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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE
OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-22871
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OMTOOL, LTD.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0447481
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
8 INDUSTRIAL WAY, SALEM, NH 03079
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (603) 898-8900
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 28, 2000, was approximately $39,841,715 (based upon the
closing price of the Registrant's Common Stock on March 28, 2000 of $5.00 per
share).
The number of shares outstanding of the Registrant's $.01 par value Common
Stock as of March 28, 2000 was 12,710,781.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1999. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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PART I
Except for the historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies;
(ii) anticipated trends in the Company's business; (iii) the Company's ability
to expand its product and service offerings; (iv) the Company's ability to
satisfy working capital requirements and (v) the Company's Year 2000 readiness.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, certain of which are
beyond the Company's control. Actual results could differ materially from these
forward-looking statements as a result of a number of factors including, but not
limited to, those factors described in "Certain Factors Affecting Future
Operating Results."
ITEM 1. BUSINESS
BUSINESS
Omtool, Ltd. ("Omtool" or the "Company") designs, develops, markets and
supports open, client/ server software solutions that integrate communications
throughout the enterprise. Omtool's products, licensed typically on a
combination server/seat basis, provide users with an extensive, flexible feature
set for transmitting and receiving electronic documents and the ability to
improve management of its communications. Included in the Company's products is
a suite of utility and control functions that are designed to maintain document
integrity. Omtool's products enable the integration of business processes that
include the exchange of electronic documents such as legal contracts, financial
transactions and purchase order processing. In addition, the Company is
currently developing and designing product solutions for secure,
business-to-business electronic document exchange.
Omtool's software products can be deployed on heterogeneous, multi-platform
networks and can be integrated with both desktop and enterprise software
applications such as e-mail and groupware systems. To address the needs of large
enterprises, Omtool's products are modular and scaleable; servers, clients and
communication capacity can be implemented and added over time as needed to keep
pace with demand. Omtool intends to maintain a leadership position in its
traditional market while developing and marketing expanded secure electronic
document exchange solutions.
The Company's server products are available on Windows server operating
systems, with a client application that runs in various versions of Microsoft
Windows, as well as having web based Java and ActiveX clients. In addition,
Omtool has integrated its electronic document exchange capabilities with
Microsoft Exchange and Lotus Notes, offering users the ability to initiate and
control electronic document exchange and track transactions from within
Microsoft Outlook and Lotus Notes. Omtool has licensed its products to thousands
of customers worldwide.
Omtool was incorporated in New Hampshire in March 1991 and was
reincorporated in Delaware in January 1996. The Company's principal executive
offices are located at 8 Industrial Way, Salem, New Hampshire 03079 and its
telephone number is (603) 898-8900.
INDUSTRY BACKGROUND
To be competitive in today's marketplace, companies must focus on improving
electronic communications within their organizations and beyond the enterprise.
Growth in electronic communication is being driven by productivity and
efficiency demands on knowledge workers, the information sharing requirements of
dispersed organizations, the emergence of the virtual enterprise to incorporate
suppliers, customers and other business partners, and the general globalization
of markets. Enterprises have responded to the need for improved communications
through a combination of telephony, facsimile, e-mail and groupware solutions.
Facsimile transmission was adopted as a worldwide standard for electronic
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communication because of its general availability, ease of use, real-time
transmission of information in a non-alterable format and consistent uniform
protocol standards.
As the fax market matures, the Company believes continued opportunities
exist in the high volume application market for specific faxing from
data-centric applications, situations where facsimile technology is used in the
context of legal requirements and mission critical business processes where the
fax is the standard for electronic document exchange.
As business-to-business transactions begin to migrate to the Internet,
businesses may increasingly require secure web-based electronic document
exchange. Existing e-mail solutions do not address the specific issues that are
key to secure exchange of mission critical, high value electronic documents.
Such solutions must enable businesses to extend and enhance their existing
enterprise and web-based technology to provide the reliable and secure document
exchange and tracking required for business-to-business Internet communication,
customer management document delivery and e-commerce. Omtool is leveraging its
experience in electronic document exchange and enterprise client/server
architecture to develop an enhanced, secure enterprise document exchange
solution designed specifically to meet the needs of businesses for secure
electronic document exchange.
THE OMTOOL SOLUTION
Omtool provides an open client/server software platform, licensed typically
on a server/seat basis, for automating and integrating exchange of electronic
documents throughout the enterprise and in business-to-business applications.
