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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended: December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 0-22871
OMTOOL, LTD.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C>
Delaware 02-0447481
(State or Other (I.R.S. Employer
Jurisdiction of Identification Number)
Incorporation or
Organization)
8 Industrial Way, Salem, NH 03079
(Address of Principal (Zip Code)
Executive Offices)
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Registrant's telephone number, including area code: (603) 898-8900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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
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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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 27, 1998, was approximately $62,265,463 (based
upon the closing price of the Registrant's Common Stock on March 27, 1998 of
$13.00 per share).
The number of shares outstanding of the Registrant's $.01 par value Common
Stock as of March 27, 1998 was 12,645,924.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1997. Portions of such proxy statement are incorporated by reference into Part
III of this report.
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PART I
Item 1. Business
BUSINESS
Omtool, Ltd. ("Omtool" or the "Company") designs, develops, markets and
supports open, client/server facsimile software, delivering solutions which
automate and integrate fax communication throughout the enterprise. Omtool's
Fax Sr. product family, licensed typically on a shrink-wrap basis, provides
users with an extensive, flexible feature set for transmitting and receiving
faxes and improves an organization's management of its fax communications
processes by providing a suite of utility and control functions. Fax Sr. can
be deployed on heterogeneous, multi-platform networks and can be integrated
with both desktop and enterprise software applications as well as e-mail and
groupware systems. To address the needs of large enterprises, Fax Sr. is
modular and scaleable as servers, clients and fax lines can be implemented
and added over time. Fax Sr. is available on the Windows NT, Sun Solaris, HP
UNIX and DEC UNIX and VMS server operating systems, and Windows 95, Windows
NT, Windows 3.1.x, Macintosh, Java, Activex and MS-DOS clients. Omtool has
licensed Fax Sr. to thousands of customers worldwide.
The Company was incorporated in New Hampshire in March 1991 and was
reincorporated in Delaware in January 1996. The Company's principal executive
offices are located at 8 Industrial Way, Salem, New Hampshire 03079 and its
telephone number is (603) 898-8900.
Industry Background
To be competitive in today's marketplace, companies must focus on improving
electronic communications within their organizations and beyond the enterprise.
Growth in electronic communication is being driven by productivity and
efficiency demands on knowledge workers, the information sharing requirements of
dispersed organizations, the emergence of the virtual enterprise to incorporate
suppliers, customers and other business partners, and the general globalization
of markets. Enterprises are responding to the need for improved communications
through the use of a combination of telephony, facsimile, e-mail and groupware
solutions. Facsimile transmission has been adopted as a world-wide standard for
electronic communication because of its ease of use, real-time transmission of
information, and consistent uniform protocol standards.
A number of technological developments have emerged to create opportunities
to automate and improve fax and other corporate communications methods. These
developments include the proliferation of personal computers in the corporate
workplace, the growth of the client/server computing environment, the emergence
of the fax modem and remote access technology, the growth of wide area network
("WAN") infrastructure, including high speed T1/T3 public networks, and the
emergence of the Internet and corporate intranets. In addition, the rapid
adoption of Windows NT as a cost-effective, technologically-advanced platform
for enterprise computing is creating an environment whereby companies can
realize significant improvements in corporate communications through the use of
automation software.
Despite these technological improvements, only limited advances have been
made to automate fax communication and to coordinate and integrate communication
by fax with other communications methods. Traditional fax communication within
and beyond the enterprise continues to be prone to errors and delays in
transmission and reception due to manual copying, sending and routing processes.
Additionally, business managers and information technology ("IT") professionals
are often unable to effectively manage access and analyze and control usage
costs across this critical corporate communications medium. Because the vast
majority, the Company believes, of all faxed documents are created
electronically, the lack of integration between fax communication and desktop or
enterprise applications causes additional inefficiencies in the document
communications and management process. Moreover, traditional fax communication
has failed to integrate with emerging communications methods that are
complementary to fax transmission, such as e-mail and groupware, to create a
coordinated communications process throughout the extended enterprise.
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Historical approaches to improving facsimile communications such as
desktop-based fax software and host-based fax applications have not provided a
comprehensive solution for the requirements of the enterprise. Desktop fax
applications are unable to support workgroups or divisions within an
organization, are often limited to a single desktop operating system and do not
provide complete management functions. In addition, desktop-based fax
applications are limited in that they require significant investment by the
organization in dedicated modem or fax boards in each user's PC and a telephone
line connection for each modem or fax board. Host-based fax applications running
on mainframes or minicomputers are typically expensive, difficult to maintain
and relatively inflexible to meet the changing needs of the enterprise. In
addition, host-based fax applications are difficult to integrate in a changing
technological environment.
As corporate communications have become more critical and complex, a need has
arisen for a solution to automate and integrate fax communications throughout
the enterprise and address a broad range of faxing requirements from
person-to-person to volume broadcast transmissions. Such a solution must provide
users and managers with superior functionality, provide tight integration with
applications and other communications methods such as e-mail and groupware,
leverage existing network technology and be implemented on a scaleable,
multi-platform client/server architecture to address the needs of the extended
enterprise.
The Omtool Solution
Omtool provides an open, client/server software solution, licensed typically
on a shrink-wrap basis, for automating and integrating facsimile communications
throughout the enterprise. Omtool's Fax Sr. solution provides the following key
benefits:
Comprehensive Fax Solution. Fax Sr. provides users with an extensive,
flexible feature set for transmitting, receiving and managing facsimiles. Fax
Sr. is designed to enhance an organization's management of its fax
communications processes by providing a suite of utility and control functions
for both IT staff and business managers.
Tight Integration with Desktop and Production Applications. Fax Sr. manages
the transmission of documents originating from desktop applications as well as
volume-based facsimiles generated by production applications, such as purchase
orders, invoices and shipping notices. Fax Sr. can be integrated with
off-the-shelf software applications as well as in-house custom applications.
Complementary E-mail and Groupware Functionality. Fax Sr. is designed to
connect to and complement e-mail and groupware by enabling faxes to be sent and
received through these applications. Fax Sr. supports multiple, complementary
e-mail and groupware systems, including Microsoft Exchange, Lotus Notes,
Microsoft Mail, cc:Mail and Simple Mail Transfer Protocol ("SMTP").
Leverage Existing Infrastructure Investments. Fax Sr. is designed to operate
on heterogeneous networks and enables enterprises to leverage their existing IT
server and desktop infrastructure and telecommunications investments. Fax Sr.
supports multiple, simultaneous protocols and is available on the Windows NT,
Sun Solaris, HP UNIX, and DEC UNIX and VMS server operating systems, and Windows
NT, Windows 95, Windows 3.1.x, Macintosh, Java, ActiveX and MS-DOS clients. Fax
Sr. operates with existing public and leased telephone lines and enables users
to take advantage of enhanced services offered by telecommunication carriers and
specialized service providers.
Enterprise-Strength Solution. Fax Sr. is architected to be modular and
scaleable to meet the needs of worldwide enterprises. Servers, clients and fax
lines can be implemented and added over time in a Fax Sr. deployment. Fax Sr.
has been utilized as a solution for up to approximately 10,000 users within a
single customer enterprise.
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Strategy
The Company's objective is to become the leading provider of enterprise
client/server facsimile software solutions. The Company seeks to achieve this
objective by implementing the following business strategy:
Maintain Technology Leadership in the Enterprise Market. The Company intends
to continue to invest in research and development to ensure that Fax Sr. remains
a robust and scaleable product for the enterprise market. The Company strives to
bring enhanced features to the market to respond to changing customer
requirements and evolving technology. The Company believes that Fax Sr. was the
first commercially available client/server facsimile solution to provide e-mail
and Microsoft Exchange integration and to incorporate least cost and global
routing.
Continue Leadership in the Windows NT Environment. The Company believes that
Windows NT will become the dominant computing platform in the enterprise
environment. The Company believes that Fax Sr. was the first commercially
available client/server facsimile solution for the Windows NT platform, and the
Company has built a leadership position in this market. The Company intends to
focus a significant portion of its near-term product development efforts on
Windows NT-related functionality. See "Factors Affecting Future Performance."
Leverage Installed Base of Customers. The Company believes that significant
opportunities exist to expand the use of Fax Sr. across more users and
applications at the Company's existing customer installations. The Company
intends to pursue these opportunities by providing comprehensive post-sale
customer support. In addition, the Company believes that a highly-referenceable
customer base is of critical importance in marketing its products to new
customers.
Pursue Multiple Distribution Channels. The Company believes that multiple
distribution channels are necessary to penetrate its target markets. The Company
is currently expanding its distribution network, including increasing its
telesales force, expanding its indirect channels within the United States and
internationally, and establishing a dedicated sales force to focus on sales to
large corporate accounts and post-sale relationship management.
Expand International Sales. The Company intends to expand its international
presence (primarily in Europe and South America) in order to address its target
markets outside of North America and to serve customers that operate on a
multi-national basis. In 1995, 1996 and 1997, approximately 5%, 7% and 11%,
respectively, of the Company's total revenues were derived from sales outside of
North America (primarily in Europe). In 1998, the Company plans to significantly
increase its investment in sales and marketing efforts directed toward
international markets.
Pursue Strategic Relationships. The Company is seeking to form relationships
with leading providers of products and services complementary to the Company's
offerings. The Company believes that these relationships will provide both a
valuable source of sales leads and an alternative source of implementation
services. The Company also believes that these relationships will be beneficial
in exposing its products to new markets and prospective customers. The Company
has recently entered into strategic alliances with UNIFI Communications, Inc.,
Xpedite Systems, Inc., and Cable and Wireless, Inc., providers of enhanced fax
carrier services, and with Active Voice Corporation and Lucent/Octel, providers
of PC-based voice mail systems and computer-telephony integration solutions. The
Company has also been named a unified messaging partner by Digital Equipment
Corp. Additionally, Omtool has recently entered into strategic partnership
agreements with Hewlett Packard, a provider of network scanning/fax machines,
and Cardiff Software, Inc., a supplier of automated data collection solutions.
Pursue Acquisitions. A key element of the Company's growth strategy is to
augment its internal growth with the acquisitions of businesses, products and
technologies that could complement or expand the Company's business. On December
5, 1997, the Company completed its acquisition of all of the outstanding share
capital of CMA Ettworth Limited, a provider of fax solutions for the IBM AS/400
market, providing the Company with a European presence as
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well as extending the Company's enterprise solution capabilities into the IBM
AS/400 platform. On February 19, 1998, the Company acquired all of the
outstanding capital stock of Desktop Paging Software, Inc., a provider of
wireless messaging software, and on February 27, 1998, the Company acquired all
of the outstanding capital stock of TRS Technologies, Inc., a provider of LAN
fax and cost recovery systems for law firms. See "Factors Affecting Future
Performance."
Products and Services
Fax Sr.
Fax Sr. is a client/server software solution for automating and integrating
fax communication throughout the enterprise. As an integrated component of an
enterprise software system, Fax Sr. is designed to be deployed on heterogeneous,
multi-platform networks and to integrate with desktop and enterprise software
applications. Fax Sr. is licensed typically on a shrink-wrap basis, primarily on
the Windows NT, Sun Solaris, HP UNIX and DEC UNIX and VMS server operating
systems. In 1997, approximately 93% of the Company's software license revenues
were derived from Fax Sr. NT. Fax Sr. can be configured with a variety of
networked clients, including Windows NT, Windows 95, Windows 3.1.x, Internet
browsers, Macintosh and MS-DOS.
The Company has versions of Fax Sr. for use on the Windows NT, Sun
Solaris, HP UNIX and DEC UNIX and VMS operating systems. Fax Sr. NT was first
released in March 1995 and the current version, 2.6, was released in March
1998. Fax Sr. VMS was first released in 1993 and the current version, 4.1,
was released in March 1997. Fax Sr. UNIX was first released in 1994 and the
current version, 4.2, was released in June 1997.
Fax Sr. is comprised of three main components: Fax Sr. Client, Fax Sr. Server
and Fax Sr. Manager. The Fax Sr. Client allows users to send and receive faxes
directly from the desktop or enterprise application. The Fax Sr. Server controls
the function of prioritizing, queuing, and transmitting outbound faxes, while
receiving and distributing inbound faxes. The Fax Sr. Manager allows for remote
monitoring, control, and analysis of fax user activity from any Windows or
Windows NT system that is connected to the network.
Fax Sr. offers a comprehensive feature set with functionality important to
users, business managers and IT professionals. Fax Sr. users can fax documents,
together with attachments, from any desktop application through the
application's print function. Alternatively, faxes may be transmitted or
received directly through e-mail. Users can create and revise shared, public and
private phonebooks for fax transmissions. Fax Sr. offers a fax broadcast
capability with immediate or delayed transmission to take advantage of off-peak
telephone line utilization and charges. Inbound faxes can be directed to a
printer, desktop personal computer or e-mail. Fax Sr. also offers remote access,
including send and receive capability, for users who are away from the office.
Fax Sr. provides tools that allow business managers and IT professionals to
effectively manage the fax communication process. Outbound faxes can be
scheduled on the individual user level and enhanced management security and
control capabilities are provided by furnishing password protection as well as
user and location restrictions. Through global routing, Fax Sr. can least cost
route fax transmissions between servers, over an organization's WAN or the
Internet, allowing long distance fax transmissions to be made as local phone
calls. Fax Sr. also offers sophisticated tools for facsimile usage analysis,
including comprehensive recordkeeping of inbound and outbound faxes. The entire
Fax Sr. environment can be managed, configured and controlled from one or more
remote workstations.
Fax Sr. can be automatically linked to enterprise data processing
applications on multiple platforms connected on an enterprise's network. Fax Sr.
provides an integrated faxing environment across an organization's computer
platforms, including both servers and desktops. Fax Sr. is scaleable as a
business' need for faxing solutions expands.
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Fax Sr. NT provides incremental functionality to the feature set available on
all versions of the Fax Sr. product. Fax Sr. NT is fully integrated with
Microsoft Exchange, Lotus Notes, and other e-mail systems. It enables business
managers to pre-approve outbound faxes on an individual user level. Fax Sr. NT
supports multiple e-mail systems and allows users to fax native file attachments
via server side rasterization of multiple desktop application formats. Fax Sr.
NT includes the capability of routing fax transmissions through third-party
service providers, Internet browser client support (including JAVA and ActiveX
content) and OCR (optical character recognition) for inbound routing.
With the acquisition of CMA Ettworth Limited, the Company expanded its
position in the enterprise facsimile software market to the IBM AS/400
platform.
The Company's Fax Sr. product is licensed to its customers on a per server
basis. Pricing is based on the number of servers and facsimile telephone
lines deployed. The software list price for a deployment of one NT server,
unlimited clients and four telephone lines is approximately $6,500. The
software list price for a deployment of one NT server, unlimited clients and
eight telephone lines is approximately $8,500. The software list price for a
deployment with one NT server, unlimited clients and a T1 line, containing 24
telephone lines, is approximately $16,500.
Hardware
The Company also resells certain hardware products, including intelligent fax
boards and fax modems, to its customers. Hardware sales are undertaken as a
convenience to Fax Sr. customers, and hardware is neither bundled with Fax Sr.
nor required to be purchased from the Company. Omtool primarily resells
intelligent fax boards from vendors such as Brooktrout Technology and Dialogic.
Customer Service
To aid in the successful deployment of the Company's products by its
customers, the Company's customer service organization provides technical
support. For an additional fee at the time of the initial licensing of the Fax
Sr. product, the Company provides support services to its customers for a period
of 12 months, including telephone support, notification of product upgrades,
minor product upgrades, functional releases and maintenance releases, technical
bulletins and replacement of damaged media. Support services may be renewed by
the customer on an annual basis. The Company currently provides annual support
services based on a percentage of its product license fee. Although to date the
Company has not provided consulting, configuration and installation services to
any significant degree, the Company intends to offer these customer services in
the future as warranted by customer demand. There can be no assurance, however,
as to the time of introduction or level of market acceptance of, or revenue
generated from, any such services. In the event that the Company devotes
significant financial and other resources to the provision of such services and
fails to achieve market acceptance and generate revenue, the Company's business,
financial condition and results of operations could be materially adversely
affected.
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Other Products
As a result of the Company's acquisition of Desktop Paging Software, Inc.
and TRS Technologies, Inc., the Company's product line has expanded. Desktop
Paging software, both client/server and stand alone, provides users with
instant access to paging from within his or her applications. TRS/Legal Fax
delivers vertical market capability for faxing in the legal field. These new
products will be integrated with the Company's current products as well as
sold through the distribution channels presently used for sales of Fax Sr.
In 1995, the Company acquired the right to license and support certain
document management and imaging software products. The Company provides
technical support for customers in exchange for support contract revenues, but
does not market these products to new customers. The Company believes that the
expertise gained in supporting the document management and imaging business can
be used to provide enhancements to its core Fax Sr. product. Revenues from the
licensing and support of these products accounted for approximately 9% and 2% of
the Company's total revenues in 1996 and 1997 respectively, and the Company does
not expect this source of revenues to increase in the future.
Sales and Marketing
The Company targets large and mid-sized corporations, organizations and
government entities as the primary market for its Fax Sr. product line. To
address the broad range of its sales opportunities, the Company relies on the
coordinated efforts of its centralized telesales organization, its key
executives and corporate account team, the Company's marketing department and
its indirect channels, including resellers, international distributors and
systems integrators. The Company is presently expanding its sales
organization.
The telesales group qualifies and pursues sales leads generated by
Omtool's marketing organization. The Company has historically conducted its
telesales operation from its corporate headquarters in Salem, New Hampshire
and intends to maintain the telesales function at this location. Direct sales
by the Company accounted for approximately 89%, 76% and 70%, respectively, of
the Company's total revenues in 1995, 1996 and 1997.
Within North America, the Company also offers its Fax Sr. product line
through indirect sales channels such as VARs, systems integrators and
resellers of complementary hardware products. While product sales may be
handled by third parties, to date all customer service contracts have been
maintained directly by the Company. The Company plans to expand the number of
resellers in North America selling Fax Sr. and anticipates the percentage of
its revenues derived from indirect channels will therefore increase.
Outside of North America, the Company primarily utilizes independent
distributors to promote, license and support its products. Omtool's
distributor strategy is to engage large-volume distributors of software
products to serve customers that operate on a multi-national basis. The
Company expects to market Fax Sr. through independent distributors in
strategic markets including Europe and South America. In 1995, 1996 and 1997,
sales outside of North America represented 5%, 7% and 11%, respectively, of
total revenues.
In support of its sales organization, the Company conducts comprehensive
marketing programs intended to promote and create awareness of the Company's
products and position the Company in the enterprise, client/server facsimile
software market. These efforts include product advertising, public relations,
trade show participation, educational seminar series, direct mail and
telemarketing campaigns and participation in industry programs and forums.
Strategic Relationships
An element of the Company's strategy is the creation and development of
strategic relationships with key industry participants, including leading
providers of products and services complementary to the Company's offerings.
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The Company's goals in establishing these relationships are to create marketing
alliances with entities that will endorse and promote the Company's products to
a larger potential customer base and to assist the Company in developing a
supply of aftermarket service providers, thereby leveraging the Company's
resources and enhancing its reach.
