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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)
DELAWARE 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
8 Industrial Way, Salem, NH 03079
(Address of Principal Executive Offices) (Zip Code)
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 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 / /.
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,
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traditional fax communication has failed to integrate with emerging
communications methods that are complementary to fax transmission, such as
e-mail and groupware, to create a coordinated communications process throughout
the extended enterprise.
Historical approaches to improving facsimile communications such as
desktop-based fax software and host-based fax applications have not provided a
comprehensive solution for the requirements of 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
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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 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
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multiple platforms connected on an enterprise's network. Fax Sr. provides an
integrated faxing environment across an organization's computer platforms,
including both servers and desktops. Fax Sr. is scaleable as a business' need
for faxing solutions expands.
Fax Sr. NT provides incremental functionality to the feature set
available on all versions of the Fax Sr. product. Fax Sr. NT is fully integrated
with Microsoft Exchange, 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.
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.
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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. 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
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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.
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.
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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 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
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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.
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
<PAGE>
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.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
YEAR ENDED DECEMBER 31,
-----------------------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
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)
----- ----- ------
<PAGE>
Weighted average number of common shares
outstanding (1)
Basic................................................................ 6,400 5,917 7,820
----- ----- ------
Diluted.............................................................. 6,400 9,700 7,820
----- ----- ------
</TABLE>
<TABLE>
<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
longterm 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 forwardlooking 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 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 forwardlooking
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 30day 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
<PAGE>
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 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 knowhow 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
<PAGE>
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>
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
<PAGE>
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 servicerelated 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 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
<PAGE>
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, INPROCESS 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
pretax income before a nondeductible 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.
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
TOTAL REVENUES. The Company's total revenues were $8.4 million and
$3.9 million in 1996 and 1995, respectively, representing an increase of 114%.
SOFTWARE LICENSE. Software license revenues were $5.3 million in 1996
and $2.8 million in 1995, or 63% and 71% of total revenues for each respective
period, representing an increase of 91%. The increase in dollar amount was
primarily due to increased market acceptance of the Company's Fax Sr. product
for the Windows NT operating system, as well as expansion of the Company's
direct telesales force and indirect sales channels.
HARDWARE. Hardware revenues were $1.5 million in 1996 and $278,000 in
1995, or 18% and 7% of total revenues for each respective period, representing
an increase of 451%. The increase in hardware revenues was due primarily to the
increase of hardware unit sales accompanying increased licenses of Fax Sr. and a
change in the sales mix of third-party hardware products from lower priced modem
products to high-end multi-channel modem boards.
SERVICE AND OTHER. Service and other revenues were $1.6 million in 1996
and $870,000 in 1995, or 19% and 22% of total revenues for each respective
period, representing an increase of 80%. The increase in dollar amount was due
primarily to the increase in maintenance and maintenance renewals as a result of
a larger installed customer base.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues 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.
<PAGE>
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
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
<PAGE>
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.
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 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
<PAGE>
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 computerbased 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;
singleplatform 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.
<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
<PAGE>
quarterly revenues and results of operations have fluctuated significantly in
the past and will likely fluctuate significantly in the future. Causes of such
fluctuations have included and may include, among others, the demand for the
Company's products and services, the size and timing of orders, the number,
timing and significance of new product announcements by the Company and its
competitors, the ability of the Company to develop, introduce, market and ship
new and enhanced versions of the Company's products on a timely basis, the level
of product and price competition, changes in operating expenses, changes in
average selling prices and mix of the Company's products, changes in the
Company's sales incentive strategy, the mix of direct and indirect sales, and
general economic factors. In addition, the sale of the Company's products often
involves delays because customers have tended to implement the products on a
large scale and customers also must establish certain minimum hardware
capabilities. The Company's products therefore often have a lengthy sales cycle
while the customer evaluates and receives approvals for the purchase of the
Company's products. During such sales cycles, the Company may expend substantial
funds and management effort yet receive no revenues. It may be difficult to
accurately predict the sales cycle of any large order. If one or more large
orders fails to close as forecasted in a fiscal quarter, the Company's revenues
and operating results for such quarter could be materially adversely affected.
