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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
(Mark one)
[X] ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __.
Commission File No. 0-20698
BROOKTROUT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2184792
(State or other (I.R.S. Employer
incorporation or organization) Identification No.)
410 FIRST AVENUE, NEEDHAM, MASSACHUSETTS 02494
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (781) 449-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 22, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $350.0 million, based
on the closing price of $33.25 on such date of the Company's common stock on the
Nasdaq ("Nasdaq") National Market System.
As of March 22, 2000, 12,159,580 shares of common stock, $.01 par value
per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of (i) the Company's Annual Report for the fiscal year ended
December 31, 1999 are incorporated into Part II of this Form 10-K and (ii) the
Company's Proxy Statement relating to the 2000 Annual Meeting of Shareholders of
the Company is incorporated into Part III of this Form 10-K.
TRADEMARKS
"TR114", "TR114 Series", "TR112", "TRNIC", "TR Series", "Universal
Port", "BTStack323", "ActiveCall", "VoiceSentence", "FaxVision", "TermView",
"SpeakIt", "ReadIt", "RealSpeech", "PowerBlock", "TR2001", "Real-Time Fax",
"TR1000", "Vantage Series" "TR2000 Series", "TRxStream", "TR2001 SDK",
"SpeechPac", "BTGateway", "Vantage DSPM", "Vantage PCI Series", "RDSP Series",
"Ensemble Series", "RTNI Series", "RFAX FRS Series", "Prelude Series", "RealCT
API", "Prompt Studio", "AccuCall Wizard", "AccuSwitch", "AccuSpan", "AccuLock",
"Vedit", "RDSPtest", "AccuTalk", "AccuDigit", "AccuCall", "AccuRate",
"AccuPitch", "AccuTone", "AccuPulse", "SMI API", and "AnyCall Software" are
trademarks of Brooktrout, Inc. "Brooktrout, Inc.", "Brooktrout Technology",
"TruFax", "Show N Tel", "Instant RAS Series", "IRAS Series", "Netaccess Series",
and "Instant ISDN Software" are registered trademarks of Brooktrout, Inc. "MVIP"
is a trademark of Natural MicroSystems, Inc. "Touch-Tone" is a registered
trademark and "UNIX"is a trademark of AT&T. "Merlin" is a registered trademark
and "Legend", "Merlin Legend", "Merlin Mail", "Merlin Multi-Lingual Version",
"RealCT" and "Partner Mail" are trademarks of Lucent Technologies Inc.
("Lucent", formerly a division of AT&T) "Microsoft" and "MS-DOS" are registered
trademarks and "Microsoft Windows Sound System" and "Windows NT" are trademarks
of Microsoft Corporation. "OS/2" is a registered trademark of International
Business Machines Corp. "UnixWare" is a trademark of Univel. "QNX" is trademark
of QNX, Inc. "Speedview", "Speedtrap", "Interspeed, Inc.", "Interspeed 1000",
and "Interspeed 500" are registered trademarks of Interspeed, Inc.
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PART I
This Annual Report contains certain statements that are
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 (the "Act") and releases issued by the
Securities and Exchange Commission. The words "believe," "expect," "anticipate,"
"intend," "estimate" and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
ITEM 1. BUSINESS
Brooktrout, Inc. (the "Company") is a Massachusetts corporation founded
in 1984. During 1999, the Company changed its name from Brooktrout Technology,
Inc. to Brooktrout, Inc. The Company delivers communications hardware and
software products that enable applications for the new global telecommunications
network. The Company's mission is to collaborate with its customers so they can
bring innovative solutions to market quickly, increase business and expand into
new markets. The Company sells its products to system vendors, service
providers, and value-added resellers, or ("VARs"), both domestically and
internationally through a direct sales force and a two-tier distribution system.
The Company's international sales efforts, principally exports from the United
States, are initiated from corporate headquarters in the United States and
internationally located sales and support offices.
The Company is organized and reports the results of its operations in
the following three business units: 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.
Brooktrout Technology delivers innovative hardware and software
platforms that enable applications ranging from Internet Protocol ("IP")
telephony and embedded voicemail to wireless messaging for the new global
communications network. While the majority of the Company's revenues were
generated by internally developed products, acquisitions have also contributed
to the Company's growth. On June 30, 1997, the Company acquired the assets and
assumed certain liabilities of Netaccess, Inc. ("Netaccess"), a worldwide
supplier of Primary Rate and Basic Rate ISDN network interface products and
multiport modem products for standards-based, open remote access and computer
telephony systems. On December 17, 1998, the Company acquired the assets and
assumed certain liabilities of the Computer Telephony Products ("CTP") business
of Lucent Technologies, Inc ("Lucent"). The CTP business provides technologies
for the voice processing industry and manufactures hardware and software
components that connect PCs and LANs with telephone networks.
Brooktrout Software, which was acquired on May 26, 1996 as Technically
Speaking, Inc. ("TSI"), is a leading provider of voice solutions and services
for e-Business and the enterprise. Brooktrout Software's products reduce the
cost, time to market, and complexity of developing interactive voice response
("IVR"), Web/IVR, call management and unified messaging applications.
Additionally, Brooktrout Software has a professional services group that offers
Web/IVR and computer telephony integration ("CTI") consulting, custom voice
solution and application design and development, and systems integration.
During 1997, the Company formed Interspeed, a subsidiary that designs,
develops, and markets advanced high-speed data communication solutions based on
digital subscriber line ("DSL") technology. Interspeed's products enable data
communication service providers such as competitive local exchange carriers,
Internet service providers, and owners of multi-tenant units ("MTUs") to deliver
high-speed data access solutions to their customers utilizing existing copper
wire infrastructure. On September 24, 1999, Interspeed sold 2 million shares of
its common stock in an initial public offering (the "Offering") at a price of
$12 per share pursuant to a registration statement on Form S-1 (333-81071), as
amended, under the Securities Act of 1933, as amended. In the Offering, the
Company sold an additional 1.5 million shares of Interspeed common stock. In
October, the Company sold an additional 425,000 shares of common stock of
Interspeed at a price of $12 per share pursuant to the underwriters'
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over allotment option. After these transactions, the Company owns 6.075 million
shares of Interspeed's outstanding common stock, or approximately 57% of
Interspeed's common shares outstanding as of December 31, 1999.
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.
Effective electronic communication over the New Network is dependent
upon network infrastructure technology to weave together the many disparate
systems and applications that already exist with the new and emerging
technologies. The Company markets many of its Switching and Access products to
customers that are creating the infrastructure to support the New Network. The
Company believes that another important market for its products is the unified
messaging market. Hardware and software applications enable users to integrate
their voice, fax and e-mail messages into one location, accessible from their
phone or laptop. An equally important New Network market segment is the growing
e-Commerce market. The Company believes that business-to-business automation,
both wired and wireless, is an important growth area for the new economy and for
the Company. E-commerce and unified messaging are examples of the enhanced
communication services that we anticipate will continue to be developed for the
New Network. Each of the Company's operating segments is delivering products
that permit the transformation from Today's Network to the New Network.
BROOKTROUT'S PRODUCTS
Throughout its history the Company has looked beyond technology to
recognize niche opportunities and help customers exploit them. The Company
prides itself on learning about, meeting, and exceeding customer expectations
for features, standards support, scalability, reliability and price. The
Company's products are being used by customers that are developing products and
services for both Today's Network and the New Network. Brooktrout Technology's
products can be classified into the following product categories: switching and
access, messaging, and IP Telephony. This classification is based upon the
principle application enabled by the hardware and software products. The
following table describes Brooktrout Technology's, Brooktrout Software's and
Interspeed's principal products and the markets that they serve:
BROOKTROUT TECHNOLOGY SWITCHING AND ACCESS PRODUCTS
<TABLE>
<CAPTION>
Products Description Target Customers
- -------- ----------- ----------------
<S> <C> <C>
PRI/BRI WAN Interface boards Multi-span ISDN/T1/E1/BRI OEMs and system
boards for data, voice and video integrators implementing
applications available in data networking and
multiple bus types, including computer telephony
cPCI applications
Instant RAS Open Remote Access A family of remote access OEMs, VARs and system
Server boards software and hardware for integrators providing
industry standard platforms remote access solutions
providing analog and digital for office and
connectivity departmental applications
RTNI Series boards Network interface cards that OEMs and VARs adding voice
provide from 2 T1/E1 to 24 processing and call
analog interfaces; compatible switching PC systems
communication interfaces for the
RDSP and Vantage Series
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
TRNIC Series Network interface cards that Service provides, OEMs and
provide up to 24 channels, in VARs integrating fax and
either ISA or PCI form factors, voice systems with T1 lines
for connecting fax and voice
systems to T1 phone lines
Enhanced Call Control API An API which extends the TR Service providers, OEMs and
Series fax and voice development VARs developing
tools to incorporate high-speed applications for different
access products telephone systems worldwide
BROOKTROUT TECHNOLOGY MESSAGING PRODUCTS
Products Description Target Customers
- -------- ----------- ----------------
TR1000 Series boards TRxStream Series high density Service providers, OEMs and developers of
messaging platform that supports enhanced fax services
MVIP and SCbus configurations
Vantage Series boards 4 to 32 port ISA and PCI voice OEMs, VARs, application developers, and
and fax boards. The PCI boards system integrators developing highly
also include an optional H.100 scalable voice/fax solutions
interface
Prelude Series Half-size, low-cost, full VARs and OEMs developing voice processing
featured voice processing solutions
platforms for PC systems that
include the Duel 2-port analog
half-size cards, and the Quartet
4-port analog half-size cards
BROOKTROUT TECHNOLOGY MESSAGING PRODUCTS
Products Description Target Customers
- -------- ----------- ----------------
RDSP Series PC voice processing platforms OEMs and VARs developing
that include up to 24 ports of computer telephony applications.
voice Service providers,
TR114 Series Intelligent Fax & Voice Multichannel boards with advanced OEMs and VARs implementing medium
boards fax and voice processing to high density fax and voice systems
capabilities available with 2, 4,
8, 12 or 16 channels/boards
TruFax Series Fax boards 2 port fax boards providing an OEMs and VARs implementing work
entry port for fax server group and medium-size business
communications communication servers
RealComm 100 Software developers kit providing Service providers, OEMs and VARs
an open, standards-based, platform developing computer telephony ("CT")
solutions
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
RealCT Direct Provides developers with direct Service providers, OEMs and VARs
access to any device in a CT developing CT solutions
environment
TR Series API C-language application Service providers, OEMs and VARs
development software for the TR developing high performance fax
Series, TruFax boards and IP and voice applications with
telephony products specific custom requirements
MerlinMail and Voice messaging systems Provided to Lucent on a private
PartnerMail systems for designed for Lucent's Merlin label basis for sale to purchasers
Lucent Partner and Merlin Legend of Merlin Partner and Merlin
Telephone switches Legend telephone systems
Ensemble Series A compact PC platform designed as VARs and OEMs developing voice
a host for compact voice processing solutions
processing solutions
BROOKTROUT TECHNOLOGY IP TELEPHONY PRODUCTS
Products Description Target Customers
- -------- ----------- ----------------
TR2001 Series boards TrxStream Series high density IP Service providers and OEMs
Telephony platform that supports implementing medium and high
MVIP and SCbus configurations density "gateways" and other
IP telephony systems
Real-Time Fax API An API that reduces the cost and Service providers, OEMs and VARs
complexity of developing developing real-time fax gateways
real-time IP/Fax gateways
BROOKTROUT SOFTWARE PRODUCTS
Products Description Target Customers
- -------- ----------- ----------------
Show N Tel Windows NT, GUI based, rapid Service providers, OEMs and VARs
application development platform developing enterprise computer
for computer telephony telephony systems seeking an
applications easy-to-use application development
and prototyping tool
ActiveCall An add-on tool to Show N Tel Computer telephony system integrators
allowing developers to extend voice and VARs developing CTI and e-Business
response systems with advanced CTI solutions
capabilities
SpeakIt An add on module allowing Computer telephony system integrators
developers to add speech and VARs developing CTI and
interfaces e-Business solutions
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
RealSpeech An add on module allowing Computer telephony system integrators and
developers to add speech VARs developing CTI and e-Business
interfaces solutions
ReadIt An add-on module that allows Computer telephony system integrators and
developers to add text-to-speech VARs developing CTI and e-Business
functionality solutions
TermView An add-on module that allows Computer telephony system integrators and
developers to create VARs developing CTI and e-Business
applications that can leverage solutions
data stored in mainframes
INTERSPEED PRODUCTS
Products Description Target Customers
- -------- ----------- ----------------
Interspeed DART, Interspeed 500 and Single system devices which Internet service providers, owners
Interspeed 1000 DSL Access Routers include products providing of MTUs and competitive local
("DSLARs") complete DSL aggregation, exchange carriers
switching, IP Routing, and
Virtual Private Network ("VPN")
functions
</TABLE>
BROOKTROUT TECHNOLOGY SWITCHING AND ACCESS PRODUCTS
PRI/BRI ISDN/TI/E1 Interface Boards. The ISDN interface boards give
original equipment manufacturers ("OEMs") and systems integrators ease to
implement digital wide area network interface solutions. When combined with
Instant ISDN Software and Brooktrout's Simple Messaging Interface (SMI)
application programming interface, customers can develop data networking and
computer telephony solutions quickly with worldwide certifications. Boards are
available in several bus formats including ISA, PCI, and Compact PCI (cPCI) with
up to eight interfaces per board and include computer telephony interfaces such
as MVIP, H.100 and H.110.
Instant Remote Access Server Products. Introduced originally as the
Multiport Modem product, the Instant RAS product family provides remote access
capability for industry standard platforms, such as Microsoft's Windows NT
Server. These products are designed for end users requiring economical access to
corporate networks through a variety of connection mechanisms, including analog
modem and digital ISDN interfaces. Instant RAS products provide reliable, easy
to install and maintain, and low price per port connections for small offices,
branch offices, departments of larger corporations, and small Internet Service
Providers. These products leverage the Company's expertise in developing network
interface products for its OEM partners.
RTNI Series. This is a family of advanced telephony network interface
cards that offer OEM and VAR developers a reliable, flexible and scalable
solution for adding voice processing and call switching to PC systems. The RTNI
family includes: 2 T1 (48 channels), 2 E1 (60 channels), and 24 analog
interfaces. Each network interface card provides a T1/E1 compatible and analog
communication interface for the RDSP and Vantage Series voice and fax platforms
through the MVIP bus.
TRNIC Series. Network interface cards that provide a seamless, easy
path to connect TR114 fax and voice systems to digital telephone lines. The
TRNIC's are single slot ISA and PCI add-in cards that provide an interface to a
North American T1 phone line for up to 24 fax and voice channels via the PEB or
MVIP telephony bus.
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Enhanced Call Control API. The Company introduced an Enhanced Call
Control application programming interface ("API") which extends its TR Series
fax and voice development tools to incorporate the Company's Primary Rate and
Basic Rate ISDN products. The Enhanced Call Control API includes a set of high
level call control functions which enable developers to easily incorporate the
Company's ISDN products into their applications without requiring the developer
to learn ISDN or API specifics. This simplifies development by allowing
developers to write a single application that can be used in many different
system implementations, from low density to high density, using a variety of
telephony services.
BROOKTROUT TECHNOLOGY MESSAGING PRODUCTS
TR1000 Series. The TR1000 is a high density messaging platform within
Brooktrout Technology's TrxStream Series. It supports up to 60 channels of voice
and intelligent fax support in a variety of port configurations. The TR1000
supports MVIP and SCbus configurations. In the past, developers of messaging
systems needed to use separate hardware for voice and separate hardware for fax,
increasing development complexity and system costs. By combining high density
voice and fax resources onto a single card, the TR1000 allows for simplified
development and faster time to market for enterprise and service provider
applications for the New Network. These New Network applications include unified
messaging, interactive voice response, digital recording, PC-PBX, call centers,
and web-based messaging services. The TRxStream platform is based on a common
architecture that scales from high-capacity service provider requirements down
to the lower-density requirements of the enterprise and workgroup markets.
The Vantage Series. The Vantage Series are versatile voice processing
platforms for developing robust, highly scalable, high density applications on a
variety of platforms. The Vantage Series are universal port boards that provide
from 4 to 32 ports of voice on a single resource card, in either ISA or PCI form
factors. The industry-leading Vantage PCI series includes optional H.100 open
standards interfaces, international approvals including CTR-21, and is ideal for
messaging and digital recording applications. This provides OEMs, VARs,
application developers and system integrators the ability to offer voice
solutions which can be packaged to better meet market demand.
Prelude Series. The Prelude series is a family of half-size, low-cost,
full featured voice processing platforms for PC systems. The Prelude Series
include the Duet 2-port analog half-size card, and the Quartet 4-port analog
half-size card that enables developers to build voice systems based on
"miniature" PC architecture, reducing overall costs while maintaining full voice
processing functionality.
RDSP Series. The RDSP Series are PC voice processing platforms that
provide developers with proven voice processing for ISA bus-compatible
computers. The RDSP Series includes up to 24 ports of voice on a single resource
card that supports development of robust solutions for messaging, digital
recording, and other computer technology applications.
TR114 Series. The TR114 Series Intelligent boards are designed for high
performance fax and fax & voice messaging systems, such as those used by
telecommunications service providers, messaging system vendors and network
communication server vendors. The TR114 Series Intelligent boards offer full fax
and voice processing on each channel of a multi-channel board. Advanced fax and
voice features, such as file conversions and file transfer protocols, are
supported on the TR114 Series. Boards are available in a range of
configurations; with two, four, eight, twelve or sixteen channels per board. The
TR114 Series boards are designed to be approved by telecommunications regulatory
agencies worldwide and have been approved for use in more than 30 countries
including the United States, Japan, England, France, and Germany.
The range of the TR114 Series configurations allows developers
flexibility in designing systems from small corporate systems to large telephone
company service systems in a cost effective manner. The TR114 Series two and
four channel analog boards support loop start, DID, and Basic Rate ISDN
telephone service. The TR114 Series boards are designed to be used in ISA and
PCI-bus computers which may be used as platforms for smaller systems, and
special purpose computers providing expansion slots for up to 20 boards to serve
the needs of large service providers. TR114 Series four, eight, twelve and
sixteen channel digital boards with interfaces for popular Pulse Code Modulation
("PCM") highways, such as MVIP, SC Bus and PCM Expansion Bus ("PEB"), offer
developers
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options in designing systems for digital network services (such as T1, E1 and
ISDN) or with other resources, such as voice recognition, from other vendors.
TruFax Series. The TruFax Series fax boards are fax processing boards
designed for small to medium scale, general purpose fax servers and systems.
TruFax Series products incorporate many of the functions that contribute to the
high reliability of TR114 Series products but do not support many of their
advanced fax features, or voice processing. TruFax Series products are
lower-priced than TR Series products. The first TruFax Series product, the
TruFax 200, is a two channel fax board. At the core of each channel is a fax
modem controlled by a microprocessor. The TruFax 200 is available with loop
start telephone system interfaces.
RealComm 100. RealComm 100 is Brooktrout Technology's implementation of
the ECTF(TM)'s S.100 Revision 2 media server that meets customers' needs for
standards based communications servers. It is offered as a software developers
kit ("SDK"), providing developers with an open, standards-based platform for
developing computer telephony ("CT") applications. RealComm 100 enables
developers to build next generation innovative electronic communications
solutions for call centers, interactive voice response, enhanced call services,
automated attendant, directory services and unified messaging. The RealComm 100
communications reduces time to market and provides investment protection by
implementing rich resource management services and hardware abstraction that
enables scalable, distributed applications.
RealCT Direct. Brooktrout Technology supports all major PC operating
systems through operating system device drivers. These drivers provide the
interface between the operating system and the Brooktrout Technology hardware.
The low level APIs for all operating systems are called the RealCT Direct APIs.
RealCT Direct is offered as a SDK and includes all the low-level APIs and
drivers. RealCT Direct provides developers with direct access to any device in a
computer telephony environment. This direct access enables developers to create
applications with fast execution time and direct control over all devices in the
system. The application has less code, resulting in faster execution and smaller
program size. Using this driver-level control, developers can create powerful,
robust applications that take full advantage of processor and other system
resources.
TR Series API. The TR Series API enables developers to quickly develop
sophisticated fax and voice applications. This API is a complete C language
library of fax, voice, tone signaling and call processing function calls. It
also includes BTStack323 - an H.323 protocol stack, time-saving sample
applications, utilities and debugging tools. The API is operating-system
independent and will support most operating systems, including Windows NT, UNIX,
UnixWare, AIX, Solaris, QNX, OS/2, Windows 95 and MS DOS. Applications developed
with the API run on all of the Company's TR Series and TruFax Series products
that support the features.
Merlin Legend Mail and Partner Mail. Since 1990, the Company has been
the supplier of the Merlin Mail, Partner Mail, and Merlin Legend Mail voice
messaging/automated attendant system for the Lucent Technology, Inc. ("Lucent")
Merlin small business telephone system. In mid 1999, Lucent released an internal
product that replaced the Company's products. Therefore, sales of this product
going forward will be limited to field replacement units and repairs.
The Ensemble Series. The Ensemble Series is a flexible, low-cost
PC-based platform designed as an ideal host for compact voice processing
solutions. The Ensemble Line consists of various configurations of compact PC
platforms bundled with Brooktrout cards. This one-stop shopping solution
provides VARs and OEMs developing voice processing solutions a unique and
flexible combination, offering superior performance over other compact platforms
while priced less than if the components were sold separately.
