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Filed pursuant to Rule 424(b)(4)
File No. 333-29397
[OMTOOL Logo]
4,000,000 SHARES
COMMON STOCK
Of the 4,000,000 shares of Common Stock offered hereby, 3,000,000 shares
are being sold by Omtool, Ltd. ("Omtool" or the "Company") and 1,000,000 shares
are being sold by certain stockholders of the Company ("Selling Stockholders").
See "Principal and Selling Stockholders." The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for information relating to the method of determining the
initial public offering price.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
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Per Share..................... $9.00 $0.63 $8.37 $8.37
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Total(3)...................... $36,000,000 $2,520,000 $25,110,000 $8,370,000
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters as stated herein (the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $800,000.
(3) Certain of the Selling Stockholders and other stockholders of the Company
(also "Selling Stockholders") have granted to the Underwriters a 30-day
option to purchase an aggregate of up to an additional 600,000 shares of
Common Stock solely to cover over-allotments, if any. See "Underwriting." If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $41,400,000, $2,898,000, $25,110,000 and $13,392,000,
respectively.
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The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about August 13, 1997.
ROBERTSON, STEPHENS & COMPANY
MONTGOMERY SECURITIES
FIRST ALBANY CORPORATION
The date of this Prospectus is August 8, 1997
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 3
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL SEPTEMBER 2, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PAGE
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Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 15
Dividend Policy....................................................................... 15
Capitalization........................................................................ 16
Dilution.............................................................................. 17
Selected Financial Data............................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 19
Business.............................................................................. 30
Management............................................................................ 39
Certain Transactions.................................................................. 46
Principal and Selling Stockholders.................................................... 47
Description of Capital Stock.......................................................... 49
Shares Eligible for Future Sale....................................................... 53
Underwriting.......................................................................... 55
Legal Matters......................................................................... 57
Experts............................................................................... 57
Additional Information................................................................ 57
Index to Financial Statements......................................................... F-1
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Omtool, Fax Sr., and the Company logo are trademarks of the Company. Trade
names and trademarks of other companies appearing in this Prospectus are the
property of their respective owners.
The Company intends to mail to all of its stockholders an annual report
containing financial statements audited by its independent accountants for each
fiscal year and quarterly reports containing unaudited financial data for each
of the first three quarters of each fiscal year.
The Company was incorporated in New Hampshire in March 1991 and was
reincorporated in Delaware in January 1996. The Company's principal executive
offices are located at 8 Industrial Way, Salem, New Hampshire 03079 and its
telephone number is (603) 898-8900. Unless otherwise indicated, all references
in this Prospectus to "Omtool" or the "Company" refer to Omtool, Ltd., a
Delaware corporation, and its predecessor Omtool, Ltd., a New Hampshire
corporation.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
THE COMPANY
Omtool designs, develops, markets and supports open, client/server
facsimile software, delivering solutions which automate and integrate fax
communication throughout the enterprise. Omtool's Fax Sr. product family,
licensed typically on a shrink-wrap basis, provides users with an extensive,
flexible feature set for transmitting and receiving faxes and improves an
organization's management of its fax communications processes by providing a
suite of utility and control functions. Fax Sr. can be deployed on
heterogeneous, multi-platform networks and can be integrated with both desktop
and enterprise software applications as well as e-mail and groupware systems. To
address the needs of large enterprises, Fax Sr. is modular and scaleable as
servers, clients and fax lines can be implemented and added over time. Fax Sr.
is available on the Windows NT, Hewlett Packard ("HP") UNIX and Digital
Equipment Corporation ("DEC") UNIX and VMS server operating systems, and Windows
95, Windows NT, Windows 3.1.x, HTML, Macintosh, Motif and MS-DOS clients. The
Company currently derives substantially all of its revenues from licenses of Fax
Sr. NT, first released in March 1995, and related services and resale of related
hardware.
Facsimile continues to be a world-wide standard for electronic
communications. With corporate communications becoming more critical and
complex, a need has arisen for a facsimile software solution which enables an
organization to automate and integrate fax communications throughout the
enterprise and address a broad range of users' faxing requirements from
person-to-person to volume broadcast transmissions. A comprehensive fax solution
must take advantage of the proliferation of personal computers in the corporate
workplace and the growth of the client/server computing environment. The
solution must also be complementary to other communications methods such as
traditional telephone and facsimile as well as emerging e-mail and groupware
solutions. Fax Sr. provides a robust and flexible facsimile solution which
addresses the multiple needs of corporate fax users and leverages the power of
advanced computing platforms.
The Company's goal is to become the leading provider of enterprise,
client/server facsimile software solutions. The Company's strategy to achieve
this goal includes extending technology leadership in the enterprise market and
increasing its market share on the Windows NT platform. The Company intends to
leverage its installed base of customers in order to promote expanded use of Fax
Sr. across more users and applications at existing customer installations. In
addition, the Company intends to expand its direct and indirect distribution
channels to increase both domestic and international sales and to form strategic
relationships with leading providers of complementary fax services and products
in order to broaden market awareness of Fax Sr. The Company has recently entered
into strategic alliances with UNIFI Communications, Inc. (formerly FAX
International) and Xpedite Systems, Inc., providers of enhanced fax carrier
services, and with Active Voice Corporation, a provider of PC-based voice mail
systems and computer-telephony integration solutions.
Omtool has licensed Fax Sr. to more than 1,500 customers worldwide,
including Alfred Berg Inc., AT&T Corp., Bloomberg Financial Markets, Boeing, Dow
Chemical, Honeywell, SmithKline Beecham and United Technologies. The Company
targets large and mid-sized corporations, organizations and government entities
as the primary market for Fax Sr. To address the broad range of its sales
opportunities, Omtool relies on the coordinated efforts of its centralized
telesales organization, its key executives and corporate account team, its
marketing department and its indirect channels, including resellers,
international distributors and systems integrators. The Company also resells
complementary hardware products and provides customer services, including
technical support. To complement its existing products and services, the Company
intends to offer enhanced consulting, configuration and installation services in
the future.
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THE OFFERING
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Common Stock Offered by the Company.................... 3,000,000 shares
Common Stock Offered by the Selling Stockholders....... 1,000,000 shares
Common Stock Outstanding after the Offering............ 11,428,239 shares(1)
Use of Proceeds........................................ For working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol.......................... OMTL
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SUMMARY FINANCIAL DATA
(in thousands, except per share data)
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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
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1994 1995 1996 1996 1997
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STATEMENT OF OPERATIONS DATA:
Total revenues................................. $1,948 $3,928 $8,401 $3,271 $8,278
Gross profit................................... 1,669 3,296 6,392 2,536 6,351
Income (loss) from operations.................. (315) 417 646 288 1,080
Net income (loss).............................. (233) 416 440 187 704
Pro forma net income per common and common
equivalent share(2).......................... $ 0.04 $ 0.07
Pro forma weighted average number of common and
common equivalent shares outstanding(2)...... 9,929 9,488
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JUNE 30, 1997
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PRO PRO FORMA
ACTUAL FORMA(3) AS ADJUSTED(3)(4)
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BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 810 $ 810 $ 25,234
Working capital...................................... 3,413 3,413 27,723
Total assets......................................... 7,669 7,669 31,979
Long-term debt, net of current portion............... 153 153 153
Convertible redeemable preferred stock............... 5,367 -- --
Total stockholders' equity (deficit)................. (944) 4,423 28,733
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(1) Based upon the number of shares of Common Stock outstanding at June 30,
1997. Excludes (i) 1,309,218 shares of Common Stock issuable upon the
exercise of stock options outstanding at June 30, 1997 at a weighted average
exercise price of $1.28 per share, of which options to purchase 321,665
shares were then exercisable and (ii) 2,114,783 shares of Common Stock
reserved for future issuance pursuant to the Company's stock plans. See
"Capitalization," "Management -- Stock Plans" and Notes 11 and 14 of Notes
to Financial Statements.
(2) Computed on the basis described in Note 2 of Notes to Financial Statements.
(3) Adjusted to give effect to the automatic conversion upon the closing of this
offering of all outstanding shares of Convertible Preferred Stock into an
aggregate of 3,037,232 shares of Common Stock.
(4) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered by
the Company hereby at the initial public offering price of $9.00 per share
and the application of the estimated net proceeds therefrom.
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Unless otherwise indicated, all information contained in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option; (ii)
reflects the 2-for-1 stock split of the Company's Common Stock effected in
January 1997; (iii) reflects the filing, prior to the closing of this offering,
of an Amendment to the Certificate of Incorporation of the Company increasing
the number of authorized shares of Common Stock; (iv) reflects the filing upon
the closing of this offering of the Amended and Restated Certificate of
Incorporation of the Company; and (v) gives effect to the conversion of all
outstanding shares of Convertible Preferred Stock into Common Stock upon the
closing of this offering. See "Certain Transactions," "Description of Capital
Stock," "Underwriting" and Notes 2, 9, 10 and 14 of Notes to Financial
Statements.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.
Limited Operating History. The Company was incorporated in March 1991 and
shipped its initial facsimile software products in 1991. The Company has
significantly increased its operating expenses in recent periods as it has
continued to expand its organization to support sales growth and product
development. Although the Company has experienced significant growth during the
past three 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 be able to increase its level of revenues or maintain
profitability in the future. Increases in operating expenses are expected to
continue and, together with pricing pressures, may result in a decrease in
operating income and operating margin percentage. The Company's limited
operating history makes the prediction of future operating results difficult or
impossible. Future operating results will depend on many factors, including,
without limitation, the degree and rate of growth of the markets in which the
Company competes and the accompanying demand for the Company's products, the
level of acceptance of the Windows NT operating system, the level of product and
price competition, the ability of the Company to establish strategic
relationships and develop and market new and enhanced products and to control
costs, the ability of the Company to expand its direct telesales force and
indirect distribution channels both domestically and internationally, and the
ability of the Company to attract and retain key personnel. See "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Fluctuations in Quarterly Results of Operations; Seasonality. 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. In addition, the sale of the Company's products
often involves delays because customers have tended to implement the products on
a large scale and customers also must establish certain minimum hardware
capabilities. The Company's products therefore often have a lengthy sales cycle
while the customer evaluates and receives approvals for the purchase of the
Company's products. During such sales cycles, the Company may expend substantial
funds and management effort yet receive no revenues. It may be difficult to
accurately predict the sales cycle of any large order. If one or more large
orders fails to close as forecasted in a fiscal quarter, the Company's revenues
and operating results for such quarter could be materially adversely affected.
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. The
potential occurrence of any one or more of these factors makes the prediction of
revenues and results of operations on a quarterly basis difficult and
performance forecasts derived from such predictions unreliable.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company has historically had and expects to continue
to have weaker sales in the months of July and August which may have an adverse
affect on third quarter sales. The Company believes that these fluctuations are
caused primarily by customer budgeting and purchasing patterns.
In general, revenues are difficult to forecast because the market for
enterprise, client/server facsimile software has developed and is evolving
rapidly and the Company's sales cycle, from the customer's initial evaluation
through purchase of licenses and the related support services, varies
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substantially from customer to customer. License fee revenues in any quarter
depend on orders received and shipped in that quarter. License fee revenues from
quarter to quarter are difficult to forecast, as no significant order backlog
exists at the end of any quarter because the Company's products typically are
shipped upon receipt of customers' orders.
A substantial portion of the Company's operating expense is related to
personnel, facilities, equipment and marketing programs. The level of spending
for such expense cannot be adjusted quickly and is therefore fixed in the short
term. The Company's expense levels for personnel, facilities, equipment and
marketing programs are based, in significant part, on the Company's expectations
of future revenues on a quarterly basis. If actual revenue levels on a quarterly
basis are below management's expectations, results of operations are likely to
be adversely affected by a similar amount because a relatively small amount of
the Company's expense varies with its revenue in the short term.
Due to all of the foregoing factors, it is likely that in some future
periods the Company's results of operations will be below the expectations of
securities analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Fax Sr. NT and the Windows NT Environment. The Company
currently derives substantially all of its revenues from licenses of Fax Sr. NT
and related services and resale of related hardware. Broad market acceptance of
Fax Sr. NT 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. In addition, there can be no assurance that the Windows
NT operating system will not be replaced by a new or enhanced operating system.
There can be no assurance that the Company will be successful in developing
products for new or enhanced operating systems, or that such systems will not
obviate the need for the Company's products. If any new or enhanced operating
system gains widespread use and the Company fails to develop and provide its
products for this operating system on a timely basis, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Strategy."
Dependence on Client/Server Environment. The Company's enterprise,
client/server facsimile software products are intended to help organizations
efficiently manage their facsimile communications, utilizing a client/server
computing environment. The client/server market is relatively new and there can
be no assurance that organizations will move away from the use of stand-alone
fax machines or continue to adopt client/server environments, or that customers
of the Company that have begun the migration to a client/server environment will
broadly implement this model of computing. The Company's future financial
performance will depend in large part on continued growth in the market for
client/server applications, which in turn will depend in part on the growth in
the number of organizations implementing client/server computing environments.
There can be no assurance that these markets will continue to grow or that the
Company will be able to respond effectively to the evolving requirements of
these markets. If the market for client/server application products and services
does not grow in the future, or grows more slowly than the Company anticipates,
or if the Company fails to respond effectively to evolving requirements of this
market, the Company's business, financial condition and results of operations
would be materially adversely affected. See "Business -- Industry Background"
and "-- Strategy."
Intense Competition. The enterprise, client/server facsimile solution
market is intensely competitive and rapidly changing and the Company expects
competition to continue to increase. The
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Company believes its ability to compete successfully depends upon a number of
factors both within and beyond its control, including product performance,
reliability and features; ease of use; product scaleability; quality of support
services; price/performance; timeliness of enhancements and new product releases
by the Company and its competitors; the emergence of new computer-based
facsimile products and standards; name recognition; the establishment of
strategic alliances with industry leaders; and industry and general economic
trends.
The Company competes directly with a large number of vendors of facsimile
products, including providers of facsimile software products for client/server
networks such as RightFAX Inc. (a subsidiary of Applied Voice Technology, Inc.),
Fenestrae BV, Optus Software Inc. and Biscom, Inc. The Company also competes
with vendors offering a range of alternative facsimile solutions including
operating systems containing facsimile and document transmission features;
low-end fax modem products; desktop fax software; single-platform facsimile
software products; and customized proprietary software solutions. In addition,
providers of operating systems or business software applications may bundle
competitive facsimile solutions as part of their broader product offerings.
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. In addition, no assurance can be
given that the Company will not be required to make substantial additional
investments in connection with its research, development, engineering,
marketing, sales and customer service efforts in order to meet any competitive
threat, or that such required investments will not have a material adverse
effect on operating margins. Increased competition will result in reduction in
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. There can be no assurance that in the
future the Company will be able to successfully compete against current and
future competitors. See "Business -- Competition."
Ability to Manage Growth. The Company has rapidly and significantly
expanded its operations and anticipates that significant expansion will continue
to be required in order to address potential market opportunities. The Company
anticipates significantly increasing the size of its sales and marketing,
research and development, customer support and administrative operations
following the completion of this offering. There can be no assurance that such
expansion will be successfully completed or that it will generate sufficient
revenues to cover the Company's expenses. In 1997, the Company upgraded certain
of its management information systems and the Company will need to continue to
upgrade these and other systems to accommodate its expanding operations. There
can be no assurance that the Company's expanded management information systems
will be sufficient to support the Company's continued growth. The Company will
need to continue to attract and retain highly qualified technical, sales and
managerial personnel. There can be no assurance that the Company will be able to
retain or continue to hire such personnel in the future. The inability of the
Company to effectively expand operations and manage growth, if any, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
New Products and Technological Change. The market for the Company's
products is relatively new and is characterized by rapid technological change,
evolving industry standards, changes in end-user requirements and frequent new
product introductions and enhancements. The Company's future success will depend
upon its ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments and respond to
evolving end-user require-
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ments. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements on a timely basis,
or that new products or product enhancements developed by the Company will
achieve market acceptance. In May 1997, the Company released Fax Sr. NT Version
2.0. There can be no assurance that Fax Sr. NT Version 2.0 and the enhancements
contained therein will achieve market acceptance. The introduction of products
embodying new technologies and the emergence of new industry standards could
render the Company's existing products and products currently under development
obsolete and unmarketable. From time to time, the Company and its competitors
may announce new products, capabilities or technologies that have the potential
to replace or shorten the life cycle of the Company's existing product
offerings. There can be no assurance that announcements of currently planned or
other new product offerings by the Company or its competitors will not cause
customers to defer or forego the licensing of the Company's existing products
and have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Research and Development."
Expansion of Indirect Channels; Potential for Channel Conflict. The
Company markets its products and services directly through telesales and
indirectly through marketing channels such as value-added resellers ("VARs"),
systems integrators and distributors. Although the Company has historically
focused its efforts on marketing through its telesales force, the Company is
increasing resources dedicated to developing and expanding indirect marketing
channels. There can be no assurance that the Company will be able to attract and
retain a sufficient number of qualified VARs, systems integrators and
distributors to market successfully the Company's products. In addition, there
can be no assurance that the Company's resellers will not develop, acquire or
market computer-based facsimile products competitive with the Company's
products. The failure to retain its VARs, systems integrators and distributors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has recently established formal non-exclusive reseller
agreements with UNIFI Communications, Inc. and a limited number of distributors.
These agreements do not require the distributors to purchase a minimum amount of
the Company's products. The UNIFI agreement provides that either the Company or
UNIFI may terminate the agreement without cause upon 90 days prior written
notice to the other party. The distributor agreements generally provide that
either party may terminate the agreement without cause upon 30 days written
notice to the other party. The Company also resells its products on a purchase
order basis through other VARs, systems integrators and distributors. Such
relationships may be terminated by either party, at any time, and therefore,
there can be no assurance that any VAR, systems integrator or distributor will
continue to represent the Company's products. The inability to retain certain
VARs, systems integrators or distributors, or the development or marketing by
VARs, systems integrators or distributors of competitive offerings, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered. The Company's strategy of marketing its products directly to
end-users and indirectly through VARs, systems integrators and distributors may
result in distribution channel conflicts. The Company's direct sales efforts may
compete with those of its indirect channels and, to the extent different
resellers target the same customers, resellers may also come into conflict with
each other. As the Company strives to expand its indirect distribution channels,
there can be no assurance that emerging channel conflicts will not materially
adversely affect its relationships with existing VARs, systems integrators or
distributors or adversely affect its ability to attract new VARs, systems
integrators and distributors. See "Business -- Sales and Marketing."
Risks Associated with International Expansion. Revenues outside of North
America represented approximately 5%, 7% and 8% of the Company's total revenues
for 1995, 1996 and the six months ended June 30, 1997, respectively. A key
element of the Company's strategy is to continue to increase its international
sales. The Company expects to face competition from local facsimile product
providers in their native countries. To successfully expand international sales,
the Company will need to recruit
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and retain additional international resellers and distributors. In order to
penetrate the international market more fully, the Company is currently
undertaking the translation of its products into several foreign languages.
There can be no assurance that the Company will be able to complete such
translation in a timely manner in order to capitalize on the international
market opportunity. There can be no assurance that the Company will be able to
maintain or increase international sales of its products or that the Company's
international distribution channels will be able to adequately market, service
and support the Company's products. International operations generally are
subject to certain risks, including dependence on independent resellers,
fluctuations in foreign currency exchange rates, compliance with foreign
regulatory and market requirements, variability of foreign economic conditions
and changing restrictions imposed by United States export laws. Additional risks
inherent in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs of localizing products for foreign countries, lack of acceptance of
localized products in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, difficulties in
enforcing intellectual property rights and the burdens of complying with a wide
variety of foreign laws. Currently, the Company does not operate sales offices
outside of the United States. If the Company establishes international sales
offices, such operations will be subject to certain additional risks, including
difficulties in staffing and managing such operations and potentially adverse
tax consequences including restrictions on the repatriation of earnings. There
can be no assurance that such factors will not have a material adverse effect on
the Company's future international sales and, consequently, the Company's
business, financial condition and results of operations. To date, all of the
Company's sales have been made in United States dollars and the Company has not
engaged in any hedging transactions through the purchase of derivative
securities or otherwise. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Strategy" and "-- Sales and
Marketing."
Strategic Relationships. The Company intends to pursue non-exclusive
arrangements with computer software vendors, hardware vendors and fax carrier
service providers to enhance its marketing and sales efforts, maintain its
access to leading technologies and support revenue growth. The Company expects
to rely upon such third parties for marketing and sales and lead generation.
Such third parties generally will not be contractually obligated to cooperate
with the Company. The Company expects that many such third parties will have
similar, and often more established, relationships with the Company's
competitors. If the Company is unable to develop, enhance and maintain effective
relationships with such third parties, the Company's business, financial
condition and results of operations could be materially adversely affected.