Any one or more of these or other factors could have a material adverse effect
on the Company's business, financial condition and results of operations. The
potential occurrence of any one or more of these factors makes the prediction of
revenues and results of operations on a quarterly basis difficult and
performance forecasts derived from such predictions unreliable.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company has historically had and expects to continue
to have weaker sales in the months of July and August which may have an adverse
affect on third quarter sales. The Company believes that these fluctuations are
caused primarily by customer budgeting and purchasing patterns.
In general, revenues are difficult to forecast because the market for
enterprise, client/server facsimile software has developed and is evolving
rapidly and the Company's sales cycle, from the customer's initial evaluation
through purchase of licenses and the related support services, varies
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
<PAGE>
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 valueadded resellers ("VARs"),
systems integrators and distributors. Although the Company has historically
focused its efforts on marketing through its telesales force, the Company is
increasing resources dedicated to developing and expanding indirect marketing
channels. There can be no assurance that the Company will be able to attract and
retain a sufficient number of qualified VARs, systems integrators and
distributors to market successfully the Company's products. In addition, there
can be no assurance that the Company's resellers will not develop, acquire or
market computerbased 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
<PAGE>
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.
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
<PAGE>
December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8K.
(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 DESCRIPTION OF DOCUMENT
NUMBER -----------------------
------
<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. 33329397 and incorporated herein by reference)
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.4 to
the Company's Registration Statement on Form S-1, No. 33329397 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. 33329397
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. 33329397 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. 33329397 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. 33329397 and
incorporated herein by reference)
<PAGE>
10.4 Lease dated November 26, 1997 between H.J. Brooks Limited Liability
Company and Omtool, Ltd.
10.5 Form of Omtool Software License (filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, No. 33329397 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 8K.
Current Report on Form 8K 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).
<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:
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 attorneysinfact 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chief Executive Officer and Chairman (principal March 31, 1998
executive officer)
Robert L. Voelk
Vice President, Finance, Chief Financial Officer, March 31, 1998
Secretary and Treasurer (principal financial and
Darioush Mardan accounting officer)
President and Director March 31, 1998
Martin A. Schultz
Director March 27, 1998
Richard D. Cramer
Director March 30, 1998
Bruce R. Evans
Director March 27, 1998
Anthony J. Mark
Director March 27, 1998
William C. Styslinger, III
</TABLE>
<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 F-5
December 31, 1997, 1996, and 1995......................................................................................
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>
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
Fe bruary 2, 1998 (except
for the matter
discussed in Note 14,
as to which the date is
February 27, 1998)
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---- ----
DECEMBER 31,
------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................. $2,210,367 $2,042,100
Shortterm 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 longterm 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
----------- ----------
longterm debt, net of current portion......................................................... -- 212,237
----------- ----------
longterm liabilities.......................................................................... 10,043 173,877
----------- ----------
Commitments (Note 13)
Series B Convertible Redeemable Preferred Stock, $.01 par value authorized, issued and -- 5,166,667
outstanding_none in 1997; 1,356,116 shares in 1996 (at redemption value)..............
----------- ----------
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 -- 1,625
preference of $325,000)...............................................................
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 paidin 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.
<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
Writeoff 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.
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ -------- ------ --------- ------ --------- ------
SERIES B CONVERTIBLE SERIES A
REDEEMABLE CONVERTIBLE
PREFERRED STOCK, PREFERRED STOCK, COMMON STOCK, COMMON STOCK,
$0.01 PAR VALUE $0.01 PAR VALUE $0.01 PAR VALUE NO PAR VALUE
--------------- --------------- --------------- ------------
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994........ -- $-- -- $ -- -- $ -- 600 $600
Net income...... -- -- -- -- -- -- -- --
Balance, December -- -- -- -- -- -- 600 600
31, 1995........
Delaware -- -- -- -- 6,400,000 64,000 (600) (600)
reincorporation,
exchange of no
par value for
$0.01 par value
common stock....