BROOKTROUT TECHNOLOGY IP TELEPHONY PRODUCTS
TR2001 Series. The TR2001, a product within Brooktrout Technology's
TRxStream Series, is a high density IP Telephony platform that allows developers
to create more reliable, scalable service provider-level IP Telephony gateways
and applications for the New Network. The TR2001 platform can operate in a dual
Pentium configuration that helps to minimize host processor loads and provides a
high degree of scalability. In addition, for developers who want the same degree
of reliability and scalability in a single chassis, the TR2001 now features
multi-board synchronization which allows four boards in a single chassis to
handle up to 240 simultaneous calls. TR2001 supports MVIP and Scbus
configurations. The TRxStream platform is based on a common architecture that
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scales from high-capacity service provider requirements to the lower-density
requirements of the enterprise and workgroup markets.
Real-Time Fax API. Real-Time Fax API, when used with the Company's TR
Series fax and voice API and TR114 Series boards, reduces the complexity of
developing IP Fax gateways. Developers can develop and deploy a real-time IP Fax
system today and migrate seamlessly to future real-time IP Fax standards such as
T.Ifax2.
BROOKTROUT SOFTWARE PRODUCTS
Show N Tel. Show N Tel is a leading Windows NT rapid application
development platform for interactive communication applications that integrate
phones, PCs and the Internet. Corporate professionals and integrators can
quickly and efficiently deliver reliable and powerful communication solutions
such as Wireless Web, Call Back, Contact Management and Unified Messaging. These
solutions allow web-based information to be shared with telephone users,
strengthening customer relationships while increasing profits and market share.
ActiveCall. The Company introduced ActiveCall, an add-on to its Show N
Tel application development platform. ActiveCall includes server-side tools for
collecting, tracking, and managing call information and exchanging data with
client applications (screen pop); components for adding telephony functions to
both off-the-shelf help-desk and telemarketing software, as well as custom
applications; and switch "middleware" links via TSAPI, TAPI, and native PBX
APIs. ActiveCall addresses the growing market for call center automation and
telecommunications-based messaging solutions, allowing developers to extend
voice response systems with advanced CTI capabilities, and reduce the cost,
complexity, and time to market for delivering CTI solutions.
SpeakIt. Add-on module that allows developers to add large vocabulary,
multi-language, speech interfaces to Show N Tel and ActiveCall applications.
This discrete speech recognition toolkit is based on Philips Speech Processing
technology.
RealSpeech. Add-on module that allows developers to add large
vocabulary, multi-language, speech interfaces to Show N Tel and ActiveCall
applications. This natural language speech recognition toolkit is based on
Philips Speech Processing technology.
ReadIt. Add-on module that allows developers to add text-to-speech
functionality to their Show N Tel and ActiveCall applications. This TTS toolkit
is based on L&H technology.
TermView. Add-on module that allows developers to create Show N Tel and
ActiveCall applications that can leverage data stored in legacy mainframe
systems.
INTERSPEED PRODUCTS
Interspeed DART, Interspeed 500 and Interspeed 1000 DSLARs. The
Interspeed DART is the industry's first complete, low-density DSL solution that
enables service providers to deliver high-speed Internet access and other
advanced IP applications to the stand-alone professional office market. The
Interspeed 500 is designed for larger MTU and campus environment deployments.
The Interspeed 1000 is ideal for central office applications. All three products
include complete DSL signal concentration, Layer 2 switching, IP Routing, and
VPN functions in a single device, eliminating the need for service providers to
purchase these components separately, saving significant cost. With these
advanced products, Interspeed can meet service providers' complete DSL access
requirements, ranging from a small eight-port application, to a large campus.
CUSTOMERS, SALES AND MARKETING
The Company employs separate sales and marketing teams at Brooktrout
Technology, Brooktrout Software and Interspeed. Brooktrout Technology and
Interspeed market their products to OEMs, service providers, and to value-added
resellers ("VARs"). In addition to these customers, Brooktrout Software also
sells to certain end-users. Delivering Brooktrout Technology product to
enterprise customers is generally accomplished through a two-tier
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distribution arrangement with Tech Data Corporation, a leading networking
supplier, and Ingram Micro, a leading wholesale distributor of computer
technology products and services.
The Company ordinarily sells its products on the basis of purchase
orders received from customers. The Company has entered into agreements with
many of its customers, which establish terms and conditions for sales made under
these agreements from time to time. These agreements generally do not establish
any long-term fixed purchase or supply commitments for either party.
In 1997, 1998 and 1999, sales to Lucent, the Company's largest
customer, accounted for 30%, 22%, and 12%, respectively, of the Company's total
revenues. The Company sells essentially all of its major products to a number of
separate business units within Lucent, although sales of the Merlin Legend Mail,
Merlin Mail Multi-Lingual Version and Partner Mail systems have constituted 82%,
83% and 65% of the revenue from Lucent in 1997, 1998 and 1999, respectively.
Merlin Legend Mail and Partner Mail and other products are sold to Lucent under
purchase orders issued by Lucent on an as-required basis. During 1999 Lucent
designed a product that will replace the Merlin Legend Mail and Partner Mail
products and as a result future sales of these products will be limited to field
replacement units and repairs. While no other single customer accounted for more
than 10% of the Company's total revenue in 1997, 1998 or 1999, approximately 62%
of Interspeed's revenue for 1999 was from Cabletron Systems, Inc.
Service Providers and Original Equipment Manufacturers (OEMs)
Providers of enhanced telecommunications services develop, or purchase
from developers, large, complex systems incorporating the Company's products to
deliver electronic communications applications. These systems typically require
long development times and result in periodic deployments of large systems. OEMs
design, manufacture and market electronic communications systems that include
the Company's products. OEMs generally have long product design and development
processes that precede the release of products.
Making sales to both of these types of customers can be a complex and
time-consuming process that is often focused on technical requirements. To serve
these customers in North America, the Company sells its products through a
direct sales force deployed throughout the United States.
Value-added Resellers (VARs)
VARs typically purchase the Company's products for resale to an
end-user enterprise customer together with application software purchased from
an independent software vendor ("ISV"). The Company has established a network of
resellers, including many who are designated Brooktrout Authorized Resellers.
The Company employs direct sales people and manufacturers' representatives to
recruit, train and assist VARs. The Company also uses a two-tier distribution
system for some of its fax, voice, network interface and multiport modem
products, utilizing national distributors who then sell to VARs.
International
The Company sells its products to service providers, OEMs and VARs
internationally through a direct sales force organized by region. The Company
has established sales offices in Belgium, England, Germany and Singapore.
The Company's international sales efforts are initiated from corporate
headquarters in the United States and internationally located sales and support
offices. International sales, principally exports from the United States,
accounted for approximately $13.7 million, or 19% of revenue, for the year ended
December 31, 1997, $20.2 million, or 20% of revenue, for the year ended December
31, 1998 and $32.4 million, or 23% of revenue, for the year ended December 31,
1999.
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
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depending on the product and the jurisdiction. The Company cannot assure you
that it will not encounter delays in obtaining approval in a foreign
jurisdiction. The Company, its distributors or its customers have received
product approvals for the Company's fax and voice products from agencies in
Australia, Canada, France, Germany, Hong Kong, Korea, Italy, Japan, Malaysia,
the Netherlands, New Zealand, Singapore, Sweden, Switzerland, Mexico, Ireland,
Norway, Denmark, India, Czech Republic, the United Kingdom, Austria, Belgium,
Finland, Greece, Luxembourg, Portugal, Spain, China, Thailand, Argentina,
Israel, South Korea, Russia, South Africa, Iceland and the United States.
Brooktrout Technology Partner Connection Program
Brooktrout Technology has established a Partner Connection Program for
OEMs, service providers and VARs. Brooktrout's mission is to be a true partner
in creating innovative solutions for the new global communications network.
Brooktrout Technology intends to assist its partners by collaborating with them
on new ideas, by helping them expand into new markets, by accelerating their
time to market for applications and by working together to deliver innovative
products and services. The participants in the Partner Connection Program
receive technical support, training, a quarterly newsletter and marketing
assistance on a priority basis; which the Company believes facilitates
development and deployment of their solutions throughout the world.
TECHNICAL SUPPORT
The Company seeks to deliver unmatched support and service to
customers. By listening to customers and attempting to thoroughly understanding
their requirements, the Company believes it can provide innovative high-value
products which meet or exceed customer expectations. Beyond delivery, the
Company backs its products with responsive, engineering level support. Many of
the Company's technical support staff members hold bachelor's degrees in
electrical engineering or computer science. Staff members place the highest
priority on providing timely, accurate information as well as advice on how to
take advantage of the Company's sophisticated product line. The Company's
technical support personnel have been a source of product improvements and new
features and functions due to close working relationships with customers. The
Company's technical support activities represent an integral element of its
marketing strategy. The Company believes that its technical support capability
represents a significant competitive advantage.
In March 2000, Brooktrout Technology increased the warranty on its
generally available network interface and signal processing products to five
years from the date of purchase from Brooktrout Technology. Products purchased
on or after January 1, 2000 will be covered under this new warranty. For
hardware products purchased before January 1, 2000, Brooktrout Technology
warrants against defects in materials and workmanship generally for twelve to
thirty-six months from the date of purchase. Brooktrout Software offers a one
year warranty on the hardware components within its systems and offers a limited
warranty on software. Both Brooktrout Technology and Brooktrout Software have
provided extended warranties to certain customers under contractual agreements
or for additional consideration.
Interspeed warranties on products extend for twelve months from the
date of purchase from Interspeed. There are a variety of hardware maintenance
and support programs tailored to customers' specific requirements that are
available for products no longer under warranty. These programs include
agreements to provide service on a time and materials basis and annual service
contracts based on a percentage of the cost of the product. To date, Interspeed
revenues attributable to customer service and support services have been
immaterial.
PRODUCT DEVELOPMENT
The market for electronic communications products is generally
characterized by rapid technological change, changes in customer requirements,
frequent new product introductions and enhancements and emerging industry
standards. The Company focuses significant resources on improving its products
in response to changes in operating systems, application software, computer and
telephony hardware, networking software, programming tools and computer language
technology. During the years ended December 31, 1997, 1998 and 1999, the Company
spent approximately $13.6 million, $22.1 million and $28.8 million, or 19%, 22%
and 20% of revenue, respectively, on research and development. Research and
development expenses have been charged to operations as incurred. The Company is
continuing its development efforts for its current products, as well as
developing next generation
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<PAGE> 13
versions of its current products. The Company believes significant investments
in product development are required to remain competitive. As a consequence, the
Company intends to continue to increase the dollar amount of its product
development expenditures in the future.
The Company believes that its software and hardware development team
provides a significant competitive advantage for the Company. The team is
comprised of members with experience in voice telephony processing, device
driver development, object-oriented software development, graphical user
interface development, and computer networking. The Company believes this
assembly of diverse technical expertise contributes to the highly integrated
functionality of its products. The Company's ability to attract and retain
highly qualified employees will be one of the principal determinants of its
success in maintaining technological leadership.
COMPETITION
The Company is in direct competition with companies offering similar
products or products responsive to similar applications. In addition, there is
always the potential for new entrants into the Company's markets by other
companies in related computer and communications companies including the
Company's customers and suppliers. The Company believes that the principal
competitive factors affecting the market for the Company's products and services
include product functionality and features, product quality, performance and
price, ease of product integration, and quality of customer support services.
The relative importance of each of these factors depends upon the specific
customer environment. Although the Company believes that its products and
services currently compete favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than the Company. The Company's present or future competitors may
be able to develop products comparable or superior to those developed by the
Company, adapt more quickly than the Company to new technologies, evolving
industry trends or customer requirements, or devote greater resources to the
development, promotion and license of their products than the Company.
Accordingly, there can be no assurance that competition will not intensify or
that the Company will be able to compete effectively in its market.
The Company expects that it will face increasing pricing pressures from
its current competitors and new market entrants. The Company's competitors may
engage in pricing practices that cause the Company to reduce the average selling
prices of its products. To offset declining average selling prices, the Company
believes that it must successfully develop and introduce on a timely basis new
products or products that incorporate new features that can be sold at gross
margins comparable to those on existing products. To the extent that such new
products are not developed in a timely manner, do not achieve customer
acceptance, or do not generate comparable gross margins, the Company's
profitability may decline.
BACKLOG
At December 31, 1999, the Company's backlog of orders for products and
services was approximately $9.4 million compared with approximately $9.0 million
at December 31, 1998. All of the backlog is expected to be shipped or provided
before the end of 2000. All orders believed to be firm for products or services
to be shipped or provided in the future are included in the backlog. The Company
regards all orders as firm orders and has experienced an order cancellation rate
in the past which the Company considers to be immaterial, although no assurance
can be given that adverse effects may not result from order cancellations in the
future. Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of actual sales for any particular future period. The period of
time between placement of an order and delivery of the product varies from one
day for certain TR Series products to ten months for certain OEM systems
products.
MANUFACTURING
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The Company's manufacturing operations consist primarily of final
assembly and testing of components, systems and subsystems. The Company tests
its products at various stages in the manufacturing process. Each product
undergoes a final load and functional test at the Company's Needham,
Massachusetts, Salem, New Hampshire or North Andover, Massachusetts facility
prior to shipment.
The Company uses independent manufacturers to perform printed circuit
board assembly and testing. The Company believes it has good relationships with
its subcontractors and has generally experienced timely delivery of products and
satisfactory quality with respect to products manufactured by subcontractors.
The Company's Needham, Massachusetts facility achieved ISO 9002 certification
and the Company's Salem, New Hampshire facility achieved ISO 9001 certification.
PROPRIETARY TECHNOLOGIES
The Company does not hold patents on a large part of its product line.
The Company's software and firmware are protected by copyright laws. Because
on-board and downloadable firmware represent an important element of the value
of the Company's hardware products, the Company believes that it obtains
significant protection for its proprietary interest in its hardware products, as
well as its software products, from copyright laws. Certain design features,
including ASICs (application specific integrated circuits), software and
firmware, receive some protection under trade secret laws. Each employee of the
Company has executed a proprietary information agreement designed to protect the
trade secrets of the Company, inventions created in the course of employment
with the Company and other proprietary information of the Company. There can be
no assurance, however, that copyright and trade secret protection will be
sufficient to prevent competitors from developing software and other technology
similar to the software and other technology upon which the Company relies for a
significant portion of its revenue.
The Company has acquired licenses under certain patents covering
aspects of voice processing technology, and licenses from third parties of
software for its voice and fax products. The Company pays royalties under these
licenses with respect to its sales of certain products. The licenses generally
extend for the life of the patent in question (in the case of patents) or in
perpetuity (in the case of software), and are subject to termination only in the
event of a breach. Royalties constitute a percentage of sales of particular
products or product elements, or a fixed amount per unit of hardware or software
distributed, and do not account for a material part of the Company's cost of
product sold.
The Company has periodically received, and may receive in the future,
communications from third parties asserting patent rights with respect to
certain of the Company's products and features. The Company has entered into an
agreement in principal to settle one patent infringement case, which will not
have a material effect on the Company. There is no other pending litigation
against the Company regarding any of these claims, nor has the Company to date
believed it necessary to license any patent rights referred to in such
communications, except as described above and except for certain other minor
cases involving non payment of ongoing royalties.
EMPLOYEES
As of December 31, 1999, the Company had 471 full-time employees, of
which 186 were engaged in engineering and product development, 170 in sales,
marketing and technical support, 67 in administration, and 48 in manufacturing.
None of the Company's employees are represented by any labor union and the
Company believes its relations with its employees are good.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 15, 2000 are as
follows:
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<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eric R. Giler........................................... 44 President and Director
David W. Duehren........................................ 42 Vice President of Research and
Development, Clerk and Director
Patrick T. Hynes........................................ 41 Vice President of Advanced Product
Engineering and Director
Robert C. Leahy......................................... 47 Vice President of Finance and Operations
and Treasurer
R. Andrew O'Brien....................................... 41 Vice President of Business Development
Heather Magliozzi....................................... 37 Vice President of Corporate Communications
Michael Donoghue........................................ 38 General Manager, IP/Fax Technology
Division, Vice President
John Ison............................................... 44 General Manager, Voice Technology
Division, Vice President
Jonathan J. Sirota...................................... 58 General Manager, Data Technology Division,
Vice President
John M. Faiman.......................................... 46 Senior Vice President of Worldwide Sales
Mark D. Flanagan........................................ 46 President, Brooktrout Software, Inc., Vice
President, Brooktrout, Inc.
</TABLE>
Eric R. Giler is a Company founder and has been President and a
Director of Brooktrout since the Company's inception in 1984. Prior to founding
the Company, Mr. Giler worked primarily in the area of technical marketing and
sales as a product manager with Teradyne, Inc. and an applications engineering
manager for Intec Corp. Mr. Giler is the former Chairman of the Massachusetts
Telecommunications Council and a current board member. He received a Bachelor of
Science degree from Carnegie-Mellon University and a Master of Business
Administration degree from the Harvard Business School. Mr. Giler serves on the
board of Interspeed, Inc. and Netegrity, Inc. Mr. Giler also is a director of
various privately-held high technology corporations.
David W. Duehren is a Company founder and has been Vice President of
Research and Development and a Director of Brooktrout since the Company's
inception in 1984. Mr. Duehren is the former chairman of the Telecommunications
Industry Association Committee TR29.1, the subcommittee responsible for Group 3
fax enhancements, and also contributes to worldwide International
Telecommunications Union -- Telephony (ITU-T) facsimile standards. Mr. Duehren
is also a member of the Institute of Electrical Electronic Engineers (IEEE) and
has been a member of the ECTF work group on facsimile API standards. Mr. Duehren
received a Bachelor of Science degree and Master of Science degree in Electrical
Engineering from the Massachusetts Institute of Technology.
Patrick T. Hynes is a Company founder and has been Vice President of
Advanced Product Engineering since January 1994 and a Director of Brooktrout
from the Company's inception in 1984. Mr. Hynes was Vice President of
Engineering from the Company's inception to December 1993. Mr. Hynes is a member
of the Institute of Electrical Electronic Engineers (IEEE). Mr. Hynes received a
Bachelor of Science degree in Electrical
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<PAGE> 16
Engineering from the Massachusetts Institute of Technology and a Master of
Science degree in Electrical Engineering from Columbia University.
Robert C. Leahy has been Vice President of Finance and Operations and
Treasurer of Brooktrout since March 1988. Prior to joining Brooktrout, Mr. Leahy
held the position of corporate controller and treasurer for Cambridge Robotics.
Mr. Leahy is an active member in the Financial Executive Institute. Mr. Leahy
received a Bachelor of Science degree in accounting and a Master of Business
Administration degree from Bentley College.
R. Andrew O'Brien has been Vice President of Business Development of
Brooktrout since July 1998 and Vice President of Marketing and Business
Development from July 1993 to June 1998. Mr. O'Brien was Director of Marketing
and Business Development from January 1993 to June 1993. Prior to joining
Brooktrout, Mr. O'Brien was a consultant with McKinsey & Company, Inc. from
September 1986 to January 1993. Mr. O'Brien received a Bachelor of Arts degree
from Yale University and a Master of Business Administration degree from the
Harvard Business School.
Heather Magliozzi has been Vice President of Corporate Communications
of Brooktrout since August 1997. Ms. Magliozzi was Director of Marketing from
April 1996 to July 1997 and was Marketing Communications Manager from August
1994 to April 1996. Prior to joining Brooktrout, Ms. Magliozzi was a Marketing
Manager for NEC Technologies from January 1985 to July 1994. Ms. Magliozzi
received a Bachelor of Arts degree in English and Communications from Boston
College.
Michael Donoghue has been General Manager of the IP/Fax Technology
Division and Vice President of Brooktrout since March 1999. Mr. Donoghue was
Vice President of Worldwide Sales from January 1997 to March 1999 and has held
several other key positions since joining Brooktrout in 1987. Mr. Donoghue
received a Bachelor of Science degree from the University of Massachusetts.
John Ison has been General Manager of the Voice Technology Division and
Vice President of Brooktrout since April 1999. Prior to joining Brooktrout, Mr.
Ison was Vice President of Marketing at Live Picture, Inc. and President and CEO
at Newfire, Inc. Mr. Ison received a Bachelor of Science and a Master of Science
in Management from the Massachusetts Institute of Technology and a Master of
Science in Engineering from Dartmouth College.
Jonathan J. Sirota has been General Manager of the Data Technology
Division and Vice President of Brooktrout since September 1998. Mr. Sirota was
Vice President of Engineering from January 1994 to August 1998. Prior to joining
Brooktrout, Mr. Sirota was Senior Vice President of Engineering and Operations
for ERGO Computing, Inc. from March 1989 to January 1994. Mr. Sirota received a
Bachelor of Science degree in Electrical Engineering from Rensselaer Polytechnic
Institute and a Master of Science degree in Electrical Engineering from
Massachusetts Institute of Technology.
John M. Faiman has been Senior Vice President of Worldwide Sales since
November 1999. Prior to joining Brooktrout, Mr. Faiman was Senior Vice President
of Sales and Marketing for Simple Technology. Mr. Faiman has also held sales
management positions with Mountain Network Solutions, Arrow Electronics, and
Tech Data Corporation. Mr. Faiman received a Bachelor of Science degree in
economics from City University of New York.
