in 1997 on the TR Series
product line.
Research and development expense was $13.6 million, or 19% of revenue in
1997, compared with $7.2 million, or 12% of revenue in 1996. The increase
reflects the Company's development efforts for the next generation of Netaccess
products and for continued development of the TR Series product family, computer
telephony software development tools, Brooktrout Open Systems Telephony
Architecture (BOSTon), Brooktrout Interspeed, Inc., as well as fax and OEM
systems development. The Company intends to continue to commit significant
resources to product development.
Selling, general and administrative expense was $20.0 million in 1997,
compared with $13.7 million in 1996. This higher expense level resulted from
increased staffing, promotional activities and depreciation. Selling, general
and administrative staff levels increased from 75 employees at December 31, 1996
to 114 employees at December 31, 1997. As a percentage of revenue, selling,
general and administrative expense was 28% of revenue for 1997 and 23% of
revenue for 1996.
On June 30, 1997, the Company recorded a charge of $3.7 million,
representing the portion of the purchase price of Netaccess allocated to
in-process research and development efforts as of the date of acquisition.
<PAGE> 12
Interest and other income was $1.7 million in 1997, compared with $1.3
million in 1996, reflecting higher investable cash balances prior to the
purchase of Netaccess, Inc.
The Company's effective tax rate was 36% for the year ended December 31,
1997 and 43% for the year ended December 31, 1996. The effective rate for 1997
decreased due to increased tax benefits derived from the use of a foreign sales
corporation for certain export sales and certain nondeductible merger costs
recorded in 1996 and not repeated in 1997.
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.
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 Technically
Speaking, Inc. (TSI). These costs primarily related to professional and
investment banking fees.
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.
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1997, the Company acquired the assets and assumed certain
liabilities of Netaccess, Inc., a worldwide supplier of Primary Rate ISDN
network interface products and multiport modem products for open,
standards-based remote access and computer telephony systems. The purchase price
was $9.9 million, paid in cash, and the Company also agreed to assume certain
liabilities aggregating $2.0 million. Based upon independent appraisals, the
Company has recorded a charge of $3.7 million ($2.3 million, net of tax
benefits) representing the portion of the purchase price allocated to Netaccess'
research and development efforts in-process. The estimated cost to complete
these product development efforts approximates $1.4 million and all work is
expected to be completed and the products available for general release by the
end of 1998.
During 1997, 1996 and 1995, the Company funded its operations primarily
through operating revenue. In July 1997, the Company renewed its working capital
line of credit. Under the renewed line of credit the Company may borrow up to
$10,000,000 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 1998 and at that time any outstanding balances would
be payable in full. The Company expects to renew the line of credit on similar
terms as those in place at present. Any amounts borrowed under the line would be
subject to interest at the bank's prime rate. At December 31, 1997 there were no
commitments outstanding on letters of credit; no borrowings have been made
during any period presented.
The Company's working capital decreased from $43.4 million at December 31,
1996 to $41.7 million at December 31, 1997. The decrease in working capital was
primarily caused by the payment of $9.9 million in cash to acquire the assets of
Netaccess, which was partially offset by an increase in working capital of $5.2
million representing the working capital of Netaccess. Other increases in
working capital represented increases in cash, receivables and inventory
consistent with the positive cash flow from operations and the growth in the
business experienced during the year ended December 31, 1997.
During 1997, 1996 and 1995, the Company purchased approximately $2,700,000,
$3,400,000, and $646,000, 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 operating lease commitments for its office and
manufacturing facilities expiring through 2006 with options to renew for periods
of up to 10 years. Certain lease agreements require the Company to pay all of
the building's taxes, insurance and maintenance costs (see Note 7 to the
consolidated financial statements).
The Company anticipates that cash flows from operations, together with
current cash and marketable securities balances and funds available under the
Company's line of credit, will be sufficient to meet the Company's working
capital and capital equipment expenditure requirements for the foreseeable
future.
