<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
AMENDMENT NO. 2 ON FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
/ / TRANSACTION 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 jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
250 First Avenue, Suite 300 02494-2814
Needham, Massachusetts ----------
---------------------------------------- (Zip code)
(Address of principal executive offices)
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 May 1, 2000, 12,212,941 shares of Common Stock, $.01 par value per
share, were outstanding.
EXPLANATORY NOTE
The Company hereby amends Part 1 of its quarterly report on Form 10-Q for
the period ended March 31, 2000 to reflect the restatement of its Unaudited
Condensed Consolidated Financial Statements as of and for the three-month period
ended March 31, 2000 (see Note 14 to the Unaudited Condensed Consolidated
Financial Statements).
Page 1 of 32 pages
<PAGE> 2
BROOKTROUT, INC.
AMENDMENT NO. 2 ON FORM 10-Q/A
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 2000 and
March 31, 1999 4
Unaudited Condensed Consolidated Statements of
Comprehensive Income for the Three Months Ended
March 31, 2000 and March 31, 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2000 and March 31,
1999 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Three Months Ended March 31,
2000 and 1999 15
Liquidity and Capital Resources 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits 29
Signatures 30
</TABLE>
2
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Brooktrout, Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ------------
(As Restated,
see Note 14)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ......................................................... $ 45,956 $ 48,541
Marketable securities ........................................................ 1,604 1,492
Accounts receivable (less allowance for doubtful accounts and sales returns of
$2,487 in 2000 and $2,466 in 1999) ......................................... 22,878 22,232
Inventory .................................................................... 18,620 14,202
Deferred tax assets .......................................................... 5,051 5,121
Prepaid expenses ............................................................. 1,925 1,975
--------- ---------
Total current assets ..................................................... 96,034 93,563
--------- ---------
Equipment and furniture:
Computer equipment .......................................................... 10,934 9,785
Furniture and office equipment .............................................. 9,535 8,628
--------- ---------
Total .................................................................... 20,469 18,413
Less accumulated depreciation and amortization ........................... (10,762) (9,694)
--------- ---------
Equipment and furniture - net ............................................ 9,707 8,719
Acquired technology and other intangible assets ................................ 14,535 12,973
Investments and other assets ................................................... 347 180
--------- ---------
Total Assets ...................................................................... $ 120,623 $ 115,435
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable and other accruals .......................................... $ 20,841 $ 18,158
Accrued compensation and commissions ......................................... 4,759 5,573
Customer deposits ............................................................ 745 661
Accrued warranty costs ....................................................... 1,513 1,304
Accrued taxes ................................................................ 1,201 2,736
--------- ---------
Total current liabilities ................................................ 29,059 28,432
--------- ---------
Deferred rent .................................................................. 478 469
Deferred tax liabilities ....................................................... 602 479
Minority interest .............................................................. 7,374 8,672
Contingencies .................................................................. -0- -0-
Shareholders' equity:
Common stock, $.01 par value; authorized, 25,000,000 shares; issued and
outstanding 12,168,462 shares in 2000 and 11,004,019 in 1999 ............... 122 110
Additional paid-in capital .................................................. 60,233 42,991
Loans to officers ........................................................... (11,845) --
Accumulated other comprehensive income (loss) ............................... (134) (117)
Retained earnings ........................................................... 38,196 37,846
Treasury stock, 248,026 shares in 2000 and 247,582 shares in 1999 ........... (3,462) (3,447)
--------- ---------
Total shareholders' equity .................................................. 83,110 77,383
--------- ---------
Total liabilities and shareholders' equity ........................................ $ 120,623 $ 115,435
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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Brooktrout, Inc.
Unaudited Condensed Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
------------- --------
(As Restated,
see Note 14)
<S> <C> <C>
Revenue ........................................................... $ 37,101 $ 32,218
Cost and expenses:
Cost of product sold ............................................ 15,215 12,957
Research and development ........................................ 8,542 6,536
Selling, general and administrative ............................. 13,098 10,342
Non-cash compensation and warrants .............................. 1,135 62
-------- --------
Total cost and expenses ..................................... 37,990 29,897
-------- --------
Income (loss) from operations ..................................... (889) 2,321
Interest income, net .............................................. 762 79
-------- --------
Income (loss) before income tax provision.......................... (127) 2,400
Income tax provision .............................................. 1,678 816
Minority interest in loss of subsidiary ........................... (2,155) --
-------- --------
Net income ........................................................ $ 350 $ 1,584
======== ========
Basic income per common share ..................................... $ 0.03 $ 0.15
======== ========
Shares for basic .................................................. 11,235 10,862
======== ========
Diluted income per common share ................................... $ 0.03 $ 0.14
======== ========
Shares for diluted ................................................ 12,380 11,404
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
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Brooktrout, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
------------- --------
(As Restated,
see Note 14)
<S> <C> <C>
Net income ............................................... $ 350 $ 1,584
Unrealized gains (losses) on marketable securities..... (14) (1,235)
Foreign currency translation adjustment ............... (8) (5)
------- -------
Comprehensive income before income tax (benefit) ......... 328 344
Income tax (benefit) related to items of
comprehensive income ................................ (5) (482)
------- -------
Comprehensive income ..................................... $ 333 $ 826
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
Brooktrout, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
2000 1999
------------- --------
(As Restated,
Cash flows from operating activities: see Note 14)
<S> <C> <C>
Net income ................................................................ $ 350 $ 1,584
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization ........................................ 1,517 1,414
Non-cash compensation and warrants ................................... 1,415 --
Tax benefit of stock options ......................................... 1,562 --
Minority interest .................................................... (2,155) --
Deferred income taxes and other ...................................... 198 (39)
Increase (decrease) in cash from:
Accounts receivable ........................................... (646) (1,596)
Inventory ..................................................... (4,418) (1,893)
Other prepaid expenses ........................................ 50 (411)
Accounts payable and other accruals ........................... 593 3,235
-------- --------
Cash provided by (used in) operating activities ........ (1,534) 2,294
-------- --------
Cash flows from investing activities:
Expenditures for equipment and furniture .................................. (2,056) (541)
Expenditures for acquired software ........................................ (1,982) --
Purchases of marketable securities ........................................ (126) --
Investment and other assets ............................................... (205) --
-------- --------
Cash used for investing activities ..................... (4,369) (541)
-------- --------
Cash flows from financing activities:
Proceeds from the sale of common stock .................................... 3,063 223
Proceeds from exercise of Interspeed options and warrants ................. 270 --
Purchase of treasury stock ................................................ (15) --
-------- --------
Cash provided by financing activities .................. 3,318 223
-------- --------
Increase (decrease) in cash and equivalents ..................................... (2,585) 1,976
Cash and equivalents, beginning of period ....................................... 48,541 8,518
-------- --------
Cash and equivalents, end of period ............................................. $ 45,956 $ 10,494
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
Brooktrout, Inc.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
Brooktrout, Inc. (the "Company") supplies electronic communications
products to system vendors, service providers, and value added resellers, or
VARs, developing applications for the new global communications network. During
1999, the Company reorganized its lines of business and changed its name from
Brooktrout Technology, Inc. to Brooktrout, Inc. The Company is organized and
reports the results of its operations in the following three business segments:
Brooktrout Technology, Brooktrout Software, Inc. ("Brooktrout Software"), and
Interspeed, Inc. ("Interspeed"). These segments are differentiated based upon
the products and services provided to the marketplace, the customers served, and
the distribution channels.
