<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 1, 1999, 10,822,522 shares of Common Stock, $.01 par
value per share, were outstanding.
Page 1 of 22 pages
<PAGE> 2
BROOKTROUT, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 (Unaudited) 3
Condensed Consolidated Statements of Income
for the Three Months Ended September 30, 1999 and
September 30, 1998, and the Nine Months Ended
September 30, 1999 and September 30, 1998 (Unaudited) 4
Condensed Consolidated Statements of
Comprehensive Income for the Three Months
Ended September 30, 1999 and September 30, 1998, and
the Nine Months Ended September 30, 1999 and
September 30, 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999 and
September 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 September 30, 1999 and 1998 13
Nine Months Ended September 30, 1999 and 1998 14
Liquidity and Capital Resources 15
Item 3 Quantitative and Qualitative Disclosures about Market Risk 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits 21
Signatures 22
<PAGE> 3
BROOKTROUT, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30, December 31,
1999 1998
----------- -----------
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and equivalents ............................. $ 48,168 $ 8,518
Marketable securities ............................ 7,312 3,837
Accounts receivable (less allowance for doubtful
accounts of $3,061 in 1999 and $2,313 in 1998) . 18,012 15,837
Inventory ........................................ 12,497 10,668
Deferred tax assets .............................. 2,270 3,853
Prepaid expenses ................................. 1,525 1,242
-------- -------
TOTAL CURRENT ASSETS ........................... 89,784 43,955
-------- -------
Equipment and furniture:
Computer equipment ............................... 9,442 8,602
Furniture and office equipment ................... 8,062 6,336
-------- -------
Total ............................................ 17,504 14,938
Less accumulated depreciation and amortization ... (8,829) (5,973)
-------- -------
EQUIPMENT AND FURNITURE - NET .................. 8,675 8,965
Deferred tax assets ................................ 4,457 4,719
Acquired technology and other intangible assets .... 13,410 14,746
Investment and other assets ........................ 226 824
-------- -------
TOTAL ASSETS ................................... $116,552 $73,209
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals .............. $ 15,680 $15,777
Accrued compensation and commissions ............. 4,166 4,529
Customer deposits ................................ 419 614
Accrued warranty costs ........................... 1,156 1,314
Accrued taxes .................................... 7,666 496
-------- -------
TOTAL CURRENT LIABILITIES ...................... 29,087 22,730
-------- -------
Deferred rent ...................................... 467 350
Minority interest .................................. 8,653 --
Stockholders' equity:
Common stock, $.01 par value; authorized,
25,000,000 shares; issued and outstanding
10,958,223 shares in 1999 and 10,828,362
in 1998 ........................................ 110 108
Additional paid-in capital ....................... 47,098 32,528
Accumulated other comprehensive income (loss) .... 306 (1,199)
Retained earnings ................................ 30,831 18,692
-------- -------
STOCKHOLDERS' EQUITY ............................. 78,345 50,129
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $116,552 $73,209
======== =======
See notes to unaudited condensed consolidated financial statements.
<PAGE> 4
BROOKTROUT, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- -----------------
1999 1998 1999 1998
------- ------- -------- -------
REVENUE.................................... $34,406 $25,246 $100,415 $75,526
------- ------- -------- -------
Cost and expenses:
Cost of product sold .................... 12,846 10,504 39,016 31,404
Research and development ................ 7,507 5,074 20,821 15,744
Selling, general and administrative ..... 11,507 7,348 33,128 21,201
Non-cash compensation charge ............ 401 -- 2,313 --
------- ------- -------- -------
Total cost and expenses ............. 32,261 22,926 95,278 68,349
------- ------- -------- -------
INCOME FROM OPERATIONS .................... 2,145 2,320 5,137 7,177
------- ------- -------- -------
Interest income, net ...................... 69 480 264 1,498
Net gain on investment activity ........... 15,485 -- 15,485 --
------- ------- -------- -------
Income before income tax provision ........ 17,699 2,800 20,886 8,675
Income tax provision ...................... 7,307 1,036 9,019 3,210
Minority interest in loss of subsidiary ... 272 -- 272 --
------- ------- -------- -------
NET INCOME ................................ $10,664 $ 1,764 $ 12,139 $ 5,465
======= ======= ======== =======
BASIC INCOME PER COMMON SHARE ............. $ 0.97 $ 0.16 $ 1.11 $ 0.51
======= ======= ======== =======
SHARES FOR BASIC .......................... 10,954 10,805 10,911 10,774
======= ======= ======== =======
DILUTED INCOME PER COMMON SHARE ........... $ 0.91 $ 0.15 $ 1.05 $ 0.48
======= ======= ======== =======
SHARES FOR DILUTED ........................ 11,728 11,468 11,600 11,482
======= ======= ======== =======
See notes to unaudited condensed consolidated financial statements
<PAGE> 5
BROOKTROUT, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1999 1998 1999 1998
------- ------ ------- ------
Net income ............................. $10,664 $1,764 $12,139 $5,465
Unrealized gains (losses) on
marketable securities .............. 2,272 (244) 3,475 (293)
Foreign currency translation
adjustment ......................... -- -- (4) --
------- ------ ------- ------
Comprehensive income before income tax
provision (benefit) .................. 12,936 1,520 15,610 5,172
Income tax (benefit) related to items
of comprehensive income .............. 772 (90) 1,181 (108)
------- ------ ------- ------
Comprehensive income ................... $12,164 $1,610 $14,429 $5,280
======= ====== ======= ======
See notes to unaudited condensed consolidated financial statements.
