<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q / A
Amendment No. 2 to
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _______
Commission File Number 0-22871
OMTOOL, LTD.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8 INDUSTRIAL WAY, SALEM, NH 03079
(Address of Principal Executive Offices) (Zip Code)
(603) 898-8900
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
There were 12,589,402 shares of the Company's Common Stock, par value $0.01,
outstanding on April 13, 1999.
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<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
FORM 10-Q/A
Amendment No. 2
For the Quarter Ended September 30, 1998
CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Income for the three months and nine months ended
September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Stockholders' Equity for the nine months ended
September 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended September
30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,086,678 $ 2,210,367
Short-term investments 19,367,134 21,179,766
Accounts receivable, less reserves of $1,179,000 and $1,037,000 in
1998 and 1997, respectively 6,017,453 4,727,089
Prepaid expenses and other current assets 1,701,542 1,492,763
Deferred tax asset 380,000 380,000
--------------- ---------------
Total current assets 30,552,807 29,989,985
Property and equipment, net 1,957,505 1,752,986
Other assets 5,399,626 4,954,606
--------------- ---------------
Total assets $ 37,909,938 $ 36,697,577
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 12,326 $ 36,888
Accounts payable 1,741,794 919,276
Accrued liabilities 1,768,180 1,808,362
Income taxes payable 126,363 809,991
Deferred revenue 2,815,575 2,080,736
--------------- ---------------
Total current liabilities 6,464,238 5,655,253
--------------- ---------------
Deferred tax liability 715,620 883,000
--------------- ---------------
Long-term liabilities 38,935 10,043
--------------- ---------------
Stockholders' equity:
Preferred Stock, $.01 par value -
Authorized-- 2,000,000; issued and outstanding-- none - -
Common Stock, $.01 par value--
Authorized -- 35,000,000; issued and outstanding -- 13,004,172
in 1998; 11,846,140 in 1997 130,041 118,461
Additional paid-in capital 32,665,525 32,255,664
Accumulated deficit (2,118,708) (2,232,548)
Cumulative translation adjustment 14,287 7,704
--------------- ---------------
Total stockholders' equity 30,691,145 30,149,281
--------------- ---------------
Total liabilities and stockholders' equity $ 37,909,938 $ 36,697,577
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license $ 4,520,557 $ 3,337,308 $ 13,827,191 $ 8,823,556
Hardware 1,353,683 1,001,637 4,848,559 2,750,075
Service and other 1,508,025 662,494 4,393,664 1,706,304
--------------- --------------- --------------- ---------------
Total revenues 7,382,265 5,001,439 23,069,414 13,279,935
--------------- --------------- --------------- ---------------
Cost of revenues:
Software license 295,757 129,462 1,061,334 347,552
Hardware 900,991 650,720 2,902,368 1,859,156
Service and other 681,626 319,359 2,176,032 820,619
--------------- --------------- --------------- ---------------
Total cost of revenues 1,878,374 1,099,541 6,139,734 3,027,327
--------------- --------------- --------------- ---------------
Gross profit 5,503,891 3,901,898 16,929,680 10,252,608
--------------- --------------- --------------- ---------------
Operating expenses:
Sales and marketing 3,236,673 1,881,713 9,132,870 4,819,931
Research and development 1,312,919 882,734 3,828,998 2,436,436
General and administrative 1,171,584 380,514 3,380,813 1,158,969
Acquisition costs - - 182,654 -
--------------- --------------- ------------- ---------------
Total operating expenses 5,721,176 3,144,961 16,525,335 8,415,336
--------------- --------------- --------------- ---------
Income (loss) from operations (217,285) 756,937 404,345 1,837,272
Interest income 225,256 154,840 598,655 202,323
Interest expense (705) (6,599) (3,216) (25,521)
--------------- --------------- ---------------- ---------------
Income before provision for income taxes 7,266 905,178 999,784 2,014,074
Provision for income taxes 1,964 260,000 270,144 665,000
--------------- --------------- --------------- ---------------
Net income $ 5,302 $ 645,178 $ 729,640 $ 1,349,074
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income per share
Basic $ 0.00 $ 0.07 $ 0.06 $ 0.21
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Diluted $ 0.00 $ 0.06 $ 0.05 $ 0.14
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Weighted average number of common shares outstanding
Basic 12,913,786 8,947,370 12,749,814 6,564,361
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Diluted 13,479,347 11,283,406 13,543,443 9,933,453
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK,
$0.01 PAR VALUE ADDITIONAL CUMULATIVE TOTAL
NUMBER OF PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 11,846,140 $ 118,461 $ 32,255,664 $ (2,232,548) $ 7,704 $ 30,149,281
Exercise of stock options 478,762 4,788 214,403 -- -- 219,191
Issuance of common stock
for acquisitions 679,270 6,792 195,458 (615,800) -- (413,550)
Change in cumulative
translation adjustment -- -- -- -- 6,583 6,583
Net income -- -- -- 729,640 -- 729,640
---------- ------------ ------------ ------------ ------------ ------------
BALANCE SEPTEMBER 30, 1998 13,004,172 $ 130,041 $ 32,665,525 $ (2,118,708) $ 14,287 $ 30,691,145
---------- ------------ ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 729,640 $ 1,349,074
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 1,941,560 292,179
Deferred income taxes (167,380) -
Changes in assets and liabilities, net of acquisitions-
Accounts receivable (1,053,855) (1,243,814)
Prepaid expenses and other current assets (150,422) (238,878)
Accounts payable 708,742 (68,518)
Accrued liabilities (305,317) 655,199
Income taxes payable (687,905) 255,743
Deferred revenue 556,284 361,285
Long-term liabilities (81,072) (170,627)
------------ ---------------
Net cash provided by operating activities 1,490,275 1,191,643
------------ --------------
Cash Flows from Investing Activities:
Purchases of property and equipment (1,181,245) (827,543)
Purchases of short-term investments (28,315,127) (26,719,838)
Proceeds from sale of short-term investments 30,160,000 2,658,800
Increase in other assets (1,361,231) (12,851)
Cash acquired in connection with acquisitions of DPSI and TRS 111,071 -
------------ --------------
Net cash used in investing activities (586,532) (24,901,432)
------------- ---------------
Cash Flows from Financing Activities:
Payments on long-term debt (247,672) (273,984)
Proceeds from issuance of common stock - 24,150,898
Exercise of stock options 219,191 -
------------ --------------
Net cash provided by (used in) financing activities (28,481) 23,876,914
------------- --------------