The rapid evolution of the world's telecommunication systems has created
important market opportunities for the Company. One opportunity consists of core
technologies and platforms primarily for business premise products such as fax,
LanFax, and voice mail - Today's Network. Another opportunity - the New Network
- is the result of the global investments that are being made to expand the
capabilities of today's communication networks. These new capabilities allow
data, voice and fax information to be distributed using packet-based data
networks, such as the internet, for portions of the transmission and also be
distributed using the traditional circuit switched telephone network.
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 1999 Annual Report on Form 10-K.
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.
7
<PAGE> 8
Brooktrout, Inc.
Notes to Condensed Consolidated Financial Statements
2. Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards (SFAS) No. 133,"Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended,
establishes new standards of accounting and reporting for derivative instruments
and hedging activities and will be effective for the Company in 2001. Management
is currently evaluating the effect of adopting SFAS No. 133 on the condensed
financial statements.
In December 1999, the Securities and Exchange Commission (the "SEC")
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements and will be effective for the Company in the fourth quarter
of 2000. Management is currently evaluating the effect of adopting SAB No. 101
on the condensed financial statements.
3. 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Shares for basic ........................... 11,235,000 10,862,000
Dilutive effect of stock options............ 1,145,000 542,000
---------- ----------
Shares for diluted ......................... 12,380,000 11,404,000
========== ==========
</TABLE>
8
<PAGE> 9
Brooktrout, Inc.
Notes to Condensed Consolidated Financial Statements
4. Inventory
Inventory is carried at the lower of cost (first-in, first-out basis) or
market and consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials .............................. $ 8,123,000 $ 7,254,000
Work in process............................. 1,210,000 1,658,000
Finished goods ............................. 9,287,000 5,290,000
----------- -----------
Total ................................... $18,620,000 $14,202,000
=========== ===========
</TABLE>
Finished goods inventory includes approximately $956,000 of Interspeed product
inventory being held under consignment type arrangements.
5. 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>
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash paid for interest............................. -- --
Cash paid for income taxes......................... $ 1,340,000 $ 156,000
</TABLE>
6. Major Customers
One customer accounted for approximately 11% and 15% of net revenue for the
three months ended March 31, 2000 and 1999, respectively.
9
<PAGE> 10
Brooktrout, Inc.
Notes to Condensed Consolidated Financial Statements
7. 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 U.S.
government notes and bonds, commercial paper, and certificates of deposit.
8. Income Taxes
The Company's tax provision in 2000 was based on the estimated effective
tax rate for the full year. The effective tax rate is greater than the statutory
tax rates due to the non-deductible Interspeed operating loss of $5,078,000.
Excluding the impact of the Interspeed operating loss, the Company's effective
tax rate would have been 35% in 2000.
9. International Sales
International sales, principally exported from the United States, accounted
for approximately 18% and 25% of revenue for the three months ended March 31,
2000 and 1999, respectively.
10. Warrants
In consideration for entering into certain long-term reseller agreements,
Interspeed granted to certain customers vested warrants to purchase an aggregate
of 55,000 shares of Interspeed's common stock at the market price of
Interspeed's common stock on the dates the warrants were granted. The
10. Warrants (Continued)
value of the warrants was calculated by applying the Black-Scholes option
pricing model using the fair market value of Interspeed's common stock on the
date the agreements were executed. The value of the warrants has been charged to
expense as a component of non-cash compensation and warrants in the condensed
consolidated statements of income (loss).
Interspeed also granted to certain customers warrants to purchase up to an
aggregate of 150,000 shares of the Interspeed's common stock that vest in
installments as the customers attain certain revenue milestones over the terms
of the agreements. The exercise price of the warrants is the fair market value
of Interspeed's common stock on the date that the warrants vest. Interspeed is
accounting for these warrants as a sales discount. As revenue is recognized on
sales to these customers, Interspeed is recording a sales discount based on the
relationship of sales to date to the customer to the specified revenue
milestone. The amount of the discount is being estimated by valuing the warrants
using the Black-Scholes option-pricing model. The value of the warrants is being
adjusted at the end of each quarter until the revenue levels are attained and
the warrants vest. The amount of discounts recorded during the quarter ended
March 31, 2000 is $280,000.
