<PAGE>
================================================================================
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 March 31, 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)
Delaware 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8 Industrial Way, Salem, NH 03079
(Address of Principal Executive Offices) (Zip Code)
(603) 898-8900
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
There were 12,745,150 shares of the Company's Common Stock, par value $0.01,
outstanding on May 13, 1998
================================================================================
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 1998
CONTENTS
Item Number Page
----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997 3
Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Convertible Redeemable
Preferred Stock and Stockholders' Equity (Deficit)
for the year ended December 31, 1997 and the
three months ended March 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 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 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,083,053 $ 2,210,367
Short-term investments 20,457,149 21,179,766
Accounts receivable, less reserves of $1,220,465 and $1,037,000 in
1998 and 1997, respectively 6,623,138 4,727,089
Prepaid expenses and other current assets 1,367,486 1,492,763
Deferred tax asset 380,000 380,000
------------ ------------
Total current assets 30,910,826 29,989,985
Property and equipment, net 1,857,220 1,752,986
Other assets 811,240 850,522
------------ ------------
Total assets $ 33,579,286 $ 32,593,493
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 28,680 $ 36,888
Accounts payable 1,483,138 919,276
Accrued liabilities 2,098,133 1,808,362
Income taxes payable 270,414 809,991
Deferred revenue 2,153,831 2,080,736
------------ ------------
Total current liabilities 6,034,196 5,655,253
------------ ------------
Deferred tax liability 266,048 283,000
------------ ------------
Long-term liabilities 63,093 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 -- 12,740,467
in 1998; 11,846,140 in 1997; 127,404 118,461
Additional paid-in capital 32,552,042 32,255,664
Accumulated deficit (5,468,759) (5,736,632)
Cumulative translation adjustment 5,262 7,704
------------ ------------
Total stockholders' equity 27,215,949 26,645,197
------------ ------------
Total liabilities and stockholders' equity $ 33,579,286 $ 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
March 31,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Software license $ 4,828,312 $ 2,536,303
Hardware 1,770,360 708,591
Service and other 1,413,259 455,743
------------ ------------
Total revenues 8,011,931 3,700,637
------------ ------------
Cost of revenues:
Software license 367,994 86,067
Hardware 1,045,131 493,927
Service and other 818,269 228,503
------------ ------------
Total cost of revenues 2,231,394 808,497
------------ ------------
Gross profit 5,780,537 2,892,140
------------ ------------
Operating expenses:
Sales and marketing 2,546,356 1,296,483
Research and development 1,222,486 763,786
General and administrative 835,958 390,591
Acquisition costs 182,654 --
------------ ------------
Total operating expenses 4,787,454 2,450,860
------------ ------------
Income from operations 993,083 441,280
Interest income 190,062 18,663
Interest expense (1,443) (17,978)
------------ ------------
Income before provision for income taxes 1,181,702 441,965
Provision for income taxes 298,029 170,000
------------ ------------
Net income $ 883,673 $ 271,965
============ ============
Net income per share
Basic $ 0.07 $ 0.05
============ ============
Diluted $ 0.07 $ 0.03
============ ============
Weighted average number of common shares outstanding
Basic 12,585,554 5,369,110
============ ============
Diluted 13,586,724 9,255,507
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
OMTOOL, LTD.
