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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, 1998
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
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OMTOOL, LTD.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C>
DELAWARE 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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<S> <C>
8 INDUSTRIAL WAY, SALEM, NH 03079
(Address of Principal Executive Offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 898-8900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such 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 29, 1999, was approximately $50,454,088 (based upon the
closing price of the Registrant's Common Stock on March 29, 1999 of $3.81 per
share).
The number of shares outstanding of the Registrant's $.01 par value Common
Stock as of March 29, 1999 was 12,588,402.
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,
1998. Portions of such proxy statement are incorporated by reference into Part
III of this report.
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PART I
Except for the historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies;
(ii) anticipated trends in the Company's business; (iii) the Company's ability
to expand its product and service offerings; (iv) the Company's ability to
satisfy working capital requirements and (v) the Company's Year 2000 readiness.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, certain of which are
beyond the Company's control. Actual results could differ materially from these
forward-looking statements as a result of a number of factors including, but not
limited to, those factors described in "Certain Factors Affecting Future
Operating Results."
ITEM 1. BUSINESS
BUSINESS
Omtool, Ltd. ("Omtool" or the "Company") designs, develops, markets and
supports open, client/ server software, delivering solutions which automate and
integrate communication throughout the enterprise. Omtool's product families,
licensed typically on a shrink-wrap basis, provide users with an extensive,
flexible feature set for transmitting and receiving documents and improve an
organization's management of its communications processes by providing a suite
of utility and control functions. Omtool's software products 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, Omtool's products are modular and
scaleable, as servers, clients and fax lines can be implemented and added over
time. To date, Omtool's products have addressed the facsimile and document
communication needs of enterprises. Omtool's products are available on the
Windows NT, AS/400, Sun Solaris, and VMS server operating systems, and Windows
95, Windows NT, Windows 3.1.x, AS/400, Macintosh, Java and ActiveX clients.
Omtool has licensed its products 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 worldwide 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 continued to emerge to create
opportunities to automate, integrate and decrease the costs of 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, and the growth of wide area network ("WAN") infrastructure,
including high speed T1/T3 public networks. Also, the further emergence and
reliability of the Internet, T.37 standards for store-and-forward Internet
faxing and corporate intranets have created additional opportunities to decrease
and, in some cases, eliminate, the telecommunication costs of faxing. 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.
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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 traditional fax machines, fax
servers and enterprise applications causes additional inefficiencies in the
document communications and management process. Moreover, traditional fax
communication via fax machines 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. Furthermore, these approaches have failed to
integrate existing stand-alone fax machines and therefore use of these solutions
requires individuals to change established practices of using fax machines to
send facsimiles.
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. Additionally, such a solution should also incorporate these features
with more traditional methods of fax communication, such as stand-alone fax
machines, so that companies have the flexibility to choose the most efficient
method of faxing and eliminate the necessity of forcing individuals to change
their established practices of faxing.
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 solution provides the following key
benefits:
COMPREHENSIVE FAX SOLUTION. Omtool's products provide users with an
extensive, flexible feature set for transmitting, receiving and managing
facsimiles. Omtool's products are 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. Omtool's
products manage 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. Omtool's
products can be integrated with off-the-shelf software applications as well as
in-house custom applications.
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COMPLEMENTARY E-MAIL AND GROUPWARE FUNCTIONALITY. Omtool's products are
designed to connect to and complement e-mail and groupware by enabling faxes to
be sent and received through these applications. Omtool's products support
multiple, complementary e-mail and groupware systems, including Microsoft
Exchange, Lotus Notes, Microsoft Mail, Lotus cc:Mail and Simple Mail Transfer
Protocol ("SMTP").
LEVERAGE EXISTING INFRASTRUCTURE INVESTMENTS. Omtool's products are
designed to operate on heterogeneous networks and enable enterprises to leverage
their existing IT server, desktop infrastructure and telecommunications
investments. Omtool's products support multiple, simultaneous protocols and are
generally available on the Windows NT, AS/400, Sun Solaris and VMS server
operating systems, and Windows NT, Windows 95, Windows 3.1.x, AS/400, Macintosh,
Java, and ActiveX clients. Omtool's products operate with existing public and
leased telephone lines and enable users to take advantage of enhanced services
offered by telecommunication carriers and specialized service providers.
INTEGRATION WITH FAX MACHINES. Additionally, a new suite of Internet fax
products, planned for release in the second quarter of 1999, is designed to
permit companies to send faxes via the Internet and will integrate existing,
stand-alone fax machines with the enterprise's network fax servers. These
products are intended to enable a company to integrate its entire faxing
infrastructure. Furthermore, these offerings extend Fax Sr.'s management
capability to archive, store, view and monitor the enterprise's fax machine
inbound and outbound activity. This will enable telecommunications managers to
identify fax trends and manage costs more effectively for all of their
organization's inbound and outbound faxes.
ENTERPRISE-STRENGTH SOLUTION. Omtool's products are architected to be
modular and scaleable to meet the needs of worldwide enterprises. Servers,
clients, stand-alone fax machines and fax lines can be implemented and added
over time in a deployment of Omtool's fax communication products.
STRATEGY
The Company's objective is to become the leading provider of 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 its
products remain robust and scaleable 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 its core
product, 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 its core product, 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 continue to focus a portion of its near-term product
development efforts on Windows NT-related functionality. See "Factors Affecting
Future Performance."
ENTER VERTICAL MARKETS. With the acquisition of TRS Technologies, Inc. (now
known as Omtool Legal Systems) in February 1998, the Company has begun to pursue
opportunities in vertical industries. Omtool Legal Systems' primary product,
LegalFax, was specifically designed to provide law firms with network faxing
capabilities and to integrate with their cost recovery systems. The Company
believes that significant opportunities exist to expand into other vertical
industries and intends to pursue these opportunities by developing new products
that leverage the specialized features already developed for LegalFax. See
"Factors Affecting Future Performance."
ENTER LOW-END MARKETS. Historically, the Company has derived only a small
percentage of its revenue from sales of its products to small businesses. The
Company believes that there is potential to expand the use of its products into
this market. The Company has recently introduced its Fax Sr. Express
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product line that was designed for small businesses and for workgroups and
remote offices within larger organizations. The Fax Sr. Express product line
currently offers complete native integration with Microsoft Exchange and Outlook
e-mail systems and is designed to meet the needs of workgroups consisting of up
to 250 users. See "Factors Affecting Future Performance."
LEVERAGE EMERGING TECHNOLOGY. The Company believes that there are
opportunities to expand the use of its products by leveraging emerging
technology, such as the Internet, T.37 standards for store-and-forward Internet
faxing and corporate intranets, to decrease and, in some cases, eliminate, the
telecommunication costs of faxing. The Company intends to pursue these
opportunities by introducing new products in the near-term. Accordingly, the
Company intends to focus a significant portion of its near-term product
development efforts on Internet related functionality. See "Factors Affecting
Future Performance."
LEVERAGE INSTALLED BASE OF CUSTOMERS. The Company believes that significant
opportunities exist to expand the use of its products across more users and
applications at the Company's existing customer installations. The Company
intends to pursue these opportunities by introducing new products and 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 expanding its
indirect channels within the United States and internationally and continue to
expand its existing 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 1996, 1997 and 1998, approximately 5%, 10% and 17%,
respectively, of the Company's total revenues were derived from sales outside of
North America (primarily in Europe). In 1999, the Company plans to continue to
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 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, and Hewlett Packard, a provider of network scanning/fax machines.
Additionally, Omtool has recently entered into strategic alliances with
NetCentric Corporation, a provider of carrier-class Internet fax systems, and
System Software Associates (SSA), a global provider of enterprise resource
planning software.
PURSUE ACQUISITIONS. A key element of the Company's growth strategy is to
augment its internal growth with the acquisitions of businesses, products and
technologies that could complement or expand the Company's business. On December
5, 1997, the Company completed its acquisition of all of the outstanding share
capital of CMA Ettworth Limited, a provider of fax solutions for the IBM AS/400
market, providing the Company with a European presence as 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."
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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 and VMS server operating systems. In 1998,
approximately 69% 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, and
Macintosh.
Fax Sr. NT was first released in March 1995 and the current version, 3.0,
was released in December 1998. Fax Sr. Sun Solaris was first released in March
1998 and the current version, 5.2, was released in January 1999. Fax Sr. VMS was
first released in 1993 and the current version, 4.1, was released in March 1997.
Fax Sr. is comprised of three main components: Fax Sr. Client, Fax Sr.
Server and Fax Sr. Manager. The Fax Sr. Client allows users to send and receive
faxes directly from the desktop or enterprise application. The Fax Sr. Server
controls the function of prioritizing, queuing, and transmitting outbound faxes,
while receiving and distributing inbound faxes. The Fax Sr. Manager allows for
remote monitoring, control, and analysis of fax user activity from any Windows
or Windows NT system that is connected to the network.
Fax Sr. offers a comprehensive feature set with functionality important to
users, business managers and IT professionals. Fax Sr. users can fax documents,
together with attachments, from any desktop application through the
application's print function. Alternatively, faxes may be transmitted or
received directly through e-mail. Users can create and revise shared, public and
private phonebooks for fax transmissions. Fax Sr. offers a fax broadcast
capability with immediate or delayed transmission to take advantage of off-peak
telephone line utilization and charges. Inbound faxes can be directed to a
printer, desktop personal computer or e-mail. Fax Sr. also offers remote access,
including send and receive capability, for users who are away from the office.
Fax Sr. provides tools that allow business managers and IT professionals to
effectively manage the fax communication process. Outbound faxes can be
scheduled on the individual user level and enhanced management security and
control capabilities are provided by furnishing password protection as well as
user and location restrictions. Through global routing, Fax Sr. can least cost
route fax transmissions between servers, over an organization's WAN or the
Internet, allowing long distance fax transmissions to be made as local phone
calls. Fax Sr. also offers sophisticated tools for facsimile usage analysis,
including comprehensive recordkeeping of inbound and outbound faxes. The entire
Fax Sr. environment can be managed, configured and controlled from one or more
remote workstations.
Fax Sr. can be automatically linked to enterprise data processing
applications on multiple platforms connected on an enterprise's network. Fax Sr.
provides an integrated faxing environment across an organization's computer
platforms, including both servers and desktops. Fax Sr. is scaleable as a
business' need for faxing solutions expands.
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.
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
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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.
FAX SR. EXPRESS
Fax Sr. Express, a new version of Fax Sr. introduced in February 1999, is
designed for small businesses, workgroups and remote offices within larger
organizations. Fax Sr. Express incorporates the most widely used features of Fax
Sr. packaged in an easy-to-install, easy-to-manage, and easy-to-use product at a
lower price.
Fax Sr. Express is licensed on a shrink-wrap basis and runs on the Windows
NT version 4.0 operating system. Fax Sr. Express provides complete native
integration with Microsoft Exchange and Outlook e-mail systems and a Windows
32-bit desktop fax client application so users can easily send and receive faxes
from the desktop. Microsoft Management Console (MMC) based administration
provides the ability to configure or reconfigure fax modems, monitor inbound and
outbound fax queues, and add, delete or modify users and settings. Fax Sr.
Express installs all NT platform and Fax Sr. Express application components in
an easy-to-follow, step-by-step process and auto-detects and configures fax
modems.
The Company's Fax Sr. Express product is licensed to its customers on a per
server basis. Pricing is based on the number of servers, number of users, and
number of facsimile telephone lines deployed. The software list price for a
deployment of one NT server, 10 users, and two telephone lines is approximately
$800. The software list price to add ten additional users is approximately $400
and to add two additional telephone lines is approximately $600.
LEGALFAX
LegalFax is a client/server software solution for law firms to automate and
integrate fax communication and cost recovery systems. LegalFax is licensed
typically on a shrink wrap basis, primarily on the Windows 95/98 and Windows NT
operating systems. LegalFax supports Microsoft Mail, Microsoft Exchange, Novell
GroupWise, Lotus cc:Mail, and Lotus Notes and allows users to fax using native
transport protocol. Additionally, LegalFax is fully integrated with document
management systems such as PC DOCS Open, iManage, and SoftSolutions, as well as
with time and billing systems such as Equitrac, Elite and CMS Open.
LegalFax is comprised of four main components: LegalFax Client, LegalFax
Server, LegalFax Accounting and LegalFax FaxCenter. The LegalFax Client allows
users to send faxes directly from the desktop, automatically validating client
matter data and integrates with document management systems. The LegalFax Server
uses the Fax Sr. NT fax server as its fax engine and provides the messaging
gateway for fax transmissions. The LegalFax Accounting component allows
integration with cost recovery systems. The LegalFax FaxCenter allows fax
administrators to instantly route incoming faxes directly to workstations,
distribution lists, printers, or fax machines using existing e-mail networks.
LegalFax provides a comprehensive feature set with functionality important
specifically to users, business managers, and IT professionals in law firms.
LegalFax enables users to fax documents directly from document management
systems and to retrieve and automatically validate client matter data from such
systems before a fax is sent to the fax server. The LegalFax Accounting module
automatically captures this client and cost information and produces a custom
file which can be posted to most time and billing systems.
