-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SUxWyqYU3E362Kx83BzybS+ItbTXZURpm0TchyqOTj7FLuzB7D7RVsE23VdK1hME gCq0FPCFOi9QRev1AduuTg== 0000950135-99-005185.txt : 19991115 0000950135-99-005185.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950135-99-005185 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROOKTROUT TECHNOLOGY INC CENTRAL INDEX KEY: 0000754516 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 042814792 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20698 FILM NUMBER: 99748552 BUSINESS ADDRESS: STREET 1: 410 FIRST AVE CITY: NEEDHAM STATE: MA ZIP: 02494 BUSINESS PHONE: 7814494100 MAIL ADDRESS: STREET 1: 410 FIRST CITY: NEEDHAM STATE: MA ZIP: 02494 10-Q 1 BROOKTROUT, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 0-20698 BROOKTROUT, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-2814792 --------------- ---------------- (State or other (I.R.S. employer jurisdiction of identification incorporation or number) organization) 410 First Avenue Needham, Massachusetts 02494-2722 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number including area code: (781) 449-4100 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 1, 1999, 10,822,522 shares of Common Stock, $.01 par value per share, were outstanding. Page 1 of 22 pages 2 BROOKTROUT, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS PART I FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 (Unaudited) 3 Condensed Consolidated Statements of Income for the Three Months Ended September 30, 1999 and September 30, 1998, and the Nine Months Ended September 30, 1999 and September 30, 1998 (Unaudited) 4 Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 1999 and September 30, 1998, and the Nine Months Ended September 30, 1999 and September 30, 1998 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and September 30, 1998 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 1999 and 1998 13 Nine Months Ended September 30, 1999 and 1998 14 Liquidity and Capital Resources 15 Item 3 Quantitative and Qualitative Disclosures about Market Risk 17 PART II OTHER INFORMATION Item 1. Legal Proceedings 21 Item 6. Exhibits 21 Signatures 22 3 BROOKTROUT, INC. Condensed Consolidated Balance Sheets (In thousands, except share data) September 30, December 31, 1999 1998 ----------- ----------- ASSETS (Unaudited) (Unaudited) Current assets: Cash and equivalents ............................. $ 48,168 $ 8,518 Marketable securities ............................ 7,312 3,837 Accounts receivable (less allowance for doubtful accounts of $3,061 in 1999 and $2,313 in 1998) . 18,012 15,837 Inventory ........................................ 12,497 10,668 Deferred tax assets .............................. 2,270 3,853 Prepaid expenses ................................. 1,525 1,242 -------- ------- TOTAL CURRENT ASSETS ........................... 89,784 43,955 -------- ------- Equipment and furniture: Computer equipment ............................... 9,442 8,602 Furniture and office equipment ................... 8,062 6,336 -------- ------- Total ............................................ 17,504 14,938 Less accumulated depreciation and amortization ... (8,829) (5,973) -------- ------- EQUIPMENT AND FURNITURE - NET .................. 8,675 8,965 Deferred tax assets ................................ 4,457 4,719 Acquired technology and other intangible assets .... 13,410 14,746 Investment and other assets ........................ 226 824 -------- ------- TOTAL ASSETS ................................... $116,552 $73,209 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and other accruals .............. $ 15,680 $15,777 Accrued compensation and commissions ............. 4,166 4,529 Customer deposits ................................ 419 614 Accrued warranty costs ........................... 1,156 1,314 Accrued taxes .................................... 7,666 496 -------- ------- TOTAL CURRENT LIABILITIES ...................... 29,087 22,730 -------- ------- Deferred rent ...................................... 467 350 Minority interest .................................. 8,653 -- Stockholders' equity: Common stock, $.01 par value; authorized, 25,000,000 shares; issued and outstanding 10,958,223 shares in 1999 and 10,828,362 in 1998 ........................................ 110 108 Additional paid-in capital ....................... 47,098 32,528 Accumulated other comprehensive income (loss) .... 306 (1,199) Retained earnings ................................ 30,831 18,692 -------- ------- STOCKHOLDERS' EQUITY ............................. 78,345 50,129 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $116,552 $73,209 ======== ======= See notes to unaudited condensed consolidated financial statements. 