11. Loans to Officers
The Board of Directors on March 3, 2000 approved and the Company instituted
a loan program. Pursuant to this loan program, the Company may lend amounts to
or on behalf of certain of the Company's executive officers (a "Loan") to
finance an executive officer's payment of the exercise price of one or more
stock options to purchase shares of common stock granted to such officer under
the Stock Incentive Plan.
10
<PAGE> 11
Brooktrout, Inc.
Notes to Condensed Consolidated Financial Statements
11. Loans to Officers (Continued)
In connection with the loans, the executive officers must execute a
Nonrecourse Promissory Note and Security Agreement (the "Promissory Note")
related to each Loan made by the Company. The Promissory Note does not bear
interest and becomes due and payable in full no later than the remaining term of
the option. The Promissory Note provides for automatic repayment upon the sale
of the common stock which is the subject of a Loan or within 90 days following
the termination of the executive officer's employment with the Company. Pursuant
to the Promissory Note, the shares of the common stock which are the subject of
a Loan serve as collateral (the "Collateral Stock") for the Promissory Note
until such time as the Promissory Note has been paid in full. Loans made by the
Company are non-recourse against the officer, and consequently for satisfaction
of the Loans the Company's recourse is to the Collateral Stock. As a result of
this program, there are loans to officers totaling $11,845,000 that are
reflected in the shareholders' equity section of the balance sheet.
12. Segment Reporting
The Company is organized and reports the results of its operations in the
following three business segments: Brooktrout Technology, Brooktrout Software
and Interspeed. These segments are differentiated based upon the products and
services provided to the marketplace, the customers served, and the distribution
channels. Brooktrout Technology provides enabling technologies for customers to
deliver voice, fax and data solutions for the electronic communications market.
Brooktrout Software provides specialized e-Business software and services that
enable companies to connect traditional telephone commerce systems with
web-based commerce systems. Interspeed develops single system, high-speed
Internet access solutions for telephone companies and Internet Service
Providers. The Company evaluates performance and allocates resources based on
revenue, gross margin and income or loss from operations.
11
<PAGE> 12
12. Segment Reporting (Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
2000 1999
------------- ------------
(As restated,
see Note 14)
<S> <C> <C>
Revenue:
Brooktrout Technology $ 33,469,000 $ 30,009,000
Brooktrout Software 2,085,000 1,882,000
Interspeed 1,547,000 327,000
------------ ------------
Consolidated revenue $ 37,101,000 $ 32,218,000
============ ============
Gross margin:
Brooktrout Technology $ 20,521,000 $ 18,298,000
Brooktrout Software 1,063,000 912,000
Interspeed 302,000 51,000
------------ ------------
Consolidated gross margin $ 21,886,000 $ 19,261,000
============ ============
Income (loss) from operations:(1)
Brooktrout Technology $ 5,405,000 $ 5,169,000
Brooktrout Software (1,216,000) (1,122,000)
Interspeed(2) (5,078,000) (1,726,000)
------------ ------------
Consolidated income (loss) from operations (889,000) 2,321,000
Other income (expense) 762,000 79,000
---------- ----------
Consolidated income (loss) before
income tax provision $ (127,000) $2,400,000
========== ==========
</TABLE>
(1) Amounts previously reported in 1999 have been revised to reflect an
allocation of certain marketing and administrative expenses to the segments.
Prior segment disclosure reflected the expenses in Brooktrout Technology.
(2) Included in the Interspeed loss from operations for the three months ended
March 31, 2000 and 1999 is a charge of $1,135,000 and $62,000, respectively,
reflecting non-cash compensation expenses as a result of stock option and
warrant grants.
<PAGE> 13
Brooktrout, Inc.
Notes to Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
------------- ----------
<S> <C> <C>
Depreciation and amortization
expense:
Brooktrout Technology $1,235,000 $1,217,000
Brooktrout Software 111,000 128,000
Interspeed 171,000 69,000
---------- ----------
Consolidated depreciation and
amortization expense $1,517,000 $1,414,000
========== ==========
</TABLE>
13. Subsequent Events
On October 9, 2000, the Company announced it would put in place a
$2,500,000 revolving line of credit for Interspeed, a majority owned subsidiary.
Borrowing on this line of credit will bear interest at the Silicon Valley Bank
prime rate per annum. The revolving line of credit will be for a six month
period from the date of closing and will be subject to a first security interest
in all tangible and intangible assets of Interspeed. As of November 13, 2000,
$578,000 has been advanced to Interspeed pursuant to promissory notes, which
will be incorporated into the revolving credit facility, and is outstanding.
In October 2000, several shareholder class action complaints were filed in
the United States District Court for the District of Massachusetts by certain
shareholders of Interspeed and of the Company. The complaints name, among
others, the Company and certain of its current and former officers and directors
as defendants. The lawsuits were filed after Interspeed's October 6, 2000
announcement that it would be restating its unaudited financial results for
certain prior quarters of its fiscal year 2000. The complaints include
allegations that the Company or certain of its officers and directors
participated in and approved the issuance of the financial statements of
Interspeed, that defendants are "controlling persons" of Interspeed, and that
the defendants made false or misleading statements regarding the Company's own
consolidated financial results. The plaintiffs are seeking unspecified damages.
The Company is defending these actions vigorously.
13
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Brooktrout, Inc.
