<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
-- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
/ / 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)
250 First Avenue
Needham, Massachusetts 02494-2814
--------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number
including area code: (781) 449-4100
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ----
As of August 1, 2000, 12,246,964 shares of Common Stock, $.01 par value
per share, were outstanding.
Page 1 of 33 pages
<PAGE> 2
BROOKTROUT, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 (Unaudited) 3
Condensed Consolidated Statements of Income for
the Three Months Ended June 30, 2000 and
June 30, 1999 and the Six Months Ended
June 30, 2000 and June 30, 1999 (Unaudited) 4
Condensed Consolidated Statements of Comprehensive
Income for the Three Months Ended June 30, 2000
and June 30, 1999 and the Six Months Ended June 30,
2000 and June 30, 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000
and June 30, 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended June 30, 2000 and 1999 15
Six Months Ended June 30, 2000 and 1999 16
Liquidity and Capital Resources 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits 32
Signatures 33
2
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BROOKTROUT, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ....................................... $ 33,639 $ 48,541
Marketabl securities ....................................... 2,478 1,492
Accounts receivable (less allowance for doubtful
accounts and sales returns of $2,825 in 2000 and
$2,466 in 1999) .......................................... 36,532 22,232
19,902
Inventory .................................................. 14,202
Deferred tax assets ........................................ 5,018 5,121
Prepaid expenses ........................................... 1,894 1,975
-------- --------
TOTAL CURRENT ASSETS ..................................... 99,463 93,563
-------- --------
Equipment and furniture:
Computer equipment ......................................... 11,408 9,785
Furniture and office equipment ............................. 10,076 8,628
-------- --------
21,484
Total .................................................... 18,413
Less accumulated depreciation and amortization ........... (11,851) (9,694)
-------- --------
EQUIPMENT AND FURNITURE - NET ............................ 9,633 8,719
Acquired technology and other intangible assets .............. 14,019 12,973
Investments and other assets ................................. 2,902 180
-------- --------
TOTAL ASSETS ............................................. $126,017 $115,435
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals ........................ $ 21,979 $ 18,158
Accrued compensation and commissions ....................... 4,895 5,573
Customer deposits .......................................... 507 661
Accrued warranty costs ..................................... 1,757 1,304
Accrued taxes .............................................. 393 2,736
-------- --------
TOTAL CURRENT LIABILITIES ................................ 29,531 28,432
-------- --------
Deferred rent ................................................ 481 469
Deferred tax liabilities ..................................... 689 479
Minority interest ............................................ 7,209 8,672
Shareholders' equity:
Common stock, $.01 par value; authorized, 25,000,000 shares;
issued and outstanding 12,238,754 shares in 2000 and
11,004,019 in 1999 ....................................... 122 110
Additional paid-in capital ................................. 61,770 42,991
Loans to officers .......................................... (11,813) --
Accumulated other comprehensive income (loss) .............. (196) (117)
Retained earnings .......................................... 41,696 37,846
Treasury stock, 248,428 shares in 2000 and 247,582
shares in 1999 ........................................... (3,472) (3,447)
TOTAL SHAREHOLDERS' EQUITY ................................. 88,107 77,383
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $126,017 $115,435
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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BROOKTROUT, INC.