Its range of features and capabilities combined with a flexible interface
provide a platform for building custom applications. Corporate customers deploy
the Company's products as a key component of business process systems. Examples
include legal document exchange, financial transactions, insurance claims,
purchase order processing and sales quoting. Omtool's client/server software
platform can be configured to automatically process data-streams from back
office, manufacturing, and other applications for automatic, electronic exchange
providing a potential cost savings in terms of materials and manpower.
Omtool's products are architected to be modular and scaleable. Servers,
clients, and communication capabilities can be implemented and added over time.
STRATEGY
The Company's objective is to maintain its position as a leading provider of
client/server facsimile software solutions and to become the leading provider of
secure business-to-business electronic document exchange solutions. Omtool
intends to take advantage of its customer base, leveraging its knowledge of
communication and enterprise solutions to become the leading provider of secure
business-to-business electronic document exchange solutions by implementing the
following business strategy:
DEVELOP FUTURE PRODUCTS. Omtool intends to invest in the necessary research
and development to enable the Company to develop new Internet based products
offering its customers a robust and reliable solution for secure
business-to-business electronic document exchange.
MAINTAIN TECHNOLOGY LEADERSHIP IN THE ENTERPRISE MARKET. The Company
intends to invest in fax messaging technology by developing a new Windows 2000
based architecture designed to become the basis of the next generation fax
server product. This is intended to enable customers to deploy computerized
faxing as part of broadband, high value enterprise document exchange solutions.
LEVERAGE INSTALLED BASE OF CUSTOMERS. The Company believes that
opportunities exist to expand the use of its products across more users and
applications at the Company's existing customer installations. The Company
intends to pursue these opportunities by leveraging the solution/reseller
channel and providing comprehensive post-sale customer support. In addition, the
Company believes that a highly-
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referenceable customer base is of critical importance in marketing its current
and future products to new customers as well as to the Company's installed base.
BUILD DISTRIBUTION CHANNELS. The Company believes that the way to succeed
in the market is by leveraging distribution channels. Omtool's sales efforts
have been redirected toward building the solution distribution channels
necessary to broaden its reach in to the target vertical markets and further
penetrate its installed base. The Company is currently expanding its
distribution network, including expanding its indirect channels within North
America and internationally and continuing to expand its existing dedicated
sales force to focus on sales to large corporate accounts and post-sale
relationship management.
EXPAND INTERNATIONAL SALES. The Company intends to expand its international
presence (primarily in Europe) in order to address its target markets outside of
North America and to serve customers that operate on a multi-national basis. In
1997, 1998 and 1999, approximately 10%, 17% and 22%, respectively, of the
Company's total revenues were derived from sales outside of North America
(primarily in Europe). In 2000, the Company plans to continue to increase its
investment in sales and marketing efforts directed towards international
markets.
LEADERSHIP IN THE WINDOWS 2000 ENVIRONMENT. The Company believes that
Windows 2000 will become the dominant computing platform in the enterprise
environment. The Company intends to continue to focus a portion of its near-term
research and development, marketing and sales efforts on Windows 2000 related
functionality. See "Factors Affecting Future Performance."
CONTINUE TO PURSUE STRATEGIC RELATIONSHIPS. The Company intends to form
relationships with leading providers of products and services that are
complementary to the Company's offerings. The Company believes that these
relationships will provide both a valuable source of sales leads and an
alternative source of implementation services. The Company also believes that
these relationships will be beneficial in exposing its products to new markets
and prospective customers.
The Company has strategic alliances with companies such as Xpedite
Systems, Inc. and Cable and Wireless, Inc., providers of enhanced fax carrier
services, and Lucent/Octel and Siemens, providers of PC-based unified messaging
systems that include voice mail systems and computer-telephony integration
solutions. Other strategic alliances include NetCentric Corporation, a provider
of carrier-class Internet fax systems, and System Software Associates (SSA), a
global provider of enterprise resource planning software. Most recently, Omtool
announced a relationship with iManage, a leading provider of information and
collaboration management software for enterprises engaged in information
commerce as part of their e-business strategy. The agreements generally provide
for reference sales, limited co-marketing activities and, in the case of
iManage, resale of Omtool's products. These agreements are mutually
non-exclusive.
CURRENT PRODUCTS AND SERVICES
FAX SR.