Foreign exchange effect on cash 1,049 -
------------ --------------
Net increase in cash and cash equivalents 876,311 167,125
Cash and cash equivalents, beginning of period 2,210,367 2,042,100
------------ --------------
Cash and cash equivalents, end of period $3,086,678 $ 2,209,225
------------ --------------
------------ --------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $ 3,216 $ 25,521
------------ --------------
------------ --------------
Income taxes $1,078,772 $ 409,324
------------ --------------
------------ --------------
Supplemental Disclosure of Noncash Investing and Financing Transactions:
Accrued dividends on Series B Convertible Redeemable Preferred Stock $ - $ 233,333
------------ --------------
------------ --------------
Conversion of Series A and B Preferred Stock $ - $ 5,401,625
------------ --------------
------------ --------------
In connection with the acquisition of DPSI and TRS, the following non-cash
transactions occurred:
Fair value of net assets acquired $ 524,621 $ -
Issuance of common stock (413,550) -
------------- ------------
Cash acquired in connection with acquisitions of DPSI and TRS $ 111,071 $ -
------------ --------------
------------ --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Omtool, Ltd. (the "Company" or "Omtool") pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1997. The
accompanying consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the interim periods
presented. The results of operations for the nine month period ended September
30, 1998 are not necessarily indicative of the results to be expected for the
full fiscal year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents consist primarily of investments in money market funds. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
ACCOUNTING FOR INVESTMENTS IN CERTAIN DEBT AND EQUITY SECURITIES, the Company's
cash equivalents are classified as held-to-maturity securities.
(B) SHORT-TERM INVESTMENTS
As of September 30, 1998 and December 31, 1997, the Company had
$19,367,134 and $21,179,766, respectively, invested in securities consisting of
municipal bonds. In accordance with SFAS No. 115, the Company has classified its
short-term investments as available-for-sale. These securities have been
recorded at cost, which approximates market value at September 30, 1998 and
December 31, 1997.
(C) FOREIGN CURRENCY TRANSLATION
The Company translates the financial statements of its foreign
subsidiaries in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION.
Accordingly, assets and liabilities are translated at exchange rates in effect
at the end of the period, and revenues and expenses are translated at the
average exchange rates during the period. All cumulative translation gains or
losses from the translation into the Company's reporting currency are included
as a separate component of stockholders' equity in the accompanying consolidated
balance sheets.
7
<PAGE>
(D) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Effective December 15, 1997, SFAS No. 128, EARNINGS PER SHARE, established
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock. The Company
has applied the provisions of SFAS No. 128 retroactively to all periods
presented. In accordance with SEC Staff Accounting Bulletin (SAB) No. 98, the
Company has determined that there were no nominal issuances of common stock or
potential common stock in the period prior to the Company's initial public
offering. The dilutive effect of potential common shares in 1998, consisting of
outstanding stock options, is determined using the treasury stock method, in
accordance with SFAS No. 128. The dilutive effect of potential common shares in
1997, consisting of outstanding stock options and redeemable convertible
preferred stock, is determined using the treasury stock method and the
if-converted method, respectively, in accordance with SFAS No. 128. A
reconciliation of basic and diluted common shares outstanding is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 12,913,786 8,947,370 12,749,814 6,564,361
Potential common shares pursuant to stock options 565,561 1,081,527 793,629 926,102
Potential common shares pursuant to conversion of
redeemable convertible preferred stock -- 1,254,509 -- 2,442,990
------------ ----------- ------------- -----------
Diluted weighted average shares 13,479,347 11,283,406 13,543,443 9,933,453
------------ ----------- ------------- -----------
------------ ----------- ------------- -----------
</TABLE>
The calculation above excludes the potential common shares related to
762,550 and 620,000 outstanding stock options which have an anti-dilutive effect
for the three months and nine months ended September 30, 1998, respectively.
(3) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
effective January 1, 1998. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements. The
components of the Company's comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Net income $ 5,302 $ 645,178 $ 729,640 $1,349,074
Foreign currency translation adjustments, net of taxes 779 -- 4,042 --
------------ ------------ ------------ -----------
Comprehensive income $ 6,081 $ 645,178 $ 733,682 $1,349,074
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
(4) ACQUISITIONS
On February 19, 1998, the Company acquired all of the outstanding capital
stock of Desktop Paging Software, Inc. ("DPSI") in exchange for 294,840 shares
of Omtool common stock. DPSI develops, markets and supports wireless messaging
software.
On February 27, 1998, the Company acquired all of the outstanding capital
stock of TRS Technologies, Inc. ("TRS") in exchange for 384,430 shares of Omtool
common stock. TRS develops, markets and supports LAN fax and cost recovery
systems for law firms.
These transactions were accounted for under the pooling of interests
method of accounting. The Company has restated the retained earnings balance as
of the beginning of fiscal 1998 without restating the periods preceding December
31, 1997, as net assets and liabilities, historic results of operations and
cumulative stockholders' equity of DPSI and TRS were not deemed
8
<PAGE>
to be material to the consolidated financial statements of the Company. The
Company recorded the costs incurred in connection with these transactions as
"Acquisition Costs" which are included in the accompanying consolidated
statements of income.
(5) STOCK OPTION REPRICING
Effective August 13, 1998, the Company's Board of Directors approved a
repricing of certain employee stock options. Options affected by the repricing
were those having an exercise price of greater than $4.875, the closing market
price of the Company's common stock on that date. Substantially all other terms
and conditions of the options remain the same. For employees that opted to
participate in the repricing, the original options were amended to reflect the
terms of the repricing.