CONSOLIDATED 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,
$0.01 Par Value $0.01 Par Value $0.01 Par Value
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,356,116 $ 5,166,667 162,500 $ 1,625 5,315,008 $ 53,150
Exercise of stock options -- -- -- -- 130,263 1,302
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock -- 233,333 -- -- -- --
Conversion of Series A and B
Preferred Stock (1,356,116) (5,400,000) (162,500) (1,625) 3,037,232 30,373
Issuance of common stock in initial
public offering net of issuance
costs -- -- -- -- 3,000,000 30,000
Issuance of common stock for
acquisition -- -- -- -- 363,637 3,636
Tax benefit from stock options -- -- -- -- -- --
Change in cumulative translation
adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ------------ -------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1997 -- -- -- -- 11,846,140 118,461
Exercise of stock options (Unaudited) -- -- -- -- 215,057 2,151
Issuance of common stock for
acquisitions (Unaudited) -- -- -- -- 679,270 6,792
Change in cumulative translation
adjustment (Unaudited) -- -- -- -- -- --
Net income (Unaudited) -- -- -- -- -- --
---------- ------------ -------- --------- ---------- ---------
BALANCE, MARCH 31, 1998 (Unaudited) -- $ -- -- $ -- 12,740,467 $ 127,404
========== ============ ======== ========= ========== =========
<CAPTION>
Stockholders' Equity (Deficit)
-------------------------------------------------------------
Total
Additional Cumulative Stockholders'
Paid-in Accumulated Translation Equity
Capital Deficit Adjustment (Deficit)
------- ------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ -- $ (1,521,547) $ -- $ (1,466,772)
Exercise of stock options 53,024 -- -- 54,326
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock -- (233,333) -- (233,333)
Conversion of Series A and B
Preferred Stock 4,971,252 400,000 -- 5,400,000
Issuance of common stock in initial
public offering net of issuance
costs 23,963,981 -- -- 23,993,981
Issuance of common stock for
acquisition 3,032,733 -- -- 3,036,369
Tax benefit from stock options 234,674 -- -- 234,674
Change in cumulative translation
adjustment -- -- 7,704 7,704
Net loss -- (4,381,752) -- (4,381,752)
------------ ------------ -------- ------------
BALANCE, DECEMBER 31, 1997 32,255,664 (5,736,632) 7,704 26,645,197
Exercise of stock options
(Unaudited) 100,920 -- -- 103,071
Issuance of common stock for
acquisitions (Unaudited) 195,458 (615,800) -- (413,550)
Change in cumulative translation
adjustment (Unaudited) -- -- (2,442) (2,442)
Net income (Unaudited) -- 883,673 -- 883,673
------------ ------------ -------- ------------
BALANCE, MARCH 31, 1998 (Unaudited) $ 32,552,042 $ (5,468,759) $ 5,262 $ 27,215,949
============ ============ ======== ============
</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>
Three months ended
March 31,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 883,673 $ 271,965
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization 180,550 71,392
Deferred income taxes (16,952)
Changes in assets and liabilities-
Accounts receivable (1,679,143) (307,533)
Prepaid expenses and other current assets 178,570 (57,465)
Accounts payable 454,891 (8,785)
Accrued liabilities 35,306 428,842
Income taxes payable (542,914) (154,257)
Deferred revenue (93,487) (70,828)
Long-term liabilities (17,862) 111
------------ ------------
Net cash provided by (used in) operating activities (617,368) 173,442
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (200,721) (377,165)
Purchases of short-term investments (4,760,142) (673,088)
Proceeds from sale of short-term investments 5,515,000 --
Increase in other assets (3,375) --
Cash acquired in connection with acquisitions of DPSI and TRS 111,071 --
------------ ------------
Net cash provided by (used in) investing activities 661,833 (1,050,253)
------------ ------------
Cash Flows from Financing Activities:
Payments on long-term debt (270,253) (27,666)
Exercise of stock options 103,071 13,833
------------ ------------
Net cash used in financing activities (167,182) (13,833)
------------ ------------
Foreign exchange effect on cash (4,597) --
Net decrease in cash and cash equivalents (127,314) (890,644)
Cash and cash equivalents, beginning of period 2,210,367 2,042,100
------------ ------------
Cash and cash equivalents, end of period $ 2,083,053 $ 1,151,456
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $ 1,443 $ 17,978
============ ============
Income taxes $ 837,606 $ 324,324
============ ============
Supplemental Disclosure of Noncash Investing and Financing Transactions:
Accrued dividends on Series B Convertible Redeemable Preferred Stock $ -- $ 100,000
============ ============
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 three month period ended March 31,
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 March 31, 1998 and December 31, 1997, the Company had $20,457,149
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 March 31, 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 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 128. Calculations of basic and diluted net
income per common share and potential common share are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 883,673 $ 271,965
=========== ===========
Weighted average number of common shares outstanding 12,585,554 5,369,110
Potential common shares pursuant to stock
options 1,001,170 849,165
Potential common shares pursuant to conversion
of redeemable convertible preferred stock -- 3,037,232
----------- -----------
Diluted weighted average shares 13,586,724 9,255,507
=========== ===========
Basic net income per share $ 0.07 $ 0.05
Diluted net income per common and potential
common share $ 0.07 $ 0.03
</TABLE>
The calculation above excludes the potential common shares related to
27,000 outstanding stock options which have an anti-dilutive effect for the
three months ended March 31, 1998.
