<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _______
Commission File Number 0-22871
OMTOOL, LTD.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8 Industrial Way, Salem, NH 03079
(Address of Principal Executive Offices) (Zip Code)
(603) 898-8900
(Registrant's Telephone Number Including Area Code)
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
There were 12,962,672 shares of the Company's Common Stock, par value $0.01,
outstanding on August 12, 1998.
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<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 1998
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
----------- -------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Income for the three months and six months
ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Stockholders' Equity for the six months ended
June 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the six months ended June 30,
1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
PART II: OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,515,216 $ 2,210,367
Short-term investments 19,108,921 21,179,766
Accounts receivable, less reserves of $1,185,000 and
$1,037,000 in 1998 and 1997, respectively 6,543,044 4,727,089
Prepaid expenses and other current assets 1,819,657 1,492,763
Deferred tax asset 380,000 380,000
--------------- ---------------
Total current assets 30,366,838 29,989,985
Property and equipment, net 1,944,221 1,752,986
Other assets 2,078,252 850,522
--------------- ---------------
Total assets $ 34,389,311 $ 32,593,493
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 20,134 $ 36,888
Accounts payable 1,389,617 919,276
Accrued liabilities 1,955,731 1,808,362
Income taxes payable 145,336 809,991
Deferred revenue 3,157,558 2,080,736
--------------- ---------------
Total current liabilities 6,668,376 5,655,253
--------------- ---------------
Deferred tax liability 253,334 283,000
--------------- ---------------
Long-term liabilities 52,093 10,043
--------------- ---------------
Stockholders' equity:
Preferred Stock, $.01 par value -
Authorized-- 2,000,000; issued and outstanding-- none - -
Common Stock, $.01 par value--
Authorized -- 35,000,000; issued and outstanding -- 12,760,961
in 1998; 11,846,140 in 1997 127,609 118,461
Additional paid-in capital 32,581,521 32,255,664
Accumulated deficit (5,306,640) (5,736,632)
Cumulative translation adjustment 13,018 7,704
--------------- ---------------
Total stockholders' equity 27,415,508 26,645,197
--------------- ---------------
Total liabilities and stockholders' equity $ 34,389,311 $ 32,593,493
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license $ 4,478,322 $ 2,949,945 $ 9,306,634 $ 5,486,248
Hardware 1,724,516 1,039,847 3,494,876 1,748,438
Service and other 1,472,380 588,067 2,885,639 1,043,810
--------------- --------------- --------------- ---------------
Total revenues 7,675,218 4,577,859 15,687,149 8,278,496
--------------- --------------- --------------- ---------------
Cost of revenues:
Software license 397,583 132,023 765,577 218,090
Hardware 956,246 714,509 2,001,377 1,208,436
Service and other 676,137 272,757 1,494,406 501,260
--------------- --------------- --------------- ---------------
Total cost of revenues 2,029,966 1,119,289 4,261,360 1,927,786
--------------- --------------- --------------- ---------------
Gross profit 5,645,252 3,458,570 11,425,789 6,350,710
--------------- --------------- --------------- ---------------
Operating expenses:
Sales and marketing 3,349,841 1,641,735 5,896,197 2,938,218
Research and development 1,293,593 789,916 2,516,079 1,553,702
General and administrative 917,769 387,864 1,753,727 778,455
Acquisition costs - - 182,654 -
--------------- ------------- -------------- --------------
Total operating expenses 5,561,203 2,819,515 10,348,657 5,270,375
--------------- --------------- --------------- ---------------
Income from operations 84,049 639,055 1,077,132 1,080,335
Interest income 183,337 28,820 373,399 47,483
Interest expense (1,068) (944) (2,511) (18,922)
--------------- --------------- ---------------- ---------------
Income before provision for income taxes 266,318 666,931 1,448,020 1,108,896
Provision for income taxes 104,199 235,000 402,228 405,000
--------------- --------------- --------------- ---------------
Net income $ 162,119 $ 431,931 $ 1,045,792 $ 703,896
--------------- --------------- ---------------- ---------------
--------------- --------------- ---------------- ---------------
Net income per share
Basic $ 0.01 $ 0.08 $ 0.08 $ 0.13
--------------- --------------- ---------------- ---------------
--------------- --------------- ---------------- ---------------
Diluted $ 0.01 $ 0.05 $ 0.08 $ 0.08
--------------- --------------- ---------------- ---------------
--------------- --------------- ---------------- ---------------
Weighted average number of common shares
outstanding
Basic 12,750,102 5,376,602 12,667,828 5,372,856