(6) SUBSEQUENT EVENT
In October 1998, the Company's Board of Directors authorized the
repurchase of up to 1.0 million shares of the Company's common stock. Subject to
price and market considerations and applicable securities laws, such purchases
will be made from time to time on the open market. No time limit was placed on
the duration of the repurchase program. The Company may use the repurchased
shares to offset shares issued in connection with various Company employee stock
plans. As of November 11, 1998, the Company has repurchased 472,140 shares.
(7) RESTATEMENT
In connection with the Company's acquisition of CMA Ettworth Limited (CMA)
on December 5, 1997, the Company allocated the purchase price based on the fair
value of assets acquired and liabilities assumed. A significant portion of the
purchase price was identified in an independent appraisal as intangible assets
using proven valuation procedures and techniques, including approximately $6.7
million of in-process research and development projects (IPR&D) that had not
reached technological feasibility without any alternative future use.
Accordingly, the portion allocated to IPR&D was expensed immediately.
The value allocated to IPR&D was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from such projects, and discounting the
net cash flows back to their present value. The discount rate included a factor
that took into account the uncertainty surrounding the successful development of
the purchased in-process technology. This valuation was based on accepted
appraisal methodologies used at the time of the allocation. Since that time, the
Securities and Exchange Commission (SEC) has provided new guidance with respect
to the valuation of intangible assets in purchase business combinations,
including IPR&D. In response to this new guidance and comments received by the
Company from the SEC Staff, the Company obtained a revised independent appraisal
incorporating this new guidance, resulting in a change to the allocation of the
purchase price, as follows:
<TABLE>
<CAPTION>
ORIGINAL REVISED
ALLOCATION ALLOCATION
---------- ----------
<S> <C> <C>
Current assets $1,452,891 $1,452,891
Property and equipment 397,891 397,891
Acquired intangible assets 590,000 2,090,000
IPR&D 6,680,000 3,100,000
Goodwill 245,430 2,925,430
Deferred income taxes (236,000) (836,000)
Liabilities assumed (1,593,843) (1,593,843)
----------- -----------
$7,536,369 $7,536,369
----------- -----------
----------- -----------
</TABLE>
The accompanying 1997 balance sheet and 1998 financial statements have
been restated to reflect the above revised purchase price allocation. The effect
of the restatement was as follows:
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, as previously reported $184,781 $645,178 $1,230,573 $1,349,074
Net income, as restated $5,302 $645,178 $729,640 $1,349,074
Diluted net income per share, as previously
reported $0.01 $0.06 $0.09 $0.14
Diluted net income per share, as restated
$0.00 $0.06 $0.05 $0.14
</TABLE>
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements for the periods specified and the associated notes. Further
reference should be made to the Company's Annual Report on Form 10-K as filed
with the Securities Exchange Commission on March 31, 1998.
OVERVIEW
Omtool designs, develops, markets and supports open, client/server
facsimile software, delivering solutions which automate and integrate fax
communication throughout the enterprise. The Company was incorporated in March
1991 and shipped its initial facsimile software products in 1991. The Company's
revenues are primarily derived from licensing the rights to use its Fax Sr. NT
software product directly to end users and indirectly through resellers. The
Company also derives revenues from the resale of third-party hardware products,
principally intelligent fax boards and fax modems, and from the delivery of
related services, consisting primarily of customer support contracts. The
Company first achieved profitability for the year ended December 31, 1992 and
has been profitable for the last fifteen quarters, excluding a one-time charge
for purchased, in-process research and development in the fourth quarter of
1997.
The Company has historically derived the majority of its total revenues
from sales within North America. Sales outside of North America represented
approximately 12% and 10% of the Company's total revenues in the nine months
ended September 30, 1998 and 1997, respectively.
The Company sells its products through its direct telesales force and also
sells its products through value added resellers, systems integrators, resellers
and distributors to expand its indirect distribution channel. Sales through the
Company's indirect distribution channels were 24% and 31% of the Company's total
revenues in the nine months ended September 30, 1998 and 1997, respectively.
The Company has expanded its business through three acquisitions. In
December 1997, the Company acquired CMA Ettworth Limited, based in London,
England, a provider of fax solutions for the IBM AS/400 market. The acquisition
was accounted for as a purchase and resulted in a one-time charge for purchased,
in-process research and development of approximately $3.1 million in the fourth
quarter of 1997. In February 1998, the Company acquired Desktop Paging Software,
Inc., a New Hampshire based provider of wireless messaging software, and TRS
Technologies, Inc., a Portland, Oregon based provider of LAN fax and cost
recovery systems for law firms. These acquisitions were accounted for under the
pooling of interest method of accounting.
The Company's United Kingdom subsidiary transacts business primarily in its
local currency. The Company manages its foreign exchange exposure by monitoring
its net monetary position using natural hedges of its assets and liabilities
denominated in local currencies. There can be no assurance that this policy will
eliminate all currency exposure. Foreign currency exposure has not been material
to the Company's financial position or results of operations to date. If the
Company's business denominated in foreign currencies increases, the Company may
be required to use derivatives to hedge foreign currency exposure.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license 61.2 % 66.7 % 59.9 % 66.5 %
Hardware 18.3 20.0 21.0 20.7
Service and other 20.5 13.3 19.1 12.8
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Software license 4.0 2.6 4.6 2.6
Hardware 12.2 13.0 12.6 14.0
Service and other 9.2 6.4 9.4 6.2
------ ------ ------ ------
Total cost of revenues 25.4 22.0 26.6 22.8
------ ------ ------ ------
Gross profit 74.6 78.0 73.4 77.2
------ ------ ------ ------
Operating expenses:
Sales and marketing 43.8 37.6 39.6 36.3
Research and development 17.8 17.7 16.6 18.4
General and administrative 15.9 7.6 14.7 8.7
Acquisition costs -- -- 0.8 --
------ ------ ------ ------
Total operating expenses 77.5 62.9 71.7 63.4
------ ------ ------ ------
Income (loss) from operations (2.9) 15.1 1.7 13.8
Interest income, net 3.0 3.0 2.6 1.4
------ ------ ------ ------
Income before provision for
income taxes 0.1 18.1 4.3 15.2
Provision for income taxes 0.0 5.2 1.2 5.0
------ ------ ------ ------
Net income 0.1 % 12.9 % 3.1 % 10.2 %
------ ------ ------ ------
------ ------ ------ ------
Gross profit:
Software license 93.5 % 96.1 % 92.3 % 96.1 %
Hardware 33.4 35.0 40.1 32.4
Service and other 54.8 51.8 50.5 51.9
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
TOTAL REVENUES. The Company's revenues are currently derived primarily from
fees from licensing of the Company's software products and, to a lesser extent,
from related sales of hardware and services. The Company's total revenues were
$7.4 million and $5.0 million for the three months ended September 30, 1998 and
1997, respectively, representing an increase of 48%.
