<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _______
Commission File Number 0-22871
OMTOOL, LTD.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8 INDUSTRIAL WAY, SALEM, NH 03079
(Address of Principal Executive Offices) (Zip Code)
(603) 898-8900
(Registrant's Telephone Number Including Area Code)
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
--- ---
There were 11,466,839 shares of the Company's Common Stock, par value $0.01,
outstanding on November 12, 1997.
================================================================================
<PAGE> 2
OMTOOL, LTD.
FORM 10-Q
For the Quarter Ended September 30, 1997
CONTENTS
Item Number PAGE
- ----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 and
December 31, 1996 (Unaudited) 3
Statements of Operations for the three months and nine
months ended September 30, 1997 and 1996 (Unaudited) 4
Statement of Convertible Redeemable Preferred Stock and
Stockholders' Equity (Deficit) for the nine months ended
September 30, 1997 (Unaudited) 5
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (Unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Certain Factors That May Affect Future Results 15
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE> 3
OMTOOL, LTD.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,209,225 $ 2,042,100
Short-term investments 24,991,657 930,619
Accounts receivable, less reserves of $856,000 and
$375,000 in 1997 and 1996, respectively 3,508,316 2,264,502
Inventory 153,939 225,117
Prepaid expenses 423,399 113,343
Deferred tax asset 108,000 108,000
----------- -----------
Total current assets 31,394,536 5,683,681
Property and equipment, net 1,289,762 754,398
Other assets 31,712 18,861
----------- -----------
$32,716,010 $ 6,456,940
=========== ===========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 33,355 $ 105,651
Accounts payable 499,231 567,749
Accrued liabilities 1,057,823 402,624
Income taxes payable 513,112 257,369
Deferred revenue 1,398,823 1,037,538
----------- -----------
Total current liabilities 3,502,344 2,370,931
----------- -----------
Long-term debt, net of current portion 10,549 212,237
----------- -----------
Long-term liabilities 3,250 173,877
----------- -----------
Commitments
Series B Convertible Redeemable Preferred Stock,
$.01 par value --
Authorized, issued and outstanding --
none in 1997; 1,356,116 shares in 1996
(at redemption value); -- 5,166,667
----------- -----------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value -
Authorized -- 2,000,000; issued and
outstanding -- none -- --
Series A Convertible Preferred Stock, $.01
par value --
Authorized, issued and outstanding --
none in 1997; 162,500 shares
in 1996 (Liquidation preference of $325,000) -- 1,625
Common Stock, $.01 par value --
Authorized -- 35,000,000; issued and outstanding --
11,465,271 in 1997; 5,315,008 in 1996; 114,653 53,150
Additional paid-in capital 29,091,020 --
Accumulated deficit (5,806) (1,521,547)
----------- -----------
Total stockholders' equity (deficit) 29,199,867 (1,466,772)
----------- -----------
$32,716,010 $ 6,456,940
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
OMTOOL, LTD.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license $ 3,337,308 $ 1,347,341 $ 8,823,556 $ 3,378,732
Hardware 1,001,637 360,456 2,750,075 887,423
Service and other 662,494 417,804 1,706,304 1,130,512
----------- ----------- ----------- -----------
Total revenues 5,001,439 2,125,601 13,279,935 5,396,667
----------- ----------- ----------- -----------
Cost of revenues:
Software license 129,462 25,801 347,552 75,748
Hardware 650,720 252,100 1,859,156 590,913
Service and other 319,359 211,028 820,619 557,342
----------- ----------- ----------- -----------
Total cost of revenues 1,099,541 488,929 3,027,327 1,224,003
----------- ----------- ----------- -----------
Gross profit 3,901,898 1,636,672 10,252,608 4,172,664
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 1,881,713 699,576 4,819,931 1,740,609
Research and development 882,734 567,689 2,436,436 1,344,394
General and administrative 380,514 228,841 1,158,969 658,737
----------- ----------- ----------- -----------
Total operating expenses 3,144,961 1,496,106 8,415,336 3,743,740
----------- ----------- ----------- -----------
Income from operations 756,937 140,566 1,837,272 428,924
Interest income 154,840 9,928 202,323 14,065
Interest expense (6,599) (2,846) (25,521) (6,964)
----------- ----------- ----------- -----------
Income before provision for income
taxes 905,178 147,648 2,014,074 436,025
Provision for income taxes 260,000 52,000 665,000 153,000
----------- ----------- ----------- -----------
Net income $ 645,178 $ 95,648 $ 1,349,074 $ 283,025
=========== =========== =========== ===========
Net income per common and common
equivalent share $ 0.06 $ 0.13
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 11,320,309 10,098,658
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
OMTOOL, LTD.
STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------
SERIES B CONVERTIBLE REDEEMABLE SERIES A CONVERTIBLE
PREFERRED STOCK, PREFERRED STOCK,
$0.01 PAR VALUE $0.01 PAR VALUE
--------------- ---------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 1,356,116 $ 5,166,667 162,500 $ 1,625
Exercise of stock options -- -- -- --
Accrued dividends
on Series B
Convertible
Redeemable
Preferred Stock -- 233,333 -- --
Conversion of Series
A and B Preferred Stock (1,356,116) (5,400,000) (162,500) (1,625)
Issuance of common stock in initial
public offering net of issuance costs -- -- -- --
Net income -- -- -- --
---------- ----------- -------- -------
Balance, September 30, 1997 -- $ -- -- $ --
========== =========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------------------------------------------
COMMON STOCK, $0.01 PAR VALUE TOTAL
----------------------------- ADDITIONAL STOCKHOLDERS'
NUMBER OF PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,315,008 $ 53,150 $ -- $(1,521,547) $ (1,466,772)
Exercise of stock options 113,031 1,130 37,048 -- 38,178
Accrued dividends
on Series B
Convertible
Redeemable
Preferred Stock -- -- -- (233,333) (233,333)
Conversion of Series
A and B Preferred Stock 3,037,232 30,373 4,971,252 400,000 5,400,000
Issuance of common stock in initial
public offering net of issuance costs 3,000,000 30,000 24,082,720 -- 24,112,720
Net income -- -- -- 1,349,074 1,349,074
---------- -------- ----------- ----------- ------------
Balance, September 30, 1997 11,465,271 $114,653 $29,091,020 $ (5,806) $ 29,199,867
========== ======== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
OMTOOL, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,349,074 $ 283,025
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization 292,179 121,402
Changes in assets and liabilities-
Accounts receivable (1,243,814) (1,361,583)
Inventory 71,178 (59,790)
Prepaid expenses (310,056) 25,069
Accounts payable (68,518) 172,418
Accrued liabilities 655,199 (7,333)
Income taxes payable 255,743 153,071
Deferred revenue 361,285 502,047
Long-term liabilities (170,627) (99,825)
------------ ------------
Net cash provided by (used in) operating activities 1,191,643 (271,499)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (827,543) (340,172)
Purchases of short-term investments (26,719,838) (70,000)
Proceeds from sale of short-term investments 2,658,800 --
Increase in other assets (12,851) (552)
------------ ------------
Net cash used in investing activities (24,901,432) (410,724)
------------ ------------
Cash Flows from Financing Activities:
Payments on long-term debt (273,984) (20,142)
Proceeds from issuance of common stock 24,150,898 --
Purchase and retirement of common stock -- (2,000,183)
Net proceeds from sales of Series A Convertible
Preferred Stock -- 325,000
Net proceeds from sale of Series B Convertible
Redeemable Preferred Stock -- 4,923,932
------------ ------------
Net cash provided by financing activities 23,876,914 3,228,607
------------ ------------
Net increase in cash and cash equivalents 167,125 2,546,384
Cash and cash equivalents, beginning of period 2,042,100 550,684
------------ ------------
Cash and cash equivalents, end of period $ 2,209,225 $ 3,097,068
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $ 25,521 $ 4,398
============ ============
Income taxes $ 409,324 $ --
============ ============
Supplemental Disclosure of Noncash Investing and Financing
Transactions:
Equipment acquired under capital lease obligation $ -- $ 62,732
============ ============
Accrued dividends on Series B Convertible Redeemable
Preferred Stock $ 233,333 $ 66,667
============ ============
Conversion of Series A and B Preferred Stock $ 5,401,625 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Omtool, Ltd. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the financial statements and notes
thereto for the year ended December 31, 1996 included in the Company's
Registration Statement on Form S-1 (File No. 333-29397) as filed with the
Securities and Exchange Commission. The accompanying financial statements
reflect all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of results for
the interim periods presented. The results of operations for the three and nine
month periods ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full fiscal year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding during the
period, including the automatic conversion of all outstanding shares of
convertible preferred stock into 3,037,232 shares of common stock. Pursuant to
the requirements of the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common and common equivalent shares issued during the 12 months
immediately prior to the date of the initial filing of the Company's
registration statement have been included in the calculation of weighted average
number of common shares outstanding for all periods presented using the treasury
stock method. Fair market value for the purpose of the calculation was assumed
to be $9.00. Historical net income (loss) per share data have not been
presented, as such information is not considered to be relevant or meaningful.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents consist primarily of investments in money market funds. In
accordance with SFAS 115, Accounting for Investments in Certain Debt and Equity
Securities, the Company's cash equivalents are classified as held-to-maturity
securities.
(c) Short-Term Investments
As of December 31, 1996 and September 30, 1997, the Company had $930,619
and $24,991,657, respectively, invested in securities consisting of municipal
bonds. In accordance with SFAS No. 115, the Company has classified its
short-term investments as available-for-sale. These securities have been
recorded at cost, which approximates market value at December 31, 1996 and
September 30, 1997.
