<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 0-20698
BROOKTROUT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2814792
--------------- ----------------
(State or other (I.R.S. employer
jurisdiction of identification
incorporation or number)
organization)
410 First Avenue
Needham, Massachusetts 02494-2722
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number
including area code: (781) 449-4100
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of August 2, 1999, 10,954,723 shares of Common Stock, $.01 par value
per share, were outstanding.
Page 1 of 22 pages
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BROOKTROUT, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 (Unaudited) 3
Condensed Consolidated Statements of Income (Loss)
for the Three Months Ended June 30, 1999 and
June 30, 1998, and the Six Months Ended
June 30, 1999 and June 30, 1998 (Unaudited) 4
Condensed Consolidated Statements of
Comprehensive Income for the Three Months
Ended June 30, 1999 and June 30, 1998, and the
Six Months Ended June 30, 1999 and
June 30, 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999
and June 30, 1998 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended June 30, 1999 and 1998 12
Six Months Ended June 30, 1999 and 1998 13
Liquidity and Capital Resources 14
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 21
Signatures 22
<PAGE> 3
BROOKTROUT, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
June 30, December 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and equivalents .................................. $ 9,772 $ 8,518
Marketable securities ................................. 5,040 3,837
Accounts receivable (less allowance for doubtful
accounts of $2,357 in 1999 and $2,313 in 1998) ....... 17,741 15,837
Inventory ............................................. 10,594 10,668
Deferred tax assets ................................... 3,477 3,853
Prepaid expenses ...................................... 1,339 1,242
------- -------
TOTAL CURRENT ASSETS ................................. 47,963 43,955
------- -------
Equipment and furniture:
Computer equipment .................................... 9,130 8,602
Furniture and office equipment ........................ 7,479 6,336
------- -------
Total ................................................ 16,609 14,938
Less accumulated depreciation and amortization ....... (7,773) (5,973)
------- -------
EQUIPMENT AND FURNITURE - NET ........................ 8,836 8,965
Deferred tax assets ................................... 4,544 4,719
Acquired technology and other intangible assets ....... 13,855 14,746
Investment and other assets ........................... 1,291 824
------- -------
TOTAL ASSETS ......................................... $76,489 $73,209
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals ................... $15,780 $15,777
Accrued compensation and commissions .................. 4,248 4,529
Customer deposits ..................................... 439 614
Accrued warranty costs ................................ 1,252 1,314
Accrued taxes ......................................... 1,258 496
------- -------
TOTAL CURRENT LIABILITIES ............................ 22,977 22,730
------- -------
Deferred rent ......................................... 419 350
Stockholders' equity:
Common stock, $.01 par value; authorized, 25,000,000
shares; issued and outstanding 10,948,573 shares in
1999 and 10,828,362 in 1998 ......................... 110 108
Additional paid-in capital ........................... 33,225 32,528
Accumulated other comprehensive income (loss) ........ (409) (1,199)
Retained earnings .................................... 20,167 18,692
------- -------
STOCKHOLDERS' EQUITY ................................. 53,093 50,129
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $76,489 $73,209
======= =======
See notes to unaudited condensed consolidated financial statements.
<PAGE> 4
BROOKTROUT, INC.
