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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2000 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _______
Commission File Number 0-22871
OMTOOL, LTD.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8 INDUSTRIAL WAY, SALEM, NH 03079
(Address of Principal Executive Offices) (Zip Code)
(603) 898-8900
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
There were 12,730,978 shares of the Company's Common Stock, par value $0.01,
outstanding on August 11, 2000.
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<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2000
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
----------- ----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31,
1999 3
Consolidated Statements of Operations for the three months and six months
ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,192,030 $ 1,576,283
Short-term investments 16,668,598 17,587,195
Accounts receivable, less reserves of $1,121,000 in 2000 and
$2,090,000 in 1999, respectively 1,292,668 3,049,161
Prepaid expenses and other current assets 1,000,263 1,523,279
Deferred tax asset 1,258,978 1,258,978
------------ ------------
Total current assets 21,412,537 24,994,896
Property and equipment, net 1,512,816 1,630,125
Other assets, net 640,614 848,178
------------ ------------
Total assets $ 23,565,967 $ 27,473,199
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 555,461 $ 1,055,197
Accrued liabilities 2,654,171 3,329,576
Deferred revenue 2,551,232 2,903,549
------------ ------------
Total current liabilities 5,760,864 7,288,322
------------ ------------
Contingencies (Note 6)
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 shares 130,093 130,093
Additional paid-in capital 32,095,176 32,215,321
Accumulated deficit (13,527,545) (10,912,010)
Treasury Stock (288,591 shares and 420,125 shares at cost
respectively) (825,681) (1,201,998)
Cumulative translation adjustment (66,940) (46,529)
------------ ------------
Total stockholders' equity 17,805,103 20,184,877
------------ ------------
Total liabilities and stockholders' equity $ 23,565,967 $ 27,473,199
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financialstatements.
3
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license $ 1,439,472 $ 3,129,205 $ 3,208,224 $ 6,820,042
Hardware 947,237 1,703,822 1,899,848 3,581,641
Service and other 1,634,011 1,771,738 3,440,061 3,616,070
------------ ------------ ------------ ------------
Total revenues 4,020,720 6,604,765 8,548,133 14,017,753
------------ ------------ ------------ ------------
Cost of revenues:
Software license 70,445 245,643 185,187 485,344
Hardware 509,123 1,137,811 1,269,499 2,116,527
Service and other 1,041,363 927,803 2,141,951 1,778,235
------------ ------------ ------------ ------------
Total cost of revenues 1,620,931 2,311,257 3,596,637 4,380,106
------------ ------------ ------------ ------------
Gross profit 2,399,789 4,293,508 4,951,496 9,637,647
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,752,179 3,323,510 3,864,385 6,056,912
Research and development 986,867 1,355,085 2,141,275 2,588,337
General and administrative 1,018,459 1,644,826 2,235,051 2,776,305
Gain on sale of AS/400 product line (150,000) -- (150,000) --
Restructuring costs -- -- -- 1,128,000
------------ ------------ ------------ ------------
Total operating expenses 3,607,505 6,323,421 8,090,711 12,549,554
------------ ------------ ------------ ------------
Loss from operations (1,207,716) (2,029,913) (3,139,215) (2,911,907)
Interest income, net 277,335 179,067 523,680 335,697
------------ ------------ ------------ ------------
Loss before benefit for income taxes (930,381) (1,850,846) (2,615,535) (2,576,210)
Benefit for income taxes -- (646,582) -- (600,917)
------------ ------------ ------------ ------------
Net loss $ (930,381) $ (1,204,264) $ (2,615,535) $ (1,975,293)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.07) $ (0.09) $ (0.21) $ (0.16)
============ ============ ============ ============
Basic and diluted Weighted average number of
common shares outstanding 12,720,561 12,711,614 12,678,280 12,595,970
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,615,535) $ (1,975,293)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 440,061 1,037,850
Deferred income taxes -- (216,974)
Restructuring costs -- 295,705
Changes in assets and liabilities-
Accounts receivable 1,681,869 1,883,194
Prepaid expenses and other current assets 514,526 261,275
Income tax receivable -- (616,631)
Accounts payable (475,593) 425
Accrued liabilities (636,295) 188,710
Deferred revenue (319,745) 440,846
------------- -------------
Net cash provided by (used in) operating activities (1,410,712) 1,299,107
------------- -------------
Cash Flows from Investing Activities:
Purchases of property and equipment (273,241) (520,868)
Purchases of short-term investments (100,796,038) (28,280,467)
Proceeds from sale of short-term investments 101,692,745 27,996,312
(Increase) decrease in other assets 143,266 (702,301)
------------- -------------
Net cash provided by (used in) investing activities 766,732 (1,507,324)
------------- -------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 256,172 117,933
------------- -------------
Foreign exchange effect on cash 3,555 (41,014)
------------- -------------
Net decrease in cash and cash equivalents (384,253) (131,298)
Cash and cash equivalents, beginning of period 1,576,283 2,706,038
------------- -------------
Cash and cash equivalents, end of period $ 1,192,030 $ 2,574,740
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $ -- $ 285
============= =============
Income taxes $ -- $ 1,581
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Omtool, Ltd. (the "Company" or "Omtool") pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements and should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1999. The accompanying consolidated financial statements reflect
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of results for the
interim periods presented. The results of operations for the three month and six
month periods ended June 30, 2000 are not necessarily indicative of the results
to be expected for the full fiscal year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents consist primarily of investments in money market funds. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
ACCOUNTING FOR INVESTMENTS IN CERTAIN DEBT AND EQUITY SECURITIES, the Company's
cash equivalents are classified as held-to-maturity securities.