Mark D. Flanagan has been Vice President of Brooktrout and President of
Brooktrout Software since January 1998. Prior to joining Brooktrout, Mr.
Flanagan was executive vice president of Lernout & Hauspie's Dictation Division
and general manager of its PC Applications Group. Previously, he held senior
management positions with International Data Group, Lotus Development
Corporation and International Thomson Organization. Mr. Flanagan holds a
Bachelor of Arts degree from the University of Rochester and he also attended
The Graduate School of Management at Boston College.
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<PAGE> 17
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.
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.
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<PAGE> 18
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.
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
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<PAGE> 19
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.
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
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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.
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;
20
<PAGE> 21
- 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.
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 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.
21
<PAGE> 22
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 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.
22
<PAGE> 23
THE COMPANY DERIVES A SIGNIFICANT PORTION OF ITS REVENUES FROM INTERNATIONAL
SALES.
Sales to customers outside North America accounted for approximately
23%, 20% and 19% of the Company's revenues in 1999, 1998 and 1997 respectively
and 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.
23
<PAGE> 24
ITEM 2. PROPERTIES
The Company's Brooktrout Technology operation has its principal
locations in leased facilities in Needham, Massachusetts, in Salem, New
Hampshire and in Los Gatos, California. In Needham, Massachusetts the Company
leases two stand-alone facilities, a 31,000 square foot manufacturing facility
and a 38,000 square foot office that accommodates corporate headquarters as well
as engineering, sales and marketing. Both Needham, Massachusetts facilities are
leased until 2006. In Los Gatos, California the Company leases an office of
approximately 33,000 square feet for engineering, sales, marketing and
administration. This lease expires on February 28, 2006. In Salem, New Hampshire
a 26,000 square foot leased facility is used for engineering, manufacturing,
sales, marketing and administrative operations. This lease expires on August 31,
2000.
The Company has recently signed a lease for approximately 22,000 square
feet of additional office space in Needham, Massachusetts to accommodate
corporate headquarters. This lease expires on March 31, 2005 with an option to
extend for seven years.
The Company has also signed operating leases for sales and support
offices in Belgium, Singapore, and the United Kingdom.
Brooktrout Software leases approximately 16,515 square feet in
Southborough, Massachusetts. This facility accommodates engineering, sales and
marketing, and technical support. The lease for this facility expires on April
30, 2001.
Interspeed leases a facility consisting of approximately 36,000 square
feet in North Andover, Massachusetts, under a lease expiring in 2004.
The Company believes that its present facilities are adequate for its
current needs and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
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. This settlement,
if completed, will not have a material impact on the Company's consolidated
financial position or results of operations. The arbitration proceedings have
been stayed pending final resolution of this settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
24
<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Information in response to this item appears under the caption "Stock
Market Information" of the Company's Annual Report for the year ended December
31, 1999, which is incorporated in this report by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this item appears under the caption
"Selected Consolidated Financial Data" of the Company's Annual Report for the
year ended December 31, 1999, which is incorporated in this report by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Information in response to this item appears under the caption
"Management's Discussion & Analysis of Financial Condition and Results of
Operations" contained in the Company's Annual Report for the year ended December
31, 1999, which is incorporated in this report by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this item appears under the caption
"Quantitative and Qualitative Disclosures about Market Risk" contained in the
Company's Annual Report for the year ended December 31, 1999, which is
incorporated in this report by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information in response to this item is contained in the Company's
Annual Report for the year ended December 31, 1999, which is incorporated in
this report by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. The information appearing under the caption "Information
Regarding Nominees and Directors" of the Company's Proxy Statement for its 2000
Annual Meeting of Stockholders is incorporated in this report by reference.
Executive Officers. Information with respect to executive officers
appears under the caption "Executive Officers" in Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item appears under the caption
"Executive Compensation" of the Company's Proxy Statement for its 2000 Annual
Meeting of Stockholders, which is incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item appears under the caption
"Ownership of Equity Securities" of the Company's Proxy Statement for its 2000
Annual Meeting of Stockholders, which is incorporated in this report by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item appears under the caption "Certain
Relationships" of the Company's Proxy Statement for its 2000 Annual Meeting of
Stockholders, which is incorporated in this report by reference.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following is included in Part II of this report, incorporated by
reference from the Company's Annual Report for the year ended December 31, 1999
filed as Exhibit 13 hereto:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report......................................................................
Consolidated Balance Sheets as of December 31, 1999 and 1998......................................
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997...........................................................
Consolidated Statements of Comprehensive Income (Loss) for
the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 1999, 1998 and 1997...............................................
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997...............................................
Notes to Consolidated Financial Statements........................................................
</TABLE>
(a) (2) Financial Statement Schedule
The following are contained on the indicated pages of this annual
report on Form 10-K:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report on Schedule..........................................................
Schedule IX Valuation and Qualifying Accounts.....................................................
</TABLE>
Schedules not listed above are omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
(a) (3) Exhibits
The following exhibits are filed as part of this report. Where such
filing is made by incorporation by reference to a previously filed statement,
such statement is identified.
Additional Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Title Page No.
--- ----- --------
<S> <C> <C>
2.1 Asset Purchase Agreement by and among BTGP, Inc. and Brooktrout
Technology Europe Limited dated December 17, 1998 is hereby
incorporated by reference from the Company's current report on
form 8-K filed with the Securities and Exchange Commission
("SEC") on December 29, 1998 (File No. 000-20698)
2.2 Asset Purchase Agreement by and among BTINH Operating Company, Inc. and
Netaccess, Inc. dated June 30, 1997 is hereby incorporated by reference
from the Company's current report on form 8-K filed with the SEC on July
14, 1997 (File No. 000-20698)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
No. Title Page No.
--- ----- --------
<S> <C> <C>
2.3 Amended and Restated Agreement and Plan of Merger by and among Brooktrout
Technology, Inc. and Technically Speaking, Inc. is hereby incorporated by
reference from the Company's current report on form 8-K filed with the SEC
on June 13, 1996 (File No. 000-20698)
3.1 Restated Articles of Organization of the Company are filed herewith
3.2 Articles of Amendment to the Restated Articles of Organization of the
Company are filed herewith
3.3 Amended and Restated By-laws of the Company is hereby incorporated by
reference from the Company's Registration Statement on Form S-1 with
respect to its initial public offering of Common Stock as initially filed
with the SEC on August 28, 1992 (File No. 33-51424)
10.1 Lease between the Company and Trustees of Needham 152 Second Avenue Trust
dated April 7, 1997 is hereby incorporated by reference from the Company's
Annual Report on Form 10-K for the Fiscal year ended December 31, 1997, as
filed with the SEC on March 30, 1998 (File No. 000-20698)
10.2 Lease between the Company and NAM Partners, L.P. dated December 28, 1998
is hereby incorporated by reference from the Company's Annual Report on
Form 10-K for the Fiscal year ended December 31, 1998, as filed with the
SEC on March 30, 1999 (File No. 000-20698)
10.3 Assignment and Assumption of Lease between the Company and Lucent
Technologies Inc. dated December 17, 1998 is hereby incorporated by
reference from the Company's Annual Report on Form 10-K for the Fiscal
year ended December 31, 1998, as filed with the SEC on March 30, 1999
(File No. 000-20698)
10.4 Lease between the Company and Pacific Gateway Properties, Inc., dated
August 15, 1995, as amended is hereby incorporated by reference filed from
the Company's Annual Report on Form 10-K for the Fiscal year ended
December 31, 1998, as filed with the SEC on March 30, 1999 (File No.
000-20698)
10.5 Brooktrout, Inc. 1992 Stock Incentive Plan is hereby incorporated by
reference from the Company's Registration Statement on Form S-8 filed with
the SEC on September 19, 1996 (File No. 333-12313)
10.6 Brooktrout, Inc. Amended and Restated 1992 Stock Purchase Plan is hereby
incorporated by reference from the Company's Registration Statement on
Form S-8 filed with the SEC on September 4, 1998 (File No. 333-62959).
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
No. Title Page No.
--- ----- --------
<S> <C> <C>
10.7 First Amendment to Brooktrout, Inc. Amended and Restated 1992 Stock
Purchase Plan is hereby incorporated by reference from the Company's
Registration Statement on Form S-8 filed with the SEC on September 4, 1998
(File No. 333-62959)
10.8 Second Amendment to Brooktrout, Inc. 1992 Stock Incentive Plan is hereby
incorporated by reference from the Company's Registration Statement on
Form S-8 filed with the SEC on September 4, 1998 (File No. 333-62959)
10.9 Third Amendment to Brooktrout, Inc. 1992 Stock Incentive Plan incorporated
by reference from the Company's Registration Statement on Form S-8 filed
with the SEC on October 12, 1999 (File No. 333-88803)
10.10 December 1999 Amendment to the 1992 Stock Incentive Plan is filed herewith
10.11 Brooktrout, Inc. 1999 Stock Incentive Plan is filed herewith
13 1999 Annual Report of Brooktrout, Inc. is filed herewith
21 List of Subsidiaries of the Company is filed herewith
23 Independent Auditors' Consent is filed herewith
27 Financial Data Schedule is filed herewith
</TABLE>
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BROOKTROUT, INC.
By: /s/ Eric R. Giler
-------------------------------
Eric R. Giler
President
Date: March 29, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Eric R. Giler President and Director (Principal March 29, 2000
- ---------------------------------------- Executive Officer)
Eric R. Giler
/s/ Robert C. Leahy Vice President of Finance March 29, 2000
- ---------------------------------------- and Operations and Treasurer
Robert C. Leahy (Principal Financial and
Accounting Officer)
/s/ David W. Duehren Vice President and Director March 29, 2000
- ----------------------------------------
David W. Duehren
/s/ Patrick T. Hynes Vice President and Director March 29, 2000
- ----------------------------------------
Patrick T. Hynes
/s/ Robert G. Barrett Director March 29, 2000
- ----------------------------------------
Robert G. Barrett
/s/ David L. Chapman Director March 29, 2000
- ----------------------------------------
David L. Chapman
/s/ W. Brooke Tunstall Director March 29, 2000
- ----------------------------------------
W. Brooke Tunstall
</TABLE>
30
<PAGE> 31
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Brooktrout, Inc.:
We have audited the consolidated financial statements of Brooktrout, Inc. and
subsidiaries (the "Company") as of December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999, and have issued our
report thereon dated February 3, 2000, which is incorporated by reference in
this Annual Report on Form 10-K. Our audits also included the financial
statement schedule of Brooktrout, Inc., listed in Item 14(a)(2) of this Annual
Report on Form 10-K. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 3, 2000
31
<PAGE> 32
SCHEDULE IX
BROOKTROUT, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
OF YEAR($) EXPENSES($) DEDUCTIONS($) ADDITIONS OF YEAR($)
---------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the year ended December 31, 1997 524 748 (108) -- 1,164
For the year ended December 31, 1998 1,164 958 (447) 638(1) 2,313
For the year ended December 31, 1999 2,313 824 (671) -- 2,466
ACCRUED WARRANTY COSTS:
For the year ended December 31, 1997 446 672 (268) -- 850
For the year ended December 31, 1998 850 948 (484) -- 1,314
For the year ended December 31, 1999 1,314 519 (529) -- 1,304
</TABLE>
(1) Allowance for doubtful accounts recorded in connection with the CTP
acquisition.
32
<PAGE> 1
Exhibit 3.1
The Commonwealth of Massachusetts
MICHAEL JOSEPH CONNELLY FEDERAL IDENTIFICATION
Secretary of State NO. 04-2814792
ONE ASHBURTON PLACE, BOSTON, MASS 02108
RESTATED ARTICLES OF ORGANIZATION
GENERAL LAWS, CHAPTER 156B, SECTION 74
This certificate must be submitted to the Secretary of the Commonwealth
within sixty days after the date of the vote of stockholders adopting the
restated articles of organization. The fee for filing this certificate is
prescribed by General Laws, Chapter 156B. Section 114. Make check payable to
the Commonwealth of Massachusetts.
---------
We, Eric R. Giler , President and
David W. Duehren , Clerk of
Brooktrout Technology, Inc.
- --------------------------------------------------------------------------------
(Name of Corporation)
located at 144 Gould Street, Needham, MA 02192
do hereby certify that the following restatement of the articles of organization
of the corporation was duly adopted at a meeting held on August 25, 1992, by
vote of 3,064,029 shares of Common Stock out of 3,196,353 shares outstanding,
1,066,667 shares of Series A Preferred Stock out of 1,066,667 shares
outstanding, and shares of out of
shares outstanding, being at least two-thirds of each class of stock outstanding
and entitled to vote and of each class or series of stock adversely affected
thereby: -
1. The name by which the corporation shall be known is: -
Brooktrout Technology, Inc.
2. The purposes for which the corporation is formed are as follows: -
To engage in the development, manufacture and distribution of
digital signal processing devices; and
To engage in and carry out any other business or other activity
permitted to a corporation organized under Chapter 156B of the
Massachusetts General Laws, whether or not referred to in the
preceding paragraph.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of
paper leaving a left hand margin of at least 1 inch for binding. Additions to
more than one article may be continued on a single sheet so long as each article
requiring each such addition is clearly indicated.
<PAGE> 2
3. The total number of shares and the par value, if any, of each class of
stock which the corporation is authorized to issue is as follows:
<TABLE>
<CAPTION>
WITHOUT PAR
VALUE WITH PAR VALUE
----------------- -----------------------------
NUMBER OF PAR
CLASS OF STOCK SHARES NUMBER OF SHARES VALUE
-------------- ----------------- ----------------- ---------
<S> <C> <C> <C>
Preferred None 100,000 $1.00
Common None 7,500,000 $ .01**
</TABLE>
*4. If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting
powers, qualifications, special or relative rights or privileges as to
each class thereof and any series now established:
See attached pages 1-3
*5. The restrictions, if any, imposed by the articles of organization upon
the transfer of shares of stock of any class are as follows:
None
*6. Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary
dissolution, or for limiting, defining, or regulating the powers of
the corporation, or of its directors or stockholders, or of any class
of stockholders:
See attached pages 4-7
*If there are no such provisions, state "None".
** See below for a description of the reverse stock split pursuant to which
outstanding shares of the previously authorized Common Stock, $.001 par value,
shall be converted to newly authorized shares of Common Stock, $.01 par value.
<PAGE> 3
BROOKTROUT TECHNOLOGY, INC.
RESTATED ARTICLES OF ORGANIZATION
ARTICLE IV.
CAPITAL STOCK
The total number of shares of all classes of stock which the Corporation
has authority to issue is 7,500,000, consisting of 7,500,000 shares of Common
Stock, $.01 par value per share (the "Common Stock") and, 100,000 shares of
preferred stock, $1.00 par value per share (the "Preferred Stock").
(a) Common Stock
Section 1. Voting Rights. The holders of shares of Common Stock shall be
entitled to one vote for each share so held with respect to all matters voted
on by the shareholders of the Corporation, subject in all cases to section (b)
of this Article IV and the voting rights described therein, if any, of any
holders of Preferred Stock.
Section 2. Liquidation Rights. Subject to the prior and superior rights
of any shares of Preferred Stock then outstanding, and subject to the prior
payment or satisfaction of or provision for all outstanding debts and
obligations of the Corporation, upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the holders of
Common Stock shall be entitled to receive the remaining funds to be
distributed. Such funds shall be paid to the holders of Common Stock pro rata
on the basis of the number of shares of Common Stock held by each of them.
Section 3. Dividends. Subject to the right of the Preferred Stock,
dividends may be paid on the Common Stock as and when declared by the Board of
Directors out of funds legally available therefor.
Section 4. Residual Rights. All rights accruing to the outstanding
shares of the Corporation not expressly provided for to the contrary herein or
hereunder (or in any amendment hereto) shall be vested in the Common Stock.
(b) Preferred Stock
Subject to any limitations prescribed by law or these Articles, the Board
of Directors of the Corporation is expressly authorized to provide for the
issuance of shares of Preferred Stock in one or more classes or one or more
series of stock within any class, and by filing a certificate pursuant to
applicable law of the Commonwealth of Massachusetts, to
<PAGE> 4
establish or change from time to time the number of shares to be included in
each such class or series, and to fix the designation, voting powers,
preferences, qualifications, privileges and rights of the shares of each such
class or series and any qualifications, limitations and restrictions thereof.
Any stock issued hereunder shall, in addition to its specific designation, be
generally known and referred to as "Preferred Stock." The Board of Directors
shall have the right to determine or fix by vote or votes providing for the
issuance of the shares thereof one or more of the following with respect to each
class or series of such Preferred Stock:
(a) The distinctive class or serial designation and the number of
shares constituting such class or series;
(b) The dividend rates or the amount of dividends to be paid on the
shares of such class or series, whether dividends shall be cumulative and,
if so, from which date or dates, the payment date or dates for dividends,
and the participating and other rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares of such
class or series;
(d) Whether the shares of such class or series shall be redeemable
and, if so, the price or prices at which, and the terms and conditions on
which, such shares may be redeemed;
(e) The amount or amounts payable upon the shares of such class or
series and any preferences applicable thereto in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such class or series shall be entitled to
the benefit of a sinking or retirement fund to be applied to the purchase
or redemption of such shares, and if so entitled, the amount of such fund
and the manner of its application, including the price or prices at which
such shares may be redeemed or purchased through the application of such
fund;
(g) Whether the shares of such class or series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any
other series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion price or
prices, or the rate or rates of exchange, and the adjustments thereof, if
any, at which such conversion or exchange may be made, and any other terms
and conditions of such conversion or exchange;
2
<PAGE> 5
(h) The price or other consideration for which the shares of such
class or series shall be issued;
(i) Whether the shares of such class or series which are redeemed or
converted shall have the status of authorized but unissued shares of
preferred stock and whether such shares may be reissued as shares of the
same or any other class or series of stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors of the
Corporation may deem advisable
Subject to the authority of the Board of Directors as set forth in clause
(i) above, any shares of Preferred Stock shall, upon reacquisition thereof by
the Corporation, be restored to the status of authorized but unissued Preferred
Stock under this section (b).
Except as specifically provided in these Articles, no vote of the holders
of Preferred Stock or Common Stock shall be a prerequisite to the designation
or issuance of any shares of any series of the Preferred Stock authorized by
and complying with the conditions of these Articles, and subject to the
authority of the Board of Directors as set forth above, the right to have such
vote being expressly waived by all present and future holders of the capital
stock of the Corporation.
3
<PAGE> 6
ARTICLE VI. A.
TRANSACTIONS WITH INTERESTED PERSONS
1. Unless entered into in bad faith, no contract or transaction by this
Corporation shall be void, voidable or in any way affected by reason of the fact
that it is with an Interested Person.
2. For the purposes of this Article, "Interested Person" means any person
or organization in any way interested in this Corporation whether as an officer,
director, stockholder, employee or otherwise, and any other entity in which any
such person or organization or this Corporation is in any way interested.
3. Unless such contract or transaction was entered into in bad faith, no
Interested Person, because of such interest, shall be liable to this Corporation
or to any other person or organization for any loss or expense incurred by
reason of such contract or transaction or shall be accountable for any gain or
profit realized from such contract or transaction.
4. The provisions of this Article shall be operative notwithstanding the
fact that the presence of an Interested Person was necessary to constitute a
quorum at a meeting of directors or stockholders of this Corporation at which
such contract or transaction was authorized or that the vote of an Interested
Person was necessary for the authorization of such contract or transaction.
ARTICLE VI. B.
STOCKHOLDERS' MEETINGS
Meetings of stockholders of this Corporation may be held anywhere in the
United States.
ARTICLE VI. C.
AMENDMENT OF BY-LAWS
The By-Laws may provide that the Board of Directors as well as the
stockholders may make, amend or repeal the By-Laws of this Corporation in
whole or in part, except with respect to any provision thereof which by law, by
these Articles or by the By-Laws requires action by the stockholders
4.
<PAGE> 7
ARTICLE VI. D
LIMITATION OF DIRECTOR LIABILITY
1. No director of this Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such liability;
provided, however, that this Article shall not eliminate or limit any liability
of a director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Sections 61 or 62 of Chapter 1563 of the General Laws of the Commonwealth
of Massachusetts or (iv) with respect to any transaction from which the director
derived an improper personal benefit.
2. No amendment or repeal of this Article shall adversely affect the
rights and protection afforded to a director of this Corporation under this
Article for acts or omissions occurring prior to such amendment or repeal.
3. If the Massachusetts Business Corporation Law is subsequently amended
to further eliminate or limit the personal liability of directors or to
authorize corporate action to further eliminate or limit such liability, then
the liability of the directors of this Corporation shall, without further action
of the Board of Directors or the stockholders of this Corporation, be eliminated
or limited to the extent permitted by the Massachusetts Business Corporation Law
as so amended.
ARTICLE VI. E.
CLASSIFIED BOARD OF DIRECTORS
1. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is contained in
the quotient arrived at by dividing the designated number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class III, and if such fraction is two-thirds, one of the extra directors shall
be a member Class III and one of the extra directors shall be a member of Class
II, unless otherwise provided from time to time by resolution adopted by the
Board of Directors. The Board of Directors shall designate the directors of each
class upon effectiveness of this provision.
5
<PAGE> 8
2. Terms of Office. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director is elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending December 31, 1992; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the Corporation's fiscal year ending December
31, 1993; and each initial director in Class III shall serve for a term ending
on the date of the annual meeting next following the end of the Corporation's
fiscal year ending December 31, 1994.