--------------- --------------- ---------------- ---------------
--------------- --------------- ---------------- ---------------
Diluted 13,564,257 9,261,447 13,575,491 9,258,477
--------------- --------------- ---------------- ---------------
--------------- --------------- ---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OMTOOL, LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock,
$0.01 Par Value
--------------- Additional Cumulative Total
Number of Paid-in Accumulated Translation Stockholders'
Shares Amount Capital Deficit Adjustment Equity
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 11,846,140 $ 118,461 $ 32,255,664 $ (5,736,632) $ 7,704 $ 26,645,197
Exercise of stock options 235,551 2,356 130,399 - - 132,755
Issuance of common stock
for acquisitions 679,270 6,792 195,458 (615,800) - (413,550)
Change in cumulative
translation adjustment - - - - 5,314 5,314
Net income - - - 1,045,792 - 1,045,792
---------- ---------- ------------ ------------ -------- -------------
BALANCE, JUNE 30, 1998 12,760,961 $ 127,609 $ 32,581,521 $ (5,306,640) $ 13,018 $ 27,415,508
---------- ---------- ------------ ------------ -------- -------------
---------- ---------- ------------ ------------ -------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $1,045,792 $ 703,896
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization 957,447 177,396
Deferred income taxes (29,666) -
Changes in assets and liabilities, net of acquisitions-
Accounts receivable (1,599,244) (1,725,737)
Prepaid expenses and other current assets (273,651) (48,788)
Accounts payable 361,418 25,763
Accrued liabilities (106,990) 478,941
Income taxes payable (667,983) 80,743
Deferred revenue 910,359 128,342
Long-term liabilities (28,861) (171,002)
------------ ---------------
Net cash provided by (used in) operating activities 568,621 (350,446)
------------ ---------------
Cash Flows from Investing Activities:
Purchases of property and equipment (989,048) (555,173)
Purchases of short-term investments (10,931,914) (1,234,843)
Proceeds from sale of short-term investments 13,035,000 957,400
Increase in other assets (1,346,030) (14,825)
Cash acquired in connection with acquisitions of DPSI and TRS 111,071 -
------------ --------------
Net cash used in investing activities (120,921) (847,441)
------------- ---------------
Cash Flows from Financing Activities:
Payments on long-term debt (278,799) (53,609)
Exercise of stock options 132,755 19,000
------------ --------------
Net cash used in financing activities (146,044) (34,609)
------------- ---------------
Foreign exchange effect on cash 3,193 -
------------ --------------
Net increase (decrease) in cash and cash equivalents 304,849 (1,232,496)
Cash and cash equivalents, beginning of period 2,210,367 2,042,100
------------ --------------
Cash and cash equivalents, end of period $2,515,216 $ 809,604
------------ ---------------
------------ ---------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $ 2,511 $ 18,922
------------ ---------------
------------ ---------------
Income taxes $1,066,883 $ 324,324
------------ ---------------
------------ ---------------
Supplemental Disclosure of Noncash Investing and Financing Transactions:
Accrued dividends on Series B Convertible Redeemable Preferred Stock $ - $ 200,000
------------ ---------------
------------ ---------------
In connection with the acquisition of DPSI and TRS, the following non-cash
transactions occurred:
Fair value of net assets acquired $ 524,621 $ -
Issuance of common stock (413,550) -
------------- ---------------
Cash acquired in connection with acquisitions of DPSI and TRS $ 111,071 $ -
------------ ---------------
------------ ---------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Omtool, Ltd. (the "Company" or "Omtool") pursuant to the rules
and regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended
December 31, 1997. The accompanying consolidated financial statements reflect
all adjustments (consisting of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of results for
the interim periods presented. The results of operations for the six month
period ended June 30, 1998 are not necessarily indicative of the results to
be expected for the full fiscal year.
(2) Summary of Significant Accounting Policies
(a) 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 Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Investments in Certain Debt and Equity Securities, the
Company's cash equivalents are classified as held-to-maturity securities.
(b) Short-Term Investments
As of June 30, 1998 and December 31, 1997, the Company had $19,108,921
and $21,179,766, 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 June 30, 1998 and
December 31, 1997.
(c) Foreign Currency Translation
The Company translates the financial statements of its foreign
subsidiaries in accordance with SFAS No. 52, Foreign Currency Translation.