(b) SHORT-TERM INVESTMENTS
As of June 30, 2000 and December 31, 1999, the Company had $16,668,598 and
$17,587,195, respectively, invested in securities consisting of commercial paper
as of June 30, 2000 and municipal bonds as of December 31, 1999. 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.
(c) FOREIGN CURRENCY TRANSLATION
The Company translates the financial statements of its foreign
subsidiaries in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION.
Accordingly, assets and liabilities are translated at exchange rates in effect
at the end of the period, and revenues and expenses are translated at the
average exchange rates during the period. All cumulative translation gains or
losses from the translation into the Company's reporting currency are included
as a separate component of stockholders' equity in the accompanying consolidated
balance sheets.
(d) RECENTLY ISSUED ACCOUNTING STANDARDS
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
(SAB 101). SAB 101 was initially to become effective for calendar year end
companies for the quarter ending March 31, 2000. However, the SEC has delayed
the effective date for SAB 101 until the quarter ending December 31, 2000. As a
result, the Company is currently in the process of evaluating the potential
impact that SAB 101 may have on its revenue recognition policies and its results
of operations. At this time, the Company is not able to reasonably determine the
potential impact of the application of SAB 101 on its financial condition or
results of operations.
6
<PAGE>
(e) NET LOSS PER COMMON SHARE
The Company reports earnings per share in accordance with SFAS No. 128.
Weighted average shares outstanding for the three months and six months ended
June 30, 2000, respectively, exclude the potential common shares related to
2,115,534 outstanding stock options because to include them would have been
anti-dilutive for the periods presented. Weighted average shares outstanding for
the three months and six months ended June 30, 1999, respectively, exclude the
potential common shares related to 1,787,323 outstanding stock options because
to include them would have been anti-dilutive for the periods presented.
(3) COMPREHENSIVE LOSS
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
effective January 1, 1998. SFAS 130 establishes standards for reporting and
display of comprehensive income (loss) and its components in financial
statements. The components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net loss $ (930,381) $(1,204,264) $(2,615,535) $(1,975,293)
Foreign currency translation adjustments, net of taxes (9,287) (8,661) (12,528) (31,913)
----------- ----------- ----------- -----------
Comprehensive loss $ (939,668) $(1,212,925) $ (2,628,063) $(2,007,206)
=========== =========== ============ ===========
</TABLE>
(4) SEGMENT AND GEOGRAPHIC INFORMATION
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 $555,000 and
$1.8 million for the three months and six months ended June 30, 2000,
respectively, and $1.6 million and $3.5 million for the three months and six
months ended June 20, 1999, respectively. The Company's revenues from
international sources were primarily generated from customers located in Europe.
The following table represents amounts relating to geographic locations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ------------------------------
Total revenues (1) 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States $ 3,465,501 $ 5,010,483 $ 6,748,373 $10,553,973
United Kingdom 200,916 832,274 866,176 1,781,841
Other North America 234,349 253,636 447,565 649,748
Other Europe 86,582 374,998 380,701 779,159
Latin America / South America 11,870 58,990 23,340 97,725
Middle East / Far East 20,007 63,331 72,037 136,930
Australia 1,495 11,053 9,941 18,377
----------- ----------- ----------- -----------
$ 4,020,720 $ 6,604,765 $ 8,548,133 $14,017,753
=========== =========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
Long-lived assets (2) 2000 1999
------------ --------
<S> <C> <C>
North America $ 2,009,018 $2,239,778
Europe 144,412 238,525
------------- -------------
$ 2,153,430 $2,478,303
=========== ==========
</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.
(5) RESTRUCTURING COSTS
A rollforward of the restructuring reserve is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1999 $ 783,735
Severance and other payments (620,912)
---------
Balance, June 30, 2000 $ 162,823
=========
</TABLE>
The balance of the restructuring reserve is expected to be paid by
December 31, 2000.