Fax Sr. is a client/server software solution for automating and integrating
fax communication throughout the enterprise. As an integrated component of an
enterprise software system, Fax Sr. is designed to be deployed on heterogeneous,
multi-platform networks and to integrate with desktop and enterprise software
applications. Fax Sr. is licensed typically on a shrink-wrap basis, primarily on
the Windows NT, Sun Solaris and VMS server operating systems. In 1999,
approximately 74% of the Company's software license revenues were derived from
Fax Sr. NT. Fax Sr. can be configured with a variety of networked clients,
including Windows NT, Windows 95, Windows 3.1.x, Internet browsers, and
Macintosh.
Fax Sr. is comprised of three main components: Fax Sr. Client, Fax Sr.
Server and Fax Sr. Manager. The Fax Sr. Client allows users to send and receive
faxes directly from the desktop or enterprise application. The Fax Sr. Server
controls the function of prioritizing, queuing, and transmitting outbound faxes,
while receiving and distributing inbound faxes. The Fax Sr. Manager allows for
remote monitoring,
4
control, and analysis of fax user activity from any Windows or Windows NT system
that is connected to the network.
Fax Sr. offers a comprehensive feature set with functionality important to
users, business managers and IT professionals. Fax Sr. users can fax documents,
together with attachments, from any desktop application through the
application's print function. Alternatively, faxes may be transmitted or
received directly through e-mail. Users can create and revise shared, public and
private phonebooks for fax transmissions. Fax Sr. offers a fax broadcast
capability with immediate or delayed transmission to take advantage of off-peak
telephone line utilization and charges. Inbound faxes can be directed to a
printer, desktop personal computer or e-mail. Fax Sr. also offers remote access,
including send and receive capability, for users who are away from the office.
Fax Sr. provides tools that allow business managers and IT professionals to
effectively manage the fax communication process. Outbound faxes can be
scheduled on the individual user level and enhanced management security and
control capabilities are provided by furnishing password protection as well as
user and location restrictions. Through global routing, Fax Sr. can least cost
route fax transmissions between servers, over an organization's WAN or the
Internet, allowing long distance fax transmissions to be made as local phone
calls. Fax Sr. also offers sophisticated tools for facsimile usage analysis,
including comprehensive tracking of inbound and outbound faxes. The entire Fax
Sr. environment can be managed, configured and controlled from one or more
remote workstations.
Fax Sr. can be automatically linked to enterprise data processing
applications on multiple platforms connected on an enterprise's network. Fax Sr.
provides an integrated faxing environment across an organization's computer
platforms, including both servers and desktops. Fax Sr. is scaleable as a
business' need for faxing solutions expands.
The Company's Fax Sr. product is licensed to its customers on a per
server/seat basis. Pricing is based on the number of servers, end user seats and
facsimile telephone lines deployed.
LEGALFAX
LegalFax is a client/server software solution for law firms to automate and
integrate fax communications and cost recovery systems. LegalFax is licensed
typically on a shrink-wrap basis, primarily on the Windows 95/98 and Windows NT
operating systems. LegalFax supports Microsoft Exchange, Novell GroupWise, and
Lotus Notes and allows users to fax using native transport protocol.
Additionally, LegalFax is fully integrated with document management systems such
as iManage and PC DOCS Open, as well as with time and billing systems such as
Equitrac, Elite and CMS Open.
LegalFax is comprised of four main components: LegalFax Client, LegalFax
Server, LegalFax CostRecovery and FaxCenter. The LegalFax Client allows users to
send faxes directly from the desktop, automatically validating client matter
data and integrates with document management systems. The LegalFax Server uses
the Fax Sr. NT fax server as its fax engine and provides the messaging gateway
for fax transmissions. The LegalFax CostRecovery component allows integration
with cost recovery systems. The LegalFax FaxCenter allows fax administrators to
instantly route incoming faxes directly to workstations, distribution lists,
printers, or fax machines using existing e-mail networks.
LegalFax provides a comprehensive feature set with functionality important
specifically to users, business managers, and IT professionals in law firms.
LegalFax enables users to fax documents directly from document management
systems and to retrieve and automatically validate client matter data from such
systems before a fax is sent to the fax server. The LegalFax CostRecovery module
automatically captures this client and cost information and produces a custom
file which can be posted to any time and billing system.