The Company has recently entered into strategic alliances with UNIFI
Communications, Inc. Xpedite Systems, Inc. and Cable and Wireless, Inc.,
providers of enhanced fax carrier services, and with Active Voice Corporation
and Lucent/Octel, providers of PC-based voice mail systems and
computer-telephony integration solutions. The agreements generally provide
for reference sales, limited co-marketing activities and, in the case of
UNIFI Communications, Inc. and Active Voice Corporation, resale of Fax Sr.
These agreements are mutually non-exclusive.
Customers
As of December 31, 1997, the Company had more than 2,000 customers
worldwide. The Company's customer base reflects the cross-industry
applicability of the Company's products and services.
In 1995, Dow Chemical accounted for approximately 11% of total revenues.
No single customer accounted for 10% or more of total revenues in 1996 or
1997.
Research and Development
The Company has made substantial investments in research and development.
The Company believes its future performance will depend in large part on its
ability to enhance its current product line, maintain technological
competitiveness and meet an expanding range of customer requirements. Omtool
deploys its development engineers in product teams which focus on the
concurrent development of a range of product enhancements that leverage Fax
Sr.'s modular product architecture. Omtool's product development efforts are
focused on continued enhancement of existing products, development of new
features, integration of acquired products and exploration of emerging
technologies. The Company also continually reviews opportunities to form
alliances with third-party vendors of complementary technologies and products
in order to enhance the functionality of the Fax Sr. product family. In the
future, the Company may, based on timing and cost considerations, continue to
explore opportunities to license or acquire technologies or products from
third parties.
The Company is seeking and will continue to seek to hire additional
skilled development engineers. Such engineers are likely to be in short
supply, and the Company's business, financial condition and results of
operations could be adversely affected if it encounters delays in hiring or
fails to retain the required skilled engineers. The Company's research and
development expense for 1995, 1996 and 1997 was approximately $893,000,
$1,973,000 and $3,468,000, respectively. Since its inception, the Company has
not capitalized any research and development costs. The Company plans to
continue to make significant investments in research and development,
primarily through the hiring of additional skilled engineers and independent
contractors.
Competition
The enterprise, client/server facsimile solution market is intensely
competitive and rapidly changing and the Company expects competition to
continue to increase. The Company believes its ability to compete
successfully depends upon a number of factors both within and beyond its
control, including product performance, reliability and features; ease of
use; product scaleability; quality of support services; price/performance;
timeliness of enhancements and new product releases by the Company and its
competitors; the emergence of new computer-based facsimile products and
standards; name recognition; the establishment of strategic alliances with
industry leaders; and industry and general economic trends.
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The Company competes directly with a large number of vendors of facsimile
products, including providers of facsimile software products for
client/server networks such as RightFAX Inc. (a subsidiary of Applied Voice
Technology, Inc.), Fenestrae BV, Optus Software Inc. and Biscom, Inc. The
Company also competes with providers offering a range of alternative
facsimile solutions including operating systems containing facsimile and
document e-mail features; low-end fax modem products; providers of desktop
fax software; single-platform facsimile software products; and customized
proprietary software solutions. In addition, providers of operating systems
or business software applications may bundle competitive facsimile solutions
as part of their broader product offerings.
Many of Omtool's competitors have longer operating histories and greater
financial, technical, sales, marketing and other resources, as well as
greater name recognition and market acceptance of their products and
technologies than the Company. In addition, there are relatively low barriers
to entry in the markets in which the Company operates, and new competition
may arise either from expansion by established companies or from new emerging
companies or from resellers of the Company's products. There can be no
assurance that current or potential competitors of Omtool will not develop
products comparable or superior in terms of price and performance features to
those developed by the Company, adapt more quickly than the Company to new or
emerging technologies and changes in market opportunities or customer
requirements, establish alliances with industry leaders, or take advantage of
acquisition opportunities more readily than the Company. In addition, no
assurance can be given that the Company will not be required to make
substantial additional investments in connection with its research,
development, engineering, marketing, sales and customer service efforts in
order to meet any competitive threat, or that the Company will be able to
compete successfully in the future. Increased competition will result in
reductions in market share, pressure for price reductions and related
reductions in gross margins, any of which could materially and adversely
affect the Company's ability to achieve its financial and business goals.
There can be no assurance that in the future the Company will be able to
successfully compete against current and future competitors.
Proprietary Rights
The Company regards its software as a trade secret and attempts to protect
it with a combination of copyright and trade secret laws, and employee
nondisclosure and assignment of invention agreements. The Company has no
patents or patents pending, and to date has not registered any copyrights or
trademarks. The Company generally licenses its products under "shrink-wrap"
licenses (i.e., licenses included as part of the product packaging).
Shrink-wrap licenses are not negotiated with or signed by individual
licensees, and purport to take effect upon the opening of the product
package. Certain provisions of such licenses, including provisions protecting
against unauthorized use, copying, transfer and disclosure of the licensed
program, may be unenforceable under the laws of many jurisdictions. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult, and although the Company is
unable to determine the extent to which piracy of its products exists, such
piracy can be expected to be a persistent problem, particularly in
international markets. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as the laws of
the United States. There can be no assurance that these protections will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.
There has been substantial litigation in the software industry involving
intellectual property rights. There can be no assurance that claims of
infringement of intellectual property rights will not be asserted against the
Company and, if asserted, would not have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, inasmuch as the Company licenses certain components of its Fax Sr.
product from third parties, its exposure to copyright and other infringement
actions may increase because the Company must rely on such third parties for
information as to the origin and ownership of such licensed components. In
the future, litigation may be necessary to enforce and protect trade secrets,
copyrights and other intellectual property rights of the Company. The Company
may also be subject to litigation to defend against claimed infringement of
the rights of others or to determine
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the scope and validity of the intellectual property rights of others. Any such
litigation could be costly and divert management's attention, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such litigation
could result in the loss of the Company's proprietary rights, subject the
Company to significant liabilities, require the Company to seek licenses from
third parties or prevent the Company from selling its products, any one of which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Employees
As of December 31, 1997, the Company employed 151 persons. The Company is
not subject to any collective bargaining agreements, has never experienced a
work stoppage and considers its relations with its employees to be good.
Item 2. Properties
The Company's executive offices are located in Salem, New Hampshire in a
leased facility consisting of approximately 30,000 square feet. The lease
expires on December 31, 2002, and the Company has an option to extend the
lease for a period of three years thereafter. The Company believes that such
facilities are adequate for its present operations. The Company, however,
expects in the future to expand into additional facilities. The Company also
leases additional facilities and offices for sales, customer service,
development, and support in Florida, Oregon, Paris, France and London,
England.
Item 3. Legal Proceedings
The Company is a defendant from time to time in lawsuits incidental to its
business. The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been traded on The Nasdaq Stock Market
under the symbol OMTL since August 8, 1997, the date of the Company's initial
public offering of Common Stock. Prior to August 8, 1997, there was not
public market for the Company's Common Stock. The following table sets forth
for the periods indicated the high and low bid prices for the Common Stock
as reported by The Nasdaq Stock Market based on actual sales price.
<TABLE>
<CAPTION>
Stock Price 1997
----------------
Quarter ended: High Low
---- ---
<S> <C> <C>
September 30, 1997................................. $15 $9 1/4
December 31, 1997.................................. $14 3/4 $8 1/4
</TABLE>
On March 27, 1998, the closing price for the Common Stock was $13.00 per
share. As of March 27, 1998, there were approximately 67 stockholders of
record. The Company believes that shares of the Company's Common Stock held
in bank, money management, institution and brokerage house "nominee" names
may account for at least an estimated 1,263 additional beneficial holders.
The Company has not paid any cash dividends on its capital stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
intends to retain any earnings or other cash resources to finance future
growth of its business. Any future determinations to pay cash dividends will
be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's results of operations, financial condition and
other factors deemed relevant by the Board of Directors.
Item 6. Selected Consolidated Financial Data
The consolidated statement of operations data set forth below for each of
the fiscal years ended December 31, 1995, 1996 and 1997 and the consolidated
balance sheet data as of December 31, 1996 and 1997 have been derived from
the Company's consolidated financial statements, which statements have been
audited by Arthur Andersen LLP, independent public accountants, and are
included herein. The consolidated balance sheet data at December 31, 1995 and
1994 are derived from the Company's financial statements, which statements
have been audited by Arthur Andersen LLP and are not included herein. The
data presented as of and for the years ended December 31, 1993 are derived
from the Company's unaudited financial statements which are not included
herein. In the opinion of management, all unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the data for such periods. The selected financial
data set forth below should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and with Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere herein.
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<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Software license ....................... $902 $1,486 $2,780 $5,304 $12,666
Hardware ............................... 101 124 278 1,533 3,998
Service and other ...................... 71 338 870 1,564 2,704
----- ------ ------ ------ -------
Total revenues ................... 1,074 1,948 3,928 8,401 19,368
----- ------ ------ ------ -------
Cost of revenues:
Software license ....................... 9 35 104 109 519
Hardware ............................... 92 114 209 1,084 2,632
Service and other ...................... 81 130 319 816 1,266
----- ------ ------ ------ -------
Total cost of revenues ........... 182 279 632 2,009 4,417
----- ------ ------ ------ -------
Gross profit ..................... 892 1,669 3,296 6,392 14,951
----- ------ ------ ------ -------
Operating expenses:
Sales and marketing .................... 499 649 1,236 2,824 6,919
Research and development ............... 208 414 893 1,972 3,468
General and administrative ............. 350 721 750 950 1,689
Write-off of purchased, in-process
research and development .............. -- -- -- -- 6,680
Write-off of intangible asset .......... -- 200 -- -- --
----- ------ ------ ------ -------
Total operating expenses ......... 1,057 1,984 2,879 5,746 18,756
----- ------ ------ ------ -------
Income (loss) from operations ............ (165) (315) 417 646 (3,805)
Interest income (expense), net ........... (2) 12 (1) 32 413
----- ------ ------ ------ -------
Income (loss) before provision
(benefit) for income taxes ............... (167) (303) 416 678 (3,392)
Provision (benefit) for income taxes ..... -- (70) -- 238 990
----- ------ ------ ------ -------
Net income (loss) ........................ $(167) $(233) $416 $440 $(4,382)
===== ====== ====== ====== =======
Net income (loss) per share (1)
Basic ................................. $0.07 $0.07 $(0.56)
====== ====== =======
Diluted ............................... $0.07 $0.05 $(0.56)
====== ====== =======
Weighted average number of common
shares outstanding (1)
Basic ................................. 6,400 5,917 7,820
====== ====== =======
Diluted ............................... 6,400 9,700 7,820
====== ====== =======
<CAPTION>
December 31,
-----------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ................ $39 $20 $551 $2,042 $2,210
Working capital (deficit) ................ (210) (305) (50) 3,313 24,335
Total assets ............................. 529 449 1,575 6,495 32,593
Long-term debt, net of current portion ... 3 -- 21 212 --
Convertible redeemable preferred stock ... -- -- -- 5,167 --
Total stockholders' equity (deficit) .... (171) (405) 11 (1,467) 26,645
</TABLE>
- ----------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies;
(ii) anticipated trends in the Company's
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<PAGE>
business; (iii) the Company's ability to expand its product and service
offerings; and (iv) the Company's ability to satisfy working capital
requirements. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control. Actual
results could differ materially from these forward-looking statements as a
result of a number of factors including, but not limited to, those factors
described in "Certain Factors Affecting Future Operating Results."
Overview
Omtool designs, develops, markets and supports open, client/server facsimile
software, delivering solutions which automate and integrate fax communication
throughout the enterprise. The Company was incorporated in March 1991 and
shipped its initial facsimile software products in 1991. The Company's revenues
are primarily derived from licensing the rights to use its Fax Sr. software
product directly to end users and indirectly through resellers. The Company
first achieved profitability for the year ended December 31, 1992 and has been
profitable, excluding a one time charge for purchased, in-process research and
development, for the last twelve quarters.
Revenues from software licenses are recognized upon shipment of the software
if there are no significant post-delivery obligations and collection of the
resulting receivable is deemed probable. Payments received in advance for
services or products are initially recorded as deferred revenue. The Company
provides a 30-day money back guarantee for its Fax Sr. product and reserves for
potential product returns and allowances at the time of shipment. Historically,
the Company has adequately reserved for such potential returns and allowances
The Company is dependent on licenses of its Fax Sr. NT product, first
licensed in March 1995, for substantially all of its revenues. In the years
ended December 31, 1997 and 1996, approximately 93% and 82%, respectively, of
the Company's software license revenues were derived from Fax Sr. NT. In
addition, substantially all of the Company's hardware and service and other
revenue is dependent on such licenses of Fax Sr. NT.
The Company also derives revenues from the sale of hardware products such as
intelligent fax boards and fax modems. Hardware sales are undertaken as a
convenience to Fax Sr. customers and hardware is neither bundled with Fax Sr.
nor required to be purchased from the Company. Omtool primarily resells
intelligent fax boards from vendors such as Brooktrout Technology and Dialogic.
The Company purchases these hardware products as needed to ship to its customers
and the Company maintains a minimal inventory of these hardware products.
Revenue for hardware products is recognized upon shipment of the product.
Service and other revenues have consisted primarily of the sale of support
contracts. Revenue from support contracts is recognized ratably over the term of
the support contract period, which is typically one year. Although to date the
Company has not provided consulting, configuration and installation services,
the Company intends to offer these customer services in the future as warranted
by customer demand.
The Company has historically derived substantially all of its total revenues
from sales within North America. Sales outside of North America (primarily in
Europe) represented approximately 11%, 7% and 5% of the Company's total revenues
in 1997, 1996 and 1995, respectively. The Company's gross profit on these sales
approximates the gross profit on sales within North America. The Company's
strategy is to expand its international presence (primarily in Europe and South
America) and to increase its investment in sales and marketing efforts directed
toward international markets. See "CMA Ettworth Acquisition". There can be no
assurance that the Company will be able to maintain or increase international
sales of its products, and the failure to do so may have a material adverse
effect on the Company's business, financial condition and results of operations.
Historically, the Company had marketed and sold its products principally
through its direct telesales force. During 1996, the Company began actively
recruiting VARs, systems integrators, resellers and distributors to expand its
indirect
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<PAGE>
distribution channel. As a result, sales through the Company's indirect
distribution channels increased from 11% of total revenues in 1995 to 24% of
total revenues in 1996 to 30% of total revenues for the year 1997.
CMA Ettworth Acquisition
On December 5,1997, the Company acquired all of the outstanding shares of
capital stock of CMA Ettworth Limited ("CMA Ettworth"). As a result of the CMA
Ettworth acquisition, the Company acquired the CMA Ettworth Telex/Fax/400
software products for the IBM AS/400 market including related know-how and
goodwill. The purchase price was paid in a combination of 363,637 newly issued
shares of common stock, $.01 par value of the Company and $4 million in cash.
The cash used by the Company to fund the acquisition was derived primarily from
the proceeds of the Company's initial public offering, which became effective on
August 7, 1997. The acquisition was accounted for as a purchase, in
accordance with Accounting Principles Board (APB) Opinion No. 16, Business
Combinations. Based on an independent appraisal, a substantial portion of the
purchase price, net liabilities of CMA Ettworth and transaction costs was
allocated to purchased in-process research and development for which the
Company incurred a one time charge against earnings of approximately $6.7
million in the quarter ended December 31, 1997. CMA Ettworth is headquartered
in London, England, with offices in Paris, France and Melbourne, Florida, and
designs, markets and supports facsimile software solutions for the IBM AS/400
market.
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software license ................. 65.4% 63.1% 70.8%
Hardware ......................... 20.6 18.3 7.1
Service and other ................ 14.0 18.6 22.1
----- ----- -----
Total revenues ............... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software license ................. 2.7 1.3 2.7
Hardware ......................... 13.6 12.9 5.3
Service and other ................ 6.5 9.7 8.1
----- ----- -----
Total cost of revenues ....... 22.8 23.9 16.1
----- ----- -----
Gross profit ....................... 77.2 76.1 83.9
----- ----- -----
Operating expenses:
Sales and marketing .............. 35.7 33.6 31.5
Research and development ......... 17.9 23.5 22.7
General and administrative ....... 8.7 11.3 19.1
Write-off of purchased,
in-process research and
development ..................... 34.5 -- --
----- ----- -----
Total operating expenses ..... 96.8 68.4 73.3
----- ----- -----
Income (loss) from operations ...... (19.6) 7.7 10.6
Interest income, net ............... 2.1 0.4 --
----- ----- -----
Income (loss) before provision
for income taxes ................. (17.5) 8.1 10.6
Provision for income taxes ......... 5.1 2.9 --
----- ----- -----
Net income (loss) .................. (22.6%) 5.2% 10.6%
===== ===== =====
Gross profit:
Software license ................. 95.9% 97.9% 96.3%
Hardware ......................... 34.2 29.3 24.7
Service and other ................ 53.2 47.8 63.4
</TABLE>
-15-
<PAGE>
Fiscal years Ended December 31, 1997 and 1996
Revenues
Total Revenues. The Company's revenues are currently derived primarily from
fees from licensing of the Company's software products and, to a lesser extent,
from related sales of hardware and services. The Company's total revenues were
$19.4 million and $8.4 million for the year ended December 31, 1997 and 1996,
respectively, representing an increase of 131%.
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 $12.7 million for the year ended December 31, 1997 and $5.3
million for the year ended December 31, 1996, or 65% and 63% of total revenues
for each respective period, representing an increase of 139%. The increase in
dollar amount was primarily due to increased market acceptance of the Company's
Fax Sr. product for the Windows NT operating system, as well as expansion of the
Company's direct telesales force and indirect sales channels.
Hardware. Hardware revenues are derived from the resale of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. Hardware revenues were $4.0 million for the
year ended December 31, 1997 and $1.5 million for the year ended December 31,
1996, or 21% and 18% of total revenues for each respective period, representing
an increase of 161%. The increase in hardware revenues was due primarily to the
increase of hardware unit sales accompanying increased licenses of Fax Sr. and a
change in the sales mix of third-party hardware products from lower priced modem
products to high-end multi-channel modem boards.
Service and Other. Service and other revenues are primarily comprised of
fees from maintenance contracts. Service and other revenues were $2.7 million
and $1.6 million for 1997 and 1996 respectively, or 14% and 19% of total
revenues for each respective period, representing an increase of 73%. 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 $519,000 and $109,000 in 1997
and 1996, respectively, representing 4% and 2% of software license revenues for
each respective period. The increase in dollar amount was primarily due to the
higher volume of products shipped during the fiscal year 1997 compared to the
same period in 1996. Software license gross margin percentages remained
relatively constant at 96% for year ended December 31, 1997 compared to 98% in
1996.
Hardware. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $2.6 million and
$1.1 million in 1997 and 1996, respectively, representing 66% and 71% of
hardware revenues for each respective period. The increase in dollar amount for
the cost of hardware revenues for the fiscal year ended December 31, 1997 was
due primarily to increased unit sales of hardware products accompanying licenses
of Fax Sr. and a change in the sales mix of third-party hardware products from
less expensive modem products to high-end multi-channel modem boards. The gross
margin percentage for hardware sales increased to 34% for 1997 from 29% in 1996
due to the change in the hardware sales mix.
Service and Other. Cost of service and other revenues consists primarily of the
costs incurred in providing telephone support as well as other miscellaneous
customer service-related expenses. Cost of service and other revenues was $1.3
million and $816,000 in 1997 and 1996, respectively, representing 47% and 52% 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
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<PAGE>
primarily to the higher volume of products shipped during the year ended
December 31, 1997 and the hiring of incremental personnel to support such
growth. The gross margin percentage for service and other revenues increased to
53% from 48% for the fiscal year ended 1997 as compared to 1996.