Notes to Condensed Consolidated Financial Statements
14. Restatement
Subsequent to the issuance of the Company's Unaudited Condensed
Consolidated Financial Statements as of and for the three months ended March 31,
2000, the Company's management was informed by Interspeed that revenue from
transactions with certain resellers had been incorrectly recognized. Interspeed
has restated its financial statements to reflect the transactions as the
consignment of inventory rather than as sales and accordingly, the accompanying
financial statements of the Company have been restated. A summary of the
significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
AS OF MARCH 31, 2000:
Accounts receivable-net $ 25,063,000 $ 22,878,000
Inventory 17,664,000 18,620,000
Minority interest 7,912,000 7,374,000
Additional paid-in capital 60,319,000 60,233,000
Retained earnings 38,801,000 38,196,000
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
Revenue $ 39,119,000 $ 37,101,000
Cost of product sold 16,163,000 15,215,000
Minority interest in loss of subsidiary (1,690,000) (2,155,000)
Net income 955,000 350,000
Basic income per common share $ 0.09 $ 0.03
Diluted income per common share $ 0.08 $ 0.03
</TABLE>
14
<PAGE> 15
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. You should not rely on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors, some of which
are beyond the control of Brooktrout, Inc. (the "Company"), 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. These forward-looking statements
were based on information, plans, and estimates at the date of this document and
the Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the Company's ability to respond to rapidly developing changes in its
marketplace; (ii) the Company's ability to develop and market quality,
innovative products; (iii) the Company's ability to protect its proprietary
intellectual property; and (iv) the Company's ability to retain relationships
with its major customers, including Lucent Technologies Inc. In addition to the
foregoing, the Company's actual future results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth in the Company's various filings with the Securities and
Exchange Commission and of changes in general economic conditions and changes in
the assumptions used in making such forward-looking statements.
As discussed in Note 14 to the unaudited condensed consolidated financial
statements the unaudited condensed consolidated financial statements as of and
for the three months ended March 31, 2000 have been restated. The accompanying
discussion and analysis gives effect to the restatement.
15
<PAGE> 16
Three Months Ended March 31, 2000 and 1999
Revenue during the three months ended March 31, 2000 increased by
approximately 15% to $37,101,000, up from $32,218,000 during the three months
ended March 31, 1999. The majority of this growth was from the Company's
Brooktrout Technology segment driven by the New Network applications. There was
an increase in switching and access products sold combined with an increase in
messaging products sold. These increases in revenue were partially offset by a
decline in voice mail systems sold for Today's Network applications. During the
three months ended March 31, 2000, Interspeed recognized $280,000 of sales
discounts related to warrants granted to certain customers. Since these
equipment purchase contracts were executed during the three months ended March
31, 2000, no such sales discounts were recorded in any prior fiscal periods.
Cost of product sold was $15,215,000, or 41% of revenue, during the three
months ended March 31, 2000, compared to $12,957,000, or 40% of revenue, for the
same period in 1999. Gross profit percentage was approximately 59% and 60% for
the three months ended March 31, 2000 and 1999, respectively. The slight
decrease in gross profit percentage was due to a greater amount of lower margin
Interspeed products sold during the three months ended March 31, 2000, compared
to the same period in 1999.
Research and development expense was $8,542,000, or 23% of revenue,
compared with $6,536,000, or 20% of revenue, for the three months ended March
31, 2000 and 1999, respectively. The increase primarily is attributable to the
development of the digital subscriber line ("DSL") products of Interspeed
combined with increased product development at Brooktrout Technology. The
Company's continuing development efforts are focused on its switching and access
products that allow customers to create the infrastructure to support the New
Network, messaging products that allow integration of voice, fax and e-mail into
one location and IP Telephony and e-Commerce products.
Selling, general and administrative expense was $13,098,000, or 35% of
revenue, compared with $10,342,000, or 32% of revenue, for the three months
ended March 31, 2000 and 1999, respectively. The majority of this increase was
generated by Interspeed due to increased staffing and marketing initiatives. In
addition, there was an increase at Brooktrout Technology and Brooktrout Software
as a result of increased staffing and related expenses in the sales and
marketing areas.
For the three months ended March 31, 2000 and 1999, the Company recorded a
charge of $1,135,000 and $62,000, respectively, representing non-cash expenses
of Interspeed as a result of stock option grants to employees and warrant grants
to customers.
For the three months ended March 31, 2000, interest and other income was
$762,000, compared with $79,000 for the same period in 1999, reflecting higher
investable cash balances after the sale of Interspeed common shares in 1999.
The Company's tax provision in 2000 was based on the estimated effective
tax rate for the full year. The effective tax rate is greater than the statutory
tax rates due to the non-deductible Interspeed operating loss of $5,078,000.
Excluding the impact of the Interspeed operating loss, the Company's effective
tax rate would have been 35% in 2000. The Company's effective tax rate was 34%
in 1999.
Minority interest in loss of subsidiary was $2,155,000 for the three months
ended March 31, 2000, which represents the minority shareholders' portion of the
losses of Interspeed.
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<PAGE> 17
Liquidity and Capital Resources
For the three months ended March 31, 2000, the Company funded its
Brooktrout Technology and Brooktrout Software operations principally through
operating revenue and it's Interspeed operations through Initial Public Offering
("IPO") proceeds. The Company's working capital increased to $67,000,000 at
March 31, 2000 from $65,100,000 at December 31, 1999. This increase was a result
of increases in accounts receivable and inventory balances offset by an increase
in accounts payable and other accrual balances. Interspeed's cash balance at
March 31, 2000 was $10,000,000 and is solely available for use by Interspeed.
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 during the twelve
month period ending September 30, 2000. Through March 31, 2000, the Company had
repurchased a total of 248,026 shares for a total cash purchase of $3,500,000.
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 March 31, 2000 there were no commitments outstanding on letters
of credit; no borrowings have been made during any period presented.
During the first three months of 2000, the Company invested approximately
$2,000,000 in capital equipment. A substantial portion of this was related to
the expansion of the Company's facilities. In addition, the Company invested
approximately $2,000,000 on purchased software to support New Network
applications. The Company currently has no material commitments for additional
capital expenditures.
The Company generated approximately $3,000,000 from the sale of common
stock. There was a large volume of employee option exercises due to the stock
price increase during the quarter.
The Company anticipates that cash flows from operations from Brooktrout
Technology 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. The Company believes that the remaining Interspeed IPO
proceeds will be sufficient to meet anticipated Interspeed cash needs for
working capital and capital expenditures at least until September 30, 2000.
Thereafter, if cash generated from operations is insufficient to satisfy
Interspeed's liquidity requirements, Interspeed may need to raise additional
funds through public or private financing, strategic relationships or other
arrangements.
Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 133,"Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, establishes new
standards of accounting and reporting for derivative instruments and hedging
activities and will be effective for the Company in 2001. Management is
currently evaluating the effect of adopting SFAS No. 133 on the condensed
consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the
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<PAGE> 18
Securities and Exchange Commission's views in applying generally accepted
accounting principles to revenue recognition in financial statements and will be
effective for the Company in the fourth quarter of 2000. Management does not
believe that SAB No. 101 will have a material impact on the condensed
consolidated financial statements.
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<PAGE> 19
RISK FACTORS
You should carefully consider the following risk factors before you decide
to buy the Company's common stock. The Company's business, financial condition
or results of operations could be harmed by any of the following risks.
THE COMPANY'S OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND CAUSE
THE COMPANY'S STOCK PRICE TO BE VOLATILE WHICH COULD CAUSE THE VALUE OF YOUR
INVESTMENT TO DECLINE.
The Company's operating results are likely to fluctuate in the future due
to a variety of factors, many of which are outside of its control. If the
Company's operating results do not meet the expectations of securities analysts,
the trading price of the Company's common stock could significantly decline.
This may cause the value of your investment in the Company to decline. In
addition, the value of your investment could be impacted by investor perception
of the Company's industry or its prospects generally, independent of the
operating performance of the Company. Some of the factors that could affect the
Company's operating results or impact the market price of the common stock
include:
- the Company's ability to develop, manufacture, market and support its
products and product enhancements;
- the timing and amount of, or cancellation or rescheduling of, orders for
the Company's products;
- the Company's ability to hire, train and retain key management, sales and
marketing and engineering personnel;
- announcements or technological innovations by the Company's competitors or
in competing technologies;
- the Company's ability to obtain sufficient supplies of sole or limited
source components for the Company's products;
- a decrease in the demand for the Company's stock;
- a decrease in the average selling prices of the Company's products;
- changes in costs of components which the Company includes in its products;
and
- the mix of products that the Company sells and the mix of distribution
channels through which they are sold.
Due to these and other factors, revenues, expenses and results of
operations could vary significantly in the future, and period-to-period
comparisons should not be relied upon as indications of future performance.
IF THE COMPANY IS UNABLE TO ATTRACT OR RETAIN KEY PERSONNEL, IT MAY BE UNABLE TO
SUCCESSFULLY OPERATE ITS BUSINESS.
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<PAGE> 20
The Company's success depends on a large part upon the continued
contributions of its key management, sales and marketing and engineering
personnel, many of whom perform important-functions and would be difficult to
replace. The Company does not have employment contracts with its key personnel.
In addition, in order to grow its business, the Company must increase the number
of engineering, sales, customer support and administrative personnel. There is
intense competition in the Company's industry for qualified personnel, and, at
times, the Company has experienced difficulty in recruiting qualified personnel.
The Company may not be able to attract and retain the necessary personnel to
accomplish its business objectives, and it may experience constraints that will
adversely affect its ability to satisfy customer demand in a timely fashion or
to support its customers and operations.
The Company's inability to hire qualified personnel on a timely basis, or
to retain its key personnel, could materially adversely affect the Company's
business, financial condition and results of operations.
THE COMPANY'S MARKETS ARE HIGHLY COMPETITIVE, AND THE COMPANY MAY NOT BE ABLE TO
COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED COMPANIES WITH GREATER
RESOURCES.
The market for telecommunications equipment is highly competitive. If the
Company is unable to differentiate its products from existing and future
offerings of its competitors, and, thereby, effectively compete in the market
for telecommunications equipment, the Company's results of operations could be
materially adversely affected. Many of the Company's current and potential
competitors have significantly greater selling and marketing, technical,
manufacturing, marketing, financial, and other resources. Moreover, the
Company's competitors may have greater access to components necessary to
manufacture their products. The strength and capabilities of the Company's
competitors may be increased as a result of the trend toward consolidation in
the telecommunications market. Capitalizing on and maintaining the Company's
technological advantage will require a continued high level of investment in
research and development, marketing and customer service and support. Due to the
rapidly evolving markets in which the Company competes, additional competitors
with significant market presence and financial resources may enter those
markets, thereby further intensifying competition. The Company may not have
sufficient resources to continue to make the investments or achieve the
technological advances necessary to compete successfully with existing
competitors or new entrants.
INTERNAL DEVELOPMENT EFFORTS BY THE COMPANY'S CUSTOMERS MAY ADVERSELY AFFECT
DEMAND FOR ITS PRODUCTS.
Many of the Company's customers, including the large OEM's on which the
Company focuses a significant portion of its sales and marketing efforts, have
the technical and financial ability to design and produce components replicating
or improving on the functionality of most of its products. These customers often
consider in-house development of technologies and products as an alternative to
doing business with the Company. For example, during 1999, Lucent designed a
product that will replace the Merlin Legend Mail and Partner Mail products
manufactured by the Company. As a result, future sales of these products will be
limited to field replacement units and repairs. The Company cannot assure that
its existing customers or potential customers will do business with the Company,
rather than attempting to develop similar technology and products internally or
obtaining them through acquisition. The Company cannot be certain that it will
be able to find customers to replace the revenues lost as a result of customers
developing technologies or products in house. Any such occurrence could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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<PAGE> 21
UNLESS THE COMPANY IS ABLE TO KEEP PACE WITH THE EVOLUTION OF THE
TELECOMMUNICATIONS HARDWARE AND SOFTWARE MARKET, THE COMPANY'S BUSINESS MAY BE
ADVERSELY IMPACTED.
The telecommunications hardware and software market is characterized by:
- rapid technological advances:
- evolving industry standards;
- changes in customer requirements;
- frequent new product introductions;
- emerging competition; and
- evolving offerings by telecommunications service providers.