Condensed Consolidated Statements of Income (Loss)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
REVENUE .................................. $33,791 $26,104 $66,009 $50,280
Cost and expenses:
Cost of product sold .................... 13,213 10,915 26,170 20,900
Research and development ................ 6,778 5,380 13,314 10,670
Selling, general and administrative ..... 11,279 7,221 21,683 13,853
Non-cash compensation charge ............ 1,850 -- 1,850 --
------- ------- ------- -------
Total cost and expenses ............... 33,120 23,516 63,017 45,423
------- ------- ------- -------
INCOME FROM OPERATIONS ................... 671 2,588 2,992 4,857
Interest income, net ..................... 116 568 195 1,018
------- ------- ------- -------
Income before income tax provision ....... 787 3,156 3,187 5,875
Income tax provision ..................... 896 1,168 1,712 2,174
------- ------- ------- -------
NET INCOME (LOSS) ........................ $( 109) $ 1,988 $ 1,475 $ 3,701
======= ======= ======= =======
BASIC INCOME (LOSS) PER COMMON SHARE ..... $( 0.01) $ 0.18 $ 0.14 $ 0.34
======= ======= ======= =======
SHARES FOR BASIC ......................... 10,917 10,770 10,890 10,758
======= ======= ======= =======
DILUTED INCOME (LOSS) PER COMMON SHARE ... $( 0.01) $ 0.17 $ 0.13 $ 0.32
======= ======= ======= =======
SHARES FOR DILUTED ....................... 10,917 11,561 11,536 11,489
======= ======= ======= =======
See notes to unaudited condensed consolidated financial statements.
<PAGE> 5
BROOKTROUT, INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
Net income (loss) ........................... $( 109) $1,988 $1,475 $3,701
Unrealized gains (losses) on marketable
securities ............................... 2,438 (29) 1,203 (48)
Foreign currency translation adjustment ... -- -- (4) --
------ ------ ------ ------
Comprehensive income before income tax
provision (benefit) ........................ 2,329 1,959 2,674 3,653
Income tax (benefit) related to items of
comprehensive income ....................... 829 (11) 409 (18)
------ ------ ------ ------
Comprehensive income ........................ $1,500 $1,970 $2,265 $3,671
====== ====== ====== ======
See notes to unaudited condensed consolidated financial statements.
<PAGE> 6
BROOKTROUT, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
------------------
1999 1998
------ -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $1,475 $ 3,701
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization .................. 2,692 1,377
Amortization of (premium) discount on
marketable securities ......................... (4) (33)
Deferred income taxes .......................... 142 (613)
Increase (decrease) in cash from:
Accounts receivable .......................... (1,904) (2,405)
Inventory .................................... 74 (495)
Other prepaid expenses ....................... (565) 172
Accounts payable and other accruals .......... 316 4,506
------ -------
Cash provided by
operating activities ...................... 2,226 6,210
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment and furniture ........... (1,671) (2,629)
Purchases of marketable securities ................. -- (3,505)
Maturities and sales of marketable securities ...... -- 3,259
-------
Cash used for
investing activities ...................... (1,671) (2,875)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock ............. 699 351
Cash provided by
financing activities ...................... 699 351
------ -------
INCREASE IN CASH AND EQUIVALENTS ....................... 1,254 3,686
CASH AND EQUIVALENTS, BEGINNING OF PERIOD .............. 8,518 27,916
------ -------
CASH AND EQUIVALENTS, END OF PERIOD .................... $9,772 $31,602
====== =======
See notes to unaudited condensed consolidated financial statements.
<PAGE> 7
BROOKTROUT, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
Brooktrout, Inc. (the "Company") has recently reorganized and changed
its name from Brooktrout Technology, Inc. The Company is organized and reports
the results of its operations in three business segments (Brooktrout Technology,
Brooktrout Software, and Interspeed, Inc.) based on the products and services
provided to the marketplace, customers served by each segment and distribution
channels.
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting. They
should be read in conjunction with the audited consolidated financial statements
included in the Company's 1998 Annual Report on Form 10K.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the interim periods presented.
The operating results for the interim periods presented are not
necessarily indicative of the results which could be expected for the full year.
2. Interspeed, Inc.
A subsidiary of the Company, Interspeed, Inc., has filed a registration
statement for the initial public offering of its shares on Form S-1 of the
Securities Act. The Company's policy is to recognize gains on subsidiary stock
transactions as income.