(d) Inventory
Inventory consists of hardware purchased for resale and is valued at the
lower of cost or net realizable value.
7
<PAGE> 8
(3) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Initial Public Offering
In the quarter ended September 30, 1997, the Company completed its initial
public offering ("IPO") of 3,000,000 shares of Common Stock at $9.00 per share
resulting in net proceeds to the Company of approximately $24,112,720, net of
issuance costs. The Series A Convertible Preferred Stock and Series B
Convertible Redeemable Preferred Stock automatically converted into 325,000
shares and 2,712,232 shares, respectively, of Common Stock upon the closing of
the IPO.
(b) Amended and Restated Certificate of Incorporation
Effective upon the closing of the Company's IPO, the Company amended its
Certificate of Incorporation to increase its authorized common stock to
35,000,000 shares and to authorize 2,000,000 shares of Preferred Stock, $0.01
par value per share.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying financial
statements for the periods specified and the associated notes. Further reference
should be made to the Company's Registration Statement on Form S-1 (File No.
333-29397) as filed with the Securities and Exchange Commission.
OVERVIEW
Omtool designs, develops, markets and supports open, client/server
facsimile software, delivering solutions which automate and integrate fax
communication throughout the enterprise. The Company was incorporated in March
1991 and shipped its initial facsimile software products in 1991. The Company's
revenues are primarily derived from licensing the rights to use its Fax Sr. NT
software product directly to end users and indirectly through resellers. The
Company also derives revenues from the resale of third-party hardware products,
principally intelligent fax boards and fax modems, and from the delivery of
related services, consisting primarily of customer support contracts.
The Company has historically derived substantially all of its total
revenues from sales within North America. Sales outside of North America
represented approximately 7%, 13% and 10% of the Company's total revenues in
1996 and the three and nine months ended September 30, 1997, respectively.
Historically, the Company had marketed and sold its products principally
through its direct telesales force. During 1996, the Company began actively
recruiting value added resellers, systems integrators, resellers and
distributors to expand its indirect distribution channel. Sales through the
Company's indirect distribution channels were 24%, 23% and 31% of the Company's
total revenues in 1996 and the three and nine months ended September 30, 1997,
respectively.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------ ----- ----- ------
<S> <C> <C> <C> <C>
Revenues:
Software license 66.7% 63.4% 66.5% 62.6%
Hardware 20.0 17.0 20.7 16.5
Service and other 13.3 19.6 12.8 20.9
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Software license 2.6 1.2 2.6 1.4
Hardware 13.0 11.9 14.0 11.0
Service and other 6.4 9.9 6.2 10.3
----- ----- ----- -----
Total cost of revenues 22.0 23.0 22.8 22.7
----- ----- ----- -----
Gross profit 78.0 77.0 77.2 77.3
----- ----- ----- -----
Operating expenses:
Sales and marketing 37.6 32.9 36.3 32.3
Research and development 17.7 26.7 18.4 24.9
General and administrative 7.6 10.8 8.7 12.2
----- ----- ----- -----
Total operating
expenses 62.9 70.4 63.4 69.4
----- ----- ----- -----
Income from operations 15.1 6.6 13.8 7.9
Interest income, net 3.0 .3 1.4 .1
----- ----- ----- -----
Income before provision for
income taxes 18.1 6.9 15.2 8.0
Provision for income taxes 5.2 2.4 5.0 2.8
----- ----- ----- -----
Net income 12.9% 4.5% 10.2% 5.2%
===== ===== ===== =====
Gross profit:
Software license 96.1% 98.1% 96.1% 97.8%
Hardware 35.0 30.1 32.4 33.4
Service and other 51.8 49.5 51.9 50.7
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues
Total Revenues. The Company's revenues are currently derived primarily from
fees from licensing of the Company's software products and, to a lesser extent,
from related sales of hardware and services. The Company's total revenues were
$5.0 million and $2.1 million for the three months ended September 30, 1997 and
1996, respectively, representing an increase of 135%.
Software License. The Company's software license revenues are derived
primarily from the licensing of the Company's Fax Sr. product. Software license
revenues were $3.3 million for the three months ended September 30, 1997 and
$1.3 million for the three months ended September 30, 1996, or 67% and 63% of
total revenues for each respective period, representing an increase of 148%. The
increase in dollar amount was primarily due to increased market acceptance of
the
10
<PAGE> 11
Company's Fax Sr. product for the Windows NT operating system, as well as
expansion of the Company's direct telesales force and indirect sales channels.
Hardware. Hardware revenues are derived from the resale of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. Hardware revenues were $1.0 million for the
three months ended September 30, 1997 and $360,000 for the three months ended
September 30, 1996, or 20% and 17% of total revenues for each respective period,
representing an increase of 178%. The increase in hardware revenues was due
primarily to the increase of hardware unit sales accompanying increased licenses
of Fax Sr. and a change in the sales mix of third-party hardware products from
lower priced modem products to high-end multi-channel modem boards.