Accordingly, assets and liabilities are translated at exchange rates in
effect at the end of the period, and revenues and expenses are translated at
the average exchange rates during the period. All cumulative translation
gains or losses from the translation into the Company's reporting currency
are included as a separate component of stockholders' equity in the
accompanying consolidated balance sheets.
7
<PAGE>
(d) Net Income per Common and Common Equivalent Share
Effective December 15, 1997, SFAS No. 128, Earnings Per Share,
established standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common
stock. The Company has applied the provisions of SFAS No. 128 retroactively
to all periods presented. In accordance with SEC Staff Accounting Bulletin
(SAB) No. 98, the Company has determined that there were no nominal issuances
of common stock or potential common stock in the period prior to the
Company's initial public offering. The dilutive effect of potential common
shares in 1998, consisting of outstanding stock options is determined using
the treasury stock method, in accordance with SFAS No. 128. The dilutive
effect of potential common shares in 1997, consisting of outstanding stock
options and redeemable convertible preferred stock, is determined using the
treasury stock method and the if-converted method, respectively, in
accordance with SFAS No. 128. A reconciliation of basic and diluted common
shares outstanding is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income $ 162,119 $ 431,931 $ 1,045,792 $ 703,896
----------- ---------- ----------- ----------
Weighted average number of common shares
outstanding 12,750,102 5,376,602 12,667,828 5,372,856
Potential common shares pursuant to stock options 814,155 847,613 907,663 848,389
Potential common shares pursuant to conversion of
redeemable convertible preferred stock -- 3,037,232 -- 3,037,232
----------- ---------- ----------- ----------
Diluted weighted average shares 13,564,257 9,261,447 13,575,491 9,258,477
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
The calculation above excludes the potential common shares related to
557,500 and 531,500 outstanding stock options which have an anti-dilutive
effect for the three months and six months ended June 30, 1998, respectively.
(3) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
effective January 1, 1998. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements.
The components of the Company's comprehensive income are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income $ 162,119 $ 431,931 $ 1,045,792 $ 703,896
Foreign currency translation adjustments, net of taxes 4,762 -- 3,263 --
----------- ---------- ----------- ----------
Comprehensive income $ 166,881 $ 431,931 $ 1,049,055 $ 703,896
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
(4) Acquisitions
On February 19, 1998, the Company acquired all of the outstanding
capital stock of Desktop Paging Software, Inc. ("DPSI") in exchange for
294,840 shares of Omtool common stock. DPSI develops, markets and supports
wireless messaging software.
On February 27, 1998, the Company acquired all of the outstanding
capital stock of TRS Technologies, Inc. ("TRS") in exchange for 384,430
shares of Omtool common stock. TRS develops, markets and supports LAN fax and
cost recovery systems for law firms.
These transactions were accounted for under the pooling of interests
method of accounting. None of the periods preceding December 31, 1997 were
restated, as net assets and liabilities, historic results of operations and
cumulative stockholders' equity of DPSI and TRS were not deemed to be
material to the consolidated financial statements of the
8
<PAGE>
Company. The Company recorded the costs incurred in connection with these
transactions as "Acquisition Costs" which are included in the accompanying
consolidated statements of income.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the accompanying
consolidated financial statements for the periods specified and the
associated notes. Further reference should be made to the Company's Annual
Report on Form 10-K as filed with the Securities Exchange Commission on March
31, 1998.
Overview
Omtool designs, develops, markets and supports open, client/server
facsimile software, delivering solutions which automate and integrate fax
communication throughout the enterprise. The Company was incorporated in
March 1991 and shipped its initial facsimile software products in 1991. The
Company's revenues are primarily derived from licensing the rights to use its
Fax Sr. NT software product directly to end users and indirectly through
resellers. The Company also derives revenues from the resale of third-party
hardware products, principally intelligent fax boards and fax modems, and
from the delivery of related services, consisting primarily of customer
support contracts. The Company first achieved profitability for the year
ended December 31, 1992 and has been profitable, for the last fourteen
quarters, excluding a one-time charge for purchased, in-process research and
development in the fourth quarter of 1997.
The Company has historically derived the majority of its total revenues
from sales within North America. Sales outside of North America represented
approximately 11% and 8% of the Company's total revenues in the six months
ended June 30, 1998 and 1997, respectively.
The Company sells its products through its direct telesales force and
also sells its products through value added resellers, systems integrators,
resellers and distributors to expand its indirect distribution channel. Sales
through the Company's indirect distribution channels were 27% and 35% of the
Company's total revenues in the six months ended June 30, 1998 and 1997,
respectively.