Further, there can be no assurance that such third parties, many of which will
have significantly greater financial, technical, sales, marketing and other
resources than the Company, will not develop and market computer-based facsimile
products in competition with the Company in the future, enter into joint
marketing arrangements with the Company's competitors, or otherwise reduce or
discontinue their relationships with or support of the Company. See
"Business -- Strategic Relationships."
Dependence on Hardware Revenues. As an accommodation to the Company's
customers, the Company resells certain hardware products, such as intelligent
fax boards, which are used in conjunction with the Company's software products.
Revenues from such hardware sales can amount to a significant portion of the
Company's total revenues in any period. To the extent that the size of the
Company's implementations increases, its customers may find it attractive to
purchase such hardware directly from the manufacturers of such products, with a
resultant decrease to the Company in such ancillary revenues and related
contribution to income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Products and Services."
Risks Associated with New Product Offerings; Potential for Undetected
Errors. Software products as complex as those offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released. The Company released the latest version of Fax Sr. NT, Version
2.0, in May 1997. There can be no assurance that, despite significant testing by
the Company and by current and potential customers, errors will not be found in
Fax Sr. NT Version 2.0 or any other new products after commencement of
commercial shipments. In addition, third-party products, upon
10
<PAGE> 11
which the Company's products are dependent, such as Windows NT, Windows 95, and
other software and various hardware components, may contain defects which could
reduce the performance of the Company's products or render the Company's
products useless. Because the Company's products integrate with third-party
applications, any errors in applications deemed critical to the use of the
Company's products could adversely impact the marketability of the Company's
products. Although the Company has not experienced material adverse effects
resulting from any such errors or defects to date, there can be no assurance
that errors or defects will not be discovered in the future, causing delays in
product introduction and shipments or requiring design modifications that could
materially adversely affect the Company's competitive position, business,
financial condition and results of operations. See "Business -- Products and
Services" and "-- Research and Development."
Dependence on Proprietary Technology; Risks of Third-Party Claims for
Infringement. The Company regards its software as a trade secret and attempts
to protect it with a combination of copyright and trade secret laws, and
employee nondisclosure and assignment of invention agreements. The Company has
no patents or patents pending, and has not to date registered any copyrights or
trademarks. The Company generally licenses its products under "shrink-wrap"
licenses (i.e., licenses included as part of the product packaging). Shrink-wrap
licenses are not negotiated with or signed by individual licensees, and purport
to take effect upon the opening of the product package. Certain provisions of
such licenses, including provisions protecting against unauthorized use,
copying, transfer and disclosure of the licensed program, may be unenforceable
under the laws of many jurisdictions. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and although the Company is unable to determine the extent to which piracy of
its products exists, such piracy can be expected to be a persistent problem,
particularly in international markets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
the laws of the United States. There can be no assurance that these protections
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies.
There has been substantial litigation in the software industry involving
intellectual property rights. There can be no assurance that claims of
infringement of intellectual property rights will not be asserted against the
Company and, if asserted, would not have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
inasmuch as the Company licenses certain components of its Fax Sr. product from
third parties, its exposure to copyright and other infringement actions may
increase because the Company must rely on such third parties for information as
to the origin and ownership of such licensed components. In the future,
litigation may be necessary to enforce and protect trade secrets, copyrights and
other intellectual property rights of the Company. The Company may also be
subject to litigation to defend against claimed infringement of the rights of
others or to determine the scope and validity of the intellectual property
rights of others. Any such litigation could be costly and divert management's
attention, either of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Adverse determinations
in such litigation could result in the loss of the Company's proprietary rights,
subject the Company to significant liabilities, require the Company to seek
licenses from third parties or prevent the Company from selling its products,
any one of which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Proprietary
Rights."
Dependence on Third Party Licensed Technology. Certain components used in
the Company's products are licensed from third parties. Should any of these
components become unavailable to the Company, the Company believes that it would
be able to obtain alternative suppliers; however, any failure to obtain such
components on a timely basis at an affordable cost, or any significant delays or
interruptions in the supply of such components, would have a material adverse
effect on the Company's business, financial condition and results of operations.
11
<PAGE> 12
Dependence on Key Personnel. The Company's future performance depends, in
significant part, upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement
and only certain of whom are bound by noncompetition agreements. The loss of the
services of one or more of the Company's executive officers or other key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical, sales and managerial personnel. Competition for such personnel is
intense, and the Company has experienced difficulty in recruiting qualified
technical personnel. There can be no assurance that the Company will be able to
retain or continue to hire key technical, sales and managerial personnel in the
future. The Company currently carries a key man life insurance policy in the
amount of $1 million on each of Robert L. Voelk and Martin A. Schultz, with the
proceeds payable to the Company. See "Management."
No Prior Public Market; Determination of Initial Public Offering Price;
Potential Volatility of Stock Price. Prior to this offering, there has been no
public market for the Common Stock, and there can be no assurance that an active
trading market will develop or continue after the offering. The initial public
offering price for the Common Stock was determined by negotiation among the
Company, representatives of the Selling Stockholders and the representatives of
the Underwriters. Among the factors considered in determining the initial public
offering price were prevailing market and economic conditions, revenues and
earnings and other financial information of the Company, the market valuations
of other companies engaged in activities similar to those of the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. These factors may not be indicative of the market price
of the Common Stock after this offering. In addition, the stock markets in
general, and the market prices for high technology companies in particular, have
historically experienced volatility that at times has been unrelated to the
operating performance of such companies. The trading price of the Common Stock
could also be subject to significant fluctuations in response to variations in
quarterly results of operations, announcements of new products or acquisitions
by the Company or its competitors, governmental regulatory action, other
developments or disputes with respect to proprietary rights, general trends in
the industry and overall market conditions, and other factors. Broad market and
industry fluctuations may materially adversely affect the market price of the
Common Stock regardless of the Company's operating performance. See
"Underwriting."
Risks Associated with Possible Acquisitions. The Company may pursue
potential acquisitions of businesses, products and technologies that could
complement or expand the Company's business. The Company currently has no plans,
commitments or agreements with respect to any material acquisitions and there
can be no assurance that the Company will be able to identify any appropriate
acquisition candidates. If the Company identifies an acquisition candidate,
there can be no assurance that the Company will be able to successfully
negotiate the terms of any such acquisition, finance such acquisition or
integrate such acquired businesses, products or technologies into the Company's
existing business and products. Furthermore, the negotiation of potential
acquisitions as well as the integration of an acquired business could cause
diversion of management's time and resources, and require the Company to use
proceeds from the offering to consummate a potential acquisition. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses. If any such acquisition were to occur, there can be no
assurance that, whether or not consummated, any such acquisition would not have
a material adverse effect on the Company's business, financial condition and
results of operations. See
"-- Uncertainty as to Use of Proceeds."
Uncertainty as to Use of Proceeds. The principal purposes of this offering
are to obtain additional working capital, to enhance the visibility of the
Company in its commercial markets, to create a public market for the Company's
Common Stock and to facilitate future access by the Company to public equity
markets. A portion of the net proceeds of the offering may also be used to
acquire or invest in products, technologies or businesses which broaden or
enhance the Company's current product
12
<PAGE> 13
offerings. There are no current agreements with respect to any material
acquisitions or investments. As of the date of this Prospectus, the Company has
no specific plans as to the use of the substantial majority of the net proceeds
of this offering, and will have broad discretion in the application of such
proceeds. See "Use of Proceeds."
Control by Existing Stockholders. Following this offering, the Company's
executive officers, directors and other principal stockholders, in the
aggregate, will beneficially own approximately 62.9% of the Company's
outstanding Common Stock (57.8% if the over-allotment option is exercised in
full). As a result, these stockholders, if acting together, would be able to
exert substantial influence over the Company and effectively control most
matters requiring approval by the stockholders of the Company, including the
election of directors. Further, such stockholders, if acting together, could
prevent the election of any person nominated to the Board of Directors by any
other stockholder. The voting power of these stockholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company and could limit the price that certain investors may be
willing to pay in the future for shares of the Company's Common Stock. See
"Management," "Principal and Selling Stockholders" and "Description of Capital
Stock."
Shares Eligible for Future Sale. Sales of a substantial number of shares
of the Company's Common Stock in the public market following this offering could
adversely affect the prevailing market price of the Common Stock. Immediately
after completion of the offering, the Company will have 11,428,239 shares of
Common Stock outstanding, of which the 4,000,000 shares offered hereby will be
eligible for sale without regard to volume or other limitations pursuant to Rule
144 ("Rule 144") under the Securities Act, unless purchased by "affiliates" of
the Company as that term is defined under Rule 144. The Company, its executive
officers, directors and certain current stockholders, who in the aggregate own
beneficially 7,425,572 of the remaining outstanding shares of Common Stock and
stock options exercisable for an additional 966,668 shares of Common Stock have
agreed pursuant to lock-up agreements that they will not sell or otherwise
dispose of any shares of Common Stock beneficially owned by them for a period of
180 days from the date of this Prospectus. Such agreements provide that
Robertson, Stephens & Company may, in its sole discretion and at any time
without notice, release all or a portion of the shares subject to these lock-up
agreements. Upon the expiration of these lock-up agreements, all of such
outstanding shares will become immediately eligible for sale in the public
market, subject in some cases to the volume and other restrictions of Rule 144
or Rule 701 under the Securities Act. Promptly after the date of this
Prospectus, the Company intends to register on one or more registration
statements on Form S-8 all shares of Common Stock issuable under its stock
plans. Shares covered by such registration statements will be eligible for sale
in the public market after the effective date of such registration. In addition,
the holders of 6,961,220 shares of Common Stock are entitled to certain
registration rights with respect to such shares. If such holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales may have a material adverse effect on the
market price for the Common Stock. In addition, if the Company is required to
include in a Company-initiated registration shares held by such holders pursuant
to the exercise of their "incidental" registration rights, such sales may have
an adverse effect on the Company's ability to raise needed capital. See
"Management," "Principal and Selling Stockholders," "Shares Eligible for Future
Sale" and "Underwriting."
Immediate and Substantial Dilution. Purchasers in this offering will
suffer an immediate and substantial dilution of $6.49 per share in the net
tangible book value of the Common Stock from the initial public offering price
of $9.00 per share. Additional dilution is likely to occur upon exercise of
options granted by the Company. See "Dilution."
Absence of Dividends. The Company has never paid cash dividends and does
not intend to pay any cash dividends in the foreseeable future. See "Dividend
Policy."
Anti-Takeover Effect of Charter and By-Law Provisions; Availability of
Preferred Stock for Issuance. The Company's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws contain provisions that could
discourage a proxy contest or make more difficult the acquisition of a
substantial block of the Company's Common Stock. Such provisions could limit the
price that
13
<PAGE> 14
investors might be willing to pay in the future for shares of the Company's
Common Stock. The Board of Directors is authorized to issue, without stockholder
approval, up to 2,000,000 shares of Preferred Stock, $0.01 par value, of the
Company (the "Preferred Stock") with voting, conversion and other rights and
preferences that may be superior to the Common Stock and that could adversely
affect the voting power or other rights of the holders of Common Stock. The
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. See "Description of
Capital Stock -- Preferred Stock" and "-- Delaware Law and Certain Charter and
By-Law Provisions; Anti-Takeover Effects."
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby at the initial public offering price
of $9.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be approximately $24,310,000. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders.
The principal purposes of this offering are to obtain additional working
capital, to expand the size of the Company's sales and marketing, research and
development, customer support and administrative operations, to enhance the
visibility of the Company in its commercial markets, to create a public market
for the Company's Common Stock and to facilitate future access by the Company to
public equity markets. A portion of the net proceeds of the offering may also be
used to acquire or invest in products, technologies or businesses which broaden
or enhance the Company's current product offerings. There are no current
agreements with respect to any material acquisitions or investments. The Company
does not believe it can accurately estimate the particular amounts to be used
for the purposes outlined above. As of the date of this Prospectus, the Company
has no specific plans as to the use of the substantial majority of the net
proceeds of this offering, and will have broad discretion in the application of
the proceeds. See "Risk Factors -- Uncertainty as to Use of Proceeds." Pending
any such uses, such net proceeds will be invested in short-term, investment
grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its capital stock in the
foreseeable future. Any future declaration and payment of dividends will be
subject to the discretion of the Company's Board of Directors, will be subject
to applicable law and will depend upon the Company's results of operations,
earnings, financial condition, contractual limitations, cash requirements,
future prospects and other factors deemed relevant by the Company's Board of
Directors.
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
conversion of all outstanding shares of Convertible Preferred Stock into Common
Stock upon the closing of this offering and (iii) on such pro forma basis as
adjusted to give effect to the sale of the 3,000,000 shares of Common Stock by
the Company offered hereby based upon the initial public offering price of $9.00
per share and the application of the estimated net proceeds therefrom. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Long-term debt, net of current portion....................... $ 153 $ 153 $ 153
------- ------- -------
Series B Convertible Redeemable Preferred Stock, $.01 par
value per share; 1,356,116 shares authorized, issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted........... 5,367 -- --
------- ------- -------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value per share; 1,481,384 shares
authorized, no shares issued or outstanding, actual;
2,000,000 shares authorized, no shares issued or
outstanding, pro forma and pro forma as adjusted........ -- -- --
Series A Convertible Preferred Stock, $.01 par value per
share; 162,500 shares authorized, issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted........ 2 -- --
Common Stock, $.01 par value per share; 10,000,000 shares
authorized, 5,391,007 shares issued and outstanding,
actual; 35,000,000 shares authorized, 8,428,239 shares
issued and outstanding, pro forma; 35,000,000 shares
authorized, 11,428,239 shares issued and outstanding,
pro forma as adjusted (1)............................... 54 84 114
Additional paid-in capital................................... 18 4,990 29,270
Retained earnings (deficit).................................. (1,018) (651) (651)
------- ------- -------
Total stockholders' equity (deficit).................... (944) 4,423 28,733
------- ------- -------
Total capitalization............................... $ 4,576 $ 4,576 $28,886
======= ======= =======
</TABLE>
- ------------
(1) Excludes (i) 1,309,218 shares of Common Stock issuable upon the exercise of
stock options outstanding at June 30, 1997 granted under the Company's stock
plans at a weighted average exercise price of $1.28 per share, of which
options to purchase 321,665 shares were then exercisable and (ii) 2,114,783
shares of Common Stock reserved for future issuance pursuant to the
Company's stock plans. See "Management -- Stock Plans" and Notes 11 and 14
of Notes to Financial Statements.
16
<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
was $4,294,332, or $0.51 per share of Common Stock after giving effect to the
conversion of all outstanding shares of Convertible Preferred Stock into Common
Stock. Pro forma net tangible book value per share is equal to the Company's
total tangible assets less total liabilities, divided by the total number of
shares of Common Stock outstanding (assuming the conversion of all outstanding
shares of Convertible Preferred Stock into Common Stock). After giving effect to
the sale by the Company of 3,000,000 shares of Common Stock offered hereby at
the initial public offering price of $9.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company, the adjusted pro forma net tangible book value of the Company as
of June 30, 1997 would have been $28,717,967, or $2.51 per share. This
represents an immediate increase in pro forma net tangible book value of $2.00
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $6.49 per share to new investors purchasing shares of
Common Stock in this offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price.............................. $9.00
Pro forma net tangible book value at June 30, 1997......... $0.51
Increase per share attributable to new investors........... 2.00
-----
Adjusted pro forma net tangible book value per share after
the offering............................................. 2.51
-----
Dilution to new investors.................................. $6.49
=====
</TABLE>
The following table summarizes on a pro forma basis, as of June 30, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors at the initial public offering
price of $9.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 8,428,239 73.7% $ 5,344,300 16.5% $0.63
New investors............. 3,000,000 26.3 27,000,000 83.5 $9.00
---------- ----- ----------- -----
Total........... 11,428,239 100.0% $32,344,300 100.0%
========== ===== =========== =====
</TABLE>
- ------------
(1) Sales by Selling Stockholders in this offering will cause the number of
shares held by existing stockholders to be reduced to 7,428,239 shares, or
65.0% (6,858,905 shares, or 59.9%, if the Underwriters' over-allotment
option is exercised in full) of the total number of shares of Common Stock
to be outstanding after this offering, and will increase the number of
shares held by new stockholders to 4,000,000 shares, or 35.0% (4,600,000
shares, or 40.1%, if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock to be outstanding after
the offering. See "Principal and Selling Stockholders."
The calculation of net tangible book value and the other computations above
assume no exercise of outstanding options under the Company's stock plans. As of
June 30, 1997, 1,309,218 shares of Common Stock were issuable upon exercise of
outstanding stock options at a weighted average exercise price of $1.28 per
share, of which options to purchase 321,665 shares were then exercisable at a
weighted average exercise price of $0.25 per share. To the extent the
outstanding options are exercised and that any of the shares reserved for
issuance are issued with exercise prices below the initial public offering
price, there will be further dilution to new investors. See "Management -- Stock
Plans" and "Shares Eligible for Future Sale."
17
<PAGE> 18
SELECTED FINANCIAL DATA
The statement of operations data set forth below for each of the fiscal
years ended December 31, 1994, 1995 and 1996 and the balance sheet data as of
December 31, 1995 and 1996 have been derived from the Company's financial
statements, which statements have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this Prospectus.
The balance sheet data at December 31, 1994 is derived from the Company's
financial statements, which statements have been audited by Arthur Andersen LLP
and are not included in this Prospectus. The data presented as of and for the
years ended December 31, 1992 and 1993 are derived from the Company's unaudited
financial statements which are not included in this Prospectus. The data
presented as of June 30, 1997 and for the six months ended June 30, 1996 and
1997 are derived from unaudited financial statements included elsewhere in this
Prospectus. In the opinion of management, all unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the data for such periods. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year or for any future period. The selected
financial data set forth below should be read in conjunction with the Financial
Statements and the Notes thereto and with Management's Discussion and Analysis
of Financial Condition and Results of Operations appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -----------------
1992 1993 1994 1995 1996 1996 1997
---- ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license................................. $636 $ 902 $1,486 $2,780 $5,304 $2,031 $5,486
Hardware......................................... 125 101 124 278 1,533 527 1,748
Service and other................................ 86 71 338 870 1,564 713 1,044
---- ------ ------ ------ ------ ------ ------
Total revenues............................. 847 1,074 1,948 3,928 8,401 3,271 8,278
---- ------ ------ ------ ------ ------ ------
Cost of revenues:
Software license................................. 167 9 35 104 109 50 218
Hardware......................................... 120 92 114 209 1,084 339 1,208
Service and other................................ 40 81 130 319 816 346 501
---- ------ ------ ------ ------ ------ ------
Total cost of revenues..................... 327 182 279 632 2,009 735 1,927
---- ------ ------ ------ ------ ------ ------
Gross profit............................... 520 892 1,669 3,296 6,392 2,536 6,351
---- ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing.............................. 283 499 649 1,236 2,824 1,041 2,938
Research and development ........................ 93 208 414 893 1,972 777 1,554
General and administrative....................... 140 350 721 750 950 430 779
Write-off of intangible asset.................... -- -- 200 -- -- -- --
---- ------ ------ ------ ------ ------ ------
Total operating expenses................... 516 1,057 1,984 2,879 5,746 2,248 5,271
---- ------ ------ ------ ------ ------ ------
Income (loss) from operations...................... 4 (165) (315) 417 646 288 1,080
Interest income (expense), net..................... (2) (2) 12 (1) 32 -- 29
---- ------ ------ ------ ------ ------ ------
Income (loss) before provision (benefit)
for income taxes................................. 2 (167) (303) 416 678 288 1,109
Provision (benefit) for income taxes............... -- -- (70) -- 238 101 405
---- ------ ------ ------ ------ ------ ------
Net income (loss).................................. $ 2 $ (167) $ (233) $ 416 $ 440 $ 187 $ 704
==== ====== ====== ====== ====== ====== ======
Pro forma net income per common and common
equivalent share(1).............................. $ 0.04 $ 0.07
====== ======
Pro forma weighted average number of common and
common equivalent shares outstanding(1).......... 9,929 9,488
====== ======
<CAPTION>
JUNE 30, 1997
DECEMBER 31, -------------------
------------------------------------------------ PRO
1992 1993 1994 1995 1996 ACTUAL FORMA(2)
---- ------ ------ ------ ------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ -- $ 39 $ 20 $ 551 $2,042 $ 810 $ 810
Working capital (deficit)....................... (14) (210) (305) (50) 3,313 3,413 3,413
Total assets.................................... 200 529 449 1,575 6,457 7,669 7,669
Long-term debt, net of current portion.......... 16 3 -- 21 212 153 153
Convertible redeemable preferred stock.......... -- -- -- -- 5,167 5,367 --
Total stockholders' equity (deficit)............ (4) (171) (405) 11 (1,467) (944) 4,423
</TABLE>
- ---------------
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.
(2) Adjusted to give effect to the automatic conversion upon the closing of this
offering of all outstanding shares of Convertible Preferred Stock into an
aggregate of 3,037,232 shares of Common Stock.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
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.
software product directly to end users and indirectly through resellers. The
Company first achieved profitability for the year ended December 31, 1992 and
has been profitable for the last ten quarters.