(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
March 31,
-----------------------------
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Net income $ 883,673 $ 271,965
Foreign currency translation adjustments, net of taxes (1,499) --
---------- ----------
Comprehensive income $ 882,174 $ 271,965
========== ==========
</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.
8
<PAGE>
These transactions were accounted for as pooling of interests. 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 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 thirteen 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 22% and 10% of the Company's total revenues in the three months
ended March 31, 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 32% of the Company's total
revenues in the three months ended March 31, 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:
Three months
ended March 31,
-----------------------
1998 1997
----- -----
Revenues:
Software license 60.3% 68.5%
Hardware 22.1 19.2
Service and other 17.6 12.3
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Software license 4.6 2.3
Hardware 13.0 13.4
Service and other 10.3 6.2
----- -----
Total cost of revenues 27.9 21.9
----- -----
Gross profit 72.1 78.1
----- -----
Operating expenses:
Sales and marketing 31.8 35.0
Research and development 15.3 20.6
General and administrative 10.4 10.6
Acquisition costs 2.3 --
----- -----
Total operating expenses 59.8 66.2
----- -----
Income from operations 12.3 11.9
Interest income, net 2.4 0
----- -----
Income before provision for
income taxes 14.7 11.9
Provision for income taxes 3.7 4.6
----- -----
Net income 11.0% 7.3%
===== =====
Gross profit:
Software license 92.4% 96.6%
Hardware 41.0 30.3
Service and other 42.1 49.8
Three Months Ended March 31, 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 $8.0 million and $3.7 million for the three months ended March 31,
1998 and 1997, respectively, representing an increase of 117%.
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 $4.8 million for the three months ended March 31, 1998 and $2.5
million for the three months ended March 31, 1997, or 60% and 69% of total
revenues for each respective period, representing an increase of 90%. The
increase in dollar amount was primarily due to increased market acceptance of
the Company's products for various operating systems.