SOFTWARE LICENSE. The Company's software license revenues are derived
primarily from the licensing of the Company's Fax Sr. product. Software license
revenues were $4.5 million for the three months ended September 30, 1998 and
$3.3 million for the three months ended September 30, 1997, representing an
increase of 35%. Software license revenues accounted for 61% and 67% of total
revenues for each respective period. The increase in dollar amount was due to
increased market acceptance of the Company's facsimile software products for
various operating systems as well as the expansion into new markets as a result
of recent acquisitions. The decrease in software license revenue as a percentage
of total revenues is primarily attributable to the increase in service and other
revenue due to the Company's larger installed customer base.
12
<PAGE>
HARDWARE. Hardware revenues are derived from the resale of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. Hardware revenues were $1.4 million for the
three months ended September 30, 1998 and $1.0 million for the three months
ended September 30, 1997, representing an increase of 35%. Hardware revenues
accounted for 18% and 20% of total revenues for each respective period. The
increase in hardware revenues was due primarily to the increase of hardware unit
sales accompanying the Company's products and a change in the sales mix of
third-party hardware products from less expensive modem products to high-end
multi-channel modem boards.
SERVICE AND OTHER. Service and other revenues are primarily comprised of
fees from maintenance contracts. Service and other revenues were $1.5 million
for the three months ended September 30, 1998 and $662,000 for the three months
ended September 30, 1997, representing an increase of 128%. Service and other
revenues accounted for 21% and 13% of total revenues for each respective period.
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 $296,000 and $129,000
for the three months ended September 30, 1998 and 1997, respectively,
representing 6% and 4% of software license revenues for each respective period.
The increase in dollar amount was primarily due to the higher volume of products
shipped during the three months ended September 30, 1998 compared to the same
period in 1997, as well as increased license fees and royalties paid to
third-party software providers. As a result of these increases, the software
license gross margin percentages decreased to 94% for the three months ended
September 30, 1998 from 96% for the same period in 1997.
HARDWARE. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $901,000 and
$651,000 for the three months ended September 30, 1998 and 1997, respectively,
representing 67% and 65% of hardware revenues for each respective period. The
increase in dollar amount for the cost of hardware revenues for the three months
ended September 30, 1998 was due primarily to increased unit sales of hardware
products accompanying licenses of Fax Sr. and a change in the sales mix of
third-party hardware products from less expensive modem products to high-end
multi-channel modem boards. The gross margin percentage for hardware sales was
33% for the three months ended September 30, 1998 compared to 35% in the same
period in 1997 due to the change in hardware sales mix.
SERVICE AND OTHER. Cost of service and other revenues consists primarily of
the costs incurred in providing telephone support as well as other miscellaneous
customer service-related expenses. Cost of service and other revenue was
$682,000 and $319,000 for the three months ended September 30, 1998 and 1997,
respectively, representing 45% of service and other revenues versus 48% for the
same quarter last year. The increase in dollar amount of cost of service and
other revenues during the period was due primarily to the hiring of incremental
personnel to support growth in the customer base. The gross margin percentage
for service and other revenues increased to 55% from 52% for the three month
periods ended September 30, 1998 and 1997, respectively, due to the Company's
ability to leverage its existing infrastructure.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, and associated overhead costs, and the
cost of marketing programs such as direct mailings, public relations, trade
shows, seminars, and related communication costs. Sales and marketing expenses
were $3.2 million and $1.9 million for the three months ended September 30, 1998
and 1997, respectively, or 44% and 38% of total revenues for each respective
period. The increase in dollar amount was primarily due to the Company's effort
to expand its direct telesales force and marketing organization, higher sales
commissions associated with increased revenues and planned increases in
marketing program activities. The Company expects that sales and marketing
expenses will remain relatively consistent with the current sales and marketing
expenses in absolute terms.
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RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities, and consist primarily of
employee salaries, benefits, and associated overhead costs as well as consulting
expenses and the cost of software development tools. Research and development
expenses were $1.3 million and $883,000 for the three months ended September 30,
1998 and 1997, respectively, or 18% of total revenues for each respective
period. The increase in dollar amount was primarily attributable to the
employment of additional staff to develop and enhance the Company's products and
provide quality assurance as well as the additional personnel added as a result
of recent acquisitions. The Company expects that research and development
expenses will remain relatively consistent with current research and development
expenses in absolute terms.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive and
financial personnel and associated overhead costs, as well as consulting,
accounting, and legal expenses. General and administrative expenses were $1.2
million and $381,000 for the three months ended September 30, 1998 and 1997,
respectively, or 16% and 8% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to an increase in personnel
and the overhead costs allocated to support such personnel as well as additional
administrative expenses and amortization incurred as a result of recent
acquisitions and operating multiple locations worldwide. General and
administrative expenses as a percentage of total revenues increased due to the
addition of personnel required to adequately support the expansion of the
Company's operations and the additional amortization expense incurred as a
result of recent acquisitions. The Company expects that general and
administrative expenses are likely to continue to increase in absolute terms.