Revenues from software licenses are recognized upon shipment of the
software if there are no significant post-delivery obligations and collection of
the resulting receivable is deemed probable. Payments received in advance for
services or products are initially recorded as deferred revenue. The Company
provides a 30-day money back guarantee for its Fax Sr. product and reserves for
potential product returns and allowances at the time of shipment. Historically,
the Company has adequately reserved for such potential returns and allowances.
In addition to licensing its Fax Sr. product, the Company also derives revenues
from licensing certain document imaging software products. Licensing revenues
from these imaging products accounted for 3% of total revenues in 1996 and less
than 1% of total revenues in the six months ended June 30, 1997, and the Company
does not expect this source of revenues to increase in the future.
The Company is dependent on licenses of its Fax Sr. NT product, first
licensed in March 1995, for substantially all of its revenues. In 1996 and the
six months ended June 30, 1997, approximately 82% and 96%, respectively, of the
Company's software license revenues were derived from Fax Sr. NT. In addition,
substantially all of the Company's hardware and service and other revenue is
dependent on such licenses of Fax Sr. NT. See "Risk Factors -- Dependence on Fax
Sr. NT and the Windows NT Environment."
The Company also derives revenues from the sale of hardware products such
as intelligent fax boards and fax modems. Hardware sales are undertaken as a
convenience to Fax Sr. customers and hardware is neither bundled with Fax Sr.
nor required to be purchased from the Company. Omtool primarily resells
intelligent fax boards from vendors such as Brooktrout Technology and Dialogic.
The Company purchases these hardware products as needed to ship to its customers
and the Company maintains a minimal inventory of these hardware products.
Revenue for hardware products is recognized upon shipment of the product.
Service and other revenues have consisted primarily of the sale of support
contracts. Revenue from support contracts is recognized ratably over the term of
the support contract period, which is typically one year. 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. The Company also derives revenues pursuant to contractual
obligations to support certain document imaging software products. Support
revenues attributable to these imaging products accounted for 6% of total
revenues in 1996 and 2% of total revenues in the six months ended June 30, 1997,
and the Company does not expect this source of revenues to increase in the
future.
The Company has historically derived substantially all of its total
revenues from sales within North America. Sales outside of North America
(primarily in Europe) represented approximately 5%, 7% and 8% of the Company's
total revenues in 1995, 1996 and six months ended June 30, 1997, respectively.
The Company's gross profit on these sales approximates the gross profit on sales
within North America. The Company's strategy is to expand its international
presence (primarily in Europe and South
19
<PAGE> 20
America) and to increase its investment in sales and marketing efforts directed
toward international markets. There can be no assurance that the Company will be
able to maintain or increase international sales of its products, and the
failure to do so may have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Risks
Associated with International Expansion" and "Business -- Strategy."
Historically, the Company had marketed and sold its products principally
through its direct telesales force. During 1996, the Company began actively
recruiting VARs, systems integrators, resellers and distributors to expand its
indirect distribution channel. As a result, sales through the Company's indirect
distribution channels increased from 11% of total revenues in 1995 to 24% of
total revenues in 1996 to 35% of total revenues in the six months ended June 30,
1997.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software license................................. 76.2% 70.8% 63.1% 62.1% 66.3%
Hardware......................................... 6.4 7.1 18.3 16.1 21.1
Service and other................................ 17.4 22.1 18.6 21.8 12.6
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Software license................................. 1.8 2.7 1.3 1.5 2.6
Hardware......................................... 5.8 5.3 12.9 10.4 14.6
Service and other................................ 6.7 8.1 9.7 10.6 6.1
----- ----- ----- ----- -----
Total cost of revenues................... 14.3 16.1 23.9 22.5 23.3
----- ----- ----- ----- -----
Gross profit....................................... 85.7 83.9 76.1 77.5 76.7
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing.............................. 33.3 31.5 33.6 31.8 35.5
Research and development......................... 21.3 22.7 23.5 23.7 18.8
General and administrative....................... 37.0 19.1 11.3 13.2 9.4
Write-off of intangible asset.................... 10.3 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses................. 101.9 73.3 68.4 68.7 63.7
----- ----- ----- ----- -----
Income (loss) from operations...................... (16.2) 10.6 7.7 8.8 13.0
Interest income, net............................... 0.6 -- 0.4 -- 0.4
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for income
taxes............................................ (15.6) 10.6 8.1 8.8 13.4
Provision (benefit) for income taxes............... (3.6) -- 2.9 3.1 4.9
----- ----- ----- ----- -----
Net income (loss).................................. (12.0)% 10.6% 5.2% 5.7% 8.5%
===== ===== ===== ===== =====
Gross profit:
Software license................................. 97.7% 96.3% 97.9% 97.5% 96.0%
Hardware......................................... 8.0 24.7 29.3 35.7 30.9
Service and other................................ 61.6 63.4 47.8 51.4 52.0
</TABLE>
20
<PAGE> 21
SIX MONTHS ENDED JUNE 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 $8.3 million and $3.3 million for the six months ended June 30,
1997 and 1996, respectively, representing an increase of 153%.
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 $5.5 million for the six months ended June 30, 1997 and $2.0
million for the six months ended June 30, 1996, or 66% and 62% of total revenues
for each respective period, representing an increase of 170%. 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 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 $1.7 million for the
six months ended June 30, 1997 and $527,000 for the six months ended June 30,
1996, or 21% and 16% of total revenues for each respective period, representing
an increase of 232%. 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 $1.0 million
for the six months ended June 30, 1997 and $713,000 for the six months ended
June 30, 1996, or 13% and 22% of total revenues for each respective period,
representing an increase of 46%. 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 consists primarily of
the costs of sublicensing third-party software products, product media, and
product duplication. Cost of software license revenues was $218,000 and $50,000
for the six months ended June 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 six months ended June 30, 1997 compared to the same period in 1996. Software
license gross margin percentages remained relatively constant at 96% for the six
months ended June 30, 1997 compared to 98% for the same period in 1996.
Hardware. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $1.2 million and
$339,000 for the six months ended June 30, 1997 and 1996, respectively,
representing 69% and 64% of hardware revenues for each respective period. The
increase in dollar amount for the cost of hardware revenues for the six months
ended June 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
decreased to 31% for the six months ended June 30, 1997 from 36% in the same
period in 1996 due to the change in the 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
revenues was $501,000 and $346,000 for the six months ended June 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
21
<PAGE> 22
the higher volume of products shipped during the six months ended June 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 six months ended June 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 $2.9 million and $1.0 million for the six months ended June 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 (approximately
$580,000), higher sales commissions associated with increased revenues
(approximately $175,000), and increased marketing program activities
(approximately $549,000). 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 $1.6 million and $777,000 for the six months ended June 30, 1997
and 1996, respectively, or 19% and 24% 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. 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
finance personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses were
$779,000 and $430,000 for the six months ended June 30, 1997 and 1996,
respectively, or 9% and 13% 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 (Expense), Net. Interest income (expense), net consists
principally of interest earned on cash, cash equivalents, and short-term
investments, offset by interest expense associated with equipment financing and
borrowings. Interest income (expense), net represented income of $29,000 in the
six months ended June 30, 1997, due primarily to interest income earned on
excess cash from the proceeds of the Company's 1996 private placements of its
preferred stock.
Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes
was $405,000 and $101,000 for the six months ended June 30, 1997 and 1996,
respectively, resulting in effective tax rates of approximately 37% and 35% in
the six months ended June 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 1996 was lower due
primarily to utilization of net operating loss carryforwards.
22
<PAGE> 23
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues
Total Revenues. The Company's total revenues were $8.4 million and $3.9
million in 1996 and 1995, respectively, representing an increase of 114%.
Software License. Software license revenues were $5.3 million in 1996 and
$2.8 million in 1995, or 63% and 71% of total revenues for each respective
period, representing an increase of 91%. 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 $1.5 million in 1996 and $278,000 in
1995, or 18% and 7% of total revenues for each respective period, representing
an increase of 451%. 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 were $1.6 million in 1996
and $870,000 in 1995, or 19% and 22% of total revenues for each respective
period, representing an increase of 80%. The increase in dollar amount was due
primarily to the increase in maintenance and maintenance renewals as a result of
a larger installed customer base.
Cost of Revenues
Software License. Cost of software license revenues was $109,000 and
$104,000 in 1996 and 1995, respectively, representing 2% and 4% of software
license revenues for each respective period. The increase in dollar amount was
primarily due to the higher volume of products shipped during 1996 compared to
1995. Software license gross margin percentages remained relatively constant at
98% in 1996 compared to 96% in 1995.
Hardware. Cost of hardware revenues was $1.1 million and $209,000 in 1996
and 1995, respectively, representing 71% and 75% of hardware revenues for each
respective year. The increase in dollar amount 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 29% in 1996 from 25% in 1995 due to the change in
the hardware sales mix.
Service and Other. Cost of service and other revenues was $816,000 and
$319,000 in 1996 and 1995, respectively, representing 52% and 37% of service and
other revenues for each respective year. The increase in dollar amount was due
primarily to the higher volume of products shipped during 1996 and the hiring of
incremental personnel to support such growth. The gross margin percentage for
service and other revenues decreased to 48% in 1996 from 63% in 1995 due
primarily to the increase in the number of customer support personnel and
related overhead costs necessary to support a larger installed customer base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $2.8 million and
$1.2 million in 1996 and 1995, respectively, or 34% 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 (approximately $479,000), higher sales commissions associated with
increased revenues (approximately $199,000), and increased marketing program
activities (approximately $571,000).
Research and Development. Research and development expenses were $2.0
million and $893,000 in 1996 and 1995, respectively, or 24% and 23% of total
revenues for each respective period. The
23
<PAGE> 24
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.
General and Administrative. General and administrative expenses were
$950,000 and $750,000 in 1996 and 1995, respectively, or 11% and 19% 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 (Expense), Net. Interest income (expense), net represented
income of $32,000 in 1996 and expense of $1,000 in 1995. The increase in
interest income (expense), net was due primarily to interest income earned on
excess cash from the proceeds of the Company's 1996 private placements of its
preferred stock.
Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes
was $238,000 in 1996, resulting in an effective tax rate of approximately 35%.
This rate is lower than the combined state and federal rates due to the
utilization of net operating loss carryforwards and tax credits. Net operating
loss carryforwards were used to offset all federal and state income taxes in
1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues
Total Revenues. The Company's revenues were $3.9 million and $1.9 million
in 1995 and 1994, respectively, representing an increase of 102%.
Software License. Software license revenues were $2.8 million and $1.5
million in 1995 and 1994, respectively, or 71% and 76% of total revenues for
each respective period, representing an increase of 87%. The increase in dollar
amount was due to increased market acceptance of the Company's fax software
products, the introduction of Fax Sr. for the Windows NT operating system and
expansion of the Company's direct telesales force.
Hardware. Hardware revenues were $278,000 and $124,000 in 1995 and 1994,
respectively, or 7% and 6% of total revenues for each respective period,
representing an increase of 124%. The increase in dollar amount was primarily
due to increased hardware sales accompanying increased licenses of Fax Sr.
Service and Other. Service and other revenues were $870,000 and $338,000
in 1995 and 1994, respectively, or 22% and 17% of total revenues for each
respective period, representing an increase of 157%. The increase in dollar
amount was due primarily to the increase in maintenance and maintenance renewals
as a result of a larger installed customer base.
Cost of Revenues
Software License. Cost of software license revenues was $104,000 and
$35,000 in 1995 and 1994, respectively, representing 4% and 2% of the related
software license revenues for each respective year. The increase in dollar
amount was primarily due to the higher volume of products shipped during 1995.
The software license gross margin percentage remained relatively constant at 96%
in 1995 compared to 98% in 1994.
Hardware. Cost of hardware revenues was $209,000 and $114,000 in 1995 and
1994, respectively, representing 75% and 92% of the related hardware revenues
for each respective year. The increase in dollar amount for the cost of hardware
revenues during 1995 was primarily due to increased unit sales of hardware
products accompanying licenses of Fax Sr. and to a change in the sales mix of
third-party hardware products from less expensive modem products to high end
multi-channel modem boards.
24
<PAGE> 25
The gross margin percentage for hardware sales increased to 25% in 1995 from 8%
in 1994 due primarily to a change in the hardware sales mix.
Service and Other. Cost of service and other revenues was $319,000 and
$130,000 in 1995 and 1994, respectively, or 37% and 38% of the related service
and other revenues for each respective year. The increase in dollar amount of
cost of service and other from 1994 to 1995 was due primarily to the higher
volume of products shipped during 1995 and to the increase in the number of
customer support personnel and the hiring of incremental personnel to support
such growth. The gross margin percentage for service and other revenues remained
relatively constant at 63% in 1995 compared to 62% in 1994.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $1.2 million and
$649,000 in 1995 and 1994, respectively, or 32% and 33% of total revenues for
each respective period. The increase in dollar amount was primarily due to the
Company's effort to expand its sales and marketing organization (approximately
$118,000), higher sales commissions associated with increased revenues
(approximately $150,000), and increased marketing program activities
(approximately $209,000).
Research and Development. Research and development expenses were $893,000
and $414,000 in 1995 and 1994, respectively, or 23% and 21% of total revenues
for each respective period. The increase in dollar amount and as a percentage of
total revenues was primarily attributable to the employment of additional staff
and independent contractors to develop and enhance the Company's products and
quality assurance.
General and Administrative. General and administrative expenses were
$750,000 and $721,000 in 1995 and 1994, respectively, or 19% and 37% 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 began to realize operating leverage
from its established infrastructure.
Write-off of Intangible Assets. In 1993, the Company acquired from a third
party the rights, title and interest to two software products for a purchase
price of $300,000. In 1994, the Company recorded a charge of $200,000 to
write-off the unamortized portion of the software rights as a result of the
Company's increased focus on its Fax Sr. product line and to reflect their net
realizable value.
Interest Income (Expense), Net. Interest income (expense), net represented
expense of $1,000 in 1995 and income of $12,000 in 1994.
Provision (Benefit) for Income Taxes. Net operating loss carryforwards
were used to offset all federal and state income tax in 1995. The benefit for
income taxes in 1994 was $70,000 primarily due to federal and state net
operating loss carryforwards utilized in subsequent periods.
25
<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for each of the eight most recent quarters. In the opinion of
management, this information has been prepared on the same basis as the audited
financial statements appearing elsewhere in this Prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results
when read in conjunction with the audited Financial Statements of the Company
and related Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license......... $1,059 $ 660 $ 971 $1,060 $1,348 $1,925 $2,536 $2,950
Hardware................. 67 111 196 331 360 646 709 1,039
Service and other........ 254 257 324 388 418 434 456 588
------ ------ ------ ------ ------ ------ ------ ------
Total revenues.... 1,380 1,028 1,491 1,779 2,126 3,005 3,701 4,577
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Software license......... 39 37 20 30 26 33 86 132
Hardware................. 48 85 151 188 252 493 494 714
Service and other........ 109 103 174 172 211 259 229 272
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues........ 196 225 345 390 489 785 809 1,118
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............... 1,184 803 1,146 1,389 1,637 2,220 2,892 3,459
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing...... 327 400 491 550 700 1,083 1,296 1,642
Research and
development............ 323 230 365 411 568 628 764 790
General and
administrative......... 276 163 209 221 229 291 391 388
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses........ 926 793 1,065 1,182 1,497 2,002 2,451 2,820
------ ------ ------ ------ ------ ------ ------ ------
Income from operations..... 258 10 81 207 140 218 441 639
Interest income (expense),
net...................... (2) 7 1 -- 7 24 1 28
------ ------ ------ ------ ------ ------ ------ ------
Income before provision for
income taxes............. 256 17 82 207 147 242 442 667
Provision for income
taxes.................... -- -- 29 73 51 85 170 235
------ ------ ------ ------ ------ ------ ------ ------
Net income................. $ 256 $ 17 $ 53 $ 134 $ 96 $ 157 $ 272 $ 432
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
26
<PAGE> 27
The following table sets forth certain unaudited consolidated quarterly
statement of operations data expressed as a percentage of total revenues for
each of the eight most recent quarters:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- --------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license........... 76.7% 64.2% 65.1% 59.6% 63.4% 64.1% 68.5% 64.4%
Hardware................... 4.9 10.8 13.2 18.6 16.9 21.5 19.2 22.7
Service and other.......... 18.4 25.0 21.7 21.8 19.7 14.4 12.3 12.9
----- ----- ----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Software license........... 2.8 3.6 1.3 1.7 1.2 1.1 2.3 2.9
Hardware................... 3.5 8.3 10.1 10.5 11.9 16.4 13.4 15.6
Service and other.......... 7.9 10.0 11.7 9.7 9.9 8.6 6.2 5.9
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues.......... 14.2 21.9 23.1 21.9 23.0 26.1 21.9 24.4
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 85.8 78.1 76.9 78.1 77.0 73.9 78.1 75.6
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing........ 23.7 38.9 32.9 30.9 32.9 36.0 35.0 35.9
Research and development... 23.4 22.4 24.5 23.1 26.7 20.9 20.6 17.2
General and
administrative........... 20.0 15.8 14.1 12.5 10.8 9.7 10.6 8.5
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.......... 67.1 77.1 71.5 66.5 70.4 66.6 66.2 61.6
----- ----- ----- ----- ----- ----- ----- -----
Income from operations....... 18.7 1.0 5.4 11.6 6.6 7.3 11.9 14.0
Interest income (expense),
net........................ (0.1) 0.7 0.1 -- 0.3 0.8 -- 0.6
----- ----- ----- ----- ----- ----- ----- -----
Income before provision for
income taxes............... 18.6 1.7 5.5 11.6 6.9 8.1 11.9 14.6
Provision for income taxes... -- -- 1.9 4.1 2.4 2.9 4.6 5.2
----- ----- ----- ----- ----- ----- ----- -----
Net income................... 18.6% 1.7% 3.6% 7.5% 4.5% 5.2% 7.3% 9.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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. In addition, the sale of the Company's products
often involves delays because customers have tended to implement the products on
a large scale and customers also must establish certain minimum hardware
capabilities. The Company's products therefore often have a lengthy sales cycle
while the customer evaluates and receives approvals for the purchase of the
Company's products. During such sales cycles, the Company may expend substantial
funds and management effort yet receive no revenues. It may be difficult to
accurately predict the sales cycle of any large order. If one or more large
orders fails to close as forecasted in a fiscal quarter, the Company's revenues
and operating results for such quarter could be materially adversely affected.
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. The
potential occurrence of any one or more of these factors makes the prediction of
revenues and results of operations on a quarterly basis difficult and
performance forecasts derived from such predictions unreliable. The Company's
business has experienced and is expected to continue to experience seasonality.
The Company has historically had and expects to continue to have weaker sales in
the months of July and August which may have an adverse effect on
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third quarter sales. The Company believes that these fluctuations are caused
primarily by customer budgeting and purchasing patterns. See "Risk
Factors -- Fluctuations in Quarterly Results of Operations; Seasonality."
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 and the private
sales of preferred stock. The net proceeds to the Company from the sale of its
preferred stock in 1996 were approximately $5.2 million. The Company used these
proceeds principally for working capital needs and property and equipment
additions necessary to support the Company's growth and for the repurchase of
approximately $2.0 million of Common Stock from certain officers of the Company.
See "Certain Transactions."
At June 30, 1997, the Company had cash and cash equivalents of $810,000 and
working capital of $3.4 million. The Company has entered into a loan and
security agreement with a bank which is comprised of a term loan and a line of
credit. The Company borrowed $250,000 under the term loan, which bears interest
at the bank's prime rate plus 0.5% (9.0% at June 30, 1997) and is payable in
monthly installments through December 31, 1999. At June 30, 1997, $213,000 was
outstanding under this term loan.
The line of credit permits the Company to borrow up to the lesser of $1.0
million or 70% of eligible accounts receivable (as defined) and bears interest
at the bank's prime rate plus 0.5% (9.0% at June 30, 1997). There were no
amounts outstanding under the line of credit at June 30, 1997. The term loan and
line of credit are collateralized by all of the assets of the Company and
require the Company to maintain certain financial ratios.
The Company's operating activities provided cash of $853,000 in the year
ended December 31, 1995, and used cash of $350,000 and $566,000 during the six
months ended June 30, 1997 and the year ended December 31, 1996, respectively.
Net cash provided during 1995 consisted primarily of net income from operations
and increases in accounts payable, accrued liabilities and deferred revenue,
offset by an increase in accounts receivable and prepaid expenses. Net cash used
by operations during the six months ended June 30, 1997 consisted primarily of
an increase in accounts receivable offset by net income from operations and an
increase in accrued liabilities. Net cash used by operations during 1996 was
comprised primarily of an increase in accounts receivable offset by net income
from operations and an increase in deferred revenue.