FAX/400
FAX/400 is a client/server software solution for automating and integrating
fax communication for AS/400 and Windows NT users. FAX/400 incorporates the Fax
Sr. NT Server and is a full-function fax system complete with built-in text
editor for internal and external e-mail, directory and distribution list
management. FAX/400 fully integrates with Microsoft Exchange, Lotus Notes, SMTP,
Microsoft Mail, and
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Lotus cc:Mail. FAX/400 can be configured with a variety of networked clients,
including AS/400 terminals, Windows 95, Windows NT, Macintosh, ActiveX, Java,
DOS and Office/Vision/400.
FAX/400 provides not only the feature set included in the Fax Sr. NT server
but also a comprehensive feature set with functionality important specifically
to users, business managers, and IT professionals of AS/400 systems. Fax/400
permits fax enabling of existing AS/400 line-of-business applications without
programming, and its directories and distribution lists facilitate easy
addressing of facsimiles. Additionally, FAX/400 provides a single point of
sending and receiving faxes, while delivering portability between Windows NT and
AS/400 mid-range systems.
FAX/400 allows faxes and e-mail to be sent in a variety of ways with or
without automatic fax covers. These faxes and e-mail can be created from any
terminal on the AS/400 system in the built-in text editor, Office/Vision/400 or
any Windows, OS/2 or DOS application. Connection via TCP/IP, Client Access,
Rumba, or Elite is supported in Windows 3.1, Windows 95, and OS/2 environments.
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 the Company's customers, and hardware is neither bundled with the
Company's software products nor required to be purchased from the Company.
Omtool primarily resells intelligent fax boards from vendors such as Brooktrout
Technology, Dialogic and Natural MicroSystems.
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
Company's products, 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.,
the Company's product line has expanded to include both client/server and stand
alone software that provide users with instant access to paging from within
applications. U-Page Messenger is a client/server paging software solution for
seamless integration of computer network and alphanumeric receiving devices.
This product allows unlimited users anywhere on a corporate network, intranet,
or internet to send messages to anyone carrying a message receiving device.
U-Page Messenger is available on Windows NT and Windows 95 operating systems.
U-Page Pro is a stand alone paging software solution for sending messages to
alphanumeric receiving devices from a computer desktop. U-Page Pro is available
in Windows 95, Windows NT, Windows 3.x and Macintosh versions. These new
products are sold through the distribution channels presently used for sales of
Fax Sr.
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SALES AND MARKETING
The Company historically targeted large and mid-sized corporations,
organizations and government entities as the primary market for its Fax Sr.
product line. With the introduction of Fax Sr. Express in February 1999, the
Company has begun to also target smaller businesses. 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, distributors and systems integrators.
The telesales group qualifies and pursues sales leads generated by Omtool's
marketing organization. The Company has historically conducted its telesales
operation from its various offices in the US and Europe. Direct sales by the
Company accounted for approximately 79%, 72% and 77%, respectively, of the
Company's total revenues in 1996, 1997 and 1998.
Within North America, the Company also offers its product lines through
indirect sales channels such as distributors, systems integrators and resellers
of complementary hardware products. The Company plans to expand the number of
resellers in North America selling its product lines and anticipates the
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 distribution
strategy is to engage large-volume distributors of software products to serve
customers that operate on a multi-national basis. The Company expects to
continue to market its products through independent distributors in strategic
international markets including Europe and South America. In 1996, 1997 and
1998, sales outside of North America represented approximately 5%, 10% and 17%,
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 seminars, 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 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. Additionally, Omtool has recently entered into strategic alliances
with NetCentric Corporation, a provider of carrier-class Internet fax systems,
and System Software Associates (SSA), a global provider of enterprise resource
planning software. 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, 1998, the Company had more than 2,500 customers
worldwide. The Company's customer base reflects the cross-industry applicability
of the Company's products and services.
8
<PAGE>
No single customer accounted for 10% or more of total revenues in 1996, 1997
or 1998.
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 develop new products, maintain technological competitiveness, enhance
its current product line 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 its
products' modular product architecture. Omtool's product development efforts are
focused on development of new products, the exploration of emerging
technologies, continued enhancement of existing products, development of new
features, and the integration of acquired products. 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
its product families. 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
1996, 1997 and 1998 was approximately $2.2 million, $3.9 million and $5.1
million, 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 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, including Internet enabled capabilities; 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., TopCall International and Biscom, Inc. The
Company also competes with providers offering a range of alternative facsimile
solutions including operating systems containing facsimile and document e-mail
features; low-end fax modem products; providers of desktop fax software;
single-platform facsimile software products; and customized proprietary software
solutions. In addition, providers of operating systems or business software
applications may bundle competitive facsimile solutions as part of their broader
product offerings.
Many of Omtool's competitors have longer operating histories and greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and market acceptance of their products and technologies than
the Company. In addition, there are relatively low barriers to entry in the
markets in which the Company operates, and new competition may arise either from
expansion by established companies or from new emerging companies or from
resellers of the Company's products. There can be no assurance that current or
potential competitors of Omtool will not develop products comparable or superior
in terms of price and performance features to those developed by the Company,
9
<PAGE>
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 products 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 operations.
EMPLOYEES
As of December 31, 1998, the Company employed 195 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.
10
<PAGE>
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 1998.
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 a 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
--------------------
<S> <C> <C>
QUARTER ENDED: HIGH LOW
- ------------------------------------------------------------------------------------------------- --------- ---------
1997
September 30, 1997............................................................................... $15 $9 1/4
December 31, 1997................................................................................ $14 3/4 $8 1/4
1998
March 31, 1998................................................................................... $14 1/8 $9 5/16
June 30, 1998.................................................................................... $13 7/8 $7 3/16
September 30, 1998............................................................................... $ 7 3/4 $2 1/4
December 31, 1998................................................................................ $ 3 1/4 $1 11/16
</TABLE>
On March 29, 1999, the closing price for the Common Stock was $13.00 per
share. As of March 29, 1999, there were approximately 82 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 1,566 additional beneficial holders.
The Company has not paid any cash dividends on its capital stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
intends to retain any earnings or other cash resources to finance future growth
of its business. Any future determinations to pay cash dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition and other factors deemed
relevant by the Board of Directors.
11
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The statements of consolidated operations data set forth below for each of
the fiscal years ended December 31, 1996, 1997 and 1998 and the balance sheet
data as of December 31, 1997 and 1998 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
statements of consolidated operations data for the fiscal years ended December
31, 1994 and 1995 and the balance sheet data as of December 31, 1994, 1995 and
1996 are derived from the Company's financial statements, which statements have
been audited by Arthur Andersen LLP and are not included herein. 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 in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997
-----------
1994 1995 1996 1998
--------- --------- --------- (RESTATED) ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software license................................................. $ 1,486 $ 2,780 $ 6,636 $ 14,232 $ 18,542
Hardware......................................................... 124 278 1,831 4,308 6,482
Service and other................................................ 338 870 1,879 3,032 6,088
--------- --------- --------- ----------- ---------
Total revenues................................................. 1,948 3,928 10,346 21,572 31,112
--------- --------- --------- ----------- ---------
Cost of revenues:
Software license................................................. 35 104 588 1,027 1,331
Hardware......................................................... 114 209 1,310 2,867 3,925
Service and other................................................ 130 319 993 1,450 2,951
--------- --------- --------- ----------- ---------
Total cost of revenues......................................... 279 632 2,891 5,344 8,207
--------- --------- --------- ----------- ---------
Gross profit................................................... 1,669 3,296 7,455 16,228 22,905
--------- --------- --------- ----------- ---------
Operating expenses:
Sales and marketing.............................................. 649 1,236 3,337 7,937 12,341
Research and development......................................... 414 893 2,217 3,955 5,059
General and administrative....................................... 721 750 1,129 2,140 4,755
Write-off of purchased, in-process research and development...... -- -- -- 3,100 --
Write-off of intangible asset.................................... 200 -- -- -- --
--------- --------- --------- ----------- ---------
Total operating expenses....................................... 1,984 2,879 6,683 17,132 22,155
--------- --------- --------- ----------- ---------
Income (loss) from operations...................................... (315) 417 772 (904) 750
Interest income (expense), net..................................... 12 (1) 16 392 754
--------- --------- --------- ----------- ---------
Income (loss) before provision (benefit) for income taxes.......... (303) 416 788 (512) 1,504
Provision (benefit) for income taxes............................... (70) -- 244 993 406
--------- --------- --------- ----------- ---------
Net income (loss).................................................. $ (233) $ 416 $ 544 $ (1,505) $ 1,098
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Net income (loss) per share (1)
Basic.......................................................... $ 0.07 $ 0.08 $ (0.18) $ 0.09
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Diluted........................................................ $ 0.07 $ 0.05 $ (0.18) $ 0.08
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Weighted average number of common shares outstanding (1)
Basic.......................................................... 6,400 6,596 8,499 12,713
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Diluted........................................................ 6,400 10,379 8,499 13,415
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 20 $ 632 $ 2,123 $ 2,354 $ 2,706
Working capital (deficit)........................................... (305) (9) 3,586 23,973 23,610
Total assets........................................................ 449 1,721 7,044 37,132 36,403
Long-term debt, net of current portion.............................. -- 21 212 -- --
Convertible redeemable preferred stock.............................. -- -- 5,167 -- --
Total stockholders' equity (deficit)................................ (405) 120 (1,253) 29,736 29,765
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies;
(ii) anticipated trends in the Company's business; (iii) the Company's ability
to expand its product and service offerings; (iv) the Company's ability to
satisfy working capital requirements and (v) the Company's Year 2000 readiness.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, certain of which are
beyond the Company's control. Actual results could differ materially from these
forward-looking statements as a result of a number of factors including, but not
limited to, those factors described in "Certain Factors Affecting Future
Operating Results."
OVERVIEW
Omtool designs, develops, markets and supports open, client/server software,
delivering solutions that automate and integrate communication throughout the
enterprise. The Company was incorporated in March 1991 and shipped its initial
facsimile software products in 1991. Omtool's Fax Sr., LegalFax and FAX/400
product families provide users with an extensive, flexible feature set for
transmitting and receiving faxes, and improve an organization's management of
its fax communications process by providing a suite of utility and control
functions. A majority of the Company's revenues are 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 sixteen quarters.
Revenues from software licenses are recognized upon shipment of the software
if there are no significant post-delivery obligations and collection of the
resulting receivable is deemed probable. Payments received in advance for
services or products are initially recorded as deferred revenue. The Company
provides a 30-day money back guarantee for its Fax Sr. product and reserves for
potential product returns and allowances at the time of shipment. Historically,
the Company has adequately reserved for such potential returns and allowances
The Company is dependent on licenses of its Fax Sr. NT product, first
licensed in March 1995, for a substantial portion of its revenues. In the years
ended December 31, 1998, 1997 and 1996, approximately 69%, 83% and 66%,
respectively, of the Company's software license revenues were derived from Fax
Sr. NT. In addition, a substantial portion 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 the Company's customers and hardware is neither bundled with the
Company's software products nor required to be purchased from the Company.
Omtool primarily resells intelligent fax boards from vendors such as Brooktrout
Technology, Dialogic and Natural MicroSystems. 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 a significant amount of consulting, configuration and
installation services, the Company intends to offer these customer services in
the future as warranted by customer demand.
13
<PAGE>
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 17%, 10% and 5% of the Company's total
revenues in 1998, 1997 and 1996, 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 "Acquisitions". 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.
The Company's United Kingdom subsidiary transacts business primarily in its
local currency. The Company manages its foreign exchange exposure by monitoring
its net monetary position using natural hedges of its assets and liabilities
denominated in local currencies. There can be no assurance that this policy will
eliminate all currency exposure. Foreign currency exposure has not been material
to the Company's financial position or results of operations to date. If the
Company's business denominated in foreign currencies increases, the Company may
be required to use derivatives to hedge foreign currency exposure.
Historically, the Company has marketed and sold its products principally
through its direct telesales force. However, the Company continues to actively
recruit VARs, systems integrators, resellers and distributors to expand its
indirect distribution channel. Sales through the Company's indirect distribution
channels represent approximately 23%, 28% and 21% of the Company's total
revenues for the years ended December 31, 1998, 1997 and 1996, respectively.
ACQUISITIONS
On December 5, 1997, the Company acquired all of the outstanding shares of
capital stock of CMA Ettworth Limited ("CMA Ettworth"). CMA Ettworth (now known
as Omtool Europe) is headquartered in London, England, with offices in Paris,
France and Melbourne, Florida, and designs, markets and supports fax solutions
for the IBM AS/400 market. As a result of the CMA Ettworth acquisition, the
Company acquired the CMA Ettworth Telex/Fax/400 software products for the IBM
AS/400 market including related know-how and goodwill. The purchase price was
paid with 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 was allocated
to purchased in-process research and development (IPR&D) for which the Company
incurred a one time charge against earnings of approximately $3.1 million (as
restated) in the quarter ended December 31, 1997. See "Discussion of Acquired
Technologies".
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. This transaction was accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements were restated to
include the accounts and operations of DPSI for all periods presented prior to
the acquisition.
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. This transaction was accounted for as a pooling of
interests and, accordingly, the Company's consolidated financial statements were
restated to include the accounts and operations of TRS for all periods presented
prior to the acquisition.