The Company has expanded its business through three acquisitions. In
December 1997, the Company acquired CMA Ettworth Limited, based in London,
England, a provider of fax solutions for the IBM AS/400 market. The
acquisition was accounted for as a purchase and resulted in a one-time charge
for purchased, in-process research and development of approximately $6.7
million in the fourth quarter of 1997. In February 1998, the Company acquired
Desktop Paging Software, Inc., a New Hampshire based provider of wireless
messaging software, and TRS Technologies, Inc., a Portland, Oregon based
provider of LAN fax and cost recovery systems for law firms. These
acquisitions were accounted for under the pooling of interest method of
accounting.
10
<PAGE>
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license 58.3 % 64.4 % 59.3 % 66.3 %
Hardware 22.5 22.7 22.3 21.1
Service and other 19.2 12.9 18.4 12.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Software license 5.2 2.9 4.9 2.6
Hardware 12.4 15.6 12.8 14.6
Service and other 8.8 5.9 9.5 6.1
----- ----- ----- -----
Total cost of revenues 26.4 24.4 27.2 23.3
----- ----- ----- -----
Gross profit 73.6 75.6 72.8 76.7
----- ----- ----- -----
Operating expenses:
Sales and marketing 43.6 35.9 37.6 35.5
Research and development 16.9 17.2 16.0 18.8
General and administrative 12.0 8.5 11.2 9.4
Acquisition costs -- -- 1.2 --
----- ----- ----- -----
Total operating expenses 72.5 61.6 66.0 63.7
----- ----- ----- -----
Income from operations 1.1 14.0 6.8 13.0
Interest income, net 2.4 0.6 2.4 .4
----- ----- ----- -----
Income before provision for
income taxes 3.5 14.6 9.2 13.4
Provision for income taxes 1.4 5.2 2.6 4.9
----- ----- ----- -----
Net income 2.1 % 9.4 % 6.6 % 8.5 %
----- ----- ----- -----
----- ----- ----- -----
Gross profit:
Software license 91.1 % 95.5 % 91.8 % 96.0 %
Hardware 44.5 31.3 42.7 30.9
Service and other 54.1 53.6 48.2 52.0
</TABLE>
Three Months Ended June 30, 1998 and 1997
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 $7.7 million and $4.6 million for the three months ended June
30, 1998 and 1997, respectively, representing an increase of 68%.
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 $4.5 million for the three months ended June 30, 1998
and $2.9 million for the three months ended June 30, 1997, or 58% and 64% of
total revenues for each respective period, representing an increase of 52%.
The increase in dollar amount was primarily due to increased market
acceptance of the Company's facsimile software products for various operating
systems. The decrease in software license revenue as a percentage of total
revenues is primarily attributable to the increase in service and other
revenue due to the Company's larger installed customer base as well as the
conversion of fewer forecasted license orders than anticipated during the
second quarter of 1998.
11
<PAGE>
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 three months ended June 30, 1998 and $1.0 million for the three months
ended June 30, 1997, or 23% of total revenues for each respective period,
representing an increase of 66%. The increase in hardware revenues was due
primarily to the increase of hardware unit sales accompanying the Company's
products and a change in the sales mix of third-party hardware products from
less expensive 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 $1.5 million
for the three months ended June 30, 1998 and $588,000 for the three months
ended June 30, 1997, or 19% and 13% of total revenues for each respective
period, representing an increase of 150%. 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 $398,000 and
$132,000 for the three months ended June 30, 1998 and 1997, respectively,
representing 9% and 5% of software license revenues for each respective
period. The increase in dollar amount was primarily due to the higher volume
of products shipped during the three months ended June 30, 1998 compared to
the same period in 1997. Software license gross margin percentages decreased
to 91% for the three months ended June 30, 1998 from 96% for the same period
in 1997 due to increased license fees and royalties paid to third-party
software providers.
Hardware. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $956,000 and
$715,000 for the three months ended June 30, 1998 and 1997, respectively,
representing 55% and 69% of hardware revenues for each respective period. The
increase in dollar amount for the cost of hardware revenues for the three
months ended June 30, 1998 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 45% for the three months ended June 30, 1998 from 31% in
the same period in 1997 due to the change in hardware sales mix and better
pricing due to volume discounts provided by third-party hardware vendors.