INTEREST INCOME, NET. Interest income, net consists primarily of interest
earned on cash, cash equivalents, and short-term investments, offset by interest
expense associated with equipment financing and borrowings. Interest income, net
represented income of $225,000 in the three months ended September 30, 1998
compared to $148,000 earned in the comparable period last year.
PROVISION FOR INCOME TAXES. Provision for income taxes was approximately
$2,000 and $260,000 for the three months ended September 30, 1998 and 1997,
respectively, resulting in effective tax rates of approximately 27% and 29% in
the three months ended September 30, 1998 and 1997, respectively. Income taxes
in 1998 have been provided at the Company's respective federal and state
statutory rates, reduced primarily for income tax credits and the tax effect of
certain tax-exempt interest income.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
TOTAL REVENUES. The Company's total revenues were $23.1 million and $13.3
million for the nine months ended September 30, 1998 and 1997, respectively,
representing an increase of 74%.
SOFTWARE LICENSE. Software license revenues were $13.8 million for the nine
months ended September 30, 1998 and $8.8 million for the nine months ended
September 30, 1997, representing an increase of 57%. Software license revenues
accounted for 60% and 67% of total revenues for each respective period. The
increase in dollar amount was primarily due to increased market acceptance of
the Company's products for various operating systems as well as the expansion
into new markets as a result of recent acquisitions.
HARDWARE. Hardware revenues were $4.9 million for the nine months ended
September 30, 1998 and $2.8 million for the nine months ended September 30,
1997, representing an increase of 76%. Hardware revenues accounted for 21% of
total revenues for each respective period. The increase in hardware revenues was
due primarily to the increase of hardware unit sales accompanying the Company's
products and a change in the sales mix of third-party hardware products from
less expensive modem products to high-end multi-channel modem boards.
SERVICE AND OTHER. Service and other revenues were $4.4 million for the
nine months ended September 30, 1998 and $1.7 million for the nine months ended
September 30, 1997, representing an increase of 157%. Service and other revenues
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accounted for 19% and 13% of total revenues for each respective period. The
increase in dollar amount was due primarily to the increase in maintenance
revenues as a result of a larger installed customer base.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues was $1.1 million and
$348,000 for the nine months ended September 30, 1998 and 1997, respectively,
representing 8% and 4% of software license revenues for each respective period.
The increase in dollar amount was primarily due to the higher volume of products
shipped during the nine months ended September 30, 1998 compared to the same
period in 1997, as well as increased license fees and royalties paid to
third-party software providers. As a result of these increases, the software
license gross margin percentages decreased to 92% for the nine months ended
September 30, 1998 from 96% for the same period in 1997.
HARDWARE. Cost of hardware revenues was $2.9 million and $1.9 million for
the nine months ended September 30, 1998 and 1997, respectively, representing
60% and 68% of hardware revenues for each respective period. The increase in
dollar amount for the cost of hardware revenues for the nine months ended
September 30, 1998 was due primarily to increased unit sales of hardware
products accompanying licenses of Fax Sr. and a change in the sales mix of
third-party hardware products from less expensive modem products to high-end
multi-channel modem boards. The gross margin percentage for hardware sales
increased to 40% for the nine months ended September 30, 1998 from 32% in the
same period in 1997 due to the change in hardware sales mix and better pricing
due to volume discounts provided by certain third-party hardware vendors.
SERVICE AND OTHER. Cost of service and other revenue was $2.2 million and
$821,000 for the nine months ended September 30, 1998 and 1997, respectively,
representing 49% and 48% of service and other revenues for each respective
period. The increase in dollar amount of cost of service and other revenues
during the period was due primarily to the hiring of incremental personnel to
support growth in the customer base. The gross margin percentage for service and
other revenues remained relatively constant at 51% and 52% for the nine months
ended September 30, 1998 and 1997, respectively.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $9.1 million and
$4.8 million for the nine months ended September 30, 1998 and 1997,
respectively, or 40% and 36% of total revenues for each respective period. The
increase in dollar amount was primarily due to the Company's effort to expand
its direct telesales force and marketing organization, higher sales commissions
associated with increased revenues and increased marketing program activities.
The Company expects that sales and marketing expenses will remain relatively
consistent with current sales and marketing expenses in absolute terms.
RESEARCH AND DEVELOPMENT. Research and development expenses were $3.8
million and $2.4 million for the nine months ended September 30, 1998 and 1997,
respectively, or 17% and 18% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to the employment of
additional staff to develop and enhance the Company's products and provide
quality assurance as well as the additional personnel added as a result of
recent acquisitions. Research and development expenses decreased as a percentage
of total revenues as the Company continued to realize operating leverage from
its established infrastructure. The Company expects that research and
development expenses will remain relatively consistent with current research and
development expenses in absolute terms.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.4
million and $1.2 million for the nine months ended September 30, 1998 and 1997,
respectively, or 15% and 9% of total revenues for each respective period. The
increase in dollar amount was primarily attributable to an increase in personnel
and the overhead costs allocated to support such personnel as well as additional
administrative expenses and amortization incurred as a result of recent
acquisitions. General and administrative expenses as a percentage of total
revenues increased due to the addition of personnel required to adequately
support the expansion of the Company's operations and the additional
amortization expense incurred as a result of recent acquisitions. The Company
expects that general and administrative expenses are likely to continue to
increase in absolute terms.
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ACQUISITION COSTS. In connection with the acquisition of Desktop Paging
Software, Inc. and TRS Technologies, Inc., the Company expensed $183,000 of
accounting, legal, and other associated costs. See Note 4 of Notes to
Consolidated Financial Statements.
INTEREST INCOME, NET. Interest income, net represented income of $595,000
in the nine months ended September 30, 1998, compared to $177,000 in the
comparable period of 1997, due primarily to interest income earned on excess
cash from the proceeds of the Company's initial public offering completed in
August 1997.