Investing activities used cash of $847,000 during the six months ended June
30, 1997, $1.4 million during 1996 and $269,000 during 1995. During these
periods, the principal uses were purchases of property and equipment and
purchases of short-term investments. The Company expects that the rate of
purchases of property and equipment will remain constant or increase as the
Company's employee base grows.
Financing activities used cash of $35,000 during the six months ended June
30, 1997, generated cash of $3.5 million in 1996 due primarily to net proceeds
from the issuance of preferred stock and used cash of $53,000 in 1995.
The Company believes that the proceeds from the sale of the Common Stock
offered hereby, together with its existing cash balances, funds generated from
operations and available borrowings under its line of credit 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.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 128, Earnings Per Share, which is effective for financial statements
issued for periods ending after December 15, 1997; earlier application is not
permitted. This statement requires restatement of all prior-period earnings per
share data presented. The Company has not yet determined the impact of this
statement on the earnings per share data presented.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new accounting standards will not have a material impact on the Company's
financial statements.
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BUSINESS
Omtool designs, develops, markets and supports open, client/server
facsimile software, delivering solutions which automate and integrate fax
communication throughout the enterprise. Omtool's Fax Sr. product family,
licensed typically on a shrink-wrap basis, provides users with an extensive,
flexible feature set for transmitting and receiving faxes and improves an
organization's management of its fax communications processes by providing a
suite of utility and control functions. Fax Sr. can be deployed on
heterogeneous, multi-platform networks and can be integrated with both desktop
and enterprise software applications as well as e-mail and groupware systems. To
address the needs of large enterprises, Fax Sr. is modular and scaleable as
servers, clients and fax lines can be implemented and added over time. Fax Sr.
is available on the Windows NT, HP UNIX and DEC UNIX and VMS server operating
systems, and Windows 95, Windows NT, Windows 3.1.x, HTML, Macintosh, Motif and
MS-DOS clients. Omtool has licensed Fax Sr. to more than 1,500 customers
worldwide, including Alfred Berg Inc., AT&T Corp., Bloomberg Financial Markets,
Boeing, Dow Chemical, Honeywell, SmithKline Beecham and United Technologies.
INDUSTRY BACKGROUND
To be competitive in today's marketplace, companies must focus on improving
electronic communications within their organizations and beyond the enterprise.
Growth in electronic communication is being driven by productivity and
efficiency demands on knowledge workers, the information sharing requirements of
dispersed organizations, the emergence of the virtual enterprise to incorporate
suppliers, customers and other business partners, and the general globalization
of markets. Enterprises are responding to the need for improved communications
through the use of a combination of telephony, facsimile, e-mail and groupware
solutions. Facsimile transmission has been adopted as a world-wide standard for
electronic communication because of its ease of use, real-time transmission of
information, and consistent uniform protocol standards. According to an industry
source, an estimated 41% of the average annual telephone bills in 1996 for
Fortune 500 companies is attributable to fax costs.
A number of technological developments have emerged to create opportunities
to automate and improve fax and other corporate communications methods. These
developments include the proliferation of personal computers in the corporate
workplace, the growth of the client/server computing environment, the emergence
of the fax modem and remote access technology, the growth of wide area network
("WAN") infrastructure, including high speed T1/T3 public networks, and the
emergence of the Internet and corporate intranets. In addition, the rapid
adoption of Windows NT as a cost-effective, technologically-advanced platform
for enterprise computing is creating an environment whereby companies can
realize significant improvements in corporate communications through the use of
automation software.
Despite these technological improvements, only limited advances have been
made to automate fax communication and to coordinate and integrate communication
by fax with other communications methods. Traditional fax communication within
and beyond the enterprise continues to be prone to errors and delays in
transmission and reception due to manual copying, sending and routing processes.
Additionally, business managers and information technology ("IT") professionals
are often unable to effectively manage access and analyze and control usage
costs across this critical corporate communications medium. Because the vast
majority, the Company believes, of all faxed documents are created
electronically, the lack of integration between fax communication and desktop or
enterprise applications causes additional inefficiencies in the document
communications and management process. Moreover, traditional fax communication
has failed to integrate with emerging communications methods that are
complementary to fax transmission, such as e-mail and groupware, to create a
coordinated communications process throughout the extended enterprise.
Historical approaches to improving facsimile communications such as
desktop-based fax software and host-based fax applications have not provided a
comprehensive solution for the requirements of
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the enterprise. Desktop fax applications are unable to support workgroups or
divisions within an organization, are often limited to a single desktop
operating system and do not provide complete management functions. In addition,
desktop-based fax applications are limited in that they require significant
investment by the organization in dedicated modem or fax boards in each user's
PC and a telephone line connection for each modem or fax board. Host-based fax
applications running on mainframes or minicomputers are typically expensive,
difficult to maintain and relatively inflexible to meet the changing needs of
the enterprise. In addition, host-based fax applications are difficult to
integrate in a changing technological environment.
As corporate communications have become more critical and complex, a need
has arisen for a solution to automate and integrate fax communications
throughout the enterprise and address a broad range of faxing requirements from
person-to-person to volume broadcast transmissions. Such a solution must provide
users and managers with superior functionality, provide tight integration with
applications and other communications methods such as e-mail and groupware,
leverage existing network technology and be implemented on a scaleable,
multi-platform client/server architecture to address the needs of the extended
enterprise. According to a third-party market research firm, the U.S. fax server
market, which includes revenues from software-only fax servers as well as
revenues from bundled, turnkey hardware and software fax server systems, is
expected to grow from $155 million in 1995 to $400 million in 1999.
THE OMTOOL SOLUTION
Omtool provides an open, client/server software solution, licensed
typically on a shrink-wrap basis, for automating and integrating facsimile
communications throughout the enterprise. Omtool's Fax Sr. solution provides the
following key benefits:
Comprehensive Fax Solution. Fax Sr. provides users with an extensive,
flexible feature set for transmitting, receiving and managing facsimiles. Fax
Sr. is designed to enhance an organization's management of its fax
communications processes by providing a suite of utility and control functions
for both IT staff and business managers.
Tight Integration with Desktop and Production Applications. Fax Sr.
manages the transmission of documents originating from desktop applications as
well as volume-based facsimiles generated by production applications, such as
purchase orders, invoices and shipping notices. Fax Sr. can be integrated with
off-the-shelf software applications as well as in-house custom applications.
Complementary E-mail and Groupware Functionality. Fax Sr. is designed to
connect to and complement e-mail and groupware by enabling faxes to be sent and
received through these applications. Fax Sr. supports multiple, complementary
e-mail and groupware systems, including Microsoft Mail, cc:Mail, Lotus Notes,
Microsoft Exchange and Simple Mail Transfer Protocol ("SMTP").
Leverage Existing Infrastructure Investments. Fax Sr. is designed to
operate on heterogeneous networks and enables enterprises to leverage their
existing IT server and desktop infrastructure and telecommunications
investments. Fax Sr. supports multiple, simultaneous protocols and is available
on the Windows NT, HP UNIX, and DEC UNIX and VMS server operating systems, and
Windows NT, Windows 95, Windows 3.1.x, HTML, Macintosh, Motif and MS-DOS
clients. Fax Sr. operates with existing public and leased telephone lines and,
with additional features included in Fax Sr. NT Version 2.0, enables users to
take advantage of enhanced services offered by telecommunication carriers and
specialized service providers.
Enterprise-Strength Solution. Fax Sr. is architected to be modular and
scaleable to meet the needs of worldwide enterprises. Servers, clients and fax
lines can be implemented and added over time in a Fax Sr. deployment. Fax Sr.
has been utilized as a solution for up to approximately 10,000 users within a
single customer enterprise.
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STRATEGY
The Company's objective is to become the leading provider of enterprise
client/server facsimile software solutions. The Company seeks to achieve this
objective by implementing the following business strategy:
Maintain Technology Leadership in the Enterprise Market. The Company
intends to continue to invest in research and development to ensure that Fax Sr.
remains a robust and scaleable product for the enterprise market. The Company
strives to bring enhanced features to the market to respond to changing customer
requirements and evolving technology. The Company believes that Fax Sr. was the
first commercially available client/server facsimile solution to provide e-mail
and Microsoft Exchange integration and to incorporate least cost routing.
Continue Leadership in the Windows NT Environment. The Company believes
that Windows NT will become the dominant computing platform in the enterprise
environment. The Company believes that Fax Sr. was the first commercially
available client/server facsimile solution for the Windows NT platform, and the
Company has built a leadership position in this market. The Company intends to
focus a significant portion of its near-term product development efforts on
Windows NT-related functionality.
Leverage Installed Base of Customers. The Company believes that
significant opportunities exist to expand the use of Fax Sr. across more users
and applications at the Company's existing customer installations. The Company
intends to pursue these opportunities by providing comprehensive post-sale
customer support. In addition, the Company believes that a highly-referenceable
customer base is of critical importance in marketing its products to new
customers.
Pursue Multiple Distribution Channels. The Company believes that multiple
distribution channels are necessary to penetrate its target markets. The Company
is currently expanding its distribution network, including increasing its
telesales force, expanding its indirect channels within the United States and
internationally, and establishing a dedicated sales force to focus on sales to
large corporate accounts and post-sale relationship management.
Expand International Sales. The Company intends to expand its
international presence (primarily in Europe and South America) in order to
address its target markets outside of North America and to serve customers that
operate on a multi-national basis. In 1995, 1996 and the six months ended June
30, 1997, approximately 5%, 7% and 8%, respectively, of the Company's total
revenues were derived from sales outside of North America (primarily in Europe).
In 1997, the Company plans to significantly increase its investment in sales and
marketing efforts directed toward international markets.
Pursue Strategic Relationships. The Company is seeking to form
relationships with leading providers of products and services complementary to
the Company's offerings. The Company believes that these relationships will
provide both a valuable source of sales leads and an alternative source of
implementation services. The Company also believes that these relationships will
be beneficial in exposing its products to new markets and prospective customers.
The Company has recently entered into strategic alliances with UNIFI
Communications, Inc. and Xpedite Systems, Inc., providers of enhanced fax
carrier services, and with Active Voice Corporation, a provider of PC-based
voice mail systems and computer-telephony integration solutions.
PRODUCTS AND SERVICES
Fax Sr.
Fax Sr. is a client/server software solution for automating and integrating
fax communication throughout the enterprise. As an integrated component of an
enterprise software system, Fax Sr. is designed to be deployed on heterogeneous,
multi-platform networks and to integrate with desktop and enterprise software
applications. Fax Sr. is licensed typically on a shrink-wrap basis, primarily on
the Windows NT, HP UNIX and DEC UNIX and VMS server operating systems. In 1996
and the six months
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ended June 30, 1997, approximately 82% and 96%, respectively, of the Company's
software license revenues were derived from Fax Sr. NT. Fax Sr. can be
configured with a variety of networked clients, including Windows NT, Windows
95, Windows 3.1.x, HTML, Macintosh, Motif and MS-DOS.
The Company has versions of Fax Sr. for use on the Windows NT, HP UNIX and
DEC UNIX and VMS operating systems. Fax Sr. NT was first released in March 1995
and the current version, 2.0, was released in May 1997. Fax Sr. VMS was first
released in 1993 and the current version, 4.1, was released in March 1997. Fax
Sr. UNIX was first released in 1994 and the current version, 4.2, was released
in June 1997.
Fax Sr. is comprised of three main components: Fax Sr. Client, Fax Sr.
Server and Fax Sr. Manager. The Fax Sr. Client allows users to send and receive
faxes directly from the desktop or enterprise application. The Fax Sr. Server
controls the function of prioritizing, queuing, and transmitting outbound faxes,
while receiving and distributing inbound faxes. The Fax Sr. Manager allows for
remote monitoring, control, and analysis of fax user activity from any Windows
or Windows NT system that is connected to the network.
Fax Sr. offers a comprehensive feature set with functionality important to
users, business managers and IT professionals. Fax Sr. users can fax documents,
together with attachments, from any desktop application through the
application's print function. Alternatively, faxes may be transmitted or
received directly through e-mail. Users can create and revise shared, public and
private phonebooks for fax transmissions. Fax Sr. offers a fax broadcast
capability with immediate or delayed transmission to take advantage of off-peak
telephone line utilization and charges. Inbound faxes can be directed to a
printer, desktop personal computer or e-mail. Fax Sr. also offers remote access,
including send and receive capability, for users who are away from the office.
Fax Sr. provides tools that allow business managers and IT professionals to
effectively manage the fax communication process. Outbound faxes can be
prioritized and scheduled on the individual user level and enhanced management
security and control capabilities are provided by furnishing password protection
as well as user and location restrictions. Through least cost routing, Fax Sr.
can route fax transmissions between servers, over an organization's WAN or the
Internet, allowing long distance fax transmissions to be made as local phone
calls. Fax Sr. also offers sophisticated tools for facsimile usage analysis,
including comprehensive recordkeeping of inbound and outbound faxes. The entire
Fax Sr. environment can be managed, configured and controlled from one or more
remote workstations.
Fax Sr. can be automatically linked to enterprise data processing
applications on multiple platforms connected on an enterprise's network. Fax Sr.
provides an integrated faxing environment across an organization's computer
platforms, including both servers and desktops. Fax Sr. is scaleable as a
business' need for faxing solutions expands.
Fax Sr. NT provides incremental functionality to the feature set available
on all versions of the Fax Sr. product. Fax Sr. NT is fully integrated with
Microsoft Exchange and enables business managers to pre-approve outbound faxes
on an individual user level. Fax Sr. NT supports multiple e-mail systems and
server side rasterization of multiple desktop application formats. Fax Sr. NT
Version 2.0 contains new client and server features including the capability of
routing fax transmissions through third-party service providers, SMTP gateway,
Internet browser client support (including HTML and JAVA content) and OCR
(optical character recognition) for inbound routing.
The Company's Fax Sr. product is licensed to its customers on a per server
basis. Pricing is based on the number of servers and facsimile telephone lines
deployed. The software list price for a deployment of one server, unlimited
clients and four telephone lines is approximately $6,500. The software list
price for a deployment of one server, unlimited clients and eight telephone
lines is approximately $9,000. The software list price for a deployment with one
server, unlimited clients and a T1 line, containing 24 telephone lines, is
approximately $17,000.
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Hardware
The Company also resells certain hardware products, including intelligent
fax boards and fax modems, to its customers. Hardware sales are undertaken as a
convenience to Fax Sr. customers, and hardware is neither bundled with Fax Sr.
nor required to be purchased from the Company. Omtool primarily resells
intelligent fax boards from vendors such as Brooktrout Technology and Dialogic.
Customer Service
To aid in the successful deployment of the Company's products by its
customers, the Company's customer service organization provides technical
support. For an additional fee at the time of the initial licensing of the Fax
Sr. product, the Company provides support services to its customers for a period
of 12 months, including telephone support, notification of product upgrades,
minor product upgrades, functional releases and maintenance releases, technical
bulletins and replacement of damaged media. Support services may be renewed by
the customer on an annual basis. The Company currently provides annual support
services based on a percentage of its product license fee. Although to date the
Company has not provided consulting, configuration and installation services to
any significant degree, the Company intends to offer these customer services in
the future as warranted by customer demand. There can be no assurance, however,
as to the time of introduction or level of market acceptance of, or revenue
generated from, any such services. In the event that the Company devotes
significant financial and other resources to the provision of such services and
fails to achieve market acceptance and generate revenue, the Company's business,
financial condition and results of operations could be materially adversely
affected.
Other Products
In 1995, the Company acquired the right to license and support certain
document management and imaging software products. The Company provides
technical support for customers in exchange for support contract revenues, but
does not market these products to new customers. The Company believes that the
expertise gained in supporting the document management and imaging business can
be used to provide enhancements to its core Fax Sr. product. Revenues from the
licensing and support of these products accounted for approximately 9% and 3% of
the Company's total revenues in 1996 and the six months ended June 30, 1997,
respectively, and the Company does not expect this source of revenues to
increase in the future.
SALES AND MARKETING
The Company targets large and mid-sized corporations, organizations and
government entities as the primary market for its Fax Sr. product line. To
address the broad range of its sales opportunities, the Company relies on the
coordinated efforts of its centralized telesales organization, its key
executives and corporate account team, the Company's marketing department and
its indirect channels, including resellers, international distributors and
systems integrators. The Company is presently expanding its sales organization.
The telesales group qualifies and pursues sales leads generated by Omtool's
marketing organization. The Company has historically conducted its telesales
operation from its corporate headquarters in Salem, New Hampshire and intends to
maintain the telesales function at this location. Direct sales by the Company
accounted for approximately 89%, 76% and 65%, respectively, of the Company's
total revenues in 1995, 1996 and the six months ended June 30, 1997.
Within North America, the Company also offers its Fax Sr. product line
through indirect sales channels such as VARs, systems integrators and resellers
of complementary hardware products. While product sales may be handled by third
parties, to date all customer service contracts have been maintained directly by
the Company. The Company plans to expand the number of resellers in North
America selling Fax Sr. and anticipates the percentage of its revenues derived
from indirect channels will therefore increase.
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Outside of North America, the Company primarily utilizes independent
distributors to promote, license and support its products. Omtool's distributor
strategy is to engage large-volume distributors of software products to serve
customers that operate on a multi-national basis. The Company expects to market
Fax Sr. through independent distributors in strategic markets including Europe
and South America. In 1995, 1996 and the six months ended June 30, 1997, sales
outside of North America represented 5%, 7% and 8%, respectively, of total
revenues.
In support of its sales organization, the Company conducts comprehensive
marketing programs intended to promote and create awareness of the Company's
products and position the Company in the enterprise, client/server facsimile
software market. These efforts include product advertising, public relations,
trade show participation, educational seminar series, direct mail and
telemarketing campaigns and participation in industry programs and forums.
STRATEGIC RELATIONSHIPS
An element of the Company's strategy is the creation and development of
strategic relationships with key industry participants, including leading
providers of products and services complementary to the Company's offerings. The
Company's goals in establishing these relationships are to create marketing
alliances with entities that will endorse and promote the Company's products to
a larger potential customer base and to assist the Company in developing a
supply of aftermarket service providers, thereby leveraging the Company's
resources and enhancing its reach.
The Company has recently entered into strategic alliances with UNIFI
Communications, Inc. and Xpedite Systems, Inc., providers of enhanced fax
carrier services, and with Active Voice Corporation, a provider of PC-based
voice mail systems and computer-telephony integration solutions. The agreements
generally provide for reference sales, limited co-marketing activities and, in
the case of UNIFI Communications, Inc. and Active Voice Corporation, resale of
Fax Sr. These agreements are mutually non-exclusive. See "Risk
Factors -- Expansion of Indirect Channels; Potential for Channel Conflict" and
"-- Strategic Relationships."
CUSTOMERS
As of June 30, 1997, the Company had more than 1,500 customers worldwide.
The Company's customer base reflects the cross-industry applicability of the
Company's products and services. The following is a representative list of
certain Fax Sr. customers that have each purchased more than $20,000 in the
aggregate of the Company's products and services:
ALCOA
Alfred Berg Inc.
Ameritech
AT&T Corp.
Auto Nation USA
Bank of Bermuda
Bloomberg Financial Markets
Boeing
Cellular One-Chicago
Charles Schwab
Correctional Services Canada
CSX Technology, Inc.
Digital Equipment Corporation
Dow Chemical
Environment Canada
Ericsson Inc.
Fina Oil & Chemical
Franklin Quest Co.
GMAC Mortgage Co.
Honeywell Inc.
J.D. Edwards
Legislative Counsel Bureau
Lockheed Martin
Logicorp
Los Alamos National Lab
Mayo Foundation
Micro Warehouse
Monsanto
New Brunswick Power
Pacific Bell
Payless Cashways, Inc.
Polaroid Corp.
Quark Incorporated
Sanford C. Bernstein & Co. Inc.
SmithKline Beecham
Transquest, Inc.
Tri Valley Growers
United Technologies
World Mercantile Exchange
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In 1995, Dow Chemical accounted for approximately 11% of total revenues. No
single customer accounted for 10% or more of total revenues in 1994 or 1996.
RESEARCH AND DEVELOPMENT
The Company has made substantial investments in research and development.
The Company believes its future performance will depend in large part on its
ability to enhance its current product line, maintain technological
competitiveness and meet an expanding range of customer requirements. Omtool
deploys its development engineers in product teams which focus on the concurrent
development of a range of product enhancements that leverage Fax Sr.'s modular
product architecture. Omtool's product development efforts are focused on
continued enhancement of existing products, development of new features and
exploring emerging technologies. The Company also continually reviews
opportunities to form alliances with third-party vendors of complementary
technologies and products in order to enhance the functionality of the Fax Sr.
product family. In the future, the Company may, based on timing and cost
considerations, explore opportunities to license or acquire technologies or
products from third parties.