<PAGE> 6
BROOKTROUT, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 30,
-------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $12,139 $ 5,465
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on Brooktrout's sale of Interspeed stock .. (9,129) --
Non-cash compensation expense .................. 2,313 --
Depreciation and amortization .................. 4,194 2,201
Amortization of (premium) discount on marketable (3) (45)
securities
Deferred income taxes .......................... 101 (732)
Increase (decrease) in cash from:
Accounts receivable .......................... (2,175) (3,065)
Inventory .................................... (1,829) (510)
Other prepaid expenses ....................... (376) 282
Accounts payable and other accruals .......... (723) 3,806
------- -------
Cash provided by
operating activities ...................... 4,512 7,402
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment and furniture
(2,566) (3,558)
Purchases of marketable securities ................ -- (9,924)
Maturities and sales of marketable securities ..... -- 5,756
Brooktrout's sale of Interspeed stock, net of
related expenses ................................. 16,140 --
------- -------
Cash provided by (used for)
investing activities ...................... 13,574 (7,726)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock ............ 770 360
Interspeed sale of stock, net of offering expenses 20,794 --
------- -------
Cash provided by
financing activities ...................... 21,564 360
------- -------
INCREASE IN CASH AND EQUIVALENTS .................... 39,650 36
CASH AND EQUIVALENTS, BEGINNING OF PERIOD ........... 8,518 27,916
------- -------
CASH AND EQUIVALENTS, END OF PERIOD ................. $48,168 $27,952
======= =======
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 its lines of
business 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, as amended.
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.
On September, 24, 1999, Interspeed, Inc. (Interspeed), a subsidiary of
the Company, sold 2 million primary shares of its common stock in an initial
public offering at a price of $12 per share pursuant to a registration statement
on Form S-1 under the Securities Act of 1933, as amended. In the offering, the
Company sold an additional 1.5 million secondary shares of Interspeed common
stock. Following the completion of the offering, the Company owned 6.5 million
shares of Interspeed common stock or approximately 61% of the shares
outstanding. Due to the sale of the 2 million shares of stock by Interspeed, the
Company recorded additional paid-in capital of $12.1 million reflecting the
increase in its investment in Interspeed.
For the three months ended September 30, 1999, Brooktrout's net income
reflects the Company's share of Interspeed's net income (loss) for the same 3
month period ending September 30, 1999. In addition, the Company's net income
for the three months and nine months ended September 30, 1999, also includes:
(a) the net gain recorded by the Company on the sale of 1.5 million shares of
Interspeed it owned in conjunction with Interspeed's initial public offering and
(b) the tax benefit associated with Interspeed's operating losses realized by
the Company in their consolidated return. Subsequent to the completion of
Interspeed's initial public offering on September 24, 1999, Interspeed will not
be included in the consolidated tax return of the Company and therefore the
Company will not receive tax benefits from its share of Interspeed losses.