The Company believes that its future success will depend, in part, on its
ability to offer products that address the sophisticated and varied needs of its
current and prospective customers and to respond to technological advances and
evolving industry standards on a timely and cost-effective basis. The Company
intends to continue to invest significantly in product and technology
development. The development of new or enhanced products is a complex and
uncertain process. The Company may experience design, manufacturing, marketing
and other difficulties that could delay or prevent its development, introduction
or marketing of new products and enhancements. The Company may also not be able
to incorporate new technologies on a cost effective or timely basis. This may
result in unexpected expenses. The introduction of new or enhanced products also
requires that the Company manage the transition from older products to minimize
the disruption to customers and ensure that adequate supplies of new products
can be delivered to meet anticipated customer demand. The Company's inability to
develop on a timely basis new products or enhancements to existing products, or
the failure of such new products or enhancements to achieve market acceptance,
could have a material, adverse effect on the Company's business, financial
condition and results of operations.
THE COMPANY'S DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS AND INDEPENDENT
MANUFACTURERS EXPOSES IT TO SUPPLY INTERRUPTIONS THAT COULD RESULT IN PRODUCT
DELIVERY DELAYS.
Although the Company generally uses standard parts and components for its
products, some key components are purchased from sole or single source vendors
for which alternative sources are not currently available or are difficult to
obtain. The Company's inability to obtain sufficient quantities of these
components may result in future delays or reductions in product shipments which
could materially adversely affect its business, financial condition and results
of operations. The Company currently purchases proprietary components from a
number of suppliers for which there are no direct substitutes. These components
could be replaced with alternatives from other suppliers, but that could involve
redesign of the Company's products. If such redesign was required, the Company
would incur considerable time and expenses. The Company currently enters into
purchase orders with its suppliers for materials based on forecasts of need, but
has no guaranteed supply arrangements with these suppliers.
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<PAGE> 22
In addition, the Company currently uses a number of independent
manufacturers to manufacture printed circuit boards, chassis and subassemblies
to its design. The Company's reliance on independent manufacturers involves a
number of risks, including the potential for inadequate capacity, unavailability
of, or interruptions in access to, process technologies, and reduced control
over delivery schedules, manufacturing yields and costs. If the Company's
manufacturers are unable or unwilling to continue manufacturing its components
in required quantities and qualities, the Company will have to transfer
manufacturing to acceptable alternative manufacturers whom it has identified,
which could result in significant delays in shipment of products to customers.
Moreover, the manufacture of these components is extremely complex, and the
Company's reliance on the suppliers of these components exposes it to potential
production difficulties and quality variations, which could negatively impact
cost and timely delivery of its products. The Company currently enters into
purchase orders with independent manufacturers of materials based on forecasts
of need, but has no guaranteed arrangements with these manufacturers. Any
significant interruption in the supply, or degradation in the quality, of any
component would have a material adverse effect on the Company's business,
financial condition and results of operations.
THE COMPANY'S REVENUE GROWTH DEPENDS SIGNIFICANTLY ON THE TIMELY DEVELOPMENT AND
LAUNCH OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS, AND THE COMPANY CANNOT BE SURE
THAT ITS NEW PRODUCTS WILL GAIN WIDE MARKET ACCEPTANCE.
The telecommunications equipment and services market is characterized by
rapid technological change, which requires continual development and
introduction of new products and product enhancements that respond to evolving
customer needs and industry standards on a timely and cost-effective basis.
Successfully developing new products requires the Company to accurately
anticipate technological evolution in the telecommunications industry as well as
the technical and design needs of its customers. In addition, new product
development and launch require significant commitments of capital and personnel.
Failure to successfully update and enhance current products and to develop and
launch new products would harm the Company's business. In addition, failure of
the market to accept the Company's new products could negatively impact the
Company's business, results of operations and financial condition.
DEFECTS IN THE COMPANY'S PRODUCTS OR PROBLEMS ARISING FROM THE USE OF ITS
PRODUCTS MAY SERIOUSLY HARM ITS BUSINESS AND REPUTATION.
Products as complex as the Company's may contain known and undetected
errors or performance problems. Defects are frequently found during the period
immediately following introduction and initial implementation of new products or
enhancements to existing products. Although the Company attempts to resolve all
errors that it believes would be considered serious by its customers before
implementation, the Company's products may not be error-free. The Company also
provides warranties against defects in materials and workmanship on its products
that range, depending on the product, generally from twelve months to five
years. However, errors or performance problems could result in lost revenues or
customer relationships and could be detrimental to the Company's business and
reputation generally. Additionally, reduced market acceptance of the Company's
services due to errors or defects in its technology would harm its business by
reducing its revenues and damaging its reputation. In addition, the Company's
customers generally use its products together with their own products and
products from other vendors. As a result, when problems occur, it may be
difficult to identify the source of the problem. These problems may cause the
Company to incur significant warranty and repair costs, divert the attention of
its engineering personnel from the Company's product development efforts and
cause significant customer relations problems. To date, defects in the Company's
products or those of other vendors' products with
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<PAGE> 23
which its products are used by its customers have not had a material negative
effect on its business. However, the Company cannot be certain that a material
negative effect will not occur in the future.
CHANGES TO REGULATIONS AFFECTING THE TELECOMMUNICATIONS OR INTERNET INDUSTRIES
COULD REDUCE DEMAND FOR THE COMPANY'S PRODUCTS OR INCREASE ITS COSTS.
Laws and regulations governing telecommunications, electronic commerce and
the Internet are beginning to emerge, but remain largely unsettled, even in the
areas where there has been some legislative action. Any changes to existing laws
or the adoption of new regulations by federal or state regulatory authorities or
any legal challenges to existing laws or regulations relating to the
telecommunications industry, could have a material adverse effect upon the
market for the Company's products. Moreover, the Company's VARs or other
customers may require, or the Company may otherwise deem it necessary or
advisable, that it alter its products to address actual or anticipated changes
in the regulatory environment. The Company's inability to alter its products or
address any regulatory changes could have a material adverse effect on its
business, financial condition or results of operations.
