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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 September 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
(State or Other Jurisdiction of Incorporation or Organization)
02-0447481
(I.R.S. Employer
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 theSecurities 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 12,737,228 shares of the Company's Common Stock, par value
$0.01, outstanding on November 6, 2000.
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OMTOOL, LTD. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 2000
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Item Number Page
----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Operations for the three months and nine months
ended September 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 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 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
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OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------ ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 939,505 $ 1,576,283
Short-term investments 16,715,327 17,587,195
Accounts receivable, less reserves of $1,079,000 in 2000 and
$2,090,000 in 1999, respectively 1,313,719 3,049,161
Prepaid expenses and other current assets 827,783 1,523,279
Deferred tax asset 1,258,978 1,258,978
------------- ------------
Total current assets 21,055,312 24,994,896
Property and equipment, net 1,421,243 1,630,125
Other assets, net 539,753 848,178
------------- ------------
Total assets $ 23,016,308 $ 27,473,199
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 879,922 $ 1,055,197
Accrued liabilities 2,452,552 3,329,576
Deferred revenue 2,368,448 2,903,549
------------- ------------
Total current liabilities 5,700,922 7,288,322
------------- ------------
Contingencies (Note 7)
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 32,074,193 32,215,321
Accumulated deficit (14,053,323) (10,912,010)
Treasury Stock (272,144 shares and 420,125 shares at cost
respectively) (778,636) (1,201,998)
Cumulative translation adjustment (56,941) (46,529)
------------- ------------
Total stockholders' equity 17,315,386 20,184,877
------------- ------------
Total liabilities and stockholders' equity $ 23,016,308 $ 27,473,199
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
3
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OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license $ 1,298,264 $ 3,161,934 $ 4,506,488 $ 9,981,976
Hardware 1,439,543 1,908,585 3,339,391 5,490,226
Service and other 1,581,626 1,932,197 5,021,687 5,548,267
--------------- --------------- --------------- ---------------
Total revenues 4,319,433 7,002,716 12,867,566 21,020,469
--------------- --------------- --------------- ---------------
Cost of revenues:
Software license 85,975 282,913 271,162 768,257
Hardware 1,051,007 1,307,608 2,320,506 3,424,135
Service and other 1,046,426 930,808 3,188,377 2,709,043
--------------- --------------- --------------- ---------------
Total cost of revenues 2,183,408 2,521,329 5,780,045 6,901,435
--------------- --------------- --------------- ---------------
Gross profit 2,136,025 4,481,387 7,087,521 14,119,034
--------------- --------------- --------------- ---------------
Operating expenses:
Sales and marketing 1,233,345 2,979,598 5,097,730 9,036,510
Research and development 874,224 1,221,503 3,015,499 3,809,840
General and administrative 991,571 1,345,567 3,226,622 4,121,872
Gain on sale of AS/400 product line (149,831) - (299,831) -
Restructuring costs - - - 1,128,000
--------------- --------------- --------------- ---------------
Total operating expenses 2,949,309 5,546,668 11,040,020 18,096,222
--------------- --------------- --------------- ---------------
Loss from operations (813,284) (1,065,281) (3,952,499) (3,977,188)
Interest income 287,506 173,825 811,186 509,522
--------------- --------------- --------------- ---------------
Loss before benefit for income taxes (525,778) (891,456) (3,141,313) (3,467,666)
Benefit for income taxes - (206,634) - (807,551)
--------------- --------------- --------------- ---------------
Net loss $ (525,778) $ (684,822) $ (3,141,313) $ (2,660,115)
=============== =============== =============== ===============
Basic and diluted net loss per share $ (0.04) $ (0.05) $ (0.25) $ (0.21)
=============== =============== =============== ===============
Basic and diluted weighted average number of
common shares outstanding 12,730,388 12,619,399 12,695,649 12,603,780
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (3,141,313) $(2,660,115)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization 571,248 1,654,224
Deferred income taxes - (255,891)
Restructuring costs - 78,600
Changes in assets and liabilities--
Accounts receivable 1,660,819 2,121,622
Prepaid expenses and other current assets 269,075 (297,670)
Income tax receivable 439,737 (1,171,316)
Accounts payable (151,133) 454,679
Accrued liabilities (859,720) (144,333)
Long-term liabilities - (38,420)
Deferred revenue (502,529) 200,188
------------ -----------
Net cash used in operating activities (1,713,816) (58,432)
------------ -----------
Cash Flows from Investing Activities:
Purchases of property and equipment (282,826) (761,797)