<PAGE> 14
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Company will be required to adopt the provisions of AICPA
Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2),
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). Adoption of SOP 97-2 and SFAS 130 is not expected to have a material
effect on financial position or the results of operations; the Company has not
yet determined the operating segments to be reported under SFAS 131.
YEAR 2000
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Company implemented a new
enterprise information system during 1997 which has been designed by the vendor
to properly process transactions which could be impacted by the "Year 2000"
problem. The Company presently believes, with modification to existing software
and the conversion to new software, the "Year 2000" problem will not pose
significant operational problems and costs to complete this process are not
anticipated to be material to its financial position or results of operations in
any given year.
<PAGE> 15
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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 at December 31, 1997 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 11, 1998
<PAGE> 16
BROOKTROUT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
NOTES 1997 1996
----- ---- ----
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and equivalents............................................ 1 $27,916 $30,738
Marketable securities........................................... 1 8,462 8,976
Accounts receivable (less allowance for doubtful accounts of
$1,164 and $524 in 1997 and 1996, respectively)................ 1 9,804 7,107
Inventory........................................................ 1 7,801 5,504
Deferred tax assets.............................................. 1,861 726
Prepaid expenses................................................. 613 899
------- -------
Total current assets............................................. 56,457 53,950
------- -------
Equipment and furniture: 1
Computer equipment............................................... 6,182 2,822
Furniture and office equipment................................... 3,696 2,476
------- -------
Total............................................................ 9,878 5,298
Less accumulated depreciation and amortization................... (3,253) (1,438)
------- -------
Equipment and furniture -- net................................... 6,625 3,860
Deferred tax assets.............................................. 4 1,234 --
Investments and other assets..................................... 1 1,099 556
------- -------
Total............................................................ $65,415 $58,366
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals............................. $10,510 $ 7,633
Accrued compensation and commissions............................ 2,321 1,996
Customer deposits............................................... 325 263
Accrued warranty costs.......................................... 1 850 446
Accrued income taxes............................................ 4 710 204
------- -------
Total current liabilities..................................... 14,716 10,542
------- -------
Deferred rent.................................................... 7 255 232
Commitments and contingencies.................................... 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, 10,741,195 and 10,683,352 in
1997 and 1996, respectively..................................... 107 107
Additional paid-in capital....................................... 31,978 31,785
Unrealized gains (losses) on marketable securities............... -- (8)
Retained earnings................................................ 18,359 15,708
------- -------
Total stockholders' equity....................................... 50,444 47,592
------- -------
$65,415 $58,366
Total........................................................ ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 17
BROOKTROUT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
NOTES 1997 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenue.................................... 1,6,8 $72,192 $58,827 $38,673
Cost and expenses:
Cost of product sold...................... 32,381 26,059 17,759
Research and development................. 1 13,627 7,175 4,822
Purchased research and development........ 2 3,746 -- --
Selling, general and administrative....... 19,970 13,666 9,144
Merger related charges.................... -- 1,236 --
------ ------- -------
Total cost and expenses............... 69,724 48,136 31,725
------ ------- -------
Income from operations..................... 2,468 10,691 6,948
Other income (expense):
Interest and other income................. 1,688 1,283 967
Interest expense.......................... (11) (1) (7)
------ ------- -------
Total other income......................... 1,677 1,282 960
------ ------- -------
Income before income tax provision......... 4,145 11,973 7,908
Income tax provision....................... 1,4 1,494 5,108 2,705
------- ------- -------
Net income................................. $ 2,651 $ 6,865 $ 5,203
======= ======= =======
Income per common share: 1
Basic................................... $ 0.25 $ 0.69 $ 0.54
======= ======= =======
Shares for basic........................ 10,702 9,947 9,661
======= ======= =======
Diluted................................. $ 0.23 $ 0.63 $ 0.52
======= ======= =======
Shares for diluted...................... 11,300 10,901 10,077
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 18
BROOKTROUT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