(6) GAIN ON SALE OF AS/400 PRODUCT LINE
On January 4, 2000, Omtool sold to International Presence PLC ("IPP") certain
business assets consisting of intellectual property, goodwill, customer lists,
customer contracts, equipment and other assets related to the Company's software
products and third party hardware products for facsimile and other communication
applications for the IBM AS/400 product line (the "AS/400 Assets"). The sale
price for the AS/400 Assets was $600,000 in cash, payable in four equal
installments, with the first payment on January 4, 2000 and the remaining
payments in April, July and October of 2000. The purchase price for the AS/400
Assets was determined through arms' length negotiations between management of
IPP and management of Omtool. The Company recognized a loss associated with this
sale of $2,667,500 as of December 31, 1999. Included in the reported loss was a
reserve of $450,000 established to reflect the Company's uncertainty regarding
payment of the deferred proceeds due to the IPP's short operating history and
limited capitalization. During the second quarter of 2000, the Company received
the second installment of $150,000 of the deferred proceeds which was recorded
as a gain from the sale of the AS/400 product line. The Company will continue to
record the proceeds on a cash basis as payments are received.
Pro forma operating results for the Company, assuming the sale of the AS/400
product line occurred on January 1, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Revenues $ 6,032,754 $ 12,719,925
Net loss (1,226,444) (1,581,710)
Basic and diluted net loss per share (0.10) (0.13)
</TABLE>
8
<PAGE>
(7) LITIGATION
On October 5, 1999, the Company and certain of its directors and officers
were named as defendants in a purported securities class action complaint
filed in the United States District Court for the District of New Hampshire.
On June 15, 2000, an amended complaint was filed against the same named
defendants. The amended complaint is allegedly brought on behalf of
purchasers of the Company's stock during the period from August 8, 1997 to
October 6, 1998, and alleges, among other things, that the Company's initial
public offering prospectus and registration statement and subsequent
quarterly financial statements contained misstatements. On July 31, 2000, the
Company and the named individual defendants filed a motion to dismiss the
amended complaint, which is still pending. The Company believes that the
allegations contained in the amended complaint are without merit and intends
to defend vigorously against the claims. The lawsuit, however, is in its
earliest stages, and there can be no assurances that this litigation will
ultimately be resolved on terms that are favorable to the Company.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements for the periods specified and the associated notes. Further
reference should be made to the Company's Annual Report on Form 10-K as filed
with the Securities Exchange Commission on March 30, 2000.
OVERVIEW
Omtool, Ltd. ("Omtool" or the "Company") designs, develops, markets
and supports open, client/server software solutions that 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. and LegalFax 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 significant portion 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.
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
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 has historically derived substantially all of its total
revenues from sales within North America. Sales outside of North America
(primarily in Europe) represented approximately 16% and 20% of the Company's
total revenues for the six months ended June 30, 2000 and 1999, respectively.
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 63% and 19% of the Company's total
revenues for the six months ended June 30, 2000 and 1999, respectively.
As of March 31, 2000, the Company discontinued the sale and support of
U-Page, Fax Sr. Express, Fax Sr. Sun Solaris, Fax Sr. VMS and Fax Sr. Unix
products.
On January 4, 2000, the Company sold to International Presence PLC
("IPP") certain business assets consisting of intellectual property, goodwill,
customer lists, customer contracts, equipment and other assets related to the
Company's software products and third party hardware products for facsimilie and
other communication applications for the IBM AS/400 product line which were
acquired in the Company's acquisition of CMA Ettworth. The Company recorded a
loss of $2.7 million related to this sale as of December 31, 1999. During the
second quarter of 2000, the Company received a payment of $150,000 from the
buyer and recorded that amount as a gain in the quarter ended June 30, 2000 (see
Note 6 of Notes to Financial Statements).
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license 35.8 % 47.4 % 37.6 % 48.7 %
Hardware 23.6 25.8 22.2 25.6
Service and other 40.6 26.8 40.2 25.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Software license 1.7 3.7 2.1 3.5
Hardware 12.7 17.2 14.9 15.1
Service and other 25.9 14.0 25.1 12.7
----- ----- ----- -----
Total cost of revenues 40.3 34.9 42.1 31.3
----- ----- ----- -----
Gross profit 59.7 65.1 57.9 68.7
----- ----- ----- -----
Operating expenses:
Sales and marketing 43.6 50.3 45.2 43.2
Research and development 24.5 20.5 25.0 18.5
General and administrative 25.3 24.9 26.1 19.7
Gain on sale of AS/400
product line (3.7) -- (1.7) --
Restructuring costs -- -- -- 8.0
----- ----- ----- -----
Total operating expenses 89.7 95.7 94.6 89.4
----- ----- ----- -----
Loss from operations (30.0) (30.6) (36.7) (20.7)
Interest income, net 6.9 2.7 6.1 2.4
----- ----- ----- -----
Loss before benefit for
income taxes (23.1) (27.9) (30.6) (18.3)
Benefit for income taxes -- (9.8) -- (4.3)
----- ----- ----- -----
Net loss (23.1) % (18.1) % (30.6) % (14.0) %
===== ===== ===== =====
Gross profit:
Software license 95.1 % 92.1 % 94.2 % 92.9 %
Hardware 46.3 33.2 33.2 40.9
Service and other 36.3 47.6 37.7 50.8
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
TOTAL REVENUES. The Company's revenues are currently derived from licensing fees
of the Company's software products and from related sales of hardware and
services. The Company's total revenues were $4.0 million and $6.6 million for
the three months ended June 30, 2000 and 1999, respectively, representing a
decrease of 39%.