14
<PAGE>
Regarding Omtool's acquisition of CMA, the transaction was structured as a
purchase of the assets and the business of CMA. Subsequent to the acquisition,
it was appropriate to immediately expense the purchased in-process technology
that had not yet reached technological feasibility without any alternative use.
The value was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the purchased
in-process technology. In the Company's 1997 Form 10-K, the amount of the CMA
purchase price that was allocated to purchased in-process technology was
determined to be $6.7 million. This was based on accepted appraisal
methodologies used at the time of the allocation. Since that time, the
Securities and Exchange Commission (SEC) provided new guidance with respect to
the valuation of intangible assets in purchase business combinations, including
IPR&D. In response to this new guidance and comments received by the Company
from the SEC Staff, the Company obtained a revised independent appraisal
incorporating this new guidance, resulting in a change to the allocation of the
purchase price. The amount allocated to IPR&D has been revised to an allocation
of $3.1 million incorporating the new guidelines. The accompanying 1997
financial statements have been restated to reflect the above revised purchase
price allocation. The effect of the restatement was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Net loss, as previously reported........................................... $ (4,381,752)
-----------------
-----------------
Net loss, as restated...................................................... $ (1,504,843)
-----------------
-----------------
Diluted net loss per share, as previously reported......................... $ (0.56)
-----------------
-----------------
Diluted net loss per share, as restated.................................... $ (0.18)
-----------------
-----------------
</TABLE>
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED)
<S> <C> <C> <C>
Revenues:
Software license....................................................................... 59.6% 66.0% 64.1%
Hardware............................................................................... 20.8 20.0 17.7
Service and other...................................................................... 19.6 14.0 18.2
--------- --------- ---------
Total revenues....................................................................... 100.0 100.0 100.0
--------- --------- ---------
Cost of revenues:
Software license....................................................................... 4.3 4.8 5.7
Hardware............................................................................... 12.6 13.3 12.7
Service and other...................................................................... 9.5 6.7 9.5
--------- --------- ---------
Total cost of revenues............................................................... 26.4 24.8 27.9
--------- --------- ---------
Gross profit............................................................................. 73.6 75.2 72.1
--------- --------- ---------
Operating expenses:
Sales and marketing.................................................................... 39.7 36.8 32.3
Research and development............................................................... 16.3 18.3 21.4
General and administrative............................................................. 15.2 9.9 10.9
Write-off of purchased, in-process research and development............................ -- 14.4 --
--------- --------- ---------
Total operating expenses............................................................. 71.2 79.4 64.6
--------- --------- ---------
Income (loss) from operations............................................................ 2.4 (4.2) 7.5
Interest income, net..................................................................... 2.4 1.8 0.1
--------- --------- ---------
Income (loss) before provision for income taxes.......................................... 4.8 (2.4) 7.6
Provision for income taxes............................................................... 1.3 4.6 2.3
--------- --------- ---------
Net income (loss)........................................................................ 3.5% (7.0)% 5.3%
--------- --------- ---------
--------- --------- ---------
Gross profit:
Software license....................................................................... 92.8% 92.8% 91.1%
Hardware............................................................................... 39.4 33.4 28.5
Service and other...................................................................... 51.5 52.2 47.2
</TABLE>
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
TOTAL REVENUES. The Company's revenues are currently derived primarily from
licensing fees of the Company's software products and, to a lesser extent, from
related sales of hardware and services. The Company's total revenues were $31.1
million and $21.6 million for the years ended December 31, 1998 and 1997,
respectively, representing an increase of 44%.
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 $18.5 million for the year ended December 31, 1998 and $14.2
million for the year ended December 31, 1997, representing an increase of 30%.
Software license revenues accounted for 60% and 66% of total revenues for each
respective period. The increase in dollar amount was primarily due to increased
market acceptance of the Company's
16
<PAGE>
facsimile software products for various operating systems as well as the
expansion into new markets as a result of recent acquisitions. Approximately
$2.0 million of the increase in software license revenue is attributable to the
Company's acquisition of CMA-Ettworth Limited in December 1997. The decrease in
software license revenue as a percentage of total revenues is primarily
attributable to the increase in service and other revenue due to the Company's
larger installed customer base.
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 $6.5 million for the
year ended December 31, 1998 and $4.3 million for the year ended December 31,
1997, representing an increase of 50%. Hardware revenues accounted for 21% and
20% of total revenues for each respective period. The increase in hardware
revenues was due primarily to the increase of hardware unit sales accompanying
the Company's products and a change in the sales mix of third-party hardware
products from less expensive modem products to high-end multi-channel modem
boards.
SERVICE AND OTHER. Service and other revenues are primarily comprised of
fees from maintenance contracts. Service and other revenues were $6.1 million
and $3.0 million for 1998 and 1997, respectively, representing an increase of
101%. Service and other revenues accounted for 20% and 14% of total revenues for
each respective period. The increase in dollar amount was due primarily to an
increase in maintenance revenues as a result of a larger installed customer
base. The Company anticipates that service revenue will continue to increase as
the Company's installed base grows.
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 $1.3 million and $1.0
million in 1998 and 1997, respectively, representing 7% 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 1998
compared to the same period in 1997. Software license gross margin percentages
remained constant at 93% for the years ended December 31, 1998 and 1997.
HARDWARE. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $3.9 million and
$2.9 million in 1998 and 1997, respectively, representing 61% and 67% 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, 1998 was
due primarily to the increase of hardware unit sales accompanying the Company's
products and a change in the sales mix of third-party hardware products from
less expensive modem products to high-end multi-channel modem boards. The gross
margin percentage for hardware sales increased to 39% for 1998 from 33% in 1997
due to the change in the hardware sales mix.
SERVICE AND OTHER. Cost of service and other revenues consists primarily of
the costs incurred in providing telephone support as well as other miscellaneous
customer service-related expenses. Cost of service and other revenues was $3.0
million and $1.4 million in 1998 and 1997, respectively, representing 48% of
service and other revenues for each respective period. The increase in dollar
amount of cost of service and other revenues during the period was due primarily
to the hiring of incremental personnel to support growth in the customer base.
The gross margin percentage for service and other revenues remained constant at
52% for the years ended December 31, 1998 and 1997.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, and associated overhead costs, and the
cost of marketing programs such as direct mailings, public relations, trade
shows, seminars, and related communication costs. Sales and marketing expenses
were $12.3 million and $7.9 million in 1998 and 1997, respectively, or 40% and
37% of total revenues for each respective period. The increase in dollar amount
and the increase in sales and marketing expenses as
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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 planned increases in
marketing program activities. The Company expects that sales and marketing
expenses will remain relatively consistent with the current sales and marketing
expenses in absolute terms.
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 $5.1 million and $4.0 million in 1998 and 1997, respectively, or
16% and 18% of total revenues for each respective period. The increase in dollar
amount was primarily attributable to the employment of additional staff to
develop and enhance the Company's products and provide quality assurance as well
as the additional personnel added as a result of recent acquisitions. The
Company expects research and development expenses will remain relatively
consistent with current research and development expenses in absolute terms.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive and
finance personnel and associated overhead costs, as well as consulting,
accounting and legal expenses. General and administrative expenses were $4.8
million and $2.1 million in 1998 and 1997, respectively, or 15% and 10% of total
revenues for each respective period. The increase in dollar amount and as a
percentage of revenues was primarily attributable to an increase in personnel
and the overhead costs allocated to support such personnel as well as additional
administrative expenses and amortization expense incurred as a result of recent
acquisitions. The Company expects general and administrative expenses are likely
to continue to increase in absolute terms.
WRITE-OFF OF PURCHASED, IN-PROCESS RESEARCH AND DEVELOPMENT. In connection
with the acquisition of CMA Ettworth, the Company expensed $3.1 million of
in-process research and development costs that did not have a future alternative
use during the quarter ended December 31, 1997. See Note 4 of Notes to
Consolidated Financial Statements.
INTEREST INCOME, NET. Interest income, 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, net
represented income of $754,000 for the fiscal year ended December 31, 1998 and
$392,000 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 $406,000 and
$993,000 for fiscal years ended December 31, 1998 and 1997, respectively. The
effective income tax rate in 1998 was approximately 27% which is lower than the
combined federal and state statutory rates primarily as a result of tax credits
and tax-exempt interest. The effective income tax rate was approximately 38% in
1997, calculated based on pre-tax income before a non-deductible charge for
purchased, in-process research and development of $3.1 million, which
approximates the Company's respective federal and state statutory rates. See
Note 8 of Notes to Consolidated Financial Statements.
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
TOTAL REVENUES. The Company's total revenues were $21.6 million and $10.3
million in 1997 and 1996, respectively, representing an increase of 109%.
SOFTWARE LICENSE. Software license revenues were $14.2 million in 1997 and
$6.6 million in 1996, representing an increase of 114%. Software license
revenues accounted for 66% and 64% of total revenues
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for each respective period. 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 $4.3 million in 1997 and $1.8 million in
1996, representing an increase of 135%. Hardware revenues accounted for 20% and
18% of total revenues for each respective period. 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 $3.0 million in 1997 and
$1.9 million in 1996, representing an increase of 61%. Service and other
revenues accounted for 14% and 18% of total revenues for each respective period.
The increase in dollar amount was due primarily to the increase in maintenance
revenues as a result of a larger installed customer base.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues were $1.0 million and
$588,000 in 1997 and 1996, respectively, representing 7% and 9% of software
license revenues for each respective period. The increase in dollar amount was
primarily due to the higher volume of products shipped during fiscal year 1997
compared to the same period in 1996. Software license gross margin percentages
remained relatively constant at 93% in 1997 compared to 91% in 1996.
HARDWARE. Cost of hardware revenues were $2.9 million and $1.3 million in
1997 and 1996, respectively, representing 67% and 71% 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 33% in 1997 from 29% in 1998 due to
the change in the hardware sales mix.
SERVICE AND OTHER. Cost of service and other revenues were $1.4 million and
$993,000 in 1997 and 1996, respectively, representing 48% and 53% 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 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
52% from 47% for the fiscal year ended 1997 as compared to 1996.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $7.9 million and
$3.3 million in 1997 and 1996, respectively, or 37% and 32% of total revenues
for each respective period. The increase in dollar amount and the increase in
sales and marketing expenses as a percentage of total revenues was primarily due
to the Company's effort to expand its direct telesales force and marketing
organization, higher sales commissions associated with increased revenues and
increased marketing program activities.
RESEARCH AND DEVELOPMENT. Research and development expenses were $4.0
million and $2.2 in 1997 and 1996, respectively, or 18% and 21% 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 $2.1
million and $1.1 million in 1997 and 1996, respectively, or 10% and 11% of total
revenues for each respective period. The increase in dollar amount was primarily
attributable to an increase in personnel and the overhead costs allocated to
support such personnel.
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INTEREST INCOME, NET. Interest income, net represented income of $392,000
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 $993,000 and
$244,000 for fiscal years ended December 31, 1997 and 1996, respectively. The
effective income tax rate in 1997 was approximately 38% calculated based on
pre-tax income before non-deductible charge for purchased in-process research
and development of $3.1 million, which approximates the Company's federal and
state statutory rates. The effective income tax rate was 31% in 1996. Income
taxes in 1996 were provided at the Company's respective federal and state
statutory rates, reduced primarily for income tax credits. See Note 8 of Notes
to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since 1996, the Company has financed its operations primarily through cash
flow from operations, the private sales of preferred stock and the Company's
initial public offering of Common Stock completed in August 1997. At December
31, 1998, the Company had cash and cash equivalents of $2.7 million, short-term
investments of $18.0 million and working capital of $23.6 million.
The Company's operating activities provided cash of $1.1 million and $1.2
million for the years ended December 31, 1998 and 1997, respectively. Net cash
provided during the year ended December 31, 1998 consisted primarily of net
income from operations, depreciation and amortization, and increases in deferred
revenue and accounts payable, offset by increased accounts receivable and income
taxes payable. Net cash provided during the year ended December 31, 1997
consisted primarily of a net loss, increased accounts receivable and prepaid
expenses and other current assets, offset by the write-off of purchased,
in-process research and development, depreciation and amortization, and
increases in accrued expenses and deferred revenue.
Investing activities provided cash of $560,000 during the year ended
December 31, 1998 and used cash of $25.1 million during the year ended December
31, 1997. During the year ended December 31, 1998, the principal uses were
purchases of short-term investments, increases in other assets and purchases of
property and equipment, offset by proceeds from the sale of short-term
investments. 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.
Financing activities used cash of $1.3 million during the year ended
December 31, 1998 due primarily to the purchases of treasury stock. Financing
activities generated cash of $24.1 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.
At December 31, 1998, the Company did not have any material commitments for
capital expenditures.
Subject to the factors discussed below, the Company believes that the
existing cash balances, short-term investments and cash generated from
operations will be sufficient to finance the Company's operations for the next
twelve months. Although operating activities may provide cash in certain
periods, to the extent the Company grows in the future, its operating and
investing activities may use cash. There can be no assurance that any necessary
additional financing will be available to the Company on commercially reasonable
terms, or at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
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would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for all fiscal
quarters beginning within the Company's fiscal year ending December 31, 2000.
The Company believes that this statement will not have a significant impact on
the Company.