Omtool is committed to enhancing Fax Sr. so that it remains a robust,
scaleable product, compatible with major emerging technologies utilized by large
enterprises. The Company is currently developing Fax Sr. NT Version 2.5, which
will include support for an enhanced JAVA client, an ActiveX client, LDAP
(light-weight directory access protocol) integration, additional OCR (optical
character recognition) capabilities, SNMP (simple network management protocol)
capability and support for international clients. There can be no assurance that
the Company will be successful in developing and marketing Fax Sr. NT Version
2.5 or other new versions or in responding to other emerging technological
developments or that any development will achieve commercial acceptance. See
"Risk Factors -- New Products and Technological Change" and "-- Risks Associated
with New Product Offerings; Potential for Undetected Errors."
The Company is seeking and will continue to seek to hire additional skilled
development engineers. Such engineers are likely to be in short supply, and the
Company's business, financial condition and results of operations could be
adversely affected if it encounters delays in hiring or fails to retain the
required skilled engineers. The Company's research and development expense for
1994, 1995 and 1996 was approximately $414,000, $893,000 and $1,972,000,
respectively. Since its inception, the Company has not capitalized any research
and development costs. The Company plans to continue to make significant
investments in research and development, primarily through the hiring of
additional skilled engineers and independent contractors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The enterprise, client/server facsimile solution market is intensely
competitive and rapidly changing and the Company expects competition to continue
to increase. The Company believes its ability to compete successfully depends
upon a number of factors both within and beyond its control, including product
performance, reliability and features; ease of use; product scaleability;
quality of support services; price/performance; timeliness of enhancements and
new product releases by the Company and its competitors; the emergence of new
computer-based facsimile products and standards; name recognition; the
establishment of strategic alliances with industry leaders; and industry and
general economic trends.
The Company competes directly with a large number of vendors of facsimile
products, including providers of facsimile software products for client/server
networks such as RightFAX Inc. (a subsidiary of Applied Voice Technology, Inc.),
Fenestrae BV, Optus Software Inc. and Biscom, Inc. The Company also competes
with providers offering a range of alternative facsimile solutions including
operating systems containing facsimile and document e-mail features; low-end fax
modem products; providers of desktop fax software; single-platform facsimile
software products; and customized
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proprietary software solutions. In addition, providers of operating systems or
business software applications may bundle competitive facsimile solutions as
part of their broader product offerings.
Many of Omtool'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 Omtool 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. In addition, no assurance can be given that the Company will
not be required to make substantial additional investments in connection with
its research, development, engineering, marketing, sales and customer service
efforts in order to meet any competitive threat, or that the Company will be
able to compete successfully in the future. Increased competition will result in
reductions in market share, pressure for price reductions and related reductions
in gross margins, any of which could materially and adversely affect the
Company's ability to achieve its financial and business goals. There can be no
assurance that in the future the Company will be able to successfully compete
against current and future competitors. See "Risk Factors -- Intense
Competition."
PROPRIETARY RIGHTS
The Company regards its software as a trade secret and attempts to protect
it with a combination of copyright and trade secret laws, and employee
nondisclosure and assignment of invention agreements. The Company has no patents
or patents pending, and to date has not registered any copyrights or trademarks.
The Company generally licenses its products under "shrink-wrap" licenses (i.e.,
licenses included as part of the product packaging). Shrink-wrap licenses are
not negotiated with or signed by individual licensees, and purport to take
effect upon the opening of the product package. Certain provisions of such
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of many jurisdictions. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and although the Company is unable to determine the extent to which piracy of
its products exists, such piracy can be expected to be a persistent problem,
particularly in international markets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
the laws of the United States. There can be no assurance that these protections
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies. See "Risk Factors -- Dependence on Proprietary
Technology; Risks of Third-Party Claims for Infringement."
There has been substantial litigation in the software industry involving
intellectual property rights. There can be no assurance that claims of
infringement of intellectual property rights will not be asserted against the
Company and, if asserted, would not have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
inasmuch as the Company licenses certain components of its Fax Sr. product from
third parties, its exposure to copyright and other infringement actions may
increase because the Company must rely on such third parties for information as
to the origin and ownership of such licensed components. In the future,
litigation may be necessary to enforce and protect trade secrets, copyrights and
other intellectual property rights of the Company. The Company may also be
subject to litigation to defend against claimed infringement of the rights of
others or to determine the scope and validity of the intellectual property
rights of others. Any such litigation could be costly and divert management's
attention, either of which could have a material adverse effect on the Company's
business, financial condition and
37
<PAGE> 38
results of operations. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any one of which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Dependence on Proprietary Technology; Risks of
Third-Party Claims for Infringement" and "-- Dependence on Third Party Licensed
Technology."
EMPLOYEES
As of June 30, 1997, the Company employed 88 persons. The Company is not
subject to any collective bargaining agreements, has never experienced a work
stoppage and considers its relations with its employees to be good.
FACILITIES
The Company's executive offices are located in Salem, New Hampshire in a
leased facility consisting of approximately 22,500 square feet. The lease
expires on July 31, 2000, and the Company has an option to extend the lease for
a period of three years thereafter. The Company believes that such facilities
are adequate for its present operations. The Company, however, expects in the
future to expand into additional facilities.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
38
<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert L. Voelk.................. 41 Chairman of the Board, Chief Executive
Officer and Director
Martin A. Schultz................ 42 President and Director
Ellen Ohlenbusch Flaherty........ 31 Vice President, Sales
Darioush Mardan.................. 32 Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
Mark P. Overington............... 39 Vice President, Operations
Craig A. Randall................. 37 Vice President, Marketing
Paul E. St. Pierre............... 45 Vice President, Engineering
Richard D. Cramer (2)............ 34 Director
Bruce R. Evans (1)............... 38 Director
Anthony J. Mark (1)(2)........... 50 Director
William C. Styslinger, III....... 51 Director
</TABLE>
- ------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Robert L. Voelk has served as Chief Executive Officer of the Company since
January 1996 and Director of the Company since August 1993. Mr. Voelk served as
President of the Company from August 1993 to January 1996. Mr. Voelk was
employed in various positions at ASA International, Ltd., a designer and
developer of proprietary vertical market software, from 1981 to 1993, most
recently serving as Executive Vice President and Director. Mr. Voelk is a
Director of ASA International, Ltd.
Martin A. Schultz, the founder of the Company, has served as President of
the Company since January 1996 and Director of the Company since inception. Mr.
Schultz founded the Company in March 1991 and served as the Company's President
from its inception through August 1993 and served as Chief Executive Officer of
the Company from March 1991 to January 1996. Mr. Schultz served as Vice
President of ASA International, Ltd. from April 1989 to January 1991.
Ellen Flaherty joined the Company in February 1994 as Vice President,
Sales. Ms. Flaherty served as Director of Sales at Laboratory Technologies
Corporation, a developer of engineering and scientific software, from May 1992
to November 1993. From 1987 to 1992, Ms. Flaherty worked for Analog Devices, a
manufacturer of linear digital and mixed-signal integrated circuits.
Darioush Mardan has served as Chief Financial Officer and Vice President,
Finance of the Company since October 1995. Mr. Mardan has also served as
Secretary and Treasurer of the Company since January 1996. Mr. Mardan was
employed in various positions by Arthur Andersen LLP, a national public
accounting firm, from August 1989 to October 1995, most recently serving as
audit manager in the firm's Boston office.
Mark P. Overington joined the Company in January 1997 as Vice President,
Operations. Mr. Overington was employed in various positions by Avid Technology,
Inc., a developer of nonlinear film, video and audio solutions, from January
1989 to December 1996, most recently serving as Vice President of Corporate
Marketing. From 1983 to 1989, Mr. Overington was employed in various positions
by Lotus Development Corporation, a software developer.
Craig A. Randall joined the Company in September 1995 as Vice President,
Marketing. Mr. Randall served as Vice President, Marketing for Simplex Time
Recorder Co., a seller of fire alarm, sound, security and other monitor and
control systems, from December 1994 to July 1995. Previously
39
<PAGE> 40
Mr. Randall was employed by Racal-Datacom, Inc., a data communications company,
from November 1988 to December 1994, most recently as Division Vice President of
Product Marketing.
Paul E. St. Pierre joined the Company as Vice President, Engineering in
March 1996. Mr. St. Pierre was Director of Engineering at Avid Technology from
May 1992 to February 1996. Previously, Mr. St. Pierre was Consulting Engineer
for Digital Equipment Corporation, a computer systems, peripheral equipment and
software manufacturer, from January 1992 to May 1992. Prior to that, Mr. St.
Pierre was employed by Compass, Inc., a software engineering firm, from November
1982 to November 1991, most recently as Director of Engineering.
Richard D. Cramer became a Director of the Company in January 1996. Mr.
Cramer has served as Vice President, Sales and Marketing of CENTRA Software,
Inc., a developer and marketer of Web-Centric distance learning software, since
May 1996. Mr. Cramer served as Vice President of North American Field Operations
at Avid Technology from 1989 to 1995 and Vice President and General Manager of
the Desktop Division of Avid Technology during 1996.
Bruce R. Evans has served as a Director of the Company since July 1996.
Since 1991, Mr. Evans has been a general partner of Summit Partners, a venture
capital firm, where he has been employed since 1986. Mr. Evans serves as a
director of Pediatrix Medical Group and several privately-held companies.
Anthony J. Mark became a Director of the Company in January 1996. Mr. Mark
has served as Vice President, Product Development at CENTRA Software, Inc. since
March 1997. Mr. Mark served as Vice President and General Manager of Broadcast
Products Group from 1993 to 1995 and Vice President of Engineering from 1990 to
1993 at Avid Technology. Prior to his employment with Avid Technology, Mr. Mark
held various technical and managerial positions at companies such as Compass,
Inc., Datamark, Ltd., Lexico Enterprises and GPP GmbH.
William C. Styslinger, III became a Director of the Company in June 1997.
Mr. Styslinger has served as President, Chief Executive Officer and Director of
SeaChange International, a provider of software products to manage, store and
distribute digital video for cable television operators and telecommunications
companies, since 1993 and as Chairman of the Board of SeaChange International
since January 1995. Prior to July 1993, Mr. Styslinger was employed at Digital
Equipment Corporation since March 1978, most recently as manager of the Cable
Television Business Unit from October 1991 to May 1993.
Mr. Evans was nominated and elected in accordance with a shareholders'
agreement, which will terminate upon the closing of this offering. See "Certain
Transactions."
The Company's By-laws provide for the Company's Board of Directors to be
comprised of as many directors as are designated from time to time by the Board
of Directors or by the stockholders of the Company. The board is currently
comprised of six members. Each director holds office until his successor is duly
elected and qualified, or until his earlier death, resignation or removal. Prior
to this offering, the Company's stockholders approved an amendment and
restatement of the Company's By-laws to take effect upon the consummation of
this offering, that includes a provision to establish a classified Board of
Directors. Under this provision, Messrs. Mark and Cramer are serving for terms
expiring on the date of the Company's 1998 Annual Meeting of Stockholders,
Messrs. Evans and Styslinger are serving for terms expiring on the date of the
Company's 1999 Annual Meeting of Stockholders and Messrs. Voelk and Schultz are
serving for terms expiring on the date of the Company's 2000 Annual Meeting of
Stockholders. See "Description of Capital Stock -- Delaware Law and Certain
Charter and By-Law Provisions; Anti-Takeover Effects."
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the executive officers
or directors of the Company.
40
<PAGE> 41
COMMITTEES OF THE BOARD OF DIRECTORS
In March 1996, the Board of Directors established a Compensation Committee
and an Audit Committee. The Compensation Committee makes recommendations to the
Board of Directors concerning the compensation of executives and salaries of the
employees and consultants to the Company. The Compensation Committee also makes
recommendations to the Board of Directors concerning incentive compensation of
employees and directors of and consultants to the Company. The current members
of the Compensation Committee are Bruce R. Evans and Anthony J. Mark. The Audit
Committee recommends the engagement of auditors and is responsible for reviewing
the results and scope of audits and other services provided by the Company's
independent auditors. The current members of the Audit Committee are Richard D.
Cramer and Anthony J. Mark.
DIRECTOR COMPENSATION
Following the consummation of this offering, non-employee directors will
receive a fee of $1,000 for each meeting of the Board and $500 for each
committee meeting that they attend in person and will be reimbursed for their
reasonable out-of-pocket expenses incurred in attending such meetings. No
director who is an employee of the Company will receive separate compensation
for services rendered as a director.
On January 3, 1996, the Company granted Messrs. Cramer and Mark
nonstatutory options under the 1996 Stock Option Plan to purchase 80,000 shares
of Common Stock, respectively, at an exercise price of $0.25 per share,
determined by the Board of Directors to be the fair market value at the date of
grant. The options vest in equal annual installments over a period of three
years, commencing January 3, 1997. The options become exercisable in full upon a
change in control of the Company.
On July 1, 1997 the Company granted Mr. Styslinger a nonstatutory option
under the 1996 Stock Option Plan to purchase 15,000 shares of Common Stock at an
exercise price of $8.50 per share, determined by the Board of Directors to be
the fair market value at the date of grant. The option vests in equal annual
installments over a period of three years, commencing July 1, 1998. The option
becomes exercisable in full upon a change in control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to March 1996, the Company had no separate compensation committee or
other equivalent function, and this function was performed by the Company's
Board of Directors. From March 1996 until July 1996, the Company had a
Compensation Committee comprised of Messrs. Voelk (the Chief Executive Officer
of the Company), Schultz (the President of the Company) and Mark. From July 22,
1996 until April 15, 1997, the Compensation Committee was comprised of Messrs.
Voelk, Mark and Evans. Mr. Evans is a general partner of Summit Investors III,
L.P. a stockholder of the Company, and is also a general partner of Stamps,
Woodsum & Co. IV, which is the general partner of Summit Partners IV, L.P. which
is the general partner of Summit Ventures IV, L.P., another stockholder of the
Company. Since April 15, 1997, the Compensation Committee has been comprised of
Messrs. Mark and Evans.
41
<PAGE> 42
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers whose annual
salary and bonus for the year ended December 31, 1996 exceeded $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS(2)
ANNUAL ------------
COMPENSATION(1) SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- -------------------------------------------------------- -------- ------- ------------
<S> <C> <C> <C>
Robert L. Voelk......................................... $176,923 $50,000 --
Chairman of the Board, Chief Executive Officer and
Director
Martin A. Schultz....................................... 176,923 50,000 --
President and Director
Ellen Flaherty.......................................... 151,635 -- 160,000
Vice President, Sales
Craig A. Randall........................................ 99,333 10,000 160,000
Vice President, Marketing
Darioush Mardan......................................... 88,019 12,000 160,000
Vice President, Finance, Chief Financial Officer,
Treasurer and Secretary
</TABLE>
- ------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
have been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonus reported for the executive officer during the year ended
December 31, 1996.
(2) The Company did not grant any restricted stock awards or stock appreciation
rights during the year ended December 31, 1996. The Company does not have
any long term incentive plans.
Option Grants
The following table sets forth certain information concerning grants of
stock options made during the year ended December 31, 1996 by the Company to the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(3)
OPTIONS EMPLOYEES PRICE PER EXPIRATION -------------------
NAME GRANTED(1) IN 1996 SHARE(2) DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Voelk........ -- -- -- -- -- --
Martin A. Schultz...... -- -- -- -- -- --
Ellen Flaherty......... 160,000 18.0% $0.25 1/2/06 $25,156 $63,750
Craig A. Randall....... 160,000 18.0 0.25 1/2/06 25,156 63,750
Darioush Mardan........ 160,000 18.0 0.25 1/2/06 25,156 63,750
</TABLE>
42
<PAGE> 43
- ------------
(1) Generally, the options vest in equal annual installments over a period of
three years commencing one year from the date on which the options were
granted. All of the options were granted on January 3, 1996 and become
exercisable in full upon a change in control of the Company. The option
granted to Ms. Flaherty to purchase 160,000 shares of Common Stock was
exercisable for 53,333 shares of Common Stock on January 3, 1996; the
remaining 106,667 shares vest in equal annual installments over a period of
two years commencing on January 3, 1997.
(2) All options were granted at fair market value on the date of grant as
determined by the Board of Directors of the Company.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on the fair market value of $0.25 per share on the date of grant
(January 3, 1996) and assumed rates of stock price appreciation of 5% and
10% compounded annually from the date the respective options were granted to
their expiration date. These assumptions are mandated by the rules of the
Securities and Exchange Commission and are not intended to forecast future
appreciation of the Company's stock price. The potential realizable value
computation is net of the applicable exercise price, but does not take into
account federal or state income tax consequences and other expenses of
option exercises or sales of appreciated stock. Actual gains, if any, are
dependent upon the timing of such exercise and the future performance of the
Company's Common Stock. There can be no assurance that the rates of
appreciation in this table can be achieved. This table does not take into
account any appreciation in the price of the Common Stock to date.
Option Exercises and Unexercised Option Holdings
No Named Executive Officer exercised a stock option during 1996. The
following table sets forth certain information regarding the stock options held
as of December 31, 1996 by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AS OF IN-THE-MONEY OPTIONS AS OF
DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert L. Voelk..................... -- -- -- --
Martin A. Schultz................... -- -- -- --
Ellen Flaherty...................... 53,333 106,667 $ 466,664 $ 933,336
Craig A. Randall.................... -- 160,000 -- 1,400,000
Darioush Mardan..................... -- 160,000 -- 1,400,000
</TABLE>
- ------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. Accordingly, these values have been calculated on the basis of the
initial public offering price of $9.00 per share, less the applicable
exercise price.
STOCK PLANS
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan") was adopted by the Board of Directors and approved by the Company's
stockholders in January 1996. The 1996 Plan provides for the issuance of Common
Stock pursuant to the grant to employees of "incentive stock options" within the
meaning of the Internal Revenue Code of 1986, as amended (the "Code"), and the
grant of non-qualified stock options to consultants, directors (whether or not
an employee) and other non-employees of the Company.
43
<PAGE> 44
The 1996 Plan is administered by the Board of Directors. Subject to the
provisions of the 1996 Plan, the Board has the authority to select the optionees
and determine the terms of the options granted under the 1996 Plan including:
(i) the number of shares subject to each option, (ii) when the option becomes
exercisable, (iii) the exercise price of the option (which in the case of an
incentive stock option cannot be less than the fair market value of the Common
Stock as of the date of grant), (iv) the duration of the option and (v) the
time, manner and form of payment upon exercise of an option. An option is not
transferable by the recipient except by will or by the laws of descent and
distribution. Generally, no incentive stock option may be exercised more than
three months following termination of employment. However, in the event that
termination is due to death or disability, the option is exercisable for a
maximum of one year after such termination. The vesting of all options granted
under the 1996 Plan accelerate upon a change in control of the Company.
The aggregate number of shares of Common Stock which may be issued pursuant
to the 1996 Plan is 1,500,000. As of June 30, 1997, options to purchase a total
of 1,309,218 shares of Common Stock at exercise prices ranging from $0.25 to
$8.25 per share (with a weighted average exercise price of $1.28 per share) were
outstanding under the 1996 Plan (of which 321,665 options were then exercisable)
and options for 75,999 shares of Common Stock had been exercised. On April 14,
1997, the Company's Board of Directors voted that, effective upon the closing of
this offering, no further options may be granted or issued under this plan.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") was
adopted by the Board of Directors in April 1997 and approved by the Company's
stockholders in June 1997. The 1997 Plan will take effect upon the closing of
this offering. No options have been granted under the 1997 Plan. The 1997 Plan
provides for the issuance of Common Stock pursuant to the grant to employees of
"incentive stock options" within the meaning of the Code, and the grant of
non-qualified stock options, stock awards or opportunities to make direct
purchases of stock in the Company to employees, consultants, directors and
officers of the Company. The aggregate number of shares of Common Stock which
may be issued pursuant to the 1997 Plan is 1,800,000.
The 1997 Plan is administered by the Board of Directors. Subject to the
provisions of the 1997 Plan, the Board has the authority to select the optionees
and determine the terms of the options granted, including: (i) the number of
shares subject to each option, (ii) when the option becomes exercisable, (iii)
the exercise price of the option (which in the case of an incentive stock option
cannot be less than the market price of the Common Stock as of the date of
grant), (iv) the duration of the option and (v) the time, manner and form of
payment upon exercise of an option. An option is not transferable by the
optionholder except by will or by the laws of descent and distribution.
Generally, no incentive stock option may be exercised more than 90 days
following termination of employment. However, in the event that termination is
due to death or disability, the option is exercisable for a maximum of 180 days
after such termination.
1997 Employee Stock Purchase Plan. The 1997 Employee Stock Purchase Plan
(the "1997 Purchase Plan") was adopted by the Board of Directors in April 1997
and approved by the Company's stockholders in June 1997. The 1997 Purchase Plan
will take effect in January 1998. The 1997 Purchase Plan provides for the
issuance of a maximum of 200,000 shares of Common Stock pursuant to the exercise
of nontransferable options granted to participating employees.
The 1997 Purchase Plan is administered by the Board of Directors. All
employees of the Company, except employees who own five percent or more of the
Company's stock, whose customary employment is 25 hours or more per week and
more than five months in any calendar year and who have completed at least five
months of employment are eligible to participate in the 1997 Purchase Plan.