3. Allocation of Directors Among Classes in the Event of Increases or
Decreases in the Number of Directors. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he is a member
and (ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of office are to expire at the earliest date
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
4. Removal. Subject to the rights of the holders of any Preferred Stock
then outstanding, directors or the entire Board of Directors may be removed,
only by vote of the holders of sixty-six and two-thirds percent (66-2/3%) of
the shares then entitled to vote at an election of directors at a meeting of
the stockholders duly called and held for the purpose, only for (i) conviction
of a felony, (ii) declaration of unsound mind by order of court, (iii) gross
dereliction of duty, (iv) commission of an act involving moral turpitude, or
(vi) commission of an action which constitutes intentional misconduct or a
knowing violation of law if such action in either event results both in an
improper substantial personal benefit and a material injury to the Corporation.
ARTICLE VI. F.
ACTING AS A PARTNER
This Corporation may be a partner in any business enterprise which it
would have power to conduct by itself.
6
<PAGE> 9
ARTICLE VI. G
EXAMINATION OF BOOKS
Except as otherwise provided by law, no stockholder shall have any right
to examine any property or any books, accounts or other writings of the
Corporation if there is reasonable ground for belief that such examination will
for any reason be adverse to the interests of the Corporation, and a vote of
the directors refusing permission to make such examination and setting forth
that in the opinion of the directors such examination would be adverse to the
interests of the Corporation shall be prime facie evidence that such
examination would be adverse to the interests of the Corporation. Every such
examination shall be subject to such reasonable requirements as the Corporation
may establish in regard thereto.
YP-7572/B
7
<PAGE> 10
* We further certify that the foregoing restated articles of organization
effect no amendments to the articles of organization of the corporation as
heretofore amended, except amendments to the following articles 3, 4, 6
- -------------------------------------------------------------------------------
(*If there are no such amendments, state "None".)
Briefly describe amendments in space below:
The Articles of Organization were amended to provide:
1. For the authorization of 7,500,000 shares of Common Stock, $.01 par value,
and 100,000 shares of Preferred Stock, $1.00 par value;
2. For a 1-for-2 reverse stock split whereby each two shares of Common Stock,
$.001 par value, become one share of Common Stock, $.01 par value, with all
fractional shares to be redeemed by the corporation;
3. For the elimination of all authorized shares of Series A Preferred Stock;
4. That the rights, privileges and preferences of the Preferred Stock may be
determined by the Board of Directors without further shareholder action;
5. For limitation on stockholders' rights to examine the books of the
corporation;
6. For the division of the Board of Directors into three classes with each
class serving for a term of three years.
We further certify that the above-referenced shares were voted in favor of
a 1-for-2 reverse stock split whereby each two shares of Common Stock, $.001 par
value, become one share of Common Stock, $.01 par value, with all fractional
shares to be redeemed by the corporation, immediately upon the effectiveness of
these Restated Articles of Organization.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed
our names this 25th day of August in the year 1992
/s/ Eric R. Giler President
- -------------------------------------
/s/ David W. Duehren Clerk
- -------------------------------------
42
<PAGE> 1
Exhibit 3.2
FEDERAL IDENTIFICATION
NO. 042814792
-------------
/s/ JSD THE COMMONWEALTH OF MASSACHUSETTS
- ---------- WILLIAM FRANCIS GALVIN
Examiner
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(GENERAL LAWS, CHAPTER 156B, SECTION 72)
/s/ YE, RES, MB
- ---------------
Name
Approved
We, Eric R. Giler , *President
---------------------------------------------------
and David W. Duehren , *Clerk
-------------------------------------------------------
of Brooktrout Technology, Inc. ,
--------------------------------------------------------------
(Exact name of corporation)
located at: 410 First Avenue, Needham, Massachusetts 02494 ,
------------------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles
numbered:
One
------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5, and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held
on May 13, 1999, by vote of:
------ ----
9,832,447 shares of common stock, $.01 par value of 10,907,012
--------- ---------------------------- ----------
(type, class & series, if any)
shares outstanding,
shares of of
--------- ---------------------------- ----------
(type, class & series, if any)
shares outstanding, and
shares of of
--------- ---------------------------- ----------
(type, class & series, if any)
shares outstanding.
C [ ] (1) ** being at least a majority of each type, class or series
P [ ] outstanding and entitled to vote thereon:
M [ ]
R.A. [ ]
Voted: That the name of the Corporation be changed from
Brooktrout Technology, Inc. to Brooktrout, Inc.
* Delete the inapplicable words. ** Delete the inapplicable
clause.
(1) For amendments adopted pursuant to Chapter 156B, Section 70.
(2) For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form
is insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at least
4 1 inch. Additions to more than one article may be made on a single
- ---------- sheet so long as each article requiring each addition is clearly
P.C. indicated.
<PAGE> 2
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------------------------------------------
Common: Common:
- --------------------------------------------------------------------------------------------------------------------
Preferred: Preferred:
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- --------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------------------------------------------
Common: Common:
- --------------------------------------------------------------------------------------------------------------------
Preferred: Preferred:
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
---------------------------------------------------------.
SIGNED UNDER THE PENALTIES OF PERJURY, this 13th day of May, 1999.
/s/ Eric R. Giler, *President /
-------------------------------------
Eric R. Giler
/s/ David W. Duehren, *Clerk /
-------------------------------------
David W. Duehren
*Delete the inapplicable words.
<PAGE> 1
DECEMBER 1999 AMENDMENT
TO THE
BROOKTROUT TECHNOLOGY, INC.
1992 STOCK INCENTIVE PLAN
The Brooktrout Technology, Inc. 1992 Stock Incentive Plan, as amended
(the "Plan"), is hereby further amended as follows:
1. Section 1 is hereby amended by deleting the definition of "Disinterested
Person" in its entirety.
2. Section 1 is hereby further amended by deleting the definition of "ERISA"
in its entirety.
3. Section 2(a) is hereby amended by deleting the last sentence thereof in
its entirety.
4. Section 3(c) is hereby amended by adding the following sentence at the
end thereof:
"Any substitute Awards granted under the Plan shall not count against the
share limitation set forth in Section 3(a)."
5. Section 5(a)(iv)(B) is hereby deleted in its entirety and the following
substituted therefor:
"(B) Through the delivery (or attestation
to the ownership) of shares of Stock that have been purchased by the
optionee on the open market or that have been beneficially owned by the
optionee for at least six months and are not then subject to restrictions
under any Company plan. Such surrendered shares shall be valued at Fair
Market Value on the exercise date;"
6. Section 5(a)(iv)(C) is hereby amended by deleting the sentence "Payment
instruments will be received subject to collection." in its entirety, and
deleting the period at the end of the first sentence and substituting therefor a
semicolon followed by the word "or."
7. Section 5(a)(iv) is hereby further amended by adding the following
subsection (D) immediately following subsection (C):
<PAGE> 2
"(D) By the optionee delivering to the
Company a promissory note if the Board has expressly authorized the loan
of funds to the optionee for the purpose of enabling or assisting the
optionee to effect the exercise of his Stock Option; provided that at
least so much of the exercise price as represents the par value of the
Stock shall be paid other than with a promissory note."
8. Section 5(a)(iv) is hereby further amended by adding the following
sentence at the beginning of the last paragraph thereof:
"Payment instruments will be received subject to limitation."
9. Section 5(a)(iv) is hereby further amended by adding the following
sentence at the end of the last paragraph thereof:
"In the event an optionee chooses to pay the purchase price by
previously-owned shares of Stock through the attestation method, the
number of shares of Stock transferred to the optionee upon the exercise
of the Stock Option shall be net of the number of shares attested to."
10. Section 5(a)(v) is hereby amended by deleting the period at the end
thereof and substituting therefor the following:
", or by the optionee's legal representative or guardian in the event of
the optionee's incapacity. Notwithstanding the foregoing, the Committee,
in its sole discretion, may provide in the Award agreement regarding a
given Option that the optionee may transfer his Non-Qualified Stock
Options to members of his immediate family, to trusts for the benefit of
such family members, or to partnerships in which such family members are
the only partners, provided that the transferee agrees in writing with
the Company to be bound by all of the terms and conditions of this Plan
and the applicable Option."
11. Section 5(c)(iv) is hereby amended by deleting the last sentence thereof
in its entirety.
12. Section 9(b) is hereby amended by deleting the phrase "such tax
withholding obligation" appearing in the first sentence thereof and substituting
therefor the following:
"the minimum tax withholding obligation"
2
<PAGE> 3
13. Section 9(b) is hereby further amended by deleting the phrase "the
withholding amount due" appearing at the end of the first sentence thereof and
substituting therefor the following:
"the minimum withholding amount due"
14. Section 9(b) is hereby further amended by deleting the last sentence
thereof, including subsections (A) through (D) thereof, in its entirety.
15. Section 13 is hereby amended by adding the following subsection (d) at
the end thereof:
"(d) PAYMENT BY PROMISSORY NOTE. Any payment to
be made by a participant in the Plan to the Company for any reason under
the Plan may be satisfied by the delivery by such participant to the
Company of a promissory note if the Board has expressly authorized the
loan of funds to the participant for such purpose; provided that to the
extent any such payment represents the par value of Stock, such amount
shall be paid other than with a promissory note."
16. Section 15 is hereby amended by deleting said Section 15 in its entirety
and substituting therefor the following:
"Section 15 GOVERNING LAW.
This Plan and all Awards and actions thereunder shall be
governed by, and construed in accordance with, the laws of the
Commonwealth of Massachusetts, applied without regard to conflict of law
principles."
17. Except as so amended, the Plan in all other respects, is hereby
confirmed.
IN WITNESS WHEREOF, this December 1999 Amendment is effective as of this
___ day of December, 1999.
BROOKTROUT TECHNOLOGY, INC.
By:
---------------------------
3
<PAGE> 1
BROOKTROUT, INC.
1999 STOCK INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS.
The name of the plan is the Brooktrout, Inc. 1999 Stock Incentive Plan
(the "Plan"). The purpose of the Plan is to encourage and enable the employees
of Brooktrout, Inc. (the "Company") and its Subsidiaries who are not officers or
directors and upon whose judgment, initiative and efforts the Company largely
depends for the successful conduct of its business to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a
direct stake in the Company's welfare will assure a closer identification of
their interests with those of the Company, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards", except where referring to a particular
category of grant under the Plan, shall include Incentive Stock
Options, Non-Qualified Stock Options, Restricted Stock Awards,
Unrestricted Stock Awards and Performance Share Awards.
"Board" means the Board of Directors of the Company.
"Cause" means and shall be limited to a determination by the
Company's Chief Executive Officer in good faith that the participant
should be dismissed as a result of (i) any material breach by the
participant of any agreement to which the participant and the Company
are parties, (ii) any act (other than retirement) or omission to act by
the participant which may have a material and adverse effect on the
business of the Company or any Subsidiary or on the participant's
ability to perform services for the Company or any Subsidiary,
including, without limitation, the commission of any crime (other than
ordinary traffic violations), or (iii) any material misconduct or
neglect of duties by the participant in connection with the business or
affairs of the Company or any Subsidiary.
"Code" means the Internal Revenue Code of 1986, as amended,
and any successor Code, and related rules, regulations and
interpretations.
"Committee" means any Committee of the Board referred to in
Section 2.
"Disability" means disability as set forth in Section 22(e)(3)
of the Code.
"Fair Market Value" on any given date means the last reported
sale price at which Stock is traded on such date or, if no Stock is
traded on such date, the most recent date on which Stock was traded, as
reflected on the NASDAQ National Market
<PAGE> 2
System or, if applicable, any other national stock exchange on which
the Stock is traded.
"Option" or "Stock Option" means any option to purchase shares
of Stock granted pursuant to Section 5.
"Restricted Stock Award" mean Awards granted pursuant to
Section 6.
"Stock" means the Common Stock, $.01 par value per share, of
the Company, subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than
the Company) in any unbroken chain of corporations or other entities,
beginning with the Company if each of the corporations or entities
(other than the last corporation or entity in the unbroken chain) owns
stock or other interests possessing 50% or more of the total combined
voting power of all classes of stock or other interests in one of the
other corporations or entities in the chain.
SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT PARTICIPANTS
AND DETERMINE AWARDS.
(a) COMMITTEE. The Plan shall be administered by the
Board, or any committee thereof (the "Committee").
(b) POWERS OF COMMITTEE. The Committee shall have the
power and authority to grant Awards consistent with the terms of the Plan,
including the power and authority:
(i) to select the employees of the Company and
its Subsidiaries who are not officers or directors to whom Awards may
from time to time be granted;
(ii) to determine the time or times of grant,
and the extent, if any, of Stock Options and Restricted Stock, or any
combination of the foregoing, granted to any one or more participants;
(iii) to determine the number of shares to be
covered by any Award;
(iv) to determine and modify the terms and
conditions, including restrictions, not inconsistent with the terms of
the Plan, of any Award, which terms and conditions may differ among
individual Awards and participants, and to approve the form of written
instruments evidencing the Awards;
(v) to accelerate the exercisability or vesting
of all or any portion of any Option;
2
<PAGE> 3
(vi) to extend the period in which Stock Options
may be exercised;
(vii) to determine whether, to what extent, and
under what circumstances Stock and other amounts payable with respect
to an Award shall be deferred either automatically or at the election
of the participant and whether and to what extent the Company shall pay
or credit amounts equal to interest (at rates determined by the
Committee) or dividends or deemed dividends on such deferrals; and
(viii) to adopt, alter and repeal such rules,
guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms
and provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in
connection with the Plan; and to otherwise supervise the administration
of the Plan.
All decisions and interpretations of the Committee shall be binding on
all persons, including the Company and Plan participants.
(c) DELEGATION OF AUTHORITY TO GRANT AWARDS. The
Committee, in its discretion, may delegate to the Chief Executive Officer of the
Company all or part of the Committee's authority and duties with respect to
Awards, including the granting thereof. The Committee may revoke or amend the
terms of a delegation at any time but such action shall not invalidate any prior
actions of the Committee's delegate or delegates that were consistent with the
terms of the Plan.
SECTION 3. SHARES ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION.
(a) SHARES ISSUABLE. The maximum number of shares of
Stock reserved and available for issuance under the Plan shall be 250,000. For
purposes of this limitation, the shares of Stock underlying any Awards which are
forfeited, canceled, reacquired by the Company, satisfied without the issuance
of Stock or otherwise terminated (other than by exercise) shall be added back to
the shares of Stock available for issuance under the Plan so long as the
participants to whom such Awards had been previously granted received no
benefits of ownership of the underlying shares of Stock to which the Award
related. Subject to such overall limitation, shares may be issued up to such
maximum number pursuant to any type or types of Award. Shares issued under the
Plan may be authorized but unissued shares or shares reacquired by the Company.
(b) STOCK DIVIDENDS, MERGERS, ETC. In the event of a
stock dividend, stock split or similar change in capitalization affecting the
Stock, the Committee shall make appropriate adjustments in (i) the number and
kind of shares of stock or securities on which Awards may thereafter be granted,
(ii) the number and kind of shares remaining subject to outstanding Awards, and
(iii) the option or purchase price in respect of such shares. In the event of
any merger, consolidation, dissolution or liquidation of the Company, the
Committee in its sole discretion may, as to any outstanding Awards, make such
substitution or adjustment
3
<PAGE> 4
in the aggregate number of shares reserved for issuance under the Plan and in
the number and purchase price (if any) of shares subject to such Awards as it
may determine and as may be permitted by the terms of such transaction, or
accelerate, amend or terminate such Awards upon such terms and conditions as it
shall provide (which, in the case of the termination of the vested portion of
any Award, shall require payment or other consideration which the Committee
deems equitable in the circumstances).
(c) SUBSTITUTE AWARDS. The Committee may grant Awards
under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who concurrently become employees of the
Company or a Subsidiary as the result of a merger or consolidation of the
employing corporation with the Company or a Subsidiary or the acquisition by the
Company or a Subsidiary of property or stock of the employing corporation. The
Committee may direct that the substitute awards be granted on such terms and
conditions as the Committee considers appropriate in the circumstances. Any
substitute Awards granted under the Plan shall not count against the share
limitation set forth in Section 3(a).
SECTION 4. ELIGIBILITY.
Participants in the Plan will be such full or part-time employees of
the Company and its Subsidiaries who are not officers or directors and who are
responsible for or contribute to the management, growth or profitability of the
Company and its Subsidiaries and who are selected from time to time by the
Committee, in its sole discretion.
SECTION 5. STOCK OPTIONS.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve. All Stock Options granted under the
Plan are not "incentive stock options" as defined in Section 422 of the Code.
(a) STOCK OPTIONS GRANTED TO EMPLOYEES. The Committee in
its discretion may grant Stock Options to employees of the Company or any
Subsidiary; provided, however, that such employees are neither an officer nor a
director of the Company or any Subsidiary. Stock Options granted to employees
pursuant to this Section 5(a) shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(i) EXERCISE PRICE. The exercise price per share
for the Stock covered by a Stock Option granted pursuant to this
Section 5(a) shall be determined by the Committee at the time of grant
but shall be not less than 85% of Fair Market Value on the date of
grant.
(ii) OPTION TERM. The term of each Stock Option
shall be fixed by the Committee, but shall never exceed ten years.
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(iii) EXERCISABILITY; RIGHTS OF A STOCKHOLDER.
Stock Options shall become vested and exercisable at such time or
times, whether or not in installments, as shall be determined by the
Committee at or after the grant date. The Committee may at any time
accelerate the exercisability of all or any portion of any Stock
Option. An optionee shall have the rights of a stockholder only as to
shares acquired upon the exercise of a Stock Option and not as to
unexercised Stock Options.
(iv) METHOD OF EXERCISE. Stock Options may be
exercised in whole or in part, by giving written notice of exercise to
the Company, specifying the number of shares to be purchased. Payment
of the purchase price may be made by one or more of the following
methods:
(A) In cash, by certified or bank check
or by other instrument acceptable to the Committee;
(B) Through the delivery (or
attestation to the ownership) of shares of Stock
that have been purchased by the optionee on the open
market or that have been beneficially owned by the
optionee for at least six months and are not then
subject to restrictions under any Company plan. Such
surrendered shares shall be valued at Fair Market
Value on the exercise date;
(C) By the optionee delivering to the
Company a properly executed exercise notice together
with irrevocable instructions to a broker to
promptly deliver to the Company cash or a check
payable and acceptable to the Company to pay the
purchase price; provided that in the event the
optionee chooses to pay the purchase price as so
provided, the optionee and the broker shall comply
with such procedures and enter into such agreements
of indemnity and other agreements as the Committee
shall prescribe as a condition of such payment
procedure; or
(D) By the optionee delivering to the
Company a promissory note if the Board has expressly
authorized the loan of funds to the optionee for the
purpose of enabling or assisting the optionee to
effect the exercise of his Stock Option; provided
that at least so much of the exercise price as
represents the par value of the Stock shall be paid
other than with a promissory note.
Payment instruments will be received subject to collection. The delivery of
certificates representing shares of Stock to be purchased pursuant to the
exercise of a Stock Option shall be contingent upon receipt from the Optionee
(or a purchaser acting in his stead in accordance with the provisions of the
Stock Option) by the Company of the full purchase price for such shares and the
fulfillment of any other requirements contained in the Stock Option or
applicable provisions of law. In the event an optionee chooses to pay the
purchase price by previously-owned shares of Stock through the attestation
method, the number of shares of Stock transferred to the optionee upon the
exercise of the Stock Option shall be net of the number of shares attested to.
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(v) NON-TRANSFERABILITY OF OPTIONS. No Stock
Option shall be transferable by the optionee otherwise than by will or
by the laws of descent and distribution and all Stock Options shall be
exercisable, during the optionee's lifetime, only by the optionee, or
by the optionee's legal representative or guardian in the event of the
optionee's incapacity.
(vi) TERMINATION BY DEATH. If any optionee's
employment by the Company and its Subsidiaries terminates by reason of
death, the Stock Option may thereafter be exercised, to the extent
exercisable at the date of death, by the legal representative or
legatee of the optionee, for a period of 180 days (or such longer
period as the Committee shall specify at any time) from the date of
death, or until the expiration of the stated term of the Option, if
earlier.
(vii) TERMINATION BY REASON OF DISABILITY.
(A) Any Stock Option held by an
optionee whose employment by the Company and its
Subsidiaries has terminated by reason of Disability
may thereafter be exercised, to the extent it was
exercisable at the time of such termination, for a
period of twelve months (or such longer period as
the Committee shall specify at any time) from the
date of such termination of employment, or until the
expiration of the stated term of the Option, if
earlier.
(B) The Committee shall have sole
authority and discretion to determine whether a
participant's employment has been terminated by
reason of Disability.
(C) Except as otherwise provided by the
Committee at the time of grant, the death of an
optionee during a period provided in this Section
5(a)(vii) for the exercise of a Stock Option, shall
extend such period for 180 days from the date of
death, subject to termination on the expiration of
the stated term of the Option, if earlier.
(viii) TERMINATION FOR CAUSE. If any optionee's
employment by the Company and its Subsidiaries has been terminated for
Cause, any Stock Option held by such optionee shall immediately
terminate and be of no further force and effect; provided, however,
that the Committee may, in its sole discretion, provide that such stock
option can be exercised for a period of up to 30 days from the date of
termination of employment or until the expiration of the stated term of
the Option, if earlier.