In March 1998, the AICPA issued SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF
A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, which amends certain
provisions of SOP 97-2. The Company believes it is in compliance with the
provisions of SOP 97-2 as amended by SOP 98-4. However, detailed implementation
guidelines for this standard have not yet been issued. Once issued, such
guidance could lead to unanticipated changes in the Company's current revenue
recognition practices, and such changes could be material to the Company's
results of operations. In December 1998, the AICPA issued SOP 98-9, MODIFICATION
OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS,
which amends certain provisions of SOP 97-2 and extends the deferral of the
application of certain passages of SOP 97-2 provided by SOP 98-4 until the
beginning of the Company's fiscal year 2000. The Company is currently evaluating
the impact of SOP 98-9 on its consolidated financial statements and related
disclosures.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. This standard requires companies to capitalize qualifying computer software
costs, which are incurred during the application development stage, and amortize
them over the software's estimated useful life. The Company is required to adopt
this standard in fiscal 1999 and is currently evaluating the impact that its
adoption will have on the consolidated financial position and results of
operations of the Company.
DISCUSSION OF ACQUIRED TECHNOLOGIES
CMA-Ettworth (now known as "Omtool Europe") was acquired in the quarter
ended December 31, 1997. The Company acquired in-process research and
development related to a strategic fax gateway solution called IMPS (Integrated
Message Processing Server), which was to provide integrated fax, voice, e-mail,
Internet connectivity and EDI on a single platform product application. Omtool
Europe is located in Kingston-upon-Thames, just outside of London, England, and
has two wholly owned subsidiaries, one in Paris, France and the other in
Melbourne, Florida.
At the time of the acquisition, Omtool Europe's in-process research and
development value was comprised of several ongoing projects which included (1)
development of a Windows NT 4.0-based server; (2) development of a 32-bit
Windows 95 client; (3) development of an email-to-fax capability; (4)
development of workload balancing functions; (5) development of least-cost
routing systems using a corporate WAN or the Internet; and (6) development of
in-bound fax routing techniques. These projects had not yet reached
technological feasibility at the time of the acquisition.
Development of the acquired in-process technology into commercially viable
products and services required efforts principally related to the completion of
all planning, designing, coding, prototyping, scalability verification, and
testing activities necessary to establish that the proposed technologies would
meet their design specifications, including functional, technical, and economic
performance requirements. The Company has successfully developed certain
acquired in-process research and development and is currently benefiting from
the technology through sales of the enhanced Omtool Fax Sr. applications.
Omtool's acquisition of Omtool Europe was structured as a purchase of the
assets and the business of Omtool Europe. Subsequent to the acquisition, it was
appropriate to immediately expense the purchased in-process technology that had
not yet reached technological feasibility without any alternative use. The value
was determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from such projects, and discounting the net cash flows back to their
present value. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the purchased in-process
technology. In the December 31, 1997 Form 10-K, the amount of the Omtool Europe
purchase price that was allocated to
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purchased in-process technology was determined to be $6.7 million. This was
based on accepted appraisal methodologies used at the time of the allocation.
Since the date of the September 30, 1998 filing, the allocation for in-process
technology has been revised to $3.1 million, incorporating new guidelines.
The acquired in-process research and development was valued at $3.1 million
based on an analysis of forecasted income. The developmental projects at the
time of the acquisition were not technologically feasible and had no alternative
future use. This conclusion was attributable to the fact that Omtool Europe had
not completed a working model that had been tested and proven to work at
performance levels which were expected to be commercially viable, and that the
technologies constituting the projects had no alternative use other than as an
enterprise fax software application. The value is attributable solely to the
development efforts completed as of the acquisition date.
The valuation included, but was not limited to, an analysis of (1) the
market for Omtool Europe products; (2) the completion costs for the projects;
(3) the expected cash flows attributable to the in-process research and
development projects; and (4) the risks associated with achieving such cash
flows. The assumptions underlying the cash flow projections were derived from
investment banking reports, independent analyst reports, Omtool and Omtool
Europe company records, and discussions with the management of both companies.
Primary assumptions such as revenue growth and profitability were compared to
indications of similar companies as well as to indications from industry analyst
reports, to determine the extent to which these assumptions were supportable.
The Company did not assume in its model any material change in its profit
margins as a result of the acquisition and did not assume any material increases
in selling, general and administrative expenses as a result of the acquisition.
The Company did not anticipate any expense reductions or other synergies as a
result of the acquisition. The basis of the acquisition was an attempt to
enhance the Company's competitive position by offering a broader product line,
including support for AS/400 systems and the implementation of advanced
technologies such as least-cost routing, load balancing, in-bound fax routing
and fax-to-email connectivity.
In the analysis, revenues attributable to the Omtool Europe in-process
technologies were estimated to total approximately $70 million over five years
assuming the successful completion and market acceptance of the new Omtool
Europe technology in conjunction with Omtool products, in particular the Fax Sr.
product line. Revenues were expected to peak in 2001 and then decline as other
new products and technologies are expected to enter into the market. The Company
does not break down revenues attributable specifically to Omtool Europe-derived
products; since products are offered both as a suite and as individual
applications, Omtool license fees are not necessarily application-specific.
However, the Company believes that revenues generated to date concur with the
assumptions used in the valuation analysis.
Because the Company does not account for expenses by product, it is not
possible to determine the actual expenses associated with the technology
acquired from Omtool Europe. The Company currently believes that expenses
associated with completing the purchased in-process research and development and
integrating the technology with the Company's existing products are
approximately consistent with the Company's estimates used in the analysis and
that completion dates for the Omtool Europe development projects discussed above
concur with projections used at the time of the acquisition. Research and
development spending with respect to these offerings is expected to continue at
a rate that is consistent with the Company's overall research and development
spending. The Company does not believe that the acquisition resulted in any
material changes in its profit margins or in selling, general and administrative
expenses. The Company does not believe that it achieved any material expense
reductions or synergies as a result of the acquisition.
The rates utilized to discount the net cash flows to their present value
were consistent with the nature of the forecast and the risks associated with
the projected growth, profitability and developmental projects. A discount rate
of 24% was deemed appropriate for the business enterprise and for the in-process
research and development. These discount rates were consistent with Omtool
Europe's stage of development; the
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uncertainties in the economic estimates described above; the inherent
uncertainty at the time of the acquisition surrounding the successful
development of the purchased in-process technology; the useful life of such
technology; the profitability levels of such technology; and the inherent
uncertainties of the technological advances that were indeterminable at the time
of the acquisition.
The forecast used in valuing the in-process research and development were
based upon assumptions the Company believed to be reasonable but which were
inherently uncertain and unpredictable. For these reasons, actual results may
vary from projected results. The Company continues to develop all of its
products with the acquired technologies. The Company maintains a research and
development group with facilities in the United Kingdom.
YEAR 2000 READINESS DISCLOSURE STATEMENT
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21(st) century dates from
20(th) century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.
The Company is in the process of evaluating the Year 2000 readiness of the
software products sold by the Company ("Products"). The Company performs
on-going assessments of the current versions of its most significant Products
and believes they are generally Year 2000 compliant. Even so, the assessment of
whether a complete system or device in which a Product is embedded will operate
correctly for an end-user depends in large part on the Year 2000 compliance of
the system's other components, most of which are supplied by parties other than
the Company. The cost to evaluate the Company's Year 2000 compliance has not
been material to date and the Company does not expect future expenditures to be
material. To the extent that the Company's Products are sold through system
integrators or other third parties, there can be no assurance that the users of
the Company's Products will not experience Year 2000 problems as a result of the
integration of the Company's software with noncompliant Year 2000 products of
such third party suppliers. In addition, in certain circumstances, the Company
has warranted that the use or occurrence of dates on or after January 1, 2000
will not adversely affect the performance of the Company's Products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.
The Company has certain key relationships with suppliers of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. If these suppliers fail to adequately
address the Year 2000 issue for the hardware products they provide to the
Company, and as a result, any of the Company's hardware customers experience
Year 2000 problems such customers could discontinue use of the Company's
Products resulting in a material adverse impact on the Company's operations and
financial results. The Company is still addressing the effect the Year 2000
issue will have on its suppliers and at this time, cannot determine the impact
it will have.
The Year 2000 issue also affects the Company's internal systems, including
information technology (IT) systems, such as management information systems and
financial accounting packages, and non-IT systems, such as building security,
voice mail and other systems. Omtool is assessing the readiness of its systems
for handling the Year 2000. Although the assessment is still underway,
management currently believes that all material internal systems will be
compliant by the Year 2000 and that the cost to address any issues will not be
material.
To date, the Company has not identified a complete and separate budget for
investigating and remedying issues related to Year 2000 compliance, whether
involving the Company's own software products or the software of systems used in
its internal operations. Additionally, the Company has currently not developed a
contingency plan related to Year 2000. The Company expects to evaluate the
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costs versus the benefits of developing such a plan in fiscal year 1999. There
can be no assurance that the Company's resources spent on the investigating and
remedying Year 2000 compliance issues will not have a material adverse effect on
the Company's business, financial condition and results of operations. Moreover,
customer purchasing patterns may be affected by Year 2000 issues as customers
delay purchases in anticipation of the future release of Year 2000 compliant
products or releases, and as customers expend significant resources to upgrade
their current software systems and applications for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company.
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 a substantial portion 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. The Company is devoting a
significant portion of its near-term product development efforts on Internet
related functionality. 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 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, including
Internet related capabilities;
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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., TopCall International and Biscom, Inc. The
Company also competes with vendors offering a range of alternative facsimile
solutions including operating systems containing facsimile and document
transmission features; low-end fax modem products; desktop fax software;
single-platform facsimile software products; and customized proprietary software
solutions. In addition, providers of operating systems or business software
applications may bundle competitive facsimile solutions as part of their broader
product offerings.
Many of the Company's competitors have longer operating histories and
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition and market acceptance of their products and
technologies than the Company. In addition, there are relatively low barriers to
entry in the markets in which the Company operates, and new competition may
arise either from expansion by established companies or from new emerging
companies or from resellers of the Company's products. There can be no assurance
that current or potential competitors of the Company will not develop products
comparable or superior in terms of price and performance features to those
developed by the Company, adapt more quickly than the Company to new or emerging
technologies and changes in market opportunities or customer requirements,
establish alliances with industry leaders, or take advantage of acquisition
opportunities more readily than the Company. In addition, no assurance can be
given that the Company will not be required to make substantial additional
investments in connection with its research, development, engineering,
marketing, sales and customer service efforts in order to meet any competitive
threat, or that such required investments will not have a material adverse
effect on operating margins. Increased competition will result in reduction in
market share, pressure for price reductions and related reductions in gross
margins, any of which could materially adversely affect the Company's ability to
achieve its financial and business goals. There can be no assurance that in the
future the Company will be able to successfully compete against current and
future competitors.
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,
including the planned Internet enabled products, 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
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the acquired businesses with its existing operations, and no assurance can be
given that the Company will be successful in this regard. The Company has
limited experience in intergrating acquired companies into its operations, in
expanding the scope of operations of required businesses, in managing
geographically dispersed operations, and in operating internationally. In the
past the Company has incurred one-time costs and expenses in connection with
acquisitions and it is likely that similar one-time costs and expenses may be
incurred in connection with future acquisitions. In addition, attractive
acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers and the possible need to obtain
regulatory approval. There can be no assurance that the Company will be able to
complete future acquisitions. In order to finance such acquisitions, it may be
necessary for the Company to raise additional funds either through public or
private financings, including bank borrowings. Any financing, if available at
all, may be on terms which are not favorable to the Company. The Company may
also issue shares of its Common stock to acquire such businesses, which may
result in dilution to the Company's existing stockholders.
LIMITED OPERATING HISTORY. The Company was incorporated in March 1991 and
shipped its initial facsimile software products in 1991. The Company has
significantly increased its operating expenses in recent periods as it has
continued to expand its organization to support sales growth and product
development. Although the Company has experienced significant growth during the
past three years, the Company does not believe that prior growth rates are
sustainable or indicative of future operating results. There can be no assurance
that the Company will be able to increase its level of revenues or maintain
profitability in the future. Increases in operating expenses are expected to
continue and, together with pricing pressures, may result in a decrease in
operating income and operating margin percentage. The Company's limited
operating history makes the prediction of future operating results difficult or
impossible. Future operating results will depend on many factors, including,
without limitation, the degree and rate of growth of the markets in which the
Company competes and the accompanying demand for the Company's products, the
level of acceptance of the Windows NT operating system, the level of product and
price competition, the ability of the Company to establish strategic
relationships and develop and market new and enhanced products and to control
costs, the ability of the Company to expand its direct telesales force and
indirect distribution channels both domestically and internationally, and the
ability of the Company to attract and retain key personnel.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS; SEASONALITY. The Company's
quarterly revenues and results of operations have fluctuated significantly in
the past and will likely fluctuate significantly in the future. Causes of such
fluctuations have included and may include, among others, the demand for the
Company's products and services, the size and timing of orders, the number,
timing and significance of new product announcements by the Company and its
competitors, the ability of the Company to develop, introduce, market and ship
new and enhanced versions of the 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.
26
<PAGE>
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 with an increasing
percentage of orders in any quarter being received in the last weeks of the
quarter. License fee revenues from quarter to quarter are difficult to forecast,
as no significant order backlog exists at the end of any quarter because the
Company's products typically are shipped upon receipt of customers' orders.