4 BROOKTROUT, INC. Condensed Consolidated Statements of Income (Unaudited) (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ---------------- ----------------- 1999 1998 1999 1998 ------- ------- -------- ------- REVENUE.................................... $34,406 $25,246 $100,415 $75,526 ------- ------- -------- ------- Cost and expenses: Cost of product sold .................... 12,846 10,504 39,016 31,404 Research and development ................ 7,507 5,074 20,821 15,744 Selling, general and administrative ..... 11,507 7,348 33,128 21,201 Non-cash compensation charge ............ 401 -- 2,313 -- ------- ------- -------- ------- Total cost and expenses ............. 32,261 22,926 95,278 68,349 ------- ------- -------- ------- INCOME FROM OPERATIONS .................... 2,145 2,320 5,137 7,177 ------- ------- -------- ------- Interest income, net ...................... 69 480 264 1,498 Net gain on investment activity ........... 15,485 -- 15,485 -- ------- ------- -------- ------- Income before income tax provision ........ 17,699 2,800 20,886 8,675 Income tax provision ...................... 7,307 1,036 9,019 3,210 Minority interest in loss of subsidiary ... 272 -- 272 -- ------- ------- -------- ------- NET INCOME ................................ $10,664 $ 1,764 $ 12,139 $ 5,465 ======= ======= ======== ======= BASIC INCOME PER COMMON SHARE ............. $ 0.97 $ 0.16 $ 1.11 $ 0.51 ======= ======= ======== ======= SHARES FOR BASIC .......................... 10,954 10,805 10,911 10,774 ======= ======= ======== ======= DILUTED INCOME PER COMMON SHARE ........... $ 0.91 $ 0.15 $ 1.05 $ 0.48 ======= ======= ======== ======= SHARES FOR DILUTED ........................ 11,728 11,468 11,600 11,482 ======= ======= ======== ======= See notes to unaudited condensed consolidated financial statements 5 BROOKTROUT, INC. Condensed Consolidated Statements of Comprehensive Income (Unaudited) (In thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------- ----------------- 1999 1998 1999 1998 ------- ------ ------- ------ Net income ............................. $10,664 $1,764 $12,139 $5,465 Unrealized gains (losses) on marketable securities .............. 2,272 (244) 3,475 (293) Foreign currency translation adjustment ......................... -- -- (4) -- ------- ------ ------- ------ Comprehensive income before income tax provision (benefit) .................. 12,936 1,520 15,610 5,172 Income tax (benefit) related to items of comprehensive income .............. 772 (90) 1,181 (108) ------- ------ ------- ------ Comprehensive income ................... $12,164 $1,610 $14,429 $5,280 ======= ====== ======= ====== See notes to unaudited condensed consolidated financial statements. 6 BROOKTROUT, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Nine Months Ended September 30, ------------------- 1999 1998 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................ $12,139 $ 5,465 Adjustments to reconcile net income to cash provided by operating activities: Gain on Brooktrout's sale of Interspeed stock .. (9,129) -- Non-cash compensation expense .................. 2,313 -- Depreciation and amortization .................. 4,194 2,201 Amortization of (premium) discount on marketable (3) (45) securities Deferred income taxes .......................... 101 (732) Increase (decrease) in cash from: Accounts receivable .......................... (2,175) (3,065) Inventory .................................... (1,829) (510) Other prepaid expenses ....................... (376) 282 Accounts payable and other accruals .......... (723) 3,806 ------- ------- Cash provided by operating activities ...................... 4,512 7,402 CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for equipment and furniture (2,566) (3,558) Purchases of marketable securities ................ -- (9,924) Maturities and sales of marketable securities ..... -- 5,756 Brooktrout's sale of Interspeed stock, net of related expenses ................................. 16,140 -- ------- ------- Cash provided by (used for) investing activities ...................... 13,574 (7,726) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the sale of common stock ............ 770 360 Interspeed sale of stock, net of offering expenses 20,794 -- ------- ------- Cash provided by financing activities ...................... 21,564 360 ------- ------- INCREASE IN CASH AND EQUIVALENTS .................... 39,650 36 CASH AND EQUIVALENTS, BEGINNING OF PERIOD ........... 8,518 27,916 ------- ------- CASH AND EQUIVALENTS, END OF PERIOD ................. $48,168 $27,952 ======= ======= See notes to unaudited condensed consolidated financial statements. 