Condensed Consolidated Statements of Income (Loss) (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE ................................... $47,203 $33,791 $86,322 $66,009
Cost and expenses:
Cost of product sold .................... 18,911 13,213 35,074 26,170
Research and development ................ 8,499 6,778 17,041 13,314
Selling, general and administrative ..... 14,587 11,279 27,685 21,621
Non-cash compensation and warrants ...... 284 1,850 1,419 1,912
------- ------- ------- -------
Total cost and expenses ............... 42,281 33,120 81,219 63,017
------- ------- ------- -------
INCOME FROM OPERATIONS .................... 4,922 671 5,103 2,992
------- -------
Other income (expense):
Equity in loss of affiliate ............. (1,400) -- (1,400) --
Interest income, net .................... 634 116 1,396 195
------- ------- ------- -------
Total other income (expense) .......... (766) 116 (4) 195
------- ------- ------- -------
Income before income tax provision ........ 4,156 787 5,099 3,187
Income tax provision ...................... 2,225 896 3,903 1,712
Minority interest in loss of subsidiary ... (964) -- (2,654) --
------- ------- ------- -------
NET INCOME (LOSS) ......................... $ 2,895 ($ 109) $ 3,850 $ 1,475
======= ======= ======= =======
BASIC INCOME (LOSS) PER COMMON SHARE ...... $ 0.24 ($ 0.01) $ 0.33 $ 0.14
======= ======= ======= =======
SHARES FOR BASIC .......................... 11,959 10,917 11,597 10,890
======= ======= ======= =======
DILUTED INCOME (LOSS) PER COMMON SHARE .... $ 0.23 ($ 0.01) $ 0.30 $ 0.13
======= ======= ======= =======
SHARES FOR DILUTED ........................ 12,804 10,917 12,678 11,536
======= ======= ======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
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BROOKTROUT, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) ...................................... $2,895 ($ 109) $3,850 $1,475
Unrealized gains (losses) on marketable securities ... -- 2,438 (14) 1,203
Foreign currency translation adjustment .............. (62) -- (70) (4)
------ ------ ------ ------
Comprehensive income before income tax
provision (benefit) .................................... 2,833 2,329 3,766 2,674
Income tax provision (benefit) related to items of
comprehensive income .................................. -- 829 (5) 409
------ ------ ------ ------
Comprehensive income ................................... $2,833 $1,500 $3,771 $2,265
====== ====== ====== ======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
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BROOKTROUT, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 3,850 $ 1,475
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization .................... 3,055 2,692
Non-cash compensation and warrants ............... 1,859 1,912
Tax benefit of stock options ..................... 1,562 --
Minority interest ................................ (2,654) --
Deferred income taxes and other .................. 318 138
Increase (decrease) in cash from:
Accounts receivable .......................... (14,300) (1,904)
Inventory .................................... (5,700) 74
Prepaid expenses ............................. 81 (565)
Accounts payable and other accruals .......... 1,681 (1,596)
-------- -------
Cash provided by (used in)
operating activities ................... (10,248) 2,226
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for equipment and furniture ................. (3,071) (1,671)
Expenditures for acquired software ....................... (1,982) --
Purchases of marketable securities ....................... (1,000) --
Investment and other assets .............................. (2,772) --
-------- -------
Cash used for
investing activities ................... (8,825) (1,671)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock .................... 3,854 699
Proceeds from exercise of Interspeed options and warrants . 326 --
Equity in loss of affiliate ............................... 16 --
Purchase of treasury stock ................................ (25) --
-------- -------
Cash provided by
financing activities ................... 4,171 699
-------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS .................. (14,902) 1,254
CASH AND EQUIVALENTS, BEGINNING OF PERIOD .................... 48,541 8,518
-------- -------
CASH AND EQUIVALENTS, END OF PERIOD .......................... $ 33,639 $ 9,772
======== =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
BROOKTROUT, INC.