Employees who own five percent or more of the Company's Common Stock and
directors who are not employees of the Company may not participate in the 1997
Purchase Plan. To participate in the 1997 Purchase Plan, an employee must
authorize the Company to deduct an amount (not less than one percent nor more
than ten percent of a participant's total cash compensation) from his or her pay
during six-month periods commencing on January 1 and July 1 of each year (each a
"Plan Period"), but
44
<PAGE> 45
in no case shall an employee be entitled to purchase more than 1,000 shares in
any Plan Period. The exercise price for the option for each Plan Period is 85%
of the lesser of the market price of the Common Stock on the first or last
business day of the Plan Period. If an employee is not a participant on the last
day of the Plan Period, such employee is not entitled to exercise his or her
option, and the amount of his or her accumulated payroll deductions will be
refunded. An employee's rights under the 1997 Purchase Plan terminate upon his
or her voluntary withdrawal from the plan at any time or upon termination of
employment.
401(k) AND PROFIT SHARING PLAN
The Company maintains the Omtool 401(k) and Profit Sharing Plan (the
"401(k) Plan") qualified under Section 401(k) of the Code. All employees of the
Company are eligible to participate in the 401(k) Plan. The 401(k) Plan provides
that each participant may contribute up to 15% of the participant's annual
pre-tax compensation, but not more than the annual limit prescribed by law,
which limit was $9,500 in 1996. The Company matches by 50% an employee's
contribution subject to a maximum of 3% of an employee's base salary.
All Company contributions to the 401(k) Plan, if any, shall vest 100% after
three years of service.
EMPLOYEE AGREEMENTS
None of the Company's executive officers has an employment contract with
the Company, and their employment may be terminated at any time. However,
Messrs. Voelk and Schultz have both entered into Noncompetition, Nondisclosure
and Invention Agreements with the Company. Pursuant to the terms of these
Agreements, each of Messrs. Voelk and Schultz has agreed that he will not
directly or indirectly compete with the Company during the course of his
employment and for an additional two-year period thereafter if his employment is
terminated for any reason.
45
<PAGE> 46
CERTAIN TRANSACTIONS
SALE OF SERIES A CONVERTIBLE PREFERRED STOCK
Pursuant to subscription agreements entered into in February 1996, on July
8, 1996 the Company issued an aggregate of 162,500 shares of Series A
Convertible Preferred Stock, at a purchase price of $2.00 per share, to director
Richard D. Cramer, to then director William R. Daniels, III and to T.M.
Partners, of which director Anthony J. Mark is a general partner. Upon the
closing of this offering, the Series A Convertible Preferred Stock will
automatically convert into an aggregate of 325,000 shares of Common Stock.
SALE OF SERIES B CONVERTIBLE PREFERRED STOCK
On July 22, 1996, the Company issued an aggregate of 1,356,116 shares of
Series B Convertible Preferred Stock (the "Series B Financing"), at a purchase
price of $3.687 per share, to Summit Ventures IV, L.P. and Summit Investors III,
L.P. (the "Series B Holders"). Bruce R. Evans, a director of the Company, is a
general partner of Summit Investors III, L.P. and is the general partner of
Stamps, Woodsum & Co. IV, which is a general partner of Summit Partners IV,
L.P., which is a general partner of Summit Ventures IV, L.P. Upon the closing of
this offering, the Series B Convertible Preferred Stock will automatically
convert into an aggregate of 2,712,232 shares of Common Stock.
In connection with the Series B Financing, the Company, Messrs. Voelk and
Schultz, and the Series B Holders entered into a Shareholders' Agreement dated
July 22, 1996, pursuant to which Mr. Evans was elected to the Board of
Directors. The Company and the Series B Holders also entered into a Redemption
Agreement dated July 22, 1996 pursuant to which the Company must redeem the
Series B shares if certain events have not occurred by July 22, 2003. Both such
agreements will terminate upon the closing of this offering. Pursuant to the
Series B purchase agreement, the Company granted registration rights to certain
stockholders of the Company. See "Shares Eligible for Future
Sale -- Registration Rights."
REPURCHASE OF COMMON STOCK
In July 1996, in connection with the Series B Financing, the Company
entered into Common Stock Purchase Agreements with each of Robert L. Voelk and
Martin A. Schultz, executive officers of the Company, pursuant to which it
acquired 542,496 shares of Common Stock from each at a purchase price of $1.8435
per share.
TRANSACTIONS WITH SELLING STOCKHOLDER
William R. Daniels, III, a Selling Stockholder, served as Chief Financial
Officer of the Company from May 1995 to August 1995 and served as a Director of
the Company from January 1996 to June 1997. On January 3, 1996, the Company
granted Mr. Daniels a nonstatutory option under the 1996 Plan to purchase 80,000
shares of Common Stock at an exercise price of $0.25 per share, determined by
the Board of Directors to be the fair market value at the date of grant. The
option vests in equal annual installments over a period of three years,
commencing January 3, 1997, and becomes exercisable in full upon a change in
control of the Company. Pursuant to an at-will consulting agreement, Mr. Daniels
provides advisory services to the Company in exchange for cash payments of $500
per day plus any expenses incurred in performing such services. Mr. Daniels
became an employee of Robertson, Stephens & Company LLC on June 30, 1997.
The Company believes that the terms of the foregoing transactions involving
the Company were no less favorable to the Company than could have been obtained
from unaffiliated third parties. The Company has adopted a policy whereby all
transactions between the Company and its executive officers, directors and
affiliates will be on terms no less favorable to the Company than could be
obtained from unrelated third parties and will be approved by a majority of the
disinterested members of the Board of Directors.
46
<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1997 and as adjusted to
reflect the sale of the shares offered hereby by (i) each person who is known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director and Named Executive Officer of the Company, (iii) all
directors and executive officers of the Company as a group and (iv) each Selling
Stockholder. Unless otherwise indicated below, to the knowledge of the Company,
all persons listed below have sole voting and investment power with respect to
their shares of Common Stock, except to the extent authority is shared by
spouses under applicable law.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
--------------------- SHARES TO BE ---------------------
NAME AND ADDRESS NUMBER PERCENT SOLD IN OFFERING(2) NUMBER PERCENT
- ----------------------------- --------- ------- ------------------- --------- -------
<S> <C> <C> <C> <C> <C>
Summit Partners(3)........... 2,712,232 32.2% 444,520 2,267,712 19.8%
600 Atlantic Avenue
Boston, MA 02110
Robert L. Voelk(4)........... 2,557,504 30.3 255,750 2,301,754 20.1
Martin A. Schultz (5)........ 2,657,504 31.5 265,750 2,391,754 20.9
Richard D. Cramer............ 51,666 * 5,167 46,499 *
Bruce R. Evans (6)........... 2,712,232 32.2 444,520 2,267,712 19.8
Anthony J. Mark.............. 76,666 * 7,666 69,000 *
William C. Styslinger, III... -- -- -- -- --
William R. Daniels (7)....... 211,466 2.5 21,147 190,319 1.7
Ellen Flaherty (8)........... 106,666 1.2 -- 106,666 *
Darioush Mardan (9).......... 53,333 * -- 53,333 *
Mark P. Overington (10)...... 40,000 * -- 40,000 *
Craig A. Randall (9)......... 53,333 * -- 53,333 *
Paul E. St. Pierre (9)....... 53,333 * -- 53,333 *
All directors and executive
officers as a group (11
persons)(11)............... 8,362,237 95.7% 978,853 7,383,384 62.9%
</TABLE>
- ------------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock outstanding prior to this offering
includes (i) 8,428,239 shares outstanding as of June 30, 1997 and (ii)
shares issuable by the Company pursuant to options held by the respective
person or group which may be exercised within 60 days following June 30,
1997 ("Presently Exercisable Options"). The number of shares of Common
Stock deemed outstanding after this offering includes an additional
3,000,000 shares that are being offered for sale by the Company in this
offering. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission that deem shares to be
beneficially owned by any person or group who has or shares voting and
investment power with respect to such shares. Presently Exercisable Options
are deemed to be outstanding and to be beneficially owned by the person or
group holding such options for the purpose of computing the percentage
ownership of such person or group but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person or
group.
(2) If the Underwriters exercise their over-allotment option to purchase up to
600,000 shares, then the following stockholders named in the table above
will sell up to the following number of additional shares: Ellen Flaherty,
10,667 shares; Darioush Mardan, 5,333 shares; Mark P. Overington, 4,000
shares; Craig A. Randall, 5,333 shares; Paul E. St. Pierre, 5,333 shares;
and Summit Partners, 569,334 shares.
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<PAGE> 48
(3) Includes 2,571,042 shares held by Summit Ventures IV, L.P. and 141,190
shares held by Summit Investors III, L.P. The respective general partners
of these entities exercise sole voting and investment power with respect to
the shares owned by such entities.
(4) Includes 180,000 shares held in trust for the benefit of certain family
members; Mr. Voelk disclaims beneficial ownership of such shares.
(5) Includes 64,900 shares held in trust for the benefit of certain family
members; Mr. Schultz disclaims beneficial ownership of such shares.
(6) Includes 2,571,042 shares held by Summit Ventures IV, L.P. and 141,190
shares held by Summit Investors III, L.P. Mr. Evans is a general partner of
Summit Investors III, L.P. and is the general partner of Stamps, Woodsum &
Co. IV, which is the general partner of Summit Partners IV, L.P., which is
the general partner of Summit Ventures IV, L.P. Mr. Evans may be deemed to
share voting and investment power with respect to all shares held by the
partnerships. Mr. Evans disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
(7) Includes 6,666 Presently Exercisable Options.
(8) Consists of 106,666 Presently Exercisable Options.
(9) Consists of 53,333 Presently Exercisable Options.
(10) Consists of 40,000 shares of Common Stock issuable upon the exercise of
options, which options will become exercisable upon the closing of this
offering.
(11) Includes 306,665 Presently Exercisable Options and 2,571,042 shares held by
Summit Ventures IV, L.P. and 141,190 shares held by Summit Investors III,
L.P.
48
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering and after giving effect to the
amendment and restatement of the Company's Restated Certificate of Incorporation
immediately prior to the closing of this offering, the authorized capital stock
of the Company will consist of 35,000,000 shares of Common Stock, $0.01 par
value per share, and 2,000,000 shares of Preferred Stock, $0.01 par value per
share. Prior to this offering, there were outstanding an aggregate of 1,518,616
shares of Convertible Preferred Stock which will automatically convert into an
aggregate of 3,037,232 shares of Common Stock immediately upon the closing of
this offering.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Restated Certificate of
Incorporation as amended and restated immediately prior to the closing of this
offering which is included as an exhibit to the Registration Statement, and by
the provisions of applicable law.
COMMON STOCK
As of June 30, 1997, there were 8,428,239 shares of Common Stock
outstanding held of record by 33 stockholders, after giving effect to the
conversion of all outstanding Preferred Stock upon the closing of this offering.
Based upon the number of shares outstanding as of that date and giving effect to
the issuance of the 3,000,000 shares of Common Stock offered by the Company
hereby, there will be 11,428,239 shares of Common Stock outstanding upon the
closing of this offering.
Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of Common Stock are entitled to receive ratable dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. Upon
the liquidation, dissolution or winding up of the Company, holders of Common
Stock share ratably in the assets of the Company available for distribution to
its stockholders, subject to the preferential rights of any then outstanding
Preferred Stock. No shares of Preferred Stock will be outstanding immediately
following the closing of this offering. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. All shares of Common
Stock outstanding upon the effective date of this Prospectus, and the shares
offered hereby will, upon issuance and sale, be fully paid and nonassessable.
PREFERRED STOCK
Prior to this offering, there were two series of Preferred Stock
outstanding consisting of 162,500 shares of Series A Preferred Stock and
1,356,116 shares of Series B Preferred Stock. All outstanding shares of Series A
and B Preferred Stock will be converted into an aggregate of 3,037,232 shares of
Common Stock upon the closing of this offering and such shares of Preferred
Stock will no longer be issued and outstanding.
Upon the closing of this offering, the Company's Board of Directors will
have the authority to issue 2,000,000 shares of Preferred Stock in one or more
series and to fix the relative rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The Board of Directors could, without the approval of the stockholders, issue
Preferred Stock having voting or conversion rights that could adversely affect
the voting power of the holders of Common Stock, and the issuance of Preferred
Stock could be used, under certain circumstances, to render more difficult or
discourage a hostile takeover of the Company. The Company has no present plans
to issue any shares of Preferred Stock.
49
<PAGE> 50
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or the business combination is approved in a
prescribed manner, or certain other conditions are satisfied. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Company's Amended and Restated By-laws (the "By-laws") provide for the
election of directors. See "Management -- Executive Officers and Directors." The
By-laws provide that (i) the number of directors shall be determined from time
to time by resolution adopted by a majority of the Board of Directors, (ii)
vacancies on the Board of Directors may be filled by the Board unless and until
filled by the stockholders, and (iii) directors may be removed only for cause by
the vote of the holders of at least 75% of the shares then entitled to vote at
an election of directors.
The By-laws provide for a classified Board of Directors consisting of three
classes of directors having staggered terms of three years each, with each of
the classes being as nearly equal as possible. A single class of directors is
elected each year at the Company's annual meeting of stockholders. Subject to
transition provisions, each director elected at each such meeting will serve for
a term ending on the date of the third annual meeting of stockholders after his
election and until his successor has been elected and duly qualified. Messrs.
Mark and Cramer are serving for terms expiring on the date of the Company's 1998
Annual Meeting of Stockholders, Messrs. Evans and Styslinger are serving for
terms expiring on the date of the Company's 1999 Annual Meeting of Stockholders
and Messrs. Voelk and Schultz are serving for terms expiring on the date of the
Company's 2000 Annual Meeting of Stockholders.
The By-laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a notice must be
delivered not less than 120 days nor more than 150 days prior to the first
anniversary of the date of the proxy statement delivered to stockholders in
connection with the preceding year's annual meeting, provided, however, that if
either (i) the date of the annual meeting is more than 30 days before or more
than 60 days after such anniversary, or (ii) if no proxy statement was delivered
to stockholders in connection with the preceding year's annual meeting, such
notice must be delivered not earlier than 90 days prior to such annual meeting
and not later than the later of (i) 60 days prior to the annual meeting or (ii)
10 days following the date on which public announcement of the date of such
annual meeting is first made by the Company. With respect to special meetings
called by the Company for the purpose of electing directors, the stockholder's
notice must generally be delivered not more than 90 days prior to such meeting
and not later than the later of 60 days prior to such meeting or 10 days
following the day on which public announcement of such meeting is first made by
the Company. The notice must contain, among other things, certain information
about the stockholder delivering the notice and, as applicable, background
information about each nominee or a description of the proposed business to be
brought before the meeting.
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") empowers the Board of Directors, when considering a tender offer or
merger or acquisition proposal, to take into account any factors that the Board
of Directors determines to be relevant, including, without limitation, (i) the
interests of the Company's stockholders, including the possibility that these
interests might be best served by the continued independence of the Company,
(ii) whether the proposed transaction might violate federal or state laws, (iii)
not only the consideration being offered in the
50
<PAGE> 51
proposed transaction, in relation to the then current market price for the
outstanding capital stock of the Company, but also to the market price for the
capital stock of the Company over a period of years, the estimated price that
might be achieved in a negotiated sale of the Company as a whole or in part or
through orderly liquidation, the premiums over market price for the securities
of other corporations in similar transactions, current political, economic and
other factors bearing on securities prices and the Company's financial condition
and future prospects, and (iv) the social, legal and economic effects upon
employees, suppliers, customers, creditors and others having similar
relationships with the Company, upon the communities in which the Company
conducts its business and upon the economy of the state, region and nation.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of the Company.
The Charter and By-laws also provide that any action required or permitted
to be taken by the stockholders of the Company may be taken only at a duly
called annual or special meeting of the stockholders, and may not be taken by
written consent. The Charter and By-laws provide that special meetings of
stockholders may be called only by the Chairman of the Board of Directors, a
majority of the Board of Directors or the President of the Company. These
provisions could have the effect of delaying until the next annual stockholders
meeting stockholder actions which are favored by the holders of a majority of
the then outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 75% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions, and to reduce the number of authorized shares of Common
Stock and Preferred Stock. A 75% vote of stockholders is required for the
stockholders to adopt, amend or repeal any By-law provisions. The By-laws may
also be amended or repealed by a majority vote of the Board of Directors subject
to any limitations set forth in the By-laws.
The foregoing provisions of Delaware law and the Company's Charter and
By-laws could have the effect of discouraging others from attempting hostile
takeovers of the Company and, as a consequence, they may also inhibit temporary
fluctuations in the market price of the Common Stock that might result from
actual or rumored hostile takeover attempts. Such provisions may also have the
effect of preventing changes in the management of the Company. It is possible
that such provisions could make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests. See "Risk
Factors -- Anti-Takeover Effect of Charter and By-Law Provisions; Availability
of Preferred Stock for Issuance."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derives an improper personal
benefit. These provisions do not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief, such as an injunction or recession,
in the event of a breach of a director's fiduciary duty. These provisions will
not alter a director's liability under federal securities laws. The Company's
Charter also contains provisions indemnifying the directors and officers of the
51
<PAGE> 52
Company to the fullest extent permitted by the DGCL. The Company believes that
these provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
The Company has entered into separate indemnification agreements with each
of its directors and executive officers, whereby the Company agreed, among other
things, (i) to indemnify them to the fullest extent permitted by the DGCL,
subject to specified limitations, against certain liabilities actually and
reasonably incurred by them in any proceeding in which they are a party that may
arise by reason of their status as directors, officers, employees or agents or
may arise by reason of their serving as such at the request of the Company for
another entity and (ii) to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. The Company
intends to enter into similar separate indemnification agreements with any
directors or officers who may join the Company in the future. There is no
pending litigation or proceeding involving a director, officer, employee or
other agent of the Company as to which indemnification is being sought nor is
the Company aware of any pending or threatened litigation that may result in
claims for indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 11,428,239 shares
of Common Stock outstanding (based upon shares of Common Stock outstanding as of
June 30, 1997, the conversion of the Company's Convertible Preferred Stock and
assuming no exercise of outstanding options). Of these shares, the 4,000,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below. The remaining 7,428,239 shares of
Common Stock (the "Restricted Shares") held by existing stockholders upon
completion of this offering will be "restricted" securities within the meaning
of Rule 144 and may not be sold except in compliance with the registration
requirements of the Securities Act or an applicable exemption under the
Securities Act, including an exemption pursuant to Rule 144.
SALES OF RESTRICTED SHARES
Beginning 90 days after the date of this Prospectus, approximately 2,667
additional Restricted Shares will become eligible for sale in the public market
pursuant to Rule 144 or Rule 701 under the Securities Act. Beginning 180 days
after the date of this Prospectus, approximately 7,425,572 additional Restricted
Shares subject to lock-up agreements between the Underwriters and certain
stockholders, including officers and directors, will become eligible for sale in
the public market pursuant to Rule 144(k), Rule 144 or Rule 701. In addition,
certain existing holders of an aggregate of 6,961,220 shares of Common Stock
have the right to require registration of their shares under certain
circumstances. However, such stockholders have entered into lock-up agreements
with respect to all shares owned by them and not sold in this offering, which
provide that they will not sell or otherwise dispose of any shares of Common
Stock (except for shares sold in this offering) without the prior written
consent of Robertson, Stephens & Company LLC for a period of 180 days from the
date of this Prospectus. Robertson, Stephens & Company LLC may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. See "-- Registration Rights" and
"Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) including an Affiliate, who has beneficially owned
shares for at least one year (including the holding period of certain prior
owners), will be entitled to sell in "brokers' transactions" or to market
makers, within any three-month period commencing 90 days after the Company
becomes subject to the reporting requirements of Section 13 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), a number of shares that
does not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately 114,282 shares immediately after this offering) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks immediately preceding such sale, subject, generally, to the
filing of a Form 144 with respect to such sales and certain other limitations
and restrictions. In addition, a person (or person whose shares are aggregated),
who is not deemed to have been an Affiliate at any time during the 90 days
immediately preceding the sale and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
under Rule 144(k) without regard to the limitations described above. Further,
Rule 144A under the Securities Act as currently in effect permits the immediate
sale of restricted shares to certain qualified institutional buyers without
regard to the volume restrictions described above.
OPTIONS
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
compensatory agreement is entitled to resell such shares without having to
comply with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144, and Affiliates are entitled to sell their Rule 701
shares without having to comply with
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<PAGE> 54
Rule 144's holding-period restrictions, in each case commencing 90 days after
the Company becomes subject to the reporting requirements of Section 13 of the
Exchange Act. Rule 701 is available for stockholders of the Company as to all
shares issued pursuant to exercise of options granted prior to the offering.