<PAGE> 8
2. Interspeed, Inc. (Continued)
For the six months ended June 30, 1999, and for the three months and
nine months ended September 30, 1998, the consolidated results of operations
reflect the contribution by Interspeed as a 100% owned subsidiary of the
Company. In addition, net income for the six months ended June 30, 1999, and for
the three months and nine months ended September 30, 1998, also includes the tax
benefit associated with Interspeed's operating losses realized by the Company in
their consolidated return.
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.
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Weighted average shares
for basic ............ 10,954,000 10,805,000 10,911,000 10,774,000
Dilutive effect of stock
options .............. 774,000 663,000 689,000 708,000
---------- ---------- ---------- ----------
Weighted average shares
for diluted .......... 11,728,000 11,468,000 11,600,000 11,482,000
========== ========== ========== ==========
<PAGE> 9
5. Inventory
Inventory is carried at the lower of cost (first-in, first-out basis)
or market and consisted of the following:
September 30, December 31,
1999 1998
----------- -----------
Raw materials .................... $ 5,820,000 $ 3,277,000
Work in process .................. 1,096,000 2,164,000
Finished goods ................... 5,581,000 5,227,000
----------- -----------
Total ....................... $12,497,000 $10,668,000
=========== ===========
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:
Nine Months Ended
September 30, September 30,
1999 1998
---- ----
Cash paid for interest ................. $ 4,000 $ 2,000
Cash paid for income taxes ............. $1,998,000 $3,075,000
7. Major Customer
No customer accounted for more than 10% of revenue for the three months
ended September 30, 1999. One customer accounted for approximately 22% of
revenue for the three months ended September 30, 1998, and 13% and 21% of
revenue for the nine months ended September 30, 1999 and 1998, respectively.
<PAGE> 10
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 September 30, 1999 were $3,475,000.
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 27% and 20% of revenue for the three months ended
September 30, 1999 and 1998, respectively, and 25% and 21% of revenue for the
nine months ended September 30, 1999 and 1998, respectively.
<PAGE> 11
11. Segment Reporting
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
REVENUE:
Brooktrout Technology $31,520,000 $23,818,000 $ 92,772,000 $70,749,000
Brooktrout Software 2,249,000 1,428,000 5,729,000 4,777,000
Interspeed, Inc. 637,000 -- 1,914,000 --
----------- ----------- ------------ -----------
Consolidated revenue $34,406,000 $25,246,000 $100,415,000 $75,526,000
=========== =========== ============ ===========
GROSS MARGIN:
Brooktrout Technology $20,211,000 $14,175,000 $ 57,662,000 $41,575,000
Brooktrout Software 1,251,000 567,000 3,152,000 2,547,000
Interspeed, Inc. 98,000 -- 585,000 --
----------- ----------- ------------ -----------
Consolidated gross margin $21,560,000 $14,742,000 $ 61,399,000 $44,122,000
=========== =========== ============ ===========
INCOME (LOSS) FROM OPERATIONS:(1)
Brooktrout Technology $ 6,401,000 $ 4,526,000 $ 16,964,000 $13,183,000
Brooktrout Software (857,000) (1,172,000) (2,977,000) (2,391,000)
Interspeed, Inc. (2) (3,399,000) (1,034,000) (8,850,000) (3,615,000)
----------- ----------- ------------ -----------
Consolidated income
from operations 2,145,000 2,320,000 5,137,000 7,177,000
Interest income (net) 69,000 480,000 264,000 1,498,000
Net gain on investment
activity 15,485,000 -- 15,485,000 --
----------- ----------- ------------ -----------
Consolidated income
before income tax
provision $17,699,000 $ 2,800,000 $ 20,886,000 $ 8,675,000
=========== =========== ============ ===========
(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 nine months ended September 30, 1999, is a charge of $401,000 and
$2,313,000, respectively, reflecting non-cash compensation expenses as a result
of stock option grants.
<PAGE> 12
11. Segment Reporting (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1999 1998 1999 1998
---------- -------- ---------- ----------
DEPRECIATION AND AMORTIZATION
EXPENSE:
Brooktrout Technology $1,269,000 $620,000 $3,555,000 $1,707,000
Brooktrout Software 119,000 149,000 371,000 338,000
Interspeed, Inc. 114,000 55,000 268,000 156,000
---------- -------- ---------- ----------
Consolidated depreciation and
amortization expense $1,502,000 $824,000 $4,194,000 $2,201,000
========== ======== ========== ==========
12. Subsequent Event
On October 27, 1999, the Company sold an additional 425,000 shares of
Interspeed common stock at a price of $12 per share pursuant to the
underwriters' over allotment option. After this transaction, the Company owns
6,075,000 shares of Interspeed common stock or approximately 57% of the shares
outstanding.