Notes to Unaudited 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, Inc. ("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 to 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
2. Income Per Share
Basic income per share is computed using the weighted average number of
common shares outstanding during each period. 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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares
for basic ............... 11,959,000 10,917,000 11,597,000 10,890,000
Dilutive effect of stock
options ................. 845,000 -- 1,081,000 646,000
---------- ---------- ---------- ----------
Weighted average shares
for diluted ............. 12,804,000 10,917,000 12,678,000 11,536,000
========== ========== ========== ==========
</TABLE>
3. Inventory
Inventory is carried at the lower of cost (first-in, first-out basis)
or market and consisted of the following:
June 30, December 31,
2000 1999
----------- -----------
Raw materials .......... $10,206,000 $ 7,254,000
Work in process ........ 868,000 1,658,000
Finished goods ......... 8,828,000 5,290,000
----------- -----------
Total ............... $19,902,000 $14,202,000
=========== ===========
4. 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:
Six Months Ended
June 30, June 30,
2000 1999
---------- --------
Cash paid for interest ....... -- $ 4,000
Cash paid for income taxes ... $4,076,000 $774,000
8
<PAGE> 9
5. Major Customers
One customer accounted for approximately 19% and 16% of revenue for the
three months ended June 30, 2000 and 1999, respectively, and 15% and 16% of
revenue for the six months ended June 30, 2000 and 1999, respectively. In
addition, another customer accounted for 14% of revenue for the three months
ended June 30, 2000.
6. 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.
7. Income Taxes
The Company's tax provision in 2000 is 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. Excluding the
impact of the Interspeed operating loss, the Company's effective tax rate would
have been 35% in 2000.
8. International Sales
International sales, principally exported from the United States,
accounted for approximately 30% and 22% of revenue for the three months ended
June 30, 2000 and 1999, respectively, and 24% and 23% of revenue for the six
months ended June 30, 2000 and 1999, respectively.
9. Concentration of Credit Risk
The Company sells its products to various customers in several
industries. The Company generally requires no collateral; however, to reduce
credit risk the Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses. At June 30, 2000,
approximately 20% of the Company's accounts receivable were from one customer.
In addition, approximately 26% of the Company's accounts receivable were
comprised of balances due from three Interspeed customers.
9
<PAGE> 10
10. Warrants
In consideration for entering into certain long-term reseller
agreements, Interspeed granted to the customers vested warrants to purchase
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 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 statement of operations.
Interspeed also granted to the customers warrants to purchase up to
150,000 shares of the Company's common stock that vest in installments as the
customers attain certain revenue milestones over the terms of the agreements.
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 at the end of each fiscal
period. The value of the warrants is being adjusted in each fiscal period until
the revenue levels are attained and the warrants vest. The exercise price of the
warrants is the fair market value of Interspeed's common stock on the date that
the warrants vest.
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 loaned
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.
In connection with the loans, the executive officers executed 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 limited to the Collateral Stock. As a
result of this program, there are loans to officers totaling approximately
$11,800,000 that are reflected in the shareholders' equity section of the
balance sheet.
10
<PAGE> 11
12. Deconsolidation of Beacon Networks, Inc.
During the first quarter of 2000, the Company owned 100% of Beacon
Networks, Inc. ("Beacon Networks") and accounted for its investment under the
consolidation method. Through subsequent sale and distribution of Beacon
Networks shares on June 29, 2000, the Company's ownership percentage in Beacon
Networks was reduced to below 50%. As the Company still exercises significant
influence over Beacon Networks, it has accounted for its remaining investment
under the equity method of accounting beginning in the second quarter of 2000.
The operating loss of approximately $540,000 generated by Beacon Networks in the
first quarter of 2000 is included in the Company's consolidated operating
results. The Company's share of Beacon Networks' losses for the second quarter
of 2000 (100% through June 29, 2000) has been reported as "Equity in loss of
affiliates" in the condensed consolidated statement of income.
13. 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 of
the segments.