Service and Other. Service and other revenues are primarily comprised of
fees from maintenance contracts. Service and other revenues were $662,000 for
the three months ended September 30, 1997 and $418,000 for the three months
ended September 30, 1996, or 13% and 20% of total revenues for each respective
period, representing an increase of 59%. The increase in dollar amount was due
primarily to the increase in maintenance revenues as a result of a larger
installed customer base. Although to date the Company has not provided
consulting, configuration and installation services, the Company intends to
offer these customer services in the future as warranted by customer demand.
There can be no assurance that the Company will ultimately decide to provide
these services or that the Company will be successful in providing these
services.
Cost of Revenues
Software License. Cost of software license revenues consists primarily of
the costs of sublicensing third-party software products, product media, and
product duplication. Cost of software license revenues was $129,000 and $26,000
for the three months ended September 30, 1997 and 1996, respectively,
representing 4% and 2% of software license revenues for each respective period.
The increase in dollar amount was primarily due to the higher volume of products
shipped during the three months ended September 30, 1997 compared to the same
period in 1996. Software license gross margin percentages decreased to 96% for
the three months ended September 30, 1997 from 98% for the same period in 1996
due to increased license fees and royalties paid to third-party software
providers.
Hardware. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $651,000 and
$252,000 for the three months ended September 30, 1997 and 1996, respectively,
representing 65% and 70% of hardware revenues for each respective period. The
increase in dollar amount for the cost of hardware revenues for the three months
ended September 30, 1997 was due primarily to increased unit sales of hardware
products accompanying licenses of Fax Sr. and a change in the sales mix of
third-party hardware products from less expensive modem products to high-end
multi-channel modem boards. The gross margin percentage for hardware sales
increased to 35% for the three months ended September 30, 1997 from 30% in the
same period in 1996 due to the change in hardware sales mix.
Service and Other. Cost of service and other revenues consists primarily of
the costs incurred in providing telephone support as well as other miscellaneous
customer service-related expenses. Cost of service and other revenue was
$319,000 and $211,000 for the three months ended September 30, 1997 and 1996,
respectively, representing 48% and 50% of service and other revenues for each
respective period. The increase in dollar amount of cost of service and other
revenues during the period was due primarily to the higher volume of product
upgrades shipped during the three months ended September 30, 1997 and the hiring
of incremental personnel to support growth in the customer base. The gross
margin percentage for service and other revenues remained relatively constant at
52% and 50% for the three months ended September 30, 1997 and 1996,
respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, and associated overhead costs, and the
cost of marketing programs such as direct mailings, public relations, trade
shows, seminars, and related communication costs. Sales and marketing expenses
were $1.9 million and $700,000 for the three months ended September 30, 1997 and
1996, respectively, or 38% and 33% of total revenues for each respective period.
The increase in dollar amount and the increase in sales and marketing expenses
as a percentage of total revenues was primarily due to the Company's effort to
expand its direct telesales force and marketing organization, higher sales
commissions associated with
11
<PAGE> 12
increased revenues and increased marketing program activities. The increase was
also partly due to the acceleration of additions to the Company's direct sales
force in an effort to expand the sales infrastructure required for the
Company's future revenue objectives. The Company expects sales and marketing
expenses will continue to increase in absolute terms.
Research and Development. Research and development expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities, and consist primarily of
employee salaries, benefits, and associated overhead costs as well as consulting
expenses and the cost of software development tools. Research and development
expenses were $883,000 and $568,000 for the three months ended September 30,
1997 and 1996, respectively, or 18% and 27% of total revenues for each
respective period. The increase in dollar amount was primarily attributable to
the employment of additional staff and independent contractors to develop and
enhance the Company's products and provide quality assurance. Research and
development expenses decreased as a percentage of total revenues as the Company
continued to realize operating leverage from its established infrastructure. The
Company expects research and development expenses will continue to increase in
absolute terms.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive and
financial personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses were
$381,000 and $229,000 for the three months ended September 30, 1997 and 1996,
respectively, or 8% and 11% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to an increase in personnel
and the overhead costs allocated to support such personnel. General and
administrative expenses decreased as a percentage of total revenues as the
Company continued to realize operating leverage from its established
infrastructure. The Company expects general and administrative expenses will
continue to increase in absolute terms.
Interest Income, Net. Interest income, net consists primarily of interest
earned on cash, cash equivalents, and short-term investments, offset by interest
expense associated with equipment financing and borrowings. Interest income, net
represented income of $148,000 in the three months ended September 30, 1997, due
primarily to interest income earned on excess cash from the proceeds of the
Company's initial public offering completed in August 1997.