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 $6.9 million and $2.8 million in 1997 and 1996, respectively, or 36% and
34% of total revenues for each respective period. The increase in dollar amount
and the increase in sales and marketing expenses as a percentage of total
revenues was primarily due to the Company's effort to expand its direct
telesales force and marketing organization, higher sales commissions associated
with increased revenues, and increased marketing program activities. 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 $3.5 million and $2.0 million in 1997 and 1996, respectively, or 18% and
24% of total revenues for each respective period. The increase in dollar amount
was primarily attributable to the employment of additional staff and independent
contractors to develop and enhance the Company's products and provide quality
assurance. The Company expects research and development expenses will continue
to increase in absolute terms.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive and
finance personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses were $1.7
million and $950,000 in 1997 and 1996, respectively, or 9% and 11% of total
revenues for each respective period. The increase in dollar amount was primarily
attributable to an increase in personnel and the overhead costs allocated to
support such personnel. General and administrative expenses decreased as a
percentage of total revenues as the Company continued to realize operating
leverage from its established infrastructure. The Company expects general and
administrative expenses will continue to increase in absolute terms.
Write-off of Purchased, In-process Research and Development. In connection
with the acquisition of CMA Ettworth, the Company expensed $6,680,000 of
in-process research and development costs that did not have a future alternative
use during the quarter ending December 31, 1997. See Note 3 of Notes to
Consolidated Financial Statements.
Interest Income (Expense), Net. Interest income (expense), net consists
principally of interest earned on cash, cash equivalents, and short-term
investments, offset by interest expense associated with equipment financing and
borrowings. Interest income (expense), net represented income of $413,000 for
the fiscal year ended December 31, 1997, due primarily to interest income earned
on excess cash from the proceeds of the Company's initial public offering which
was completed in August 1997.
Provision for Income Taxes. The provision for income taxes was $990,000 and
$238,000 for fiscal year ended December 31, 1997 and 1996. The effective income
tax rate in 1997 was approximately 30%, calculated based on pre-tax income
before a non-deductible charge for purchased, in-process research and
development, of $6,680,000 in 1997. The effective income tax rate was 35% in
1996. Income taxes in 1997 were 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.
Years Ended December 31, 1996 and 1995
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<PAGE>
Revenues
Total Revenues. The Company's total revenues were $8.4 million and $3.9
million in 1996 and 1995, respectively, representing an increase of 114%.
Software License. Software license revenues were $5.3 million in 1996 and
$2.8 million in 1995, or 63% and 71% of total revenues for each respective
period, representing an increase of 91%. The increase in dollar amount was
primarily due to increased market acceptance of the Company's Fax Sr. product
for the Windows NT operating system, as well as expansion of the Company's
direct telesales force and indirect sales channels.
Hardware. Hardware revenues were $1.5 million in 1996 and $278,000 in 1995,
or 18% and 7% of total revenues for each respective period, representing an
increase of 451%. The increase in hardware revenues was due primarily to the
increase of hardware unit sales accompanying increased licenses of Fax Sr. and a
change in the sales mix of third-party hardware products from lower priced modem
products to high-end multi-channel modem boards.
Service and Other. Service and other revenues were $1.6 million in 1996 and
$870,000 in 1995, or 19% and 22% of total revenues for each respective period,
representing an increase of 80%. The increase in dollar amount was due primarily
to the increase in maintenance and maintenance renewals as a result of a larger
installed customer base.
Cost of Revenues
Software License. Cost of software license revenues were $109,000 and
$104,000 in 1996 and 1995, respectively, representing 2% and 4% of software
license revenues for each respective period. The increase in dollar amount was
primarily due to the higher volume of products shipped during 1996 compared to
1995. Software license gross margin percentages remained relatively constant at
98% in 1996 compared to 96% in 1995.
Hardware. Cost of hardware revenues were $1.1 million and $209,000 in 1996
and 1995, respectively, representing 71% and 75% of hardware revenues for each
respective year. The increase in dollar amount was due primarily to increased
unit sales of hardware products accompanying licenses of Fax Sr. and a change in
the sales mix of third-party hardware products from less expensive modem
products to high-end multi-channel modem boards. The gross margin percentage for
hardware sales increased to 29% in 1996 from 25% in 1995 due to the change in
the hardware sales mix.
Service and Other. Cost of service and other revenues were $816,000 and
$319,000 in 1996 and 1995, respectively, representing 52% and 37% of service and
other revenues for each respective year. The increase in dollar amount was due
primarily to the higher volume of products shipped during 1996 and the hiring of
incremental personnel to support such growth. The gross margin percentage for
service and other revenues decreased to 48% in 1996 from 63% in 1995 due
primarily to the increase in the number of customer support personnel and
related overhead costs necessary to support a larger installed customer base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $2.8 million and
$1.2 million in 1996 and 1995, respectively, or 34% and 32% of total revenues
for each respective period. The increase in dollar amount and the increase in
sales and marketing expenses as a percentage of total revenues was primarily
due to the Company's effort to expand its direct telesales force and
marketing organization, higher sales commissions associated with increased
revenues, and increased marketing program activities.
Research and Development. Research and development expenses were $2.0 million
and $893,000 in 1996 and 1995, respectively, or 24% and 23% of total revenues
for each respective period. The increase in dollar amount was primarily
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<PAGE>
attributable to the employment of additional staff and independent contractors
to develop and enhance the Company's products and provide quality assurance.
General and Administrative. General and administrative expenses were $950,000
and $750,000 in 1996 and 1995, respectively, or 11% and 19% of total revenues
for each respective period. The increase in dollar amount was primarily
attributable to an increase in personnel and the overhead costs allocated to
support such personnel. General and administrative expenses decreased as a
percentage of total revenues as the Company continued to realize operating
leverage from its established infrastructure.
Interest Income (Expense), Net. Interest income (expense), net represented
income of $32,000 in 1996 and expense of $1,000 in 1995. The increase in
interest income (expense), net was due primarily to interest income earned on
excess cash from the proceeds of the Company's 1996 private placements of its
preferred stock.
Provision for Income Taxes. The provision for income taxes was $238,000 in
1996, resulting in an effective tax rate of approximately 35%. This rate is
lower than the combined state and federal rates due to the utilization of net
operating loss carryforwards and tax credits. Net operating loss carryforwards
were used to offset all federal and state income taxes in 1995.
Liquidity and Capital Resources
Since 1995, 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. In August
1996, the company entered into a loan and security agreement with a bank that
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. No amounts have
been borrowed under the line of credit in 1997 or 1996. At December 31, 1997, no
amount was outstanding under the term loan, as the Company paid the remaining
balance due with the proceeds of the initial public offering. The line of
credit expired in August 1997. At December 31, 1997 the Company had cash and
cash equivalents of $2.2 million, short-term investments of $21.2 million,
and working capital of $24.6 million.
The Company's operating activities provided cash of $1.3 million for the year
ended December 31, 1997 and used cash of $566,000 in the year ended December 31,
1996. Investing activities used cash of $25.2 million and $1.4 during the twelve
months ended December 31, 1997 and 1996, respectively. During the year ended
December 31, 1997, the principal uses were purchases of short-term
investments, cash paid for the acquisition of CMA Ettworth, and purchases of
property and equipment, offset by the proceeds from the sale of short-term
investments. During the year ended December 31, 1996, the principal uses were
purchases of short-term investments and purchases of property and equipment.
Financing activities generated cash of $24.0 million for the year ended
December 31, 1997 due primarily to net proceeds from the issuance of 3,000,000
shares of Common Stock in an initial public offering which was completed in
August 1997. Financing activities generated cash of $3.5 million for the year
ended December 31, 1996 due primarily to net proceeds from the private sales of
preferred stock.
At December 31, 1997, the Company did not have any material commitments for
capital expenditures.
Subject to the factors discussed below, the Company believes that the
existing cash balances, short-term investments and cash generated from
operations will be sufficient to finance the Company's operations for the next
twelve months. Although operating activities may provide cash in certain
periods, to the extent the Company grows in the future, its
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<PAGE>
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.
Subsequent 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
Common Stock. TRS develops, markets and supports LAN fax and cost recovery
systems for law firms.
These transactions will be accounted for as pooling of interests. None of the
periods preceding December 31, 1997 will be 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.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new accounting standards will not have a material impact on the Company's
financial statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition. SOP
97-2 is effective for fiscal years beginning after December 15, 1997. The
Company believes that its revenue recognition practices are substantially
consistent with those required by SOP 97-2.
Year 2000
In 1997, Omtool began modifying its computer system programming to process
transactions in the year 2000. Anticipated spending for this modification
will be expensed as incurred and is not expected to have a significant impact
on the Company's ongoing results of operations.
Certain Factors Affecting Future Operating Results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The
discussion highlights some of the risks which may affect future operating
results.
Dependence on Fax Sr. NT and the Windows NT Environment. The Company
currently derives substantially all of its revenues from licenses of Fax Sr. NT
and related services and resale of related hardware. Broad market acceptance of
Fax Sr. NT is critical to the Company's future success. As a result, any decline
in demand for or failure to achieve broad market acceptance of Fax Sr. NT as a
result of competition, technological change or otherwise, would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future financial performance will depend in large part
on the successful development, introduction and customer acceptance of new and
enhanced versions of Fax Sr. NT. There can be no assurance that the Company will
continue to be successful in marketing Fax Sr. NT or any new or enhanced
versions of Fax Sr. NT. In addition, there can be no assurance that the Windows
NT operating system will not be replaced by a new or enhanced operating system.
There can be no assurance
-20-
<PAGE>
that the Company will be successful in developing products for new or enhanced
operating systems, or that such systems will not obviate the need for the
Company's products. If any new or enhanced operating system gains widespread use
and the Company fails to develop and provide its products for this operating
system on a timely basis, the Company's business, financial condition and
results of operations would be materially adversely affected.
Dependence on Client/Server Environment. The Company's enterprise,
client/server facsimile software products are intended to help organizations
efficiently manage their facsimile communications, utilizing a client/server
computing environment. The client/server market is relatively new and there can
be no assurance that organizations will move away from the use of stand-alone
fax machines or continue to adopt client/server environments, or that customers
of the Company that have begun the migration to a client/server environment will
broadly implement this model of computing. The Company's future financial
performance will depend in large part on continued growth in the market for
client/server applications, which in turn will depend in part on the growth in
the number of organizations implementing client/server computing environments.
There can be no assurance that these markets will continue to grow or that the
Company will be able to respond effectively to the evolving requirements of
these markets. If the market for client/server application products and services
does not grow in the future, or grows more slowly than the Company anticipates,
or if the Company fails to respond effectively to evolving requirements of this
market, the Company's business, financial condition and results of operations
would be materially adversely affected.
Intense Competition. The enterprise, client/server facsimile solution market
is intensely competitive and rapidly changing and the Company expects
competition to continue to increase. The Company believes its ability to compete
successfully depends upon a number of factors both within and beyond its
control, including product performance, reliability and features; ease of use;
product scaleability; quality of support services; price/performance; timeliness
of enhancements and new product releases by the Company and its competitors; the
emergence of new computer-based facsimile products and standards; name
recognition; the establishment of strategic alliances with industry leaders; and
industry and general economic trends.
The Company competes directly with a large number of vendors of facsimile
products, including providers of facsimile software products for client/server
networks such as RightFAX Inc. (a subsidiary of Applied Voice Technology, Inc.),
Fenestrae BV, Optus Software Inc. and Biscom, Inc. The Company also competes
with vendors offering a range of alternative facsimile solutions including
operating systems containing facsimile and document transmission features;
low-end fax modem products; desktop fax software; single-platform facsimile
software products; and customized proprietary software solutions. In addition,
providers of operating systems or business software applications may bundle
competitive facsimile solutions as part of their broader product offerings.
Many of the Company's competitors have longer operating histories and greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and market acceptance of their products and technologies than
the Company. In addition, there are relatively low barriers to entry in the
markets in which the Company operates, and new competition may arise either from
expansion by established companies or from new emerging companies or from
resellers of the Company's products. There can be no assurance that current or
potential competitors of the Company will not develop products comparable or
superior in terms of price and performance features to those developed by the
Company, adapt more quickly than the Company to new or emerging technologies and
changes in market opportunities or customer requirements, establish alliances
with industry leaders, or take advantage of acquisition opportunities more
readily than the Company. In addition, no assurance can be given that the
Company will not be required to make substantial additional investments in
connection with its research, development, engineering, marketing, sales and
customer service efforts in order to meet any competitive threat, or that such
required investments will not have a material adverse effect on operating
margins. Increased competition will result in reduction in market share,
pressure for price reductions and related reductions in gross margins, any of
which could materially adversely affect the Company's ability to achieve its
financial and business goals. There can be no assurance that in the future the
Company will be able to successfully compete against current and future
competitors.
-21-
<PAGE>
New Products and Technological Change. The market for the Company's products
is relatively new and is characterized by rapid technological change, evolving
industry standards, changes in end-user requirements and frequent new product
introductions and enhancements. The Company's future success will depend upon
its ability to enhance its current products and to develop and introduce new
products that keep pace with technological developments and respond to evolving
end-user requirements. There can be no assurance that the Company will be
successful in developing and marketing new products or product enhancements on a
timely basis, or that new products or product enhancements developed by the
Company will achieve market acceptance. The introduction of products embodying
new technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. From time to time, the Company and its competitors may
announce new products, capabilities or technologies that have the potential to
replace or shorten the life cycle of the Company's existing product offerings.
There can be no assurance that announcements of currently planned or other new
product offerings by the Company or its competitors will not cause customers to
defer or forego the licensing of the Company's existing products and have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Acquisitions. A key element of the Company's growth
strategy is to augment its internal growth with acquisitions of businesses,
products and technologies that could complement or expand the Company's
business. Certain of these businesses may be marginally profitable or
unprofitable. In order to achieve anticipated benefits from these
acquisitions, the Company must successfully integrate the acquired businesses
with its existing operations, and no assurance can be given that the Company
will be successful in this regard. The Company has limited experience in
intergrating acquired companies into its operations, in expanding the scope
of operations of required businesses, in managing geographically dispersed
operations, and in operating internationally. In the past the Company has
incurred one-time costs and expenses in connection with acquisitions and it
is likely that similar one-time costs and expenses may be incurred in
connection with future acquisitions. In addition, attractive acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the possible need to obtain
regulatory approval. There can be no assurance that the Company will be able
to complete future acquisitions. In order to finance such acquisitions, it
may be necessary for the Company to raise additional funds either through
public or private financings, including bank borrowings. Any financing, if
available at all, may be on terms which are not favorable to the Company. The
Company may also issue shares of its Common stock to acquire such businesses,
which may result in dilution to the Company's existing stockholders.
Limited Operating History. The Company was incorporated in March 1991 and
shipped its initial facsimile software products in 1991. The Company has
significantly increased its operating expenses in recent periods as it has
continued to expand its organization to support sales growth and product
development. Although the Company has experienced significant growth during
the past three years, the Company does not believe that prior growth rates
are sustainable or indicative of future operating results. There can be no
assurance that the Company will be able to increase its level of revenues or
maintain profitability in the future. Increases in operating expenses are
expected to continue and, together with pricing pressures, may result in a
decrease in operating income and operating margin percentage. The Company's
limited operating history makes the prediction of future operating results
difficult or impossible. Future operating results will depend on many
factors, including, without limitation, the degree and rate of growth of the
markets in which the Company competes and the accompanying demand for the
Company's products, the level of acceptance of the Windows NT operating
system, the level of product and price competition, the ability of the
Company to establish strategic relationships and develop and market new and
enhanced products and to control costs, the ability of the Company to expand
its direct telesales force and indirect distribution channels both
domestically and internationally, and the ability of the Company to attract
and retain key personnel.
Fluctuations in Quarterly Results of Operations; Seasonality. The Company's
quarterly revenues and results of operations have fluctuated significantly in
the past and will likely fluctuate significantly in the future. Causes of such
fluctuations have included and may include, among others, the demand for the
Company's products and services, the size and timing of orders, the number,
timing and significance of new product announcements by the Company and its
competitors, the ability of the Company to develop, introduce, market and ship
new and enhanced versions of the
-22-
<PAGE>
Company's products on a timely basis, the level of product and price
competition, changes in operating expenses, changes in average selling prices
and mix of the Company's products, changes in the Company's sales incentive
strategy, the mix of direct and indirect sales, and general economic factors. In
addition, the sale of the Company's products often involves delays because
customers have tended to implement the products on a large scale and customers
also must establish certain minimum hardware capabilities. The Company's
products therefore often have a lengthy sales cycle while the customer evaluates
and receives approvals for the purchase of the Company's products. During such
sales cycles, the Company may expend substantial funds and management effort yet
receive no revenues. It may be difficult to accurately predict the sales cycle
of any large order. If one or more large orders fails to close as forecasted in
a fiscal quarter, the Company's revenues and operating results for such quarter
could be materially adversely affected. Any one or more of these or other
factors could have a material adverse effect on the Company's business,
financial condition and results of operations. The potential occurrence of any
one or more of these factors makes the prediction of revenues and results of
operations on a quarterly basis difficult and performance forecasts derived from
such predictions unreliable.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company has historically had and expects to continue
to have weaker sales in the months of July and August which may have an adverse
affect on third quarter sales. The Company believes that these fluctuations are
caused primarily by customer budgeting and purchasing patterns.
In general, revenues are difficult to forecast because the market for
enterprise, client/server facsimile software has developed and is evolving
rapidly and the Company's sales cycle, from the customer's initial evaluation
through purchase of licenses and the related support services, varies
substantially from customer to customer. License fee revenues in any quarter
depend on orders received and shipped in that quarter. License fee revenues from
quarter to quarter are difficult to forecast, as no significant order backlog
exists at the end of any quarter because the Company's products typically are
shipped upon receipt of customers' orders.
A substantial portion of the Company's operating expense is related to
personnel, facilities, equipment and marketing programs. The level of spending
for such expense cannot be adjusted quickly and is therefore fixed in the short
term. The Company's expense levels for personnel, facilities, equipment and
marketing programs are based, in significant part, on the Company's expectations
of future revenues on a quarterly basis. If actual revenue levels on a quarterly
basis are below management's expectations, results of operations are likely to
be adversely affected by a similar amount because a relatively small amount of
the Company's expense varies with its revenue in the short term.
Due to all of the foregoing factors, it is likely that in some future periods
the Company's results of operations will be below the expectations of securities
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
Ability to Manage Growth. The Company has rapidly and significantly
expanded its operations and anticipates that significant expansion will
continue to be required in order to address potential market opportunities.
The Company anticipates that it will continue to significantly increase the
size of its sales and marketing, research and development, customer support
and administrative operations. There can be no assurance that such expansion
will be successfully completed or that it will generate sufficient revenues
to cover the Company's expenses. The Company will need to continue to attract
and retain highly qualified technical, sales and managerial personnel. There
can be no assurance that the Company will be able to retain or continue to
hire such personnel in the future. The inability of the Company to
effectively expand operations and manage growth, if any, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Expansion of Indirect Channels; Potential for Channel Conflict. The Company
markets its products and services directly through telesales and indirectly
through marketing channels such as value-added resellers ("VARs"), systems
integrators and distributors. Although the Company has historically focused its
efforts on marketing through its telesales
-23-
<PAGE>
force, the Company is increasing resources dedicated to developing and expanding
indirect marketing channels. There can be no assurance that the Company will be
able to attract and retain a sufficient number of qualified VARs, systems
integrators and distributors to market successfully the Company's products. In
addition, there can be no assurance that the Company's resellers will not
develop, acquire or market computer-based facsimile products competitive with
the Company's products. The failure to retain its VARs, systems integrators and
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations.