(ix) OTHER TERMINATION. Unless otherwise
determined by the Committee, if an optionee's employment by the Company
and its Subsidiaries terminates for any reason other than death,
Disability, or for Cause, any Stock Option held by such optionee may
thereafter be exercised, to the extent it was exercisable on the date
of termination of employment, for three months (or such longer period
as the
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Committee shall specify at any time) from the date of termination of
employment or until the expiration of the stated term of the Option, if
earlier.
(x) FORM OF SETTLEMENT. Shares of Stock issued
upon exercise of a Stock Option shall be free of all restrictions under
the Plan, except as otherwise provided in this Plan.
(b) RELOAD OPTIONS. At the discretion of the Committee,
Options granted under this Section 5(a) may include a so-called "reload" feature
pursuant to which an optionee exercising an option by the delivery of a number
of shares of Stock in accordance with Section 5(a)(iv)(B) hereof would
automatically be granted an additional Option (with an exercise price equal to
the Fair Market Value of the Stock on the date the additional Option is granted
and with the same expiration date as the original Option being exercised, and
with such other terms as the Committee may provide) to purchase that number of
shares of Stock equal to the number delivered to exercise the original Option.
SECTION 6. RESTRICTED STOCK AWARDS.
(a) NATURE OF RESTRICTED STOCK AWARD. The Committee may
grant Restricted Stock Awards to any employees of the Company or any Subsidiary.
A Restricted Stock Award is an Award entitling the recipient to acquire, at no
cost or for a purchase price determined by the Committee, shares of Stock
subject to such restrictions and conditions as the Committee may determine at
the time of grant ("Restricted Stock"). Conditions may be based on continuing
employment and/or achievement of pre-established performance goals and
objectives. In addition, a Restricted Stock Award may be granted to an employee
by the Committee in lieu of a cash bonus due to such employee pursuant to any
other plan of the Company.
(b) ACCEPTANCE OF AWARD. A participant who is granted a
Restricted Stock Award shall have no rights with respect to such Award unless
the participant shall have accepted the Award within 60 days (or such shorter
date as the Committee may specify) following the award date by making payment to
the Company, if required, by certified or bank check or other instrument or form
of payment acceptable to the Committee in an amount equal to the specified
purchase price, if any, of the shares covered by the Award and by executing and
delivering to the Company a written instrument that sets forth the terms and
conditions of the Restricted Stock in such form as the Committee shall
determine.
(c) RIGHTS AS A STOCKHOLDER. Upon complying with Section
6(b) above, a participant shall have all the rights of a stockholder with
respect to the Restricted Stock including voting and dividend rights, subject to
non-transferability restrictions and Company repurchase or forfeiture rights
described in this Section 6 and subject to such other conditions contained in
the written instrument evidencing the Restricted Stock Award. Unless the
Committee shall otherwise determine, certificates evidencing shares of
Restricted Stock shall remain in the possession of the Company until such shares
are vested as provided in Section 6(e) below.
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(d) RESTRICTIONS. Shares of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise encumbered or disposed of
except as specifically provided herein. In the event of termination of
employment by the Company and its Subsidiaries for any reason (including death,
Disability, and for Cause), the Company shall have the right, at the discretion
of the Committee, to repurchase shares of Restricted Stock with respect to which
conditions have not lapsed at their purchase price, or to require forfeiture of
such shares to the Company if acquired at no cost, from the participant or the
participant's legal representative. The Company must exercise such right of
repurchase or forfeiture not later than the 90th day following such termination
of employment (unless otherwise specified in the written instrument evidencing
the Restricted Stock Award).
(e) VESTING OF RESTRICTED STOCK. The Committee at the
time of grant shall specify the date or dates and/or the attainment of
pre-established performance goals, objectives and other conditions on which the
non-transferability of the Restricted Stock and the Company's right of
repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or
the attainment of such pre-established performance goals, objectives and other
conditions, the shares on which all restrictions have lapsed shall no longer be
Restricted Stock and shall be deemed "vested."
(f) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The
written instrument evidencing the Restricted Stock Award may require or permit
the immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
SECTION 7. TAX WITHHOLDING.
(a) PAYMENT BY PARTICIPANT. Each participant shall, no
later than the date as of which the value of an Award or of any Stock or other
amounts received thereunder first becomes includable in the gross income of the
participant for Federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of any Federal,
state, or local taxes of any kind required by law to be withheld with respect to
such income. The Company and its Subsidiaries shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the participant.
(b) PAYMENT IN SHARES. A participant may elect to have
the minimum tax withholding obligation satisfied, in whole or in part, by (i)
authorizing the Company to withhold from shares of Stock to be issued pursuant
to any Award a number of shares with an aggregate Fair Market Value (as of the
date the withholding is effected) that would satisfy the withholding amount due,
or (ii) transferring to the Company shares of Stock owned by the participant
with an aggregate Fair Market Value (as of the date the withholding is effected)
that would satisfy the minimum withholding amount due.
SECTION 8. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
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(a) a transfer to the employment of the Company from a
Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to
another; or
(b) an approved leave of absence for military service or
sickness, or for any other purpose approved by the Company, if the employee's
right to re-employment is guaranteed either by a statute or by contract or under
the policy pursuant to which the leave of absence was granted or if the
Committee otherwise so provides in writing.
SECTION 9. AMENDMENTS AND TERMINATION.
The Board may at any time amend or discontinue the Plan and the
Committee may at any time amend or cancel any outstanding Award (or provide
substitute Awards at the same or reduced exercise or purchase price or with no
exercise or purchase price, but such price, if any, must satisfy the
requirements which would apply to the substitute or amended Award if it were
then initially granted under this Plan) for the purpose of satisfying changes in
law or for any other lawful purpose, but no such action shall adversely affect
rights under any outstanding Award without the holder's consent.
SECTION 10. STATUS OF PLAN.
With respect to the portion of any Award which has not been exercised
and any payments in Stock not received by a participant, a participant shall
have no rights greater than those of a general creditor of the Company unless
the Committee shall otherwise expressly determine in connection with any Award
or Awards. In its sole discretion, the Committee may authorize the creation of
trusts or other arrangements to meet the Company's obligations to deliver Stock
or make payments with respect to Awards hereunder, provided that the existence
of such trusts or other arrangements is consistent with the provision of the
foregoing sentence.
SECTION 11. GENERAL PROVISIONS.
(a) NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS.
The Committee may require each person acquiring shares pursuant to an Award to
represent to and agree with the Company in writing that such person is acquiring
the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange requirements have
been satisfied. The Committee may require the placing of such stop-orders and
restrictive legends on certificates for Stock and Awards as it deems
appropriate.
(b) DELIVERY OF STOCK CERTIFICATES. Delivery of stock
certificates to participants under this Plan shall be deemed effected for all
purposes when the Company or a stock transfer agent of the Company shall have
delivered such certificates in the United States mail, addressed to the
participant, at the participant's last known address on file with the Company.
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(c) OTHER COMPENSATION ARRANGEMENTS; NO EMPLOYMENT
RIGHTS. Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, including trusts, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
(d) PAYMENT BY PROMISSORY NOTE. Any payment to be made by
a participant in the Plan to the Company for any reason under the Plan may be
satisfied by the delivery by such participant to the Company of a promissory
note if the Board has expressly authorized the loan of funds to the participant
for such purpose; provided that to the extent any such payment represents the
par value of Stock, such amount shall be paid other than with a promissory note.
SECTION 12. EFFECTIVE DATE OF PLAN.
The Plan was adopted by the Board of Directors on December 8, 1999.
SECTION 13. GOVERNING LAW.
This Plan and all Awards and actions thereunder shall be governed by,
and construed in accordance with, the laws of the Commonwealth of Massachusetts,
applied without regard to conflict of law principles.
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Exhibit 13
1999 Brooktrout, Inc. Annual Report
Your Hook into the New Network
1999 Achievements
Sales and earnings grew to the highest levels in the Company's history.
Expanded support for a wide range of operating systems including support for the
LynxOS, QNX Neutrino, and Linux operating systems.
Initiated new partnerships with Motorola, Lotus, and Panasonic to offer
customers joint messaging solutions that incorporate Brooktrout products.
Continued to expand sales and distribution activities into the global markets of
Latin America, Asia, Europe, and Canada.
Introduced RealComm(TM) 100, an open standards-based platform to help developers
speed time-to-market and protect their software investment.
Strengthened the position of Brooktrout Software in the e-Business marketplace
as a major provider of specialized software and services that enable companies
to merge traditional telephone commerce systems with the Web.
Announced a Stock Repurchase Plan for up to one million shared of Brooktrout's
outstanding common stock.
Completed an initial public offering of Brooktrout's Interspeed subsidiary,
receiving approximately $20 million in cash. Brooktrout owns 57% of the shares
of Interspeed as of December 31st, 1999.
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Shareholder Letter:
Dear fellow shareholder:
It was an exciting year for Brooktrout in 1999. We firmly established a
leadership position as a true partner in creating innovative solutions for the
New Network. We achieved record sales and the highest earnings in the Company's
history and successfully completed an initial public offering for our Interspeed
operation that delivered a substantial investment return for shareholders.
Financially, it was a year for the record books. Brooktrout's core revenues grew
by approximately 35 percent in 1999 to $135.7 million compared with $100.8
million in 1998. Net income from core activity was approximately $13.7 million
or $1.18 per share. This compares with pro forma net income from core activity
of $10.3 million or $0.90 per share in 1998. Brooktrout's core activity excludes
the results from its investment in Interspeed and other investment activity.
During the year, we broadened our customer base significantly due, in part, to
the December 1998 acquisition of the Computer Telephony Products business of
Lucent Technologies Inc., with 26 customers at the million dollar level in 1999,
nearly double the 14 customers at that level in 1998. Also in 1999, there were
218 customers that did more than $100,000 in business with Brooktrout, an 80
percent increase over the 121 customers at that level in 1998.
A STRATEGIC VIEW OF THE MARKETPLACE
As the communications market has evolved in the past year, it has become clear
to us that Brooktrout is very well positioned to address two opportunities with
different dynamics. The first area, what we're calling Today's Network, consists
of current technologies such as products for fax, LAN fax, and voice mail. It
remains a significant business, and we anticipate it will remain so for the near
future. In the second area, which we call the New Network, we believe there are
several exciting growth opportunities. This business consists of the products we
supply for today's most promising, in our view, new communication technologies:
IP telephony, voice-over-DSL, wireless, unified messaging, and e-Business. Our
revenues in this New Network category grew by more than 80 percent in 1999,
while revenues in the Today's Network category grew by 15 percent. The New
Network is an exciting opportunity for Brooktrout since most of the Company's
major product introductions over the past two years have been aimed at these new
types of applications. We feel this focus has given Brooktrout a strong position
in this new marketplace.
BECOMING A ONE-STOP COMMUNICATIONS PROVIDER
The Company's largest business, Brooktrout Technology, develops and manufactures
component-level circuit boards and software that enable our customers to build
products with any combination of voice messaging, data access, fax, and IP
telephony capabilities. Among the new products released in 1999 was a higher
density version of the TR2001(TM) IP telephony platform that can now support as
many as 60 channels in a single PCI slot. The TR2001 enables developers to
create reliable, scalable, service provider-level IP telephony gateways and
applications for the New Network. Also, Brooktrout extended its high-density
Netaccess intelligent WAN Access products to support the LynxOS and QNX Neutrino
operating systems, making the products available to a broader segment of
developers' of carrier-grade and high density network infrastructure equipment.
The Company also announced support for the Linux operating system on the
TR114(TM) Series intelligent fax and voice boards. By providing continuing
support for a variety of operating systems, Brooktrout is committed to
addressing developers needs to be able to choose the best operating system for
their application requirements. In December, Brooktrout Technology introduced
RealComm(TM) 100, an open standards-based platform that allows developers to
build next-generation communications solutions. The RealComm 100 communications
server helps developers reduce time to market and provides them with protection
of their software investment.
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In addition to new product releases, Brooktrout also established new
partnerships. We became a Gold Partner of the Motorola Computer Group.
Brooktrout and Motorola are now working together to provide solutions to
customers working on applications for the New Network. In the intelligent fax
area, Brooktrout TruFax(R) and TR114 Series intelligent fax boards were selected
by Lotus for bundling with Lotus Fax for Domino R4.0. These bundles enable Lotus
Notes users to send and receive faxes directly from their desktops or send faxes
from within any Microsoft Windows application as easily as sending and receiving
e-mail.
FORGING AN IMPORTANT E-BUSINESS OPPORTUNITY
During 1999, Brooktrout Software has become a very focused business with what we
believe to be a bright future in the area of voice-enabling Web applications.
The basis of Brooktrout Software is the Company's award-winning Show N Tel(TM)
graphical user interface software and application development tools for creating
interactive voice messaging and call management systems. Using Show N Tel and
ActiveCall(TM) software, Brooktrout Software customers can standardize and
consolidate their Web catalog and e-Business activities with their existing
800-number phone-ordering system and bring it all together into a single
integrated call center. Using the same software tools to build and maintain both
commerce systems offers Brooktrout Software customers great cost advantages and
much faster time-to-market.
COMPLETING A SUCCESSFUL PUBLIC OFFERING
A major 1999 event and a milestone for Brooktrout occurred in the Fall with the
initial public offering of our Interspeed subsidiary. Interspeed develops
high-speed data access equipment based on DSL or digital subscriber line
technology. The Interspeed business was developed from within Brooktrout over
the past three years, and marks the first time the Company has spun off part of
its business through an IPO. Brooktrout sold 1.5 million shares in that
offering, generating a pretax gain of $16.1 million, net of offering related
costs, in the third quarter of 1999, and in the fourth quarter, another $3.8
million through an additional sale of 425,000 shares, pursuant to the
underwriters' over allotment option; totaling $19.9 million. In addition,
Brooktrout now holds 6.1 million shares of Interspeed's common stock (NASD:
ISPD), representing approximately 57 percent of the outstanding shares of
Interspeed as of December 31, 1999.
MILLION-SHARE STOCK REPURCHASE PLAN
On October 1, 1999, we announced a Stock Repurchase Plan under which the Company
is authorized to repurchase up to one million shares of its common stock in the
open market or in private transactions over a 12 month period. Brooktrout plans
to use the repurchased shares for general corporate purposes including the
Company's stock option plans, employee stock purchase plans and other stock
benefit plans. As of December 31, Brooktrout had repurchased approximately
250,000 shares under the plan for an aggregate purchase price of $3.4 million.
Overall, we are pleased with the company's performance and progress in each of
our businesses during 1999. As we begin the new millennium, we believe
Brooktrout is well positioned to support Today's Network as well as the
rapid-growth business areas of the New Network. We offer leading technologies
for voice messaging systems, voice-over-IP, voice-over-DSL, high-speed net
access, wireless and mobile switching, and unique solutions for unified
messaging and voice-enabled web commerce. Financially, we are stronger than ever
and we have never been better equipped to shape our own destiny.
Sincerely,
Eric Giler
President
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Welcome to the New Network
Years from now when we look back on the turn of the century, we will be even
more amazed at the pace of change. Technology is driving change at such an
extraordinary pace that in just a few years, the 1980s and the 1990s will seem
quaint.
The world of electronic communications is setting the pace. Networks are
expanding far beyond the walls of any organization. As companies connect to
customers, suppliers, employees, and each other, everyone wins. If Today's
Network reflects the communication technologies of the recent past, then the
changes we're just beginning to experience represent a New Network for a new
century, and a future about to explode with opportunity.
In the next few years, we expect to see the convergence of voice and data,
of telephones and computers. The New Network will set us free from the desktop
and bring the Internet to wireless devices in our homes, offices, schools,
stores, virtually anywhere we choose.
For Brooktrout, the opportunities created by this New Network are exciting.
Our technologies are already enabling corporate customers, communication
companies, and service providers to create new applications in many of the
hottest business areas including: wireless communications, unified messaging,
Internet telephony, voice-over-DSL, and defining the very infrastructure of the
New Network itself.
Net Infrastructure
The first task for builders of the New Network is to develop its infrastructure,
weaving together the many disparate systems and applications that already exist
with the new and emerging technologies that will define the future. The
challenge for the enterprise and the systems developer is to bridge those gaps
as smoothly and efficiently as possible. What results is a new communications
paradigm, a New Network that brings together data, voice, wireless, and the
Internet. A New Network that is seamless and user-driven.
Companies today have significant investments in hardware, software, and
systems. For most, the move to the technologies of a New Network needs to be
evolutionary. They need reliable systems and equipment that will provide a path
for upgrading their network infrastructure on their own terms, products that
will help them route voice traffic over less expensive Internet lines or allow
them to create user-friendly unified messaging as they need it. This convergence
of communications holds the promise of new applications for business and
consumers at home, in the office, on the road, and around the globe.
At the Threshold of the New Network
Today, Brooktrout is a world leader in enabling technology for the New Network
and a full-line supplier providing equipment for voice, fax, data, and IP
telephony. We are at the crossroads of this New Network, building the links that
connect these communications platforms. Our circuit boards make it possible for
corporations, Internet service providers, and telecommunications companies to
communicate effortlessly between standard, circuit-switched telephone networks
and the new generation of packet-switched digital IP networks that carry
wireless and Internet traffic.
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Brooktrout is enabling high-growth applications
Brooktrout voice boards enable growing companies like World Telecom Labs to make
voice-over-IP technology a reality, driving down the cost of telephone service
to anywhere in the world. Brooktrout helps Nortel offer Internet Call Waiting to
notify single-line subscribers of incoming phone calls with a pop-up screen,
while they surf the Internet. Brooktrout mobile switching equipment is fueling
the growth in wireless communications, providing the key link between the
satellite signal and the land-based connection. Brooktrout fax boards have
helped make NetMoves Corp. a leader in Internet fax and document delivery,
allowing companies to leverage existing network and Internet connections in
order to deliver email-to-fax, Web-to-fax, PC-to-fax, and broadcast fax.
In short, the Internet is changing everything, and fast. Many households in
North America are already online. The time they spend on the Internet is
increasing. Connection speeds are faster and access costs are lower. New
applications are exploding faster than anyone could have forecast and with them,
a whole new marketplace thirsty for innovation. The first major challenge of the
new century is to meet that growth with an infrastructure that can expand right
along with it. Brooktrout technologies are helping build that infrastructure for
today and tomorrow.
Voice-over-DSL:
Jetstream Communication
Voice-over-DSL is the newest of the new communications technologies. Pioneered
by Brooktrout customer Jetstream Communications, voice-over-DSL is a combination
of high-speed data and Internet access with as many as 16 digital phone lines.
Jetstream Communications is the leading provider of voice-over-DSL equipment to
local carriers. The company's JetPowered(TM) voice-over-broadband solution is
rapidly becoming the standard for integrated voice and data service delivery to
the small business and high-end residential communications markets. With the
addition of the Jetstream CPX-1000 multi-service platform, both voice and data
services may be simultaneously carried on the customer's existing copper
telephone lines. With revenue currently dwarfing that for data services,
voice-over-broadband is the killer application for service providers looking to
add value to the small and medium-enterprise community.
Unified Messaging
In just a few years, electronic messaging has evolved to become a critical tool.
It has helped small firms and large corporations to increase productivity, bring
improvements to customer service, supplier relations, marketing, and just about
every facet of business. In that time, messaging has grown to include e-mail,
voice mail, fax, even pagers and a new generation of subscriber services all
travelling across company networks, the Internet, wireless systems, or standard
phone lines. Electronic messaging gives us the flexibility to communicate with
the timeliness of the telephone and the accuracy of print.
But this rapid growth of messaging has brought with it a virtual maze of
different and competing systems. Voice mail travelling on the phone network,
e-mail on the Internet, faxes on separate phone lines. The challenge of the New
Network is to consolidate the many different message types and provide every
user with a single, easy-to-use mailbox that can handle all of it. This is
unified messaging, the convergence of voice mail, fax, and e-mail into one
compatible system.
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A single point of communications
The business opportunities are unlimited for companies providing unified
messaging solutions to their customers or for Internet service providers
offering unified messaging services to their subscribers. Travelling employees
can check for voice mail, e-mail, and important faxes all with a single phone
call or from the browser on their laptop. Text readers and voice recognition are
even enabling users to have their e-mail or faxes read to them by phone or
forwarded to a local fax number. The bottom line is greater productivity and the
market is rapidly embracing unified messaging.
At Brooktrout, we build the equipment to bring it all together: voice
boards to handle voice input from standard telephone lines, multi-port fax
boards to manage and convert fax traffic, remote access boards and IP telephony
equipment for network and Internet traffic. Brooktrout customers include
corporations upgrading the enterprise, equipment manufacturers that integrate
system components and provide total solutions, and service providers that offer
direct access to individual and business clients.
Enabling high-growth applications
Brooktrout fax, voice, and universal port boards are helping scores of companies
like Lucent and Mitel build some of the most innovative universal messaging
products on the market. The Unified Messenger from Lucent supports users on the
road or in the office, allowing them to receive, forward, and store voice
messages just as they do e-mail. Mitel's OnePoint Messenger lets users access
their inbox by using a Web browser and Microsoft Outlook to log in from any
location with Web access. Unified messaging is an application ideally suited to
the New Network and Brooktrout technologies are helping to make it happen.