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 $1.4 million for the three months ended June 30, 2000 and $3.1 million for
the three months ended June 30, 1999, representing a decrease of 54%. Software
license revenues accounted for 36% and 47% of total revenues for each respective
period. The decline in software license revenue can be attributed to a number of
factors which include softness in demand for enterprise fax solutions, the
elimination of several of the Fax Sr. product lines, including AS/400, Sun
Solaris, VMS and Unix, along with longer customer purchasing cycles typical of
Fortune 500 customers. Additionally, the decline in software license revenue can
be attributed to sales delays associated with transitioning the Company's sales
structure from a direct model to channel model. The decrease in software license
revenue as a percentage of total revenues is primarily attributable to the
decrease in software revenues.
11
<PAGE>
HARDWARE. Hardware revenues are derived from the resale of third-party hardware
products sold to the Company's customers in conjunction with the licensing of
the Company's software. Hardware revenues were $947,000 for the three months
ended June 30, 2000 and $1.7 million for the three months ended June 30, 1999,
representing a decrease of 44%. Hardware revenues accounted for 24% and 26% of
total revenues for each respective period. The decrease in hardware revenues was
due primarily to the decrease in the number of software sales made in the second
quarter of 2000 that act as a basis for selling the hardware. The decrease in
hardware revenue as a percent of total revenue is due to a decrease in the
number of hardware unit sales accompanying the Company's products.
SERVICE AND OTHER. Service and other revenues are primarily comprised of fees
from maintenance contracts. Service and other revenues were $1.6 million for the
three months ended June 30, 2000 and $1.8 million for the three months ended
June 30, 1999, respectively. Service and other revenues accounted for 40% and
27% of total revenues for each respective period. The decrease in service and
other revenues was due primarily to the elimination of support for several of
the Fax Sr. product line as of March 31, 2000. The increase in service and other
revenues as a percent of total revenues is due to the decrease in software and
hardware revenues for the three months ended June 30, 2000.
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 $70,000 and $246,000 for the
three months ended June 30, 2000 and 1999, respectively, representing 5% and 8%
of software license revenues for each respective period. The decrease in dollar
amount was primarily due to the lower volume of products shipped during the
three months ended June 30, 2000 compared to the same period in 1999. Software
license gross margin percentages increased to 95% for the three months ended
June 30, 2000 from 92% in the same period in 1999 due primarily to costs
associated with new versions of the Company's software that were released in
1999.
HARDWARE. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $509,000 and $1.1
million for the three months ended June 30, 2000 and 1999, respectively,
representing 54% and 67% of hardware revenues for each respective period. The
decrease in dollar amount for the cost of hardware revenues was due primarily to
the decrease of hardware unit sales accompanying the Company's products and a
decrease in hardware sales. The gross margin percentage for hardware sales
increased to 46% for the three months ended June 30, 2000 from 33% in the same
period in 1999. The gross margin increase is due mainly to a change in the mix
of the particular hardware products sold.
SERVICE AND OTHER. Cost of service and other revenues consists primarily of the
costs incurred in providing telephone support as well as other miscellaneous
customer service-related expenses. Cost of service and other revenues was $1.0
million and $928,000 for the three months ended June 30, 2000 and 1999,
respectively, representing 64% and 52% of service and other revenues for each
respective period. The gross margin percentage for service and other revenues
decreased to 36% for the three months ended June 30, 2000, compared to 48% in
the same period in 1999. The decrease in gross margin and the increase in dollar
amount of cost of service and other revenues during the period was due primarily
to the hiring of incremental personnel and wage increases for existing personnel
and due to the fixed nature of service costs. The decline in service revenue did
not result in a proportionate decline in service costs.
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
$1.8 million and $3.3 million for the three months ended June 30, 2000 and 1999,
respectively, or 44% and 50% of total revenues for each respective period. The
decrease in dollar amount and the decrease in the percentage of total revenues
was due to a decrease in spending associated with marketing programs and fewer
number of employees in the sales and marketing departments due to Company
restructurings. The Company expects that sales and marketing expenses will
increase as new products are introduced to the market.
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 $987,000 and $1.4 million for the three months ended June 30, 2000 and
1999, respectively, representing 25% and 21% of total revenues for each
respective period. The decrease in dollar amount is due to the fewer
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number of employees in the research and development department due to Company
restructurings. The increase in the expense as a percent of revenue is due to
decreased revenue. The Company expects research and development expenses will
increase as new products are put in the development cycle.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive and
finance personnel and associated overhead costs, as well as consulting,
accounting and legal expenses. General and administrative expenses were $1.0
million and $1.6 million for the three months ended June 30, 2000 and 1999,
respectively, or 25% of total revenues for each respective period. The decrease
in dollar amount was primarily attributable to the fewer number of employees in
the general and administrative department due to company restructurings. The
Company expects general and administrative expenses are likely to remain
relatively consistent with the current general and administrative expenses in
absolute terms.