COMMON STOCK ADDITIONAL (LOSSES) ON
------------------------ PAID-IN MARKETABLE RETAINED
SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL
---------- -------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ................. 9,606,122 $ 96 $16,663 ($ 95) $ 4,234 $20,898
Issuance 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
Issuance 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
Issuance of common stock for cash ....... 57,843 -- 193 -- -- 193
Unrealized gains on marketable securities -- -- -- 8 -- 8
Net income ............................... -- -- -- -- 2,651 2,651
---------- ---- ------- ----- ------- -------
Balance, December 31, 1997 .............. 10,741,195 $107 $31,978 $ -- $18,359 $50,444
========== ==== ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 19
BROOKTROUT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................ $ 2,651 $ 6,865 $ 5,203
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ............. 1,815 586 648
Purchased research and development ........ 3,746 -- --
Amortization of (premium) discount on
marketable securities ..................... (44) 18 21
Deferred income taxes ..................... (2,369) (272) (50)
Increase (decrease) in cash from (net
of acquisition):
Accounts receivable ....................... 1,083 (1,010) (3,026)
Inventory ................................. 957 (1,626) (2,237)
Other prepaid expenses .................... 346 (533) (123)
Accounts payable and other accruals ....... 1,368 2,694 3,547
-------- -------- --------
Cash provided by operating
activities ................................ 9,553 6,722 3,983
-------- -------- --------
Cash flows from investing activities:
Expenditures for equipment and furniture . (2,717) (3,413) (646)
Acquisition of Netaccess (net of
cash acquired) .......................... (9,909) -- --
other assets ............................ (258) 43 (11)
Investment ................................ (250) -- (500)
Purchases of marketable securities ........ (8,754) (4,532) (10,801)
Maturities of marketable securities ....... 9,320 3,405 11,544
-------- -------- --------
Cash used for investing activities ..... (12,568) (4,497) (414)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the sale of common stock ... 193 12,728 115
Disqualifying dispositions ................ -- 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)
-------- -------- --------
Cash provided by financing activities ..... 193 14,283 226
-------- -------- --------
Increase (decrease) in cash and equivalents (2,822) 16,508 3,795
Cash and equivalents, beginning of year .. 30,738 14,230 10,435
-------- -------- --------
Cash and equivalents, end of
year ......................... $ 27,916 $ 30,738 $ 14,230
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 20
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 primarily in the United States, with manufacturing, research and sales
operations centered in Massachusetts, New Hampshire and Texas. The Company sells
its products to service providers, original equipment manufacturers, and
value-added resellers.
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. Actual results could differ from those
estimates.
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 Networks Group, Inc., Brooktrout Technology Foreign Sales
Corporation, Brooktrout Interspeed, Inc., Brooktrout Business Trust, Brooktrout
Holding, Inc. and Netaccess, Inc. All significant intercompany balances and
transactions have been eliminated.
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
ratably over the service period. Maintenance and support revenue included with
an initial license fee is unbundled and recognized ratably over the service
period.
Concentration of Credit Risk -- The Company sells its products to various
customers in several industries. The Company generally requires no collateral;
however, to reduce credit risk the Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. At
December 31, 1997 and 1996, 17% and 35%, respectively, of the Company's accounts
receivable were from one customer (see Note 6).
<PAGE> 21
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventory -- Inventory is carried at the lower of cost (first-in, first-out
basis) or market and consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials .................................................. $3,268,000 $3,740,000
Work inprocess ................................................. 1,606,000 1,104,000
Finished goods ................................................. 2,927,000 660,000
---------- ----------
Total ................................................... $7,801,000 $5,504,000
========== ==========
</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 (three or five years).
Software Development Costs -- Certain software development costs are
capitalized following attainment of technological feasibility. No such costs
were capitalized in 1997, 1996 or 1995.
Research and Development Costs -- Research and development costs, other
than software development costs, are expensed as incurred.
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.
Investments -- The Company has investments in the common stock of two
companies operating in the computer telephony industry. One of the Company's
investments aggregated $500,000 at December 31, 1997 and 1996, and the other
investment aggregated $250,000 at December 31, 1997. Both investments represent
less than 20% of the voting interest. Because the common stock of the two
companies is not readily marketable, the investments are carried at cost and
periodically assessed for potential impairment in value.