Sale of Series A -- -- 162,500 1,625 -- -- -- --
Convertible
Preferred Stock.
Sale of Series B 1,356,116 5,000,000 -- -- -- -- -- --
Convertible
Redeemable
Preferred Stock,
net of issuance
costs of $76,068
Purchase and -- -- -- -- (1,084,992) (10,850) -- --
retirement of
common stock....
Accrued dividends -- 166,667 -- -- -- -- -- --
on Series B
Convertible
Redeemable
Preferred Stock.
TOTAL
ADDITIONAL CUMULATIVE STOCKHOLDERS'
PAIDIN ACCUMULATED TRANSLATION EQUITY
CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
----------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Balance, December $ -- $ (405,209) $ -- $ (404,609)
31, 1994........
Net income...... -- 416,092 -- 416,092
Balance, December -- 10,883 -- 11,483
31, 1995........
Delaware -- (63,400) -- --
reincorporation,
exchange of no
par value for
$0.01 par value
common stock....
Sale of Series A 323,375 -- -- 325,000
Convertible
Preferred Stock.
Sale of Series B (76,068) -- -- (76,068)
Convertible
Redeemable
Preferred Stock,
net of issuance
costs of $76,068
Purchase and (247,307) (1,742,026) -- (2,000,183)
retirement of
common stock....
Accrued dividends.. -- (166,667) -- (166,667)
on Series B
Convertible
Redeemable
Preferred Stock.
<PAGE>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ -------- ------ --------- ------ --------- ------
SERIES B CONVERTIBLE SERIES A
REDEEMABLE CONVERTIBLE
PREFERRED STOCK, PREFERRED STOCK, COMMON STOCK, COMMON STOCK,
$0.01 PAR VALUE $0.01 PAR VALUE $0.01 PAR VALUE NO PAR VALUE
--------------- --------------- --------------- ------------
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income......... -- -- -- -- -- -- -- --
Balance, December 1,356,116 5,166,667 162,500 1,625 5,315,008 53,150 -- --
31, 1996........
Exercise of stock -- -- -- -- 130,263 1,302 -- --
options.........
Accrued dividends on -- 233,333 -- -- -- -- -- --
Series B
Convertible
Redeemable
Preferred Stock.
Conversion of Series (1,356,116) (5,400,000 ) (162,500) (1,625) 3,037,232 30,373 -- --
A and B Preferred
Stock...........
Issuance of common -- -- -- -- 3,000,000 30,000 -- --
stock in initial
public offering,
net of issuance
costs...........
Issuance of common -- -- -- -- 363,637 3,636 -- --
stock for
acquisition.....
Tax benefit from -- -- -- -- -- -- -- --
stock options...
Change in cumulative -- -- -- -- -- -- -- --
translation
adjustment......
Net loss........... -- -- -- -- -- -- -- --
Balance, December -- $ -- -- $ -- 11,846,140 $118,461 -- $ --
31, 1997........
TOTAL
ADDITIONAL CUMULATIVE STOCKHOLDERS'
PAIDIN ACCUMULATED TRANSLATION EQUITY
CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Net income......... -- 439,663 -- 439,663
Balance, December -- (1,521,547) -- (1,466,772)
31, 1996........
Exercise of stock 53,024 -- -- 54,326
options.........
Accrued dividends on -- (233,333) -- (233,333)
Series B
Convertible
Redeemable
Preferred Stock.
Conversion of Series 4,971,252 400,000 -- 5,400,000
A and B Preferred
Stock...........
Issuance of common 23,963,981 -- -- 23,993,981
stock in initial
public offering,
net of issuance
costs...........
Issuance of common 3,032,733 -- -- 3,036,369
stock for
acquisition.....
Tax benefit from 234,674 -- -- 234,674
stock options...
Change in cumulative -- -- 7,704 7,704
translation
adjustment......
Net loss........... -- (4,381,752) -- (4,381,752)
Balance, December $32,255,664 $(5,736,632) $7,704 $26,645,197
31, 1997........