3. Acquisition
On December 17, 1998, the Company acquired the assets and assumed
certain liabilities of the Computer Telephony Products (CTP) business of Lucent
Technologies Inc. CTP provides technologies for the voice processing industry
and manufactures hardware and software components that connect PCs and LANs with
telephone networks. The purchase price was $29.4 million, paid in cash, plus
$1.1 million of transaction costs, and the Company assumed certain liabilities
aggregating $1.9 million. The acquisition has been accounted for as a purchase,
and accordingly, the results of operations of CTP 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.
<PAGE> 8
4. Income Per Share
Basic income per share is computed using the weighted average number of
common shares outstanding during each year. Diluted income per share reflects
the effect of the Company's outstanding options (using the treasury stock
method), except where such options would be antidilutive. A reconciliation of
weighted average shares used for the basic and diluted computations is as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Weighted average shares
for basic ................. 10,917,000 10,770,000 10,890,000 10,758,000
Dilutive effect of stock
options ................... -- 791,000 646,000 731,000
---------- ---------- ---------- ----------
Weighted average shares
for diluted ............... 10,917,000 11,561,000 11,536,000 11,489,000
========== ========== ========== ==========
5. Inventory
Inventory is carried at the lower of cost (first-in, first-out basis)
or market and consisted of the following:
June 30, December 31,
1999 1998
----------- -----------
Raw materials........................................ $ 3,383,000 $ 3,277,000
Work in process...................................... 1,220,000 2,164,000
Finished goods....................................... 5,991,000 5,227,000
----------- -----------
Total............................................ $10,594,000 $10,668,000
=========== ===========
<PAGE> 9
6. Cash Flow Information
Cash equivalents include liquid securities with remaining maturities of
three months or less at the time of purchase.
Supplemental disclosure of cash flow information:
Six Months Ended
June 30, June 30,
1999 1998
-------- -----------
Cash paid for interest............ $ 4,000 $ 2,000
Cash paid for income taxes........ $774,000 $ 3,075,000
7. Major Customer
One customer accounted for approximately 16% and 21% of net revenue for
the three months ended June 30, 1999 and 1998, respectively, and 16% and 21% for
the six months ended June 30, 1999 and 1998, respectively.
8. 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 included in comprehensive income (loss).
Marketable securities consist of publicly-traded corporate equity
securities and United States government securities with remaining maturities in
excess of three months. Gross unrealized gains related to the equity securities
at June 30, 1999 were $1,203,000.
9. Income Taxes
The Company's quarterly effective tax rate is based on the estimated
effective tax rate for the full year.
10. International Sales
International sales, principally exports from the United States,
accounted for approximately 22% of revenue for the three months ended June 30,
1999 and 1998, respectively, and 23% and 21% of revenue for the six months ended
June 30, 1999 and 1998, respectively.
<PAGE> 10
11. Segment Reporting
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUE:
Brooktrout Technology $31,243,000 $24,390,000 $61,252,000 $46,931,000
Brooktrout Software 1,598,000 1,714,000 3,480,000 3,349,000
Interspeed, Inc. 950,000 -- 1,277,000 --
----------- ----------- ----------- -----------
Consolidated revenue $33,791,000 $26,104,000 $66,009,000 $50,280,000
=========== =========== =========== ===========
GROSS MARGIN:
Brooktrout Technology $19,153,000 $14,073,000 $37,451,000 $27,400,000
Brooktrout Software 989,000 1,116,000 1,901,000 1,980,000
Interspeed, Inc. 436,000 -- 487,000 --
----------- ----------- ----------- -----------
Consolidated gross margin $20,578,000 $15,189,000 $39,839,000 $29,380,000
=========== =========== =========== ===========
INCOME (LOSS) FROM OPERATIONS: (1)
Brooktrout Technology $ 5,780,000 $ 5,029,000 $11,259,000 $ 9,394,000
Brooktrout Software (1,384,000) (1,054,000) (2,816,000) (1,958,000)
Interspeed, Inc. (2) (3,725,000) (1,387,000) (5,451,000) (2,579,000)
----------- ----------- ----------- -----------
Consolidated income
from operations 671,000 2,588,000 2,992,000 4,857,000
Interest income (net) 116,000 568,000 195,000 1,018,000
----------- ----------- ----------- -----------
Consolidated income
before income tax
provision $ 787,000 $ 3,156,000 $ 3,187,000 $ 5,875,000
=========== =========== =========== ===========
(1) Amounts previously reported in 1999 and 1998 have been revised to reflect an
allocation of certain marketing and general and administrative expenses to the
segments. Prior segment disclosure reflected the expenses in Brooktrout
Technology.