<PAGE> 22
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Flow Information -- Cash equivalents include highly liquid
securities with remaining maturities of three months or less at the time of
purchase.
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid for interest................. $ -- $ 1,000 $ 7,000
Cash paid for income taxes.............. 2,401,000 3,702,000 2,219,000
</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. At December 31, 1997 and
1996, the amortized cost of these securities was $8,461,000 and $8,984,000,
respectively. Gross unrealized gains at December 31, 1997 were $10,000 and gross
unrealized losses were ($10,000). During the three years ended December 31,
1997, there were no significant realized gains or losses from sales of these
securities.
Income per Common Share - In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Prior to
1997, the Company computed income per common share using the method outlined in
Accounting Principles Board Opinion No. 15, Earnings Per Share, and its
interpretations (APB 15). Income per common share previously reported using the
provisions of APB 15 in 1995 and 1996 was $0.52 and $0.63 per share,
respectively.
Basic income per common share is computed using the weighted average number
of common shares outstanding during each year. Diluted income per common share
reflects the effect of the Company's outstanding options (using the treasury
stock method), except where such options would be antidilutive.
<PAGE> 23
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of weighted average shares used for the basic and diluted
computations is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares for basic . 10,702,000 9,947,000 9,661,000
Dilutive effect of stock options .. 598,000 954,000 416,000
---------- ---------- ----------
Weighted average shares for diluted 11,300,000 10,901,000 10,077,000
========== ========== ==========
</TABLE>
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.
NEW ACCOUNTING PRONOUNCEMENTS
Revenue Recognition -- In October 1997, the American Institute of Certified
Public Accountants released Statement of Position No. 97-2, Software Revenue
Recognition (SOP 97-2), which the Company will be required to adopt in 1998. The
Company does not believe that the adoption of the provisions of SOP 97-2 will
result in significant changes to the Company's revenue recognition practices
and, accordingly, SOP 97-2 is not expected to have a material impact on
financial position, results of operations or cash flows of the Company.
Segment Reporting -- In June 1997, the Financial Accounting Standards Board
released Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), which the Company
will be required to adopt in 1998. SFAS 131 will require the Company to provide
information about the segments of its business based upon internal information
used to make operating decisions. In addition, SFAS 131 requires that such
information be provided in greater detail than currently required. The Company
is currently evaluating its lines of business to determine reportable segments,
but has not yet completed its evaluation.
<PAGE> 24
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Income -- In June 1997, the Financial Accounting Standards
Board released Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130), which the Company will be required to adopt in
1998. SFAS 130 will require that the Company provide a prominent display of the
components of items of other comprehensive income. The only items that the
Company currently records as other comprehensive income are unrealized gains or
losses on available for sale marketable securities. Adoption of SFAS 130 will
not have an effect on reported results of operations or financial position.
2. ACQUISITIONS
Netaccess, Inc.
On June 30, 1997, the Company acquired the assets and assumed certain
liabilities of Netaccess, Inc., a worldwide supplier of Primary Rate ISDN
network interface products and multiport modem products for open,
standards-based remote access and computer telephony systems. The purchase price
was $9.9 million, paid in cash, and the Company agreed to assume certain
liabilities aggregating $2.0 million.
The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of Netaccess, Inc. have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using independent appraisals.
The Company has recorded a charge of $3.7 million ($2.3 million, net of tax
benefits) in 1997 representing the estimated value of Netaccess' research and
development efforts in-process. Such efforts had not yet reached technological
feasibility and did not possess alternative uses.
Had the acquisition occurred as of January 1, 1996, revenue on a pro forma
basis would have been $79,375,000 for the year ended December 31, 1997 and
$84,943,000 for the year ended December 31, 1996. Net income on a pro forma
basis would have been $2,999,000 for the year ended December 31, 1997 and
$7,383,000 for the year ended December 31, 1996. Basic and diluted income per
share would have been $0.28 and $0.27, respectively, for the year ended December
31, 1997 and $0.74 and $0.68, respectively, for the year ended December 31,
1996.