<PAGE> 13
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 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.
Three Months Ended September 30, 1999 and 1998
Revenue during the three months ended September 30, 1999 increased by
approximately 36% to $34,406,000, up from $25,246,000 during the three months
ended September 30, 1998. The majority of this growth was in Brooktrout
Technology and primarily was attributable to an increase in voice technology
products driven by the acquisition of the Computer Telephony Products ("CTP")
business of Lucent Technologies Inc. together with an increase in sales of
Primary Rate ISDN telephone network interface products. This increase was
partially offset by a decline in voice mail systems sold. In addition, there was
an increase in Interspeed, Inc. product sold.
Cost of product sold was $12,846,000, or approximately 37% of revenue,
during the three months ended September 30, 1999, compared to $10,504,000, or
approximately 42% of revenue, for the same period in 1998. Gross profit
percentage was approximately 63% and 58% for the three months ended September
30, 1999 and 1998, respectively. The increase in gross profit percentage was
primarily 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 higher margin products. These higher margin products replaced the
margin lost on the decline in the lower margin voice mail systems sold.
Research and development expense was $7,507,000, or approximately 22%
of revenue, compared with $5,074,000, or approximately 20% of revenue, for the
three months ended September 30, 1999 and 1998, respectively. This increase
primarily is 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 of 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> 14
Selling, general and administrative expense was $11,507,000 during the
three months ended September 30, 1999, compared with $7,348,000 during the same
period in 1998. This higher expense level resulted from the inclusion of CTP in
addition to increased staffing, promotional activities and travel related
expenses. As a percentage of revenue, selling, general and administrative
expense for the third quarter of 1999 was approximately 33% of revenue, compared
with approximately 29% for the third quarter of 1998.
During the three months ended September 30, 1999, the Company recorded
a charge of $401,000 reflecting non-cash compensation expenses as a result of
stock option grants at Interspeed.
For the three months ended September 30, 1999, interest and other
income was $69,000, compared with $480,000 for the same period in 1998. The
decrease was caused by lower investable cash balances due to the acquisition of
CTP.
During the three months ended September 30, 1999, the Company recorded
a gain of $15,485,000 reflecting a gain of $16.1 million, net of offering
related costs, on the sale of 1.5 million shares of Interspeed by the Company in
Interspeed's initial public offering, less $655,000 representing the book value
of a separate investment that was written off.
The Company's effective tax rate was 41% 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
$401,000 related to stock option grants at Interspeed and excluding the income
tax provision on the net gain on investment activity of $15,485,000, the
effective tax rate would have been 34% in 1999.
Nine Months Ended September 30, 1999 and 1998
Revenue during the nine months ended September 30, 1999 increased by
approximately 33% to $100,415,000, up from $75,526,000 during the nine months
ended September 30, 1998. The majority of this growth was in Brooktrout
Technology and primarily was attributable to an increase in voice technology
products driven by the acquisition of CTP together with an increase in sales of
Interspeed, Inc. product. In addition, there was an increase in Primary Rate
ISDN telephone network interface products sold. The increase was partially
offset by a decline in voice mail systems sold.
Cost of product sold was $39,016,000, or approximately 39% of revenue,
during the nine months ended September 30, 1999, compared to $31,404,000, or
approximately 42% of revenue, for the corresponding period in 1998. Gross profit
percentage was approximately 61% and 58% for the nine months ended September 30,
1999 and 1998, respectively. The increase in gross profit percentage was
primarily 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 higher margin products. These higher margin products replaced the
margin lost on the decline in the lower margin voice mail systems sold.
Research and development expense was $20,821,000, or approximately 21%
of revenue, compared with $15,744,000, or approximately 21% of revenue, for the
nine months ended September 30, 1999 and 1998, respectively. This increase
primarily is attributable to the inclusion of CTP and the related development
efforts on the voice technology products combined with the development of the
DSL products of Interspeed, Inc. The Company intends to continue to commit
significant resources to
<PAGE> 15
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 BOSTon architecture
Selling, general and administrative expense was $33,128,000 during the
nine months ended September 30, 1999, compared with $21,201,000 during the
corresponding period in 1998. This higher expense level resulted from the
inclusion of CTP together with increased staffing, promotional activities and
professional fees. As a percentage of revenue, selling, general and
administrative expense for the first nine months of 1999 was approximately 33%
of revenue, compared with approximately 28% for the first nine months of 1998.