(2) Included in the Interspeed, Inc. loss from operations for the three months
and six months ended June 30, 1999, is a charge of $1,850,000 reflecting
non-cash compensation expenses as a result of stock option grants.
<PAGE> 11
11. Segment Reporting (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
1999 1998 1999 1998
---------- -------- ---------- ----------
DEPRECIATION AND AMORTIZATION
EXPENSE:
Brooktrout Technology $1,069,000 $555,000 $2,286,000 $1,087,000
Brooktrout Software 124,000 100,000 252,000 189,000
Interspeed, Inc. 85,000 49,000 154,000 101,000
---------- -------- ---------- ----------
Consolidated depreciation and
amortization expense $1,278,000 $704,000 $2,692,000 $1,377,000
========== ======== ========== ==========
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This document contains certain statements that are "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate," and other expressions, which are predictions of or indicate future
events and trends and which do not relate to historical matters, identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
Three Months Ended June 30, 1999 and 1998
Revenue during the three months ended June 30, 1999 increased by
approximately 29% to $33,791,000, up from $26,104,000 during the three months
ended June 30, 1998. The majority of this growth was in Brooktrout Technology
and was primarily attributable to an increase in voice technology products
driven by the acquisition of CTP together with a higher proportion of sales of
Primary Rate ISDN telephone network interface products. In addition, there was
an increase in Interspeed, Inc. product sold.
Cost of product sold was $13,213,000, or 39% of revenue, during the
three months ended June 30, 1999, compared to $10,915,000, or 42% of revenue,
for the same period in 1998. Gross profit percentage was approximately 61% and
58% for the three months ended June 30, 1999 and 1998, respectively. The
increase in gross profit percentage was generated by Brooktrout Technology and
is the result of the increase in voice technology products sold and the
corresponding profit that is generated from these products.
Research and development expense was $6,778,000, or 20% of revenue,
compared with $5,380,000, or 21% of revenue, for the three months ended June 30,
1999 and 1998, respectively. The dollar increase is primarily attributable to
the inclusion of CTP and the related development efforts on the voice technology
products combined with the development of the Digital Subscriber Line (DSL)
products at Interspeed, Inc. The Company intends to continue to commit
significant resources to product development. The Company's continuing
development efforts are focused on the computer telephony software development
tools, the next generation of Primary Rate ISDN telephone network interface
products, the TR Series product family, as well as the Brooktrout Open Systems
Telephony Architecture (BOSTon).
<PAGE> 13
Selling, general and administrative expense was $11,279,000 during the
three months ended June 30, 1999, compared with $7,221,000 during the same
period in 1998. This higher expense level resulted from increased staffing,
promotional activities and travel related expenses. As a percentage of revenue,
selling, general and administrative expense for the second quarter of 1999 was
33% of revenue, compared with 28% for the second quarter of 1998.
During the three months ended June 30, 1999, the Company recorded a
charge of $1,850,000 reflecting non-cash compensation expenses as a result of
stock option grants at the Company's subsidiary, Interspeed, Inc.
For the three months ended June 30, 1999, interest and other income was
$116,000, compared with $568,000 for the same period in 1998. The decrease was
caused by lower investable cash balances due to the acquisition of CTP.
The Company's effective tax rate was 114% in 1999 and 37% in 1998,
based on the Company's estimated effective tax rate for the full year. Excluding
the permanent difference associated with the non-cash compensation charge of
$1,850,000, the effective tax rate would have been 34% in 1999.