Provision for Income Taxes. Provision for income taxes was $260,000 and
$52,000 for the three months ended September 30, 1997 and 1996, respectively,
resulting in effective tax rates of approximately 29% and 35% in the three
months ended September 30, 1997 and 1996, respectively. Income taxes in 1997
have been provided at the Company's respective federal and state statutory
rates, reduced primarily for income tax credits and the tax effect of certain
tax-exempt interest income. The effective income tax rate in 1997 is lower than
1996 due primarily to additional tax-exempt interest earned and the change in
federal tax laws extending the research and development credit through June 30,
1998.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues
Total Revenues. The Company's total revenues were $13.3 million and $5.4
million for the nine months ended September 30, 1997 and 1996, respectively,
representing an increase of 146%.
Software License. Software license revenues were $8.8 million for the nine
months ended September 30, 1997 and $3.4 million for the nine months ended
September 30, 1996, or 67% and 63% of total revenues for each respective period,
representing an increase of 161%. The increase in dollar amount was primarily
due to increased market acceptance of the Company's Fax Sr. product for the
Windows NT operating system, as well as expansion of the Company's direct
telesales force and indirect sales channels.
Hardware. Hardware revenues were $2.8 million for the nine months ended
September 30, 1997 and $887,000 for the nine months ended September 30, 1996, or
21% and 17% of total revenues for each respective period, representing an
increase of 210%. The increase in hardware revenues was due primarily to the
increase of hardware unit sales accompanying increased licenses of Fax Sr. and a
change in the sales mix of third-party hardware products from lower priced modem
products to high-end multi-channel modem boards.
12
<PAGE> 13
Service and Other. Service and other revenues were $1.7 million for the
nine months ended September 30, 1997 and $1.1 million for the nine months ended
September 30, 1996, or 13% and 21% of total revenues for each respective period,
representing an increase of 51%. The increase in dollar amount was due primarily
to the increase in maintenance revenues as a result of a larger installed
customer base.
Cost of Revenues
Software License. Cost of software license revenues was $348,000 and
$76,000 for the nine months ended September 30, 1997 and 1996, respectively,
representing 4% and 2% of software license revenues for each respective period.
The increase in dollar amount was primarily due to the higher volume of products
shipped during the nine months ended September 30, 1997 compared to the same
period in 1996. Software license gross margin percentages decreased to 96% for
the nine months ended September 30, 1997 from 98% for the same period in 1996
due to increased license fees and royalties paid to third-party software
providers.
Hardware. Cost of hardware revenues was $1.9 million and $591,000 for the
nine months ended September 30, 1997 and 1996, respectively, representing 68%
and 67% of hardware revenues for each respective period. The increase in dollar
amount for the cost of hardware revenues for the nine months ended September 30,
1997 was due primarily to increased unit sales of hardware products accompanying
licenses of Fax Sr. and a change in the sales mix of third-party hardware
products from less expensive modem products to high-end multi-channel modem
boards. The gross margin percentages remained relatively constant at 32% for the
nine months ended September 30, 1997 compared to 33% for the same period in
1996.
Service and Other. Cost of service and other revenue was $821,000 and
$557,000 for the nine months ended September 30, 1997 and 1996, respectively,
representing 48% and 49% of service and other revenues for each respective
period. The increase in dollar amount of cost of service and other revenues
during the period was due primarily to the higher volume of product upgrades
shipped during the nine months ended September 30, 1997 and the hiring of
incremental personnel to support such growth. The gross margin percentage for
service and other revenues remained relatively constant at 52% and 51% for the
nine months ended September 30, 1997 and 1996, respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $4.8 million and
$1.7 million for the nine months ended September 30, 1997 and 1996,
respectively, or 36% and 32% of total revenues for each respective period. The
increase in dollar amount and the increase in sales and marketing expenses as a
percentage of total revenues was primarily due to the Company's effort to expand
its direct telesales force and marketing organization, higher sales commissions
associated with increased revenues, and increased marketing program activities.
Research and Development. Research and development expenses were $2.4
million and $1.3 million for the nine months ended September 30, 1997 and 1996,
respectively, or 18% and 25% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to the employment of
additional staff and independent contractors to develop and enhance the
Company's products and provide quality assurance. Research and development
expenses decreased as a percentage of total revenues as the Company continued to
realize operating leverage from its established infrastructure.
General and Administrative. General and administrative expenses were $1.2
million and $659,000 for the nine months ended September 30, 1997 and 1996,
respectively, or 9% and 12% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to an increase in personnel
and the overhead costs allocated to support such personnel. General and
administrative expenses decreased as a percentage of total revenues as the
Company continued to realize operating leverage from its established
infrastructure.
Interest Income, Net. Interest income, net represented income of $177,000
in the nine months ended September 30, 1997, due primarily to interest income
earned on excess cash from the proceeds of the Company's initial public offering
completed in August 1997.