A substantial portion of the Company's operating expense is related to
personnel, facilities, equipment and marketing programs. The level of spending
for such expense cannot be adjusted quickly and is therefore fixed in the short
term. The Company's expense levels for personnel, facilities, equipment and
marketing programs are based, in significant part, on the Company's expectations
of future revenues on a quarterly basis. If actual revenue levels on a quarterly
basis are below management's expectations, results of operations are likely to
be adversely affected by a similar amount because a relatively small amount of
the Company's expense varies with its revenue in the short term.
Due to all of the foregoing factors, it is likely that in some future
periods the Company's results of operations will be below the expectations of
securities analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
ABILITY TO MANAGE GROWTH. The Company has rapidly and significantly
expanded its operations and anticipates that significant expansion will continue
to be required in order to address potential market opportunities. The Company
anticipates that it will continue to significantly increase the size of its
sales and marketing, research and development, customer support and
administrative operations. There can be no assurance that such expansion will be
successfully completed or that it will generate sufficient revenues to cover the
Company's expenses. The Company will need to continue to attract and retain
highly qualified technical, sales and managerial personnel. There can be no
assurance that the Company will be able to retain or continue to hire such
personnel in the future. The inability of the Company to effectively expand
operations and manage growth, if any, could have a material adverse effect on
the Company's business, financial condition and results of operations.
EXPANSION OF INDIRECT CHANNELS; POTENTIAL FOR CHANNEL CONFLICT. The Company
markets its products and services directly through telesales and indirectly
through marketing channels such as value-added resellers ("VARs"), systems
integrators and distributors. Although the Company has historically focused its
efforts on marketing through its telesales force, the Company is increasing
resources dedicated to developing and expanding indirect marketing channels.
There can be no assurance that the Company will be able to attract and retain a
sufficient number of qualified VARs, systems integrators and distributors to
market successfully the Company's products. In addition, there can be no
assurance that the Company's resellers will not develop, acquire or market
computer-based facsimile products competitive with the Company's products. The
failure to retain its VARs, systems integrators and distributors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The distributor agreements generally provide that either party may terminate
the agreement without cause upon 30 days written notice to the other party. The
Company also resells its products on a purchase order basis through other VARs,
systems integrators and distributors. Such relationships may be terminated by
either party, at any time, and therefore, there can be no assurance that any
VAR, systems integrator or distributor will continue to represent the Company's
products. The inability to retain certain VARs, systems integrators or
distributors, or the development or marketing by VARs, systems integrators
27
<PAGE>
or distributors of competitive offerings, could have a material adverse effect
on the Company's business, financial condition and results of operations.
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered. The Company's strategy of marketing its products directly to
end-users and indirectly through VARs, systems integrators and distributors may
result in distribution channel conflicts. The Company's direct sales efforts may
compete with those of its indirect channels and, to the extent different
resellers target the same customers, resellers may also come into conflict with
each other. As the Company strives to expand its indirect distribution channels,
there can be no assurance that emerging channel conflicts will not materially
adversely affect its relationships with existing VARs, systems integrators or
distributors or adversely affect its ability to attract new VARs, systems
integrators and distributors.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. A key element of the
Company's strategy is to continue to increase its international sales. The
Company expects to face competition from local facsimile product providers in
their native countries. To successfully expand international sales, the Company
will need to recruit and retain additional international resellers and
distributors. In order to penetrate the international market more fully, the
Company has translated its products into several foreign languages. There can be
no assurance that the completion of such translation will allow the Company to
capitalize on the international market opportunity. There can be no assurance
that the Company will be able to maintain or increase international sales of its
products or that the Company's international distribution channels will be able
to adequately market, service and support the Company's products. International
operations generally are subject to certain risks, including dependence on
independent resellers, fluctuations in foreign currency exchange rates,
compliance with foreign regulatory and market requirements, variability of
foreign economic conditions and changing restrictions imposed by United States
export laws. Additional risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
tariffs and other trade barriers, costs of localizing products for foreign
countries, lack of acceptance of localized products in foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, difficulties in enforcing intellectual property rights and the
burdens of complying with a wide variety of foreign laws. With the acquisition
of CMA Ettworth, based in London, England, in December 1997, the Company
obtained its first sales offices outside of the United States. Such operations
are subject to certain additional risks, including difficulties in staffing and
managing such operations and potentially adverse tax consequences including
restrictions on the repatriation of earnings. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
international sales and, consequently, the Company's business, financial
condition and results of operations. To date, a majority of the Company's sales
have been made in United States dollars and the Company has not engaged in any
hedging transactions through the purchase of derivative securities or otherwise.
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.
28
<PAGE>
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
As of December 31, 1998, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments consist of money market funds and municipal bonds that are carried
on the Company's books at amortized cost, which approximates fair market value.
Accordingly, the Company has no quantitative information concerning the market
risk of participating in such investments.
PRIMARY MARKET RISK EXPOSURES
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's exposure to currency
exchange rate fluctuations has been and is expected to continue to be modest due
to the fact that the operations of its United Kingdom subsidiary are almost
exclusively conducted in its local currency. The United Kingdom subsidiary
operating results are translated into U.S. dollars and consolidated for
reporting purposes. The impact of currency exchange rate movements on
intercompany transactions was immaterial for the year ended December 31, 1998.
Currently the Company does not engage in foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the auditors'
reports thereon, appear at pages F-1 through F-23, 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, 1998.
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, 1998.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
29
<PAGE>
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1998.
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, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report
(1) Financial Statements Listed under Part II, Item 8 and included herein by
reference.
(2) Financial Statement Schedules
All schedules are not submitted because they are not applicable, not
required or because the information is included in the Financial
Statements as Notes to Financial Statements.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1, No. 333-29397 and incorporated herein by reference)
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.4 to the Company's Registration
Statement on Form S-1, No. 333-29397 and incorporated herein by reference)
4.1 Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, No. 333-29397 and incorporated herein by reference)
10.1 1996 Stock Option Plan (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
10.2 1997 Stock Plan (filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
10.3 1997 Employee Stock Purchase Plan (filed as Exhibit 10.3 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
10.4 Lease dated November 26, 1997 between H.J. Brooks Limited Liability Company and Omtool, Ltd.
10.5 Form of Omtool Software License (filed as Exhibit 10.12 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27.1 Current Financial Data Schedule
27.2 Restated Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
The Company did not file any current report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1998.
(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).
30
<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 30th day of March 1999.
<TABLE>
<S> <C> <C>
OMTOOL, LTD.
By: /s/ ROBERT L. VOELK
-----------------------------------------
Robert L. Voelk
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN
</TABLE>
POWER OF ATTORNEY
We, the undersigned officers and directors of Omtool, Ltd., hereby severally
constitute and appoint Robert L. Voelk and Darioush Mardan, and each of them
singly, our true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution in each of them, to sign for us and in our names
in the capacities indicated below, and generally to do all such things in our
names and on our behalf in our capacities as officers and directors to enable
Omtool, Ltd. to comply with the provisions of the Securities Exchange Act of
1934, as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ROBERT L. VOELK Chief Executive Officer
- ------------------------------ and Chairman (principal March 30, 1999
Robert L. Voelk executive officer)
Senior Vice President,
Finance, Chief Financial
/s/ DARIOUSH MARDAN Officer, Secretary and
- ------------------------------ Treasurer (principal March 30, 1999
Darioush Mardan financial and accounting
officer)
/s/ MARTIN A. SCHULTZ
- ------------------------------ President and Director March 30, 1999
Martin A. Schultz
/s/ RICHARD D. CRAMER
- ------------------------------ Director March 30, 1999
Richard D. Cramer
/s/ BRUCE R. EVANS
- ------------------------------ Director March 30, 1999
Bruce R. Evans
/s/ WILLIAM C. STYSLINGER,
III
- ------------------------------ Director March 30, 1999
William C. Styslinger, III
</TABLE>
31
<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, 1998 and 1997 (Restated).................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 (Restated), and 1996..... F-4
Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders' Equity (Deficit) for
the years ended December 31, 1998, 1997 (Restated), and 1996............................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 (Restated), and 1996..... F-6
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Omtool, Ltd.:
We have audited the accompanying consolidated balance sheets of Omtool, Ltd.
(a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997 (as
restated--see Note 4), and the related consolidated statements of operations,
convertible redeemable preferred stock and stockholders' equity (deficit) and
cash flows for the years ended December 31, 1998, 1997 (as restated--see Note 4)
and 1996. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 22, 1999
F-2
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
<CAPTION>
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 2,706,038 $ 2,353,680
Short-term investments........................................................... 18,039,250 21,179,766
Accounts receivable, less reserves of $1,345,000 and $1,245,000 in 1998 and 1997,
respectively................................................................... 6,209,390 4,931,490
Prepaid expenses and other current assets........................................ 1,912,404 1,542,826
Deferred tax asset............................................................... 697,000 380,000
------------- -------------
Total current assets......................................................... 29,564,082 30,387,762
Property and equipment, net........................................................ 1,770,800 1,788,388
Other assets, net.................................................................. 5,068,029 4,956,002
------------- -------------
$ 36,402,911 $ 37,132,152
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligations........................................................ $ 14,047 $ 36,888
Line of credit................................................................... -- 244,563
Accounts payable................................................................. 1,328,442 998,801
Accrued liabilities.............................................................. 1,667,964 2,082,416
Income taxes payable............................................................. -- 812,729
Deferred revenue................................................................. 2,943,848 2,239,662
------------- -------------
Total current liabilities.................................................... 5,954,301 6,415,059
------------- -------------
Deferred tax liability............................................................. 644,406 883,000
------------- -------------
Long-term liabilities.............................................................. 38,935 98,362
------------- -------------
Commitments (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value
Authorized--2,000,000 shares; Issued and outstanding--none..................... -- --
Common Stock, $.01 par value
Authorized--35,000,000 shares
Issued--13,009,372 in 1998 and 12,525,410 shares in 1997....................... 130,093 125,253
Additional paid-in capital......................................................... 33,353,598 32,451,122
Accumulated deficit................................................................ (1,750,596) (2,848,348)
Treasury Stock (660,780 shares at cost in 1998).................................... (1,961,126) --
Cumulative translation adjustment.................................................. (6,700) 7,704
------------- -------------
Total stockholders' equity................................................... 29,765,269 29,735,731
------------- -------------
$ 36,402,911 $ 37,132,152
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
(RESTATED)
<S> <C> <C> <C>
Revenues:
Software license................................................... $ 18,542,007 $ 14,232,539 $ 6,635,658
Hardware........................................................... 6,482,562 4,308,086 1,831,138
Service and other.................................................. 6,087,615 3,031,867 1,878,886
------------- ------------- ------------
Total revenues................................................... 31,112,184 21,572,492 10,345,682
------------- ------------- ------------
Cost of revenues:
Software license................................................... 1,331,068 1,026,934 588,056
Hardware........................................................... 3,925,421 2,867,227 1,309,809
Service and other.................................................. 2,950,718 1,449,795 992,655
------------- ------------- ------------
Total cost of revenues........................................... 8,207,207 5,343,956 2,890,520
------------- ------------- ------------
Gross profit..................................................... 22,904,977 16,228,536 7,455,162
------------- ------------- ------------
Operating expenses:
Sales and marketing................................................ 12,340,919 7,937,094 3,337,409
Research and development........................................... 5,058,579 3,954,792 2,216,670
General and administrative......................................... 4,755,179 2,140,412 1,129,155
Write-off of purchased, in-process research and development (Note
4)............................................................... -- 3,100,000 --
------------- ------------- ------------
Total operating expenses......................................... 22,154,677 17,132,298 6,683,234
------------- ------------- ------------
Income (loss) from operations.................................... 750,300 (903,762) 771,928
Interest income.................................................... 764,322 447,306 43,093
Interest expense................................................... (10,435) (55,042) (26,680)
------------- ------------- ------------
Income (loss) before provision for income taxes.................. 1,504,187 (511,498) 788,341
Provision for income taxes......................................... 406,435 993,345 243,930
------------- ------------- ------------
Net income (loss)................................................ $ 1,097,752 $ (1,504,843) $ 544,411
------------- ------------- ------------
------------- ------------- ------------
Net income (loss) per share:
Basic............................................................ $ 0.09 $ (0.18) $ 0.08
------------- ------------- ------------
------------- ------------- ------------
Diluted.......................................................... $ 0.08 $ (0.18) $ 0.05
------------- ------------- ------------
------------- ------------- ------------
Weighted average number of common shares outstanding:
Basic............................................................ 12,713,169 8,498,953 6,596,063