Purchases of short-term investments (136,342,767) (32,076,319)
Proceeds from sale of short-term investments 137,192,745 32,157,162
(Increase) decrease in other assets 214,099 (633,069)
------------ -----------
Net cash provided by (used in) investing activities 781,251 (1,314,023)
------------ -----------
Cash Flows from Financing Activities:
Purchases of treasury stock - (535,408)
Net proceeds from issuance of common stock 282,234 141,651
------------ -----------
Net cash provided by (used in) financing activities 282,234 (393,757)
------------ -----------
Foreign exchange effect on cash 13,553 (3,789)
------------ -----------
Net decrease in cash and cash equivalents (636,778) (1,770,001)
Cash and cash equivalents, beginning of period 1,576,283 2,706,038
------------ -----------
Cash and cash equivalents, end of period $ 939,505 $ 936,037
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for income taxes $ - $ 332,775
=========== ===========
</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
nine month periods ended September 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 September 30, 2000 and December 31, 1999, the Company had $16,715,327
and $17,587,195, respectively, invested in securities consisting of commercial
paper as of September 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
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(e) NET LOSS PER COMMON SHARE
The Company reports earnings per share in accordance with SFAS No. 128,
EARNINGS PER SHARE. Weighted average shares outstanding for the three months and
nine months ended September 30, 2000, respectively, exclude the potential common
shares related to 1,385,784 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 nine months ended September 30, 1999,
respectively, exclude the potential common shares related to 1,477,625
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 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 loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ----------------------------
2000 1999 2000 1999
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net loss $(525,778) $ (684,822) $(3,141,313) $(2,660,115)
Foreign currency translation adjustments, net of taxes 5,689 34,117 (6,840) 2,204
--------- ---------- ----------- -----------
Comprehensive loss $(520,089) $ (650,705) $(3,148,153) $(2,657,911)
========= ========== =========== ===========
</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 $630,000 and
$2.4 million for the three months and nine months ended September 30, 2000,
respectively, and $2.0 million and $5.2 million for the three months and nine
months ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Total revenues (1) 2000 1999 2000 1999
----------- ----------- ------------ -----------
United States $ 3,688,564 $ 5,026,521 $ 10,436,937 $15,784,743
United Kingdom 289,602 766,371 1,155,778 2,523,139
Other North America 124,575 253,636 572,140 649,748
Other Europe 45,366 685,222 426,067 1,426,062
Latin America / South America 5,441 224,054 28,781 515,685
Middle East / Far East 156,579 46,912 228,616 121,092
Australia 9,306 -- 19,247 --
------------- ------------- ------------- -------------
$ 4,319,433 $7,002,716 $12,867,566 $21,020,469
=========== ========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
Long-lived assets (2) 2000 1999
------------- ------------
<S> <C> <C>
North America $ 1,848,843 $2,239,778
Europe 112,153 238,525
----------- ----------
$ 1,960,996 $2,478,303
=========== ==========
(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, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, such as
deferred income taxes and financial instruments.
</TABLE>
<TABLE>
(5) RESTRUCTURING COSTS
<S> <C>
A rollforward of the restructuring reserve is as follows:
Balance, December 31, 1999....................... $ 783,735
Severance and other payments...................... (698,749)
---------
Balance, September 30, 2000...................... 84,986
=========
</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 and third quarters of 2000, the
Company received the second and third installments of $150,000 of the deferred
proceeds which were 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
------------- -------------
<S> <C> <C>
Revenues $ 6,791,855 $19,022,665
Net loss (581,541) (2,507,798)
Basic and diluted net loss per share (0.05) (0.19)
</TABLE>
8
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(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
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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 for the
fiscal year ended December 31, 1999 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 enable secure,
business-to-business electronic document exchange. 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 14% and 22% of the Company's
total revenues for the nine months ended September 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 62% and 26% of the Company's total revenues for
the nine months ended September 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 each of the
second and third quarters of 2000, the Company received a payment of $150,000
from the buyer and recorded those amounts as a gain in each of the quarters
ended June 30, 2000 and September 30, 2000 (see Note 6 of Notes to Financial
Statements).