The distributor agreements generally provide that either party may terminate
the agreement without cause upon 30 days written notice to the other party. The
Company also resells its products on a purchase order basis through other VARs,
systems integrators and distributors. Such relationships may be terminated by
either party, at any time, and therefore, there can be no assurance that any
VAR, systems integrator or distributor will continue to represent the Company's
products. The inability to retain certain VARs, systems integrators or
distributors, or the development or marketing by VARs, systems integrators or
distributors of competitive offerings, could have a material adverse effect on
the Company's business, financial condition and results of operations.
Selling through indirect channels may limit the Company's contacts with
its customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered. The Company's strategy of marketing its products directly to
end-users and indirectly through VARs, systems integrators and distributors may
result in distribution channel conflicts. The Company's direct sales efforts may
compete with those of its indirect channels and, to the extent different
resellers target the same customers, resellers may also come into conflict with
each other. As the Company strives to expand its indirect distribution channels,
there can be no assurance that emerging channel conflicts will not materially
adversely affect its relationships with existing VARs, systems integrators or
distributors or adversely affect its ability to attract new VARs, systems
integrators and distributors.
Risks Associated with International Expansion. A key element of the
Company's strategy is to continue to increase its international sales. The
Company expects to face competition from local facsimile product providers in
their native countries. To successfully expand international sales, the
Company will need to recruit and retain additional international resellers
and distributors. In order to penetrate the international market more fully,
the Company has translated its products into several foreign languages. There
can be no assurance that the completion of such translation will allow the
Company to capitalize on the international market opportunity. There can be
no assurance that the Company will be able to maintain or increase
international sales of its products or that the Company's international
distribution channels will be able to adequately market, service and support
the Company's products. International operations generally are subject to
certain risks, including dependence on independent resellers, fluctuations in
foreign currency exchange rates, compliance with foreign regulatory and
market requirements, variability of foreign economic conditions and changing
restrictions imposed by United States export laws. Additional risks inherent
in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of
acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
difficulties in enforcing intellectual property rights and the burdens of
complying with a wide variety of foreign laws. With the acquisition of CMA
Ettworth, based in London, England, in December 1997, the Company obtained
its first sales offices outside of the United States. Such operations are
subject to certain additional risks, including difficulties in staffing and
managing such operations and potentially adverse tax consequences including
restrictions on the repatriation of earnings. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
international sales and, consequently, the Company's business, financial
condition and results of operations. To date, a majority of the Company's
sales have been made in United States dollars and the Company has not engaged
in any hedging transactions through the purchase of derivative securities or
otherwise.
-24-
<PAGE>
Dependence on Key Personnel. The Company's future performance depends, in
significant part, upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement
and only certain of whom are bound by noncompetition agreements. The loss of the
services of one or more of the Company's executive officers or other key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical, sales and managerial personnel. Competition for such personnel is
intense, and the Company has experienced difficulty in recruiting qualified
technical personnel. There can be no assurance that the Company will be able to
retain or continue to hire key technical, sales and managerial personnel in the
future. The Company currently carries a key man life insurance policy in the
amount of $1 million on each of Robert L. Voelk and Martin A. Schultz, with the
proceeds payable to the Company.
Item 8. Financial Statements and Supplementary Data
The Company's Financial Statements, together with the auditors' reports
thereon, appear at pages F-1 through F-21 and S-1 through S-2, respectively, of
this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The information concerning directors of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 1997.
Executive Officers
The information concerning officers of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended December 31, 1997.
Item 11. Executive Compensation and Other Information
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
-25-
<PAGE>
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1997.
Item 13. Certain Relationships and Related Transactions.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission within 120 days after the close of the Company's
fiscal year ended December 31, 1997.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) List of documents filed as part of this report
(1) Financial Statements
Listed under Part II, Item 8 and included herein by reference.
(2) Financial Statement Schedules
The following financial statement schedule is incorporated in this
report beginning on page S-1.
Schedule II Valuation and Qualifying Accounts.
All other schedules are not submitted because they are not
applicable, not required or because the information in included in
the Financial Statements as Notes to Financial Statements.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Company (filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1, No. 333-29397 and
incorporated herein by reference)
3.2 Amended and Restated By-laws of the Company (filed as
Exhibit 3.4 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
4.1 Specimen certificate representing the Common Stock (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
10.1 1996 Stock Option Plan (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1, No. 333-29397
and incorporated herein by reference)
10.2 1997 Stock Plan (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, No. 333-29397 and
incorporated herein by reference)
10.3 1997 Employee Stock Purchase Plan (filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
10.4 Lease dated November 26, 1997 between H.J. Brooks Limited
Liability Company and Omtool, Ltd.
</TABLE>
-27-
<PAGE>
<TABLE>
<S> <C>
10.5 Form of Omtool Software License (filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27.1 Current Financial Data Schedule
27.2 Restated Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
Current Report on Form 8-K dated December 5, 1997 reporting, under Item 2,
the Company's acquisition of all of the outstanding share capital of CMA
Ettworth Limited.
(c) Exhibits.
The exhibits required by this Item are listed under Item 14(a)(3).
(d) Financial Statement Schedules.
The financial statement schedules required by this Item are listed under
Item 14(a)(2).
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Salem,
State of New Hampshire, on the 31st day of March 1998.
Omtool, Ltd.
By: /s/ Robert L. Voelk
----------------------------
Robert L. Voelk
Chief Executive Officer and
Chairman
POWER OF ATTORNEY
We, the undersigned officers and directors of Omtool, Ltd., hereby
severally constitute and appoint Robert L. Voelk and Darioush Mardan, and each
of them singly, our true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution in each of them, to sign for us and in our
names in the capacities indicated below, and generally to do all such things in
our names and on our behalf in our capacities as officers and directors to
enable Omtool, Ltd. to comply with the provisions of the Securities Exchange Act
of 1934, as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert L. Voelk Chief Executive Officer March 31, 1998
- --------------------------- and Chairman
Robert L. Voelk (principal executive
officer)
/s/ Darioush Mardan Vice President, Finance, March 31, 1998
- --------------------------- Chief Financial Officer,
Darioush Mardan Secretary and Treasurer
(principal financial and
accounting officer)
/s/ Martin A. Schultz President and Director March 31, 1998
- ---------------------------
Martin A. Schultz
/s/ Richard D. Cramer Director March 27, 1998
- ---------------------------
Richard D. Cramer
/s/ Bruce R. Evans Director March 30, 1998
- ---------------------------
Bruce R. Evans
-29-
<PAGE>
/s/ Anthony J. Mark Director March 27, 1998
- -------------------------------
Anthony J. Mark
/s/ William C. Styslinger, III Director March 27, 1998
- -------------------------------
William C. Styslinger, III
-30-
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants .................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 .............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995 ....................................... F-4
Consolidated Statements of Convertible Redeemable Preferred
Stock and Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1996, and 1995 ....................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995 ....................................... F-6
Notes to Consolidated Financial Statements ................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Omtool, Ltd.:
We have audited the accompanying consolidated balance sheets of Omtool, Ltd.
(a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, convertible redeemable
preferred stock and stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Omtool,
Ltd. and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 2, 1998 (except
for the matter
discussed in Note 14,
as to which the date is
February 27, 1998)
F-2
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $2,210,367 $2,042,100
Short-term investments .................................................... 21,179,766 930,619
Accounts receivable, less reserves of $1,037,000 and
$375,000 in 1997 and 1996, respectively .................................. 4,727,089 2,205,464
Prepaid expenses and other current assets ................................. 1,492,763 397,498
Deferred tax asset ........................................................ 380,000 146,000
------------ ------------
Total current assets ............................................... 29,989,985 5,721,681
Property and equipment, net ................................................. 1,752,986 754,398
Other assets, net ........................................................... 850,522 18,861
------------ ------------
$32,593,493 $6,494,940
============ ============
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ......................................... $ 36,888 $ 105,651
Accounts payable .......................................................... 919,276 567,749
Accrued liabilities ....................................................... 1,808,362 402,624
Income taxes payable ...................................................... 809,991 257,369
Deferred revenue .......................................................... 2,080,736 1,037,538
------------ ------------
Total current liabilities .......................................... 5,655,253 2,370,931
------------ ------------
Deferred tax liability ...................................................... 283,000 38,000
------------ ------------
Long-term debt, net of current portion ...................................... -- 212,237
------------ ------------
Long-term liabilities ....................................................... 10,043 173,877
------------ ------------
Commitments (Note 13)
Series B Convertible Redeemable Preferred Stock, $.01 par value authorized,
issued and outstanding -- none in 1997; 1,356,116 shares in 1996
(at redemption value) .................................................. -- 5,166,667
------------ ------------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value
Authorized-- 2,000,000 shares; Issued and outstanding none ................ -- --
Series A Convertible Preferred Stock, $.01 par value
Authorized, issued and outstanding -- none in 1997; 162,500 shares in 1996
(Liquidation preference of $325,000) .................................. -- 1,625
Common Stock, $.01 par value
Authorized -- 35,000,000;
Issued and outstanding -- 11,846,140 in 1997; 5,315,008 shares in 1996 .... 118,461 53,150
Additional paid-in capital ................................................ 32,255,664 --
Accumulated deficit ....................................................... (5,736,632) (1,521,547)
Cumulative translation adjustment ......................................... 7,704 --
------------ ------------
Total stockholders' equity (deficit) ............................... 26,645,197 (1,466,772)
------------ ------------
$32,593,493 $6,494,940
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Software license ................................. $12,665,745 $5,304,083 $2,780,055
Hardware ......................................... 3,997,680 1,532,887 278,163
Service and other ................................ 2,704,407 1,564,248 869,445
------------ ----------- -----------
Total revenues ................................ 19,367,832 8,401,218 3,927,663
------------ ----------- -----------
Cost of revenues:
Software license ................................. 518,743 109,151 104,031
Hardware ......................................... 2,632,061 1,083,852 209,495
Service and other ................................ 1,265,762 815,828 318,626
------------ ----------- -----------
Total cost of revenues ........................ 4,416,566 2,008,831 632,152
------------ ----------- -----------
Gross profit .................................. 14,951,266 6,392,387 3,295,511
------------ ----------- -----------
Operating expenses:
Sales and marketing .............................. 6,918,683 2,824,287 1,235,749
Research and development ......................... 3,468,461 1,972,545 892,585
General and administrative ....................... 1,689,172 949,548 749,999
Write-off of purchased, in-process research
and development (Note 3) ....................... 6,680,000 -- --
------------ ----------- -----------
Total operating expenses ...................... 18,756,316 5,746,380 2,878,333
------------ ----------- -----------
Income (loss) from operations ................. (3,805,050) 646,007 417,178
Interest income .................................... 447,291 43,093 7,530
Interest expense ................................... (33,993) (11,437) (8,616)
------------ ----------- -----------
Income (loss) before provision for income taxes (3,391,752) 677,663 416,092
Provision for income taxes ......................... 990,000 238,000 --
------------ ----------- -----------
Net income (loss) ............................. $(4,381,752) $439,663 $416,092
============ =========== ===========
Net income (loss) per share
Basic ........................................... $(0.56) $0.07 $0.07
============ =========== ===========
Diluted ......................................... $(0.56) $0.05 $0.07
============ =========== ===========
Weighted average number of common shares
outstanding
Basic ........................................... 7,819,683 5,916,793 6,400,000
============ =========== ===========
Diluted ......................................... 7,819,683 9,699,812 6,400,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
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, 1994 ... -- $ -- -- $ -- -- $ --
Net income ............... -- -- -- -- -- --
---------- ----------- -------- ------- ----------- ---------
Balance, December 31, 1995 ... -- -- -- -- -- --
Delaware reincorporation,
exchange of no par value
for $0.01 par value
common stock ............. -- -- -- -- 6,400,000 64,000
Sale of Series A
Convertible Preferred Stock -- -- 162,500 1,625 -- --
Sale of Series B Convertible
Redeemable Preferred Stock,
net of issuance costs
of $76,068 ................ 1,356,116 5,000,000 -- -- -- --
Purchase and retirement of
common stock ............. -- -- -- -- (1,084,992) (10,850)
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock .......... -- 166,667 -- -- -- --
Net income ................... -- -- -- -- -- --
---------- ----------- -------- ------- ----------- ---------
Balance, December 31, 1996 ... 1,356,116 5,166,667 162,500 1,625 5,315,008 53,150
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
========== =========== ======== ======= =========== =========
<CAPTION>
-------------------------------------------------------------------------
Common Stock,
No Par Value Total
------------------ Additional Cumulative Stockholders'
Number of Paid-in Accumulated Translation Equity
Shares Amount Capital Deficit Adjustment (Deficit)
--------- ------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ... 600 $600 $ -- $(405,209) $ -- $(404,609)
Net income ............... -- -- -- 416,092 -- 416,092
--------- ------- ------------ ----------- ----------- ------------
Balance, December 31, 1995 ... 600 600 -- 10,883 -- 11,483
Delaware reincorporation,
exchange of no par value
for $0.01 par value
common stock ............. (600) (600) -- (63,400) -- --
Sale of Series A
Convertible Preferred Stock -- -- 323,375 -- -- 325,000
Sale of Series B Convertible
Redeemable Preferred Stock,
net of issuance costs
of $76,068 ................ -- -- (76,068) -- -- (76,068)
Purchase and retirement of
common stock ............. -- -- (247,307) (1,742,026) -- (2,000,183)
Accrued dividends on Series B
Convertible Redeemable
Preferred Stock .......... -- -- -- (166,667) -- (166,667)
Net income ................... -- -- -- 439,663 -- 439,663
--------- ------- ------------ ----------- ----------- ------------
Balance, December 31, 1996 ... -- -- -- (1,521,547) -- (1,466,772)
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
========= ======= ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------------ ----------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) .......................................... $(4,381,752) $439,663 $416,092
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization .......................... 430,633 132,729 63,021
Write-off of purchased, in-process research and
development .......................................... 6,680,000 -- --
Deferred income taxes .................................. (225,000) (38,000) --
Changes in assets and liabilities, net of acquisition --
Accounts receivable .................................. (1,965,814) (1,750,793) (222,760)
Prepaid expenses and other current assets ............ (846,050) (255,392) (132,912)
Accounts payable ..................................... 34,094 261,987 246,060
Accrued liabilities .................................. 693,964 (98,708) 245,401
Income taxes payable ................................. 428,422 257,369 --
Deferred revenue ..................................... 633,365 587,284 250,421
Long-term liabilities ................................ (163,834) (101,738) (12,264)
------------ ----------- ---------
Net cash provided by (used in) operating
activities ..................................... 1,318,028 (565,599) 853,059
------------ ----------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment ........................ (1,024,673) (485,773) (268,978)
Purchases of short-term investments ........................ (39,307,947) (930,619) --
Proceeds from sale of short-term investments ............... 19,058,800 -- --
Proceeds from sale of property and equipment ............... -- -- 14,000
Cash paid for acquisition of CMA Ettworth, net of cash
acquired of $631,284 ..................................... (3,868,716) -- --
Increase in other assets ................................... (10,918) (51) (14,410)
------------ ----------- ---------
Net cash used in investing activities ............ (25,153,454) (1,416,443) (269,388)
------------ ----------- ---------
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit .............. -- -- (50,000)
Proceeds from long-term debt ............................... -- 250,000 --
Payments on long-term debt ................................. (281,000) (25,291) (2,623)
Net proceeds from sales of Series A Convertible
Preferred Stock .......................................... -- 325,000 --
Net proceeds from sale of Series B Convertible
Redeemable Preferred Stock ............................... -- 4,923,932 --
Net proceeds from issuance of common stock ................. 24,048,307 -- --
Tax benefit from exercise of options ....................... 234,674 -- --
Purchase and retirement of common stock .................... -- (2,000,183) --
------------ ----------- ---------
Net cash provided by (used in) financing
activities ..................................... 24,001,981 3,473,458 (52,623)
------------ ----------- ---------
Exchange rate effect on cash ................................. 1,712 -- --
------------ ----------- ---------
Net increase in cash and cash equivalents .................... 168,267 1,491,416 531,048
Cash and cash equivalents, beginning of period ............... 2,042,100 550,684 19,636
------------ ----------- ---------
Cash and cash equivalents, end of period ..................... $2,210,367 $2,042,100 $550,684
============ =========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Interest ................................................. $33,993 $9,411 $8,614
============ =========== =========
Income taxes ............................................. $479,324 $ -- $77,732
============ =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1997 1996 1995
----------- -------- -------
<S> <C> <C> <C>
Supplemental Disclosure of Noncash Investing and
Financing Transactions:
Equipment acquired under capital lease obligations ........ $ -- $ 62,732 $33,070
=========== ======== =======
Accrued dividends on Series B Convertible Redeemable
Preferred Stock ......................................... $ 233,333 $166,667 $ --
=========== ======== =======
Conversion of Series A and Series B Preferred Stock ....... $ 5,401,625 $ -- $ --
=========== ======== =======
In connection with the acquisition of CMA Ettworth, Ltd. ......
(Note 3), the following noncash transactions occurred -
Fair value of net assets acquired ......................... $(6,905,085) $ -- $ --
Issuance of common stock .................................. 3,036,369 -- --
----------- -------- -------
Cash paid for acquisition, net of cash acquired of $631,284 .. $(3,868,716) $ -- $ --
=========== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operations
Omtool, Ltd. and subsidiaries (Omtool or the Company) design, develop, market
and support open, client/server facsimile software, delivering solutions which
automate and integrate fax communication throughout the enterprise. The Company
predominantly does business in markets located within North America and Europe.
The Company is subject to a number of risks associated with emerging,
technology-oriented companies with a limited operating history, including
continued market acceptance of the Company's products, competition from
substitute products and larger companies, and the continued ability to manage
and finance the Company's anticipated future growth.
(2) Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of
certain accounting policies as described in this note and elsewhere in the notes
to consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany transactions
have been eliminated in consolidation.
(b) Revenue Recognition
The Company generates revenue from licensing the rights to use its software
products directly to end users and indirectly through resellers. The Company
also generates revenue from sales of support contracts and consulting services
to customers who license its products and from resale of related hardware
products.
Revenues from software license agreements are recognized upon shipment of the
software, if there are no significant post-delivery obligations and if payment
is due within one year. Revenues are recorded net of an allowance for estimated
future returns. If an acceptance period is required, revenues are recognized
upon the earlier of the customer's acceptance or the expiration of the
acceptance period.
Revenues from support contracts are recognized ratably over the term of the
support period, which is generally one year. Service and other revenue is
primarily related to implementation services performed on a time-and-material
basis under separate service agreements related to the installation of the
Company's software products.
Service and other revenues are recognized as services are performed. If a
transaction includes both license and service elements, license fee revenues are
recognized upon shipment of the software, provided services do not include
significant customization or modification of the base product and the payment
terms for licenses are not subject to acceptance criteria. In cases where
license fee payment is contingent upon the acceptance of services, revenues from
both the license and the service elements are deferred until the acceptance
criteria are met.