------------- ------------- ------------
------------- ------------- ------------
Diluted.......................................................... 13,414,958 8,498,953 10,379,082
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------
<S> <C> <C> <C> <C> <C>
SERIES B CONVERTIBLE SERIES A COMMON
REDEEMABLE CONVERTIBLE STOCK,
PREFERRED STOCK, PREFERRED STOCK, $0.01 PAR
$0.01 PAR VALUE $0.01 PAR VALUE VALUE
------------------------- ---------------------- -----------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES
----------- ------------ ----------- --------- -----------
Balance, December 31, 1995......................................... -- $ -- -- $ -- 7,079,270
Sale of Series A Convertible Preferred Stock..................... -- -- 162,500 1,625 --
Sale of Series B Convertible Redeemable Preferred Stock, net of
issuance costs of $76,068...................................... 1,356,116 5,000,000 -- -- --
Purchase and retirement of common stock.......................... -- -- -- -- (1,084,992)
Accrued dividends on Series B Convertible Redeemable Preferred
Stock.......................................................... -- 166,667 -- -- --
Net income....................................................... -- -- -- -- --
----------- ------------ ----------- --------- -----------
Balance, December 31, 1996......................................... 1,356,116 5,166,667 162,500 1,625 5,994,278
Exercise of stock options........................................ -- -- -- -- 130,263
Accrued dividends on Series B Convertible Redeemable Preferred
Stock.......................................................... -- 233,333 -- -- --
Conversion of Series A and B Preferred Stock..................... (1,356,116) (5,400,000) (162,500) (1,625) 3,037,232
Issuance of common stock in initial public offering net of
issuance costs................................................. -- -- -- -- 3,000,000
Issuance of common stock for acquisition......................... -- -- -- -- 363,637
Tax benefit from exercise of stock options....................... -- -- -- -- --
Change in cumulative translation adjustment...................... -- -- -- -- --
Net loss, as restated............................................ -- -- -- -- --
----------- ------------ ----------- --------- -----------
Balance, December 31, 1997, as restated............................ -- -- -- -- 12,525,410
Purchase of Treasury Stock....................................... -- -- -- -- --
Exercise of stock options and issuance of shares through Employee
Stock Purchase Plan............................................ -- -- -- -- 483,962
Tax benefit from exercise of stock options....................... -- -- -- -- --
Change in cumulative translation adjustment...................... -- -- -- -- --
Net income....................................................... -- -- -- -- --
----------- ------------ ----------- --------- -----------
Balance, December 31, 1998......................................... -- $ -- -- $ -- 13,009,372
----------- ------------ ----------- --------- -----------
----------- ------------ ----------- --------- -----------
<CAPTION>
<S> <C> <C> <C>
TREASURY STOCK
------------------------- ADDITIONAL
NUMBER OF PAID-IN
AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- ------------ ------------
Balance, December 31, 1995......................................... $ 70,792 -- $ -- $ 195,458
Sale of Series A Convertible Preferred Stock..................... -- -- -- 323,375
Sale of Series B Convertible Redeemable Preferred Stock, net of
issuance costs of $76,068...................................... -- -- -- (76,068)
Purchase and retirement of common stock.......................... (10,850) -- -- (247,307)
Accrued dividends on Series B Convertible Redeemable Preferred
Stock.......................................................... -- -- -- --
Net income....................................................... -- -- -- --
--------- ----------- ------------ ------------
Balance, December 31, 1996......................................... 59,942 -- -- 195,458
Exercise of stock options........................................ 1,302 -- -- 53,024
Accrued dividends on Series B Convertible Redeemable Preferred
Stock.......................................................... -- -- -- --
Conversion of Series A and B Preferred Stock..................... 30,373 -- -- 4,971,252
Issuance of common stock in initial public offering net of
issuance costs................................................. 30,000 -- -- 23,963,981
Issuance of common stock for acquisition......................... 3,636 -- -- 3,032,733
Tax benefit from exercise of stock options....................... -- -- -- 234,674
Change in cumulative translation adjustment...................... -- -- -- --
Net loss, as restated............................................ -- -- -- --
--------- ----------- ------------ ------------
Balance, December 31, 1997, as restated............................ 125,253 -- -- 32,451,122
Purchase of Treasury Stock....................................... -- (660,780) (1,961,126) --
Exercise of stock options and issuance of shares through Employee
Stock Purchase Plan............................................ 4,840 -- -- 223,971
Tax benefit from exercise of stock options....................... -- -- -- 678,505
Change in cumulative translation adjustment...................... -- -- -- --
Net income....................................................... -- -- -- --
--------- ----------- ------------ ------------
Balance, December 31, 1998......................................... $ 130,093 (660,780) $ (1,961,126) $ 33,353,598
--------- ----------- ------------ ------------
--------- ----------- ------------ ------------
<CAPTION>
TOTAL
CUMULATIVE STOCKHOLDERS'
ACCUMULATED TRANSLATION EQUITY
DEFICIT ADJUSTMENT (DEFICIT)
------------ ----------- ------------
Balance, December 31, 1995......................................... $ (145,890) $ -- $ 120,360
Sale of Series A Convertible Preferred Stock..................... -- -- 325,000
Sale of Series B Convertible Redeemable Preferred Stock, net of
issuance costs of $76,068...................................... -- -- (76,068)
Purchase and retirement of common stock.......................... (1,742,026) -- (2,000,183)
Accrued dividends on Series B Convertible Redeemable Preferred
Stock.......................................................... (166,667) -- (166,667)
Net income....................................................... 544,411 -- 544,411
------------ ----------- ------------
Balance, December 31, 1996......................................... (1,510,172) -- (1,253,147)
Exercise of stock options........................................ -- -- 54,326
Accrued dividends on Series B Convertible Redeemable Preferred
Stock.......................................................... (233,333) -- (233,333)
Conversion of Series A and B Preferred Stock..................... 400,000 -- 5,400,000
Issuance of common stock in initial public offering net of
issuance costs................................................. -- -- 23,993,981
Issuance of common stock for acquisition......................... -- -- 3,036,369
Tax benefit from exercise of stock options....................... -- -- 234,674
Change in cumulative translation adjustment...................... -- 7,704 7,704
Net loss, as restated............................................ (1,504,843) -- (1,504,843)
------------ ----------- ------------
Balance, December 31, 1997, as restated............................ (2,848,348) 7,704 29,735,731
Purchase of Treasury Stock....................................... -- -- (1,961,126)
Exercise of stock options and issuance of shares through Employee
Stock Purchase Plan............................................ -- -- 228,811
Tax benefit from exercise of stock options....................... -- -- 678,505
Change in cumulative translation adjustment...................... -- (14,404) (14,404)
Net income....................................................... 1,097,752 -- 1,097,752
------------ ----------- ------------
Balance, December 31, 1998......................................... $ (1,750,596) $ (6,700) $29,765,269
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------------- -------------- --------------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................................ $ 1,097,752 $ (1,504,843) $ 544,411
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities--
Depreciation and amortization............................................ 2,488,644 501,139 202,548
Write-off of purchased, in-process research and development.............. -- 3,100,000 --
Deferred income taxes.................................................... (555,595) (225,000) (38,000)
Changes in assets and liabilities, net of acquisition--
Accounts receivable.................................................... (1,270,151) (1,891,089) (2,001,592)
Prepaid expenses and other current assets.............................. (367,577) (815,615) (336,193)
Accounts payable....................................................... 327,740 26,860 348,746
Accrued liabilities.................................................... (418,670) 949,367 (80,057)
Income taxes payable................................................... (813,101) 424,305 264,224
Deferred revenue....................................................... 699,453 792,291 587,284
Long-term liabilities.................................................. (59,474) (205,620) 28,367
--------------- -------------- --------------
Net cash provided by (used in) operating activities.................. 1,129,021 1,151,795 (480,262)
--------------- -------------- --------------
Cash Flows from Investing Activities:
Purchases of property and equipment.......................................... (1,206,151) (957,186) (653,072)
Purchases of short-term investments.......................................... (41,409,484) (39,307,947) (930,619)
Proceeds from sale of short-term investments................................. 44,550,000 19,058,800 --
Cash paid for acquisition of CMA Ettworth, net of cash acquired of
$631,284................................................................... -- (3,868,716) --
Increase in other assets..................................................... (1,374,077) (1,412) (10,953)
--------------- -------------- --------------
Net cash provided by (used in) investing activities.................... 560,288 (25,076,461) (1,594,644)
--------------- -------------- --------------
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit................................ (244,563) 151,699 92,864
Proceeds from long-term debt................................................. -- -- 250,000
Payments on long-term debt................................................... -- (250,000) --
Payments on capital lease obligations........................................ (22,841) (31,000) (25,291)
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................................... 228,811 24,048,307 --
Purchase of treasury stock................................................... (1,961,126) -- --
Tax benefit from exercise of stock options................................... 678,505 234,674 --
Purchase and retirement of common stock...................................... -- -- (2,000,183)
--------------- -------------- --------------
Net cash provided by (used in) financing activities.................... (1,321,214) 24,153,680 3,566,322
--------------- -------------- --------------
Exchange rate effect on cash................................................... (15,737) 1,713 --
--------------- -------------- --------------
Net increase in cash and cash equivalents...................................... 352,358 230,727 1,491,416
Cash and cash equivalents, beginning of period................................. 2,353,680 2,122,953 631,537
--------------- -------------- --------------
Cash and cash equivalents, end of period....................................... $ 2,706,038 $ 2,353,680 $ 2,122,953
--------------- -------------- --------------
--------------- -------------- --------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Interest................................................................... $ 10,435 $ 55,042 $ 26,680
--------------- -------------- --------------
--------------- -------------- --------------
Income taxes............................................................... $ 1,033,000 $ 479,324 $ --
--------------- -------------- --------------
--------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1996
------------- 1997 ----------
-------------
(RESTATED)
<S> <C> <C> <C>
Supplemental Disclosure of Noncash Investing and Financing Transactions:
Equipment acquired under capital lease obligations.................... $ -- $ -- $ 62,732
------------- ------------- ----------
------------- ------------- ----------
Accrued dividends on Series B Convertible Redeemable Preferred
Stock............................................................... $ -- $ 233,333 $ 166,667
------------- ------------- ----------
------------- ------------- ----------
Conversion of Series A and Series B Preferred Stock................... $ -- $ 5,401,625 $ --
------------- ------------- ----------
------------- ------------- ----------
Acquisition of CMA Ettworth, Ltd. -
Fair value of net assets acquired..................................... $ -- $ (6,905,085) $ --
Issuance of common stock.............................................. -- 3,036,369 --
------------- ------------- ----------
Cash paid for acquisition, net of cash acquired of $631,284............. $ -- $ (3,868,716) $ --
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Omtool, Ltd. and subsidiaries (Omtool or the Company) design, develop,
market and support open, client/server software, delivering solutions that
automate and integrate communication throughout the enterprise. Omtool's Fax
Sr., LegalFax and FAX/400 product families provide users with an extensive,
flexible feature set for transmitting and receiving faxes, and improve an
organization's management of its fax communications processes by providing a
suite of utility and control functions. The Company predominantly does business
in markets located within North America and Europe.
The Company is subject to a number of risks associated with emerging,
technology-oriented companies with a limited operating history, including
continued market acceptance of the Company's products, competition from
substitute products and larger companies, and the continued ability to manage
and finance the Company's anticipated future growth.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in the
notes to consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany transactions
have been eliminated in consolidation.
(B) REVENUE RECOGNITION
The Company generates revenue from licensing the rights to use its software
products directly to end users and indirectly through resellers. The Company
also generates revenue from sales of support contracts and consulting services
to customers who license its products and from resale of related hardware
products.
Revenues from software license agreements are recognized upon shipment of
the software, if there are no significant post-delivery obligations and if
payment is due within one year. Revenues are recorded net of an allowance for
estimated future returns. If an acceptance period is required, revenues are
recognized upon the earlier of the customer's acceptance or the expiration of
the acceptance period.
Revenues from support contracts are recognized ratably over the term of the
support period, which is generally one year. Service and other revenue is
primarily related to implementation services performed on a time-and-material
basis under separate service agreements related to the installation of the
Company's software products.
Service and other revenues are recognized as services are performed. If a
transaction includes both license and service elements, license fee revenues are
recognized upon shipment of the software, provided services do not include
significant customization or modification of the base product and the payment
terms for licenses are not subject to acceptance criteria. In cases where
license fee payment is contingent upon the acceptance of services, revenues from
both the license and the service elements are deferred until the acceptance
criteria are met.
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.
F-8
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Software development costs are considered for capitalization when
technological feasibility is established in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The Company sells
software in a market that is subject to rapid technological change, new product
introductions and changing customer needs. Accordingly, the Company has
determined that it cannot determine technological feasibility until the
development state of the product is nearly complete. The time period during
which cost could be capitalized from the point of reaching technological
feasibility until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material to the
Company's consolidated financial position or results of operations. Therefore,
the Company charges all research and development expenses to operations in the
period incurred.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
consist primarily of investments in money market funds. In accordance with SFAS
No. 115, ACCOUNTING FOR INVESTMENTS IN CERTAIN DEBT AND EQUITY SECURITIES, the
Company's cash equivalents are classified as held-to-maturity securities.
Held-to-maturity securities are carried at amortized cost, which approximates
market value.
(E) SHORT-TERM INVESTMENTS
As of December 31, 1998 and 1997, the Company had $18,039,250 and
$21,179,766, respectively, invested in securities consisting of municipal bonds.
In accordance with SFAS No. 115, the Company has classified its short-term
investments as available-for-sale. These securities have been recorded at cost,
which approximates market value at December 31, 1998 and 1997.
(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, 1998 and 1997 due to the short-term nature of these
instruments.