10
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RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license 30.1 % 45.1 % 35.0 % 47.5%
Hardware 33.3 27.3 26.0 26.1
Service and other 36.6 27.6 39.0 26.4
----- ---- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Software license 2.0 4.0 2.1 3.7
Hardware 24.3 18.7 18.0 16.3
Service and other 24.2 13.3 24.8 12.8
----- ----- ----- -----
Total cost of revenues 50.5 36.0 44.9 32.8
----- ----- ----- -----
Gross profit 49.5 64.0 55.1 67.2
----- ----- ----- -----
Operating expenses:
Sales and marketing 28.5 42.6 39.6 43.0
Research and development 20.2 17.4 23.4 18.1
General and administrative 23.0 19.2 25.1 19.6
Gain on sale of AS/400
product line (3.4) - (2.3) -
Restructuring costs - - - 5.4
----- ----- ----- -----
Total operating expenses 68.3 79.2 85.8 86.1
----- ----- ----- -----
Loss from operations (18.8) (15.2) (30.7) (18.9)
Interest income, net 6.7 2.5 6.3 2.5
----- ----- ----- -----
Loss before benefit for income taxes (12.1) (12.7) (24.4) (16.4)
Benefit for income taxes - (3.0) - (3.8)
----- ----- ----- -----
Net loss (12.1) % (9.7)% (24.4) % (12.6)
----- ----- ----- -----
Gross profit:
Software license 93.4 % 91.1 % 94.0 % 92.3
Hardware 27.0 31.5 30.5 37.6
Service and other 33.8 51.8 36.5 51.2
</TABLE>
THREE MONTHS ENDED SEPTEMBER 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 $4.3 million and $7.0 million for
the three months ended September 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 $1.3 million for the three months ended September 30, 2000 and $3.2 million
for the three months ended September 30, 1999, representing a decrease of 59%.
Software license revenues accounted for 30% and 45% 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,
11
<PAGE>
including AS/400, Sun Solaris, VMS and Unix, along with longer customer
purchasing cycles typical of Fortune 500 customers. The decrease in software
license revenue as a percentage of total revenues is primarily attributable to
the decrease in software revenues.
HARDWARE. Hardware revenues are derived from the resale of third-party hardware
products sold to the Company's customers in conjunction with the licensing of
the Company's software. Hardware revenues were $1.4 million for the three months
ended September 30, 2000 and $1.9 million for the three months ended September
30, 1999, representing a decrease of 26%. Hardware revenues accounted for 33%
and 27% 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 third quarter of 2000 that act as a basis for selling the hardware. The
increase in hardware revenue as a percent of total revenue is due to a decrease
in software license revenue.
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 September 30, 2000 and $1.9 million for the three months
ended September 30, 1999, respectively, representing a decrease of 16%. Service
and other revenues accounted for 37% and 28% 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 lines 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 September 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 $86,000 and $283,000 for the
three months ended September 30, 2000 and 1999, respectively, representing 7%
and 9% 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 September 30, 2000 compared to the same period in 1999.
Software license gross margin percentages increased to 93% for the three months
ended September 30, 2000 from 91% 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 $1.1 million and
$1.3 million for the three months ended September 30, 2000 and 1999,
respectively, representing 73% and 69% 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 decreased to 27% for the three months ended September 30, 2000
from 32% in the same period in 1999. The gross margin decrease 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 $931,000 for the three months ended September 30, 2000 and 1999,
respectively, representing 66% and 48% of service and other revenues for each
respective period. The gross margin percentage for service and other revenues
decreased to 34% for the three months ended September 30, 2000, compared to 52%
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
$1.2 million and $3.0 million for the three months ended September 30, 2000 and
1999, respectively, or 29% 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
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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 $874,000 and $1.2 million for the three months ended September 30, 2000 and
1999, respectively, representing 20% and 17% 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 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 $992,000
and $1.3 million for the three months ended September 30, 2000 and 1999,
respectively, or 23% and 19% 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 third quarter of 2000 represents the
payment received from IPP in July 2000.
INTEREST INCOME. Interest income of $288,000 for the three months ended
September 30, 2000 and $174,000 for the three months ended September 30, 1999 is
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 September 30, 1999 to
higher interest commercial paper which comprised the portfolio at September 30,
2000.
BENEFIT FOR INCOME TAXES. The Company recorded a net loss in the three months
ended September 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 $207,000 for the three months ended September 30, 1999,
representing the Company's then anticipated income tax benefit related to its
net operating losses.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
TOTAL REVENUES. The Company's total revenues were $12.9 million and $21.0
million for the nine months ended September 30, 2000 and 1999, respectively,
representing a decrease of 39%.