GAIN ON SALE OF AS/400 PRODUCT LINE. As noted above, the gain on sale of the
AS/400 product line recognized in the second quarter of 2000 represents the
payment received from IPP in April 2000.
INTEREST INCOME, NET. Interest income, net consists principally of interest
earned on cash, cash equivalents, and short-term investments. Interest income,
net represented income of $277,000 for the three months ended June 30, 2000 and
$179,000 for the three months ended June 30, 1999, due primarily to interest
income earned on excess cash. The increase is due to the fact that the Company
changed its investment strategy from low interest tax free municipal bonds which
comprised the portfolio at June 30, 1999 to higher interest commercial paper
which comprised the portfolio at June 30, 2000.
BENEFIT FOR INCOME TAXES. The Company recorded a net loss in the three months
ended June 30, 2000 and did not record a benefit from income taxes as
realizability of net operating loss carryforwards is uncertain. The benefit for
income taxes was $647,000 for the three months ended June 30, 1999, representing
the Company's then anticipated income tax benefit related to its net operating
losses.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
TOTAL REVENUES. The Company's total revenues were $8.5 million and $14.0 million
for the six months ended June 30, 2000 and 1999, respectively, representing a
decrease of 39%.
SOFTWARE LICENSE. Software license revenues were $3.2 million for the six months
ended June 30, 2000 and $6.8 million for the six months ended June 30, 1999,
representing a decrease of 53%. Software license revenues accounted for 38% and
49% of total revenues for each respective period. The decline in software
license revenue can be attributed to a number of factors which include softness
in demand for enterprise fax solutions, the elimination of several of the Fax
Sr. product lines, including AS/400, Sun Solaris, VMS and Unix, along with
longer customer purchasing cycles typical of Fortune 500 customers.
Additionally, the decline in software license revenue can be attributed to sales
delays associated with transitioning the Company's sales structure from a direct
model to channel model. The decrease in software license revenue as a percentage
of total revenues is primarily attributable to the decrease in software
revenues.
HARDWARE. Hardware revenues were $1.9 million for the six months ended June 30,
2000 and $3.6 million for the six months ended June 30, 1999, representing a
decrease of 47%. Hardware revenues accounted for 22% and 26% of total revenues
for each respective period. The decrease in dollar amount for the cost of
hardware revenues was due primarily to the decrease of hardware unit sales
accompanying the Company's products and a decrease in hardware sales.
SERVICE AND OTHER. Service and other revenues were $3.4 million for the six
months ended June 30, 2000 and $3.6 million for the six months ended June 30,
1999, representing a decrease of 5%. Service and other revenues accounted for
40% and 26% of total revenues for each respective period. The decrease in
service and other revenues was due primarily to the elimination of support for
several of the Fax Sr. product line as of March 31, 2000. The increase in
service and other revenues as a percent of total revenues is due to the decrease
in software and hardware revenues for the six months ended June 30, 2000.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues was $185,000 and $485,000
for the six months ended June 30, 2000 and
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1999, respectively, representing 6% and 7% of software license revenues for each
respective period. The decrease in dollar amount was primarily due to the lower
volume of products shipped during the six months ended June 30, 2000 compared to
the same period in 1999. The increase in the software license gross margin
percentages from 93% for the six months ended June 30, 1999 to 94% for the six
months ended June 30, 2000 is primarily due to costs associated with new
versions of the Company's software that were released in 1999.
HARDWARE. Cost of hardware revenues was $1.3 million and $2.1 million for the
six months ended June 30, 2000 and 1999, respectively, representing 67% and 59%
of hardware revenues for each respective period. The decrease in dollar amount
for the cost of hardware revenues for the six months ended June 30, 2000 was due
primarily to the decrease of hardware unit sales accompanying the Company's
products and a decrease in hardware sales. The gross margin percentage for
hardware sales was 33% for the six months ended June 30, 2000 compared to 41% in
the same period in 1999. The decrease in gross margin is due mainly to the
write-off of obsolete third-party hardware during the first quarter of 2000.
SERVICE AND OTHER. Cost of service and other revenue was $2.1 million and $1.8
million for the six months ended June 30, 2000 and 1999, respectively,
representing 62% of service and other revenues versus 49% for the same period
last year. The gross margin percentage for service and other revenues decreased
to 38% from 51% for the six month periods ended June 30, 2000 and 1999,
respectively. The increase in dollar amount of cost of services and the decrease
in gross margin during the period was due primarily to the hiring of incremental
personnel and wage increases for existing personnel and due to the fixed nature
of service costs. The decline in service revenue did not result in a
proportionate decline in service costs.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses were $3.9 million and $6.1
million for the six months ended June 30, 2000 and 1999, respectively, or 45%
and 43% of total revenues for each respective period. The decrease in dollar
amount and the decrease in the percentage of total revenues was due to a
decrease in spending associated with marketing programs and fewer number of
employees in the sales and marketing departments due to Company restructurings.