<PAGE> 25
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In connection with the
acquisition, the Company recorded a charge of $1,236,000 representing costs
associated with this transaction.
3. BANK LINE OF CREDIT
The Company has a line of credit with a bank. The Company may borrow up to
$10,000,000 on an unsecured basis, all of which may be used for issuance of
letters of credit, subject to compliance with certain covenants. At December 31,
1997, there were no commitments outstanding on letters of credit; 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 1998.
4. INCOME TAXES
The provision for income taxes is approximately as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal--current ............ $ 3,092,000 $ 2,428,000 $ 1,935,000
State--current .............. 771,000 769,000 713,000
Federal--deferred ........... (1,886,000) (207,000) (37,000)
State--deferred ............. (483,000) (65,000) (13,000)
Tax benefit of disqualifying
dispositions of stock
options ................. -- 2,183,000 107,000
----------- ----------- -----------
Provision ................... $ 1,494,000 $ 5,108,000 $ 2,705,000
=========== =========== ===========
</TABLE>
<PAGE> 26
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal rate to the effective tax rate is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate ............................... 34% 34% 34%
Acquisition related charges not deductible for tax -- 3 --
State taxes, net of federal benefit .............. 6 6 7
Foreign sales corporation ........................ (4) -- --
TSI income not subject to taxation ............... -- -- (5)
Other ............................................ -- -- (2)
--- -- ---
Effective tax rate ................................ 36% 43% 34%
=== == ===
</TABLE>
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred Tax Assets:
Current:
Reserves and accruals not currently deductible
for tax purposes ................................. $1,861,000 $ 746,000
Long-Term:
In-process research and development, capitalized
for tax but expensed for book ................ 1,234,000 --
Equipment and furniture, principally
depreciation methods ......................... -- (20,000)
---------- ---------
Long-term tax assets (liabilities) .................. 1,234,000 (20,000)
---------- ---------
Net deferred tax asset ............................. $3,095,000 $ 726,000
========== =========
</TABLE>
5. STOCKHOLDERS' EQUITY
Stock Option Plans -- The Company has three stock option plans in place
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. 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.
<PAGE> 27
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option activity under all plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
--------------------- ---------------------
<S> <C> <C>
Outstanding at January 1, 1995 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
Granted 478,875 $11.80
Exercised (40,249) $0.82
Expired (19,851) $17.07
--------
Outstanding at December 31, 1997 1,928,138 $11.92
=========
</TABLE>
<PAGE> 28
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth information regarding options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
RANGE OF AVERAGE AVERAGE NUMBER PRICE FOR
EXERCISE NUMBER OF EXERCISE REMAINING CURRENTLY CURRENTLY
PRICES SHARES PRICE LIFE (YEARS) EXERCISABLE EXERCISABLE
<S> <C> <C> <C> <C> <C>
$0.20-$5.56 202,739 $ 1.91 4.03 195,313 $ 1.82
$5.61-$6.11 3,375 $ 5.94 5.42 2,700 $ 5.94
$6.33 586,179 $ 6.33 6.18 577,179 $ 6.33
$6.44-$10.00 202,745 $ 8.10 7.78 72,579 $ 6.75
$10.13-$10.63 201,750 $10.61 9.64 46,875 $10.63
$10.75-$22.00 200,975 $14.74 8.43 15,131 $15.97
$22.50 487,500 $22.50 8.47 243,750 $22.50
$23.50-$27.25 33,875 $25.87 5.26 8,906 $27.25
$29.91 5,000 $29.91 8.83 1,000 $29.91
$31.50 4,000 $31.50 8.92 800 $31.50
------------ --------- ------ ---- --------- ------
$0.20-$31.50 1,928,138 $11.92 7.29 1,164,233 $ 9.48
============ ========= ====== ==== ========= ======
</TABLE>
At December 31, 1996 and 1995,options to purchase 630,371 and 563,199
shares were exercisable.