Unified Messaging:
Inter-Tel
For the average user, all this talk about convergence doesn't mean much if you
still need to make four different phone calls just to check your messages. Now,
a whole new type of application has emerged to make sending and receiving
messages much simpler, and Brooktrout is helping make it possible. Unified
messaging, being pioneered by such companies as Inter-Tel, simplifies
communications by enabling users to check one inbox for e-mail, fax, and voice
messages. The system even lets users organize fax and voice mail messages in the
same folders they organize e-mail. Inter-Tel is using Brooktrout boards to
integrate fax and voice processing with its AXXESS and AXXENT systems and its
AXXESSORY Talk Central unified messaging solution. With AXXESSORY Talk Central,
users can hear voice mail messages over any multimedia computer and read faxes
and e-mail on the PC screen.
E-Business Solutions
E-Business is an exciting transformation of the consumer and business
marketplace. Online shopping, travel reservations, finding a new job, selling at
auction, choosing a movie, even buying books are simple marketplace tasks that
have all been redefined almost overnight. E-Business is not so much a new
category of business as it is a completely different way of seeing the
relationship between buyers, sellers, manufacturers, marketers, and
distributors.
6
<PAGE> 7
As e-Business models emerge, they bring a new set of rules. Businesses are
discovering the efficiencies of using the Internet to reinvent every aspect of
their operations and they are reshaping their companies to take advantage of
these opportunities. Customers, on the other hand, are streaming online in
ever-increasing numbers, connecting at constantly faster speeds, and spending
more and more time online. We believe the potential for continued growth of
one-to-one e-Business is tremendous.
Technology to enhance the customer relationship
Success in this New Network environment lies in a company's ability to change
not just its methods, but its character. A successful e-Business is
customer-focused and service-driven. It creates a relationship with customers
from the first contact and builds on that relationship at every click, using the
latest technology to keep pace with and outperform the competition. For
Brooktrout, an opportunity lies in the growth of voice-enabling Web
applications. That is the convergence of the Internet and the telephone - the
merger of online sales convenience and personalized voice service. Brooktrout
provides the software tools and voice technology to help companies and Internet
providers combine real-time voice traffic with an online Web session to
strengthen the connection between buyer and seller. Effective customer service
is critical to building a strong e-Business relationship and the telephone
offers the easiest, fastest way to connect buyer and seller. A consumer shopping
online for software or a summer suit can simply click on-screen to make a live
voice connection with a sales agent. The agent views the order and can answer
whatever questions the buyer might have. Our customers feel that this has
resulted in a higher percentage of successful sales and increased customer
satisfaction.
Brooktrout is enabling high-growth applications
Brooktrout's expertise is enabling major companies to provide unique solutions
for linking interactive voice response to the Internet. With the press of a
button on a Web page, Nortel's Internet Voice Button, lets customers visiting a
business Web site call the business to place an order, request service or ask
for more information. Tapestry Integration Specialist, Inc. uses Brooktrout
Software's application development environment to provide their customers with
speech-enabled e-Business solutions. Brooktrout is also helping service
organizations such as Universal Pensions combine voice and computer access to
large databases, enabling employees from thousands of different 401(k)
retirement plans to check their accounts and make changes daily by phone or on
the Web. We anticipate e-Business is an exciting growth area for Brooktrout, now
and in the future.
Voice-enabled Web:
Healtheon/WebMD
Healtheon/WebMD is one of the most innovative success stories on the Internet.
Its mission is challenging, to say the least - use the Internet to bring
together doctors, patients, hospitals, insurers, drug companies, and help them
exchange information and conduct business by cutting through the maze of
healthcare paperwork. Healtheon operates an Internet-based platform that manages
distributed applications and data for clients in the healthcare community. These
applications integrate with an insurer's database, a drug company's intranet, or
any user's private system, giving members a single, integrated, easily
accessible healthcare resource. Using Brooktrout's Show N Tel(TM) software,
Healtheon worked with value-added reseller ATI to develop an open enrollment
system that allows doctors or clinics to enroll in Healtheon services on the Web
or by phone, with the data then fully integrated with the Web site.
7
<PAGE> 8
Brooktrout, Inc.
Selected Consolidated Financial Data
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
STATEMENT OF INCOME DATA 1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue ................................................ $140,745 $100,851 $72,192 $58,827 $38,673
Costs and expenses:
Cost of product sold ................................ 54,517 40,884 32,381 26,059 17,759
Research and development ............................ 28,753 22,106 13,627 7,175 4,822
In-process research and development(1) .............. -- 9,786 3,746 -- --
Selling, general and administrative ................. 46,275 29,868 19,970 13,666 9,144
Non-cash compensation (2) ........................... 2,730 34 -- -- --
Merger related charges .............................. -- -- -- 1,236 --
-------- -------- ------- ------- -------
Income (loss) from operations ......................... 8,470 (1,827) 2,468 10,691 6,948
Other income:
Interest income, net ................................ 878 1,890 1,677 1,282 960
Net gain on investment activity (3) ................. 21,738 -- -- -- --
-------- -------- ------- ------- -------
Total other income ............................... 22,616 1,890 1,677 1,282 960
-------- -------- ------- ------- -------
Income before income tax provision (benefit) ........... 31,086 63 4,145 11,973 7,908
Income tax provision (benefit) ......................... 13,287 (270) 1,494 5,108 2,705
Minority interest in loss of subsidiary (3)............. (1,355) -- -- -- --
-------- -------- ------- ------- -------
Net income .......................................... $ 19,154 $ 333 $ 2,651 $ 6,865 $ 5,203
======== ======== ======= ======= =======
Basic income per common share:
Net income ........................................... $ 1.76 $ 0.03 $ 0.25 $ 0.69 $ 0.54
Shares for basic ..................................... 10,882 10,784 10,702 9,947 9,661
Diluted income per common share:
Net income ........................................... $ 1.65 $ 0.03 $ 0.23 $ 0.63 $ 0.52
Shares for diluted ................................... 11,582 11,483 11,300 10,901 10,077
DECEMBER 31,
------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
BALANCE SHEET DATA
Cash and marketable securities ......................... $ 50,033 $ 12,355 $36,378 $39,714 $22,154
Working capital ........................................ 65,131 21,225 41,741 43,408 24,823
Total assets ........................................... 115,435 73,209 65,415 58,366 34,581
Long-term debt, less current portion ................... -- -- -- -- --
Stockholders' equity ................................... $ 77,383 $ 50,129 $50,444 $47,592 $26,445
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1998 and 1997, the Company recorded charges of $9.8 million and $3.7
million, respectively, representing the portion of the purchase price allocated
to in-process research and development efforts related to the acquisitions of
the Computer Telephony Products business of Lucent Technologies Inc. and
Netaccess, Inc., respectively.
(2) In 1999, the Company recorded a charge of $2.7 million reflecting non-cash
compensation expenses as a result of stock option grants by Interspeed, Inc.
(3) Net gain on investment activity represents the gains of $19.9 million, net
of offering related costs, on the sale of 1.925 million shares of Interspeed,
Inc. by the Company associated with Interspeed's initial public offering, a gain
of $2.5 million from the sale of marketable securities, and a loss of $655,
representing the book value of a separate investment that was written off in the
third quarter of 1999.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This Annual Report 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 Annual
Report 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.
INTRODUCTION
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. 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 merge 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.
9
<PAGE> 10
Interspeed, Inc.
On September 24, 1999, Interspeed sold 2 million shares of its common stock
in an initial public offering (the "Offering") at a price of $12 per share
pursuant to a registration statement on Form S-1 (333-81071), as amended, under
the Securities Act of 1933, as amended. In the Offering, the Company sold an
additional 1.5 million shares of Interspeed common stock that it owned. Due to
the sale of the 2 million shares of stock by Interspeed, the Company recorded
additional paid-in capital of approximately $7.0 million, net of deferred tax,
reflecting the increase in its investment in Interspeed resulting from the
receipt by Interspeed of proceeds from the Offering of $21 million. In October,
the Company sold an additional 425,000 shares of common stock of Interspeed at a
price of $12 per share pursuant to the underwriters' over allotment option.
After these transactions, the Company owns approximately 6.1 million shares of
Interspeed's outstanding common stock, or approximately 57% of Interspeed's
common shares outstanding as of December 31, 1999. The Company realized a gain
of $19.9 million, net of offering related expenses, on these stock sales.
10
<PAGE> 11
Computer Telephony Products business of Lucent Technologies Inc.
On December 17, 1998, the Company acquired the assets and assumed certain
liabilities of the Computer Telephony Products ("CTP") business of Lucent
Technologies Inc. CTP provides technologies for the voice processing industry
and manufactures hardware and software components that connect PCs and LANs with
telephone networks. The purchase price was $29.4 million, paid in cash, plus
$1.1 million of transaction costs, and the Company assumed certain liabilities
aggregating $1.9 million.
The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of the CTP business have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal. The fair value of the assets acquired and
liabilities assumed exceeded the purchase price resulting in a pro rata
reduction in identified non-current assets purchased.
The valuation of the intangible assets acquired was based on management's
estimates of the after tax net cash flows and gives explicit consideration to
the SEC's views on purchased in- process technology as set forth in its
September 9, 1998 letter to the American Institute of Certified Public
Accountants. Specifically, the valuation gave consideration to the following:
(i) a fair market value premise was employed; (ii) comprehensive due diligence
concerning all potential intangible assets including trademarks/tradenames,
patents, copyrights, non-compete agreements, assembled workforce and customer
relationships and sales channels; (iii) the value of core technology was
explicitly addressed, with a view toward ensuring the relative allocations to
core technology and in-process technology were consistent with the relative
contributions of each to the final product; and (iv) the allocation to
in-process technology was based on a calculation that considered only the
efforts completed as of the transaction date, and only the cash flow associated
with said completed efforts for one generation of the products currently
in-process.
The Company recorded a one-time charge of $9.8 million ($5.9 million, net
of tax benefits) in the fourth quarter of 1998 for the purchased research and
development for seven projects that had not yet reached technological
feasibility, had no alternative future use, and for which successful development
was uncertain.
The seven projects include High Density (digital signal processor and
software technology), Digital Recording (software and hardware), DSPM and DSP
Fax (software and hardware), Asynchronous Software, PBX Integration, and VRS-32
boards. At the time of acquisition, estimated costs to complete the seven
projects were approximately $6.9 million. The majority of these projects have
been completed and several of the products that were developed started to be
shipped to customers in 1999.
Netaccess, Inc.
On June 30, 1997, the Company acquired the assets and assumed certain
liabilities of Netaccess, Inc. ("Netaccess"), a worldwide supplier of Primary
Rate ISDN network interface products and multiport modem products for open,
standards-based remote access and computer telephony systems. The purchase price
was $9.9 million, paid in cash, and the Company assumed certain liabilities
aggregating $2.0 million.
11
<PAGE> 12
The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of Netaccess have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal.
The Company recorded a charge of $3.7 million ($2.3 million, net of tax
benefits) in 1997 representing the estimated value of Netaccess' research and
development efforts in-process. Such efforts had not yet reached technological
feasibility and did not possess alternative uses.
12
<PAGE> 13
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue during the year ended December 31, 1999 increased by approximately
39%, to $140.7 million, up from $100.9 million in 1998. The majority of this
growth was from the Company's Brooktrout Technology subsidiary and was primarily
attributable to an increase in voice technology products driven by the
acquisition of CTP. The voice technology products generated revenue of
approximately $36 million in 1999. In addition, Primary Rate ISDN telephone
network interface product revenue increased. These increases in revenue were
partially offset by a decline in voice mail systems sold. The Company's
Interspeed subsidiary also contributed to the increased revenue in 1999.
Cost of product sold was $54.5 million, or 39% of revenue, in 1999,
compared to $40.9 million, or 41% of revenue, in 1998. Gross profit percentage
was 61% for 1999 as compared to 59% for 1998. The increase in gross profit
percentage was primarily generated by Brooktrout Technology and was the result
of the increase in voice technology products sold and the corresponding profit
that was generated from these higher margin products. These higher margin
products replaced the margin lost on the decline in the lower margin voice mail
systems sold.
Research and development expense was $28.8 million, or 20% of revenue, in
1999, compared with $22.1 million, or 22% of revenue, in 1998. This increase
primarily is attributable to the inclusion of CTP and the related development
efforts on the voice technology products combined with the development of the
digital subscriber line ("DSL") products of Interspeed. The Company intends to
continue to commit significant resources to product development. The Company's
continuing development efforts are focused on the computer telephony software
development tools, the next generation of Primary Rate ISDN telephone network
interface products, the TR Series product family, as well as the Brooktrout Open
Systems Telephony Architecture ("BOSTon").
Selling, general and administrative expense was $46.3 million in 1999,
compared with $29.9 million in 1998. This higher expense level resulted from the
inclusion of CTP in Brooktrout Technology together with increased staffing,
promotional activities and travel related expenses. In addition, there was an
increase in selling, general and administrative expense at Interspeed and
Brooktrout Software due to increased staffing and marketing initiatives. As a
percentage of revenue, selling, general and administrative expense was 33% of
revenue for 1999 and 30% of revenue for 1998.
The Company recorded a charge of $2.7 million in 1999 representing non-cash
compensation expense as a result of stock options granted to employees of
Interspeed.
The Company recorded a net gain on investment activity of $21.7 million in
1999, representing gains of $19.9 million, net of offering related costs, on the
sale of 1.925 million shares of common stock of Interspeed by the Company
associated with Interspeed's initial public offering, a gain of $2.5 million
from the sale of marketable securities, and a loss of $655,000 representing the
book value of a separate investment that was written off during the year.
On December 17, 1998, the Company recorded a charge of $9.8 million,
representing the portion of the purchase price of the acquisition of CTP
allocated to in-process research and development efforts as of the date of
acquisition.
Interest and other income was $.9 million in 1999, compared with $1.9
million in 1998. This decrease is due to less cash available for investment.
13
<PAGE> 14
The Company's effective tax rate was 43% in 1999. The effective tax rate is
greater than the statutory tax rates due to the non-deductible compensation
charge of $2.7 million related to stock option grants at Interspeed along with
the non-deductible Interspeed operating losses from September 24, 1999 to
December 31, 1999. The Company recorded a tax benefit of $270,000 for the year
ended December 31, 1998.
Minority interest in loss of subsidiary was $1.4 million for the year ended
December 31, 1999, which represents the minority shareholders' portion of the
losses of Interspeed from September 24, 1999, the date of Interspeed's Offering,
until December 31, 1999.
14
<PAGE> 15
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue during the year ended December 31, 1998 increased by approximately
40%, to $100.9 million, up from $72.2 million in 1997. This growth was
principally attributable to increased shipments of TR Series products and to the
inclusion of sales of Primary Rate ISDN telephone network interface products
acquired through the acquisition of Netaccess on June 30, 1997. Increased sales
from the TR Series products reflected the growth in the local area network/fax
market segment served by the Company.
Cost of product sold was $40.9 million, or 41% of revenue in 1998, compared
to $32.4 million, or 45% of revenue, in 1997. Gross profit percentage was 59%
for 1998 and 55% for 1997. The increase in gross profit percentage was the
result of the increased volume of TR Series and Primary Rate ISDN telephone
network interface products sold as a proportion of total sales. In addition, the
TR Series product family benefited from cost reduction efforts initiated by the
Company.
Research and development expense was $22.1 million, or 22% of revenue, in
1998, compared with $13.6 million, or 19% of revenue, in 1997. The increase
reflected the Company's development efforts for Interspeed, the next generation
of Netaccess products, and for continued development of the TR Series product
family, BOSTon Architecture, OEM systems development as well as computer
telephony software development tools.
Selling, general and administrative expense was $29.9 million in 1998,
compared with $20.0 million in 1997. This higher expense level resulted from
increased staffing, promotional activities and depreciation. As a percentage of
revenue, selling, general and administrative expense was 30% of revenue for 1998
and 28% of revenue for 1997.
On December 17, 1998, the Company recorded a charge of $9.8 million,
representing the portion of the purchase price of the acquisition of CTP
allocated to in-process research and development efforts as of the date of
acquisition.
On June 30, 1997, the Company recorded a charge of $3.7 million,
representing the portion of the purchase price of Netaccess allocated to
in-process research and development efforts as of the date of acquisition.
Interest and other income was $1.9 million in 1998, compared with $1.7
million in 1997, reflecting higher cash balances available for investment prior
to the purchase of CTP.
The Company recorded a tax benefit of $270,000 for the year ended December
31, 1998 due to a permanent difference associated with the Company's foreign
sales corporation and a change in the rate at which its deferred taxes are
expected to reverse, offset by a permanent difference associated with travel and
entertainment expense. For the year ended December 31, 1997 income tax expense
was $1,494,000, an effective tax rate of 36%.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
On September 24, 1999, Interspeed sold 2 million shares of its common stock
in the Offering at a price of $12 per share pursuant to a registration statement
on Form S-1 (333-81071), as amended, under the Securities Act of 1933, as
amended. In the Offering, the Company sold 1.5 million shares of Interspeed
common stock it owned. In October , the Company sold an additional 425,000
shares of common stock of Interspeed at a price of $12 per share pursuant to the
underwriters' over allotment option. After this transaction, the Company owns
approximately 6.1 million shares of Interspeed's outstanding common stock or
approximately 57% of the shares outstanding as of December 31, 1999. These
transactions generated $42.2 million of cash in 1999.
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 for the twelve month
period ending September 30, 2000. Through December 31, 1999, the Company had
repurchased a total of 247,582 shares for a total cash purchase of $3.4 million.
In August 1999, the Company renewed its working capital line of credit.
Under the renewed line of credit the Company may borrow up to $10 million 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 this line of credit would be subject to interest at
the lender's prime rate. At December 31, 1999 there were no commitments
outstanding on letters of credit; no borrowings have been made during the three
years presented in this Annual Report.
The Company's working capital increased from $21.2 million at December 31,
1998 to $65.1 million at December 31, 1999. The increase was attributable
primarily to higher cash balances due to the proceeds from the sale of
Interspeed common stock by both Interspeed and the Company. Interspeed's cash
balance at December 31, 1999 was $14.6 million and is solely available for use
by Interspeed. In 1999, cash used in operating activities was $3.5 million
compared to cash provided by operating activities of $10.4 million in 1998. The
primary reasons that cash was used in operating activities in 1999 were because
of changes in the Company's current assets and current liabilities and, to a
lesser extent, increased cash requirements to fund Interspeed's operations prior
to the Offering.
During 1999, 1998 and 1997, the Company purchased approximately $3,5
million, $3,8 million, and $2,7 million, respectively, in equipment. The Company
currently has no material commitments for additional capital expenditures.
The pricing of the Company's products and costs of its goods are generally
determined by current market conditions. Market conditions can be impacted by
inflation, however, the Company believes that inflation has not had a
significant effect on its operations to date.
The Company has operating lease commitments for its office and
manufacturing facilities expiring through 2006. Certain lease agreements require
the Company to pay all of the building's taxes, insurance and maintenance costs
(see Note 7 to the Consolidated Financial Statements).
The Company anticipates that cash flows from operations, together with
current cash and marketable securities balances and funds available under the
Company's line of credit, will be sufficient to meet the Company's working
capital and capital equipment expenditure requirements for the foreseeable
future.
16
<PAGE> 17
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. These
securities consist of U.S. government notes and bonds, commercial paper, and
certificates of deposit. The company invests in marketable securities which
consist of notes and bonds of various Federal agencies with maturities greater
than 90 days. If the Company were to experience a 1% increase in the effective
interest rate, the effect on the marketable securities carrying value would be a
decrease of $36,000. The Company's securities are considered available-for-sale
for accounting purposes and any unrealized gain or loss is deferred as a
component of other comprehensive income. In addition, the Company's working
capital line of credit agreement provides for borrowings which bear interest at
a variable rate equal to the lender's prime rate. As of December 31, 1999, the
Company did not have any borrowings outstanding under the credit agreement. The
Company believes that the effects, if any, of possible near-term changes in
interest rates on the Company's financial position, results of operations and
cash flows should not be material.
The Company denominates substantially all sales in U.S. dollars and has
limited expenses denominated in foreign currencies, generally from its limited
operations in Belgium and the United Kingdom. Consequently, the Company has
limited exposure to fluctuations in foreign currencies. The Company, to date,
has not attempted to hedge this limited foreign currency exposure. The Company
does not enter into financial instrument transactions for trading or other
speculative purposes.
17
<PAGE> 18
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company. The Company expects to adopt this accounting standard for the
fiscal year commencing January 1, 2001, as required.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
18
<PAGE> 19
YEAR 2000 READINESS DISCLOSURE
The statements in the following section include Year 2000 readiness
disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act. This section contains certain statements that are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended.
The Company's Year 2000 compliance, and the eventual effects of the Year 2000 on
the Company may be materially different than currently projected. This may be
due to, among other things, the failure of key third parties with whom the
Company has a significant business relationship to address Year 2000 issues.
The Year 2000 issue relates to a complex group of potential problems
arising from the ways in which computer software can handle dates. Many older
systems use a two digit date format which may create ambiguities in passing into
a new century. The Year 2000 is a special case in the Gregorian calendar which
can create problems with certain leap-year calculation routines. In addition,
various contemporary computer operating systems, including systems on which many
of the Company's and its suppliers' products are dependent, employ binary dating
conventions which cannot currently manage dates falling after certain times
after the year 2000 (e.g., the year 2038 in the case of most 32-bit Windows
software.)