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income (loss) .......................................................... $ (4,381,752) $ 439,663 $ 416,092
Adjustments to reconcile net income (loss) to net cash provided by (used ... 430,633 132,729 63,021
in) operating activities_Depreciation and amortization
Writeoff 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 longterm debt ................................................ -- 250,000 --
Payments on longterm 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.
<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
----------- ----------- ---------
$ 233,333 $166,667 $ --
Accrued dividends on Series B Convertible Redeemable Preferred Stock.......... $5,401,625 $ -- $ --
----------- ----------- ---------
Conversion of Series A and Series B Preferred Stock..............................
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.
<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,
technologyoriented 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.
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.
<PAGE>
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) SHORTTERM 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.
(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:
<PAGE>
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL 1997 1996
- -------------------- LIFE DECEMBER 31,
---------------- ------------
<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 of 116,543 33,435
the lease or the
estimated useful life
Motor vehicles................................... 4 years 99,755 --
Equipment under capital leases................... Shorter of the life of 95,802 95,802
the lease or the
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
offbalance 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.
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C> <C> <C>
Net income (loss)...................................... $(4,381,752) $439,663 $416,092
----------- -------- --------
7,819,683 5,916,793 6,400,000
Weighted average number of common shares outstanding...
Potential common shares pursuant to stock options...... -- 773,314 --
Potential common shares pursuant to conversion of -- 3,009,705 --
redeemable convertible preferred stock..............
----------- -------- --------
Diluted weighted average shares........................ 7,819,683 9,699,812 6,400,000
----------- -------- --------
$(0.56) $0.07 $0.07
Basic net income (loss) per share......................
Diluted net income (loss) per common and potential common $(0.56) $0.05 $0.07
share...............................................
</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.
<PAGE>
(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.
The aggregate purchase price of $7,536,369, including acquisition
costs, was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash.................................................................................... $631,284
Current assets.......................................................................... 821,607
Property and equipment.................................................................. 397,891
Acquired intangibles.................................................................... 590,000
Inprocess 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>
1997 (1) 1996 (1)
-------- --------
Year ended
December 31,
------------
<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
----------- -----------
<PAGE>
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.
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
<PAGE>
Capital lease obligations........................................................ 36,888 67,888
------ ------
36,888 317,888
Less_current maturities.......................................................... 36,888 105,651
------ ------
$ -- $212,237
------ ------
</TABLE>
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
---- ----
Deferred tax asset
<S> <C> <C>
Accrued expenses and reserve................................................. $380,000 $146,000
-------- --------
$(47,000) $(38,000)
Deferred tax liability Depreciation..........................................
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 _ 4.6 4.6 4.6
State tax provision, net of federal benefit..............................
Research and development tax credits.................................. (4.7) (8.6) (12.9)
Taxexempt 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>
<PAGE>
- -----------
(1) Calculated based on pretax income, before nondeductible charge for
purchased, in-process research and development, of $6,680,000 for 1997.
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 taxfree 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
<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
twoforone 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
nonqualified 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 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 nonqualified 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>
NUMBER OF EXERCISE PRICE WEIGHTED
<PAGE>
SHARES PER SHARE AVERAGE
------ --------- 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
WEIGHTED EXERCISABLE
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.
(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 stockbased 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:
<PAGE>
<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 $(0.58) $0.07
Basic................................................................
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.
Future minimum lease payments under these leases at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
<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
<PAGE>
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 $0.05 $0.08 $0.07 $(0.49)
Basic.....................................
Diluted................................ $0.03 $0.05 $0.06 $(0.49)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------
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 $0.01 $0.02 $0.02 $0.03
Basic.....................................
Diluted................................ $0.01 $0.02 $0.01 $0.02
</TABLE>
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
<PAGE>
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 2, 1998
OMTOOL, LTD.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DESCRIPTION BALANCE CHARGED TO WRITE-OFFS OTHER (1) BALANCE
- ----------- AT BEGINNING COSTS AND --------- --------- AT END
OF PERIOD EXPENSES 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.
<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>