F-9
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated using accelerated and straight-line
methods over the following useful lives:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C> <C>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE 1998 1997
- ---------------------------------------- ---------------------------------- ------------ ------------
Computer equipment...................... 1--5 years $ 1,570,549 $ 1,297,482
Computer software....................... 2--3 years 1,191,366 314,415
Furniture and equipment................. 5--7 years 600,628 591,420
Leasehold improvements.................. Shorter of the life of the lease
or the estimated useful life 172,964 116,543
Motor vehicles.......................... 4 years 93,111 99,755
Equipment under capital leases.......... Shorter of the life of the lease
or the estimated useful life 95,802 95,802
------------ ------------
3,724,420 2,515,417
Less--accumulated depreciation and
amortization.......................... 1,953,620 727,029
------------ ------------
$ 1,770,800 $ 1,788,388
------------ ------------
------------ ------------
</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, 1998, the Company has no significant
off-balance sheet or credit risk concentrations, such as foreign currency
exchange contracts or other hedging instruments. Financial instruments that
potentially expose the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, short-term investments and trade
accounts receivable. The Company places its temporary cash investments in
financial institutions. The Company has not experienced significant losses
related to receivables from individual customers or groups of customers in any
specific industry or by geographic area. Due to these factors, no additional
credit risk beyond amounts provided for collection losses is believed by
management to be inherent in the Company's accounts receivable.
F-10
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following schedule summarizes the activity of the Company's accounts
receivable reserve for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OTHER (1) PERIOD
- ---------------------------------------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE RESERVE
December 31, 1996..................... $ 80,000 354,500 59,500 -- $ 375,000
December 31, 1997..................... $ 375,000 689,000 -- 181,000 $ 1,245,000
December 31, 1998..................... $ 1,245,000 100,000 -- -- $ 1,345,000
</TABLE>
- ------------------------
(1) Amount represents additional reserves resulting from the purchase of all of
the outstanding common stock of CMA Ettworth Limited in December 1997.
For the years ended December 31, 1998, 1997 and 1996, no single customer
accounted for greater than 10% of the Company's revenues.
(J) RECLASSIFICATIONS
The Company has reclassified certain prior year information to conform with
the current year's presentation.
(K) FOREIGN CURRENCY TRANSLATION
The Company translates the financial statements of its foreign subsidiaries
in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Accordingly,
assets and liabilities are translated at exchange rates in effect at the end of
the year, and revenues and expenses are translated at the average exchange rates
during the year. All cumulative translation gains or losses from the translation
into the Company's reporting currency are included as a separate component of
stockholders' equity (deficit) in the accompanying consolidated balance sheets.
(L) NET INCOME (LOSS) PER SHARE
The Company reports earnings per share in accordance with SFAS No. 128. 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 1998, consisting of
outstanding stock options, is determined using the treasury stock method, in
accordance with SFAS No. 128. The dilutive effect of potential common shares in
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 No. 128. Diluted
weighted average shares outstanding for 1997 exclude the potential common shares
from stock options and redeemable convertible preferred stock
F-11
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
outstanding because to include them would have been antidilutive for the year
presented. A reconciliation of basic and diluted common shares outstanding is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ---------- ------------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Weighted average number of common shares outstanding........... 12,713,169 8,498,953 6,596,063
Potential common shares pursuant to stock options.............. 701,789 -- 773,314
Potential common shares pursuant to conversion of redeemable
convertible preferred stock.................................. -- -- 3,009,705
------------ ---------- ------------
Diluted weighted average shares................................ 13,414,958 8,498,953 10,379,082
------------ ---------- ------------
------------ ---------- ------------
Basic net income (loss) per share.............................. $0.09 $(0.18) $0.08
Diluted net income (loss) per common and potential common
share........................................................ $0.08 $(0.18) $0.05
</TABLE>
For the year ended December 31, 1998, the calculation above excludes the
potential common shares related to 1,500 outstanding stock options which have an
anti-dilutive effect. For the year ended December 31, 1997, the calculation
above excludes the potential common shares related to 971,285 outstanding stock
options and 1,822,339 shares of redeemable convertible preferred stock which
have an anti-dilutive effect.
(M) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for all fiscal
quarters beginning within the Company's fiscal year ending December 31, 2000.
The Company believes that this statement will not have a significant impact on
the Company.
In March 1998, the AICPA issued SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF
A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, which amends certain
provisions of SOP 97-2. The Company believes it is in compliance with the
provisions of SOP 97-2 as amended by SOP 98-4. However, detailed implementation
guidelines for this standard have not yet been issued. Once issued, such
guidance could lead to unanticipated changes in the Company's current revenue
recognition practices, and such changes could be material to the Company's
results of operations. In December 1998, the AICPA issued SOP 98-9, MODIFICATION
OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS,
which amends certain provisions of SOP 97-2 and extends the deferral of the
application of certain passages of SOP 97-2 provided by SOP 98-4 until the
beginning of the Company's fiscal year 2000. The Company is currently evaluating
the impact of SOP 98-9 on its financial statements and related disclosures.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. This standard requires companies to capitalize qualifying computer software
costs, which are incurred during the application development stage
F-12
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and amortize them over the software's estimated useful life. The Company is
required to adopt this standard in fiscal 1999 and is currently evaluating the
impact that its adoption will have on the consolidated financial position and
results of operations of the Company.
(3) COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income (loss) and its components in financial statements. The
components of the Company's comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------- ----------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Net income (loss).............................................. $ 1,097,752 $ (1,504,843) $ 544,411
Foreign currency translation adjustments, net of taxes......... (8,841) 4,729 --
------------ ------------- ----------
Comprehensive income (loss).................................... $ 1,088,911 $ (1,500,114) $ 544,411
------------ ------------- ----------
------------ ------------- ----------
</TABLE>
(4) ACQUISITIONS
(A) CMA ETTWORTH--RESTATEMENT OF FINANCIAL STATEMENTS
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, 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
projects (IPR&D) that had not reached technological feasibility without any
alternative future use. Accordingly, the portion allocated to IPR&D was expensed
immediately. Acquired intangibles include developed technology and assembled
workforce. These intangibles are being amortized over their estimated useful
lives of 4 to 7 years. Due to a difference in the bases of certain assets for
financial statement and income tax purposes, deferred income taxes of $236,000
were provided as part of the purchase price allocation in accordance with SFAS
No. 109, ACCOUNTING FOR INCOME TAXES.
The value allocated to IPR&D was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from such projects and discounting the
net cash flows back to their present value. The discount rate included a factor
that took into account the uncertainty surrounding the successful development of
the purchased in-process technology. This valuation was based on accepted
appraisal methodologies used at the time of the
F-13
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS (CONTINUED)
allocation. Since that time, the Securities and Exchange Commission (SEC) has
provided new guidance with respect to the valuation of intangible assets in
purchase business combinations, including IPR&D. In response to this new
guidance and comments received by the Company from the SEC Staff, the Company
obtained a revised independent appraisal incorporating this new guidance,
resulting in a change to the allocation of the purchase price, as follows:
<TABLE>
<CAPTION>
ORIGINAL REVISED
ALLOCATION ALLOCATION
------------- -------------
<S> <C> <C>
Current assets............................................... $ 1,452,891 $ 1,452,891
Property and equipment....................................... 397,891 397,891
Acquired intangible assets................................... 590,000 2,090,000
IPR&D........................................................ 6,680,000 3,100,000
Goodwill..................................................... 245,430 2,925,430
Deferred income taxes........................................ (236,000) (836,000)
Liabilities assumed.......................................... (1,593,843) (1,593,843)
------------- -------------
$ 7,536,369 $ 7,536,369
------------- -------------
------------- -------------
</TABLE>
The accompanying 1997 financial statements have been restated to reflect the
above revised purchase price allocation. The effect of the restatement was a
reduction in net loss and diluted net loss per share of $3,504,084 and $0.41,
respectively for the year ended December 31, 1997.
Unaudited pro forma operating results for the Company, assuming the
acquisition of CMA occurred as of the beginning of the years presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
1998 (1) 1997 (1)
------------- -------------
<CAPTION>
(RESTATED)
<S> <C> <C>
Pro forma total revenues.................................... $ 31,112,184 $ 24,562,662
------------- -------------
------------- -------------
Pro forma net income........................................ $ 1,097,752 $ 829,077
------------- -------------
------------- -------------
Pro forma net income per share:
Pro forma basic........................................... $ 0.09 $ 0.09
------------- -------------
------------- -------------
Pro forma diluted......................................... $ 0.08 $ 0.07
------------- -------------
------------- -------------
Pro forma weighted average number of common shares
outstanding:
Pro forma basic (2)....................................... 12,713,169 8,832,287
------------- -------------
------------- -------------
Pro forma diluted (2)..................................... 13,414,958 11,625,911
------------- -------------
------------- -------------
</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, 1997, so that the operating results presented include only
recurring costs.
F-14
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS (CONTINUED)
(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.
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.
(B) OTHER 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. This transaction has been accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of DPSI for all periods presented prior
to the acquisition.
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. This transaction has been accounted for as a pooling of
interests and, accordingly, the Company's consolidated financial statements have
been restated to include the accounts and operations of TRS for all periods
presented prior to the acquisition.
Separate total revenues and net income (loss) amounts of the acquired
entities are presented in the following table.
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED DECEMBER 31,
FEBRUARY, ----------------------------
1998 1996
------------ 1997 -------------
-------------
(RESTATED)
<S> <C> <C> <C>
Total revenues
Omtool......................................... $ 3,737,353 $ 19,367,832 $ 8,401,218
TRS............................................ 323,816 1,705,525 1,638,740
DPSI........................................... 72,900 499,135 305,724
------------ ------------- -------------
$ 4,134,069 $ 21,572,492 $ 10,345,682
------------ ------------- -------------
------------ ------------- -------------
Net income (loss)
Omtool......................................... $ (230,451) $ (877,668) $ 439,663
TRS............................................ 113,735 (612,758) 29,457
DPSI........................................... 11,516 (14,417) 75,291
------------ ------------- -------------
$ (105,200) $ (1,504,843) $ 544,411
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
(5) 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, 1998.
F-15
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INTANGIBLE ASSETS (CONTINUED)
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>
DECEMBER 31,
ESTIMATED --------------------------
LIFE 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
(RESTATED)
Developed technology................................. 4 Years $1,900,000 $1,900,000
Assembled workforce.................................. 7 Years 190,000 190,000
Goodwill............................................. 5 Years 2,925,430 2,925,430
------------ ------------
5,015,430 5,015,430
Less--accumulated amortization....................... 1,087,224 90,602
------------ ------------
$3,928,206 $4,924,828
------------ ------------
------------ ------------
</TABLE>
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Accrued salaries and salary-related............................... $ 1,033,486 $ 779,431
Other accrued expenses............................................ 634,478 1,302,985
------------ ------------
$ 1,667,964 $ 2,082,416
------------ ------------
------------ ------------
</TABLE>
(7) LINE OF CREDIT
The Company had a line of credit that allowed the Company to borrow the
lesser of $250,000 or 75% of eligible accounts receivable, as defined. This line
of credit had an interest rate equal to the bank's prime rate (8.5% at December
31, 1997) plus 1.75%. This line of credit was collateralized by certain accounts
receivable, inventory, equipment and general intangibles of the Company,
required the Company to maintain certain financial ratios, and was guaranteed by
certain of the Company's shareholders. This line of credit expired on November
1, 1998. At December 31, 1997, approximately $245,000 was outstanding under this
line of credit.
(8) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, the
objective of which is to recognize the amount of current and deferred income
taxes at the date of the consolidated 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.
F-16
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES (CONTINUED)
The components of the deferred tax assets and the deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1998 1997
----------- -----------
<CAPTION>
(RESTATED)
<S> <C> <C>
Deferred tax asset
Net operating loss carryforward................................... $ 212,000 $ 165,000
Research and development tax credit carryforwards................. 275,000 --
Accrued liabilities and reserves.................................. 525,000 380,000
Valuation allowance............................................... (315,000) (165,000)
----------- -----------
Total deferred tax asset.......................................... $ 697,000 $ 380,000
----------- -----------
----------- -----------
Deferred tax liability
Depreciation...................................................... $ (26,000) $ (47,000)
Acquisition related intangibles................................... (618,406) (836,000)
----------- -----------
Total deferred tax liability...................................... $ (644,406) $ (883,000)
----------- -----------
----------- -----------
</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. The Company has
recorded a valuation allowance relating to a portion of its net operating loss
and tax credit carryforwards for which realization is uncertain.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1998 1997 (1) 1996
--------- ------------- ---------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Income tax provision at federal statutory rate..................... 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from--
State tax provision, net of federal benefit...................... 2.7 5.0 4.6
Non-deductible goodwill.......................................... 1.2 1.8 --
Tax-exempt interest.............................................. (15.0) (3.8) (1.1)
Research and development tax credits............................. (5.4) (6.0) (7.4)
Difference in foreign tax rates.................................. (1.0) -- --
Increase in valuation allowance.................................. 10.0 6.4 --
Other............................................................ 0.5 1.0 0.8
--------- --- ---
Provision for income taxes......................................... 27.0% 38.4% 30.9%
--------- --- ---
--------- --- ---
</TABLE>
- ------------------------
(1) Calculated based on pre-tax income, before non-deductible charge for
purchased, in-process research and development of $3.1 million for 1997.