Service and Other. Cost of service and other revenues consists primarily
of the costs incurred in providing telephone support as well as other
miscellaneous customer service-related expenses. Cost of service and other
revenue was $676,000 and $273,000 for the three months ended June 30, 1998
and 1997, respectively, representing 46% of service and other revenues for
each respective period. The increase in dollar amount of cost of service and
other revenues during the period was due primarily to the hiring of
incremental personnel to support growth in the customer base. The gross
margin percentage for service and other revenues remained unchanged at 54%
for each of the three month periods ended June 30, 1998 and 1997.
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 $3.3 million and $1.6 million for the three months ended June
30, 1998 and 1997, respectively, or 44% and 36% of total revenues for each
respective period. The increase in dollar amount was primarily due to the
Company's effort to expand its direct telesales force and marketing
organization, higher sales commissions associated with increased revenues and
planned increases in marketing program activities. The Company expects sales
and marketing expenses will continue to increase in absolute terms as the
Company continues to expand its direct telesales and indirect sales and
marketing capacities both domestically and internationally.
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,
12
<PAGE>
benefits, and associated overhead costs as well as consulting expenses and
the cost of software development tools. Research and development expenses
were $1.3 million and $790,000 for the three months ended June 30, 1998 and
1997, respectively, or 17% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to the employment of
additional staff 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
financial personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses were
$918,000 and $388,000 for the three months ended June 30, 1998 and 1997,
respectively, or 12% and 9% 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 as well
as additional administrative expenses incurred as a result of recent
acquisitions and operating multiple locations worldwide. General and
administrative expenses as a percentage of total revenues increased due to
the addition of personnel required to adequately support the expansion of the
Company's operations. The Company expects general and administrative expenses
will continue to increase in absolute terms.
Interest Income, Net. Interest income, net consists primarily of
interest earned on cash, cash equivalents, and short-term investments, offset
by interest expense associated with equipment financing and borrowings.
Interest income, net represented income of $182,000 in the three months ended
June 30, 1998, due primarily to interest income earned on excess cash from
the proceeds of the Company's initial public offering completed in August
1997.
Provision for Income Taxes. Provision for income taxes was approximately
$104,000 and $235,000 for the three months ended June 30, 1998 and 1997,
respectively, resulting in effective tax rates of approximately 39% and 35%
in the three months ended June 30, 1998 and 1997, respectively. Income taxes
in 1998 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.
Six months Ended June 30, 1998 and 1997
Revenues
Total Revenues. The Company's total revenues were $15.7 million and $8.3
million for the six months ended June 30, 1998 and 1997, respectively,
representing an increase of 90%.
Software License. Software license revenues were $9.3 million for the
six months ended June 30, 1998 and $5.5 million for the six months ended June
30, 1997, or 59% and 66% of total revenues for each respective period,
representing an increase of 70%. The increase in dollar amount was primarily
due to increased market acceptance of the Company's products for various
operating systems.
Hardware. Hardware revenues were $3.5 million for the six months ended
June 30, 1998 and $1.7 million for the six months ended June 30, 1997, or 22%
and 21% of total revenues for each respective period, representing an
increase of 100%. The increase in hardware revenues was due primarily to the
increase of hardware unit sales accompanying the Company's products and a
change in the sales mix of third-party hardware products from less expensive
modem products to high-end multi-channel modem boards.
Service and Other. Service and other revenues were $2.9 million for the
six months ended June 30, 1998 and $1.0 million for the six months ended June
30, 1997, or 18% and 13% of total revenues for each respective period,
representing an increase of 177%. The increase in dollar amount was due
primarily to the increase in maintenance revenues as a result of a larger
installed customer base.
13
<PAGE>
Cost of Revenues
Software License. Cost of software license revenues was $766,000 and
$218,000 for the six months ended June 30, 1998 and 1997, respectively,
representing 8% 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 the six months ended June 30, 1998 compared to the
same period in 1997. Software license gross margin percentages decreased to
92% for the six months ended June 30, 1998 from 96% for the same period in
1997 due to increased license fees and royalties paid to third-party software
providers.
Hardware. Cost of hardware revenues was $2.0 million and $1.2 million
for the six months ended June 30, 1998 and 1997, respectively, representing
57% and 69% 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, 1998 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 43% for the six months ended June 30, 1998 from 31% in the same
period in 1997 due to the change in hardware sales mix and better pricing due
to volume discounts provided by certain third-party hardware vendors.