Six Months Ended June 30, 1999 and 1998
Revenue during the six months ended June 30, 1999 increased by
approximately 31% to $66,009,000, up from $50,280,000 during the six months
ended June 30, 1998. The majority of this growth was in Brooktrout Technology
and was primarily attributable to an increase in voice technology products
driven by the acquisition of CTP together with a higher proportion of sales of
Primary Rate ISDN telephone network interface products. In addition, there was
an increase in Interspeed, Inc. product sold.
Cost of product sold was $26,170,000, or 40% of revenue, during the six
months ended June 30, 1999, compared to $20,900,000, or 42% of revenue, for the
same period in 1998. Gross profit percentage was approximately 60% and 58% for
the six months ended June 30, 1999 and 1998, respectively. The increase in gross
profit percentage was generated by Brooktrout Technology and is the result of
the increase in voice technology products sold and the corresponding profit that
is generated from these products.
Research and development expense was $13,314,000, or 20% of revenue,
compared with $10,670,000, or 21% of revenue, for the six months ended June 30,
1999 and 1998, respectively. The dollar increase is primarily attributable to
the inclusion of CTP and the related development efforts on the voice technology
products combined with the development of the DSL products at Interspeed, Inc.
The Company intends to continue to commit significant resources to product
development. The Company's continuing development efforts are focused on the
computer telephony software development tools, the next generation of Primary
Rate ISDN telephone network interface products, the TR Series product family, as
well as the Brooktrout Open Systems Telephony Architecture (BOSTon).
Selling, general and administrative expense was $21,683,000 during the
six months ended June 30, 1999, compared with $13,853,000 during the same period
in 1998. This higher expense level resulted from increased staffing, promotional
activities and travel related expenses. As a percentage of
<PAGE> 14
revenue, selling, general and administrative expense for the first six months of
1999 was 33% of revenue, compared with 28% for the first six months of 1998.
During the six months ended June 30, 1999, the Company recorded a
charge of $1,850,000 reflecting non-cash compensation expenses as a result of
stock option grants at the Company's subsidiary, Interspeed, Inc.
For the six months ended June 30, 1999, interest and other income was
$195,000, compared with $1,018,000 for the same period in 1998. The decrease was
caused by lower investable cash balances due to the acquisition of CTP.
The Company's effective tax rate was 54% in 1999 and 37% in 1998, based
on the Company's estimated effective tax rate for the full year. Excluding the
permanent difference associated with the non-cash compensation charge of
$1,850,000, the effective tax rate would have been 34% in 1999.
Liquidity and Capital Resources
For the six months ended June 30, 1999, the Company funded its
operations principally through operating revenue. The Company's working capital
increased from $21.2 million at December 31, 1998 to $25.0 million at June 30,
1999. The increase was attributable primarily to higher cash balances and
investments due to continued profitable operations and higher accounts
receivable balances which were partially offset by higher accrued tax balances.
In August 1999, 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 2000 and at that time any outstanding balances would be payable in full.
Any amounts borrowed under the line would be subject to interest at the lender's
prime rate. At June 30, 1999, there were no commitments outstanding on letters
of credit; no borrowings have been made during any period presented.
During the first six months of 1999, the Company invested approximately
$1.7 million in capital equipment. The Company currently has no material
commitments for additional capital expenditures.
The Company anticipates that cash flows from operations, together with
current cash and marketable securities balances and funds available under the
Company's line of credit, will be sufficient to meet the Company's working
capital and capital equipment expenditure requirements for the foreseeable
future.
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements
in short-term securities, generally with maturities of 90 days or less. In
addition, the Company's working capital line of credit agreement provides for
borrowings which bear interest at a variable rate based on the lender's prime
rate. As of June 30, 1999, the Company did not have any borrowings outstanding
under the credit agreement. The Company believes that the effects, if any, of
possible near-term changes in interest rates on the Company's financial
position, results of operations and cash flows should not be material. The
Company owns publicly-traded corporate equity securities which are considered
available-for-sale for accounting purposes and any unrealized gain or loss is
deferred as a component of other comprehensive income.