PROVISION FOR INCOME TAXES. Provision for income taxes was $270,000 and
$665,000 for the nine months ended September 30, 1998 and 1997, respectively,
resulting in effective tax rates of approximately 27% and 33% in the nine months
ended September 30, 1998 and 1997, respectively. Income taxes in 1998 have been
provided at the Company's respective federal and state statutory rates, reduced
primarily for income tax credits and the tax effect of certain tax-exempt
interest income. The effective income tax rate in 1998 is lower than 1997 due
primarily to additional tax-exempt interest earned and increased research and
development credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash flows from
operations, the private sales of preferred stock, and the Company's initial
public offering of Common Stock completed in August 1997. At September 30, 1998,
the Company had cash and cash equivalents of $3.1 million, short-term
investments of $19.4 million, and working capital of $24.0 million.
The Company's operating activities provided cash of $1.5 million in the
nine months ended September 30, 1998 and provided cash of $1.2 million in the
nine months ended September 30, 1997. Net cash provided during the nine months
ended September 30, 1998 consisted primarily of net income from operations,
depreciation and amortization, and increases in deferred revenue and accounts
payable, offset by increased accounts receivable and income taxes payable. Net
cash provided during the nine months ended September 30, 1997 consisted
primarily of net income from operations, depreciation and amortization, an
increase in accrued liabilities, income taxes payable and increased deferred
revenue offset by increases in accounts receivable and prepaid expenses and
other current assets as well as a decrease in long-term liabilities.
Investing activities used cash of $587,000 and $24.9 million during the
nine months ended September 30, 1998 and 1997, respectively. During the nine
months ended September 30, 1998, the principal uses were purchases of short-term
investments and purchases of property and equipment as well as an increase in
other assets, offset by the proceeds from the sale of short-term investments and
cash acquired in the connection with the acquisitions of DPSI and TRS. During
the nine months ended September 30, 1997, the principal uses were purchases of
short-term investments and purchases of property and equipment offset by the
proceeds from the sale of short-term investments. The Company expects that the
rate of purchases of property and equipment will increase as the Company expands
its operations.
Financing activities used cash of $28,000 for the nine months ended
September 30, 1998 due primarily to the payment of long-term debt offset by the
proceeds from the exercise of common stock. Financing activities provided cash
of $23.9 million for the nine months ended September 30, 1997 due to the net
proceeds from the issuance of 3.0 million shares of Common Stock in an initial
public offering which was completed in August 1997.
As of September 30, 1998 the Company did not have any material commitments
for capital expenditures.
Subject to the factors discussed below, the Company believes that the
existing cash balances, short-term investments and cash generated from
operations will be sufficient to finance the Company's operations for the next
twelve months. Although operating activities may provide cash in certain
periods, to the extent the Company grows in the future, its operating and
investing activities may use cash. There can be no assurance that any necessary
additional financing will be available to the Company on commercially reasonable
terms, or at all.
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DISCUSSION OF ACQUIRED TECHNOLOGIES
CMA-Ettworth ("CMA") was acquired in the quarter ended December 31, 1997.
The Company acquired in-process research and development related to a strategic
fax gateway solution called IMPS (Integrated Message Processing Server), which
was to provide integrated fax, voice, e-mail, Internet connectivity and EDI on a
single platform product application. CMA is located in Kingston-upon-Thames,
just outside of London, England, and has two wholly owned subsidiaries, one in
Paris, France and the other in Florida.
At the time of the acquisition, CMA's in-process research and development
value was comprised of several ongoing projects which included (1) development
of a Windows NT 4.0-based server; (2) development of a 32-bit Windows 95 client;
(3) development of an email-to-fax capability; (4) development of workload
balancing functions; (5) development of least-cost routing systems using a
corporate WAN or the Internet; and (6) development of in-bound fax routing
techniques. These projects had not yet reached technological feasibility at the
time of the acquisition.
Development of the acquired in-process technology into commercially viable
products and services required efforts principally related to the completion of
all planning, designing, coding, prototyping, scalability verification, and
testing activities necessary to establish that the proposed technologies would
meet their design specifications, including functional, technical, and economic
performance requirements. The Company has successfully developed certain
acquired in-process research and development and is currently benefiting from
the technology through sales of the enhanced Omtool Fax Sr. applications.
Regarding Omtool's acquisition of CMA, the transaction was structured as
a purchase of the assets and the business of CMA. Subsequent to the
acquisition, it was appropriate to immediately expense the purchased
in-process technology that had not yet reached technological feasibility
without any alternative use, valued at $6.7 million. The value was determined
by estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present
value. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the purchased
in-process technology. In the September 30, 1998 10-Q, the amount of the CMA
purchase price that was allocated to purchased in-process technology was
determined to be $6.7 million. This was based on accepted appraisal
methodologies used at the time of the allocation. Since the date of the
September 30, 1998 filing, the in-process technology has been revised to an
allocation of $3.1 million incorporating new guidelines.
The valuation was attributable to the fact that CMA had not completed a
working model that had been tested and proven to work at performance levels
which were expected to be commercially viable, and that the technologies
constituting the projects had no alternative use other than as an enterprise
fax software application. The value is attributable solely to the development
efforts completed as of the acquisition date.
The valuation included, but was not limited to, an analysis of (1) the
market for CMA products; (2) the completion costs for the projects; (3) the
expected cash flows attributable to the in-process research and development
projects; and (4) the risks associated with achieving such cash flows. The
assumptions underlying the cash flow projections were derived from investment
banking reports, independent analyst reports, Omtool and CMA company records,
and discussions with the management of both companies. Primary assumptions such
as revenue growth and profitability were compared to indications of similar
companies as well as to indications from industry analyst reports, to determine
the extent to which these assumptions were supportable. The Company did not
assume in its model any material change in its profit margins as a result of the
acquisition and did not assume any material increases in selling, general &
administrative expenses as a result of the acquisition. The Company did not
anticipate any expense reductions or other synergies as a result of the
acquisition. The basis of the acquisition was an attempt to enhance the
Company's competitive position by offering a broader product line, including
support for AS/400 systems and the implementation of advanced technologies such
as least-cost routing, load balancing, in-bound fax routing, and fax-to-email
connectivity.