The Company expects that sales and marketing expenses will increase as new
products are introduced to the market.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.1 million
and $2.6 million for the six months ended June 30, 2000 and 1999, respectively,
or 25% and 19% of total revenues for each respective period. The decrease in
dollar amount is due to the fewer number of employees in the research and
development department due to Company restructurings. The increase in the
expense as a percent of revenue is due to decreased revenue. The Company expects
that research and development expenses will increase as new products are put in
the development cycle.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.2
million and $2.8 million for the six months ended June 30, 2000 and 1999,
respectively, or 26% and 20% of total revenues for each respective period. The
decrease in dollar amount was primarily attributable to the fewer number of
employees in the general and administrative department due to Company
restructurings. The increase in percent of total revenues is due to decrease
revenue. The Company expects that general and administrative expenses will
remain relatively consistent with current general and administrative expenses in
absolute terms.
GAIN ON SALE OF AS/400 PRODUCT LINE. As noted above, the gain on sale of the
AS/400 product line recognized in the second quarter of 2000 represents the
payment received from IPP in April 2000.
RESTRUCTURING COSTS. In the first quarter of 1999, the Company announced a
restructuring of certain of its operations, and recorded a non-recurring pretax
charge of $1.1 million in accordance with Emerging Issues Task Force ("EITF")
94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER
COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING).
The non-recurring charge included severance-related costs associated with a
workforce reduction, primarily in the Company's European and Florida operations,
of approximately nine persons in sales, twelve persons in general and
administrative and three persons in research and development. The balance of
this charge included a write-down of assets associated with the closure of the
company's Florida facility. As of June 30, 2000, $937,177 of the restructuring
costs had been spent and the remaining $162,823 is expected to be paid by
December 31, 2000.
INTEREST INCOME, NET. Interest income, net represented income of $524,000 in the
six months ended June 30, 2000 compared to $336,000 earned in the comparable
period last year, due primarily to interest income earned on excess cash. The
increase is due to the fact that the Company changed its investment strategy
from low interest tax free municipal bonds which comprised
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the portfolio at June 30, 1999 to higher interest commercial paper which
comprised the portfolio at June 30, 2000.
BENEFIT FOR INCOME TAXES. The Company recorded a net loss for the six months
ended June 30, 2000 and did not record a benefit from income taxes as
realizability of net operating loss carryforwards is uncertain. The Company's
benefit for income taxes was approximately $601,000 for the six months ended
June 30, 1999 which represented the Company's anticipated income tax benefit
related to its net operating losses.
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
June 30, 2000, the Company had cash and cash equivalents of $1.2 million,
short-term investments of $16.7 million and working capital of $15.7 million.
The Company's operating activities used cash of $1.4 million for the
six months ended June 30, 2000 and provided cash of $1.3 million for the six
months ended June 30, 1999. Net cash used during the six months ended June 30,
2000 consisted primarily of a net loss from operations, a decrease in accounts
payable, accrued liabilities and deferred revenue offset by depreciation and
amortization, a decrease in accounts receivable and prepaid and other current
assets. Net cash provided during the six months ended June 30, 1999 resulted
from a net loss from operations and an increase in income tax receivable offset
by depreciation and amortization, restructuring costs, a decrease in accounts
receivable and an increase in deferred revenue.
Investing activities provided cash of $767,000 and used cash of $1.5
million during the six months ended June 30, 2000 and 1999, respectively. During
the six months ended June 30, 2000, the principal uses were purchases of
short-term investments offset by proceeds from the sale of short-term
investments. During the six months ended June 30, 1999, the principle uses were
purchases of short-term investments, purchases of property and equipment and an
increase in other assets offset by proceeds from the sale of short-term
investments.
Financing activities provided cash of $256,000 and $118,000 during the
six months ended June 30, 2000 and 1999, respectively, due to net proceeds from
the issuance of common stock.
At June 30, 2000, 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
On December 3, 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS (SAB 101). SAB 101 was initially to become effective for calendar
year end companies for the quarter ending March 31, 2000. However, the SEC
has delayed the effective date for SAB 101 until the quarter ending December
31, 2000. As a result, the Company is currently in the process of evaluating
the potential impact that SAB 101 may have on its revenue recognition
policies and its results of operations. At this time, the Company is not able
to reasonably determine the potential impact of the application of SAB 101 on
its financial condition or results of operations.
YEAR 2000 IMPACT
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
twenty-first century dates from twentieth 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. The Company has not
experienced any problems with its computer systems relating to distinguishing
twenty-first century dates from twentieth century dates, which generally are
referred to as year 2000 problems. The Company is also not aware of any
material year 2000 problems with its clients or vendors. Accordingly, the
Company does not anticipate incurring material expenses or experiencing any
material operational disruptions as a result of any year 2000 problems.
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.