Service and Other. Cost of service and other revenue was $1.5 million
and $501,000 for the six months ended June 30, 1998 and 1997, respectively,
representing 52% and 48% of service and other revenues for each respective
period. The increase in dollar amount of cost of service and other revenues
during the period was due primarily to the hiring of incremental personnel to
support growth in the customer base. The gross margin percentage for service
and other revenues decreased to 48% from 52% for the six months ended June
30, 1998 and 1997, respectively, due to the Company's investments in its
infrastructure in anticipation of future expansion of operations.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $5.9 million and
$2.9 million for the six months ended June 30, 1998 and 1997, respectively,
or 38% and 36% of total revenues for each respective period. The increase in
dollar amount was primarily due to the Company's effort to expand its direct
telesales force and marketing organization, higher sales commissions
associated with increased revenues and increased marketing program
activities. The Company expects sales and marketing expenses will continue to
increase in absolute terms.
Research and Development. Research and development expenses were $2.5
million and $1.6 million for the six months ended June 30, 1998 and 1997,
respectively, or 16% and 19% of total revenues for each respective period.
The increase in dollar amount was primarily attributable to the employment of
additional staff to develop and enhance the Company's products and provide
quality assurance. Research and development expenses decreased as a
percentage of total revenues as the Company continued to realize operating
leverage from its established infrastructure. The Company expects research
and development expenses will continue to increase in absolute terms.
General and Administrative. General and administrative expenses were
$1.8 million and $778,000 for the six months ended June 30, 1998 and 1997,
respectively, or 11% and 9% 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 as well
as additional administrative expenses incurred as a result of recent
acquisitions. General and administrative expenses as a percentage of total
revenues remained relatively consistent. The Company expects general and
administrative expenses will continue to increase in absolute terms.
Acquisition Costs. In connection with the acquisition of Desktop Paging
Software, Inc. and TRS Technologies, Inc., the Company expensed $183,000 of
accounting, legal, and other associated costs. See Note 4 of Notes to
Consolidated Financial Statements.
Interest Income, Net. Interest income, net represented income of
$371,000 in the six months ended June 30, 1998, due primarily to interest
income earned on excess cash from the proceeds of the Company's initial
public offering completed in August 1997.
14
<PAGE>
Provision for Income Taxes. Provision for income taxes was $402,000 and
$405,000 for the six months ended June 30, 1998 and 1997, respectively,
resulting in effective tax rates of approximately 28% and 37% in the six
months ended June 30, 1998 and 1997, respectively. Income taxes in 1998 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 1998 is lower
than 1997 due primarily to additional tax-exempt interest earned and the
change in federal tax laws extending the research and development credit
through June 30, 1998.
Liquidity and Capital Resources
The Company has financed its operations primarily through cash flow from
operations, the private sales of preferred stock, and the Company's initial
public offering of Common Stock completed in August 1997. At June 30, 1998,
the Company had cash and cash equivalents of $2.5 million, short-term
investments of $19.1 million, and working capital of $23.7 million.
The Company's operating activities provided cash of $569,000 in the six
months ended June 30, 1998 and used cash of $350,000 in the six months ended
June 30, 1997. Net cash provided during the six months ended June 30, 1998
consisted primarily of net income from operations, depreciation and
amortization, and increases in deferred revenue and accounts payable, offset
by increased accounts receivable and income taxes payable. Net cash used
during the six months ended June 30, 1997, consisted primarily of an increase
in accounts receivable and a decrease in long-term liabilities, offset by net
income from operations and an increase in accrued liabilities.
Investing activities used cash of $121,000 and $847,000 during the six
months ended June 30, 1998 and 1997, respectively. During the six months
ended June 30, 1998, the principal uses were purchases of short-term
investments, purchases of property and equipment, and an increase of other
assets, offset by the proceeds from the sale of short-term investments and
cash acquired in the connection with the acquisitions of DPSI and TRS. During
the six months ended June 30, 1997, the principal uses were purchases of
property and equipment and purchases of short-term investments offset by the
proceeds from the sale of short-term investments. The Company expects that
the rate of purchases of property and equipment will increase as the Company
expands its operations.
Financing activities used cash of $146,000 for the six months ended
June 30, 1998 due primarily to the payment of long-term debt. Financing
activities used cash of $35,000 for the six months ended June 30, 1997.
As of June 30,1998 the Company did not have any material commitments for
capital expenditures.