F-8
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Cost of license revenues consists of the cost of media on which the product
is delivered and any related royalties. Cost of service revenues consists
primarily of salaries and benefits related to consulting personnel and the
customer support group.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition. The
Company believes that its revenue recognition practices are substantially
consistent with those required by SOP 97-2.
(c) Research and Development and Software Development Costs
Software development costs are considered for capitalization when
technological feasibility is established in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software To Be Sold, Leased or Otherwise Marketed. The Company sells
software in a market that is subject to rapid technological change, new product
introductions and changing customer needs. Accordingly, the Company has
determined that it cannot determine technological feasibility until the
development state of the product is nearly complete. The time period during
which cost could be capitalized from the point of reaching technological
feasibility until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material to the
Company's consolidated financial position or results of operations. Therefore,
the Company charges all research and development expenses to operations in the
period incurred.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
consist primarily of investments in money market funds. In accordance with SFAS
No. 115, Accounting for Investments in Certain Debt and Equity Securities, the
Company's cash equivalents are classified as held-to-maturity securities.
Held-to-maturity securities are carried at amortized cost, which approximates
market value.
(e) Short-Term Investments
As of December 31, 1997 and 1996, the Company had $21,179,766 and $930,619,
respectively, invested in securities consisting of municipal bonds. In
accordance with SFAS No. 115, the Company has classified its short-term
investments as available-for-sale. These securities have been recorded at cost,
which approximates market value at December 31, 1997 and 1996.
(f) Derivative Financial Instruments and Fair Value of Financial Instruments
The Company does not have any derivative or other financial instruments as
defined by SFAS No. 119, Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of an estimate of the fair value of certain financial instruments.
The Company's financial instruments consist of cash equivalents, short term
investments, accounts receivable, accounts payable and debt. The estimated fair
value of these financial instruments approximates their carrying value at
December 31, 1997 and 1996 due to the short-term nature of these instruments.
F-9
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(g) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated using accelerated and straight-line
methods over the following useful lives:
<TABLE>
<CAPTION>
December 31,
------------
Asset Classification Estimated Useful Life 1997 1996
--------------------- ---------- --------
<S> <C> <C> <C>
Computer equipment.............. 1--5 years $1,205,519 $596,571
Computer software............... 2--3 years 314,415 119,584
Furniture and equipment......... 5--7 years 583,571 155,678
Leasehold improvements.......... Shorter of the life 116,543 33,435
of the lease or the
estimated useful life
Motor vehicles.................. 4 years 99,755 --
Equipment under capital leases.. Shorter of the life
of the lease or the 95,802 95,802
estimated useful life ---------- ---------
2,415,605 1,001,070
Less--accumulated depreciation
and amortization................ 662,619 246,672
---------- ---------
$1,752,986 $754,398
========== =========
</TABLE>
The Company capitalizes expenditures that materially increase asset lives and
charges ordinary repairs and maintenance to operations as incurred.
(h) Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
(i) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. As of December 31, 1997, the Company has no significant
off-balance sheet concentration of credit risk such as foreign currency exchange
contracts or other hedging instruments. Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, short-term investments and trade accounts receivable. The
Company places its temporary cash investments in financial institutions. The
Company has not experienced significant losses related to receivables from
individual customers or groups of customers in any specific industry or by
geographic area. Due to these factors, no additional credit risk beyond amounts
provided for collection losses is believed by management to be inherent in the
Company's accounts receivable.
F-10
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For the years ended December 31, 1997 and 1996, no single customer accounted
for greater than 10% of the Company's revenues. For the year ended December 31,
1995, the Company had one customer that accounted for 11% of the Company's
revenues.
Revenues outside of North America were approximately $2,130,000, $560,000 and
$210,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
(j) Reclassifications
The Company has reclassified certain prior year information to conform with
the current year's presentation.
(k) 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 year, and revenues and expenses are translated at the average exchange rates
during the year. 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.
(l) Net Income (Loss) Per Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective
December 15, 1997. SFAS No. 128 establishes 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 (IPO). The dilutive effect of potential
common shares in 1996, 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. Diluted
weighted average shares outstanding for 1997 exclude the potential common shares
from stock options and redeemable convertible preferred stock outstanding
because to include them would have been antidilutive for the year presented.
Calculations of basic and diluted net income (loss) per common share and
potential common share are as follows:
F-11
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) $(4,381,752) $439,663 $416,092
=========== ========== ==========
Weighted average number
of common shares
outstanding 7,819,683 5,916,793 6,400,000
Potential common shares
pursuant to stock options -- 773,314 --
Potential common shares
pursuant to conversion
of redeemable convertible
preferred stock -- 3,009,705 --
----------- ---------- ----------
Diluted weighted average shares 7,819,683 9,699,812 6,400,000
=========== ========== ==========
Basic net income (loss) per share $(0.56) $0.07 $0.07
Diluted net income (loss)
per common and potential
common share $(0.56) $0.05 $0.07
</TABLE>
The potential common shares excluded related to outstanding stock options and
redeemable convertible preferred stock were 971,285 and 1,822,339, respectively.
(m) Recently Issued Accounting Standards
In June and July 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, respectively. Both SFAS No. 130 and SFAS No. 131 are effective for
fiscal years beginning after December 15, 1997. The Company believes that the
adoption of these new accounting standards will not have a material impact on
the Company's consolidated financial statements.
(3) Acquisition of CMA Ettworth
On December 5, 1997 the Company acquired all of the outstanding common
stock of CMA Ettworth Limited. (CMA). The purchase price was paid in a
combination of 363,637 shares of common stock valued at approximately $3.0
million and $4.0 million in cash. The Company also incurred approximately
$500,000 in acquisition related costs resulting in a total purchase price of
approximately $7.5 million. The acquisition was accounted for as a purchase
in accordance with Accounting Principle Board (APB) Opinion No. 16, Business
Combinations, and accordingly, CMA's operating results since December 5, 1997
are included in the accompanying consolidated financial statements. For tax
purposes, the Company has recorded the transaction at CMA's carryover basis
of assets and liabilities.
In accordance with APB Opinion No. 16, the Company allocated the purchase
price based on the fair value of assets acquired and liabilities assumed. A
significant portion of the purchase price, as described below, was identified in
an independent appraisal as intangible assets using proven valuation procedures
and techniques, including approximately $6,680,000 of in-process research and
development. Acquired intangibles include developed technology and assembled
workforce. These intangibles are being amortized over their estimated useful
lives of 4 to 7 years. The portion of the purchase price allocated to the
in-process research and development projects that did not have a future
alternative use totaled $6,680,000 and was charged to expense as of the
acquisition date. Due to a difference in the bases of certain assets for
financial statement and income tax purposes, deferred income taxes of $236,000
have been provided as part of the purchase price allocation in accordance with
SFAS No. 109.
F-12
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The aggregate purchase price of $7,536,369, including acquisition costs, was
allocated as follows:
<TABLE>
<S> <C>
Cash ...................................................... $631,284
Current assets ............................................ 821,607
Property and equipment .................................... 397,891
Acquired intangibles ...................................... 590,000
In-process research and development ....................... 6,680,000
Goodwill .................................................. 245,430
Deferred income taxes ..................................... (236,000)
Liabilities assumed ....................................... (1,593,843)
-----------
$7,536,369
===========
</TABLE>
Unaudited pro forma operating results for the Company, assuming the
acquisition of CMA occurred at the beginning of the year presented are as
follows:
<TABLE>
<CAPTION>
Year ended
December 31,
------------
1997 (1) 1996 (1)
----------- -----------
<S> <C> <C>
Pro forma total revenues .................. $22,358,002 $13,028,296
=========== ===========
Pro forma net income ...................... $2,170,579 $379,244
=========== ===========
Pro forma net income per share
Pro forma basic ......................... $0.27 $0.06
=========== ===========
Pro forma diluted ....................... $0.20 $0.04
=========== ===========
Pro forma weighted average number of
common shares outstanding
Pro forma basic (2) ..................... 8,153,017 6,280,430
=========== ===========
Pro forma diluted (2) ................... 10,946,641 10,033,449
=========== ===========
</TABLE>
(1) For the purposes of these pro forma operating results, the
in-process research and development was assumed to have been
written off prior to January 1, 1996, so that the operating
results presented include only recurring costs.
(2) For the purposes of these pro forma weighted average number of
common shares outstanding, the 363,637 shares issued in
connection with the CMA Ettworth acquisition have been included
as outstanding for the entire period presented.
CMA's fiscal year ended on March 31, 1997. Fiscal 1996 represents
the results of Omtool for the year ended December 31, 1996 combined
with CMA's results for the year ended March 31, 1997. Fiscal 1997
represents the results of Omtool for the year ended December 31,
1997 combined with CMA's results from January 1, 1997 through the
date of acquisition. Accordingly, CMA's results of operations for
the three months ended March 31, 1997 are included in both periods
and include $815,500 of revenue and $40,653 of net loss.
F-13
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) Intangible Assets
The Company assesses the realizability of intangible assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Under SFAS No. 121, the Company is required
to assess the valuation of its long-lived assets, including intangible assets,
based on the estimated cash flows to be generated by such assets. Based on its
most recent analysis, the Company believes that no material impairment of
intangible assets exists as of December 31, 1997. Intangible assets are included
in Other Assets on the face of the balance sheet and are amortized on a
straight-line basis, based on their estimated lives, as follows:
<TABLE>
<CAPTION>
Estimated December 31,
Life 1997
--------- ----------
<S> <C> <C>
Developed technology............ 4 years $ 400,000
Assembled workforce............. 7 years 190,000
Goodwill........................ 5 years 245,430
----------
835,430
Less--accumulated amortization... 14,686
----------
$ 820,744
==========
</TABLE>
(5) Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
Accrued salaries and
salary-related............... $ 569,868 $264,593
Other accrued expenses......... 1,238,494 138,031
---------- --------
$1,808,362 $402,624
========== ========
</TABLE>
(6) Line of Credit
The Company had a line of credit that allowed the Company to borrow the
lesser of $1,000,000 or 70% of eligible accounts receivable, as defined. The
line of credit expired in August 1997. Borrowings under the line of credit,
collateralized by a first security interest in substantially all assets of the
Company, was payable on demand and bore interest at the bank's prime rate plus
0.5% per annum. At December 31, 1996, there were no borrowings under the line of
credit.
(7) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- ---------
<S> <C> <C>
Note payable to a bank......... $ -- $ 250,000
Capital lease obligations...... 36,888 67,888
-------- ---------
36,888 317,888
Less--current maturities........ 36,888 105,651
-------- ---------
$ -- $ 212,237
======== =========
</TABLE>
F-14
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The note payable to a bank bore interest at the bank's prime rate (8.25% at
December 31, 1996) plus 0.5% per annum and was payable in monthly installments,
including interest, totaling approximately $8,000 per month, through December
1999. At December 31, 1997, no amount was outstanding as the Company paid the
remaining balance due on this term loan.
(8) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, the objective of which is to recognize the amount
of current and deferred income taxes at the date of the financial statements as
a result of all differences in the tax basis and financial statement carrying
amount of assets and liabilities as measured by enacted tax laws.
The components of the deferred tax assets and the deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax asset
Accrued expenses and reserve .............. $ 380,000 $ 146,000
========= =========
Deferred tax liability
Depreciation .............................. $ (47,000) $ (38,000)
Acquisition related intangibles ........... (236,000) --
--------- ---------
Total deferred tax liability ......... $(283,000) $ (38,000)
========= =========
</TABLE>
Under SFAS No. 109, the Company recognizes a deferred tax asset for the
future benefit of its temporary differences if it concludes that it is more
likely than not that the deferred tax asset will be realized.
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 (1) 1996 1995
------ ------- ------
<S> <C> <C> <C>
Income tax provision at federal statutory rate .. 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from -
State tax provision, net of federal benefit ... 4.6 4.6 4.6
Research and development tax credits .......... (4.7) (8.6) (12.9)
Tax-exempt interest ........................... (3.0) -- --
Change in valuation allowance ................. -- -- (26.4)
Other ......................................... (0.8) 5.1 0.7
---- ---- ----
Provision for income taxes ...................... 30.1% 35.1% --%
==== ==== ====
</TABLE>
(1) Calculated based on pre-tax income, before non-deductible
charge for purchased, in-process research and development, of
$6,680,000 for 1997.
F-15
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The provision for income taxes in the accompanying consolidated statements of
operations consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
---------- --------- ----
<S> <C> <C> <C>
Current
Federal ...................... $ 948,000 $ 210,000 $ --
State ........................ 249,000 66,000 --
Foreign ...................... 18,000 -- --
---------- --------- ----
1,215,000 276,000 --
---------- --------- ----
Deferred
Federal ...................... $ (173,000) $ (29,000) $ --
State ........................ (52,000) (9,000) --
---------- --------- ----
(225,000) (38,000) --
---------- --------- ----
Provision for income taxes ..... $ 990,000 $ 238,000 $ --
========== ========= ====
</TABLE>
The components of domestic and foreign income (loss) before taxes are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
----------- -------- --------
<S> <C> <C> <C>
Domestic ................. $(3,452,752) $677,663 $416,092
Foreign .................. 61,000 -- --
----------- -------- --------
$(3,391,752) $677,663 $416,092
----------- -------- --------
</TABLE>
(9) Series B Convertible Redeemable Preferred Stock
In July 1996, the Company issued 1,356,116 shares of Series B Convertible
Redeemable Preferred Stock (Series B Preferred Stock) at $3.69 per share,
less offering costs of approximately $76,000, for net proceeds of
approximately $4,924,000. Upon the closing of the Company's IPO, the Series B
Preferred Stock automatically converted into an aggregate of 2,712,232 shares
of Common Stock.
(10) Stockholders' Equity (Deficit)
On January 2, 1996, by approval of the Company's stockholders, Omtool, Ltd.,
a New Hampshire corporation, was reincorporated as a Delaware corporation.
According to the terms of the merger agreement, the New Hampshire corporation
merged into the Delaware corporation in a tax-free transaction by exchanging its
outstanding common stock for the common stock of the Delaware corporation.
(a) Initial Public Offering
In August 1997, the Company completed its IPO of 3,000,000 shares of
Common Stock at $9.00 per share resulting in net proceeds to the Company of
approximately $23,993,981, net of issuance costs. The Series A Convertible
Preferred Stock and Series B Convertible
F-16
<PAGE>
Redeemable Preferred Stock automatically converted into 325,000 shares and
2,712,232 shares, respectively, of Common Stock upon the closing of the IPO.
(b) Recapitalization
On January 23, 1997, the Company's Board of Directors approved a two-for-one
stock split of the Company's common stock effected in the form of a stock
dividend. The accompanying consolidated financial statements and notes have been
retroactively restated for all periods presented to reflect this stock split.
(c) Series A Convertible Preferred Stock
Pursuant to subscription agreements entered into in February 1996, in July
1996, certain directors of the Company purchased 162,500 shares of Series A
Preferred Stock for an aggregate of $325,000. Upon the closing of the
Company's IPO, the Series A Preferred Stock automatically converted into an
aggregate of 325,000 shares of Common Stock.
(d) Repurchase of Common Stock
Concurrent with the issuance of the Series B Preferred Stock, as approved by
the stockholders and the Board of Directors, the Company purchased and retired
1,084,992 shares of common stock from two of its principal stockholders for
$2,000,183.
(e) Reserved Common Stock
As of December 31, 1997, 3,058,954 shares of common stock were reserved for
the exercise of stock options.
(11) Stock Option Plan
(a) Stock Option Plans
On January 2, 1996, the Board of Directors adopted the 1996 Stock Option
Plan (the 1996 Plan). The 1996 Plan provides for the granting of options
covering 1,500,000 shares of common stock. The 1996 Plan is administered by
the Board of Directors and allows for the granting of "incentive stock
options" within the meaning of the Internal Revenue Code of 1986, as amended,
and non-qualified stock options. Incentive stock options under the 1996 Plan
are granted at not less than the fair market value per share of common stock
on the date of grant or 110% of fair market value for any stockholder who
holds more than 10% of the total combined voting power of all classes of
stock of the Company. Under the terms of the 1996 Plan, options vest and
become exercisable as determined by the Board of Directors and expire 10
years after the date of grant. In April 1997, The Company's Board of
Directors voted that, effective upon the closing of the IPO, no further
options may be granted or issued under the 1996 Plan.
The Company's 1997 Stock Plan (the 1997 Plan) was adopted by the Board of
Directors in April 1997 and approved by the Company's stockholders in June
1997. The 1997 Plan took effect upon the closing of the Company's IPO. The
1997 Plan provides for the issuance of Common Stock
F-17
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
pursuant to the grant to employees of "incentive stock options" within the
meaning of the Internal Revenue Code of 1986, as amended, and the grant of
non-qualified stock options, stock awards or opportunities to make direct
purchases of stock in the Company to employees, consultants, directors and
officers of the Company. The aggregate number of shares of Common Stock which
may be issued pursuant to the 1997 Plan is 1,800,000.
Stock option activity for the years ended December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
Weighted
Number of Exercise Price Average
Shares per Share Exercise Price
--------- -------------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 -- -- --
Granted....................... 1,129,400 $0.25 -- $1.85 $ 0.39
Canceled...................... (33,000) 0.25 -- 1.85 0.40
--------- -------------- -------
Outstanding, December 31, 1996 1,096,400 0.25 -- 1.85 0.39
Granted....................... 435,150 1.85 -- 12.13 5.77
Exercised..................... (130,263) 0.25 -- 1.85 0.42
Canceled...................... (69,333) 0.25 -- 11.00 4.19
--------- -------------- -------
Outstanding, December 31, 1997..... 1,331,954 $0.25 --$12.13 $ 1.94
========= ============== =======
Exercisable, December 31, 1997..... 326,992 $0.25 -- $1.85 $ 0.48
========= ============== =======
</TABLE>
At December 31, 1997, options to purchase 1,727,000 shares of commons stock
were available for future grants under the 1997 Plan.
The range of exercise prices for options outstanding and options exercisable
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Weighted
Average
Range of Exercise Options Remaining Weighted Average Options Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.25 -- $1.85 1,117,804 8.2 $ 0.59 326,992 $ 0.48
5.50 -- 7.50 30,250 9.1 5.99 -- --
8.00 -- 11.00 167,900 9.6 9.25 -- --
12.13 -- 12.13 16,000 9.7 12.13 -- --
---------- --- ------- -------- -------
1,331,954 8.4 $ 1.94 326,992 $ 0.48
========== === ======= ======== =======
</TABLE>
(b) 1997 Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan (the 1997 Purchase Plan) was adopted
by the Board of Directors in April 1997 and approved by the Company's
stockholders in June 1997. The 1997 Purchase Plan will take effect in January
1998. The 1997 Purchase Plan provides for the issuance of a maximum of
200,000 shares of Common Stock pursuant to the exercise of nontransferable
options granted to participating employees. The exercise price for the option
is determined for each six-month purchase period as 85% of the lesser of the
market price of the Common Stock on the first or last business day of the
six-month purchase period.