11
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13. Segment Reporting (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Brooktrout Technology $ 37,026,000 $ 31,243,000 $ 70,495,000 $ 61,252,000
Brooktrout Software 3,170,000 1,598,000 5,255,000 3,480,000
Interspeed 7,007,000 950,000 10,572,000 1,277,000
------------ ------------ ------------ ------------
Consolidated revenue $ 47,203,000 $ 33,791,000 $ 86,322,000 $ 66,009,000
============ ============ ============ ============
GROSS MARGIN:
Brooktrout Technology $ 24,077,000 $ 19,153,000 $ 44,598,000 $ 37,451,000
Brooktrout Software 1,804,000 989,000 2,867,000 1,901,000
Interspeed 2,411,000 436,000 3,783,000 487,000
------------ ------------ ------------ ------------
Consolidated gross margin $ 28,292,000 $ 20,578,000 $ 51,248,000 $ 39,839,000
============ ============ ============ ============
INCOME (LOSS) FROM OPERATIONS: (1)
Brooktrout Technology (2) $ 8,246,000 $ 5,780,000 $ 13,651,000 $ 11,259,000
Brooktrout Software (1,031,000) (1,384,000) (2,247,000) (2,816,000)
Interspeed (3) (2,293,000) (3,725,000) (6,301,000) (5,451,000)
------------ ------------ ------------ ------------
Consolidated income
from operations 4,922,000 671,000 5,103,000 2,992,000
Other income (expense) (766,000) 116,000 (4,000) 195,000
------------ ------------ ------------ ------------
Consolidated income
before income tax
provision $ 4,156,000 $ 787,000 $ 5,099,000 $ 3,187,000
============ ============ ============ ============
</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 Brooktrout Technology income from operations for the six
months ended June 30, 2000 is approximately $540,000 in expenses related to
Beacon Networks. For the three months ended June 30, 2000, Beacon Networks
results are reflected in other income (expense).
(3) Included in the Interspeed loss from operations for the three months ended
June 30, 2000 and 1999 is a charge of $284,000 and $1,850,000, respectively,
reflecting non-cash compensation expenses as a result of stock option grants.
Included in the Interspeed loss from operations for the six months ended June
30, 2000 and 1999 is a charge of $1,419,000 and $1,912,000, respectively,
reflecting non-cash compensation expenses as a result of stock option and
warrant grants.
12
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13. Segment Reporting (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DEPRECIATION AND AMORTIZATION
EXPENSE:
Brooktrout Technology $1,233,000 $1,069,000 $2,468,000 $2,286,000
Brooktrout Software 91,000 124,000 202,000 252,000
Interspeed 214,000 85,000 385,000 154,000
---------- ---------- ---------- ----------
Consolidated depreciation and
amortization expense $1,538,000 $1,278,000 $3,055,000 $2,692,000
========== ========== ========== ==========
</TABLE>
13
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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 herein and 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.
14
<PAGE> 15
Three Months Ended June 30, 2000 and 1999
Revenue during the three months ended June 30, 2000 increased by
approximately 40% to $47,203,000, up from $33,791,000 during the three months
ended June 30, 1999. The majority of the growth was generated by the Company's
Interspeed and Brooktrout Technology subsidiaries. Interspeed experienced
increased sales for its digital subscriber line ("DSL") product line. In
addition, there was substantial growth in the Company's Brooktrout Technology
subsidiary 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.
Cost of product sold was $18,911,000, or 40% of revenue, during the
three months ended June 30, 2000, compared to $13,213,000, or 39% of revenue,
for the same period in 1999. Gross profit percentage was approximately 60% and
61% for the three months ended June 30, 2000 and 1999, respectively. The slight
decrease in gross profit percentage was due to a change in the mix of products
sold. Sales of lower margin Interspeed product increased during the three months
ended June 30, 2000, compared to the same period in 1999.
Research and development expense was $8,499,000, or 18% of revenue,
compared with $6,778,000, or 20% of revenue, for the three months ended June 30,
2000 and 1999, respectively. The dollar increase is primarily attributable to
increased product development at Brooktrout Technology combined with development
of the DSL products of Interspeed. 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, IP Telephony products
and e-Business products.
Selling, general and administrative expense was $14,587,000 during the
three months ended June 30, 2000, compared with $11,279,000 during the same
period in 1999. 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. As a percentage
of revenue, selling, general and administrative expense for the second quarter
of 2000 was 31% of revenue, compared with 33% for the second quarter of 1999.