The Company has limited exposure to fluctuations in foreign currencies
as it denominates substantially all sales in United States dollars and has some
expenses denominated in foreign currencies, mainly from its limited operations
in Belgium and the United Kingdom. The Company, to date, has not attempted to
hedge this limited foreign currency exposure. The Company does not enter into
financial instrument transactions for trading or other speculative purposes.
<PAGE> 16
YEAR 2000
The statements in the following section include Year 2000 readiness
disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Year 2000 Readiness Disclosure
This section contains certain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company's
Year 2000 compliance, and the eventual affects of the Year 2000 on the Company
may be materially different than currently projected. This may be due to, among
other things, delays in the implementation of the Company's Year 2000 Plan and
the failure of key third parties with whom the Company has a significant
business relationship to achieve Year 2000 compliance.
The Year 2000 issue relates to a complex of potential problems arising
from the ways in which computer software can handle dates. Many older systems
use a two digit date format which may create ambiguities in passing into a new
century.
The Year 2000 is a special case in the Gregorian calendar which can
create problems with certain leap-year calculation routines. In addition,
various contemporary computer operating systems, including systems on which many
of the Company's and its suppliers' products are dependent, employ binary dating
conventions which cannot currently manage dates falling after certain times
after the year 2000 (e.g., the year 2038 in the case of most 32-bit Windows
software.)
The Company has a Year 2000 Plan, which it is actively pursuing to
address the Company's Year 2000 issues. The Company's Year 2000 Plan focuses on
each of the Company's internal systems, the Company's products, and third
parties with which the Company has a significant business relationship. However,
no assurance can be given that the Company or such third parties will
successfully address its or their Year 2000 issues.
The Company's Year 2000 Plan relating to its internal systems consists
of three phases - assessment, testing and implementation. The Company is
currently in the implementation phase and anticipates completing this phase
during the third quarter of 1999. The Company believes that all material systems
will be compliant by the Year 2000 and that the cost to address this issue is
not material. The Company does not have any contingency plans in the event that
its material systems are not Year 2000 compliant, however, if the Company
determines that its systems may not be compliant prior to 2000, it shall create
and implement contingency plans as necessary.
The Company has gathered, tested and produced information about the
Company's products impacted by the Year 2000 transition. Although the Company
believes that most of its products are in or will be (through maintenance
releases or patches) in Year 2000 compliance, the Company has determined that
certain of its older products are not and will not be compliant, although
customers generally will have upgrade paths available to move to the Company's
newer compliant products, generally requiring some change in the operating
environment. The Company is taking steps to inform such affected users of this
issue.
<PAGE> 17
All organizations dealing with the Year 2000 must address the effect
this issue will have on their significant business relationships with key third
parties. The Company's significant business relationships which may be adversely
impacted by the Year 2000 issue include certain contractual relationships with
key suppliers of components for the Company's products, service providers for
the Company's internal systems and major customers for the Company's products
(including one such customer which accounts for more than 10% of the Company's
revenue). The Company continues to work with key third parties to understand
their ability to continue providing services, products and demand for the
Company's products through the change to the Year 2000. If any significant Year
2000 problems are identified with key third parties, contingency plans will be
developed.
The Company continues to evaluate the estimated costs associated with
achieving Year 2000 readiness. To date, costs associated with achieving Year
2000 readiness are $550,000. Based on current estimates, the remaining costs
associated with the Company's Year 2000 Plan will be approximately $200,000.