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 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, 1997, 72,886
shares had been issued.
<PAGE> 29
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 earnings per share would have
been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income $855,000 $5,078,000 $5,050,000
Basic income per common share $ 0.08 $ 0.51 $ 0.52
Diluted income per common share $ 0.08 $ 0.47 $ 0.50
</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:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Risk-free interest rate 5.2% 5.6% 6.1%
Expected life of option grants 5.0 5.0 5.0
Expected volatility of underlying stock 82% 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 1997, 1996 and 1995 was $8.29, $13.71 and $3.95,
respectively, per option. The estimated weighted average fair value of grants
made under the Purchase Plan during 1997, 1996, and 1995 was $3.64, $7.61 and
$1.71, 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 2,188,639 shares of common
stock for issuance upon the exercise of stock options and purchase of stock
under the Purchase Plan.
<PAGE> 30
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsidiary Stock Plans -- Two of the Company's subsidiaries have stock
option plans in place, providing for the grant of options to employees of that
subsidiary. None of these options are convertible into or can be settled in
Company stock. The following table demonstrates the dilutive effect of these
plans on the Company's ownership interest in each subsidiary assuming all
options in each category were exercised:
<TABLE>
<CAPTION>
Maximum
Dilution to
Company's Currently Maximum
Interest in Outstanding Available
Subsidiary Options Options
---------- ------- -------
<S> <C> <C> <C>
Subsidiary
A (Weighted exercise price of $1.20) 14% 1,163,000 1,620,000
B (Weighted exercise price of $6.07) 29% 240,600 400,000
</TABLE>
The options of Subsidiary A and Subsidiary B vest over a period of 5 years.
At December 31, 1997, none of the options of Subsidiary A were exerciseable and
30,913 options of Subsidiary B were exerciseable.
To date, neither of these plans has been dilutive to the Company's interest
in the earnings of the affected subsidiaries.
Distributions to Stockholders -- 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. 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 1994, 1995 and
1996 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 30%, 33% and 36% of net revenue for the years
ended December 31, 1997, 1996 and 1995, respectively.
<PAGE> 31
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE COMMITMENTS
The Company has operating lease commitments for office and manufacturing
facilities. Two of the lease agreements expire in October 2006; the Company has
the option to extend one of the leases for up to 10 years and the other for 5
years. Both lease agreements require the Company to pay all taxes, insurance and
maintenance costs. Another office and manufacturing lease expires in 2000 and
the Company has the option to extend the lease for 3 additional years. These
leases contain rent holiday and escalation clauses. In addition, the Company
leases other office facilities under noncancelable operating leases. Rent
expense under these leases is recognized on a straight-line basis. Rent expense
under all operating leases aggregated $1,547,000, $660,000 and $511,000 for each
of the years ended December 31, 1997, 1996 and 1995, respectively.
Minimum Lease Payments Under Non-Cancelable Operating Leases
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1998..................................................................... $1,202,000
1999..................................................................... 1,080,000
2000..................................................................... 1,017,000
2001..................................................................... 714,000
2002..................................................................... 664,000
Thereafter............................................................... 2,207,000
----------
Total........................................................... $6,884,000
=========
</TABLE>
8. INTERNATIONAL SALES
International sales, principally exports from the United States, accounted
for approximately 19%, 18% and 11% of revenue for the years ended December 31,
1997, 1996 and 1995, respectively.
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.