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 $1.8 million for the
three months ended March 31, 1998 and $709,000 for the three months ended March
31, 1997, or 22% and 19% of total revenues for each respective period,
representing an increase of 150%. 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 $1.4 million
for the three months ended March 31, 1998 and $456,000 for the three months
ended March 31, 1997, or 18% and 12% of total revenues for each respective
period, representing an increase of 210%. 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 $368,000 and $86,000
for the three months ended March 31, 1998 and 1997, respectively, representing
8% and 3% 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 March 31, 1998 compared to the same period in
1997. Software license gross margin percentages decreased to 92% for the three
months ended March 31, 1998 from 97% 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 $1.0 million and
$494,000 for the three months ended March 31, 1998 and 1997, respectively,
representing 59% and 70% of hardware revenues for each respective period. The
increase in dollar amount for the cost of hardware revenues for the three months
ended March 31, 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 41% for the three months ended March 31, 1998 from 30% in the same
period in 1997 due to the change in hardware sales mix and better pricing from
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 $818,000 and $229,000 for the three months ended March 31, 1998 and
1997, respectively, representing 58% and 50% of service and other revenues for
each respective period. The increase in dollar amount of cost of service and
other revenues during the period was due primarily the hiring of incremental
personnel to support growth in the customer base. The gross margin percentage
for service and other revenues decreased to 42% from 50% for the three months
ended March 31, 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 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 $2.5 million and $1.3 million for the three months ended March 31, 1998 and
1997, respectively, or 32% and 35% 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 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 $1.2 million and $764,000 for the three months ended March 31,
1998 and 1997, respectively, or 15% and 21% of total revenues for each
respective period. The increase in dollar amount was primarily attributable to
the
12
<PAGE>
employment of additional staff and independent contractors to develop and
enhance the Company's products and provide quality assurance. Research and
development expenses decreased as a percentage of total revenues as the Company
continued to realize operating leverage from its established infrastructure. The
Company expects research and development expenses will continue to increase in
absolute terms.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive and
financial personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses were
$836,000 and $391,000 for the three months ended March 31, 1998 and 1997,
respectively, or 10% and 11% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to an increase in personnel
and the overhead costs allocated to support such personnel 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 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 $189,000 in the three months ended March 31, 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 $298,000 and
$170,000 for the three months ended March 31, 1998 and 1997, respectively,
resulting in effective tax rates of approximately 25% and 38% in the three
months ended March 31, 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.
13
<PAGE>
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 March
31, 1998 the Company had cash and cash equivalents of $2.1 million,
short-term investments of $20.5 million, and working capital of $24.9
million. In August 1996, the Company entered into a loan and security
agreement with a bank which was comprised of a term loan and a line of
credit. The Company borrowed $250,000 under the term loan, which bore
interest at the bank's prime rate plus 0.5% and was payable in monthly
installments through December 31, 1999. In August 1997, the Company
extinguished the term loan with a portion of the proceeds from the IPO. The
line of credit expired in August 1997 at which time there were no additional
amounts outstanding.
The Company's operating activities used cash of $617,000 in the three
months ended March 31, 1998 and provided cash of $173,000 in the three months
ended March 31, 1997. Net cash used during the three months ended March 31, 1998
consisted primarily of an increase in accounts receivable and a decrease in
income taxes payable offset by increased accounts payable and net income from
operations. Net cash provided during the three months ended March 31, 1997
consisted primarily of net income from operations and an increase in accrued
liabilities offset by an increase in accounts receivable and a decrease in
income taxes payable.
Investing activities provided cash of $662,000 and used cash of $1.1
million during the three months ended March 31, 1998 and 1997, respectively.
During the three months ended March 31, 1998, the principal uses were purchases
of short-term investments and purchases of property and equipment, offset by the
proceeds from the sale of short-term investments. During the three months ended
March 31, 1997, 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 increase as the Company expands its
operations.
Financing activities used cash of $167,000 for the three months ended
March 31, 1998 due primarily to the payment of long-term debt. Financing
activities used cash of $14,000 for the three months ended March 31, 1997.
As of March 31,1998 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.
14
<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. 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
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
15
<PAGE>
operations. Any shortfall in revenue or earnings from levels anticipated by
securities analysts could have an immediate and material adverse effect on
the trading price of the Company's common stock. The Company typically
receives and fulfills a majority of its orders within any given quarter, with
a substantial portion occurring in the last weeks or days of the fiscal
quarter. As a result, the 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; and the Company's dependence on key personnel.
16
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Changes in Securities
On February 19, 1998, the Company issued 294,840 shares of its
common stock, par value $.01 per share (the "Common Stock"), to the stockholders
of Desktop Paging Software, Inc. ("DPSI") in connection with the acquisition of
the outstanding common stock of DPSI. No underwriters were involved in the
foregoing sale which was made in reliance upon an exemption from the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), set forth in Section 4(2) thereof, or the rules and
regulations thereunder, relative to sales by an issuer not involving any public
offering.