7 BROOKTROUT, INC. Notes to Unaudited Condensed Consolidated Financial Statements 1. Basis of Presentation Brooktrout, Inc. (the "Company") has recently reorganized its lines of business and changed its name from Brooktrout Technology, Inc. The Company is organized and reports the results of its operations in three business segments (Brooktrout Technology, Brooktrout Software, and Interspeed, Inc.) based on the products and services provided to the marketplace, customers served by each segment and distribution channels. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. They should be read in conjunction with the audited consolidated financial statements included in the Company's 1998 Annual Report on Form 10K, as amended. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results which could be expected for the full year. 2. Interspeed, Inc. On September, 24, 1999, Interspeed, Inc. (Interspeed), a subsidiary of the Company, sold 2 million primary shares of its common stock in an initial public offering at a price of $12 per share pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended. In the offering, the Company sold an additional 1.5 million secondary shares of Interspeed common stock. Following the completion of the offering, the Company owned 6.5 million shares of Interspeed common stock or approximately 61% of the shares outstanding. Due to the sale of the 2 million shares of stock by Interspeed, the Company recorded additional paid-in capital of $12.1 million reflecting the increase in its investment in Interspeed. For the three months ended September 30, 1999, Brooktrout's net income reflects the Company's share of Interspeed's net income (loss) for the same 3 month period ending September 30, 1999. In addition, the Company's net income for the three months and nine months ended September 30, 1999, also includes: (a) the net gain recorded by the Company on the sale of 1.5 million shares of Interspeed it owned in conjunction with Interspeed's initial public offering and (b) the tax benefit associated with Interspeed's operating losses realized by the Company in their consolidated return. Subsequent to the completion of Interspeed's initial public offering on September 24, 1999, Interspeed will not be included in the consolidated tax return of the Company and therefore the Company will not receive tax benefits from its share of Interspeed losses. 8 2. Interspeed, Inc. (Continued) For the six months ended June 30, 1999, and for the three months and nine months ended September 30, 1998, the consolidated results of operations reflect the contribution by Interspeed as a 100% owned subsidiary of the Company. In addition, net income for the six months ended June 30, 1999, and for the three months and nine months ended September 30, 1998, also includes the tax benefit associated with Interspeed's operating losses realized by the Company in their consolidated return. 3. Acquisition On December 17, 1998, the Company acquired the assets and assumed certain liabilities of the Computer Telephony Products ("CTP") business of Lucent Technologies Inc. CTP provides technologies for the voice processing industry and manufactures hardware and software components that connect PCs and LANs with telephone networks. The purchase price was $29.4 million, paid in cash, plus $1.1 million of transaction costs, and the Company assumed certain liabilities aggregating $1.9 million. The acquisition has been accounted for as a purchase, and accordingly, the results of operations of CTP have been included in the Company's consolidated financial statements from the date of acquisition. The purchase price has been allocated to the assets acquired based upon their fair values using independent appraisals. 4. Income Per Share Basic income per share is computed using the weighted average number of common shares outstanding during each year. Diluted income per share reflects the effect of the Company's outstanding options (using the treasury stock method), except where such options would be antidilutive. A reconciliation of weighted average shares used for the basic and diluted computations is as follows: Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Weighted average shares for basic ............ 10,954,000 10,805,000 10,911,000 10,774,000 Dilutive effect of stock options .............. 774,000 663,000 689,000 708,000 ---------- ---------- ---------- ---------- Weighted average shares for diluted .......... 11,728,000 11,468,000 11,600,000 11,482,000 ========== ========== ========== ========== 9 5. Inventory Inventory is carried at the lower of cost (first-in, first-out basis) or market and consisted of the following: September 30, December 31, 1999 1998 ----------- ----------- Raw materials .................... $ 5,820,000 $ 3,277,000 Work in process .................. 1,096,000 2,164,000 Finished goods ................... 