For the three months ended June 30, 2000 and 1999, the Company recorded
a charge of $284,000 and $1,850,000, respectively, representing non-cash
expenses of Interspeed as a result of stock option grants to employees.
During the first quarter of 2000, the Company owned 100% of Beacon
Networks, Inc. ("Beacon Networks") and accounted for its investment under the
consolidation method. Through subsequent sale and distribution of Beacon
Networks shares on June 29, 2000, the Company's ownership percentage in Beacon
Networks was reduced to below 50%. As the Company still exercises significant
influence over Beacon Networks, it has accounted for its remaining investment
under the equity method of accounting beginning in the second quarter of 2000.
The operating loss of approximately $540,000 generated by Beacon Networks in the
first quarter of 2000 is included in the Company's consolidated operating
results. The Company's share of Beacon Networks' losses for the second quarter
of 2000 (100% through June 29, 2000) has been reported as "Equity in loss of
affiliates" in the condensed consolidated statement of income.
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For the three months ended June 30, 2000, interest and other income was
$634,000, compared with $116,000 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 is based on the estimated effective
tax rate for the full year. The effective tax rate is 54% in 2000, which is
greater than the statutory tax rates due to the non-deductible Interspeed
operating loss. 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 114% in 1999. Excluding the permanent difference
associated with the non-cash compensation charge at Interspeed, the effective
tax rate would have been 34% in 1999.
Minority interest in loss of subsidiary was $964,000 for the three
months ended June 30, 2000, which represents the minority shareholders' portion
of the losses of Interspeed.
Six Months Ended June 30, 2000 and 1999
Revenue during the six months ended June 30, 2000 increased by
approximately 31% to $86,322,000, up from $66,009,000 during the six months
ended June 30, 1999. The majority of the growth was generated by the Company's
Interspeed and Brooktrout Technology subsidiaries. Interspeed experienced
increased sales for its DSL product line. During the six months ended June 30,
2000, Interspeed recognized $439,000 of sales discounts related to warrants
granted to certain customers. Since these equipment purchase contracts were
executed during the six months ended June 30, 2000, no such sales discounts were
recorded in any prior fiscal periods. In addition, there was substantial growth
in the Company's Brooktrout Technology subsidiary 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.
Cost of product sold was $35,074,000, or 41% of revenue, during the six
months ended June 30, 2000, compared to $26,170,000, or 40% of revenue, for the
same period in 1999. Gross profit percentage was approximately 59% and 60% for
the six months ended June 30, 2000 and 1999, respectively. The slight decrease
in gross profit percentage was due to a change in the mix of products sold.
Sales of lower margin Interspeed product increased during the six months ended
June 30, 2000, compared to the same period in 1999.
Research and development expense was $17,041,000, or 20% of revenue,
compared with $13,314,000, or 20% of revenue, for the six months ended June 30,
2000 and 1999, respectively. The dollar increase is primarily attributable to
increased product development at Brooktrout Technology combined with development
of the DSL products of Interspeed. 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, IP Telephony products
and e-Business products.
Selling, general and administrative expense was $27,685,000 during the
six months ended June 30, 2000, compared with $21,621,000 during the same period
in 1999. 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. As a percentage
of revenue, selling, general and
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administrative expense for the first six months of 2000 was 32% of revenue,
compared with 33% for the first six months of 1999.
For the six months ended June 30, 2000 and 1999, the Company recorded a
charge of $1,419,000 and $1,912,000, respectively, representing non-cash
expenses of Interspeed as a result of stock option grants to employees and
warrant grants to customers.
During the first quarter of 2000, the Company owned 100% of Beacon
Networks and accounted for its investment under the consolidation method.