Provision for Income Taxes. Provision for income taxes was $665,000 and
$153,000 for the nine months ended September 30, 1997 and 1996, respectively,
resulting in effective tax rates of approximately 33% and 35% in the nine months
13
<PAGE> 14
ended September 30, 1997 and 1996, respectively. Income taxes in 1997 have been
provided at the Company's respective federal and state statutory rates, reduced
primarily for income tax credits and the tax effect of certain tax-exempt
interest income. The effective income tax rate in 1997 is lower than 1996 due
primarily to additional tax-exempt interest earned and the change in federal
tax laws extending the research and development credit through June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since 1994, the Company has financed its operations primarily through cash
flow from operations, borrowings under a demand line of credit, the private
sales of preferred stock, and the Company's initial public offering of Common
Stock completed in August 1997. At September 30, 1997 the Company had cash and
cash equivalents of $2.2 million, short-term investments of $25.0 million, and
working capital of $27.9 million. In August 1996, the Company entered into a
loan and security agreement with a bank which was comprised of a term loan and a
line of credit. The Company borrowed $250,000 under the term loan, which bore
interest at the bank's prime rate plus 0.5% and was payable in monthly
installments through December 31, 1999. At September 30, 1997, no amount was
outstanding as the Company paid the remaining balance due on this term loan. The
line of credit expired in August 1997 at which time there were no amounts
outstanding.
The Company's operating activities provided cash of $1.2 million in the
nine months ended September 30, 1997 and used cash of $271,000 in the nine
months ended September 30, 1996. Net cash provided during the nine months ended
September 30, 1997 consisted primarily of net income from operations and
increases in accrued liabilities and deferred revenue, offset by an increase in
accounts receivable and prepaid expenses. Net cash used by operations during the
nine months ended September 30, 1996 consisted primarily of an increase in
accounts receivable offset by net income from operations and an increase in
deferred revenue.
Investing activities used cash of $24.9 million and $411,000 during the
nine months ended September 30, 1997 and 1996, respectively. During the nine
months ended September 30, 1997, the principal uses were purchases of short-term
investments and purchases of property and equipment, offset by the proceeds from
the sale of short-term investments. During the nine months ended September 30,
1996, the principal uses were purchases of property and equipment. The Company
expects that the rate of purchases of property and equipment will increase as
the Company expands its operations.
Financing activities generated cash of $23.9 million for the nine months
ended September 30, 1997 due primarily to net proceeds from the issuance of
3,000,000 shares of Common Stock in an initial public offering which was
completed in August 1997. Financing activities generated cash of $3.2 million
for the nine months ended September 30, 1996 due primarily to net proceeds from
the private sales of preferred stock.
As of September 30, 1997, the Company did not have any material commitments
for capital expenditures.
Subject to the factors discussed below, the Company believes that the
existing cash balances, short-term investments and cash generated from
operations will be sufficient to finance the Company's operations for the next
twelve months. Although operating activities may provide cash in certain
periods, to the extent the Company grows in the future, its operating and
investing activities may use cash. There can be no assurance that any necessary
additional financing will be available to the Company on commercially reasonable
terms, or at all.
14
<PAGE> 15
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company from time to time including
statements in this Form 10-Q which are not historical facts, are so-called
"forward-looking statements" that involve risks and uncertainties, made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. In particular, statements contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical facts (including, but not limited to, statements concerning the plans
and objectives of management; increases in sales and marketing, research and
development and general and administrative expenses; and the Company's expected
liquidity and capital resources) may constitute forward-looking statements. The
Company's actual future results may differ significantly from those stated in
any forward-looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below, and the other risks
discussed in the Company's Prospectus dated August 8, 1997 included in its
Registration Statement on Form S-1 (Reg. No. 333-29397) and from time to time in
the Company's other filings with the Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. Although the Company has experienced significant percentage
growth in revenue and net income in recent years, the Company does not believe
that prior growth rates are sustainable or indicative of future operating
results. There can be no assurance that the Company will increase its level of
revenues or remain profitable on a quarterly basis or annual basis. In addition,
the Company's limited operating history makes the prediction of future operating
results difficult or impossible. The Company has derived substantially all of
its historical revenues from licenses of Fax Sr. NT and related services and
resale of related hardware. Broad market acceptance of Fax Sr. NT, and the
Windows NT operating system in general, is critical to the Company's future
success. As a result, any decline in demand for or failure to achieve broad
market acceptance of Fax Sr. NT as a result of competition, technological change
or otherwise, would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's future financial
performance will depend in large part on the successful development,
introduction and customer acceptance of new and enhanced versions of Fax Sr. NT.
There can be no assurance that the Company will continue to be successful in
marketing Fax Sr. NT or any new or enhanced versions of Fax Sr. NT.