The Company implemented a Year 2000 Plan to address the Company's Year 2000
issues. The Company's Year 2000 Plan focused on each of the Company's internal
systems, the Company's products, and third parties with which the Company has a
significant business relationship. However, no assurance can be given that such
third parties successfully addressed their Year 2000 issues.
The Company's Year 2000 Plan relating to its internal systems consisted of
three phases - assessment, testing and implementation. The Company completed the
implementation phase, the last phase of its Year 2000 Plan, during the fourth
quarter of 1999. The Company believes that all material systems are compliant
for the Year 2000. To date, the Company has not experienced any Year 2000
issues.
The Company has gathered, tested and produced information about the
Company's products impacted by the Year 2000 transition. Although the Company
believes that most of its products are in (through maintenance releases or
patches) Year 2000 compliance, the Company has determined that certain of its
older products are not and will not be compliant. However, with respect to these
older products, customers generally will have upgrade paths available to move to
the Company's newer compliant products, which generally will require some change
in the operating environment. The Company has taken steps to inform such
affected users of this issue.
All organizations dealing with the Year 2000 must address the effect this
issue had and may continue to have on their significant business relationships
with key third parties. The Company's significant business relationships which
may be adversely impacted by the Year 2000 issue include certain contractual
relationships with key suppliers of components for the Company's products,
service providers for the Company's internal systems and major customers for the
Company's products (including one such customer which accounted for more than
10% of the Company's revenue in 1999). The Company continues to work with key
third parties to understand their ability to continue providing services,
products and demand for the Company's products through the Year 2000. If any
significant Year 2000 problems are identified with key third parties,
contingency plans will be developed. The Company is unaware of any Year 2000
problems that may have affected its significant suppliers.
19
<PAGE> 20
To date, costs associated with achieving Year 2000 readiness were $750,000
and the Company does not anticipate incurring any additional significant costs.
The Company anticipates that substantial litigation may be brought against
vendors of all component products of systems that are unable to properly manage
data related to the Year 2000. The Company has not received any threats of such
litigation against it, but no assurance can be given that such litigation may
not be threatened or brought in the future. The Company's agreements with
customers typically contain provisions designed to limit the Company's liability
for such claims. It is possible, however, that these measures will not provide
protection from liability claims, as a result of existing or future federal,
state or local laws or ordinances or unfavorable judicial decisions.
Furthermore, the failure of the Company or the Company's key suppliers and/or
customers to be Year 2000 compliant or address Year 2000 issues may also result
in litigation being brought against the Company in addition to making it more
difficult and/or costly for the Company to manufacture and sell its products.
Any such claims, with or without merit, or the failure of the Company, its
suppliers or customers to be Year 2000 compliant could result in a material
adverse affect on the Company's business, financial condition and results of
operations, including increased warranty costs, customer satisfaction issues and
potential lawsuits.
EURO ISSUE
Some of the countries in which the Company sells its products are Member States
of the Economic and Monetary Union (EMU). Beginning January 1, 1999 Member
States of the EMU 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 transact in
euros, so this upgrade is not planned for implementation until the second
quarter of 2000.
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Brooktrout, Inc.:
We have audited the accompanying consolidated balance sheets of
Brooktrout, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries at December 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 3, 2000
21
<PAGE> 22
BROOKTROUT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ....................................... $ 48,541 $ 8,518
Marketable securities ...................................... 1,492 3,837
Accounts receivable (less allowance for doubtful accounts of
$2,466 in 1999 and $2,313 in 1998) ........................ 22,232 15,837
Inventory ..................................................... 14,202 10,668
Deferred tax assets ........................................... 5,121 3,853
Prepaid expenses .............................................. 1,975 1,242
-------- -------
Total current assets .................................... 93,563 43,955
-------- -------
Equipment and furniture:
Computer equipment ......................................... 9,785 8,602
Furniture and office equipment ............................. 8,628 6,336
-------- -------
Total equipment and furniture .............................. 18,413 14,938
Less accumulated depreciation and amortization ............. (9,694) (5,973)
-------- -------
Total equipment and furniture -- net ....................... 8,719 8,965
Deferred tax assets ........................................... -- 4,719
Acquired technology and other intangible assets ............... 12,973 14,746
Investments and other assets .................................. 180 824
-------- -------
Total assets .......................................... $115,435 $73,209
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable and other accruals ........................ $ 18,158 $15,777
Accrued compensation and commissions ....................... 5,573 4,529
Customer deposits .......................................... 661 614
Accrued warranty costs ..................................... 1,304 1,314
Accrued taxes .............................................. 2,736 496
-------- -------
Total current liabilities ............................... 28,432 22,730
-------- -------
Deferred rent ................................................. 469 350
Deferred tax liabilities ...................................... 479 --
Minority interest ............................................. 8,672 --
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 100,000 shares;
issued and outstanding, none ............................ -- --
Common stock, $.01 par value; authorized 25,000,000
shares; issued and outstanding, 11,004,019 in 1999 and
10,828,362 in 1998 ...................................... 110 108
Additional paid-in capital ................................. 42,991 32,528
Accumulated other comprehensive income (loss) .............. (117) (1,199)
Retained earnings .......................................... 37,846 18,692
Treasury stock, 247,582 shares in 1999 ..................... (3,447) --
-------- -------
Total stockholders' equity ................................. 77,383 50,129
-------- -------
Total liabilities and stockholders' equity ......... $115,435 $73,209
======== =======
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
BROOKTROUT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Revenue ............................................ $140,745 $100,851 $72,192
Cost and expenses:
Cost of product sold ............................. 54,517 40,884 32,381
Research and development ......................... 28,753 22,106 13,627
In-process research and development .............. -- 9,786 3,746
Selling, general and administrative ............. 46,275 29,868 19,970
Non-cash compensation ............................ 2,730 34 --
-------- -------- -------
Total cost and expenses ..................... 132,275 102,678 69,724
-------- -------- -------
Income (loss) from operations ..................... 8,470 (1,827) 2,468
Other income:
Interest income, net ............................. 878 1,890 1,677
Net gain on investment activity (See Note 1 and 2) 21,738 -- --
-------- -------- -------
Total other income .......................... 22,616 1,890 1,677
-------- -------- -------
Income before income tax provision (benefit) ....... 31,086 63 4,145
Income tax provision (benefit) ..................... 13,287 (270) 1,494
Minority interest in loss of subsidiary ............ (1,355) -- --
-------- -------- -------
Net income ......................................... $ 19,154 $ 333 $ 2,651
======== ======== =======
Income per common share:
Basic ........................................... $ 1.76 $ 0.03 $ 0.25
======== ======== =======
Shares for basic ................................ 10,882 10,784 10,702
======== ======== =======
Diluted ......................................... $ 1.65 $ 0.03 $ 0.23
======== ======== =======
Shares for diluted .............................. 11,582 11,483 11,300
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
BROOKTROUT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------- ------- ------
Net income ......................................... $19,154 $ 333 $2,651
Unrealized gains (losses) on marketable securities 1,885 (1,885) 8
Foreign currency translation adjustment .......... (68) (49) --
------- ------- ------
Comprehensive income (loss) before income tax
provision (benefit) .............................. 20,971 (1,601) 2,659
Income tax provision (benefit) related to items of
comprehensive income ............................. 735 (735) 3
------- ------- ------
Comprehensive income (loss) ........................ $20,236 $ (866) $2,656
======= ======= ======
See notes to consolidated financial statements.
24
<PAGE> 25
BROOKTROUT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK TREASURY STOCK ADDITIONAL COMPREHENSIVE
------------------- ----------------- PAID-IN INCOME RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) EARNINGS TOTAL
---------- ------- ------- ------- ---------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997.......................... 10,683,352 $107 -- $ -- $31,785 ($8) $15,708 $47,592
Issuance of common stock for cash...... 57,843 -- -- -- 193 -- -- 193
Unrealized gains on marketable
securities, net of tax................ -- -- -- -- -- 8 -- 8
Net income............................. -- -- -- -- 2,651 2,651
---------- ------- ------- ------- ---------- ------------- --------- -------
December 31, 1997........................ 10,741,195 107 -- -- 31,978 -- 18,359 50,444
Issuance of common stock for cash...... 87,167 1 -- -- 443 -- -- 444
Tax benefit of stock options........... -- -- -- -- 107 -- -- 107
Unrealized losses on marketable
securities, net of tax................ -- -- -- -- -- (1,150) -- (1,150)
Currency translation adjustment........ -- -- -- -- -- (49) -- (49)
Net income............................. -- -- -- -- -- -- 333 333
---------- ------- ------- ------- ---------- ------------- --------- -------
December 31, 1998........................ 10,828,362 108 -- -- 32,528 (1,199) 18,692 50,129
Issuance of common stock for cash...... 175,657 2 -- -- 1,273 -- -- 1,275
Impact of Interspeed stock option
exercises............................ -- -- -- -- 2,136 -- -- 2,136
Increase resulting from sale of stock
by Interspeed......................... -- -- -- -- 6,980 -- -- 6,980
Purchase of treasury stock............. -- -- 247,582 $(3,447) -- -- -- (3,447)
Tax benefit of stock options........... -- -- -- -- 74 -- -- 74
Unrealized gains on marketable
securities, net of tax................ -- -- -- -- -- 1,150 -- 1,150
Currency translation adjustment........ -- -- -- -- -- (68) -- (68)
Net income............................. -- -- -- -- -- -- 19,154 19,154
---------- ------- ------- ------- ---------- ------------- --------- -------
December 31, 1999....................... 11,004,019 $110 247,582 $(3,447) $42,991 ($117) $37,846 $77,383
========== ======= ======= ======= ========== ============= ========= =======
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
BROOKTROUT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 19,154 $ 333 $ 2,651
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on Brooktrout's sale of Interspeed stock ........ (19,252) -- --
Gain on sale of investment ........................... (2,486) -- --
Non-cash compensation expense ........................ 2,730 -- --
Minority interest .................................... (1,355) -- --
Depreciation and amortization ........................ 5,494 2,852 1,815
Purchased research and development ................... -- 9,786 3,746
Amortization of (premium) discount on
marketable securities ............................. -- (47) (44)
Deferred income taxes ................................ (625) (4,742) (2,369)
Increase (decrease) in cash from (net of acquisition):
Accounts receivable ............................... (6,395) (2,208) 1,083
Inventory ......................................... (3,534) (250) 957
Other prepaid expenses ............................ (733) (419) 346
Accounts payable and other accruals ............... 3,446 5,098 1,368
-------- -------- --------
Cash (used in) provided by operating
activities .................................... (3,556) 10,403 9,553
Cash flows from investing activities:
Expenditures for equipment and furniture ............. (3,475) (3,797) (2,717)
Acquisition of subsidiary (net of
cash acquired) ..................................... -- (29,400) (9,909)
Investment and other assets .......................... (79) 107 (508)
Brooktrout's sale of Interspeed stock, net of
related expenses .................................. 21,483 -- --
Purchases of marketable securities ................... (1,492) (13,695) (8,754)
Sales of marketable securities ....................... 8,208 16,433 9,320
-------- -------- --------
Cash provided by (used for)
investing activities .......................... 24,645 (30,352) (12,568)
Cash flows from financing activities:
Proceeds from the sale of common stock ............... 1,275 444 193
Tax benefit of stock options ......................... 74 107 --
Proceeds from exercise of Interspeed options ......... 217 -- --
Purchase of treasury stock ........................... (3,447) -- --
Proceeds from Interspeed's sale of stock,
net of offering expenses .......................... 20,815 -- --
-------- -------- --------
Cash provided by financing activities .......... 18,934 551 193
-------- -------- --------
Increase (decrease) in cash and equivalents ............. 40,023 (19,398) (2,822)
Cash and equivalents, beginning of year ............... 8,518 27,916 30,738
-------- -------- --------
Cash and equivalents, end of year ....................... $ 48,541 $ 8,518 $ 27,916
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - During 1999, Brooktrout, Inc. (the "Company") reorganized its
lines of business and changed its name from Brooktrout Technology, Inc. to
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. 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.
Use of Estimates -- The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries, and
Interspeed, its majority-owned subsidiary. As of December 31, 1999, the Company
owned approximately 57% of the outstanding common stock of Interspeed due to
Interspeed's initial public offering (the "Offering") on September 24, 1999. For
the year ended December 31, 1998, the consolidated results of operations reflect
Interspeed as a wholly-owned subsidiary of the Company. All significant
intercompany balances and transactions have been eliminated.
Revenue Recognition -- Revenue from product or software sales is recognized
upon the shipment or delivery of product. Revenue from maintenance and support
contracts is deferred and recognized ratably over the service period.
Maintenance and support revenue included with an initial license fee is
unbundled and recognized ratably over the service period.
Concentration of Credit Risk -- The Company sells its products to various
customers in several industries. The Company generally requires no collateral;
however, to reduce credit risk the Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. At
December 31, 1999 and 1998, 10% and 19%, respectively, of the Company's accounts
receivable were from one customer (see Note 10).
27
<PAGE> 28
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventory -- Inventory is carried at the lower of cost (first-in, first-out
basis) or market and consisted of the following:
DECEMBER 31,
--------------------------------
1999 1998
----------- -----------
Raw materials........................... $ 7,254,000 $ 3,277,000
Work in process......................... 1,658,000 2,164,000
Finished goods.......................... 5,290,000 5,227,000
=========== ===========
Total.......................... $14,202,000 $10,668,000
=========== ===========
Equipment and Furniture -- Purchased equipment and furniture is recorded at
cost. Depreciation and amortization is provided using the straight-line method
over the estimated useful lives of the related assets (three or five years).
Software Development Costs -- Certain software development costs are
capitalized following attainment of technological feasibility. No such costs
were incurred in 1999, 1998, or 1997.
Research and Development Costs -- Research and development costs, other
than software development costs, are expensed as incurred.
Intangible Assets - Intangible assets include acquired technology, customer
base, trademarks, and in-place workforce and are stated at acquisition cost.
Acquired technology is being amortized on a straight line basis over 5 to 10
years while all other intangibles are being amortized over periods of 3 to 5
years. Total accumulated amortization at December 31, 1999 and 1998 was
$1,940,000 and $157,000, respectively.
Warranty Costs -- Estimated costs of warranty repairs are provided at the
time of sale of the related product.
Income Taxes -- Deferred tax assets and liabilities are recorded to
recognize temporary differences between the book and tax bases of the Company's
assets and liabilities. These assets and liabilities are measured using the
enacted rates and laws that will be in effect when the differences are expected
to reverse.
28
<PAGE> 29
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments -- The Company had an investment in the common stock of a
company operating in the computer telephony industry. The investment represented
less than 20% of the voting interest. Because the common stock of this company
was not readily marketable, the investment was carried at cost and periodically
assessed for potential impairment in value. During 1999, the Company concluded
that its investment had been fully impaired and therefore the investment was
reduced to $0. The Company's investment aggregated $655,000 at December 31,
1998.
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:
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
Cash paid for interest................ $ 8,000 $ 3,000 $ 11,000
Cash paid for income taxes............ 12,603,000 3,992,000 2,401,000
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 at December 31, 1999 consist of U.S. government notes
and bonds, commercial paper, and certificates of deposit. Gross unrealized
losses related to the equity securities were $1.9 million at December 31, 1998.
During the year ended December 31, 1999, the Company realized a gain on the sale
of securities of $2.5 million. During the years ended December 31, 1998 and
1997, there were no significant realized gains or losses from sales of these
securities.
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.
29
<PAGE> 30
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of weighted average shares used for the basic and diluted
computations is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares for basic 10,882,000 10,784,000 10,702,000
Dilutive effect of stock options 700,000 699,000 598,000
---------- ---------- ----------
Weighted average shares for diluted 11,582,000 11,483,000 11,300,000
========== ========== ==========
</TABLE>
Fair Value of Financial Instruments -- Financial instruments held or used
by the Company consist of cash, marketable securities, accounts receivable,
accounts payable and letters of credit issued under the Company's line of credit
(see Note 4). Marketable securities are carried at fair value date. Management
estimates that carrying value approximates fair value for all other financial
instruments.
Stock-Based Compensation -- Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value method of
Accounting Principles Board Opinion No. 25.
Staff Accounting Bulletin No. 51 - The Company has adopted a Staff
Accounting Bulletin No. 51 ("SAB 51") policy to record gains as a result of
equity transactions by its subsidiaries in the Consolidated Statement of Income,
except for any transactions which must be credited directly to equity in
accordance with the provisions of SAB 51. During 1999, the Company recorded
additional paid-in capital of approximately $7.0 million, net of deferred tax,
as a result of subsidiary equity transactions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company. The Company expects to adopt this accounting standard for the
fiscal year commencing January 1, 2001, as required.
30
<PAGE> 31
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INTERSPEED, INC.
On September 24, 1999, Interspeed sold 2 million shares of its common stock in
an initial public offering at a price of $12 per share pursuant to a
registration statement on Form S-1 (333-81071), as amended, under the Securities
Act of 1933, as amended. In the Offering, the Company sold 1.5 million shares of
Interspeed common stock that it owned. Due to the sale of the 2 million shares
of stock by Interspeed, the Company recorded additional paid-in capital of
approximately $7.0 million, net of deferred tax, reflecting the increase in its
investment in Interspeed. In October, the Company sold an additional 425,000
shares of Interspeed common stock at a price of $12 per share pursuant to the
underwriters' over allotment option. After these transactions, the Company owns
approximately 6.1 million shares of Interspeed's outstanding common stock, or
approximately 57% of the common shares outstanding as of December 31, 1999.
These transactions resulted in a pre-tax gain of $19.9 million, net of offering
related costs.
3. ACQUISITIONS
Computer Telephony Products business of Lucent Technologies Inc.
On December 17, 1998, the Company acquired the assets and assumed certain
liabilities of the Computer Telephony Products ("CTP") business of Lucent
Technologies Inc. CTP provides technologies for the voice processing industry
and manufactures hardware and software components that connect PCs and LANs with
telephone networks. The purchase price was $29.4 million, paid in cash, plus
$1.1 million of transaction costs, and the Company assumed certain liabilities
aggregating $1.9 million.
The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of the CTP business have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal. The fair value of the assets acquired and
liabilities assumed exceeded the purchase price resulting in a pro rata
reduction in identified non-current assets purchased. This has been reflected in
the amounts presented in the table below. The following is a summary of the
purchase price allocation.
31
<PAGE> 32
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash paid $29,400,000
Transaction costs 1,148,000
-----------
Total purchase price $30,548,000
===========
Allocated to tangible assets acquired $7,915,000
Allocated to liabilities assumed (1,863,000)
Purchased research and development 9,786,000
Existing technology 12,157,000
Customer base 1,276,000
Trademark 304,000
In-place workforce 973,000
-----------
Total $30,548,000
===========
The Company recorded a one-time charge of $9.8 million in the fourth
quarter of 1998 for purchased in-process technology related to seven development
projects that had not reached technological feasibility, had no alternative
future use, and for which successful development was uncertain.
Netaccess, Inc.
On June 30, 1997, the Company acquired the assets and assumed certain
liabilities of Netaccess, Inc. ("Netaccess"), a worldwide supplier of Primary
Rate ISDN network interface products and multiport modem products for open,
standards-based remote access and computer telephony systems. The purchase price
was $9.9 million, paid in cash, and the Company agreed to assume certain
liabilities aggregating $2.0 million.
The acquisition has been accounted for as a purchase, and accordingly, the
results of operations of Netaccess have been included in the Company's
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired based upon their fair values
using an independent appraisal.
The Company has recorded a charge of $3.7 million ($2.3 million, net of tax
benefits) in 1997 representing the estimated value of Netaccess' research and
development efforts in-process. Such efforts had not yet reached technological
feasibility and did not possess alternative uses.
32
<PAGE> 33
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents pro forma information as if the acquisitions
described had taken place at the beginning of each respective period.
YEARS ENDED DECEMBER 31,
1998 (1) 1997 (2)
------------ ------------
Revenue $130,068,000 $108,106,000
Net income $ 4,438,000 $ 5,417,000
Basic income per share $ 0.41 $ 0.51
Diluted income per share $ 0.39 $ 0.48
(1) Pro forma reflects the acquisition of CTP as if the acquisition had
taken place at the beginning of the period.
(2) Pro forma reflects the acquisitions of CTP and Netaccess as if both
acquisitions had taken place at the beginning of the period.
4. BANK LINE OF CREDIT
The Company has a line of credit with a bank. The Company may borrow up to
$10,000,000 on an unsecured basis, all of which may be used for issuance of
letters of credit, subject to compliance with certain covenants. At December 31,
1999, there were no commitments outstanding on letters of credit; no borrowings
have been made during any period presented. Any amounts borrowed under the line
of credit would be subject to interest at the lender's prime rate. The line is
subject to annual renewal and expires in July 2000.