F-17
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES (CONTINUED)
The provision for income taxes in the accompanying consolidated statements
of operations consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ------------ ----------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Current:
Federal.............................................. $ 460,000 $ 951,345 $ 215,930
State................................................ 108,000 249,000 66,000
Foreign.............................................. 394,030 18,000 --
----------- ------------ ----------
962,030 1,218,345 281,930
----------- ------------ ----------
Deferred:
Federal.............................................. $ (274,000) $ (173,000) $ (29,000)
State................................................ (64,000) (52,000) (9,000)
Foreign.............................................. (217,595) -- --
----------- ------------ ----------
(555,595) (225,000) (38,000)
----------- ------------ ----------
Provision for income taxes............................. $ 406,435 $ 993,345 $ 243,930
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
The components of domestic and foreign income (loss) before taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ----------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Domestic............................................. $ 1,460,354 $ (572,498) $ 788,341
Foreign.............................................. 43,833 61,000 --
------------ ------------ ----------
$ 1,504,187 $ (511,498) $ 788,341
------------ ------------ ----------
------------ ------------ ----------
</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 initial public offering, the
Series B Preferred Stock automatically converted into an aggregate of 2,712,232
shares of Common Stock.
(10) STOCKHOLDERS' EQUITY
(A) INITIAL PUBLIC OFFERING
In August 1997, the Company completed its initial public offering (IPO) of
3,000,000 shares of Common Stock at $9.00 per share resulting in net proceeds to
the Company of approximately $24.0 million, net of issuance costs. The Series A
Convertible Preferred Stock and Series B Convertible Redeemable Preferred Stock
automatically converted into 325,000 shares and 2,712,232 shares, respectively,
of Common Stock upon the closing of the IPO.
F-18
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCKHOLDERS' EQUITY (CONTINUED)
(B) RECAPITALIZATION
On January 23, 1997, the Company's Board of Directors approved a two-for-one
stock split of the Company's Common Stock effected in the form of a stock
dividend. The accompanying consolidated financial statements and notes have been
retroactively restated for all periods presented to reflect this stock split.
(C) SERIES A CONVERTIBLE PREFERRED STOCK
Pursuant to subscription agreements entered into in February 1996, in July
1996, certain directors of the Company purchased 162,500 shares of Series A
Preferred Stock for an aggregate of $325,000. Upon the closing of the Company's
IPO, the Series A Preferred Stock automatically converted into an aggregate of
325,000 shares of Common Stock.
(D) REPURCHASE OF COMMON STOCK
Concurrent with the issuance of the Series B Preferred Stock, as approved by
the stockholders and the Board of Directors, the Company purchased and retired
1,084,992 shares of Common Stock from two of its principal stockholders for
$2,000,183.
(E) TREASURY STOCK
In October 1998, the Company's Board of Directors authorized the repurchase
of up to 1.0 million shares of the Company's Common Stock. Subject to price and
market considerations and applicable securities laws, such purchases will be
made from time to time on the open market. No time limit was placed on the
duration of the repurchase program. The Company may use the repurchased shares
to offset shares issued in connection with various Company employee stock plans.
As of December 31, 1998, the Company has repurchased 660,780 shares.
(F) RESERVED COMMON STOCK
As of December 31, 1998, 2,673,326 shares of Common Stock were reserved for
issuance pursuant to stock option plans and the employee stock purchase plan.
(11) STOCK PLANS
(A) STOCK OPTION PLANS
On January 2, 1996, the Board of Directors adopted the 1996 Stock Option
Plan (the 1996 Plan). The 1996 Plan provides for the granting of options
covering 1,500,000 shares of Common Stock. The 1996 Plan is administered by the
Board of Directors and allows for the granting of "incentive stock options"
within the meaning of the Internal Revenue Code of 1986, as amended, and
non-qualified stock options. Incentive stock options under the 1996 Plan are
granted at not less than the fair market value per share of common stock on the
date of grant or 110% of fair market value for any stockholder who holds more
than 10% of the total combined voting power of all classes of stock of the
Company. Under the terms of the 1996 Plan, options vest and become exercisable
as determined by the Board of Directors and expire 10 years after the date of
grant. In April 1997, The Company's Board of Directors voted that, effective
upon the closing of the initial public offering, no further options may be
granted or issued under the 1996 Plan.
F-19
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK PLANS (CONTINUED)
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 initial public
offering. 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 non-qualified stock
options, stock awards or opportunities to make direct purchases of stock in the
Company to employees, consultants, directors and officers of the Company. The
aggregate number of shares of Common Stock which may be issued pursuant to the
1997 Plan is 1,800,000.
The following is a summary of all stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------- ---------------- ---------------
<S> <C> <C> <C>
Outstanding, December 31, 1995............................ -- -- --
Granted................................................. 1,129,400 $ 0.25 - $ 1.85 $ 0.39
Canceled................................................ (33,000) 0.25 - 1.85 0.40
---------- ---------------- -----
Outstanding, December 31, 1996............................ 1,096,400 0.25 - 1.85 0.39
Granted................................................. 435,150 1.85 - 12.13 5.77
Exercised............................................... (130,263) 0.25 - 1.85 0.42
Canceled................................................ (69,333) 0.25 - 11.00 4.19
---------- ---------------- -----
Outstanding, December 31, 1997............................ 1,331,954 0.25 - 12.13 1.94
Granted................................................. 709,900 2.63 - 11.88 9.91
Exercised............................................... (480,284) 0.25 - 8.25 0.43
Canceled................................................ (185,622) 0.25 - 12.13 5.55
---------- ---------------- -----
Outstanding, December 31, 1998............................ 1,375,948 $ 0.25 - $ 9.00 $ 3.00
---------- ---------------- -----
---------- ---------------- -----
Exercisable, December 31, 1998............................ 270,341 $ 0.25 - $ 9.00 $ 1.45
---------- ---------------- -----
---------- ---------------- -----
</TABLE>
At December 31, 1998, options to purchase 1,102,350 shares of Common Stock
were available for future grants under the 1997 Plan.
The range of exercise prices for options outstanding and options exercisable
at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE
RANGE OF EXERCISE OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------- ----------- ------------------- ----------------- ----------- -----------------
$0.25 - $0.25... 430,448 7.1 $ 0.25 176,441 $ 0.25
1.85 - 2.63... 180,900 8.1 1.89 37,100 1.85
2.94 - 2.94... 31,000 10.0 2.94 -- --
4.88 - 7.25... 732,600 9.5 4.88 56,550 4.88
9.00 - 9.00... 1,000 8.6 9.00 250 9.00
----------- --- ----- ----------- -----
1,375,948 8.6 $ 3.00 270,341 $ 1.45
----------- --- ----- ----------- -----
----------- --- ----- ----------- -----
</TABLE>
F-20
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK PLANS (CONTINUED)
On August 13, 1998, the Company's Board of Directors authorized a repricing
of certain employee stock options. A total of 761,550 options with exercise
prices ranging from $5.50 to $12.13 were affected by the repricing. These
options were repriced to $4.875, the closing market price of the Company's
Common Stock on that date. Substantially all other terms and conditions of the
options remain the same. For employees that opted to participate in the
repricing, the original options were amended to reflect the terms of the
repricing. These amended options are not reflected as canceled and granted in
the option rollforward above.
(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 took 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 for each six-month
purchase period is 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. As of December
31, 1998, 3,678 shares had been issued under the plan.
(C) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elects the disclosure-only
alternative under SFAS No. 123 for options granted in 1998, 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 1998, 1997 and
1996 had a weighted average fair value of $3.52, $3.31 and $0.22, respectively.
The weighted average assumptions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Risk-free interest rate................................................ 5.34% 6.16% 5.46%
Volatility............................................................. 80.0% 70.0% 70.0%
Expected dividend yield................................................ -- -- --
Expected lives......................................................... 4 Years 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 DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ------------- ----------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Net income (loss), pro forma..................................... $ 139,582 $ (1,650,622) $ 490,341
Net income (loss) per share, pro forma:
Basic.......................................................... $ 0.01 $ (0.19) $ 0.07
Diluted........................................................ $ 0.01 $ (0.19) $ 0.05
</TABLE>
F-21
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 $169,000, $124,000 and $69,000 to the
Profit-Sharing Plan for the years ended December 31, 1998, 1997 and 1996,
respectively. Additional profit-sharing contributions to the Profit-Sharing Plan
are at the discretion of the Company's management. During 1998, 1997 and 1996,
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, 1998 are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1999.......................................................... $ 387,000
2000.......................................................... 333,000
2001.......................................................... 304,000
2002.......................................................... 274,000
---------
$1,298,000
---------
---------
</TABLE>
Rent expense included in the accompanying statements of operations was
approximately $623,000, $472,000 and $377,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
(14) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision-maker, as defined
under SFAS No. 131, is the Chief Executive Officer. To date, the Company has
viewed its operations and manages its business as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, represents all of the material financial information related
to the Company's principal operating segment.
Total revenues from international sources were approximately $5.4 million,
$2.1 million and $560,000 in 1998, 1997 and 1996, respectively. The Company's
revenues from international sources were primarily
F-22
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
generated from customers located in Europe. The following table represents
amounts relating to geographic locations for the years ended December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
<CAPTION>
(RESTATED)
<S> <C> <C> <C>
Total revenues (1)
North America........................................... $ 25,712,184 $ 19,442,492 $ 9,785,682
Europe.................................................. 5,100,000 2,000,000 505,000
Other Foreign Countries................................. 300,000 130,000 55,000
------------- ------------- -------------
$ 31,112,184 $ 21,572,492 $ 10,345,682
------------- ------------- -------------
------------- ------------- -------------
Long-lived assets (2)
North America........................................... $ 2,673,211 $ 1,522,862 $ 881,641
Europe.................................................. 4,165,618 5,221,528 --
Other Foreign Countries................................. -- -- --
------------- ------------- -------------
$ 6,838,829 $ 6,744,390 $ 881,641
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Revenues are attributed to geographic regions based on location of customer.
(2) Long-lived assets include all long-term assets except those specifically
excluded under SFAS No. 131 such as deferred income taxes and financial
instruments.
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<CAPTION>
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Total revenues........................................... $ 8,011,931 $ 7,675,218 $ 7,382,265 $ 8,042,770
Gross profit............................................. 5,780,537 5,645,252 5,503,891 5,975,297
Net income............................................... 696,193 28,145 5,302 368,112
Net income per share:
Basic.................................................. $ 0.06 $ 0.00 $ 0.00 $ 0.03
Diluted................................................ $ 0.05 $ 0.00 $ 0.00 $ 0.03
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<CAPTION>
(RESTATED)
<S> <C> <C> <C> <C>
Total revenues........................................... $ 4,166,362 $ 5,105,867 $ 5,633,504 $ 6,666,757
Gross profit............................................. 3,126,552 3,747,402 4,281,211 5,073,370
Net income (loss)........................................ 214,385 244,007 454,968 (2,418,202)
Net income (loss) per share:
Basic.................................................. $ 0.04 $ 0.04 $ 0.05 $ (0.20)
Diluted................................................ $ 0.02 $ 0.02 $ 0.04 $ (0.20)
</TABLE>
F-23
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
1. Omtool Europe Limited, England
2. CMA Ettworth Limited, England
3. CMA Ettworth Inc., Florida, USA
4. Desktop Paging Software, Inc., New Hampshire, USA
5. TRS Technologies, Inc., Oregon, USA
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement (File No. 333-39571) on Form S-8.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements included in this 10K and is qualified entirely
by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,706
<SECURITIES> 18,039
<RECEIVABLES> 7,554
<ALLOWANCES> 1,345
<INVENTORY> 1,041
<CURRENT-ASSETS> 29,564
<PP&E> 3,724
<DEPRECIATION> 1,954
<TOTAL-ASSETS> 36,403
<CURRENT-LIABILITIES> 5,954
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 26,635
<TOTAL-LIABILITY-AND-EQUITY> 36,403
<SALES> 25,025
<TOTAL-REVENUES> 31,112
<CGS> 5,256
<TOTAL-COSTS> 8,207
<OTHER-EXPENSES> 22,155
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 1,504
<INCOME-TAX> 406
<INCOME-CONTINUING> 1,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,098
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements included in this 10K and is qualified entirely
by reference to such consolidated financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 2,354 2,123
<SECURITIES> 21,180 931
<RECEIVABLES> 6,176 2,860
<ALLOWANCES> 1,245 375
<INVENTORY> 360 234
<CURRENT-ASSETS> 30,388 6,162
<PP&E> 2,515 1,168
<DEPRECIATION> 727 316
<TOTAL-ASSETS> 37,132 7,044
<CURRENT-LIABILITIES> 6,415 2,576
<BONDS> 0 0
0 5,167
0 2
<COMMON> 125 60
<OTHER-SE> 29,611 (1,315)
<TOTAL-LIABILITY-AND-EQUITY> 37,132 7,044
<SALES> 18,541 8,467
<TOTAL-REVENUES> 21,573 10,346
<CGS> 3,894 1,898
<TOTAL-COSTS> 5,344 2,891
<OTHER-EXPENSES> 17,132 6,683
<LOSS-PROVISION> 689 355
<INTEREST-EXPENSE> 55 27
<INCOME-PRETAX> (511) 788
<INCOME-TAX> 993 244
<INCOME-CONTINUING> (1,504) 544
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,504) 544
<EPS-PRIMARY> (.18) .08
<EPS-DILUTED> (.18) .05
</TABLE>