The Company anticipates that substantial litigation may be brought
against vendors of all component products of systems that are unable to properly
manage data related to the Year 2000. The Company has not received any threats
of such litigation against it, but no assurance can be given that such
litigation may not be threatened or brought in the future. The Company's
agreements with customers typically contain provisions designed to limit the
Company's liability for such claims. It is possible, however, that these
measures will not provide protection from liability claims, as a result of
existing or future federal, state or local laws or ordinances or unfavorable
judicial decisions. Furthermore, the failure of the Company or the Company's key
suppliers and/or customers to be Year 2000 compliant may also result in
litigation being brought against the Company in addition to making it more
difficult and/or costly for the Company to manufacture and sell its products.
Any such claims, with or without merit, or the failure of the Company, its
suppliers or customers to be Year 2000 compliant could result in a material
adverse affect on the Company's business, financial condition and results of
operations, including increased warranty costs, customer satisfaction issues and
potential lawsuits.
EURO ISSUE
Some of the countries in which the Company sells its products are
Member States of the Economic and Monetary Union (EMU). Beginning January 1,
1999 Member States of the EMU may begin trading in either their local currencies
or the euro, the official currency of EMU participating Member States. Parties
are free to choose the unit they prefer in contractual relationships during the
transitional period, beginning January 1999 and ending June 2002. The new
accounting system that the Company implemented can be upgraded to support the
euro and process transactions in either a country's local currency or the euro.
The Company does not anticipate a large demand from its customers to transact in
euros, so this upgrade is not planned for implementation until the fourth
quarter of 1999.
<PAGE> 18
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company. The Company will adopt this accounting standard on June 30, 2000,
as required.
<PAGE> 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1995, Spectron Microsystems, Inc., a subsidiary of Dialogic
Corporation, 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 Spectron and seeking damages, special damages, and injunctive
relief. The Company 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. This lawsuit was settled by agreement of the parties and a
stipulation of dismissal was filed with the court on July 26, 1999.
As stated in the Company's 10-K filed on March 30, 1999, a second
lawsuit between the Company and Dialogic was settled by agreement and a
stipulation of dismissal was filed with the court on February 8, 1999.
On October 4, 1996, Syntellect Technology Corp. ("Syntellect") filed a
Complaint against the Company in the United States District Court for the
Northern District of Texas (the "Texas Court"), alleging infringement of certain
patents then owned by Syntellect relating to certain aspects of "automated
attendant" technology (the "Syntellect Complaint"). The Syntellect Complaint
sought injunctive relief, damages in an unspecified amount, and multiple damages
on account of alleged willful infringement. In October 1997, the Company filed a
Motion for Summary Judgement which was granted by the Texas Court on May 10,
1998. On June 10, 1998, the period for Syntellect to appeal the summary judgment
decision expired.
On September 22, 1998, Syntellect served the Company with notice that it
intended to pursue arbitration of a claim based on an alleged breach of a patent
license agreement. On October 5, 1998, the Company filed a Complaint against
Syntellect (the "Complaint") in the United States District Court for the
District of Massachusetts (the "Massachusetts Court") seeking a declaratory
judgement that Syntellect does not have the right to pursue its claim in
arbitration. On October 7, 1998, the Company filed a motion to stay Syntellect's
arbitration claim, which the Massachusetts Court denied on November 2, 1998. On
December 15, 1998, the Company filed an opposition to Syntellect's supplemental
motion to dismiss. On December 17, 1998, the Massachusetts Court denied the
Company's renewed motion to stay arbitration and ordered that all other matters
be held in abeyance until completion of the arbitration proceedings.
On October 22, 1998, Syntellect filed a demand for arbitration, with the
American Arbitration Association (the "AAA") in Dallas, Texas, in which
Syntellect asserts that Brooktrout failed to pay certain royalties under a
patent license agreement. On December 16, 1998, the AAA granted the Company's
request that any arbitration hearing be conducted by the Boston Regional Office
of the AAA. On January 6, 1999, the Company filed an answering statement in the
arbitration proceedings, in which all claims were denied. An arbitrator has been
selected, and Aspect Telecommunications Corporation has been joined as a
claimant. The Company has filed a memorandum explaining its position regarding
the scope of the arbitration proceedings. A tentative hearing date has been set
for September 13, 1999. The Company intends to vigorously defend against
Syntellect's claims in the arbitration.