33
<PAGE> 34
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The provision (benefit) for income taxes is approximately as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Federal--current ................ $11,210,000 $ 3,456,000 $ 3,092,000
State--current .................. 2,482,000 857,000 771,000
Foreign--current ................ 146,000 53,000 --
Federal--deferred ............... (487,000) (4,312,000) (1,886,000)
State--deferred ................. (138,000) (431,000) (483,000)
Tax benefit of disqualifying
dispositions of stock options.. 74,000 107,000 --
----------- ----------- -----------
Provision (benefit) ............. $13,287,000 ($ 270,000) $ 1,494,000
=========== =========== ===========
A reconciliation of the statutory federal rate to the effective tax rate is
as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------ ------- ------
Statutory tax rate............................... 35% 35% 34%
State taxes, net of federal benefit.............. 6 4 6
Losses from subsidiary, not tax deductible....... 2 -- --
Non-deductible non-cash compensation............. 3
Foreign sales corporation........................ (2) (400) (4)
Meals and entertainment.......................... 1 152 --
Research and development credits................. (2) (220) --
------ ------- ------
Effective tax rate 43% (429)% 36%
====== ======= ======
34
<PAGE> 35
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax position as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred Taxes:
Current:
Reserves and accruals not currently deductible
for tax purposes ............................ $4,773,000 $3,505,000
Purchased research and development, capitalized
for tax but expensed for book ............... 348,000 348,000
---------- ----------
Current tax assets ................................ $5,121,000 $3,853,000
========== ==========
Long-term assets:
Purchased research and development, capitalized
for tax but expensed for book ............... $4,371,000 $4,719,000
Long-term liabilities:
Unrealized gain on Interspeed
investment .................................. 4,850,000 --
---------- ----------
Net long-term tax (liabilities) assets .............. $ (479,000) $4,719,000
========== ==========
</TABLE>
6. STOCKHOLDERS' EQUITY
Brooktrout Inc. Stock Option Plans -- The Company has four stock option
plans in place providing for the grant of options to purchase up to 4,364,000
shares of common stock: the 1984 Stock Incentive Plan (the "1984 Plan"), the
1991 Executive Stock Incentive Plan (the "Executive Plan"), the 1992 Stock
Incentive Plan (the "1992 Plan") and the 1999 Stock Incentive Plan (the "1999
Plan"). No further options are being granted under the 1984 Plan and the
Executive Plan. Exercise prices are at fair value at the date of grant, in the
case of incentive stock options, or at the discretion of the Board of Directors
in the case of nonqualified options. Options generally vest over five years; in
some instances, vesting can accelerate upon the completion of certain defined
milestones set by the Compensation Committee at the date of grant. There have
been no option grants at exercise prices different from fair value from these
plans.
35
<PAGE> 36
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option activity under all Brooktrout,
Inc. plans:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
-------------------------------------
Outstanding at January 1, 1997 1,509,363 $11.61
Granted 478,875 $11.80
Exercised (40,249) $ 0.82
Expired (19,851) $17.07
---------
Outstanding at December 31, 1997 1,928,138 $11.92
Granted 637,625 $14.14
Exercised (53,959) $ 3.46
Expired (20,500) $11.11
---------
Outstanding at December 31, 1998 2,491,304 $12.68
---------
Granted 916,925 $13.66
Exercised (126,737) $ 4.89
Expired (222,052) $18.02
---------
Outstanding at December 31, 1999 3,059,440 $12.92
=========
36
<PAGE> 37
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth information regarding Brooktrout, Inc.
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
RANGE OF AVERAGE AVERAGE NUMBER PRICE FOR
EXERCISE NUMBER OF EXERCISE REMAINING CURRENTLY CURRENTLY
PRICES SHARES PRICE LIFE (YEARS) EXERCISABLE EXERCISABLE
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 6.11 114,017 $ 2.85 2.48 114,017 $ 2.85
$ 6.33 545,807 $ 6.33 4.27 545,807 $ 6.33
$ 6.56 - $10.63 375,285 $ 9.29 6.98 258,819 $ 9.48
$10.63 - $11.81 489,281 $11.37 9.18 126,421 $11.39
$11.88 - $14.19 291,875 $12.82 8.54 82,131 $12.86
$14.31 - $14.56 327,700 $14.56 8.96 64,490 $14.56
$14.75 - $17.50 335,975 $16.20 9.50 9,941 $15.95
$17.83 - $22.00 124,125 $18.60 8.25 32,606 $18.48
$22.50 412,500 $22.50 6.47 412,500 $22.50
$23.50 - $31.50 42,875 $27.23 6.78 29,075 $26.86
--------------- --------- ------ ---- --------- ------
$ 0.20 - $31.50 3,059,440 $12.21 7.30 1,675,807 $12.92
=============== ========= ====== ==== ========= ======
</TABLE>
At December 31, 1998 and 1997 options to purchase 1,381,237 and 1,164,233
shares, respectively, were exercisable.
Brooktrout Inc. Stock Purchase Plan -- The Company's 1992 Employee Stock
Purchase Plan (the "Purchase Plan") provides for sales to participating
employees of up to 212,500 shares of common stock, at prices not less than 85%
of fair market value on the beginning or ending date of the six month offering
period provided for purchase, whichever is lower. Through December 31, 1999,
common stock shares totaling 154,707 had been issued to employees under the
Purchase Plan.
37
<PAGE> 38
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Disclosure -- As described in Note 1, the Company uses the
intrinsic value method to measure compensation expense associated with grants of
stock options or awards to employees. Had the Company used the fair value method
to measure compensation, reported net income and earnings per share would have
been as follows:
1999 1998 1997
----------- ------------ --------
Net income (loss) $11,223,000 $(2,249,000) $855,000
Basic income (loss) per common share $ 1.03 $ (0.21) $ 0.08
Diluted income (loss) per common share $ .97 $ (0.21) $ 0.08
For purposes of determining the disclosure required by Statement of
Financial Accounting Standards No. 123, the fair value of options on their grant
date was measured using the Black/Scholes option pricing model. Key assumptions
used to apply this pricing model were as follows:
1999 1998 1997
--------- --------- ---------
Risk-free interest rate 6.2% 4.5% 5.2%
Expected life of option grants 5.0 years 5.0 years 5.0 years
Expected volatility of underlying stock 76% - 89% 73% 82%
The estimated weighted average fair value of option grants made during
1999, 1998 and 1997 was $9.03, $8.91, and $8.29, respectively, per option. The
estimated weighted average fair value of grants made under the Purchase Plan
during 1999, 1998, and 1997 was $4.54, $3.46, and $3.64, respectively, computed
using the assumptions described above with an expected life of 6 months for the
option feature present in the Purchase Plan awards.
Reserved Shares -- The Company has reserved 3,346,233 shares of common
stock for issuance upon the exercise of stock options and purchase of stock
under the Purchase Plan.
Treasury Stock -- Under a stock repurchase program announced in October
1999, the Company is authorized to purchase up to 1 million shares from time to
time on the open market or pursuant to negotiated transactions. The
authorization expires in September 2000. The Company purchased 247,582 shares of
common stock in 1999 at an aggregate cost of $3.4 million.
38
<PAGE> 39
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsidiary Stock Option Plans -- The Company has subsidiary stock plans in
place at Interspeed, Brooktrout Software, and Beacon Networks, Inc. providing
for the grant of options to employees of that subsidiary. None of these options
are convertible into or can be settled in Company stock. Prior to the Offering,
Interspeed granted options at exercise prices below fair market values. The
difference between the exercise price and the fair market value was recorded as
compensation expense, totaling $2.7 million, for the options that vested during
1999. The following table demonstrates the dilutive effect of these plans on the
Company's ownership interest in each subsidiary assuming all options outstanding
at December 31, 1999 in each category were exercised:
Maximum
Dilution to Weighted
Outstanding Company's Average Maximum
Options Interest in Exercise Available
at December 31, 1999 Interspeed (1) Price Options
- -------------------- -------------- -------- ---------
1,776,706 8% $4.55 3,000,868
(1) Assuming exercise of all outstanding options.
Interspeed's options generally vest over a period of 5 years and at
December 31, 1999, 189,681 of the options were exercisable.
At December 31, 1999, no options had been granted under the Brooktrout
Software plan and the Beacon Networks, Inc. plan. During 1999, the Company
terminated a different subsidiary stock plan that had been in place in 1998.
7. LEASE COMMITMENTS
The Company has various operating lease commitments for office and
manufacturing facilities expiring through October 2006. Some of the leases
contain renewal options ranging from 3 to 10 years.
Rent expense under all operating leases aggregated $2,374,000, $2,106,000,
and $1,547,000 for each of the years ended December 31, 1999, 1998 and 1997,
respectively.
Minimum Lease Payments Under Non-Cancelable Operating Leases
YEARS ENDING DECEMBER 31,
-------------------------
2000.......................................... $2,277,000
2001.......................................... 1,513,000
2002.......................................... 1,408,000
2003.......................................... 1,212,000
2004.......................................... 661,000
Thereafter.................................... 1,052,000
-----------
Total................................ $8,123,000
===========
39
<PAGE> 40
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONTINGENCIES
The Company is a party to a number of legal actions which arise in the
normal course of business. The Company, taking into account advice of counsel,
does not believe the eventual outcome of these matters will have a material
effect on the Company's consolidated financial condition or results of
operations
9. RETIREMENT PLANS
The Company has a 401(k) retirement plan available to qualified employees.
Employees are allowed to contribute up to 18% of their salary to the plan. The
Company matches contributions equal to $.25 per dollar contributed up to a
maximum of 6% of a participant's salary. The Company contributed $314,000,
$209,000 and $121,000 to this plan in 1999, 1998 and 1997, respectively.
10. SEGMENT REPORTING
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. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1).
1999 1998 1997
------------ ------------ -----------
REVENUE:
Brooktrout Technology $128,045,000 $ 94,959,000 $67,558,000
Brooktrout Software 7,634,000 5,828,000 4,634,000
Interspeed 5,066,000 64,000 --
------------ ------------ -----------
Consolidated revenue $140,745,000 $100,851,000 $72,192,000
============ ============ ===========
GROSS MARGIN:
Brooktrout Technology $ 79,792,000 $ 56,932,000 $37,339,000
Brooktrout Software 4,468,000 3,007,000 2,472,000
Interspeed 1,968,000 28,000 --
------------ ------------ -----------
Consolidated gross margin $ 86,228,000 $ 59,967,000 $39,811,000
============ ============ ===========
40
<PAGE> 41
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS: (1)
Brooktrout Technology $ 23,822,000 $ 7,151,000 $ 5,155,000
Brooktrout Software (3,726,000) (3,759,000) (924,000)
Interspeed (2) (11,626,000) (5,219,000) (1,763,000)
------------ ----------- -----------
Consolidated income (loss) from
operations 8,470,000 (1,827,000) 2,468,000
Interest income, net 878,000 1,890,000 1,677,000
Net gain on investment activity 21,738,000 -- --
------------ ----------- -----------
Consolidated income before
income tax provision (benefit) $ 31,086,000 $ 63,000 $ 4,145,000
============ =========== ===========
DEPRECIATION AND AMORTIZATION
EXPENSE:
Brooktrout Technology $ 4,596,000 $ 2,149,000 $ 1,476,000
Brooktrout Software 484,000 488,000 247,000
Interspeed 414,000 215,000 92,000
------------ ----------- -----------
Consolidated depreciation and
amortization expense $ 5,494,000 $ 2,852,000 $ 1,815,000
============ =========== ===========
ASSETS:
Brooktrout Technology $ 90,106,000 $70,063,000 $64,043,000
Brooktrout Software 2,376,000 1,141,000 936,000
Interspeed 22,953,000 1,270,000 436,000
------------ ----------- -----------
Consolidated assets $115,435,000 $72,474,000 $65,415,000
============ =========== ===========
- --------------------------------------------------------------------------------------
</TABLE>
(1) Amounts previously reported in 1998 and 1997 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 in 1999 is a charge of $2,7
million reflecting non-cash compensation expenses as a result of stock option
grants.
41
<PAGE> 42
BROOKTROUT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Major Customer -- One customer accounted for 12%, 22%, and 30% of net
revenue for the years ended December 31, 1999, 1998 and 1997, respectively.
International Sales -- International sales, principally exports from the
United States, accounted for approximately 23%, 20%, and 19% of revenue for the
years ended December 31, 1999, 1998 and 1997, respectively.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1999
Revenue .............................. $32,218,000 $33,791,000 $34,406,000 $40,330,000
Gross profit ......................... 19,261,000 20,578,000 21,560,000 24,829,000
Income (loss) from operations ........ 2,321,000 671,000 2,145,000 3,333,000
Net income (loss) .................... 1,584,000 (109,000) 10,664,000 7,015,000
Basic income (loss) per common
share .............................. $ 0.15 $ (0.01) $ 0.97 $ 0.64
Diluted income (loss) per common
share .............................. $ 0.14 $ (0.01) $ 0.91 $ 0.61
1998
Revenue .............................. $24,176,000 $26,104,000 $25,246,000 $25,325,000
Gross profit ......................... 14,191,000 15,189,000 14,742,000 15,845,000
Income (loss) from operations ........ 2,269,000 2,588,000 2,320,000 (9,004,000)
Net income (loss) .................... 1,713,000 1,988,000 1,764,000 (5,132,000)
Basic income (loss) per common
share .............................. $ 0.16 $ 0.18 $ 0.16 $ (0.47)
Diluted income (loss) per common
share .............................. $ 0.15 $ 0.17 $ 0.15 $ (0.47)
</TABLE>
42
<PAGE> 43
DIRECTORS & EXECUTIVE OFFICERS
DIRECTORS
Eric R. Giler
President
Brooktrout, Inc.
David W. Duehren
Vice President of Research & Development
Brooktrout, Inc.
Patrick T. Hynes
Vice President of Advanced Product Engineering
Brooktrout, Inc.
Robert G. Barrett
General Partner
Battery Ventures, Inc.
W. Brooke Tunstall
President
Brooke Tunstall Associates
David L. Chapman
President
NorthPoint Software Ventures, Inc.
EXECUTIVE OFFICERS
Eric R. Giler
President
Brooktrout, Inc.
David W. Duehren
Vice President of Research and Development
Brooktrout, Inc.
Patrick T. Hynes
Vice President of Advanced Product Engineering
Brooktrout, Inc.
Robert C. Leahy
Vice President of Finance and Operations, and Treasurer
Brooktrout, Inc.
R. Andrew O'Brien
Vice President of Business Development
Brooktrout, Inc.
43
<PAGE> 44
DIRECTORS & EXECUTIVE OFFICERS (CONTINUED.)
Jonathan J. Sirota
General Manager, Data Technology Division
Vice President, Brooktrout, Inc.
Michael Donoghue
General Manager, IP/Fax Technology Division
Vice President, Brooktrout, Inc.
John Ison
General Manager, Voice Technology Division
Vice President, Brooktrout, Inc.
Heather Magliozzi
Vice President of Corporate Communications, Brooktrout, Inc.
John M. Faiman
Senior Vice President of Worldwide Sales, Brooktrout Technology
Mark Flanagan
President, Brooktrout Software, Inc.
Vice President, Brooktrout, Inc.
Stephen A. Ide
President, Interspeed, Inc.
Jean Dubois
President, Beacon Networks, Inc.
44
<PAGE> 45
Stock Price Information - NASDAQ National Market System ("BRKT")
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTER ENDED HIGH LOW CLOSE QUARTER ENDED HIGH LOW CLOSE
March 31 $17.00 $10.25 $10.50 March 31 $18.88 $11.50 $18.88
June 30 $20.38 $10.19 $16.06 June 30 $21.50 $12.94 $13.88
September 30 $19.00 $13.38 $13.88 September 30 $18.38 $ 9.75 $13.59
December 31 $19.00 $11.69 $18.56 December 31 $17.88 $10.75 $17.13
</TABLE>
GENERAL COUNSEL
Goodwin, Procter & Hoar LLP
Boston, MA
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Boston, MA
SHAREHOLDER INFORMATION
The Company has never paid cash dividends on its common stock. The Company
presently does not anticipate paying any cash dividends in the foreseeable
future. On March 8, 2000, there were 432 holders of record of the Company's
common stock and the closing price of the common stock on the NASDAQ National
Market System was $48.00 per share.
TRANSFER AGENT
State Street Bank & Trust Company
c/o EquiServe, Limited Partnership
P.O. Box 8040
Boston, MA 02266-8040
781-575-3400
www.equiserve.com
INFORMATION REQUESTS
A COPY OF THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN
REQUEST TO THE COMPANY.
PLEASE ADDRESS REQUESTS TO:
Investor Relations
Robert C. Leahy
Vice President of Finance and Operations, and Treasurer
Brooktrout, Inc.
410 First Avenue
Needham, MA 02494-2722
ANNUAL MEETING
Thursday, May 11, 2000 at 9:30 a.m.
Fleet National Bank
1 Federal Street
Boston, MA 02109
45
<PAGE> 46
OFFICES
CORPORATE HEADQUARTERS
Brooktrout, Inc.
410 First Avenue
Needham, MA 02494-2722
[email protected]
www.brooktroutinc.com
Phone 781-449-4100
Fax 781-449-3171
SUBSIDIARIES
Brooktrout Technology, Inc.
410 First Avenue
Needham, MA 02494-2722
[email protected]
www.brooktrout.com
Phone 781-449-4100
Fax 781-449-3171
Brooktrout Software, Inc.
333 Turnpike Road
Southborough, MA 01772
[email protected]
www.brooksoft.com
Phone 508-229-7777
Fax 508-229-8777
Interspeed, Inc.
39 High Street
North Andover, MA 01845
[email protected]
www.interspeed.com
Phone 978-688-6164
Fax 978-688-4798
Beacon Networks, Inc.
260 Cedar Hill Street
Marlborough, MA. 01752
www.beaconnetworks.com
Phone 508-480-3600
Fax 508-485-7635
46
<PAGE> 1
BROOKTROUT, INC. AND SUBSIDIARIES
BROOKTROUT SECURITIES CORPORATION
(a subsidiary of Brooktrout Holding, Inc.)
INCORPORATED: DECEMBER 22, 1992
STATE: MASSACHUSETTS
BROOKTROUT TECHNOLOGY EUROPE LTD.
(a subsidiary of Brooktrout, Inc.)
INCORPORATED: JUNE 28, 1993
STATE: MASSACHUSETTS
BROOKTROUT NETWORKS GROUP, INC.
(a subsidiary of Brooktrout, Inc.)
INCORPORATED: APRIL 1, 1993
F.I.D.: 75-2481302
TEXAS CHARTER: 95119
CHARTER ISSUED: APRIL 26, 1993
INTERSPEED, INC.
(a 57% owned subsidiary of Brooktrout, Inc.)
INCORPORATED
IN MASSACHUSETTS: OCTOBER 23, 1996
INCORPORATED IN
DELAWARE: JUNE 17, 1999.
MERGED: JUNE 18, 1999.
NETACCESS, INC.
(a subsidiary of Brooktrout Holdings, Inc.)
INCORPORATED: JUNE 26, 1997
STATE: DELAWARE
ACQUIRED: JUNE 30, 1997
BROOKTROUT HOLDINGS, INC.
(a subsidiary of Brooktrout, Inc.)
INCORPORATED: JUNE 26, 1997
STATE: DELAWARE
33
<PAGE> 2
BROOKTROUT, INC. AND SUBSIDIARIES
BROOKTROUT, INC. SUBSIDIARIES CONT.
BROOKTROUT BUSINESS TRUST
(a subsidiary of Brooktrout Holdings, Inc.)
INCORPORATED: JUNE 26, 1997
STATE: MASSACHUSETTS
BROOKTROUT TECHNOLOGY FOREIGN SALES CORPORATION
(a subsidiary of Brooktrout Holdings, Inc.)
INCORPORATED: JANUARY 8, 1996
FOREIGN SECURITIES CORPORATION (FSC)
ESTABLISHED AS A SMALL FSC
BROOKTROUT TECHNOLOGY (EUROPE) LIMITED
(a subsidiary of Brooktrout Technology Europe Ltd Massachusetts corporation)
REGISTERED IN THE UNITED KINGDOM; REG. NO. 2760331
BROOKTROUT TECHNOLOGY (EUROPE) LIMITED
REGISTERED IN THE UNITED KINGDOM; REG. NO. 276033
BROOKTROUT TECHNOLOGY, INC.
(a subsidiary of Brooktrout, Inc.)
INCORPORATED: JANUARY 11, 1984
STATE: DELAWARE
BROOKTROUT SOFTWARE, INC.
(a subsidiary of Brooktrout, Inc.)
INCORPORATED: DECEMBER 23, 1999
STATE: DELAWARE
BEACON NETWORKS, INC.
(a subsidiary of Brooktrout, Inc.)
INCORPORATED: DECEMBER 23, 1999
STATE: DELAWARE
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-12313, 333-62959 and 333-88803 on Form S-8 of Brooktrout, Inc. of our
reports dated February 3, 2000, appearing and incorporated by reference in this
Annual Report on Form 10-K of Brooktrout, Inc. for the year ended December 31,
1999.
Boston, Massachusetts
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BROOKTROUT, INC.'S CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME
FOR THE PERIOD ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BROOKTROUT, INC.'S 10-K FOR THE PERIOD ENDED DECEMBER 31,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 48,541
<SECURITIES> 1,492
<RECEIVABLES> 22,232
<ALLOWANCES> 2,466
<INVENTORY> 14,202
<CURRENT-ASSETS> 93,563
<PP&E> 18,413
<DEPRECIATION> 9,694
<TOTAL-ASSETS> 115,435
<CURRENT-LIABILITIES> 28,432
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 115,435
<SALES> 140,745
<TOTAL-REVENUES> 140,745
<CGS> 54,517
<TOTAL-COSTS> 54,517
<OTHER-EXPENSES> 77,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,086
<INCOME-TAX> 13,287
<INCOME-CONTINUING> 19,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,154
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.65
</TABLE>