In the analysis, revenues attributable to the CMA in-process technologies
were estimated to total approximately $70 million over five years assuming the
successful completion and market acceptance of the new CMA technology in
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conjunction with Omtool products, in particular the Fax Sr. product line.
Revenues were expected to peak in 2001 and then decline as other new products
and technologies are expected to enter into the market. The Company does not
break down revenues attributable specifically to CMA-derived products; since
products are offered both as a suite and as individual applications, Omtool
license fees are not necessarily application specific. However, the Company
believes that revenues generated to date concur with the assumptions used in the
valuation analysis.
Because the Company does not account for expenses by product, it is not
possible to determine the actual expenses associated with the technology
acquired from CMA. The Company currently believes that expenses associated with
completing the purchased in-process research and development and integrating the
technology with the Company's existing products are approximately consistent
with the Company's estimates used in the analysis and that completion dates for
the CMA development projects discussed above concur with projections used at the
time of the acquisition. Research and development spending with respect to these
offerings is expected to continue at a rate that is consistent with the
Company's overall research and development spending. The Company does not
believe that the acquisition resulted in any material changes in its profit
margins or in selling, general & administrative expenses. The Company does not
believe that it achieved any material expense reductions or synergies as a
result of the acquisition.
The rates utilized to discount the net cash flows to their present value
were consistent with the nature of the forecast and the risks associated with
the projected growth, profitability and developmental projects. A discount rate
of 24 percent was deemed appropriate for the business enterprise and for the
in-process research and development. These discount rates were consistent with
CMA's stage of development; the uncertainties in the economic estimates
described above; the inherent uncertainty at the time of the acquisition
surrounding the successful development of the purchased in-process technology;
the useful life of such technology; the profitability levels of such technology;
and the inherent uncertainties of the technological advances that were
indeterminable at the time of the acquisition.
The forecast used in valuing the in-process research and development were
based upon assumptions the Company believed to be reasonable but which were
inherently uncertain and unpredictable. For these reasons, actual results may
vary from projected results. The Company continues to develop all of its
products with the acquired technologies. The Company maintains a research and
development group with facilities in the United Kingdom.
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YEAR 2000 READINESS DISCLOSURE STATEMENT
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.
The Company is in the process of evaluating the Year 2000 readiness of the
software products sold by the Company ("Products"). The Company performs
on-going assessments of the current versions of its most significant Products
and believes they are generally Year 2000 compliant. Even so, the assessment of
whether a complete system or device in which a Product is embedded will operate
correctly for an end-user depends in large part on the Year 2000 compliance of
the system's other components, most of which are supplied by parties other than
the Company. The cost to evaluate the Company's Year 2000 compliance has not
been material to date and the Company does not expect future expenditures to be
material. To the extent that the Company's Products are sold through system
integrators or other third parties, there can be no assurance that the users of
the Company's Products will not experience Year 2000 problems as a result of the
integration of the Company's software with noncompliant Year 2000 products of
such third party suppliers. In addition, in certain circumstances, the Company
has warranted that the use or occurrence of dates on or after January 1, 2000
will not adversely affect the performance of the Company's Products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.
The Company has certain key relationships with suppliers of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. If these suppliers fail to adequately
address the Year 2000 issue for the hardware products they provide to the
Company, and as a result, any of the Company's hardware customers experience
Year 2000 problems such customers could discontinue use of the Company's
Products resulting in a material adverse impact on the Company's operations and
financial results. The Company is still addressing the effect the Year 2000
issue will have on its suppliers and at this time, cannot determine the impact
it will have.
The Year 2000 issue also affects the Company's internal systems, including
information technology (IT) systems, such as management information systems and
financial accounting packages, and non-IT systems, such as building security,
voice mail and other systems. Omtool is assessing the readiness of its systems
for handling the Year 2000. Although the assessment is still underway,
management currently believes that all material internal systems will be
compliant by the Year 2000 and that the cost to address any issues will not be
material.
To date, the Company has not identified a complete and separate budget for
investigating and remedying issues related to Year 2000 compliance, whether
involving the Company's own software products or the software of systems used in
its internal operations. Additionally, the Company has currently not developed a
contingency plan related to Year 2000. The Company expects to evaluate the costs
in comparison to the benefit of developing such a plan in fiscal year 1999.
There can be no assurance that the Company's resources spent on the
investigating and remedying Year 2000 compliance issues will not have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, customer purchasing patterns may be affected by Year 2000
issues as customers delay purchases in anticipation of the future release of
Year 2000 compliant products or releases, and as customers expend significant
resources to upgrade their current software systems and applications for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by the Company.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company from time to time including statements
in this Form 10-Q which are not historical facts are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
particular, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning the plans and objectives
of management; expectations for sales and marketing, research and development
and general and administrative expenses; developments relating to the Company's
product and service offerings, markets and acquisitions; anticipated trends in
the Company's business; ongoing commercialization of in-process research and
development acquired from CMA; Year 2000 readiness; and the Company's expected
liquidity and capital resources) may constitute forward-looking statements. The
Company's actual future results may differ significantly from those stated in
any forward-looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below, and the other risks
discussed in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and from time to time in the Company's other filings with the
Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. Although the Company has experienced significant percentage
growth in revenue and net income in recent years, the Company does not believe
that prior growth rates are sustainable or indicative of future operating
results. In particular, the Company experienced decreases in both total revenues
and net income from the first quarter of 1998 to the second quarter of 1998 as
well as a decrease in total revenue from the second quarter of 1998 to the third
quarter of 1998. There can be no assurance that the Company will increase its
level of revenues or remain profitable on a quarterly basis or annual basis. In
addition, the Company's limited operating history makes the prediction of future
operating results difficult or impossible. The Company has derived substantially
all of its historical revenues from licenses of Fax Sr. NT and related services
and resale of related hardware. Broad market acceptance of Fax Sr. NT, and the
Windows NT operating system in general, is critical to the Company's future
success. As a result, any decline in demand for or failure to achieve broad
market acceptance of Fax Sr. NT as a result of competition, technological change
or otherwise, would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's future financial
performance will depend in large part on the successful development,
introduction and customer acceptance of new and enhanced versions of Fax Sr. NT.