F-18
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(c) Stock Based Compensation
In October 1995, the FASB issued SFAS No 123, Accounting for Stock-Based
Compensation, which requires the measurement of the fair value of stock options
to be included in the statement of operations or disclosed in the notes to the
consolidated financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under the
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123 for options granted in 1997 and 1996 using the
Black-Scholes option pricing model prescribed by SFAS No. 123. Based on the use
of the Black-Scholes option pricing model, options granted in 1997 and 1996 had
a weighted average fair value of $3.31 and $0.22, respectively. The weighted
average assumptions are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Risk-free interest rate................. 6.16% 5.46%
Volatility.............................. 70.0% 70.0%
Expected dividend yield................. -- --
Expected lives.......................... 4 years 4 years
</TABLE>
The pro forma effect on the Company of applying SFAS No. 123 for all options
to purchase common stock would be as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Net income (loss), pro forma............ $(4,527,531) $ 385,593
Net income (loss) per share, pro forma
Basic.............................. $ (0.58) $ 0.07
Diluted............................ $ (0.58) $ 0.04
Pro forma diluted.................. $ (0.42) $ 0.04
</TABLE>
(12) 401(k) and Profit-Sharing Plan
On December 1, 1995, the Company adopted a 401(k) and profit-sharing plan
(the Profit-Sharing Plan) to cover all eligible employees. The Profit-Sharing
Plan allows for voluntary contributions by eligible employees. The Company
matches 50% of eligible employee contributions up to a specified amount. The
Company contributed approximately $124,000, $69,000, and $4,000 to the
Profit-Sharing Plan for the years ended December 31, 1997, 1996 and 1995,
respectively. Additional profit-sharing contributions to the Profit-Sharing Plan
are at the discretion of the Company's management. During 1997, 1996, and 1995
the Company made no additional discretionary contributions.
(13) Lease Commitments
The Company leases certain equipment and its office facility under operating
leases that expire at various times through December 2002.
F-19
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future minimum lease payments under these leases at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1998............................. $341,000
1999............................. 335,000
2000............................. 320,000
2001............................. 299,000
2002............................. 274,000
----------
$1,569,000
==========
</TABLE>
Rent expense included in the accompanying statements of operations was
approximately $256,000, $199,000, and $114,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
(14) Subsequent Events
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 will be accounted for as pooling of interests. None of the
periods preceding December 31, 1997 will be 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.
(15) Quarterly Results of Operations (unaudited)
The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues .............. $3,700,637 $4,577,859 $5,001,439 $6,087,897
Gross profit ................ 2,892,140 3,458,570 3,901,898 4,698,658
Net income (loss) ........... 271,965 431,931 645,178 (5,730,826)
Net income (loss) per share
Basic .................... $0.05 $0.08 $0.07 $(0.49)
Diluted .................. $0.03 $0.05 $0.06 $(0.49)
</TABLE>
F-20
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31, 1996
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues .............. $1,491,404 $1,779,662 $2,125,601 $3,004,551
Gross profit ................ 1,145,807 1,390,186 1,636,672 2,219,722
Net income .................. 53,134 134,244 95,648 156,637
Net income per share
Basic .................... $0.01 $0.02 $0.02 $0.03
Diluted .................. $0.01 $0.02 $0.01 $0.02
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
To Omtool, Ltd.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Omtool, Ltd. and subsidiaries and have
issued our report thereon dated February 2, 1998. Our audit was made for the
purpose of forming an opinion on the consolidated financial statements taken as
a whole. The schedule listed in financial statement schedule index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth therein, in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 2, 1998
S-1
<PAGE>
OMTOOL, LTD.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged to Balance
at Beginning Costs and at End
Description of Period Expenses Write-offs Other (1) of Period
----------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Accounts receivable reserve
December 31, 1995 $ 81,370 $ 280,400 $ 281,770 $ -- $ 80,000
December 31, 1996 80,000 354,500 59,500 -- 375,000
December 31, 1997 375,000 481,000 -- 181,000 1,037,000
</TABLE>
(1) Amount represents additional reserves resulting from the purchase of
all of the outstanding common stock of CMA Ettworth Limited in
December 1997.
S-2
<PAGE>
COMMERCIAL LEASE
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
1. REFERENCE DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
(a) Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
(b) Termination Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
(c) Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
(d) Execution Deadline Date . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.2 Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.3 Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.4 Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.5 Leased Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.6 Tenant's Pro Rata Share . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.7 Permitted Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.8 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.9 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.10 Landlord's Notice/Mailing Address. . . . . . . . . . . . . . . . . . . . .5
1.11 Tenant's Notice/Mailing Address. . . . . . . . . . . . . . . . . . . . . .5
1.12 Tenant's Trade Name. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.13 Tenant's Emergency Contact . . . . . . . . . . . . . . . . . . . . . . . .5
1.14 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.15 Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.16 Landlord's Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.17 Tenant's Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.18 Signage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1.19 Required Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2. TERM OF LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.1 Initial Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3. COMMENCEMENT DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
4. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
5. LANDLORD DELIVERY AND IMPROVEMENT OF PREMISES . . . . . . . . . . . . . . . . .6
6. BASE RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
7. ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
7.1 Payment of Additional Rent. . . . . . . . . . . . . . . . . . . . . . . . .7
7.2 Contribution to Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .7
7.3 Contribution to Operating Costs . . . . . . . . . . . . . . . . . . . . . .7
7.4 Contribution to Insurance . . . . . . . . . . . . . . . . . . . . . . . . .7
7.5 Share of Additional Rent. . . . . . . . . . . . . . . . . . . . . . . . . .7
7.6 Cap on Operating Costs. . . . . . . . . . . . . . . . . . . . . . . . . . .8
7.7 Increase in Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
7.8 Increase in Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .8
8. CHANGE IN SCOPE OF TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . .8
9. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
10. UTILITIES/DUMPSTER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
11. REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
12. REQUIREMENTS OF PUBLIC AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . 10
13. LANDLORD'S RIGHT TO CURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
14. DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
15. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
16. NON-LIABILITY OF LANDLORD AND TENANT. . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
17. ALTERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
18. TENANT'S SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
19. ACCESS TO PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
20. ASSIGNMENT AND SUBLETTING. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
21. COVENANT AGAINST LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
22. SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
23. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
24. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
25. SURRENDER BY TENANT AT END OF TERM . . . . . . . . . . . . . . . . . . . . . . 14
26. DEFAULT BY TENANT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
27. QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
28. CERTIFICATES BY TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
29. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
30. CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
31. COVENANTS AND CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
32. WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
33. DEFINITION OF LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
34. BROKERAGE REPRESENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
35. LEASE YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
36. HAZARDOUS MATERIALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
37. DELAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
38. COVENANTS OF FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . 18
39. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
40. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
41. BIND AND INURE CLAUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBITS:
EXHIBIT A BUILDING/LEASED PREMISES/PROPERTY PLAN. . . . . . . . . . . . . . . 21
EXHIBIT B LANDLORD'S WORK . . . . . . . . . . . . . . . . . . . . . . . . . . 22
EXHIBIT D TENANT'S WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
EXHIBIT E TENANT'S SIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT F USE RESTRICTIONS AND PROHIBITIONS . . . . . . . . . . . . . . . . . 25
EXHIBIT G OPERATING BUDGET. . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
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LEASE AGREEMENT
THIS AGREEMENT, made this 26th day of November, 1997 between H.J. Brooks
Limited Liability Company, a duly formed limited liability company with a
principal place of business at 1 Branch Street, Methuen, Essex County, MA
("Landlord") and Omtool, Ltd. a duly formed corporation with a place of
business at 8A Industrial Way, Salem, Rockingham County, NH ("Tenant").
W I T N E S S E T H
In consideration of the mutual covenants and agreements in this Lease,
Landlord leases to Tenant and Tenant leases from Landlord, the Leased
Premises.
1. REFERENCE DATA.
1.1 Definitions:
(a) Commencement Date: January 1, 1998
(b) Termination Date: December 31, 2002
(c) Term: Five (5) Years
(d) Execution Deadline Date: December 15, 1997
1.2 Options to Extend: Two (2) periods of three (3) years each.
1.3 Property:
Brookview Industrial Condominium. Approximately 10 acres +/,
containing the Buildings, as further described on Exhibit A.
1.4 Building:
8A Industrial Way Salem, NH 03079 containing approximately
30,000 rentable square feet, as further described on
Exhibit A.
1.5 Leased Premises:
Approximately 30,000 rentable square feet of the building
(and approximately 29,740 useable square feet).
1.6 Tenant's Pro Rata Share: 18.5874% of the Property
100.00% of the Building
1.7 Permitted Use: any lawful purpose
1.8 Base Rent:
<TABLE>
<CAPTION>
LEASE YEAR ANNUALLY MONTHLY
---------- -------- -------
<S> <C> <C>
1-5 $199,500.00 $16,625.00
</TABLE>
1.9 Additional Rent:
4
<PAGE>
During the calendar year in which the Term begins, Landlord
will collect with monthly installments of Base Rent,
$5,735.00 per month on account of Additional Rent. The
provisional Additional Rent estimate is the Tenant's Pro
Rata Share of the current operating budget. See Section 7
and Exhibit G.
1.10 Landlord's Notice/Mailing Address:
H.J. Brooks LLC
1 Branch Street
Methuen, MA 01844
1.11 Tenant's Notice/Mailing Address:
Omtool Limited
8A Industrial Way
Salem, NH 03038
1.12 Tenant's Trade Name: Omtool
1.13 Tenant's Emergency Contact: Mr. Mark Ventri
1.14 Brokers: None
1.15 Security Deposit: $11,562.50
1.16 Landlord's Work: As set forth in Exhibit B.
1.17 Tenant's Work: As set forth in Exhibit D.
1.18 Signage: Tenant shall be entitled to maintain the following
signs, if checked:
X Wall-mounted sign
---
Pylon sign (specify permitted area or size, or
--- percentage of available area, and relative location)
X Other sign (specify): Vinyl door sign
---
1.19 Required Insurance:
(a) $1,000,000.00 for injury to or death of one person
(b) $1,000,000.00 for any one occurrence
(c) $1,000,000.00 for property damage
1.20 Access: Tenant shall have 24 hour access to the Building
seven (7) days a week.
2. TERM OF LEASE.
2.1 Initial Term. Landlord leases to Tenant and Tenant leases from
Landlord the Leased Premises for the Term plus any partial month if this
Lease is dated other than the first of any month, to commence on the
Commencement Date and to expire on the Termination Date or on such other date
as may be provided in this Lease. This Lease shall not commence and this
instrument shall be void unless at least one counterpart has been fully
executed by Tenant and delivered to Landlord and at least one counterpart has
been fully executed by Landlord and delivered to Tenant by the Execution
Deadline Date.
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<PAGE>
2.2 Option Period. Provided that the Lease has not been terminated
for Tenant's default and that Tenant is not then in default beyond any
applicable grace period, then Tenant at its option, exercised by notice to
the Landlord not less than 180 days prior to the expiration of the
then-current term, may extend the Term for the number and length of
immediately successive period(s) specified in Section 1.2 under the same
terms and conditions herein set forth, except that the Base Rental rate shall
be adjusted by any increase in the Consumer Price Index for all urban
consumers, Boston, MA area, which shall have occurred between the
Commencement Date of this Lease and the date on which the extension of this
Lease shall then commence.
3. COMMENCEMENT DATE.
The Term shall commence on the Commencement Date, or, if later, the
date Landlord's Work is substantially completed ("Commencement Date").
Landlord's Work shall be deemed "substantially completed" for the purposes of
this Lease upon obtaining a certificate of occupancy and completion of work
with only incomplete "punchlist" items provided, or that Tenant is not
prevented from completing Tenant Work or from operating its business in the
Leased Premises without more than minor inconvenience.
4. USE.
The Tenant shall use the Leased Premises only for the Permitted Use.
The use of the Leased Premises by Tenant, however, is expressly subject to
all applicable zoning ordinances and rules and regulations of any
governmental authority, instrumentality, board or bureau having jurisdiction
over the Leased Premises.
5. LANDLORD DELIVERY AND IMPROVEMENT OF PREMISES.
Landlord hereby covenants and agrees to deliver possession of the
Leased Premises to Tenant, substantially completed in accordance with
Landlord's Work. Landlord agrees that Landlord's Work shall be provided at
Landlord's cost and completed in a good, workmanlike manner prior to the
Commencement Date. If Landlord fails to complete Landlord's Work within 60
days of the Commencement Date (except for reason excused by the force majeure
clause of paragraph 37 in this Lease), then Tenant shall have the right to
terminate this Lease by notice to Landlord. The notice shall state the
effective date of the termination, which shall not be less than 14 days after
the notice. If Landlord substantially completes Landlord's Work prior to the
effective date of the termination, then the termination notice will be void
and the Lease shall remain in effect. If Landlord fails to complete
Landlord's Work (except for reason excused by the force majeure clause of
paragraph 37 in this Lease) prior to the effective date stated in the
termination notice, Landlord shall refund to Tenant all prepaid rent and
deposits, and this Lease shall be terminated without further recourse.
6. BASE RENT.
6.1 Tenant agrees to pay to Landlord Base Rent during the Term.
Equal monthly installments of Base Rent shall be made promptly in advance on
the first day of each and every month during the Term, including extensions
if applicable, without demand and without offset or deduction together with
such Additional Rent and other charges required to be paid by Tenant under
this Lease. Payment of Base Rent and Additional Rent shall be made at the
office of Landlord at the address first set forth above, or to such other
party and at such other place as may be specifically required by this Lease
or as Landlord may designate in writing from time to time.
6.2 No payment by Tenant or receipt by Landlord of a lesser amount
than the Base Rent or Additional Rent stipulated in this lease shall be
deemed to be other than on account of the earliest stipulated rent, nor shall
any endorsement or statement on any check or payment, or any writing
accompanying the check or payment of such rent, be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice
to Landlord's right to recover the balance of such rent or pursue any other
remedy in this lease provided.
6
<PAGE>
6.3 Tenant agrees that the Pro Rata Share may be adjusted by
Landlord following any increases or decreases in the size of the Building or
addition of common areas or buildings on the Property.
7. ADDITIONAL RENT.
7.1 Payment of Additional Rent. "Additional Rent" payable by Tenant
shall include Tenant's Pro Rata Share of the costs, assessments and expenses
listed in this Section, in addition to other charges defined in this Lease as
Additional Rent.
7.2 Contribution to Taxes. Tenant will pay to Landlord, Tenant's
Pro Rata Share of all real estate taxes, betterments and assessments
("Taxes") charged against the Building and the Property, or any taxes
assessed in lieu thereof, each year of the term or any extension or renewal
thereof and proportionately for any part of a fiscal year. This contribution
to Taxes shall be pro-rated should this Lease be in effect with respect to
only a portion of any fiscal tax year. If landlord obtains an abatement of
any such excess Taxes, a proportionate share of such abatement, less the
reasonable fees and costs incurred in obtaining the same, if any, shall be
refunded to Tenant.
7.3 Contribution to Operating Costs. Tenant shall pay to Landlord
Tenant's Pro Rata Share of the Operating Costs of the Building and the
Property during the Term of this Lease, including any extension and renewal
periods. For the purposes of this Lease, "Operating Costs" shall include all
costs and expenses for the following services, if and to the extent provided
by Landlord:
operating, managing, equipping controlling traffic, policing,
lighting, cleaning , maintaining, repairing, and restoring the
common areas of the Property, including all utility lines, pipes
and conduits, and drainage, septic and sewage systems serving the
Property; repairing and maintaining the heating and air
conditioning system servicing the Property, sweeping, snow
plowing, sanding, refuse removal, wages, unemployment taxes,
social security taxes, workmen's compensation insurance premiums,
fees for required licenses and permits, supplies, fifteen cents
($.15) per rentable square foot as contribution to a
nonreimbursable reserve account, reasonable depreciation of the
equipment associated with the maintenance or operation of such
common areas (but excluding depreciation of the original cost of
construction of the parking facilities and other common areas,
Building and Building systems) but excluding any repairs,
alterations, additions, improvements or replacements made to
rectify or correct any defect in the original design, materials
or workmanship of the Building or common areas ( which, however,
shall not include repairs, alterations, additions, improvements
or replacements made as a result of ordinary wear and tear) and
further excluding any building management fees in excess of
management fees charged by independent property managers in the
area.
7.4 Contribution to Insurance. Tenant shall pay to Landlord
Tenant's Pro Rata Share of insurance costs, which shall include all premiums
for commercial (comprehensive) general public liability, property damage,
casualty, rent loss, and other insurance reasonably maintained by Landlord
with respect to the Building and Property.
7.5 Share of Additional Rent. Landlord shall reasonably estimate
Tenant's Pro Rata Share of annual Additional Rent for Operating Costs,
Insurance and Taxes for each calendar year during the Term and Tenant shall
pay with each monthly installment of Base Rent, as Additional Rent, an amount
equal to one-twelfth of the total of Tenant's Pro Rata Share of such annual
Additional Rent for Operating Costs, Insurance and Taxes. Landlord's
estimate of the initial Additional Rent payments are stated in Section 1 of
this Lease. Landlord may adjust the estimate from time to time during each
calendar year as landlord receives actual bills or receives information of
costs incurred or to be incurred. If total payments made by Tenant based on
the estimate exceed actual Additional Rent as finally determined for the
calendar year in question, then any overpayment shall be returned to the
Tenant within 30 days. If total payments based on the estimates are less
than the actual amount of
7
<PAGE>
Tenant's Pro Rata Share, then Tenant shall pay to Landlord the full amount of
the deficiency within thirty (30) days after receiving written notice from
Landlord of the amount of such deficiency. Upon Tenant's request (which may
be exercised no more than once per calendar year), Landlord shall provide
Tenant with copies of the major invoices for charges included in Additional
Rent for Operating Costs, Insurance and Taxes for the immediately preceding
calendar year.
7.6 Cap on Operating Costs. The actual or estimated Operating
Costs, Insurance and Taxes for the calendar year immediately prior to the
Commencement Date are stated in Exhibit G. Landlord agrees that Operating
Costs, except for the actual cost of snow plowing, shall not increase by more
than five percent (5%) for any one year during the term of this lease over
the then prior year's Operating Costs.
7.7 Increase in Taxes. In addition to Tenant's contribution to
Taxes, Tenant shall pay as Additional Rent all increases in Taxes attributed
to additions and improvements to the Leased Premises made by or on behalf of
Tenant (exclusive of building standard improvements provided by Landlord at
Landlord's expense). This element of Additional Rent may be included in
Tenant's monthly installments of Additional Rent or, at Landlord's option,
separately billed to Tenant by notice to Tenant, in which case Tenant shall
pay the billed amount within thirty (30) days of notice.
7.8 Increase in Insurance. The Tenant shall not use or occupy the
Leased Premises or any part thereof or suffer or permit the same to be used
or occupied for any business or purpose deemed extra hazardous on account of
fire or otherwise, and if by reason of the use and occupancy of the Leased
Premises, the rate of fire insurance on the Building shall be increased, the
Tenant will, on demand, pay to the Landlord the amount of such increase.
8. CHANGE IN SCOPE OF TAXATION.
8.1 If during the Term the method or scope of taxation prevailing on
the date of last execution of this Lease shall be altered, modified or
enlarged so as to cause the method of taxation to be changed, in whole or in
part, so that in substitution for the real estate taxes now assessed there
may be, in whole or in part, a capital levy or other imposition based on the
value of the Leased Premises, or the rents received, or some other form of
assessment based in whole or in part on some other valuation of the Property,
then and in such event, the substituted tax or imposition shall be payable
and discharged by Tenant in the manner required pursuant to such law
promulgated which authorizes such change in the scope of taxation, and as
required by the terms and conditions of this Lease.