5,581,000 5,227,000 ----------- ----------- Total ....................... $12,497,000 $10,668,000 =========== =========== 6. Cash Flow Information Cash equivalents include liquid securities with remaining maturities of three months or less at the time of purchase. Supplemental disclosure of cash flow information: Nine Months Ended September 30, September 30, 1999 1998 ---- ---- Cash paid for interest ................. $ 4,000 $ 2,000 Cash paid for income taxes ............. $1,998,000 $3,075,000 7. Major Customer No customer accounted for more than 10% of revenue for the three months ended September 30, 1999. One customer accounted for approximately 22% of revenue for the three months ended September 30, 1998, and 13% and 21% of revenue for the nine months ended September 30, 1999 and 1998, respectively. 10 8. Marketable Securities Marketable securities are classified as available-for-sale and are carried at fair market value using current market quotes. Unrealized gains or losses are included in comprehensive income (loss). Marketable securities consist of publicly-traded corporate equity securities and United States government securities with remaining maturities in excess of three months. Gross unrealized gains related to the equity securities at September 30, 1999 were $3,475,000. 9. Income Taxes The Company's quarterly effective tax rate is based on the estimated effective tax rate for the full year. 10. International Sales International sales, principally exports from the United States, accounted for approximately 27% and 20% of revenue for the three months ended September 30, 1999 and 1998, respectively, and 25% and 21% of revenue for the nine months ended September 30, 1999 and 1998, respectively. 11 11. Segment Reporting Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- 1999 1998 1999 1998 ----------- ----------- ------------ ----------- REVENUE: Brooktrout Technology $31,520,000 $23,818,000 $ 92,772,000 $70,749,000 Brooktrout Software 2,249,000 1,428,000 5,729,000 4,777,000 Interspeed, Inc. 637,000 -- 1,914,000 -- ----------- ----------- ------------ ----------- Consolidated revenue $34,406,000 $25,246,000 $100,415,000 $75,526,000 =========== =========== ============ =========== GROSS MARGIN: Brooktrout Technology $20,211,000 $14,175,000 $ 57,662,000 $41,575,000 Brooktrout Software 1,251,000 567,000 3,152,000 2,547,000 Interspeed, Inc. 98,000 -- 585,000 -- ----------- ----------- ------------ ----------- Consolidated gross margin $21,560,000 $14,742,000 $ 61,399,000 $44,122,000 =========== =========== ============ =========== INCOME (LOSS) FROM OPERATIONS:(1) Brooktrout Technology $ 6,401,000 $ 4,526,000 $ 16,964,000 $13,183,000 Brooktrout Software (857,000) (1,172,000) (2,977,000) (2,391,000) Interspeed, Inc. (2) (3,399,000) (1,034,000) (8,850,000) (3,615,000) ----------- ----------- ------------ ----------- Consolidated income from operations 2,145,000 2,320,000 5,137,000 7,177,000 Interest income (net) 69,000 480,000 264,000 1,498,000 Net gain on investment activity 15,485,000 -- 15,485,000 -- ----------- ----------- ------------ ----------- Consolidated income before income tax provision $17,699,000 $ 2,800,000 $ 20,886,000 $ 8,675,000 =========== =========== ============ =========== (1) Amounts previously reported in 1999 and 1998 have been revised to reflect an allocation of certain marketing and general and administrative expenses to the segments. Prior segment disclosure reflected the expenses in Brooktrout Technology. (2) Included in the Interspeed, Inc. loss from operations for the three months and nine months ended September 30, 1999, is a charge of $401,000 and $2,313,000, respectively, reflecting non-cash compensation expenses as a result of stock option grants. 12 11. Segment Reporting (Continued) Three Months Ended Nine Months Ended September 30, September 30, -------------------- ---------------------- 1999 1998 1999 1998 ---------- -------- ---------- ---------- DEPRECIATION AND AMORTIZATION EXPENSE: Brooktrout Technology $1,269,000 $620,000 $3,555,000 $1,707,000 Brooktrout Software 119,000 149,000 371,000 338,000 Interspeed, Inc. 114,000 55,000 268,000 156,000 ---------- -------- ---------- ---------- Consolidated depreciation and amortization expense $1,502,000 $824,000 $4,194,000 $2,201,000 ========== ======== ========== ========== 12. Subsequent Event On October 27, 1999, the Company sold an additional 425,000 shares of Interspeed common stock at a price of $12 per share pursuant to the underwriters' over allotment option. After this transaction, the Company owns 6,075,000 shares of Interspeed common stock or approximately 57% of the shares outstanding. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend," "estimate," and other expressions, which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Three Months Ended September 30, 1999 and 1998 Revenue during the three months ended September 30, 1999 increased by approximately 36% to $34,406,000, up from $25,246,000 during the three months ended September 30, 1998. The majority of this growth was in Brooktrout Technology and primarily was attributable to an increase in voice technology products driven by the acquisition of the Computer Telephony Products ("CTP") business of Lucent Technologies Inc. together with an increase in sales of Primary Rate ISDN telephone network interface products. This increase was partially offset by a decline in voice mail systems sold. In addition, there was an increase in Interspeed, Inc. product sold. Cost of product sold was $12,846,000, or approximately 37% of revenue, during the three months ended September 30, 1999, compared to $10,504,000, or approximately 42% of revenue, for the same period in 1998. Gross profit percentage was approximately 63% and 58% for the three months ended September 30, 1999 and 1998, respectively. The increase in gross profit percentage was primarily generated by Brooktrout Technology and is the result of the increase in voice technology products sold and the corresponding profit that is generated from these higher margin products. These higher margin products replaced the margin lost on the decline in the lower margin voice mail systems sold. Research and development expense was $7,507,000, or approximately 22% of revenue, compared with $5,074,000, or approximately 20% of revenue, for the three months ended September 30, 1999 and 1998, respectively. This increase primarily is attributable to the inclusion of CTP and the related development efforts on the voice technology products combined with the development of the Digital Subscriber Line (DSL) products of Interspeed, Inc. The Company intends to continue to commit significant resources to product development. The Company's continuing development efforts are focused on the computer telephony software development tools, the next generation of Primary Rate ISDN telephone network interface products, the TR Series product family, as well as the Brooktrout Open Systems Telephony Architecture (BOSTon). 14 Selling, general and administrative expense was $11,507,000 during the three months ended September 30, 1999, compared with $7,348,000 during the same period in 1998. This higher expense level resulted from the inclusion of CTP in addition to increased staffing, promotional activities and travel related expenses. As a percentage of revenue, selling, general and administrative expense for the third quarter of 1999 was approximately 33% of revenue, compared with approximately 29% for the third quarter of 1998. During the three months ended September 30, 1999, the Company recorded a charge of $401,000 reflecting non-cash compensation expenses as a result of stock option grants at Interspeed. For the three months ended September 30, 1999, interest and other income was $69,000, compared with $480,000 for the same period in 1998. The decrease was caused by lower investable cash balances due to the acquisition of CTP. During the three months ended September 30, 1999, the Company recorded a gain of $15,485,000 reflecting a gain of $16.1 million, net of offering related costs, on the sale of 1.5 million shares of Interspeed by the Company in Interspeed's initial public offering, less $655,000 representing the book value of a separate investment that was written off. The Company's effective tax rate was 41% in 1999 and 37% in 1998, based on the Company's estimated effective tax rate for the full year. Excluding the permanent difference associated with the non-cash compensation charge of $401,000 related to stock option grants at Interspeed and excluding the income tax provision on the net gain on investment activity of $15,485,000, the effective tax rate would have been 34% in 1999. Nine Months Ended September 30, 1999 and 1998 Revenue during the nine months ended September 30, 1999 increased by approximately 33% to $100,415,000, up from $75,526,000 during the nine months ended September 30, 1998. The majority of this growth was in Brooktrout Technology and primarily was attributable to an increase in voice technology products driven by the acquisition of CTP together with an increase in sales of Interspeed, Inc. product. In addition, there was an increase in Primary Rate ISDN telephone network interface products sold. The increase was partially offset by a decline in voice mail systems sold. Cost of product sold was $39,016,000, or approximately 39% of revenue, during the nine months ended September 30, 1999, compared to $31,404,000, or approximately 42% of revenue, for the corresponding period in 1998. Gross profit percentage was approximately 61% and 58% for the nine months ended September 30, 1999 and 1998, respectively. The increase in gross profit percentage was primarily generated by Brooktrout Technology