The Company is unable to predict the impact, if any, that future
legislation, legal decisions or regulations relating to telecommunications or
the internet may have on its business, financial condition and results of
operations. Regulation may focus on, among other things, assessing access or
settlement charges, or imposing tariffs or regulations based on the
characteristics and quality of products and services, either of which could
restrict the Company's business or increase its cost of doing business.
PROVISIONS IN THE COMPANY'S CHARTER AND BY-LAWS MAY DISCOURAGE TAKEOVER ATTEMPTS
AND, THUS, DEPRESS THE MARKET PRICE OF THE COMMON STOCK.
Provisions in the Company's Charter may have the effect of delaying or
preventing a change of control or changes in the Company's management or Board
of Directors. These provisions include:
- right of the Board of Directors, without stockholder approval, to issue
shares of preferred stock and to establish the voting rights, preferences,
and other terms thereof;
- the right of the Board of Directors to elect a director to fill a vacancy
created by the expansion of the Board of Directors;
- the ability of the Board of Directors to alter the Company's by-laws
without prior stockholder approval;
- the election of three classes of directors to each serve three year
staggered terms;
- the elimination of stockholder voting by consent;
- the removal of directors only for cause;
- the vesting of exclusive authority in the Board of Directors (except as
otherwise required by law) to call special meetings of stockholders; and
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<PAGE> 24
- certain advance notice requirements for stockholder proposals and
nominations for election to the Board of Directors.
These provisions discourage potential takeover attempts and the ability of
stockholders to change management and the Board of Directors. These
anti-takeover measures could adversely affect the market price of the Company's
common stock. In addition, even if you desired to participate in a tender offer,
change of control or takeover attempt of the Company that the Company's
management and Board of Directors opposed, these provisions may prevent you from
doing so.
THE COMPANY'S ABILITY TO ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS MAY PREVENT
IT FROM RETAINING ITS COMPETITIVE ADVANTAGE AND NEGATIVELY IMPACT ITS FUTURE
OPERATING RESULTS.
The Company's success and its ability to compete are dependent, in part,
upon its proprietary technology. Taken as a whole, the Company believes its
intellectual property rights are significant and any failure to adequately
protect the unauthorized use of its proprietary rights could result in the
Company's competitors offering similar products, potentially resulting in loss
of a competitive advantage and decreased revenues. The Company relies upon a
combination of trademark law, trade secret protections, copyright law and
confidentiality agreements with consultants and third parties to protect its
proprietary rights. Notwithstanding its efforts, third parties may infringe or
misappropriate the Company's proprietary rights. In addition, each employee of
the Company has executed a proprietary information agreement designed to protect
the trade secrets of the Company, inventions created in the course of employment
with the Company and other proprietary information of the Company. Moreover,
effective trademark, copyright or trade secret protections may not be available
in every country in which the Company operates or intends to operate to the same
extent as the laws of the United States. Also, it may be possible for
unauthorized third parties to copy or reverse engineer aspects of the Company's
products, develop similar technology independently or otherwise obtain and use
information that it regards as proprietary. Furthermore, detecting unauthorized
use of the Company's proprietary rights is difficult. Litigation may be
necessary in the future to enforce the Company's proprietary rights. Such
litigation could result in the expenditure of significant financial and
managerial resources and could have a material adverse effect on the Company's
future operating results.
INTELLECTUAL PROPERTY CLAIMS AGAINST THE COMPANY CAN BE COSTLY AND NEGATIVELY
IMPACT THE COMPANY'S BUSINESS.
In the telecommunications business, there is frequent litigation based on
allegations of patent infringement. As the number of entrants in the Company's
market increases and the functionality of its products is enhanced and overlaps
with the products of other companies, the Company may become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. As a result, from time to time, third parties may claim exclusive patent
or other intellectual property rights to technologies that the Company uses. The
Company has recently entered into an agreement in principal to settle such
litigation. Although the Company believes that its proprietary rights do not
infringe on the intellectual property of others, any claims asserting that the
Company's products infringe or may infringe proprietary rights of third parties,
if determined adversely to the Company, could have a material adverse effect on
its business, financial condition or results of operations. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the
efforts of the Company's engineering and management personnel, cause delays in
product shipments or require the Company to enter into royalty or licensing
agreements, any of which could have a material adverse affect upon the Company's
operating results. If any legal action claiming patent infringement is commenced
against it, the Company cannot
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assure you that it would prevail in such litigation given the complex technical
issues and inherent uncertainties in patent litigation. In addition, the Company
may be required to obtain a license or royalty agreement under the intellectual
property rights of those parties claiming the infringement. In the event a claim
against the Company was successful, and it could not obtain a license on
acceptable terms or license a substitute technology or redesign to avoid
infringement, the Company may be unable to market its affected products. This
could have a material adverse effect on the Company's business, financial
condition and results of operations.
THE COMPANY'S PRODUCTS DEPEND UPON THE CONTINUED AVAILABILITY OF LICENSED
TECHNOLOGY FROM THIRD PARTIES.
The Company currently licenses and will continue to license certain
technology integral to its products and services from third parties. For
example, the Company has obtained licenses from third parties of software for
its voice and fax products. While the Company believes that much of this
technology is available from multiple sources, any difficulties in acquiring
third-party technology licenses, or integrating the related third-party
technology into its products, could result in delays in product development or
upgrade until equivalent technology can be identified, licensed and integrated.
The Company may require new licenses in the future as its business grows and
technology evolves. The Company cannot assure you that these licenses will
continue to be available to it on commercially reasonable terms, if at all,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
THE COMPANY'S PRODUCTS TYPICALLY HAVE LONG SALES CYCLES, CAUSING THE COMPANY TO
EXPEND SIGNIFICANT RESOURCES BEFORE RECOGNIZING REVENUE.