8.2 No provision contained in this Lease shall require Tenant to pay
any franchise, estate, inheritance, succession, capital levy or transfer tax
of Landlord, or federal income or state income tax (but not state income tax
if in whole or partial substitution for real property taxes), or excess
profits or revenue tax.
9. INSURANCE.
9.1 Landlord shall keep the Building and the entire Leased Premises
insured against loss or damage by fire and such other risks at replacement
cost.
9.2 Tenant shall obtain and maintain broad form commercial
(comprehensive) general liability insurance (including but not limited to
insurance against assumed liability under this Lease) with respect to the
Leased Premises and its appurtenances, naming Landlord as additional loss
payee, in amounts not less than the Required Insurance.
9.3 Tenant shall obtain and maintain all risks property and casualty
insurance, including theft coverage, written at replacement cost value and
with replacement cost endorsement, covering Tenant's contents, trade
fixtures, machinery, equipment and furnishings within the Leased Premises.
8
<PAGE>
9.4 Tenant shall deliver to Landlord the policies or certificates of
the insurance required by this Lease, issued by insurance companies
authorized to do business in the state in which the Property is located and
are A.M. Best Rated "A-X" or better, prior to the Commencement Date and, as
necessary, prior to the expiration of the policy it renews. Each policy of
insurance shall contain a provision by which the insurer agrees that the
policy will not be canceled, materially changed or not renewed without
Landlord's receiving at least thirty (30) days prior written notice from the
insurer to Landlord.
10. UTILITIES/DUMPSTER.
Tenant shall, at its own cost and expense, directly pay all utility
meter and service charges it incurs, including but not limited to those for
gas, sewer, electricity, and any deposits required by utility suppliers with
respect to the Leased Premises. Tenant shall pay a proportionate share of
water, standby sprinkler charges and other utilities, if any, shared with
other tenants. Tenant agrees that it shall promptly pay the cost of any
refuse removal service providing a dumpster solely to the Leased Premises for
Tenant's sole use and such amount shall be paid directly to such service when
due.
11. REPAIRS.
11.1 Tenant shall have the responsibility to keep and maintain the
Leased Premises in a good and complete state of repair and condition at all
times except for ordinary wear and tear resulting from Tenant's use and
occupancy and except as otherwise provided in this Lease. Notwithstanding
the foregoing sentence to the contrary, Landlord shall be responsible at its
sole cost and expense (unless such maintenance and/or repair is caused by
Tenant's negligent acts and then, only to the extent that the repair is not
covered by Landlord's or Tenant's insurance) for maintenance and repair of
the structural portions and all roof areas of the Building.
Except for those obligations specifically provided to be Landlord's,
following delivery of the Leased Premises to Tenant, Tenant shall maintain
the Leased Premises and make all repairs and replacements of every kind and
character, interior and exterior, ordinary and extraordinary, including, and
unless specified not limited to, the plumbing, electrical equipment and
mechanical systems (only from the point that the systems enter the Building)
and lights and lighting necessary to preserve and maintain the Leased
Premises and its appurtenances, unless such repairs and replacements are
occasioned by the negligence of Landlord, its agents, employees, or licensees.
In addition, Tenant shall replace in the Leased Premises all glass,
including plate glass, damaged or destroyed by any cause whatsoever during
the term of this Lease unless such glass is damaged or destroyed by the
negligence of Landlord, its agents, employees, or licensees.
All the foregoing repairs and replacements shall (a) be performed in
a good and workmanlike manner, (b) be of like quality, (c) not diminish the
overall value of the Leased Premises, and (d) be subject to Landlord's prior
written approval (except in cases of emergency), such approval not to be
unreasonably delayed or withheld. All repairs and replacements and other
property attached to or used in connection with the Leased Premises by or on
behalf of Tenant other than removable fixtures and trade fixtures shall
become the property of Landlord without payment on the termination of this
Lease. Landlord warrants that all non-structural elements and the interior of
the Leased Premises, together with all electrical, plumbing and other
mechanical installations therein, including, but not limited to, heating and
air conditioning equipment are in good order and repair.
11.2 Tenant will procure all necessary permits before making any
repairs, installations, alterations, additions, improvements or removals.
Landlord will cooperate with Tenant in obtaining such permits. Tenant will
make all repairs, installations, alterations, improvements and removals in a
good and workmanlike manner, in conformity with all laws, ordinances and
regulations of all public authorities and all insurance inspections or rating
bureaus having jurisdiction, and so that the structure of the Building will
not be endangered or impaired. Tenant will repair all damage caused by or
resulting from any such repairs, installations, alterations, additions,
improvements or removals, including, but without limitation, the filling of
holes. Tenant will pay promptly when due all charges for labor and materials
in connection with any work done by Tenant on the Leased
9
<PAGE>
Premises so that the Property shall at all times be free of liens and shall
immediately bond against or discharge any such liens filed by any contractor
retained by Tenant.
Notwithstanding any of the above, the Landlord shall be responsible
for any capital replacement of the HVAC system servicing the Leased Premises.
12. REQUIREMENTS OF PUBLIC AUTHORITIES.
Tenant shall suffer no waste or injury in or about the Leased
Premises and shall comply with all federal, state, county and municipal laws,
ordinances and regulations applicable to the structure, use and occupancy of
the Leased Premises. In addition, Tenant shall effect the correction,
prevention and abatement of nuisances, violations, or other grievances in,
upon or connected with the Leased Premises and shall also promptly comply
with all rules, orders and regulations of the Board of Fire Underwriters.
13. LANDLORD'S RIGHT TO CURE.
During reasonable business hours, upon prior notice and when
accompanied by a representative of Tenant, Landlord and its agents and
workmen shall have the right to enter into and upon the Leased Premises at
all reasonable times for the purpose of inspection and examination of the
state of repair and condition thereof. In case of an emergency Landlord
shall contact the Emergency Contact.
If Tenant fails to maintain the Leased Premises as required herein or
make any required repairs after reasonable notice (or prior to notice in case
of emergency), Landlord may, but shall not be obligated to, make such repairs
as shall be necessary as a consequence of any failure of Tenant to meet its
obligations under this Lease. The making of any such repairs by Landlord
shall not constitute a waiver by Landlord of any right or remedy provided by
this lease upon Tenant's default in the making of such repairs.
14. DESTRUCTION.
If the Leased Premises or the Building, at any time during the term,
are damaged in whole or in part by fire, flood, tornado or by the elements,
or by Act of God, or by the public enemy or otherwise, Tenant shall give
prompt notice to Landlord.
If the Leased Premises or the Building are substantially damaged,
then, at the election of the Mortgagee and upon mutual assent of the Tenant
and Landlord, this Lease and the Term Lease shall continue in full force and
effect. If Landlord deems that it can not complete the rebuilding and
restoring of the Building within 270 days of Tenants notice, then Landlord
agrees to notify Tenant thirty (30) days following Tenant's notice or
Landlord's discovery of such damage.
If the Leased Premises or the Building are damaged but not
substantially damaged, or if Landlord elects to restore the Building after
substantial damage, Landlord shall repair the damage and restore the Leased
Premises to substantially the same condition as existed immediately prior to
the damage with reasonable dispatch, provided that in such event Tenant's
Base Rent and Additional Rent obligations shall be reduced pro rata in
proportion to the extent that such damage and subsequent repairs unreasonably
interferes with Tenant's ability to conduct Tenant's business on the Premises
and provided further that Landlord's obligation to restore does not include
restoring leasehold improvements or Tenant's fixtures, equipment and property.
If Landlord gives Tenant a termination notice, this Lease and the
Term shall terminate on the date specified in the termination notice, with
the same effect as though that date were the scheduled Termination Date, and
Base Rent, Additional Rent and other charges payable under this Lease shall
be apportioned and paid up to the date of the damage, and any prepaid
unearned rent or other charges shall forthwith be repaid by Landlord to
Tenant.
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<PAGE>
"Substantially damaged" for the purposes of this Section shall be
defined as damage to the Building in excess of fifty percent (50%) of either
the rentable floor area or the Building's replacement cost, or in excess of
fifteen percent (15%) of either during the last year of the Term.
Notwithstanding the foregoing, if insurance proceeds recovered shall
be insufficient to restore the Leased Premises in accordance with this
Section, and Landlord elects to rebuild, then Landlord promptly shall notify
Tenant of the estimated amount of such insufficiency. Within fifteen (15)
days after receiving Landlord's notice pursuant to the preceding sentence,
Tenant will notify Landlord of Tenant's election either: (I) to pay such
insufficiency to Landlord, in which case, Landlord will rebuild; or (ii) not
to pay such insufficiency, in which case, unless Landlord elects to rebuild
notwithstanding the insufficiency, this Lease will terminate as of the date
on which the damage or destruction occurred, and rent and other charges will
be apportioned and paid to that termination date, and any prepaid unearned
rent and other charges will be repaid to Tenant. Tenant shall be entitled to
an abatement of the Base Rent and Additional Rent for the period during which
the Leased Premises are rendered untenantable for the Tenant's use. If only
a part of the Building is rendered untenantable for the Tenant's use, the
Base Rent shall be reduced proportionately.
If the Building is so damaged that it is necessary in Landlord's sole
discretion, to demolish the Building for restoration or reconstruction,
Landlord may demolish the Building, in which case rent shall be abated as
though the Building were substantially damaged.
15. INDEMNIFICATION.
Tenant agrees to indemnify Landlord and save Landlord harmless from
and against any and all claims, actions, damages, liabilities and expenses
(including attorney's fees) in connection with loss of life, personal injury
and/or damage to property to the extent arising from or out of the occupancy
or use of the premises or any part thereof to the extent such damage or loss
is caused by any negligent act or omission or intentional misconduct of
Tenant, its employees, agents or invitees.
Landlord agrees to indemnify Tenant and save Tenant harmless from and
against any and all claims, actions, damages, liabilities and expenses
(including attorney's fees) in connection with loss of life, personal injury
and/or damage to property to the extent arising from or out of the occupancy
or use of the premises or any part thereof to the extent such damage or loss
is caused by any negligent act or omission or intentional misconduct of
Landlord, its employees, agents or invitees.
16. NON-LIABILITY OF LANDLORD AND TENANT.
Landlord shall not be liable for any damage or injury which may be
sustained by Tenant or any other person resulting from acts, conduct or
omissions on the part of Tenant or of Tenant's agents, employees, guests,
licensees, invitees, assignees or successors, or on the part of any other
person or party other than those caused by any negligent act or omission or
intentional misconduct of Landlord.
Tenant shall not be liable for any damage or injury which may be
sustained by Landlord or any other person resulting from acts, conduct or
omissions on the part of Landlord or of Landlord's agents, employees, guests,
licensees, invitees, assignees or successors, or on the part of any other
person or party other than those caused by any negligent act or omission or
intentional misconduct of Tenant.
17. ALTERATIONS.
Except for that work specifically shown on Exhibit D attached hereto
and incorporated herein as Tenant's Work, Tenant covenants and agrees that it
will not make any improvements, changes, installations, renovations,
11
<PAGE>
additions or alterations in and about the Leased Premises in excess of any
aggregate cost of $10,000.00 without the prior written consent of Landlord
which consent shall not be unreasonably delayed or withheld. Tenant
covenants and agrees that it will not make any structural improvements,
changes, installations, renovations, additions or alterations in and about
the Leased Premises of any kind whatsoever, without first obtaining the prior
written consent of Landlord.
18. TENANT'S SIGNS.
Tenant may maintain the signs permitted in Section 1 and in
accordance with Exhibit "E" attached hereto. Tenant's signage shall comply
with all laws, ordinances and regulations of any governmental authority
having jurisdiction.
19. ACCESS TO PREMISES.
At any time on reasonable prior notice and when accompanied by a
representative of Tenant, Tenant shall permit Landlord or its agents to enter
the Leased Premises to show the Leased Premises to lenders, appraisers, and
possible purchasers, and at any time within one (1) year prior to the
Termination Date to persons wishing to rent the Leased Premises. Within one
year of the Termination Date Tenant shall permit the usual "To Let" and "For
Sale" signs to be placed on the Leased Premises and to remain thereon without
hindrance or molestation.
20. ASSIGNMENT AND SUBLETTING.
Provided Tenant is not in default, Tenant shall have the right to
assign this Lease, or to sublet the whole or any part of the Leased Premises
to any party resulting from a merger or consolidation or to any affiliate or
Tenant without the written consent of the Landlord. In addition, Tenant
shall have the right to assign this Lease, or to sublet the whole or any part
of the Leased Premises, subject to Landlord's prior consent, which consent
may not be unreasonably withheld or delayed. If is assigned, Tenant shall at
all times remain liable for full performance of each and every covenant of
this Lease on the part of the Tenant to be performed.
21. COVENANT AGAINST LIENS.
Tenant agrees that it shall not encumber, or suffer or permit to be
encumbered, the Leased Premises or the fee thereof by any lien, charge or
encumbrance, and Tenant shall have no authority to mortgage or hypothecate
this Lease in any way whatsoever.
22. SUBORDINATION.
This Lease shall be subject and subordinate at all times to the lien
of any mortgage or other encumbrance now or hereafter placed on the Leased
Premises or any part thereof. Tenant covenants and agrees to execute and
deliver upon demand such further instrument or instruments evidencing such
subordination of this Lease to any such mortgage or other encumbrance as
shall be desired by a mortgagee, or proposed mortgagee. Landlord agrees,
upon the request of Tenant, to cause purchaser, assignee or transferee to
execute a nondisturbance and attornment agreement to the benefit of Tenant.
In the event that any mortgage shall be foreclosed for any reason and the
mortgagee, its successors or assigns or any new owner of the Leased Premises
("Successor") succeeds to the interest of Landlord under this lease, Tenant
hereby agrees to be bound to the Successor under all of the covenants and
conditions of this Lease for the balance of the term hereof with the same
force and effect as if the Successor were the Landlord under this Lease, and
Tenant does hereby attorn to the Successor as its Landlord, said attornment
to be effective and self-operative without the execution of any further
instruments on the part of any of the parties hereto immediately upon the
Successor succeeding to that interest of Landlord under this Lease, provided,
however, that Tenant shall be under no obligation to pay rent to the
successor until Tenant received written notice from the Successor that it has
succeeded to the interest of Landlord under this Lease. The respective
rights and obligations of Tenant and the Successor upon such attornment shall
to the extent of the then remaining balance of the term of this Lease be the
same as set forth herein.
23. SECURITY DEPOSIT.
12
<PAGE>
Upon execution of this Lease, Tenant shall transfer the existing
Security Deposit currently held by Landlord the amount of $11,562.50 as
security for the full and faithful performance of this Lease by Tenant.
Within one month of termination of this Lease, and providing Tenant is not in
default hereunder and has performed all of the covenants and conditions of
this Lease, Landlord shall release the unused portion of the security deposit
to Tenant. Tenant covenants and agrees that it shall not assign, pledge,
hypothecate, mortgage or otherwise encumber the aforementioned security
during the term of this Lease. Landlord shall have the right to apply said
security to the payment or offset of any Base Rent, Additional Rent or other
expense resulting from a default by Tenant or otherwise arising under this
Lease, and in such event Landlord shall give Tenant notice of any application
of said security and Tenant shall forthwith restore the security fund to its
original amount.
24. CONDEMNATION.
24.1 If the entire Leased Premises (or the entire parking area or
reasonable access to the Leased Premises) is taken by eminent domain, the
amount awarded for compensation for the Leased Premises taken, including all
improvements, changes, additions and alterations made by Tenant, shall be
paid to Landlord. Tenant shall be entitled to claim, prove and receive in
the condemnation proceeding such awards as may be allowed for fixtures and
other equipment installed and paid for by Tenant. Further, Landlord shall
pay to Tenant from Landlord's awards when fully received (if not separately
awarded to Tenant) an amount equal to the unamortized cost of tenant
improvements paid for by Tenant (calculated by multiplying the reasonable
cost of tenant improvements paid for by Tenant by a fraction the numerator of
which is the number of expired months in the initial term of this Lease at
the time the Lease terminates because of the taking, and the denominator of
which is the total number of months in the initial term.) This Lease shall
terminate as of the date title to all of the Leased Premises shall vest in
the taking body, and Landlord and Tenant shall thereupon be released of and
from all obligations and liabilities to each other accruing under this Lease.
Tenant shall pay all Base Rent and Additional Rent accrued up to the
termination, and if any rent has been paid in advance, Landlord shall return
the surplus.
24.2 If a part of the Leased Premises (but less than the entire
Leased Premises and the part remaining is reasonably adequate for the
operation of Tenant's business) is taken by eminent domain, then there shall
be a reduction in the Base Rent and Additional Rent in relation to the fair
rental value of that part of the Leased Premises so taken as compared with
the rental value for the entire Leased Premises, and this Lease shall
continue in full force and effect for the balance of the Term as if the
taking had not occurred. The amount awarded for compensation for the part of
the Leased Premises so taken shall be paid to Landlord, and Tenant expressly
grants to Landlord the entire amount of the award or compensation, expressly
disclaiming all right, title and interest therein, and agrees that it shall
have no claim for any damages or loss against Landlord by reason of such
condemnation or taking. Following such a partial taking, Landlord or Tenant,
at Landlord's election, shall restore the Leased Premises as required to
render the same reasonably adequate for the operation of Tenant's business
and if applicable Landlord shall reimburse Tenant for its reasonable costs,
but only to the extent of available and proportional compensation proceeds
received by Landlord.
24.3 In the event that a portion of the Leased Premises is so taken
and the remainder of the Leased Premises is not reasonably adequate for the
operation of Tenant's business, then either Landlord or Tenant may terminate
this lease as of the date of such taking by notice to the other party within
thirty (30) days of formal notice of such taking.
24.4 If the temporary use of the whole or any part of the Leased
Premises shall be taken by eminent domain, or by agreement between Tenant and
those authorized to exercise such right, Tenant shall give prompt notice
thereof to Landlord. In such event the term of this lease shall not be
reduced or affected in any way and Tenant shall have the Base Rent,
Additional Rent and other charges herein reserved reduced or abated and
Landlord shall be entitled to receive for itself any award or payment made
for such use.
24.5 The terms "condemnation", "taking" or similar terms as herein
used shall mean the acquisition by a public or quasi-public authority having
the right to take the same by condemnation or eminent domain or otherwise,
regardless of whether such taking is the result of actual condemnation or of
voluntary conveyance by Landlord.
13
<PAGE>
24.6 Tenant agrees to execute and deliver any instruments as may be
deemed necessary by Landlord to expedite any condemnation proceeding or to
effectuate a property transfer of title to such governmental or other public
authority, agency, body or public utility seeking to take or acquire the
Leased Premises or any portion thereof.
25. SURRENDER BY TENANT AT END OF TERM.
25.1. Tenant shall surrender possession of the Leased Premises
and remove all goods and improvements and other personal property in the
possession of Tenant, by whomsoever owned, (collectively "Goods and
Improvements") at the end of the Term of this Lease, or at such other time as
Landlord may be entitled to reenter and take possession of the Leased
Premises pursuant to any provision of this Lease. In default of such
surrender of possession and removal of Goods and Improvements at the time
aforesaid, Tenant will pay to Landlord statutory penalties and all other
damages which Landlord shall suffer by reason of Tenant holding over in
violation of the terms and provisions of this Lease.