and is the result of the increase in voice technology products sold and the corresponding profit that is generated from these higher margin products. These higher margin products replaced the margin lost on the decline in the lower margin voice mail systems sold. Research and development expense was $20,821,000, or approximately 21% of revenue, compared with $15,744,000, or approximately 21% of revenue, for the nine months ended September 30, 1999 and 1998, respectively. This increase primarily is attributable to the inclusion of CTP and the related development efforts on the voice technology products combined with the development of the DSL products of Interspeed, Inc. The Company intends to continue to commit significant resources to 15 product development. The Company's continuing development efforts are focused on the computer telephony software development tools, the next generation of Primary Rate ISDN telephone network interface products, the TR Series product family, as well as the BOSTon architecture Selling, general and administrative expense was $33,128,000 during the nine months ended September 30, 1999, compared with $21,201,000 during the corresponding period in 1998. This higher expense level resulted from the inclusion of CTP together with increased staffing, promotional activities and professional fees. As a percentage of revenue, selling, general and administrative expense for the first nine months of 1999 was approximately 33% of revenue, compared with approximately 28% for the first nine months of 1998. During the nine months ended September 30, 1999, the Company recorded a charge of $2,313,000 reflecting non-cash compensation expenses as a result of stock option grants at Interspeed. For the nine months ended September 30, 1999, interest and other income was $264,000, compared with $1,498,000 for the same period in 1998. The decrease was caused by lower investable cash balances due to the acquisition of CTP. During the nine months ended September 30, 1999, the Company recorded a gain of $15,485,000 reflecting a gain of $16.1 million, net of offering related costs, on the sale of 1.5 million shares of Interspeed by the Company in Interspeed's initial public offering, less $655,000 representing the book value of a separate investment that was written off. The Company's effective tax rate was 43% in 1999 and 37% in 1998, based on the Company's estimated effective tax rate for the full year. Excluding the permanent difference associated with the non-cash compensation charge of $2,313,000 related to stock option grants at Interspeed and excluding the income tax provision on the net gain on investment activity of $15,485,000, the effective tax rate would have been 34% in 1999. Liquidity and Capital Resources For the nine months ended September 30, 1999, the Company funded its operations principally through operating revenue. The Company's working capital increased from $21.2 million at December 31, 1998 to $60.7 million at September 30, 1999. The increase was attributable primarily to higher cash balances due to the proceeds from the sale of Interspeed stock. On September 24, 1999, Interspeed sold 2 million shares of its common stock in an initial public offering generating $16.7 million. The Company sold 1.5 million shares of Interspeed that it owned in the offering. The Company recognized a pre-tax gain of $15.5 million from the offering. In addition, cash was generated from continued profitable operations which were partially offset by higher accrued tax balances. On October 1, 1999, the Company's Board of Directors approved the purchase of up to one million shares of the Company's common stock. Through November 1, 1999, the Company had repurchased a total of 137,000 shares for a total cash purchase of $1.7 million. In August 1999, the Company renewed its working capital line of credit. Under the renewed line of credit, the Company may borrow up to $10,000,000 on an unsecured basis, all of which may be used for issuance of letters of credit, subject to compliance with certain covenants. The line of credit will expire in July 2000 and at that time any outstanding balances would be payable in full. Any 16 amounts borrowed under the line would be subject to interest at the lender's prime rate. At September 30, 1999, there were no commitments outstanding on letters of credit; no borrowings have been made during any period presented. During the first nine months of 1999, the Company invested approximately $2.6 million in capital equipment. The Company currently has no material commitments for additional capital expenditures. The Company anticipates that cash flows from operations, together with current cash and marketable securities balances and funds available under the Company's line of credit, will be sufficient to meet the Company's working capital equipment expenditure requirements for the foreseeable future. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. In addition, the Company's working capital line of credit agreement provides for borrowings which bear interest at a variable rate based on the lender's prime rate. As of September 30, 1999, the Company did not have any borrowings outstanding under the credit agreement. The Company believes that the effects, if any, of possible near-term changes in interest rates on the Company's financial position, results of operations and cash flows should not be material. The Company owns publicly-traded corporate equity securities which are considered available-for-sale for accounting purposes and any unrealized gain or loss is deferred as a component of other comprehensive income. The Company denominates substantially all sales in U.S. dollars and has limited expenses denominated in foreign currencies, generally from its limited operations in Belgium and the United Kingdom. Consequently, the Company has limited exposure to fluctuations in foreign currencies. The Company, to date, has not attempted to hedge this limited foreign currency exposure. The Company does not enter into financial instrument transactions for trading or other speculative purposes. 18 YEAR 2000 The statements in the following section include Year 2000 readiness disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act. Year 2000 Readiness Disclosure This section contains certain statements that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's Year 2000 compliance, and the eventual affects of the Year 2000 on the Company may be materially different than currently projected. This may be due to, among other things, delays in the implementation of the Company's Year 2000 Plan and the failure of key third parties with whom the Company has a significant business relationship to achieve Year 2000 compliance. The Year 2000 issue relates to a complex of potential problems arising from the ways in which computer software can handle dates. Many older systems use a two digit date format which may create ambiguities in passing into a new century. The Year 2000 is a special case in the Gregorian calendar which can create problems with certain leap-year calculation routines. In addition, various contemporary computer operating systems, including systems on which many of the Company's and its suppliers' products are dependent, employ binary dating conventions which cannot currently manage dates falling after certain times after the year 2000 (e.g., the year 2038 in the case of most 32-bit Windows software.) The Company has a Year 2000 Plan, which it is actively pursuing to address the Company's Year 2000 issues. The Company's Year 2000 Plan focuses on each of the Company's internal systems, the Company's products, and third parties with which the Company has a significant business relationship. However, no assurance can be given that the Company or such third parties will successfully address its or their Year 2000 issues. The Company's Year 2000 Plan relating to its internal systems consists of three phases - assessment, testing and implementation. The Company is currently in the implementation phase and anticipates completing this phase during the fourth quarter of 1999. The Company believes that all material systems will be compliant by the Year 2000 and that the cost to address this issue is not material. The Company does not have any contingency plans in the event that its material systems are not Year 2000 compliant, however, if the Company determines that its systems may not be compliant prior to 2000, it shall create and implement contingency plans as necessary. The Company has gathered, tested and produced information about the Company's products impacted by the Year 2000 transition. Although the Company believes that most of its products are in or will be (through maintenance releases or patches) in Year 2000 compliance, the Company has determined that certain of its older products are not and will not be compliant. However, with respect to these older products, customers generally will have upgrade paths available to move to the Company's newer compliant products, which generally will require some change in the operating environment. The Company is taking steps to inform such affected users of this issue. 