PRODUCT CONCENTRATION. To date, substantially all of the Company's revenues
have been attributable to sales of licenses of the Company's facsimile based
enterprise solutions and related products and services. The Company expects such
products and related services to continue to account for a substantial majority
of the Company's future revenues. In March 2000, the
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Company changed its strategic focus to the development of secure
business-to-business electronic document exchange solutions. To date, the
Company has not introduced any secure business-to-business electronic document
exchange products to the market. The Company expects that its planned secure
business-to-business electronic document exchange solutions will account for an
increasing portion of future revenues. However, there can be no assurances that
the Company will be able to implement the secure business-to-business electronic
document exchange solutions, or if implemented, such solutions will be
financially successful or result in any revenues. As a result, factors adversely
affecting the pricing of or demand for such products, such as competition or
technological change, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's prospects
must be considered in light of the risks and difficulties frequently encountered
by companies dependent upon operating revenues from a new product line in an
emerging and rapidly evolving market.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for the Company's products
and planned products are relatively new and are characterized by rapid
technological change, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. The
Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments and respond to evolving end-user requirements. There
can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely basis, or that new
products or product enhancements developed by the Company will achieve market
acceptance. The introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
and products currently under development obsolete and unmarketable. From time to
time, the Company and its competitors may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycle of the
Company's existing product offerings. There can be no assurance that
announcements of currently planned or other new product offerings by the Company
or its competitors will not cause customers to defer or forego the licensing of
the Company's existing or planned products and have a material adverse effect on
the Company's business, financial condition and results of operations.
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. Continued 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 maintain 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 customer acceptance of new and enhanced versions of Fax Sr. NT. There can be
no assurance that the Company will continue to be successful in marketing Fax
Sr. NT or any new or enhanced versions of Fax Sr. NT. In addition, there can be
no assurance that the Windows NT operating system will not be replaced by a new
or enhanced operating system. There can be no assurance that the Company will be
successful in developing products for new or enhanced operating systems such as
Windows 2000, 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.
THE MARKET RISKS FOR SECURE BUSINESS-TO-BUSINESS ELECTRONIC DOCUMENT EXCHANGE
SOLUTIONS. The market for the Company's secure business-to-business electronic
document exchange solutions are new and evolving rapidly. The Company's success
will depend upon the adoption and use by current and potential customers of
secure business-to-business electronic document exchange solutions. The
Company's success will also depend upon acceptance of its technology as the
standard for providing these solutions. The adoption and use of the Company's
secure business-to-business electronic document exchange solutions will involve
changes in the manner in which businesses have traditionally exchanged
information. The Company's ability to influence usage of its secure
business-to-business electronic document exchange solutions by customers is
limited. The
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Company intends to spend considerable resources educating potential customers
about the value of secure business-to-business electronic document exchange
solutions. It is difficult to assess, or to predict with any assurance, the
present and future size of the potential market for the Company's secure
business-to-business electronic document exchange solutions, or its growth rate,
if any. Moreover, the Company cannot predict whether the Company's secure
business-to-business electronic document exchange solutions will achieve any
market acceptance. Any future products or future product enhancements that are
not favorably received by customers may not be profitable and, furthermore,
could damage the Company's reputation or brand name.
INTENSE COMPETITION. The enterprise, client/server facsimile solution and
secure business-to-business electronic document exchange solutions markets are
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; product adoption; 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 and secure business-to-business
electronic document exchange solutions 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.
The Company may not be able to compete successfully against current and
future competitors in the secure business-to-business electronic document
exchange solutions market, and the competitive pressures the Company faces could
harm its business and prospects. The Company intends to provide an alternative
to traditional mail and courier document delivery services, such as those
offered by Federal Express Corporation, United Parcel Service or the U.S. Postal
Service. The Company's solution is also an alternative to general purpose e-mail
applications and services. In the more narrow area of secure online document
exchange, the Company's competition comes from secure online document exchange
services providers. Some of these providers have products that are intended to
compete with the Company's products. Examples of these companies include
Differential, e-Parcel, NetDox, PostX and Tumbleweed. In addition, many
companies with which the Company does not presently compete may become
competitors in the future. This could occur either through the expansion of the
Company's products or through other companies' product development in the area
of secure online communication. These companies could include Critical Path,
Documentum, Hummingbird, International Business Machines/Lotus Development,
Microsoft and Verisign.
Many of the Company's competitors and potential competitiors 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 intends to operate, 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.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company may 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
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integrate the acquired businesses with its existing operations, and no assurance
can be given that the Company will be successful in this regard. The Company has
limited experience in intergrating acquired companies into its operations, in
expanding the scope of operations of required businesses, in managing
geographically dispersed operations, and in operating internationally. In the
past the Company has incurred one-time costs and expenses in connection with
acquisitions and it is likely that similar one-time costs and expenses may be
incurred in connection with future acquisitions. In addition, attractive
acquisitions are difficult to identify and complete for a number of reasons,
including competition among prospective buyers and the possible need to obtain
regulatory approval. There can be no assurance that the Company will be able to
complete future acquisitions. In order to finance such acquisitions, it may be
necessary for the Company to raise additional funds either through public or
private financings, including bank borrowings. Any financing, if available at
all, may be on terms which are not favorable to the Company. The Company may
also issue shares of its Common stock to acquire such businesses, which may
result in dilution to the Company's existing stockholders.