25.2 All improvements, additions, installations, renovations, changes
or alterations in the Leased Premises (except removable fixtures and trade
fixtures) shall remain in the Leased Premises and be surrendered upon the
expiration of the Term.
26. DEFAULT BY TENANT.
26.1 If before or during the term of this Lease there shall occur any
of the following events ("Events of Default"):
(a) if Tenant shall make a general assignment for the benefit
of creditors, or shall admit in writing its inability to pay its
debts as they become due, or shall file a petition in bankruptcy, or
shall be adjudicated insolvent, or shall file a petition seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute,
law or regulation, or shall file an answer admitting or not
contesting the material allegations of a petition against it in any
such proceeding, or shall seek or consent to or acquiesce in the
appointment of any trustee, receiver or liquidator of Tenant or any
material part of its assets; or
(b) if there is an entry of an order for relief, or, in the
absence of an order for relief, if, within ninety (90) days after the
commencement of any proceeding against Tenant seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute,
law or regulation, such proceeding shall not have been dismissed, or
if, within ninety (90) days after the appointment without the consent
or acquiescence of Tenant of any trustee, receiver or liquidator of
Tenant or of any material part of its assets, such appointment shall
not have been vacated; and if Tenant shall fail to pay any
installment of Base Rent or Additional Rent within ten business days
after notice by Landlord that the installment of rent has not been
paid when due (provided, however, that Landlord shall not have any
obligation to give this notice to Tenant more than twice in any
twelve (12) month period and any further failure to pay shall be an
Event of Default with no opportunity for cure); or
(c) if the interest of Tenant in the Leased Premises shall be
sold under execution or other legal process, or
(d) if Tenant shall fail to pay any installment of Base or
Additional Rent within ten business days after notice by Landlord
that the installment of rent has not been paid when due (provided,
however, that Landlord shall not have any obligation to give this
notice to Tenant more than three times in any twelve (12) month
period and any further failure to pay shall be an Event of Default
with no opportunity for cure); or
(e) if Tenant shall fail to perform or observe any
requirement, obligation, agreement, covenant or condition of this
Lease, other than the payment of any installment of Base Rent or
14
<PAGE>
Additional Rent, and the failure shall continue for thirty (30) days
after Landlord gives Tenant notice thereof, or if the failure cannot
be remedied within thirty (30) days, then for a reasonable time
thereafter, provided Tenant commences to remedy such failure within
the thirty (30) day period and prosecutes the same to completion with
diligence (provided, however, that Landlord shall not have any
obligation to give notice of default of the same nature to Tenant
more than three times in any twelve (12) month period and any further
default of the same nature shall be an Event of Default with no
opportunity for cure); or
(f) if any representations or warranty contained in this
Lease shall prove to be incorrect in any material respect on the date
upon which it was made,
then at any time following any of such events of default, Landlord, without
waiving any other rights herein available to Landlord at law or in equity,
may either (1) give Tenant notice of termination of this Lease, or (2)
without terminating this Lease, give Tenant notice of Landlord's intention to
reenter and take possession of the Leased Premises, with legal process.
The giving of either of such notices to Tenant shall terminate
Tenant's right to possession of the Leased Premises under this Lease without
prejudice, however, to the rights of Landlord to exercise all other available
legal remedies and without discharging Tenant from any of its liabilities
hereunder.
26.2 Upon the occurrence of any one or more Event of Default,
Landlord, at any time thereafter, at Landlord's option, may give to Tenant
ten (10) days' notice of termination of this Lease and, in the event such
notice is given, this Lease and the term hereof shall come to an end and
expire (whether or not said term shall have commenced) upon the expiration of
said ten (10) days with the same effect as if the date of expiration of said
ten (10) days were the expiration date of this Lease, but Tenant shall remain
liable for damages as provided in this Article.
If Tenant shall default in the payment when due of any installment of
rent or in the making of any other payment herein required and such default
shall continue for a period of ten (10) days after notice by Landlord to
Tenant of such default, or if this Lease and the term hereof shall expire and
come to an end as hereinabove provided, then:
(a) Landlord, must make a reasonable attempt to relet the whole or
any part or parts of the Leased Premises either in the name of the Landlord
or otherwise, to such tenant or tenants, for such term or terms ending
before, on, or after the expiration date of this Lease, at such rent which is
the fair market rent for that property at the time and which will reasonably
mitigate the loss caused by Tenant's vacancy. Landlord, at Landlord's
option, may make such repairs, replacements, alterations, additions,
improvements, decorations and other physical changes in and to the Leased
Premises as Landlord, in Landlord's reasonable discretion, considers
advisable or necessary in connection with any such reletting or proposed
reletting, however, Tenant will only be responsible for these costs to the
extent such were repairs beyond reasonable wear and tear.
If this Lease and the term hereof shall expire and come to an end as
provided in this Article, or by or under any summary proceeding or any other
action or proceeding then, in any of said events;
(aa) Tenant shall pay to Landlord all rent and other charges
payable under this Lease by Tenant to Landlord to the date upon which
this Lease and the term hereof shall have expired and come to an end
or to the date of reentry upon the Leased Premises by Landlord,
whichever event occurs first, except Tenant's rent shall be mitigated
to the extent that the premises are relet and Landlord collects rent
as set forth in Section 26.2(bb).
(bb) Tenant shall also be liable for and shall pay to
Landlord, as damages, any deficiency (referred to as "Deficiency")
between the rent reserved in this Lease for the period which
otherwise would have constituted an unexpired portion of the term
hereof (which period shall be calculated as if there was no right of
the Landlord to terminate this Lease in advance of the expiration
date of the term hereof) and the net amount, if any, of rents
collected under any reletting effected pursuant to the provisions
15
<PAGE>
of this Article for any part of such period (first deducting from the
rents collected under any such reletting all of Landlord's expenses
in connection with the termination of this Lease or Landlord's
reentry upon the Leased Premises and with such reletting, including,
all repossession costs, brokerage commissions, legal expenses, and
attorney's fees. Any such deficiency shall be paid in monthly
installments by Tenant on the days specified in this Lease for
payment of monthly installments of rent. Landlord shall be entitled
to recover from Tenant each monthly Deficiency as the same shall
arise, and no suit to collect the amount of the Deficiency for any
month shall prejudice Landlord's right to collect the Deficiency for
any subsequent month by a similar proceeding; and
(cc) Tenant shall in no event be entitled to any rents
collected or payable under any reletting, except that such rents
shall be considered payment of rent owed by Lessee, whether or not
such rent shall exceed the rent reserved in this Lease.
26.3 Landlord may sue for and collect any amounts which may be due
pursuant to the provisions of preceding subsection of this Lease from time to
time as Landlord may elect, but no such suit shall bar or in any way
prejudice the rights of Landlord to enforce the collection of amounts due at
any time or times thereafter by a like or similar proceeding.
26.4 No remedy herein conferred upon or reserved to Landlord is
intended to be exclusive of any other remedy herein or by law provided, but
each shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute.
The receipt and acceptance by Landlord of rent with knowledge of the default
by Tenant in any of Tenant's obligations under this Lease shall not be deemed
a waiver by Landlord of such default. Nothing contained in this Lease shall
limit or prejudice the right of Landlord to prove for and obtain in
proceedings for bankruptcy or insolvency an amount equal to the maximum
allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, the damages are to be proved, whether or
not the amount be greater, equal to, or less than the amount of the loan or
damages referred to above.
26.5 No waiver by Landlord of any Event of Default or any default by
Tenant in any covenant, agreement or obligation under this Lease shall
operate to waive or affect any subsequent Event of Default or default in any
covenant, agreement or obligation hereunder, nor shall any forbearance by
Landlord to enforce a right or remedy upon an Event of Default or any such
default be a waiver of any of its rights and remedies with respect to such or
any subsequent default or in any other manner operate to the prejudice of
Landlord.
27. QUIET ENJOYMENT.
As of the Commencement Date, Landlord covenants that Tenant, on
paying the rental and performing the covenants and conditions contained in
this Lease, shall and may peaceably and quietly have, hold, and enjoy the
Leased Premises for the use and purpose contemplated herein for the term
aforesaid, without any manner of hindrance or molestation from Landlord or
anyone claiming under Landlord, subject, however, to the terms of this Lease.
28. CERTIFICATES BY TENANT.
Tenant agrees at any time and from time to time during the term of
this Lease, within ten (10) days after written request from Landlord, to
execute, acknowledge and deliver to Landlord or to a third party a statement
in writing certifying that this Lease is unmodified and in full force and
effect (or if there have been modifications, that the same is in full force
and effect as modified and stating the modifications, and the dates to which
the Base Rent, Additional Rent and other charges have been paid in advance,
if any, and stating whether or not, to the best knowledge of Tenant, Landlord
is in default in the performance of any covenant, agreement or condition
contained in this Lease, and, if so, specifying each such default of which
Tenant may have knowledge. Such third party shall have the right to rely upon
the contents of any such written statement of Tenant.
29. NOTICES.
16
<PAGE>
All notices shall be made in writing and served by in hand delivery
with written receipt, or by certified mail, return receipt requested, or by
Express Mail or by a recognized overnight courier such as Federal Express.
All notices shall be served at the respective address stated in the first
grammatical paragraph of this Lease, or at such other address as either party
may designate for itself from time to time by notice in the manner stated in
this section. A notice shall be deemed served on the earlier of actual
delivery or tender of delivery at the notice address on a business day during
ordinary business hours.
30. CAPTIONS.
The captions to the sections of this Lease are inserted only as a
matter of convenience and for reference and in no way define, limit or
describe the scope of intent of this Lease or any part thereof nor in any way
affect this Lease or any part thereof.
31. COVENANTS AND CONDITIONS.
(Intentionally omitted)
32. WAIVER OF SUBROGATION.
Landlord and Tenant each hereby releases the other, its officers,
directors, employees and agents, from any and all liability or responsibility
(to the other or any one claiming through or under them by way of subrogation
or otherwise) for any loss or damage to property covered by valid and
collectible fire insurance with standard extended coverage endorsement, even
if such fire or other casualty shall have been caused by the fault or
negligence of the other party, or anyone for whom such party may be
responsible. However, this release shall be applicable and in force and
effect only with respect to loss or damage (a) actually recovered from an
insurance company and (b) occurring during such time as the releasor's fire
or extended coverage insurance policies shall contain a clause or endorsement
to the effect that any such release shall not adversely affect or impair said
policies or prejudice the right of the releasor to recover hereunder.
Landlord and Tenant each agrees that any fire and extended coverage insurance
policies will include such a clause or endorsement as long as the same shall
be obtainable without extra cost, or, if extra cost shall be charged
therefore, so long as the other party pays such extra cost. If extra cost
shall be chargeable therefore, each party shall advise the other thereof and
of the amount of the extra cost, and the other party, at its election may pay
the same, but shall not be obligated to do so.
33. DEFINITION OF LANDLORD.
The term "Landlord" shall mean and include only the then owner of the
fee title of the Leased Premises. On transfer by Landlord of the fee title
to the Leased Premises, Landlord shall give Tenant notice of the name and
address of Landlord's transferee. In such event, the then Landlord shall be
automatically freed and relieved from and after the date of such transfer of
title of all personal liability with respect to the performance under this
Lease for liability arising from the date of such transfer thereon, provided
any such transfer and conveyance by Landlord is expressly subject to the
assumption by the grantee of transferee of the obligations of this Lease.
34. BROKERAGE REPRESENTATION.
Landlord and Tenant each represent and warrant that it has had no
dealings or conversations with any real estate broker in connection with the
negotiation and execution of this Lease, except the brokers specified in
Section 1. Landlord and Tenant each agree to indemnify the other against all
liabilities arising from any claim of any real estate brokers not listed in
Section 1 of this Lease, including cost of counsel fees, resulting from the
respective acts of Landlord and Tenant.
35. LEASE YEAR.
17
<PAGE>
"Lease Year" means a period of twelve consecutive calendar months.
The first Lease Year shall commence on the Commencement Date (or, if the
Commencement Date is not the first day of a calendar month, then the first
day of the following calendar month) and each succeeding Lease Year shall
commence on the anniversary date of the first Lease Year. Any reference in
this Lease to a Lease Year which is not a full 12 months shall, unless the
context clearly indicates otherwise, be deemed a "Partial Lease Year."
36. HAZARDOUS MATERIALS.
For the purposes of this Lease "Environmental Laws" means any
applicable federal, state or local law (including statutes, regulations,
rules, orders, licenses, or permits) intended to protect the environment or
human health or safety and shall include but not be limited to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601, et. seq.; the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. Section 1801 et. seq.; the
Resources Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901
et. seq.. "Hazardous Materials" means any substance, material or waste
regulated under any Environmental Law, but shall not include office and
cleaning supplies handled in compliance with applicable laws. "Release"
means any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, or disposing into the
environment (including, without limitation, the abandonment or discarding of
barrels, containers and other closed receptacles containing any Hazardous
Material) or the Building.
If, at any time during the Term, a Release or a threat of Release of
Hazardous Materials, shall be found at, on, in or under the Leased Premises
or at, on, in or under the Property or Building then, in such event:
(i) with regard to any Release or a threat of Release of
Hazardous Materials that Landlord or the Landlord's agents,
employees, guests, licensees, invitees, assignees, or successors or
any prior tenants or their agents, employees, guests, licensees,
invitees, assignees, or successors shall have caused, Landlord shall
assess, remove and/or remediate same, as required by and in
compliance with all applicable Environmental Laws, and at Landlord's
sole cost and expense; and Landlord agrees to defend, indemnify, and
hold Tenant harmless from and against any and all costs, damages,
expenses, and/or liabilities (including reasonable attorney's fees)
which Tenant may suffer as a result of any claim, suit or action
regarding any such Hazardous Materials (whether alleged or real)
and/or regarding the assessment, removal and cleanup of same.
(ii) with regard to any Release or a threat of Release of
Hazardous Materials caused by Tenant, its assignees, licensees,
subtenants or invitees, Tenant shall remove and/or remediate same, as
required by and in compliance with all applicable Environmental Laws,
and at Tenant's sole cost and expense; and Tenant agrees to defend,
indemnify, and hold Landlord harmless from and against any and all
costs, damages, expenses, and/or liabilities (including reasonable
attorney's fees) which Landlord may suffer as a result of any claim,
suit or action regarding any such Hazardous Materials (whether
alleged or real), and/or regarding the assessment, removal and
cleanup of same.
37. DELAYS.
In any case where Landlord or Tenant is required to do any act,
delays caused by or resulting from Act of God, force majeure, war, civil
commotion, fire or other casualty, labor difficulties, shortages of labor,
materials or equipment, government regulations or other causes beyond a
party's reasonable control shall not be counted in determining the time for
completion of performance, whether such time be designated by a fixed date, a
fixed time or "a reasonable time." In any case where work is to be paid for
out of insurance proceeds or condemnation awards, due allowance shall be
made, both to the party required to perform the work and to the party
required to make the payment, for delays in the collection of the proceeds
and awards, but in no event shall the provisions of this Section affect
Tenant's obligation to pay rent.
38. COVENANTS OF FURTHER ASSURANCES.
18
<PAGE>
If, in connection with obtaining financing for the Leased Premises, a
lender shall request reasonable modifications in this Lease as a condition to
such financing, Tenant will not withhold, delay or defer its written consent,
provided that such modifications do not materially adversely affect the
leasehold interest hereby created or Tenant's use and enjoyment of the Leased
Premises, or increase Tenant's responsibilities with respect to the Leased
Premises.
39. ENTIRE AGREEMENT.
This Lease and the exhibits and attachments incorporated herein
contains the entire agreement between the parties and shall not be modified
in any manner except by an instrument in writing executed by the parties.
40. GOVERNING LAW.
This Lease shall be governed by and construed in accordance with the
laws in which the Leased Premises are located.
41. BIND AND INURE CLAUSE.
The terms, covenants and conditions of this Lease shall be binding
upon and inure to the benefit of each of the parties, and their respective
successors and assigns.
Executed as a sealed instrument, all as of the day and year first above written.
LANDLORD: TENANT:
H.J. Brooks Limited Liability Company Omtool Ltd.
Harold B. Limited Liability Company
By: /s/ Harold J. Brooks By: /s/ Darioush Mardan
------------------------------ ------------------------------
Harold J. Brooks, Manager Duly Authorized Officer
By: /s/ Mary Jo Brooks By: /s/ Darioush Mardan - CFO
------------------------------ ------------------------------
Mary Jo Brooks, Manager Printed Officer Name and Title
By: /s/ Patricia B. Howard
------------------------------
Patricia B. Howard, Manager
19
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
Essex, ss. . 19__
Then personally appeared the above-named ____________________________________,
____________________________ OF ____________________________, and acknowledged
the foregoing to be his free act and deed and the free act and
deed of ____________________________________, before me.
--------------------------------
NOTARY PUBLIC
My commission expires:
20
<PAGE>
EXHIBIT A
BUILDING/LEASED PREMISES/PROPERTY PLAN
21
<PAGE>
EXHIBIT B
LANDLORD'S WORK
Landlord will paint existing walls and clean the 7,500 square feet formerly
occupied by Mosaic Technology.
22
<PAGE>
EXHIBIT D
TENANT'S WORK
TO BE DETERMINED
23
<PAGE>
EXHIBIT E
TENANT'S SIGNS
Tenant may affix a sign containing its corporate logo to the Building. The
sign shall first be approved by Landlord, which approval shall not be
unreasonably withheld or delayed.
24
<PAGE>
EXHIBIT F
USE RESTRICTIONS AND PROHIBITIONS
NONE
25
<PAGE>
EXHIBIT G
OPERATING BUDGET
See attached budget estimate for year in which Term begins, and budget or, if
available, actual expenses for prior year.
<TABLE>
<CAPTION>
1996 Actual 1997 Estimate
----------- -------------
<S> <C> <C>
Real Estate Taxes $ 32,951.00 $ 32,950.00
Building Insurance 4,181.00 4,180.00
Landscaping 2,820.00 3,890.00
Snowplowing 5,595.05 6,700.00
Water 1,909.75 2,600.00
Repair and Maintenance 4,994.72 5,000.00
Management Fee (est.) 9,000.00 9,000.00
Capital Reserve (est.) 4,500.00 4,500.00
-------- --------
Total $65,951.52 $68,820.00
</TABLE>
26
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
1. Omtool Europe Limited, England
2. CMA Ettworth Limited, England
3. CMA Ettworth Inc., Florida, USA
4. Desktop Paging Software, Inc., New Hampshire, USA
5. TRS Technologies, Inc., Oregon, USA
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement (File No. 333-39571) on Form S-8.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,210
<SECURITIES> 21,180
<RECEIVABLES> 5,764
<ALLOWANCES> 1,037
<INVENTORY> 339
<CURRENT-ASSETS> 29,990
<PP&E> 2,416
<DEPRECIATION> 663
<TOTAL-ASSETS> 32,593
<CURRENT-LIABILITIES> 5,425
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 26,527
<TOTAL-LIABILITY-AND-EQUITY> 32,593
<SALES> 16,663
<TOTAL-REVENUES> 19,368
<CGS> 3,151
<TOTAL-COSTS> 4,417
<OTHER-EXPENSES> 18,756
<LOSS-PROVISION> 481
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> (3,392)
<INCOME-TAX> 990
<INCOME-CONTINUING> (4,382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,382)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
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<PERIOD-END> DEC-31-1996 DEC-31-1995 SEP-30-1997
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5,167 0 0
2 0 0
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</TABLE>