The length of the Company's sales cycle typically ranges from six to
eighteen months and varies substantially from customer to customer. Prospective
customers generally must commit significant resources to test and evaluate the
Company's products and integrate them into larger systems. This evaluation
period is often prolonged due to delays associated with approval processes that
typically accompany the design and testing of new communications equipment by
the Company's customers. In addition, the rapidly emerging and evolving nature
of the markets in which the Company and its customers compete may cause
prospective customers to delay their purchase decisions as they evaluate new
technologies and develop and implement new systems. During the period in which
the Company's customers are evaluating whether to place an order with the
Company, it often incurs substantial sales and marketing expenses, without any
assurance of future orders or their timing. Even after a customer places an
order with the Company and its product is expected to be utilized in a product
or service offering being developed by our customer, the timing of the
development, introduction and implementation of those products is controlled by,
and can vary significantly with the needs of, the Company's customers. In some
circumstances, the customer will not require the product for several months.
This complicates the Company's planning processes and reduces the predictability
of the Company's earnings. If sales forecasted from a specific customer for a
particular quarter are not realized in that quarter, the Company may fail to
achieve its revenue goals.
THE AVERAGE SELLING PRICES OF THE COMPANY'S PRODUCTS MAY DECREASE, WHICH COULD
ADVERSELY AFFECT GROSS MARGINS AND REVENUES.
Competitive pressures and rapid technological change may cause decreases of
the average selling prices of the Company's products and services. In addition,
as many of the Company's target customers are large OEM's with significant
market power, the Company may face pressure from them for steep discounts in its
pricing. Any significant erosion in the Company's average selling prices could
impact its
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gross margins and have a material adverse effect on the Company's business,
financial condition and results of operations.
THE COMPANY'S REVENUE GROWTH DEPENDS SIGNIFICANTLY ON THE TIMELY DEVELOPMENT AND
LAUNCH OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS, AND THE COMPANY CANNOT BE SURE
THAT ITS NEW PRODUCTS WILL GAIN WIDE MARKET ACCEPTANCE.
The telecommunications equipment and services market is characterized by
rapid technological change, which requires continual development and
introduction of new products and product enhancements that respond to evolving
customer needs and industry standards on a timely and cost-effective basis.
Successfully developing new products requires the Company to accurately
anticipate technological evolution in the telecommunications industry as well as
the technical and design needs of its customers. In addition, new product
development and launch require significant commitments of capital and personnel.
Failure to successfully update and enhance current products and to develop and
launch new products would harm the Company's business. In addition, failure of
the market to accept the Company's new products could negatively impact the
Company's business, results of operations and financial condition.
THE COMPANY DERIVES A SIGNIFICANT PORTION OF ITS REVENUES FROM INTERNATIONAL
SALES.
The Company believes a material portion of its domestic sales results in
the use of its products outside North America. Risks arising from the Company's
international business include currency fluctuation, political instability in
other countries, the imposition of trade and tariff regulations by foreign
governments and the difficulties in managing operations across disparate
geographic areas. In addition, 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. The Company cannot assure a shareholder that it will not encounter
delays in obtaining approval in a foreign jurisdiction. These or other factors
may limit the Company's ability to sell its products and services in other
countries, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEFECTS IN THE COMPANY'S PRODUCTS OR PROBLEMS ARISING FROM THE USE OF ITS
PRODUCTS MAY SERIOUSLY HARM ITS BUSINESS AND REPUTATION.
Products as complex as the Company's may contain known and undetected
errors or performance problems. Defects are frequently found during the period
immediately following introduction and initial implementation of new products or
enhancements to existing products. Although the Company attempts to resolve all
errors that it believes would be considered serious by its customers before
implementation, the Company's products may not be error-free. The Company also
provides warranties against defects in materials and workmanship on its products
that range, depending on the product, generally from twelve months to five
years. However, errors or performance problems could result in lost revenues or
customer relationships and could be detrimental to the Company's business and
reputation generally. Additionally, reduced market acceptance of the Company's
services due to errors or defects in its technology would harm its business by
reducing its revenues and damaging its reputation. In addition, the Company's
customers generally use its products together with their own products and
products from other vendors. As a result, when problems occur, it may be
difficult to identify the source of the problem. These problems may cause the
Company to incur significant warranty and repair costs, divert the attention of
its
26
<PAGE> 27
engineering personnel from the Company's product development efforts and cause
significant customer relations problems. To date, defects in the Company's
products or those of other vendors' products with which its products are used by
its customers have not had a material negative effect on its business. However,
the Company cannot be certain that a material negative effect will not occur in
the future.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 22, 1998, Syntellect Technology Corp. ("Syntellect") served
the Company with notice that it intended to pursue arbitration of a claim based
on an alleged infringement and breach of a patent license agreement. On October
22, 1998, Syntellect filed a demand for arbitration, with the American
Arbitration Association in which Syntellect asserted that the Company failed to
pay certain royalties under the patent license agreement. On June 15, 1999,
Aspect Telecommunications Corporation joined the arbitration as a claimant.
On January 31, 2000, Syntellect and the Company reached an understanding on
terms under which the matter would be settled. The arbitration proceedings have
been stayed pending final resolution of this settlement. On April 3, 2000,
Syntellect and the Company finalized a settlement agreement to resolve the
matter, and the arbitration proceeding has been dismissed with prejudice. The
settlement will not have a material impact on the Company's consolidated
financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
27. Financial Data Schedule (as restated)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarterly period ended
March 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No.2 on Form 10-Q/A to be signed on
its behalf by the undersigned thereunto duly authorized.
BROOKTROUT, INC.
Date: November 16, 2000 By: /s/ Eric R. Giler
-----------------------------
Eric R. Giler
President
(Principal Executive Officer)
Date: November 16, 2000 By: /s/ Robert C. Leahy
-----------------------------
Robert C. Leahy
Vice President of Finance and
Operations and Treasurer
(Principal Financial and
Accounting Officer)
30