In addition, on February 27, 1998, the Company issued 384,430 shares
of its Common Stock to the stockholders of TRS Technologies, Inc. ("TRS") in
connection with the acquisition of the outstanding common stock of TRS. No
underwriters were involved in the foregoing sale which was made in reliance upon
an exemption from the registration provisions of the Securities Act, set forth
in Section 4(2) thereof, or the rules and regulations thereunder, relative to
sales by an issuer not involving any public offering.
(d) Use of Proceeds
On August 7, 1997, the Company's Registration Statement on Form S-1
(File No. 333-29397) became effective. From August 7, 1997 through March 31,
1998, the aggregate amount of expenses incurred by the Company in connection
with the issuance and distribution of the shares of Common Stock offered and
sold in the initial public offering (the "IPO") were approximately $3,006,000,
including $1,890,000 in underwriting discounts and commissions and $1,116,000 in
other expenses. The net proceeds to the Company from the IPO, after deducting
underwriting discounts and commissions and other expenses were approximately
$23,994,000. From August 7, 1997 through March 31, 1998, the Company has applied
approximately all of the net proceeds from the IPO as follows: $477,000 to the
repayment of indebtedness; $468,000 to the purchase of plant, equipment and real
estate; $4,000,000 in partial payment of the acquisition price of CMA Ettworth
Limited ("CMA"); $620,000 for acquisition and other expenses relating to CMA,
DPSI and TRS; and the remaining $18,429,000 for working capital.
None of the net proceeds from the IPO were used to pay, directly or
indirectly, directors, officers, persons owning ten percent or more of the
Company's equity securities, or affiliates of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit Description
------ -------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
Amendment No. 1 to Current Report on Form 8-K/A dated December 5,
1997, as amended on February 3, 1998, amending and restating Item 7
to reflect the date before which the financial statements relating
to the business acquired by the Company from CMA would be filed.
Amendment No. 2 to Current Report on Form 8-K/A dated December 5,
1997, as amended on February 18, 1998, amending and restating Item 7
to report the financial statements of CMA and the pro forma combined
financial statements of the Company giving effect to the acquisition
of all the outstanding share capital of CMA.
Current Report on Form 8-K dated February 19, 1998 reporting, under
Item 5, the Company's acquisition of all of the outstanding capital
stock of DPSI and the Company's acquisition of all the outstanding
capital stock of TRS.
17
<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.
May 14, 1998 By: /s/ Darioush Mardan
----------------------------------------------
Darioush Mardan
Vice President, Finance,
Chief Financial Officer, Secretary and Treasurer
18
<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> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 2,083 1,151
<SECURITIES> 20,457 1,604
<RECEIVABLES> 7,844 3,172
<ALLOWANCES> 1,220 600
<INVENTORY> 466 198
<CURRENT-ASSETS> 30,911 5,831
<PP&E> 2,721 1,378
<DEPRECIATION> 864 318
<TOTAL-ASSETS> 33,579 6,910
<CURRENT-LIABILITIES> 6,034 2,568
<BONDS> 0 0
0 0
0 5,267
<COMMON> 127 54
<OTHER-SE> 27,089 (1,336)
<TOTAL-LIABILITY-AND-EQUITY> 33,579 6,910
<SALES> 6,599 3,245
<TOTAL-REVENUES> 8,012 3,701
<CGS> 1,413 580
<TOTAL-COSTS> 2,231 808
<OTHER-EXPENSES> 4,787 2,451
<LOSS-PROVISION> (24) 225
<INTEREST-EXPENSE> 1 18
<INCOME-PRETAX> 1,182 442
<INCOME-TAX> 298 170
<INCOME-CONTINUING> 884 272
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 884 272
<EPS-PRIMARY> 0.07 .05
<EPS-DILUTED> 0.07 .03
</TABLE>