Subject to the factors discussed below, the Company believes that the
existing cash balances, short-term investments and cash generated from
operations will be sufficient to finance the Company's operations for the
next twelve months. Although operating activities may provide cash in certain
periods, to the extent the Company grows in the future, its operating and
investing activities may use cash. There can be no assurance that any
necessary additional financing will be available to the Company on
commercially reasonable terms, or at all.
15
<PAGE>
Certain Factors That May Affect Future Results
Information provided by the Company from time to time including
statements in this Form 10-Q which are not historical facts are so-called
"forward-looking statements" that involve risks and uncertainties, made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. In particular, statements contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations
which are not historical facts (including, but not limited to, statements
concerning the plans and objectives of management; increases in sales and
marketing, research and development and general and administrative expenses;
developments relating to the Company's product and service offerings, markets
and acquisitions; anticipated trends in the Company's business; and the
Company's expected liquidity and capital resources) may constitute
forward-looking statements. The Company's actual future results may differ
significantly from those stated in any forward-looking statements. Factors
that may cause such differences include, but are not limited to, the factors
discussed below, and the other risks discussed in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 and from time to
time in the Company's other filings with the Securities and Exchange
Commission.
The Company's future results are subject to substantial risks and
uncertainties. Although the Company has experienced significant percentage
growth in revenue and net income in recent years, the Company does not
believe that prior growth rates are sustainable or indicative of future
operating results. In particular, the Company experienced decreases in both
total revenues and net income from the first quarter of 1998 to the second
quarter of 1998. There can be no assurance that the Company will increase its
level of revenues or remain profitable on a quarterly basis or annual basis.
In addition, the Company's limited operating history makes the prediction of
future operating results difficult or impossible. The Company has derived
substantially all of its historical revenues from licenses of Fax Sr. NT and
related services and resale of related hardware. Broad market acceptance of
Fax Sr. NT, and the Windows NT operating system in general, is critical to
the Company's future success. As a result, any decline in demand for or
failure to achieve broad market acceptance of Fax Sr. NT as a result of
competition, technological change or otherwise, would have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's future financial performance will depend in large
part on the successful development, introduction and customer acceptance of
new and enhanced versions of Fax Sr. NT. There can be no assurance that the
Company will continue to be successful in marketing Fax Sr. NT or any new or
enhanced versions of Fax Sr. NT.
The enterprise, client/server facsimile solution market is intensely
competitive and rapidly changing and the Company expects competition to
continue to increase. Many of the Company's competitors have longer operating
histories and greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and market acceptance of their
products and technologies than the Company. In addition, there are relatively
low barriers to entry in the markets in which the Company operates, and new
competition may arise either from expansion by established companies or from
new emerging companies or from resellers of the Company's products. There can
be no assurance that current or potential competitors of the Company will not
develop products comparable or superior in terms of price and performance
features to those developed by the Company, adapt more quickly than the
Company to new or emerging technologies and changes in market opportunities
or customer requirements, establish alliances with industry leaders, or take
advantage of acquisition opportunities more readily than the Company.
Increased competition will result in decreased market share, pressure for
price reductions and related reductions in gross margins, any of which could
materially adversely affect the Company's ability to achieve its financial
and business goals.
The Company's future earnings and stock price may be subject to
significant volatility, particularly on a quarterly basis. The Company's
quarterly revenues and results of operations have fluctuated significantly in
the past and will likely fluctuate significantly in the future. Causes of
such fluctuations have included and may include, among others, the demand for
the Company's products and services, the size and timing of orders, the
number, timing and significance of new product announcements by the Company
and its competitors, the ability of the Company to develop, introduce, market
and ship new and enhanced versions of the Company's products on a timely
basis, the level of product and price competition, changes in operating
expenses, changes in average selling prices and mix of the Company's
products, changes in the Company's sales incentive strategy, the mix of
direct and indirect sales, and general economic factors. The Company's
products often have a lengthy sales cycle, especially in the case of large
orders. If one or more large orders fails to close as forecasted by the
Company in a fiscal quarter, the Company's revenues and operating results for
such quarter could be materially adversely
16
<PAGE>
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. For example, the Company has identified a decrease in demand for
the Company's products and services in certain international markets, as well
as delays in closing certain anticipated customer orders as contributing to a
decline in software license and total revenues from the first quarter of 1998
to the second quarter of 1998. In addition, this decline in revenues, when
coupled with the Company's planned increases in its investment in sales and
marketing during the second quarter of 1998, resulted in a significant
reduction in net income for the second quarter of 1998 compared to both the
corresponding period of 1997 and the preceding period of 1998. Any shortfall
in revenue or earnings from levels anticipated by securities analysts has had
and could have an immediate and material adverse effect on the trading price
of the Company's common stock. The Company typically receives and fulfills a
majority of its orders within any given quarter, with a substantial portion
occurring in the last weeks or days of the fiscal quarter. As a result, the
Company may not learn of revenue shortfalls until late in a fiscal quarter,
which could result in an even more immediate and adverse effect on the
trading price of the Company's common stock.