<PAGE> 32
BROOKTROUT TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 matches contributions equal to $.25 per dollar contributed up to a
maximum of 6% of a participant's salary. The Company contributed $121,000 to the
plan in 1997.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
1997
<S> <C> <C> <C> <C>
Revenue ..................... $15,070,000 $14,725,000 $19,493,000 $22,904,000
Gross profit ................ 8,548,000 8,182,000 10,689,000 12,392,000
Income (loss) from
operations ................ 2,117,000 (2,936,000) 1,020,000 2,267,000
Net income (loss) .......... 1,560,000 (1,475,000) 816,000 1,750,000
Basic income (loss) per
common share............... $ 0.15 ($ 0.14) $ 0.08 $ 0.16
Diluted income (loss) per
common share .............. $ 0.15 ($ 0.14) $ 0.07 $ 0.15
1996
Revenue ..................... $11,300,000 $13,445,000 $15,874,000 $18,208,000
Gross profit ................ 6,203,000 7,737,000 8,726,000 10,102,000
Income from operations ...... 1,663,000 1,555,000 3,369,000 4,104,000
Net income .................. 1,166,000 694,000 2,218,000 2,787,000
Basic income per
common share .............. $ 0.12 $ 0.07 $ 0.22 $ 0.28
Diluted income per
common share .............. $ 0.11 $ 0.07 $ 0.20 $ 0.25
</TABLE>
<PAGE> 33
DIRECTORS & EXECUTIVE OFFICERS
DIRECTORS
Eric R. Giler
President
Brooktrout Technology, Inc.
David W. Duehren
Vice President of Research & Development
Brooktrout Technology, Inc.
Patrick T. Hynes
Vice President of Advanced Product Engineering
Brooktrout Technology, Inc.
Robert G. Barrett
General Partner
Battery Ventures, Inc.
W. Brooke Tunstall
President
Brooke Tunstall Associates
David L. Chapman
President
NorthPoint Software Ventures, Inc.
EXECUTIVE OFFICERS
Eric R. Giler
President
David W. Duehren
Vice President of Research and Development
Stephen A. Ide
Senior Vice President,
President, Interspeed, Inc.
Robert C. Leahy
Vice President of Finance and Operations, and Treasurer
Jonathan J. Sirota
Vice President of Engineering
R. Andrew O'Brien
Vice President of Marketing and Business Development
<PAGE> 34
DIRECTORS & EXECUTIVE OFFICERS (CONTINUED.)
Patrick T. Hynes
Vice President of Advanced Product Engineering
Michael Donoghue
Vice President of Worldwide Sales
William Rosenberger
Vice President,
President, Netaccess, Inc.
Mark Flanagan
Vice President, General Manager,
Brooktrout Software and Systems
<PAGE> 35
OFFICES
CORPORATE HEADQUARTERS
Brooktrout Technology, Inc.
410 First Avenue
Needham, Massachusetts 02194-2703
Fax-on-Demand: 1-800-7-BROOKT
[email protected]
www.brooktrout.com
Phone 781-449-4100
Fax 781-449-3171
SOFTWARE & SYSTEMS
333 Turnpike Road
Southborough, Massachusetts 01772
Phone 508-229-7777
Fax 508-229-8777
SUBSIDIARIES
Netaccess, Inc.
18 Keewaydin Drive
Salem, New Hampshire 03079
[email protected]
www.netacc.com
Phone 603-898-1800
Fax 603-894-4545
Interspeed, Inc.
601 South Union Street
Lawrence, Massachusetts 01843
[email protected]
www.interspeed.com
Phone 978 688-6164
Phone 978-688-6327
Fax 978-688-4798
Brooktrout Networks Group, Inc.
Arapaho Creek Business Park
1350 East Arapaho Road
Richardson, Texas 75081
Phone 972-907-0885
Fax 972-907-0889
<PAGE> 36
OFFICES (CONTINUED.)
Brooktrout Technology Europe, Ltd.
Hoeilaart Office Center
Vandammestraat 5, Box 2
1560 Hoeilaart
Belgium
Phone +32-2-658-0170
Fax +32-2-658-0180
SALES & SUPPORT OFFICES
EAST COAST OFFICES
Brooktrout Technology, Inc.
410 First Avenue
Needham, Massachusetts 02194-2703
Phone 781-449-4100
Fax 781-449-3171
Interspeed, Inc.
601 South Union Street
Lawrence, Massachusetts 01843
Phone 978 688-6164
Fax 978-688-4798
Netaccess, Inc.
18 Keewaydin Drive
Salem, New Hampshire 03079
Phone 603-898-1800
Fax 603-894-4545
Brooktrout Technology, Inc.