5
DISCONTINUED PRODUCTS
On January 4, 2000, the Company sold 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 to International Presence PLC. As of March 31, 2000, the
Company will discontinue the sale and support of the U-Page, Fax Sr. Express,
Fax Sr. Sun Solaris, Fax Sr. VMS and Fax Sr. Unix products.
HARDWARE
The Company also resells certain hardware products, including intelligent
fax boards and fax modems, to its customers. Hardware sales are undertaken as a
convenience to the Company's customers, and hardware is neither bundled with the
Company's software products nor required to be purchased from the Company.
Omtool primarily resells intelligent fax boards from third party vendors.
CUSTOMER SERVICE
To aid in the successful deployment of the Company's products by its
customers, the Company's customer service organization provides technical
support. For an additional fee at the time of the initial licensing of the
Company's products, the Company provides support services to its customers for a
period of 12 months, including telephone support, software support comprised of
maintenance releases, minor feature enhancement releases, technical bulletins
and replacement of damaged media. Support services, may be renewed by the
customer on an annual basis. The Company currently provides annual support
services based on a percentage of its product license fee. Although to date the
Company has not provided certification training, consulting, and professional
services to any significant degree, the Company intends to offer these customer
services in the future and has begun to organize the customer support business
unit to develop and deliver these services. There can be no assurance, however,
as to the time of introduction or level of market acceptance of, or revenue
generated from, any such services. In the event that the Company devotes
significant financial and other resources to the provision of such services and
fails to achieve market acceptance and generate revenue, the Company's business,
financial condition and results of operations could be materially adversely
affected.
SALES AND MARKETING
The Company targets large and mid-sized corporations, organizations and
government entities as the primary market for its Fax Sr. product line, with
small businesses comprising a secondary market opportunity. To address the broad
range of its sales opportunities, the Company relies on the coordinated efforts
of its sales organization, its key executives, the Company's marketing
department and its indirect channels, including resellers, distributors and
systems integrators.
The Company offers its product lines through indirect sales channels such as
resellers, systems integrators and value added distributors. The Company has
refocused its efforts to establish a strong reseller channel by dedicating sales
resources specifically to finding and qualifying new reseller partners. As a
result, the number of distribution partners has increased significantly.
Consequently the sales organization has been re-organized and streamlined to
reflect the increased focus on the reseller channel. The Company plans to
continue to expand its sales through resellers in North America selling its
product lines and anticipates the revenues derived from indirect channels will
therefore increase.
Outside of North America, the Company primarily utilizes independent
distributors to promote, license and support its products. Omtool's distribution
strategy is to engage large-volume distributors of software products to serve
customers that operate on a multi-national basis. The Company expects to
continue to market its products through independent distributors in strategic
international markets. In
6
1997, 1998 and 1999, sales outside of North America represented approximately
10%, 17% and 22%, respectively, of total revenues.
In support of its sales organization, the Company conducts comprehensive
marketing programs intended to promote and create awareness of the Company's
products and position the Company in the enterprise, client/server facsimile
software market. These efforts may include product advertising, public
relations, trade show participation, educational seminars, direct mail and
telemarketing campaigns and participation in industry programs and forums.
CUSTOMERS
As of December 31, 1999, the Company had more than 3,000 customers
worldwide. The Company's customer base reflects the cross-industry applicability
of the Company's products and services. As a result of the increased focus on
distribution channels, by the end of 1999, the Company has signed on over 30
reseller and distributor partners.
No single customer accounted for 10% or more of total revenues in 1997, 1998
or 1999.
RESEARCH AND DEVELOPMENT
The Company continues to invest in research and development. The Company
believes its future performance will depend in large part on its ability to
develop a new product architecture that can serve as a platform that meets the
demands of the market it currently serves as well as future non-fax based,
business-to-business, secured electronic document exchange. Omtool deploys its
development engineers in product teams that focus on the concurrent development
of a range of product enhancements that leverage its products' modular product
architecture. Omtool's product development efforts are focused on development of
new products, the exploration of emerging technologies and the continued
enhancement of existing products. The Company also continually reviews
opportunities to form alliances with third-party vendors of complementary
technologies and products in order to enhance the functionality of its product
families. In the future, the Company may, based on timing and cost
considerations, continue to explore opportunities to license or acquire
technologies or products from third parties.