<PAGE> 20
Items 2 and 3.
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 13, 1999, the Company held its 1999 Annual Meeting of
Stockholders (the "Annual Meeting"). At the Annual Meeting, stockholders of the
Company were asked to consider proposals (the "Proposals") (i) to elect David W.
Chapman and David W. Duehren as Class I Directors of the Company to serve until
the 2002 Annual Meeting of Stockholders and until their respective successors
are duly elected and qualified, (ii) to consider and act upon a proposal to
approve the amendment to the Company's Restated Articles of Organization, as
amended (the " Articles of Organization"), to change the corporate name of the
Company to Brooktrout, Inc., (iii) to consider and act upon a proposal to amend
the Company's 1992 Stock Incentive Plan, as amended, (the "Incentive Plan") to
increase the number of shares of the Company's common stock subject to issuance
under the 1992 Plan, and (iv) to consider and act upon a proposal to ratify and
approve the selection of Deloitte & Touche LLP as the Company's independent
auditors for the fiscal year ending December 31, 1999.
With regard to the election of Directors, David W. Chapman and David W.
Duehren were nominated to serve as Class I Directors of the Company until the
2002 Annual Meeting; the other Directors of the Company whose terms of office as
Directors continued after the Annual Meeting are as follows: Eric R. Giler
(Class III Director), Robert G. Barret (Class III Director), Patrick T. Hynes
(Class II Director) and W. Brooke Tunstall (Class II Director).
With respect to the Proposals, the stockholders of the Company voted at
the Annual Meeting as hereinafter described. By a vote of 9,490,549 votes of
common stock in favor of David W. Chapman and 9,475,937 votes of common stock in
favor of David W. Duehren, in excess of a plurality of the eligible votes, with
474,831 votes and 489,937 votes against each of Messrs. Chapman and Duehren,
respectively, each of Messrs. Chapman and Duehren was elected as a Class I
Director of the Company.
The stockholders of the Company approved the amendment to the Articles
of Organization by a vote of 9,490,549 in favor, in excess of a majority of
eligible votes, with 118,445 votes against and 14,488 votes abstaining.
The stockholders of the Company approved an amendment to the Incentive
Plan by a vote of 8,323,458 votes in favor, in excess of a majority of eligible
votes, with 1,590,960 votes against and 50,963 votes abstaining.
The stockholders of the Company ratified and approved the selection of
Deloitte & Touche LLP as the Company's independent auditors for the current
fiscal year by a vote of 9,886,588 votes in favor, in excess of a majority of
eligible votes, with 50,035 votes against and 28,757 votes abstaining.
Item 5.
None
<PAGE> 21
Item 6. Exhibits
(a) Exhibits
27.1 Financial Data Schedule
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROOKTROUT, INC.
Date: August 13, 1999 By: /s/ Eric R. Giler
----------------------------
Eric R. Giler
President
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ Robert C. Leahy
----------------------------
Robert C. Leahy
Vice President of Finance and
Operations and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BROOKTROUT,
INC.'S CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME FOR THE
PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
BROOKTROUT, INC.'S 10-Q FOR THE PERIOD ENDED JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,772
<SECURITIES> 5,040
<RECEIVABLES> 17,741
<ALLOWANCES> 2,357
<INVENTORY> 10,594
<CURRENT-ASSETS> 47,963
<PP&E> 16,609
<DEPRECIATION> 7,773
<TOTAL-ASSETS> 76,489
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0
0
<COMMON> 110
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<SALES> 33,791
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<CGS> 13,213
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<INCOME-PRETAX> 787
<INCOME-TAX> 896
<INCOME-CONTINUING> (109)
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<EXTRAORDINARY> 0
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