SOFTWARE LICENSE. Software license revenues were $4.5 million for the nine
months ended September 30, 2000 and $10.0 million for the nine months ended
September 30, 1999, representing a decrease of 55%. Software license revenues
accounted for 35% and 48% 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. 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 $3.3 million for the nine months ended
September 30, 2000 and $5.5 million for the nine months ended September 30,
1999, representing a decrease of 40%. Hardware revenues accounted for 26% of
total revenues for each respective period. The decrease in dollar amount for
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 $5.0 million for the nine
months ended September 30, 2000 and $5.5 million for the nine months ended
September 30, 1999, representing a decrease of 9%. Service and other revenues
accounted
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for 39% 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 lines 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 nine months ended
September 30, 2000.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues was $271,000 and $768,000
for the nine months ended September 30, 2000 and 1999, respectively,
representing 6% 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 nine months ended September 30, 2000 compared to the same
period in 1999. The increase in the software license gross margin percentages
from 92% for the nine months ended September 30, 1999 to 94% for the nine months
ended September 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 $2.3 million and $3.4 million for the
nine months ended September 30, 2000 and 1999, respectively, representing 69%
and 62% of hardware revenues for each respective period. The decrease in dollar
amount for the cost of hardware revenues for the nine months ended September 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 31% for the nine months ended September 30, 2000 compared
to 38% 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 $3.2 million and $2.7
million for the nine months ended September 30, 2000 and 1999, respectively,
representing 63% of service and other revenues versus 49% for the same period
last year. The gross margin percentage for service and other revenues decreased
to 37% from 51% for the nine month periods ended September 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 $5.1 million and $9.0
million for the nine months ended September 30, 2000 and 1999, respectively, or
40% 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 $3.0 million
and $3.8 million for the nine months ended September 30, 2000 and 1999,
respectively, or 23% and 18% 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 $3.2
million and $4.1 million for the nine months ended September 30, 2000 and 1999,
respectively, or 25% 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 decreased
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 represents the payments received from IPP in April 2000 and
July 2000.
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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.
INTEREST INCOME. Interest income was $811,000 in the nine months ended September
30, 2000 compared to $510,000 earned in the comparable period last year, and is
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 September 30, 1999 to
higher interest commercial paper which comprised the portfolio at September 30,
2000.
BENEFIT FOR INCOME TAXES. The Company recorded a net loss for the nine months
ended September 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 $808,000 for the nine months ended
September 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 September
30, 2000, the Company had cash and cash equivalents of $940,000, short-term
investments of $16.7 million and working capital of $15.4 million.
The Company's operating activities used cash of $1.7 million and $58,000
for the nine months ended September 30, 2000 and 1999, respectively. Net cash
used during the nine months ended September 30, 2000 consisted primarily of a
net loss from operations, a decrease in accrued liabilities and deferred revenue
offset by depreciation and amortization, a decrease in accounts receivable,
prepaid and other current assets and income tax receivable. Net cash used during
the nine months ended September 30, 1999 resulted from a net loss from
operations, an increase in income tax receivable and a decrease in prepaid
expenses and other current assets offset by depreciation and amortization, a
decrease in accounts receivable and an increase in accounts payable and deferred
revenue.
Investing activities provided cash of $781,000 and used cash of $1.3
million during the nine months ended September 30, 2000 and 1999, respectively.
During the nine months ended September 30, 2000, the principal uses were
purchases of short-term investments and purchases of property and equipment
offset by proceeds from the sale of short-term investments and a decrease in
other assets. During the nine months ended September 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 $282,000 during the nine months ended
September 30, 2000 due to net proceeds from the issuance of common stock.
Financing activities used cash of $394,000 for the nine months ended September
30, 1999 due primarily to the purchases of treasury stock offset by the net
proceeds from the issuance of common stock.
At September 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
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On December 3, 1999, the Securities and Exchange Commission (SEC) issued 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
Information provided by the Company from time to time including statements in
this Form 10-Q which are not historical facts are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
particular, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning the plans and
objectives of management; expectations for sales and marketing, research and
development and general and administrative expenses; developments relating to
the Company's product and service offerings, markets and acquisitions;
anticipated trends in the Company's business; Year 2000 readiness; and the
Company's expected liquidity and capital resources) may constitute
forward-looking statements. These forward-looking statements are neither
promises nor guarantees, but are subject to risk and uncertainties that could
cause actual results to differ materially from the expectations set forth in
the forward-looking statements. Factors that may cause such differences
include, but are not limited to, the factors discussed below, and the other
risks discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 and from time to time in the Company's other
filings with the Securities and Exchange Commission.
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 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
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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 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 (a subsidiary of Applied Voice
Technology), Fenestrae BV, Optus Software, TopCall International and Biscom. 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.
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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, Tumbleweed and Zixit. 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 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
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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.
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
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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 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
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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 September 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,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. 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 nine months ended
September 30, 2000. Currently the Company does not engage in foreign currency
hedging activities.
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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
effect on its financial condition.
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
None
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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.
November 8,2000 By: /s/ Kira A. Nelson
------------------
Kira A. Nelson
Chief Financial Officer,
Secretary and Treasurer
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