Through subsequent sale and distribution of Beacon Networks shares on June 29,
2000, the Company's ownership percentage in Beacon Networks was reduced to below
50%. As the Company still exercises significant influence over Beacon Networks,
it has accounted for its remaining investment under the equity method of
accounting beginning in the second quarter of 2000. The operating loss of
approximately $540,000 generated by Beacon Networks in the first quarter of 2000
is included in the Company's consolidated operating results. The Company's share
of Beacon Networks' losses for the second quarter of 2000 (100% through June 29,
2000) has been reported as "Equity in loss of affiliates" in the condensed
consolidated statement of income.
For the six months ended June 30, 2000, interest and other income was
$1,396,000, compared with $195,000 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 is based on the estimated effective
tax rate for the full year. The effective tax rate is 77% in 2000, which is
greater than the statutory tax rates due to the non-deductible Interspeed
operating loss. 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 54% in 1999. Excluding the permanent difference
associated with the non-cash compensation charge at Interspeed, the effective
tax rate would have been 34% in 1999.
Minority interest in loss of subsidiary was $2,654,000 for the six
months ended June 30, 2000, which represents the minority shareholders' portion
of the losses of Interspeed.
Liquidity and Capital Resources
For the six months ended June 30, 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 from $65.1 million at
December 31, 1999 to $69.9 million at June 30, 2000. 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
June 30, 2000 was $6.4 million and is solely available for use by Interspeed.
On June 29, 2000, Beacon Networks completed an equity financing
transaction in which the Company and outside investors purchased Beacon Networks
Series A Preferred Stock. The Company expended approximately $2.5 million in
this financing transaction and is no longer the controlling shareholder of
Beacon Networks.
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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 June 30, 2000, the
Company had repurchased a total of 248,428 shares for a total cash purchase of
$3.5 million.
In August 2000, the Company renewed its working capital line of credit.
Under the renewed line of credit, the Company may borrow up to $10 million on an
unsecured basis, all of which may be used for issuance of letters of credit,
subject to compliance with certain covenants. Any amounts borrowed under the
line would be subject to interest at the lender's prime rate. At June 30, 2000
there were no commitments outstanding on letters of credit; no borrowings have
been made during any period presented.
During the first six months of 2000, the Company invested approximately
$3 million 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 million on purchased software to support New Network
applications. The Company currently has no material commitments for additional
capital expenditures.
During the first six months of 2000, the Company generated
approximately $3 million from the sale of common stock as a result of employee
stock option purchases.
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.
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RISK FACTORS
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.
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
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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 Original Equipment
Manufacturers ("OEM") 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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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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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
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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 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;
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- the vesting of exclusive authority in the Board of Directors (except as
otherwise required by law) to call special meetings of stockholders; and
- 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.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS
The Company has historically derived the majority of its revenues from
a small number of customers, most of whom are significantly larger companies.
The Company's failure to generate as much revenue as expected from these
customers or the failure of these customers to purchase the Company's products
would seriously harm the Company's business. Accordingly, present and future
customers may terminate their purchasing arrangements with the Company,
significantly reduce or delay their orders or seek to renegotiate their
agreements on terms less favorable to the Company. Furthermore, in any future
negotiations the Company may be subject to the perceived or actual leverage the
customers may have given their relative size and importance to the Company. Any
termination, change, reduction or delay in orders could seriously harm the
Company's business, financial condition and results of operations. Accordingly,
unless and until the Company can diversify and expand its customer base, the
Company's future success will significantly depend upon the timing and size of
future purchases by the Company's largest customers and the financial and
operational success of these customers.
The loss of any one of the Company's major customers or the delay of
significant orders from such customers, even if only temporary, could reduce or
delay the Company's recognition of revenues, harm the Company's reputation in
the industry and reduce the Company's ability to accurately predict cash flow,
and, as a consequence, could seriously harm the Company's business, financial
condition and results of operations.
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
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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 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.
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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 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.
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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 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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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 were able to 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 carry out transactions in euros, so this upgrade is not planned
for implementation until the fourth quarter of 2000.