LIMITED OPERATING HISTORY. The Company was incorporated in March 1991 and
shipped its initial facsimile software products in 1991. The Company may
increase its operating expenses to expand its organization to support sales
growth and product development. Although the Company has experienced growth
during the past, 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 achieve
profitability in the future. Increases in operating expenses, primarily research
and development spending, 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 and Windows 2000 operating
systems, the level of acceptance for secure business-to-business electronic
document exchange solutions, 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 current and planned products on a
timely basis, the level of product and price competition, changes in operating
expenses, changes in average selling prices and mix of the Company's products,
changes in the Company's sales incentive strategy, the mix of direct and
indirect sales, and general economic factors. In addition, the sale of the
Company's products often involves delays because customers have tended to
implement the products on a large scale and customers also must establish
certain minimum hardware capabilities. The Company's products therefore often
have a lengthy sales cycle while the customer evaluates and receives approvals
for the purchase of the Company's products. During such sales cycles, the
Company may expend substantial funds and management effort yet receive no
revenues. It may be difficult to accurately predict the sales cycle of any large
order. If one or more large orders fails to close as forecasted in a fiscal
quarter, the Company's revenues and operating results for such quarter could be
materially adversely affected. Any one or more of these or other factors could
have a material adverse effect on the Company's business, financial condition
and results of operations. The potential occurrence of any one or more of these
factors makes the prediction of revenues and results of operations on a
quarterly basis difficult and performance forecasts derived from such
predictions unreliable.
The Company's business has experienced and is expected to continue to
experience seasonality. The Company has historically had and expects to continue
to have weaker sales in the months of July and August which may have an adverse
affect on third quarter sales. The Company believes that these fluctuations are
caused primarily by customer budgeting and purchasing patterns.
In general, revenues are difficult to forecast because the market for
enterprise, client/server facsimile and secure business-to-business electronic
document exchange solutions 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.
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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 significantly expanded its operations
and anticipates that expansion will continue to be required in order to address
potential market opportunities. The Company anticipates that it may continue to
increase the size of its sales and marketing and research and development
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 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 and secure business-to-business
electronic document exchange solutions providers in their native countries. To
successfully expand international sales, the Company will need to recruit and
retain additional international resellers and distributors. 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
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
As of June 30, 2000, 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 quarter and six months ended
June 30, 2000. Currently the Company does not engage in foreign currency hedging
activities.
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<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 5, 1999, the Company and certain of its directors and
officers were named as defendants in a purported securities class action
complaint filed in the United States District Court for the District of New
Hampshire. On June 15, 2000, an amended complaint was filed against the same
named defendants. The amended complaint is allegedly brought on behalf of
purchasers of the Company's stock during the period from August 8, 1997 to
October 6, 1998, and alleges, among other things, that the Company's initial
public offering prospectus and registration statement and subsequent
quarterly financial statements contained misstatements. On July 31, 2000, the
Company and the named individual defendants filed a motion to dismiss the
amended complaint, which is still pending. The Company believes that the
allegations contained in the amended complaint are without merit and intends
to defend vigorously against the claims. The lawsuit, however, is in its
earliest stages, and there can be no assurances that this litigation will
ultimately be resolved on terms that are favorable to the Company. In
addition, the Company is a defendant from time to time in lawsuits incidental
to its business. The Company, however, is not at this time a party to any
legal proceedings that it currently believes will have a material, adverse
affect on its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of security-holders of the Company was held on
June 2, 2000. The following nominees were re-elected as Class III directors to
serve for a three year term or until their successors are elected and qualified.
<TABLE>
<CAPTION>
Nominee Total Votes for Nominee Total Votes Withheld
for Nominee
------------------------------------ -------------------------------- -------------------------
<S> <C> <C>
Robert L. Voelk 11,951,590 35,450
Martin A. Schultz 11,951,590 35,450
</TABLE>
The term of office for the following directors continued after the
meeting: Richard D. Cramer (Class I), Adrian A. Peters (Class I), Bruce R.
Evans (Class II) and William C. Styslinger, III (Class II). Mr. Peters
subsequently resigned from the Board of Directors on July 20, 2000.
The election of Arthur Andersen LLP as independent auditors for the
fiscal year ending December 31, 2000 was ratified, with 11,966,240 shares voting
in favor, 19,100 voting against, and 1,700 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Exhibit Description
------ -------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
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OMTOOL, LTD.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMTOOL, LTD.
August 14, 2000 By: /s/ KIRA A. NELSON
-----------------------------
Kira A. Nelson
Chief Financial Officer,
Secretary and Treasurer
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