In addition, the Company identifies the following risk factors which
could affect the Company's actual results and could cause actual results to
differ materially from forward-looking statements. The Company's future
results remain difficult to predict and may be affected by a number of
factors, including: the Company's dependence on the continued acceptance and
growth of the Windows NT environment and of the client/server environment;
the ability of the Company to manage growth; the ability of the Company to
enhance existing products and introduce new products in a timely manner and
market acceptance of these products; the expansion of indirect sales channels
and the potential for channel conflict; risks associated with acquisitions;
risks associated with international expansion; risks associated with the
development and maintenance of strategic relationships; the Company's
dependence on revenues from resale of third-party hardware products; the
risks associated with new product offerings and the potential for undetected
errors; the Company's dependence on proprietary technology and the risk of
third-party claims for infringement of intellectual property rights; and the
Company's dependence on third-party licensed technology; the Company's
dependence on key personnel.
Year 2000
The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As the
century date change occurs, many date sensitive systems will recognize the
year 2000 as 1900, or not at all. This inability to recognize or properly
treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. The Company utilizes software and
related technologies throughout its business that will be affected by the
date change in the Year 2000. An internal study is currently underway to
determine the full scope and related costs to insure that the Company's
systems continue to meet its internal needs and those of its customers. The
company began incurring expenses in 1997 to resolve this issue. All
expenditures will be expensed as incurred and they are not expected to have a
significant impact on the Company's ongoing results of operations.
17
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of security-holders of the Company was held on May
22, 1998. The following nominees were re-elected as Class I directors to
serve for a three year term or until their successors are elected and
qualified.
<TABLE>
<CAPTION>
Total Votes for Total Votes Withheld
Nominee Nominee for Nominee
------- ------- -----------
<S> <C> <C>
Richard D. Cramer 10,770,056 2,160
Anthony J. Mark 10,770,056 2,160
</TABLE>
The term of office for the following directors continued after the
meeting: Robert L. Voelk (Class III), Martin A. Schultz (Class III), Bruce R.
Evans (Class II) and William C. Stylinger, III (Class II).
The election of Arthur Andersen LLP as independent auditors for the
fiscal year ending December 31, 1998 was ratified, with 10,752,106 shares
voting in favor, 3,380 shares voting against, and 16,730 abstaining.
Item 5. Other Information
The Company's By-Laws establish an advance notice procedure with regard
to certain matters, including stockholder proposals not included in the
Company's proxy statement to be brought before an annual meeting of
stockholders. In general for matters to be addressed at the Company's 1999
annual meeting of stockholders, notice must be validly given to the Company
after November 24, 1998 and before December 24, 1998 and must contain
specified information concerning the matters to be brought before such
meeting and concerning the stockholder proposing such matters.
All notices of proposals by stockholders should be sent Certified Mail -
Return Receipt Requested to the attention of: Darioush Mardan, Secretary,
Omtool, Ltd., 8 Industrial Way, Salem, New Hampshire 03079.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Exhibit Description
------ -------------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
18
<PAGE>
OMTOOL, LTD.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMTOOL, LTD.
August 13, 1998 By: /s/ Darioush Mardan
-------------------
Darioush Mardan
Chief Financial Officer, Secretary and Treasurer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS 10Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,515
<SECURITIES> 19,109
<RECEIVABLES> 7,728
<ALLOWANCES> 1,185
<INVENTORY> 852
<CURRENT-ASSETS> 30,367
<PP&E> 3,509
<DEPRECIATION> 1,565
<TOTAL-ASSETS> 34,389
<CURRENT-LIABILITIES> 6,668
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 27,288
<TOTAL-LIABILITY-AND-EQUITY> 34,389
<SALES> 12,802
<TOTAL-REVENUES> 15,687
<CGS> 2,767
<TOTAL-COSTS> 4,261
<OTHER-EXPENSES> 10,349
<LOSS-PROVISION> (59)
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 1,448
<INCOME-TAX> 402
<INCOME-CONTINUING> 1,046
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,046
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