19 All organizations dealing with the Year 2000 must address the effect this issue will have on their significant business relationships with key third parties. The Company's significant business relationships which may be adversely impacted by the Year 2000 issue include certain contractual relationships with key suppliers of components for the Company's products, service providers for the Company's internal systems and major customers for the Company's products (including one such customer which accounts for more than 10% of the Company's revenue). The Company continues to work with key third parties to understand their ability to continue providing services, products and demand for the Company's products through the change to the Year 2000. If any significant Year 2000 problems are identified with key third parties, contingency plans will be developed. The Company continues to evaluate the estimated costs associated with achieving Year 2000 readiness. To date, costs associated with achieving Year 2000 readiness are $650,000. Based on current estimates, the remaining costs associated with the Company's Year 2000 Plan will be approximately $100,000. The Company anticipates that substantial litigation may be brought against vendors of all component products of systems that are unable to properly manage data related to the Year 2000. The Company has not received any threats of such litigation against it, but no assurance can be given that such litigation may not be threatened or brought in the future. The Company's agreements with customers typically contain provisions designed to limit the Company's liability for such claims. It is possible, however, that these measures will not provide protection from liability claims, as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Furthermore, the failure of the Company or the Company's key suppliers and/or customers to be Year 2000 compliant may also result in litigation being brought against the Company in addition to making it more difficult and/or costly for the Company to manufacture and sell its products. Any such claims, with or without merit, or the failure of the Company, its suppliers or customers to be Year 2000 compliant could result in a material adverse affect on the Company's business, financial condition and results of operations, including increased warranty costs, customer satisfaction issues and potential lawsuits. EURO ISSUE Some of the countries in which the Company sells its products are Member States of the Economic and Monetary Union (EMU). Beginning January 1, 1999 Member States of the EMU may begin trading in either their local currencies or the euro, the official currency of EMU participating Member States. Parties are free to choose the unit they prefer in contractual relationships during the transitional period, beginning January 1999 and ending June 2002. The new accounting system that the Company implemented can be upgraded to support the euro and process transactions in either a country's local currency or the euro. The Company does not anticipate a large demand from its customers to transact in euros, so this upgrade is not planned for implementation until the fourth quarter of 1999. 20 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Management is currently assessing the impact of SFAS No. 133 on the financial statements of the Company. The Company expects to adopt this accounting standard for the fiscal year commencing January 1, 2001, as required. 21 Part II. OTHER INFORMATION Item 1. Legal Proceedings On October 22, 1998, Syntellect filed a demand for arbitration, with the American Arbitration Association (the "AAA") in Dallas, Texas, in which Syntellect asserts that Brooktrout failed to pay certain royalties under a patent license agreement. On December 16, 1998, the AAA granted the Company's request that any arbitration hearing be conducted by the Boston Regional Office of the AAA. On January 6, 1999, the Company filed an answering statement in the arbitration proceedings, in which all claims were denied. An arbitrator has been selected, and Aspect Telecommunications Corporation has been joined as a claimant. The Company has filed a memorandum explaining its position regarding the scope of the arbitration proceedings. A tentative hearing date has been set for February 7, 2000. The Company intends to vigorously defend against Syntellect's claims in the arbitration. Items 2 through 5. None Item 6. Exhibits (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarterly period ended September 30, 1999. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BROOKTROUT, INC. Date: November 12, 1999 By: /s/ Eric R. Giler ---------------------------------- Eric R. Giler President (Principal Executive Officer) Date: November 12, 1999 By: /s/ Robert C. Leahy ---------------------------------- Robert C. Leahy Vice President of Finance and Operations and Treasurer (Principal Financial and Accounting Officer) EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 48,168 7,312 18,012 3,061 12,497 89,784 17,504 8,829 116,552 29,087 0 110 0 0 0 116,552 34,406 34,406 12,846 12,846 19,415 0 0 17,699 7,307 10,392 0 272 0 10,664 .97 .91
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