The enterprise, client/server facsimile solution market is intensely
competitive and rapidly changing and the Company expects competition to continue
to increase. Many of the Company's competitors have longer operating histories
and greater financial, technical, sales, marketing and other resources, as well
as greater name recognition and market acceptance of their products and
technologies than the Company. In addition, there are relatively low barriers to
entry in the markets in which the Company operates, and new competition may
arise either from expansion by established companies or from new emerging
companies or from resellers of the Company's products. There can be no assurance
that current or potential competitors of the Company will not develop products
comparable or superior in terms of price and performance features to those
developed by the Company, adapt more quickly than the Company to new or emerging
technologies and changes in market opportunities or customer requirements,
establish alliances with industry leaders, or take advantage of acquisition
opportunities more readily than the Company. Increased competition will result
in decreased market share, pressure for price reductions and related reductions
in gross margins, any of which could materially adversely affect the Company's
ability to achieve its financial and business goals.
The Company's future earnings and stock price may be subject to
significant volatility, particularly on a quarterly basis. The Company's
quarterly revenues and results of operations have fluctuated significantly in
the past and will likely fluctuate significantly in the future. Causes of such
fluctuations have included and may include, among others, the demand for the
Company's products and services, the size and timing of orders, the number,
timing and significance of new product announcements by the Company and its
competitors, the ability of the Company to develop, introduce, market and ship
new and enhanced versions of the Company's products on a timely basis, the level
of product and price competition, changes in operating expenses, changes in
average selling prices and mix of the Company's products, changes in the
Company's sales incentive strategy, the mix of direct and indirect sales, and
general economic factors. Any one or more of these or other factors could have a
material adverse effect on the Company's business, financial condition and
results of operations. Any shortfall in revenue or earnings from levels
anticipated by securities analysts could have an immediate and material adverse
effect on the trading price of the Company's common stock. The Company typically
receives and fulfills a majority of its orders within any given quarter, with a
substantial portion occurring in the last weeks or days of the fiscal quarter.
As a result, the
15
<PAGE> 16
Company may not learn of revenue shortfalls until late in a fiscal quarter,
which could result in an even more immediate and adverse effect on the trading
price of the Company's common stock.
In addition, the Company identifies the following risk factors which could
affect the Company's actual results and could cause actual results to differ
materially from forward-looking statements. The Company's future results remain
difficult to predict and may be affected by a number of factors, including: the
Company's dependence on the continued acceptance and growth of the Windows NT
environment and of the client/server environment; the ability of the Company to
manage growth; the ability of the Company to enhance existing products and
introduce new products in a timely manner and market acceptance of these
products; the expansion of indirect sales channels and the potential for channel
conflict; risks associated with international expansion; risks associated with
the development and maintenance of strategic relationships; the Company's
dependence on revenues from resale of third-party hardware products; the risks
associated with new product offerings and the potential for undetected errors;
the Company's dependence on proprietary technology and the risk of third-party
claims for infringement of intellectual property rights; the Company's
dependence on third-party licensed technology; the Company's dependence on key
personnel; and risks associated with possible acquisitions.
16
<PAGE> 17
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Changes in Securities
On July 1, 1997 an employee of the Company exercised an incentive
stock option for 2,000 shares of the Company's Common Stock, with an exercise
price of $1.85 per share.
On August 1, 1997 an employee of the Company exercised an incentive
stock option for 2,500 shares of the Company's Common Stock, with an exercise
price of $0.25 per share.
On September 9, 1997 an employee of the Company exercised incentive
stock options for 1,667 and 200 shares of the Company's Common Stock, with
exercise prices of $0.25 and $1.85 per share, respectively.
On August 13, 1997, in connection with the exercise of the
Underwriters' Option (as defined below), certain of the Company's employees
exercised incentive stock options for 26,666 and 4,000 shares of the Company's
Common Stock, with exercise prices of $0.25 and $1.85 per share, respectively.
No underwriters were involved in the foregoing sale of securities.
Such sales were made in reliance on an exemption from the registration provision
of the Securities Act of 1933, as amended, set forth in Sections 2(3) and 4(2)
thereof.
(d) Use of Proceeds
On August 8, 1997, the Company commenced an initial public offering
("IPO") of 4,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company pursuant to the Company's final prospectus dated
August 8, 1997 (the "Prospectus"). The Prospectus was contained in the Company's
Registration Statement on Form S-1, which was declared effective by the
Securities and Exchange Commission (SEC File No. 333-29397) on August 7, 1997.
of the 4,000,000 shares of Common Stock offered, 3,000,000 shares were offered
and sold by the Company and 1,000,000 shares were offered and sold by certain
stockholders of the Company. As part of the IPO, certain stockholders of the
Company granted the several underwriters, for whom BancAmerica Robertson
Stephens and Company (formerly known as Robertson, Stephens & Company, LLC),
NationsBank Montgomery Securities (formerly known as Montgomery Securities) and
First Albany Corporation, acted as representatives (the "Representatives"), an
overallotment option to purchase up to an additional 600,000 shares of Common
Stock (the "Underwriters' Option"). The IPO closed on August 13, 1997 upon the
sale of 4,000,000 shares of Common Stock to the underwriters. On September 3,
1997, the Representatives, on behalf of the several underwriters, exercised the
Underwriters' Option, purchasing 600,000 shares of Common Stock from certain
stockholders of the Company.