12 Godfrey Place
Wilton, Connecticut 06897
Phone 203-834-2405
Fax 203-761-9769
Netaccess, Inc.
9891 Broken Land Parkway
Columbia, Maryland 21046
Phone 410-312-5745
Fax 410-381-3909
<PAGE> 37
OFFICES (CONTINUED.)
CENTRAL OFFICES
Brooktrout Technology, Inc.
1600 Golf Road, Suite 1200
Rolling Meadows, Illinois 60008
Phone 847-981-5062
Fax 847-981-5063
WEST COAST OFFICES
Brooktrout Technology, Inc.
2890 Zanker Road, Suite 107
San Jose, California 95134
Phone 408-232-0300
Fax 408-232-0795
Netaccess, Inc.
1250 Oakmead Parkway, Suite 210
Sunnyvale, California 94086
Phone 408-730-2662
Fax 408-730-2667
INTERNATIONAL OFFICES
Brooktrout Technology Europe, Ltd.
Hoeilaart Office Center
Vandammestraat 5, Box 2
1560 Hoeilaart
Belgium
Phone +32-2-658-0170
Fax +32-2-658-0180
Brooktrout Technology, Inc.
No. 10 Overline House
Station Way, Crawley
Crawley
West Sussex, UK
RHIO IJA
Phone +44 (0) 1293-522-881
Fax +44 (0) 1293-613-567
Brooktrout Technology, Inc.
International Plaza
10 Anson Road, #19-06A
Singapore 079903
Phone +65-224-0313
Fax +65-224-0337
<PAGE> 38
Stock Price Information
<TABLE>
<CAPTION>
1997 1996
QUARTER ENDED HIGH LOW CLOSE QUARTER ENDED HIGH LOW CLOSE
<S> <C> <C> <C> <C> <C> <C> <C>
March 31 $27.75 $14.50 $14.88 March 31 $24.83 $11.11 $23.00
June 30 $16.88 $10.00 $11.88 June 30 $32.66 $15.50 $28.00
September 30 $17.38 $9.50 $15.88 September 30 $38.00 $14.00 $36.50
December 31 $16.75 $9.50 $11.56 December 31 $42.25 $25.00 $28.00
</TABLE>
GENERAL COUNSEL
Goodwin, Procter & Hoar LLP
Boston, Massachusetts
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Boston, Massachusetts
TRANSFER AGENT
State Street Bank & Trust Company
Boston EquiServe, Limited Partnership
P.O. Box 8040
Boston, MA 02266-8040
781-575-3400
www.equiserve.com
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 and Operations, and Treasurer
Brooktrout Technology, Inc.
410 First Avenue
Needham, Massachusetts 02194-2703
ANNUAL MEETING
Thursday, May 14, 1998
Fleet Bank
75 State Street
Boston, Massachusetts 02109
<PAGE> 1
EXHIBIT 23.1
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 February 11, 1998, appearing in and incorporated by reference
in the Annual Report on Form 10-K of Brooktrout Technology, Inc. for the year
ended December 31, 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 27, 1998
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BROOKTROUT
TECHNOLOGY, INC.'S CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME
FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BROOKTROUT TECHNOLOGY, INC.'S 10-K FOR THE PERIOD ENDED
DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 27,916
<SECURITIES> 8,462
<RECEIVABLES> 9,804
<ALLOWANCES> 1,164
<INVENTORY> 7,801
<CURRENT-ASSETS> 56,457
<PP&E> 9,878
<DEPRECIATION> 3,253
<TOTAL-ASSETS> 65,415
<CURRENT-LIABILITIES> 14,716
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 65,415
<SALES> 72,192
<TOTAL-REVENUES> 72,192
<CGS> 32,381
<TOTAL-COSTS> 32,381
<OTHER-EXPENSES> 37,343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 4,145
<INCOME-TAX> 1,494
<INCOME-CONTINUING> 2,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,651
<EPS-PRIMARY> .25
<EPS-DILUTED> .23
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