During the nine months ended September 30, 1999, the Company recorded a
charge of $2,313,000 reflecting non-cash compensation expenses as a result of
stock option grants at Interspeed.
For the nine months ended September 30, 1999, interest and other income
was $264,000, compared with $1,498,000 for the same period in 1998. The decrease
was caused by lower investable cash balances due to the acquisition of CTP.
During the nine months ended September 30, 1999, the Company recorded a
gain of $15,485,000 reflecting a gain of $16.1 million, net of offering related
costs, on the sale of 1.5 million shares of Interspeed by the Company in
Interspeed's initial public offering, less $655,000 representing the book value
of a separate investment that was written off.
The Company's effective tax rate was 43% 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
$2,313,000 related to stock option grants at Interspeed and excluding the income
tax provision on the net gain on investment activity of $15,485,000, the
effective tax rate would have been 34% in 1999.
Liquidity and Capital Resources
For the nine months ended September 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 $60.7 million at September
30, 1999. The increase was attributable primarily to higher cash balances due to
the proceeds from the sale of Interspeed stock. On September 24, 1999,
Interspeed sold 2 million shares of its common stock in an initial public
offering generating $16.7 million. The Company sold 1.5 million shares of
Interspeed that it owned in the offering. The Company recognized a pre-tax gain
of $15.5 million from the offering. In addition, cash was generated from
continued profitable operations which were partially offset by higher accrued
tax balances.
On October 1, 1999, the Company's Board of Directors approved the
purchase of up to one million shares of the Company's common stock. Through
November 1, 1999, the Company had repurchased a total of 137,000 shares for a
total cash purchase of $1.7 million.
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
<PAGE> 16
amounts borrowed under the line would be subject to interest at the lender's
prime rate. At September 30, 1999, there were no commitments outstanding on
letters of credit; no borrowings have been made during any period presented.
During the first nine months of 1999, the Company invested
approximately $2.6 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 equipment expenditure requirements for the foreseeable future.
<PAGE> 17
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 September 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 denominates substantially all sales in U.S. dollars and has
limited expenses denominated in foreign currencies, generally from its limited
operations in Belgium and the United Kingdom. Consequently, the Company has
limited exposure to fluctuations in foreign currencies. 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> 18
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 fourth 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. However, with
respect to these older products, customers generally will have upgrade paths
available to move to the Company's newer compliant products, which generally
will require some change in the operating environment. The Company is taking
steps to inform such affected users of this issue.
<PAGE> 19
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 $650,000. Based on current estimates, the remaining costs
associated with the Company's Year 2000 Plan will be approximately $100,000.
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> 20
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 expects to adopt this accounting standard for the
fiscal year commencing January 1, 2001, as required.
<PAGE> 21
Part II. OTHER INFORMATION
Item 1. Legal 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 February 7, 2000. The Company intends to vigorously defend against
Syntellect's claims in the arbitration.
Items 2 through 5.
None
Item 6. Exhibits
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarterly period ended September 30, 1999.
<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: November 12, 1999 By: /s/ Eric R. Giler
----------------------------------
Eric R. Giler
President
(Principal Executive Officer)
Date: November 12, 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 48,168
<SECURITIES> 7,312
<RECEIVABLES> 18,012
<ALLOWANCES> 3,061
<INVENTORY> 12,497
<CURRENT-ASSETS> 89,784
<PP&E> 17,504
<DEPRECIATION> 8,829
<TOTAL-ASSETS> 116,552
<CURRENT-LIABILITIES> 29,087
<BONDS> 0
110
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 116,552
<SALES> 34,406
<TOTAL-REVENUES> 34,406
<CGS> 12,846
<TOTAL-COSTS> 12,846
<OTHER-EXPENSES> 19,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,699
<INCOME-TAX> 7,307
<INCOME-CONTINUING> 10,392
<DISCONTINUED> 0
<EXTRAORDINARY> 272
<CHANGES> 0
<NET-INCOME> 10,664
<EPS-BASIC> .97
<EPS-DILUTED> .91
</TABLE>