There can be no assurance that the Company will continue to be successful in
marketing Fax Sr. NT or any new or enhanced versions of Fax Sr. NT.
The enterprise, client/server facsimile solution market is intensely
competitive and rapidly changing and the Company expects competition to continue
to increase. Many of the Company's competitors have longer operating histories
and greater financial, technical, sales, marketing and other resources, as well
as greater name recognition and market acceptance of their products and
technologies than the Company. In addition, there are relatively low barriers to
entry in the markets in which the Company operates, and new competition may
arise either from expansion by established companies or from new emerging
companies or from resellers of the Company's products. There can be no assurance
that current or potential competitors of the Company will not develop products
comparable or superior in terms of price and performance features to those
developed by the Company, adapt more quickly than the Company to new or emerging
technologies and changes in market opportunities or customer requirements,
establish alliances with industry leaders, or take advantage of acquisition
opportunities more readily than the Company. Increased competition will result
in decreased market share, pressure for price reductions and related reductions
in gross margins, any of which could materially adversely affect the Company's
ability to achieve its financial and business goals.
The Company's future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. The Company's quarterly revenues
and results of operations have fluctuated significantly in the past and will
likely fluctuate significantly in the future. Causes of such fluctuations have
included and may include, among others, the demand for the Company's products
and services, the size and timing of orders, the number, timing and significance
of new product announcements by the Company and its competitors, the ability of
the Company to develop, introduce, market and ship new and enhanced versions of
the Company's products on a timely basis, the level of product and price
competition, changes in operating expenses, changes in average selling prices
and mix of the Company's products, changes in the Company's sales incentive
strategy, the mix of direct and indirect sales, and general economic factors.
The Company's products often have a lengthy sales cycle, especially in the case
of large orders. If one or more large orders fails to close as forecasted by the
Company in a fiscal quarter, the Company's revenues and operating results for
such quarter could be materially adversely
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affected. Any one or more of these or other factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, the Company has identified a decrease in demand for the
Company's products and services in certain international markets, as well as
delays in closing certain anticipated customer orders as contributing to a
decline in software license and total revenues from the first quarter of 1998 to
the second quarter of 1998. The Company has also identified the further
extension of sales cycles and changes in the buying patterns of customers as
contributing to a decline in total revenues from the second quarter of 1998 to
the third quarter of 1998. In addition, these declines in revenues, when coupled
with the Company's planned increases in its investment in sales and marketing
during the second and third quarter of 1998, resulted in a significant reduction
in net income for the second and third quarter of 1998 compared to the
corresponding periods of 1997 and the first quarter of 1998. Any shortfall in
revenue or earnings from levels anticipated by securities analysts has had and
could have an immediate and material adverse effect on the trading price of the
Company's common stock. The Company typically receives and fulfills a majority
of its orders within any given quarter, with a substantial portion occurring in
the last weeks or days of the fiscal quarter. As a result, the Company may not
learn of revenue shortfalls until late in a fiscal quarter, which could result
in an even more immediate and adverse effect on the trading price of the
Company's common stock.
The Company's international operations are subject to several risks
including, but not limited to, fluctuations in the value of foreign currencies,
changes to import and export duties or regulations and greater difficulty in
collecting accounts receivable. While to date these factors have not had a
material impact on the Company's results, there can be no assurance that there
will not be such an impact in the future.
Like all providers of computer software and companies who rely on
information technology systems, the Company continues to face the risks
associated with the Year 2000 issue. See "Year 2000 Readiness Disclosure
Statement" in Management's Discussion and Analysis.
In addition, the Company identifies the following risk factors which could
affect the Company's actual results and could cause actual results to differ
materially from forward-looking statements. The Company's future results remain
difficult to predict and may be affected by a number of factors, including: the
Company's dependence on the continued acceptance and growth of the Windows NT
environment and of the client/server environment; the ability of the Company to
manage growth; the ability of the Company to enhance existing products and
introduce new products in a timely manner and market acceptance of these
products; the expansion of indirect sales channels and the potential for channel
conflict; risks associated with acquisitions; risks associated with
international expansion; risks associated with the development and maintenance
of strategic relationships; the Company's dependence on revenues from resale of
third-party hardware products; the risks associated with new product offerings
and the potential for undetected errors; the Company's dependence on proprietary
technology and the risk of third-party claims for infringement of intellectual
property rights; the Company's dependence on third-party licensed technology;
and the Company's dependence on key personnel.
21
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
NUMBER EXHIBIT DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K
None
22
<PAGE>
OMTOOL, LTD.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMTOOL, LTD.
April 15, 1999 By: /S/ DARIOUSH MARDAN
-------------------
Darioush Mardan
Chief Financial Officer,
Secretary and Treasurer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements included in this 10Q/A and is qualified in its
entirety by reference to such consoldiated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,087
<SECURITIES> 19,367
<RECEIVABLES> 7,196
<ALLOWANCES> 1,179
<INVENTORY> 879
<CURRENT-ASSETS> 30,553
<PP&E> 3,708
<DEPRECIATION> 1,751
<TOTAL-ASSETS> 37,910
<CURRENT-LIABILITIES> 6,464
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 30,561
<TOTAL-LIABILITY-AND-EQUITY> 37,910
<SALES> 18,676
<TOTAL-REVENUES> 23,069
<CGS> 3,964
<TOTAL-COSTS> 6,140
<OTHER-EXPENSES> 16,525
<LOSS-PROVISION> (65)
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 1,000
<INCOME-TAX> 270
<INCOME-CONTINUING> 730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 730
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