The aggregate offering price of the IPO to the public was $36,000,000
(exclusive of the Underwriters' Option), with proceeds to the Company and the
selling stockholders, after deduction of underwriting discount, of $25,110,000
(before deducting offering expenses payable by the Company) and $8,370,000,
respectively. The aggregate offering price of the Underwriters' Option exercised
was $5,400,000, with proceeds to the selling stockholders, after deduction of
the underwriting discount, of $5,022,000.
From August 7, 1997 through September 30, 1997, the aggregate amount
of expenses incurred by the Company in connection with the issuance and
distribution of the shares of Common Stock offered and sold in the IPO were
approximately $2,887,000, including $1,890,000 in underwriting discounts and
commissions and $997,000 in other expenses.
None of the expenses paid by the Company in connection with the IPO or
the exercise of the Underwriters' Option were paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.
The net proceeds to the Company from the IPO, after deducting
underwriting discounts and commissions and other expenses were approximately
$24,113,000.
17
<PAGE> 18
From August 7, 1997 through September 30, 1997, the Company has
applied approximately $206,000 of the net proceeds from the IPO for the
repayment of indebtedness. the Company invested the balance of such net proceeds
primarily in high grade municipal bonds.
None of the net proceeds from the IPO were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On July 14, 1997, by written consent in lieu of a special meeting (the
"Written Consent"), the majority of the outstanding shares of the Company's
Common Stock and the majority of the outstanding shares of each of the Company's
Series A Preferred Stock and Series B Preferred Stock, approved the following
matters: (i) the amendment of the Certificate of Incorporation of the Company to
change the number of the Company's authorized shares of Common Stock to
35,000,000 and to authorize undesignated shares of Preferred Stock, (ii) the
correction of the stock exchange ratio contained in the Certificate of Agreement
of Merger which merged Omtool, Ltd., a New Hampshire corporation with and into
Omtool, Ltd., a Delaware corporation, and (iii) the certification of the
capitalization of the Company. One stockholder of the Company, holding 2,000
shares of the Company's Common Stock, did not execute the Written Consent. All
of the holders of the remaining 5,389,007 shares of outstanding Common Stock,
the 162,500 shares of the outstanding Series A Preferred Stock and the 1,356,116
shares of the outstanding Series B Preferred Stock executed the Written Consent.
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit Description
------ -------------------
11.1 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<PAGE> 19
OMTOOL, LTD.
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.
OMTOOL, LTD.
November 14, 1997
By: /s/ Darioush Mardan
-----------------------------
Darioush Mardan
Vice President of Finance and
Chief Financial Officer
19
<PAGE> 1
EXHIBIT 11.1
OMTOOL, LTD.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
1997 1997
----------- -----------
<S> <C> <C>
Weighted average common stock outstanding
during the period 8,947,370 6,564,361
Assumed conversion of outstanding preferred
stock to common stock 1,254,509 2,442,991
Shares issuable from the assumed exercise of stock
options, computed in accordance with the
treasury stock method 1,118,430 938,403
Dilutive effect of common and common equivalent
shares issued subsequent to June 17, 1996,
computed in accordance with the treasury
stock method (1) -- 152,903
----------- -----------
Weighted average number of common and common
equivalent shares outstanding 11,320,309 10,098,658
=========== ===========
Net income $ 645,178 $ 1,349,074
=========== ===========
Net income per common and common equivalent share $ 0.06 $ 0.13
=========== ===========
</TABLE>
(1) Pursuant to SEC Staff Accounting Bulletin No 83, common and preferred
stock, and stock options issued at prices below an assumed initial public
offering price of $9.00 per share during the twelve month period
immediately preceding the initial filing date of the Company's Registration
Statement for its initial public offering have been included as outstanding
for all periods. The dilutive effect of the common and common share
equivalents was computed in accordance with the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,209
<SECURITIES> 24,992
<RECEIVABLES> 4,364
<ALLOWANCES> 856
<INVENTORY> 154
<CURRENT-ASSETS> 31,395
<PP&E> 1,829
<DEPRECIATION> 539
<TOTAL-ASSETS> 32,716
<CURRENT-LIABILITIES> 3,502
<BONDS> 11
0
0
<COMMON> 115
<OTHER-SE> 29,085
<TOTAL-LIABILITY-AND-EQUITY> 32,716
<SALES> 11,574
<TOTAL-REVENUES> 13,280
<CGS> 2,207
<TOTAL-COSTS> 3,027
<OTHER-EXPENSES> 8,415
<LOSS-PROVISION> 481
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 2,014
<INCOME-TAX> 665
<INCOME-CONTINUING> 1,349
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,349
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