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RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Instruments." This bulletin summarizes certain views of the SEC staff on
applying generally accepted accounting principles to revenue recognition in
financial instruments. We have not completed our assessment of the consolidated
financial statement impact of this bulletin. This bulletin is effective for the
fourth quarter of 2000.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential change in a financial instrument's value
caused by fluctuations in interest and currency exchange rates and equity and
equity and commodity prices. Our operating activities expose us to many risks
that are continually monitored, evaluated, and managed. Proper management of
these risks helps reduce the likelihood of earnings volatility.
At June 30, 2000, approximately 19% of our accounts receivable were
denominated in Australian dollars due to the sale of DSL product from Interspeed
to a foreign customer during the three months ended June 30, 2000.
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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
On May 15, 2000, the Company held its 2000 Annual Meeting of
Stockholders (the "Annual Meeting"). At the Annual Meeting, stockholders of the
Company were asked to consider proposals (the "Proposals") (i) to elect one
Class II Director, to serve for a three-year term until the 2003 annual meeting
of stockholders and until his successor is duly elected and qualified, (ii) to
consider and act upon a proposal to approve an amendment to the Company's 1992
Stock Incentive Plan, as amended, (the "1992 Plan") to increase the number of
shares of the Company's common stock reserved for issuance under the 1992 Plan,
(iii) to consider and act upon a proposal to approve an amendment to the
Company's Amended and Restated 1992 Stock Purchase Plan (the "Purchase Plan") to
increase the number of shares of the Company's common stock subject to issuance
under the Purchase Plan, (iv) to consider and act upon a proposal to adopt an
amendment to the Company's Articles of Organization, as amended, increasing the
number of authorized shares of the Company's common stock, $.01 par value per
share, and (v) to consider and act upon a proposal to ratify and approve the
selection of Deloitte & Touche LLP as the Company's independent auditors for the
fiscal year ending December 31, 2000.
With regard to the election of Directors, W. Brooke Tunstall was
nominated to serve as a Class II Director of the Company until the 2003 annual
meeting; the other Directors of the Company whose terms of office as directors
continued after the Annual Meeting are as follows: David L. Chapman (Class I
Director), David W. Duehren (Class I Director), Robert G. Barrett (Class III
Director) and Eric R. Giler (Class III Director).
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With respect to the Proposals, the stockholders of the Company voted at
the Annual Meeting as hereinafter described. By a vote of 9,933,080 votes of
Common Stock in favor of W. Brooke Tunstall, in excess of a majority of the
eligible votes, with 696,106 votes against Mr. Tunstall. Mr. Tunstall was
elected as a Class II Director of the Company.
The stockholders of the Company approved an amendment to the 1992 Plan
by a vote of 3,899,263 votes in favor, in excess of a majority of eligible
votes, with 2,226,045 votes against, 153,812 votes abstaining and 4,350,066
broker non-votes.
The stockholders of the Company approved an amendment to the Purchase
Plan by a vote of 5,733,095 votes in favor, in excess of a majority of eligible
votes, with 390,888 votes against, 155,137 votes abstaining and 4,350,066 broker
non-votes.
The stockholders of the Company approved an amendment to the Articles
of Organization by a vote of 9,498,257 votes in favor, in excess of a majority
of eligible votes, with 982,791 votes against and 148,138 votes abstaining.
The stockholders of the Company ratified and approved the selection of
Deloitte & Touche LLP as the Company's independent auditors for the current
fiscal year by a vote of 10,466,932 votes in favor, in excess of a majority of
eligible votes, with 25,307 votes against and 136,947 votes abstaining
Item 5. Other Information
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
June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROOKTROUT, INC.
Date: August 11, 2000 By: /s/ Eric R. Giler
---------------------------------
Eric R. Giler
President
(Principal Executive Officer)
Date: August 11, 2000 By: /s/ Robert C. Leahy
---------------------------------
Robert C. Leahy
Vice President of Finance and
Operations and Treasurer
(Principal Financial and
Accounting Officer)
33