As of the date of this Prospectus, the Board of Directors, subject to
stockholder approval, has authorized an aggregate of up to 3,500,000 shares of
Common Stock for issuance pursuant to the 1996 Plan, the 1997 Plan and the 1997
Purchase Plan. As of June 30, 1997, options to purchase 1,309,218 shares were
outstanding under the 1996 Plan and options to purchase 2,114,783 shares were
available for issuance under the 1996 Plan, the 1997 Plan and the 1997 Purchase
Plan. The Company intends to file one or more registration statements on Form
S-8 under the Securities Act promptly after the date of this Prospectus to
register up to 3,424,001 shares available for issuance under the 1996 Plan, the
1997 Plan and the 1997 Purchase Plan. Such registration statements are expected
to become effective upon filing. After the effective date of the applicable
registration statement, shares of Common Stock issued under the relevant plan
will be immediately eligible for sale in the public market, subject in certain
cases to the lockup restrictions described below.
LOCK-UP AGREEMENTS
Certain stockholders and all executive officers and directors of the
Company, who in the aggregate hold 7,425,572 shares of Common Stock and options
to purchase 966,668 shares of Common Stock, have agreed, pursuant to the Lock-up
Agreements, that they will not, without the prior written consent of Robertson,
Stephens & Company LLC, offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock beneficially owned by them for a period of 180 days
after the date of this Prospectus.
REGISTRATION RIGHTS
After the completion of this offering, certain stockholders of the Company
(the "Rightsholders") will be entitled to require the Company to register under
the Securities Act up to a total of 6,961,220 shares of outstanding Common Stock
(the "Registrable Shares") under the terms of a certain agreement among the
Company and the Rightsholders (the "Series B Purchase Agreement"). The Series B
Purchase Agreement provides that in the event the Company proposes to register
any of its securities under the Securities Act at any time or times, the
Rightsholders, subject to certain exceptions, shall be entitled to include
Registrable Shares in such registration. However, the managing underwriter of
any such offering may exclude for marketing reasons some or all of such
Registrable Shares from such registration. Certain of the Rightsholders have,
subject to certain conditions and limitations, additional rights to require the
Company to prepare and file a registration statement with respect to their
Registrable Shares and the Company is required to use its best efforts to effect
such registration if the aggregate offering price of such proposed offering is
at least $5,000,000. Furthermore, such holders may require the Company to file
additional registration statements on Form S-3 subject to certain conditions and
limitations. The Company is generally required to bear the expenses of all such
registrations, except underwriting discounts and commissions.
Prior to this offering, there has not been any public market for securities
of the Company. No predictions can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock in the public market could adversely affect the prevailing
market price. See "Risk Factors -- Shares Eligible for Future Sale."
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<PAGE> 55
UNDERWRITING
The Underwriters named below acting through their representatives,
Robertson, Stephens & Company LLC, Montgomery Securities and First Albany
Corporation (the "Representatives"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company and
the Selling Stockholders the number of shares of Common Stock set forth opposite
their respective names below. The Underwriters are committed to purchase and pay
for all of such shares if any are purchased:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------------------------------------------------------------- ---------
<S> <C>
Robertson, Stephens & Company LLC................................ 1,360,000
Montgomery Securities............................................ 1,360,000
First Albany Corporation......................................... 680,000
William Blair & Company, L.L.C................................... 120,000
Needham & Company, Inc........................................... 120,000
Sands Brothers & Co., Ltd........................................ 120,000
Unterberg Harris, L.P............................................ 120,000
H.C. Wainwright & Co., Inc....................................... 120,000
---------
Total.................................................. 4,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession of not more than $0.36 per share, of
which $0.10 per share may be reallowed to other dealers. After the initial
public offering, the public offering price, concession and reallowances to
dealers may be reduced by the Representatives.
Certain of the Selling Stockholders have granted to the Underwriters an
option, exercisable during the 30-day period after the date of this Prospectus,
to purchase an aggregate of up to an additional 600,000 shares of Common Stock
at the same price per share as the Company and the Selling Stockholders receive
for the 4,000,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 4,000,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 4,000,000 shares are being
sold. The stockholders subject to such over-allotment option will be obligated,
pursuant to the option, to sell shares to the Underwriters to the extent the
option is exercised. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of shares of Common Stock
offered hereby.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
and liability arising from breaches of representations and warranties contained
in the Underwriting Agreement.
The holders of approximately 7,425,572 shares of Common Stock have agreed
with the Representatives that, until 180 days from the date of this Prospectus,
subject to certain limited exceptions, they will not, directly or indirectly,
sell, offer, contract to sell, pledge, grant any option to purchase or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exchangeable for, or any rights to purchase or acquire, shares of Common Stock,
owned directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of Robertson, Stephens & Company
LLC. Robertson, Stephens & Company LLC may, in its sole discretion and without
notice, release all or any portion of the securities subject to the lock-up
55
<PAGE> 56
agreements. See "Shares Eligible for Future Sale -- Lock-Up Agreements."
Approximately 7,425,572 of such shares will be eligible for immediate public
sale following expiration of the lock-up period, subject to Rule 144. In
addition, the Company has agreed that, until 180 days from the date of this
Prospectus, the Company will not, without the prior written consent of
Robertson, Stephens & Company LLC, subject to certain limited exceptions, sell
or otherwise dispose of any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of Common Stock upon the
exercise of outstanding options, or the Company's grant of options and issuance
of stock under existing employee stock option or stock purchase plans.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Certain persons participating in this offering may overallot or affect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, affecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or affecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transaction may be affected, where
permitted, on the Nasdaq National Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the shares of Common Stock offered hereby for employees of
the Company and certain individuals who have expressed an interest in purchasing
shares of Common Stock in this offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock was determined through negotiations between the Company,
representatives of the Selling Stockholders and the Representatives. The
material factors considered in such negotiations were prevailing market and
economic conditions, revenues and earnings and other financial information of
the Company, the market valuations of other companies engaged in activities
similar to those of the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. There
can be no assurance that an active or orderly trading market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to this offering at or above the initial trading price. See "Risk
Factors -- No Prior Public Market; Determination of Initial Public Offering
Price; Potential Volatility of Stock Price" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
56
<PAGE> 57
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and certain of the Selling Stockholders by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts. Certain legal matters in connection with
this offering will be passed upon for the Underwriters by Hale and Dorr LLP,
Boston, Massachusetts.
EXPERTS
The audited financial statements and related schedule of the Company
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549 (the "Commission"), a Registration Statement on Form S-1
(including all amendments and exhibits thereto, the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement including exhibits, schedules and reports filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the Registration Statement are
not necessarily complete, and in each instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission in Washington, D.C. and
copies of all or any part of which may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
57
<PAGE> 58
OMTOOL, LTD.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants............................................. F-2
Balance Sheets as of December 31, 1995 and 1996, and June 30, 1997 (Unaudited and Pro
Forma)............................................................................. F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996, and
for the six months ended June 30, 1996 and 1997 (Unaudited)........................ F-4
Statements of Convertible Redeemable Preferred Stock and Stockholders' Equity
(Deficit) as of December 31, 1994, 1995 and 1996, and June 30, 1997 (Unaudited).... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996, and
for the six months ended June 30, 1996 and 1997 (Unaudited)........................ F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Omtool, Ltd.:
We have audited the accompanying balance sheets of Omtool, Ltd. (a Delaware
corporation) as of December 31, 1995 and 1996, and the related statements of
operations, convertible redeemable preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Omtool, Ltd. as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 24, 1997
F-2
<PAGE> 60
OMTOOL, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------- JUNE 30, JUNE 30,
1995 1996 1997 1997
---------- ---------- ---------- ----------
(UNAUDITED)
NOTE 2
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 550,684 $2,042,100 $ 809,604 $ 809,604
Short-term investments................................. -- 930,619 1,208,062 1,208,062
Accounts receivable, less reserves of $80,000, $375,000
and $856,000 in 1995, 1996 and 1997, respectively.... 454,974 2,264,502 3,990,239 3,990,239
Inventory.............................................. -- 225,117 95,741 95,741
Prepaid expenses....................................... 141,803 113,343 291,507 291,507
Deferred tax asset..................................... 70,000 108,000 108,000 108,000
---------- ---------- ---------- ----------
Total current assets............................ 1,217,461 5,683,681 6,503,153 6,503,153
Property and equipment, net.............................. 338,622 754,398 1,132,175 1,132,175
Other assets............................................. 18,810 18,861 33,686 33,686
---------- ---------- ---------- ----------
$1,574,893 $6,456,940 $7,669,014 $7,669,014
========== ========== ========== ==========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt...................... $ 9,849 $ 105,651 $ 111,247 $ 111,247
Accounts payable....................................... 305,762 567,749 593,512 593,512
Accrued liabilities.................................... 501,332 402,624 881,565 881,565
Income taxes payable................................... -- 257,369 338,112 338,112
Deferred revenue....................................... 450,254 1,037,538 1,165,880 1,165,880
---------- ---------- ---------- ----------
Total current liabilities....................... 1,267,197 2,370,931 3,090,316 3,090,316
---------- ---------- ---------- ----------
Long-term debt, net of current portion................... 20,598 212,237 153,032 153,032
---------- ---------- ---------- ----------
Long-term liabilities.................................... 275,615 173,877 2,875 2,875
---------- ---------- ---------- ----------
Commitments (Note 13)
Series B Convertible Redeemable Preferred Stock, $.01 par
value --
Authorized, issued and outstanding -- none in 1995;
1,356,116 shares in 1996 and 1997; none pro forma;
(at redemption value)................................ -- 5,166,667 5,366,667 --
---------- ---------- ---------- ----------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value --
Authorized -- 1,481,384 shares; issued and
outstanding -- none................................ -- -- -- --
Series A Convertible Preferred Stock, $.01 par value --
Authorized, issued and outstanding -- none in 1995;
162,500 shares in 1996 and 1997; none pro forma;
(Liquidation preference of $325,000)............... -- 1,625 1,625 --
Common Stock, $.01 par value --
Authorized -- 10,000,000; issued and outstanding --
none in 1995; 5,315,008 shares in 1996; 5,391,007
shares in 1997; 8,428,239 shares pro forma......... -- 53,150 53,910 84,282
Common Stock, no par value --
Authorized, issued and outstanding -- 600 shares in
1995; none in 1996 and 1997........................ 600 -- -- --
Additional paid-in capital............................. -- -- 18,240 4,989,493
Retained earnings (deficit)............................ 10,883 (1,521,547) (1,017,651) (650,984)
---------- ---------- ---------- ----------
Total stockholders' equity (deficit)............ 11,483 (1,466,772) (943,876) 4,422,791
---------- ---------- ---------- ----------
$1,574,893 $6,456,940 $7,669,014 $7,669,014
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 61
OMTOOL, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software license............... $1,485,655 $2,780,055 $5,304,083 $2,031,392 $5,486,248
Hardware....................... 124,162 278,163 1,532,887 526,966 1,748,438
Service and other.............. 338,615 869,445 1,564,248 712,708 1,043,810
---------- ---------- ---------- ---------- ----------
Total revenues.............. 1,948,432 3,927,663 8,401,218 3,271,066 8,278,496
---------- ---------- ---------- ---------- ----------
Cost of revenues:
Software license............... 34,874 104,031 109,151 49,948 218,090
Hardware....................... 114,168 209,495 1,083,852 338,813 1,208,436
Service and other.............. 130,066 318,626 815,828 346,312 501,260
---------- ---------- ---------- ---------- ----------
Total cost of revenues...... 279,108 632,152 2,008,831 735,073 1,927,786
---------- ---------- ---------- ---------- ----------
Gross profit................ 1,669,324 3,295,511 6,392,387 2,535,993 6,350,710
---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing............ 649,291 1,235,749 2,824,287 1,041,033 2,938,218
Research and development....... 413,810 892,585 1,972,545 776,705 1,553,702
General and administrative..... 721,119 749,999 949,548 429,896 778,455
Write-off of intangible asset
(Note 8).................... 200,000 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses.... 1,984,220 2,878,333 5,746,380 2,247,634 5,270,375
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................ (314,896) 417,178 646,007 288,359 1,080,335
Interest income.................. 11,984 7,530 43,093 4,417 47,483
Interest expense................. (482) (8,616) (11,437) (4,398) (18,922)
---------- ---------- ---------- ---------- ----------
Income (loss) before
provision (benefit) for
income taxes.............. (303,394) 416,092 677,663 288,378 1,108,896
Provision (benefit) for income
taxes.......................... (70,000) -- 238,000 101,000 405,000
---------- ---------- ---------- ---------- ----------
Net income (loss)........... $ (233,394) $ 416,092 $ 439,663 $ 187,378 $ 703,896
========== ========== ========== ========== ==========
Pro forma net income per
common and common
equivalent share............... $ 0.04 $ 0.07
========== ==========
Pro forma weighted average number
of common and
common equivalent shares
outstanding.................... 9,929,167 9,487,832
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 62
OMTOOL, LTD.
STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------
SERIES B CONVERTIBLE SERIES A
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK, COMMON STOCK, COMMON STOCK,
$0.01 PAR VALUE $0.01 PAR VALUE $0.01 PAR VALUE NO PAR VALUE
---------------------- ----------------- ------------------- ----------------- ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- --------- ------ ---------- ------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993..... -- $ -- -- $ -- -- $ -- 600 $ 600 $ --
Net loss..................... -- -- -- -- -- -- -- -- --
--------- ---------- ------- ------ --------- ------- ---- ---- -------
Balance, December 31, 1994..... -- -- -- -- -- -- 600 600 --
Net income................... -- -- -- -- -- -- -- -- --
--------- ---------- ------- ------ --------- ------- ---- ---- -------
Balance, December 31, 1995..... -- -- -- -- -- -- 600 600 --
Delaware reincorporation,
exchange of no par value
for $0.01 par value common
stock...................... -- -- -- -- 6,400,000 64,000 (600) (600) --
Sale of Series A Convertible
Preferred Stock............ -- -- 162,500 1,625 -- -- -- -- 323,375
Sale of Series B Convertible
Redeemable Preferred Stock,
net of issuance costs of
$76,068.................... 1,356,116 5,000,000 -- -- -- -- -- -- (76,068)
Purchase and retirement of
common stock............... -- -- -- -- (1,084,992) (10,850) -- -- (247,307)
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock............ -- 166,667 -- -- -- -- -- -- --
Net income................... -- -- -- -- -- -- -- -- --
--------- ---------- ------- ------ --------- ------- ---- ---- -------
Balance, December 31, 1996..... 1,356,116 5,166,667 162,500 1,625 5,315,008 53,150 -- -- --
Stock options exercised
(unaudited)................ -- -- -- -- 75,999 760 -- -- 18,240
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock
(unaudited)................ -- 200,000 -- -- -- -- -- -- --
Net income (unaudited)....... -- -- -- -- -- -- -- -- --
--------- ---------- ------- ------ --------- ------- ---- ---- -------
Balance, June 30, 1997
(unaudited).................. 1,356,116 $5,366,667 162,500 $1,625 5,391,007 $53,910 -- $ -- $ 18,240
========= ========== ======= ====== ========= ======= ==== ==== =======
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
(DEFICIT) (DEFICIT)
----------- -----------------
<S> <C> <C>
Balance, December 31, 1993..... $ (171,815) $ (171,215)
Net loss..................... (233,394) (233,394)
---------- ----------
Balance, December 31, 1994..... (405,209) (404,609)
Net income................... 416,092 416,092
---------- ----------
Balance, December 31, 1995..... 10,883 11,483
Delaware reincorporation,
exchange of no par value
for $0.01 par value common
stock...................... (63,400) --
Sale of Series A Convertible
Preferred Stock............ -- 325,000
Sale of Series B Convertible
Redeemable Preferred Stock,
net of issuance costs of
$76,068.................... -- (76,068)
Purchase and retirement of
common stock............... (1,742,026) (2,000,183)
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock............ (166,667) (166,667)
Net income................... 439,663 439,663
---------- ----------
Balance, December 31, 1996..... (1,521,547) (1,466,772)
Stock options exercised
(unaudited)................ -- 19,000
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock
(unaudited)................ (200,000) (200,000)
Net income (unaudited)....... 703,896 703,896
---------- ----------
Balance, June 30, 1997
(unaudited).................. $(1,017,651) $ (943,876)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 63
OMTOOL, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)....................................... $(233,394) $ 416,092 $ 439,663 $ 187,378 $ 703,896
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization....................... 124,294 63,021 132,729 67,402 177,396
Write-off of intangible asset....................... 200,000 -- -- -- --
Deferred income taxes............................... (70,000) -- (38,000) -- --
Changes in assets and liabilities--
Accounts receivable............................... (88,725) (222,760) (1,809,528) (1,042,300) (1,725,737)
Inventory......................................... -- -- (225,117) (21,320) 129,376
Prepaid expenses.................................. (4,395) (132,912) 28,460 12,601 (178,164)
Accounts payable.................................. (69,935) 246,060 261,987 18,024 25,763
Accrued liabilities............................... 68,400 245,401 (98,708) (163,981) 478,941
Income taxes payable.............................. -- -- 257,369 101,280 80,743
Deferred revenue.................................. 116,643 250,421 587,284 476,602 128,342
Long-term liabilities............................. (12,121) (12,264) (101,738) (100,200) (171,002)
--------- --------- ---------- --------- ----------
Net cash provided by (used in) operating
activities.................................. 30,767 853,059 (565,599) (464,514) (350,446)
--------- --------- ---------- --------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment..................... (99,617) (268,978) (485,773) (115,808) (555,173)
Purchases of short-term investments..................... -- -- (930,619) -- (1,234,843)
Proceeds from sale of short-term investments............ -- -- -- -- 957,400
Proceeds from sale of property and equipment............ -- 14,000 -- -- --
Increase in other assets................................ (1,006) (14,410) (51) (1,254) (14,825)
--------- --------- ---------- --------- ----------
Net cash used in investing activities......... (100,623) (269,388) (1,416,443) (117,062) (847,441)
--------- --------- ---------- --------- ----------
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit........... 50,000 (50,000) -- -- --
Proceeds from long-term debt............................ -- -- 250,000 -- --
Payments on long-term debt.............................. -- (2,623) (25,291) (14,010) (53,609)
Net proceeds from sales of Series A Convertible
Preferred Stock....................................... -- -- 325,000 325,000 --
Net proceeds from sale of Series B Convertible
Redeemable Preferred Stock............................ -- -- 4,923,932 -- --
Exercise of stock options............................... -- -- -- -- 19,000
Purchase and retirement of common stock................. -- -- (2,000,183) -- --
--------- --------- ---------- --------- ----------
Net cash provided by (used in) financing
activities.................................. 50,000 (52,623) 3,473,458 310,990 (34,609)
--------- --------- ---------- --------- ----------
Net increase (decrease) in cash and cash equivalents...... (19,856) 531,048 1,491,416 (270,586) (1,232,496)
Cash and cash equivalents, beginning of period............ 39,492 19,636 550,684 550,684 2,042,100
--------- --------- ---------- --------- ----------
Cash and cash equivalents, end of period.................. $ 19,636 $ 550,684 $ 2,042,100 $ 280,098 $ 809,604
========= ========= ========== ========= ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Interest.............................................. $ 432 $ 8,614 $ 9,411 $ 4,398 $ 18,922
========= ========= ========== ========== ==========
Income taxes.......................................... $ -- $ 77,732 $ -- $ -- $ 324,324
========= ========= ========== ========== ==========
Supplemental Disclosure of Noncash Investing and Financing
Transactions:
Equipment acquired under capital lease obligations...... $ -- $ 33,070 $ 62,732 $ 62,732 $ --
========= ========= ========== ========== ==========
Accrued dividends on Series B Convertible Redeemable
Preferred Stock....................................... $ -- $ -- $ 166,667 $ -- $ 200,000
========= ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 64
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Omtool, Ltd. (the Company) designs, develops, markets and supports open,
client/server facsimile software, delivering solutions which automate and
integrate fax communication throughout the enterprise. The Company predominantly
does business in markets located within North America.
The Company is subject to a number of risks associated with emerging,
technology-oriented companies with a limited operating history, including
continued market acceptance of the Company's products, competition from
substitute products and larger companies, and the continued ability to manage
and finance the Company's anticipated future growth.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies as described in this note and elsewhere in the notes to
financial statements.
(a) Revenue Recognition
The Company generates revenue from licensing the rights to use its software
products directly to end users and indirectly through resellers. The Company
also generates revenue from sales of support contracts and consulting services
to customers who license its products and from resale of related hardware
products.
Revenues from software license agreements are recognized upon shipment of
the software, if there are no significant post-delivery obligations and if
payment is due within one year, less an allowance for estimated future returns.
If an acceptance period is required, revenues are recognized upon the earlier of
the customer's acceptance or the expiration of the acceptance period.
Revenues from support contracts are recognized ratably over the term of the
support period, which is generally one year. Service and other revenue is
primarily related to implementation services performed on a time-and-material
basis under separate service agreements related to the installation of the
Company's software products.
Service and other revenues are recognized as services are performed. If a
transaction includes both license and service elements, license fee revenues are
recognized upon shipment of the software, provided services do not include
significant customization or modification of the base product and the payment
terms for licenses are not subject to acceptance criteria. In cases where
license fee payment is contingent upon the acceptance of services, revenues from
both the license and the service elements are deferred until the acceptance
criteria are met.
Cost of license revenues consists of the cost of media on which the product
is delivered and any related royalties. Cost of service revenues consists
primarily of salaries and benefits related to consulting personnel and the
customer support group.
(b) Research and Development and Software Development Costs
Software development costs are considered for capitalization when
technological feasibility is established in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software To Be Sold, Leased or Otherwise Marketed. The Company sells
software in a market that is subject to rapid technological change, new product
introductions and changing customer needs. Accordingly, the Company has
determined that it cannot determine technological feasibility until the
development state of the product is nearly complete. The time period during
which cost could be capitalized from the point of reaching technological
feasibility until
F-7
<PAGE> 65
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
the time of general product release is very short and, consequently, the amounts
that could be capitalized are not material to the Company's financial position
or results of operations. Therefore, the Company charges all research and
development expenses to operations in the period incurred.
(c) 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 No. 115, Accounting for Investments in Certain Debt and
Equity Securities, the Company's cash equivalents are classified as
held-to-maturity securities.
(d) Short-Term Investments
As of December 31, 1996 and June 30, 1997, the Company had $930,619 and
$1,208,062, 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 June 30, 1997.
(e) Derivative Financial Instruments and Fair Value of Financial Instruments
The Company does not have any derivative or other financial instruments as
defined by SFAS No. 119, Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
short term investments, accounts receivable, accounts payable and debt. The
estimated fair value of these financial instruments approximates their carrying
value at December 31, 1995 and 1996 and at June 30, 1997 due to the short-term
nature of these instruments.
(f) Inventory
Inventory consists of hardware purchased for resale and is valued at the
lower of cost or net realizable value.
(g) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated using accelerated and straight-line
methods over the following useful lives:
<TABLE>
<S> <C>
Computer equipment 3-5 years
Computer software 2-3 years
Furniture and equipment 5-7 years
Leasehold improvements Shorter of the life of the lease
or the estimated useful life
Equipment under capital lease Shorter of the life of the lease
or the estimated useful life
</TABLE>
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred.
(h) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of
F-8
<PAGE> 66
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
(i) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company places its
temporary cash investments in financial institutions. The Company has not
experienced significant losses related to receivables from individual customers
or groups of customers in any specific industry or by geographic area. Due to
these factors, no additional credit risk beyond amounts provided for collection
losses is believed by management to be inherent in the Company's accounts
receivable.
For the year ended December 31, 1995, the Company had one customer that
accounted for 11% of the Company's revenues. For the years ended December 31,
1994 and 1996, and the six months ended June 30, 1996, no single customer
accounted for greater than 10% of the Company's revenues. For the six months
ended June 30, 1997, the Company had one customer that accounted for 9% of the
Company's revenues and 21% of accounts receivable as of June 30, 1997.
Revenues outside of North America were approximately $210,000, $560,000 and
$662,000 for the years ended December 31, 1995 and 1996 and for the six months
ended June 30, 1997, respectively. Revenues outside of North America were not
material in 1994.
(j) Pro Forma Presentation
The pro forma balance sheet as of June 30, 1997 reflects the automatic
conversion of all outstanding shares of Series A and Series B preferred stock
into an aggregate of 3,037,232 shares of common stock and the forfeiture of
cumulative dividends accrued on the Series B preferred stock, which will occur
upon the closing of the Company's proposed initial public offering (see Notes 9
and 10).
(k) Pro Forma Net Income per Common and Common Equivalent Share
For the year ended December 31, 1996 and the six months ended June 30,
1997, pro forma 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, assuming the automatic conversion of all outstanding shares
of convertible preferred stock into 3,037,232 shares of common stock for all
periods presented. 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.
(l) Unaudited Interim Financial Statements
In the opinion of the Company's management, the June 30, 1996 and 1997
unaudited interim financial statements include all adjustments, consisting only
of normal recurring adjustments, neces-
F-9
<PAGE> 67
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
sary for a fair presentation of results for the respective interim period. The
results of operations for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year or for any future
period.
(m) Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings Per Share, which is effective for financial statements issued
for periods ending after December 15, 1997; earlier application is not
permitted. This statement requires restatement of all prior-period earnings per
share data presented. The Company has not yet determined the impact of this
statement on the earnings per share data presented.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new accounting standards will not have a material impact on the Company's
financial statements.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ----------
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Computer equipment............................... $308,579 $ 596,571 $ 797,607
Computer software................................ 54,707 119,584 193,495
Furniture and equipment.......................... 35,188 155,678 354,595
Leasehold improvements........................... 21,021 33,435 114,744
Equipment under capital leases................... 33,070 95,802 95,802
-------- ---------- ----------
452,565 1,001,070 1,556,243
Less--accumulated depreciation and
amortization................................... 113,943 246,672 424,068
-------- ---------- ----------
$338,622 $ 754,398 $1,132,175
======== ========== ==========
</TABLE>
(4) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Accrued salaries and salary-related................. $409,784 $264,593 $ 413,778
Other accrued expenses.............................. 91,548 138,031 467,787
-------- -------- --------
$501,332 $402,624 $ 881,565
======== ======== ========
</TABLE>
(5) LINE OF CREDIT
The Company has a line of credit allowing the Company to borrow the lesser
of $1,000,000 or 70% of eligible accounts receivable, as defined. The line of
credit may be renewed annually and expires in August 1997. Borrowings under the
line of credit, collateralized by a first security interest in substantially all
assets of the Company, are payable on demand and bear interest at the bank's
prime rate (8.25% and 8.50% at December 31, 1996 and June 30, 1997,
respectively) plus 0.5% per annum. The line of credit agreement requires the
Company to maintain certain financial covenants, including a maximum debt to
tangible net worth ratio and a minimum cash flow coverage ratio, as defined. The
F-10
<PAGE> 68
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Company was in compliance with all financial covenants as of December 31, 1996
and June 30, 1997. At December 31, 1996 and June 30, 1997, there were no
borrowings under the line of credit.
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- ---------
1995 1996 1997
------- -------- ---------
<S> <C> <C> <C>
Note payable to a bank..................... $ -- $250,000 $ 212,835
Capital lease obligations.................. 30,447 67,888 51,444
------- -------- --------
30,447 317,888 264,279
Less--current maturities................... 9,849 105,651 111,247
------- -------- --------
$20,598 $212,237 $ 153,032
======= ======== ========
</TABLE>
Maturities of long-term debt at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
NOTE CAPITAL LEASE
PAYABLE OBLIGATIONS
-------- -------------
<S> <C> <C>
Period ending December 31,
1997, six months............................. $ 38,636 $ 19,228
1998......................................... 82,922 35,151
1999......................................... 91,277 4,907
-------- --------
$212,835 59,286
========
Less -- amounts representing interest........ (7,842)
--------
Present value of minimum lease payments...... $ 51,444
========
</TABLE>
The note payable to a bank bears interest at the bank's prime rate (8.25%
and 8.50% at December 31, 1996 and June 30, 1997, respectively) plus 0.5% per
annum and is payable in monthly installments, including interest, totaling
approximately $8,000 per month, through December 1999. The weighted average
interest rate for the six months ended June 30, 1997 was approximately 8.88%.
The agreement requires the maintenance of certain financial covenants, including
a maximum debt to tangible net worth ratio and a minimum cash flow coverage
ratio, as defined, and is collateralized by a security interest in substantially
all assets of the Company. The Company was in compliance with all financial
covenants as of December 31, 1996 and June 30, 1997.
(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, the objective of which is to recognize the amount
of current and deferred income taxes at the date of the financial statements as
a result of all differences in the tax basis and financial statement carrying
amount of assets and liabilities as measured by enacted tax laws.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- --------
<S> <C> <C>
Net operating loss carryforwards...................... $12,000 $ --
Tax credit carryforwards.............................. 37,000 --
Other temporary differences........................... 21,000 108,000
------- --------
Net deferred tax asset........................... $70,000 $108,000
======= ========
</TABLE>
F-11
<PAGE> 69
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
During 1994, the Company had generated net operating loss carryforwards for
federal and state income tax purposes of approximately $240,000, which were used
in 1995 and 1996. At December 31, 1995, the Company had $37,000 of tax credits
available to offset future federal and state income taxes which were utilized in
1996.
Under SFAS No. 109, the Company recognizes a deferred tax asset for the
future benefit of its temporary differences if it concludes that it is more
likely than not that the deferred tax asset will be realized.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory rate.... (34.0)% 34.0% 34.0%
Increase (decrease) in tax resulting from --
State tax provision (benefit), net of federal benefit..... (4.6) 4.6 4.6
Research and development tax credits...................... -- (12.9) (8.6)
Change in valuation allowance............................. 15.5 (26.4) --
Other..................................................... -- 0.7 5.1
---- ----
Provision (benefit) for income taxes........................ (23.1)% --% 35.1%
==== ====
</TABLE>
The provision (benefit) for income taxes in the accompanying statements of
operations consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Federal --
Current.................................. $ -- $ -- $ 210,000
Deferred................................. (53,000) -- (29,000)
-------- -------- ---------
(53,000) -- 181,000
-------- -------- ---------
State --
Current.................................. $ -- $ -- $ 66,000
Deferred................................. (17,000) -- (9,000)
-------- -------- ---------
(17,000) -- 57,000
-------- -------- ---------
Provision (benefit) for income taxes....... $(70,000) $ -- $ 238,000
======== ======== =========
</TABLE>
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis using the expected annual
effective income tax rate. The Company anticipates that the annual effective
income tax rate for 1997 will be approximately 36.5%, which is less than the
combined federal and state statutory income tax rates, primarily due to tax
credits and tax exempt interest income earned on certain of the Company's
investments.
(8) WRITE-OFF OF INTANGIBLE ASSET
In December 1993, the Company acquired from a vendor (the Vendor) the
rights, title and interest to two software products for a purchase price of
$300,000. The Company agreed to provide the Vendor with a credit of $300,000
toward the future purchase of any software product, service or support. In
December 1994, the Company recorded a charge of $200,000 to write off the
unamortized portion of the software rights, to reflect their net realizable
value. As of December 31, 1995 and 1996, approximately $275,000 and $172,000,
respectively, of the Vendor credit was outstanding and reflected
F-12
<PAGE> 70
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
as long-term liabilities in the accompanying balance sheets. As of June 30,
1997, the Vendor had utilized all of the credit.
(9) SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
In July 1996, the Company issued 1,356,116 shares of Series B Convertible
Redeemable Preferred Stock (Series B Preferred Stock) at $3.69 per share, less
offering costs of approximately $76,000, for net proceeds of approximately
$4,924,000. The Series B Preferred Stock has the following rights, preferences
and privileges:
Voting Rights
The holders of the Series B Preferred Stock are entitled to vote on all
matters and shall be entitled to the number of votes equal to the number of
shares of common stock into which each share of the preferred stock is
convertible.
Liquidation Preference
The holders of Series B Preferred Stock have preference in the event of
liquidation, dissolution or winding up of the Company at the rate of $3.69 per
share, plus all dividends which have been accrued and are unpaid, before any
distribution may be made with respect to the holders of Series A Convertible
Preferred Stock (Series A Preferred Stock) and to the holders to the common
stock.
Conversion
The Series B Preferred Stock is convertible into common stock at a rate of
two shares of common stock for every share of Series B Preferred Stock at any
time at the option of the holder of the Series B Preferred Stock. The conversion
rate is adjustable for certain dilutive events as defined. The Series B
Preferred Stock shall automatically convert into shares of common stock on the
closing of the sale of shares of common stock in a qualified public offering as
defined.
Redemption
At any time after July 22, 2000, the holders of a majority of the
outstanding shares of Series B Preferred Stock may require the Company to redeem
all of the outstanding Series B Preferred Stock in four annual installments of
25% per year at a redemption price of $3.69 per share plus any accrued but
unpaid dividends.
Dividends
Dividends are cumulative and accrue on outstanding shares of Series B
Preferred Stock at an annual rate of 8%. Additional dividends may be paid on the
Series B Preferred Stock when declared by the Board of Directors. Dividends are
payable beginning on July 22, 2000 and are forfeited upon conversion of the
Series B Preferred Stock into common stock.
(10) STOCKHOLDERS' EQUITY (DEFICIT)
On January 2, 1996, by approval of the Company's stockholders, Omtool,
Ltd., a New Hampshire corporation, was reincorporated as a Delaware corporation.
According to the terms of the merger agreement, the New Hampshire corporation
merged into the Delaware corporation in a tax-free transaction by exchanging its
outstanding common stock for the common stock of the Delaware corporation.
F-13
<PAGE> 71
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(a) Authorized Capital Stock
As of December 31, 1996 and June 30, 1997, the Company's authorized capital
stock consisted of 10,000,000 shares of common stock, $0.01 par value per share,
and 3,000,000 shares of preferred stock, $.01 par value per share. Of the
preferred stock, 162,500 shares are designated Series A Preferred Stock,
1,356,116 shares are designated Series B Preferred Stock and 1,481,384 shares
are undesignated.
(b) Recapitalization
On January 23, 1997, the Company's Board of Directors approved a
two-for-one stock split of the Company's common stock effected in the form of a
stock dividend. The accompanying financial statements and notes have been
retroactively restated for all periods presented to reflect this stock split.
(c) Series A Convertible Preferred Stock
Pursuant to subscription agreements entered into in February 1996, in July
1996, certain directors of the Company purchased 162,500 shares of Series A
Preferred Stock for an aggregate of $325,000. The holders of the Series A
Preferred Stock have the following rights, preferences and privileges:
Voting Rights
The holders of the Series A Preferred Stock are entitled to vote on all
matters and shall be entitled to the number of votes equal to the number of
shares of common stock into which each share of the preferred stock is
convertible.
Liquidation Preference
The holders of Series A Preferred Stock have preference in the event of
liquidation or dissolution of the Company, before any distributions may be made
with respect to the common stock, at the rate of $2.00 per share, plus all
dividends which have been accrued and are unpaid before any payment or
distribution shall be made to the holders of common stock or any other class of
stock ranking junior to Series A Preferred Stock.
Conversion
The Series A Preferred Stock is convertible into common stock at a rate of
two shares of common stock for every share of Series A Preferred Stock at any
time at the option of the holder of the Series A Preferred Stock. The Company
may require all holders of shares of Series A Preferred Stock to convert their
shares into shares of common stock on or after the closing of the sale of shares
of common stock in a qualified public offering as defined in the agreement.
(d) Repurchase of Common Stock
Concurrent with the issuance of the Series B Preferred Stock, as approved
by the stockholders and the Board of Directors, the Company purchased and
retired 1,084,992 shares of common stock from two of its principal stockholders
for $2,000,183.
F-14
<PAGE> 72
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(e) Reserved Common Stock
As of June 30, 1997, 4,461,233 shares of common stock were reserved for the
following:
<TABLE>
<S> <C>
Conversion of Series A Preferred Stock........................ 325,000
Conversion of Series B Preferred Stock........................ 2,712,232
Exercise of Stock Options..................................... 1,424,001
---------
4,461,233
=========
</TABLE>
(11) STOCK OPTION PLAN
(a) 1996 Stock Option Plan
On January 2, 1996, the Board of Directors adopted the 1996 Stock Option
Plan (the Plan). The Plan provides for the granting of options covering
1,500,000 shares of common stock. The Plan is administered by the Board of
Directors and allows for the granting of both incentive stock options and
non-qualified stock options. Incentive stock options under the Plan are granted
at not less than the fair market value per share of common stock on the date of
grant or 110% of fair market value for any stockholder who holds more than 10%
of the total combined voting power of all classes of stock of the Company. Under
the terms of the Plan, options vest and become exercisable as determined by the
Board of Directors and expire 10 years after the date of grant.
Stock option activity for the year ended December 31, 1996 and six months
ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 -- -- --
Granted................................ 1,129,400 $ 0.25 - $1.85 $ 0.39
Canceled............................... (33,000) 0.25 - 1.85 0.40
--------- -------------- ------
Outstanding, December 31, 1996.............. 1,096,400 0.25 - 1.85 0.39
Granted................................ 322,650 1.85 - 8.25 4.16
Exercised.............................. (75,999) 0.25 0.25
Canceled............................... (33,833) 0.25 - 5.50 1.98
--------- -------------- ------
Outstanding, June 30, 1997.................. 1,309,218 $ 0.25 - $8.25 $ 1.28
======== ============ ===========
Exercisable, June 30, 1997.................. 321,665 $0.25 $ 0.25
======== ============ ===========
</TABLE>
At June 30, 1997, options to purchase 114,783 shares of commons stock were
available for future grants under the Plan.
F-15
<PAGE> 73
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(b) Stock Based Compensation
In October 1995, the FASB issued SFAS No 123, Accounting for Stock-Based
Compensation, which requires the measurement of the fair value of stock options
to be included in the statement of operations or disclosed in the notes to the
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under the Accounting
Principles Board Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123 for options granted in 1996 using the Black-Scholes option pricing
model prescribed by SFAS No. 123. Based on the use of the Black-Scholes option
pricing model, options granted in 1996 and during the six months ended June 30,
1997 had a weighted average fair value of $0.22 and $2.40, respectively. The
weighted average assumptions are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Risk-free interest rate......................... 5.46% 6.31%
Volatility...................................... 70.0% 70.0%
Expected dividend yield......................... -- --
Expected lives.................................. 4 Years 4 Years
</TABLE>
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income and pro forma net income per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Net income --
As reported................................ $439,663 $703,896
Pro forma.................................. $385,593 $618,373
Pro forma net income per share --
As reported................................ $ 0.04 $ 0.07
Pro forma.................................. $ 0.04 $ 0.07
</TABLE>
Because the determination of the fair value of all options granted after
the Company becomes a public entity may include a different expected volatility
factor and because additional option grants are expected to be made in future
years, the above pro forma disclosures are not representative of pro forma
effects on results for the future years.
(12) 401(K) AND PROFIT-SHARING PLAN
On December 1, 1995, the Company adopted a 401(k) and profit-sharing plan
(the Profit-Sharing Plan) to cover all eligible employees. The Profit-Sharing
Plan allows for voluntary contributions by eligible employees. The Company
matches 50% of eligible employee contributions up to a specified amount. The
Company contributed approximately $4,000, $69,000, and $55,000 to the
Profit-Sharing Plan for the years ended December 31, 1995 and 1996, and the six
months ended June 30, 1997, respectively. Additional profit-sharing
contributions to the Profit-Sharing Plan are at the discretion of the Company's
management. During 1995, 1996 and the six months ended June 30, 1997, no
additional discretionary contributions were made by the Company.
F-16
<PAGE> 74
OMTOOL, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(13) LEASE COMMITMENTS
The Company leases certain equipment and its office facility under
operating leases that expire at various times through July 2000.
Future minimum lease payments under these leases at June 30, 1997 are as
follows:
<TABLE>
<S> <C>
Period ending December 31,
1997, six months.......................................... $114,000
1998...................................................... 218,000
1999...................................................... 189,000
2000...................................................... 108,000
--------
$629,000
========
</TABLE>
Rent expense included in the accompanying statements of operations was
approximately $50,000, $114,000, $199,000, $87,000 and $128,000 for the years
ended December 31, 1994, 1995 and 1996, and the six months ended June 30, 1996
and 1997, respectively.
(14) SUBSEQUENT EVENTS
(a) Amended and Restated Certificate of Incorporation
Effective upon the closing of the Company's initial public offering and
after giving effect to the amendment and restatement of the Company's Restated
Certificate of Incorporation immediately prior to the closing of the offering,
the authorized capital stock will consist of 35,000,000 shares of Common Stock,
$0.01 par value per share, and 2,000,000 shares of Preferred Stock, $0.01 par
value per share.
(b) 1997 Stock Plan
The Company's 1997 Stock Plan (the 1997 Plan) was adopted by the board of
directors in April 1997 and approved by the Company's stockholders in June 1997.
The 1997 Plan will take effect upon the closing of the Company's initial public
offering. No options have been granted under the 1997 Plan. The 1997 Plan
provides for the issuance of Common Stock pursuant to the grant to employees of
"incentive stock options" within the meaning of the Internal Revenue Code of
1986, as amended, and the grant of non-qualified stock options, stock awards or
opportunities to make direct purchases of stock in the Company to employees,
consultants, directors and officers of the Company. The aggregate number of
shares of Common Stock which may be issued pursuant to the 1997 Plan is
1,800,000.
(c) 1997 Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan (the 1997 Purchase Plan) was adopted
by the board of directors in April 1997 and approved by the Company's
stockholders in June 1997. The 1997 Purchase Plan will take effect in January
1998. The 1997 Purchase Plan provides for the issuance of a maximum of 200,000
shares of Common Stock pursuant to the exercise of nontransferable options
granted to participating employees.
F-17
<PAGE> 75
[OMTOOL Logo]