The Company is seeking and will continue to seek to hire additional skilled
development engineers. Such engineers are likely to be in short supply, and the
Company's business, financial condition and results of operations could be
adversely affected if it encounters delays in hiring or fails to retain the
required skilled engineers. The Company's research and development expense for
1997, 1998 and 1999 was approximately $3.9 million, $5.1 million and
$5.1 million, respectively. Since its inception, the Company has not capitalized
any research and development costs. The Company plans to continue to make
significant investments in research and development, primarily through the
hiring of additional skilled engineers and independent contractors.
COMPETITION
The client/server facsimile solution market is intensely competitive and
rapidly changing and the Company expects competition to continue to increase.
The Company believes its ability to compete successfully depends upon a number
of factors both within and beyond its control, including product performance,
reliability and features, including Internet enabled capabilities; ease of use;
product scalability; quality of support services; price/performance; timeliness
of enhancements and new product releases by the Company and its competitors.
Given this, the Company believes that in order to be successful, it must sharpen
its focus and deliver products on the single most prolific system platform--
Windows NT/2000, with features that appeal to the broadest segment of the
market.
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
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Applied Voice Technology, Inc.), Fenestrae BV, Optus Software Inc., TopCall
International and Biscom, Inc. The Company also competes with providers offering
a range of alternative facsimile solutions including operating systems
containing facsimile and document e-mail features; low-end fax modem products;
providers of desktop fax software; single-platform facsimile software products;
and customized proprietary software solutions. In addition, providers of
operating systems or business software applications may bundle competitive
facsimile solutions as part of their broader product offerings.
In the business-to-business secure document exchange market, the Company
expects to compete with companies like Tumbleweed, PostX, Docspace, as well as
other companies that either have service-based solutions or are specifically
targeting document exchange service providers with technology based products.
Currently, the Company believes that there are few companies with non-service
based products in the market that address secure electronic document exchange,
although document management companies such as iManage, Hummingbird and
Documentum may develop and deliver competitive products for this market.
Many of Omtool's competitors and potential competitors have longer operating
histories and greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and market acceptance of their
products and technologies than the Company. In addition, there are relatively
low barriers to entry in the markets in which the Company operates and 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
Omtool will not develop products comparable or superior in terms of price and
performance features to those developed by the Company, adapt more quickly than
the Company to new or emerging technologies and changes in market opportunities
or customer requirements, establish alliances with industry leaders, or take
advantage of acquisition opportunities more readily than the Company. In
addition, no assurance can be given that the Company will not be required to
make substantial additional investments in connection with its research,
development, engineering, marketing, sales and customer service efforts in order
to meet any competitive threat, or that the Company will be able to compete
successfully in the future. Increased competition will result in reductions in
market share, pressure for price reductions and related reductions in gross
margins, any of which could materially and adversely affect the Company's
ability to achieve its financial and business goals. There can be no assurance
that in the future the Company will be able to successfully compete against
current and future competitors.
PROPRIETARY RIGHTS
The Company regards its software as a trade secret and attempts to protect
it with a combination of copyright and trade secret laws, and employee
nondisclosure and assignment of invention agreements. The Company has no patents
or patents pending, and to date has not registered any copyrights or trademarks.
The Company generally licenses its products under "shrink-wrap" licenses (i.e.,
licenses included as part of the product packaging). Shrink-wrap licenses are
not negotiated with or signed by individual licensees, and purport to take
effect upon the opening of the product package. Certain provisions of such
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of many jurisdictions. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and although the Company is unable to determine the extent to which piracy of
its products exists, such piracy can be expected to be a persistent problem,
particularly in international markets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
the laws of the United States. There can be no assurance that these protections
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies.
8
There has been substantial litigation in the software industry involving
intellectual property rights. There can be no assurance that claims of
infringement of intellectual property rights will not be asserted against the
Company and, if asserted, would not have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
inasmuch as the Company licenses certain components of its products from third
parties, its exposure to copyright and other infringement actions may increase
because the Company must rely on such third parties for information as to the
origin and ownership of such licensed components. In the future, litigation may
be necessary to enforce and protect trade secrets, copyrights and other
intellectual property rights of the Company. The Company may also be subject to
litigation to defend against claimed infringement of the rights of others or to
determine the scope and validity of the intellectual property rights of others.
Any such litigation could be costly and divert management's attention, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such litigation
could result in the loss of the Company's proprietary rights, subject the
Company to significant liabilities, require the Company to seek licenses from
third parties or prevent the Company from selling its products, any one of which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of December 31, 1999, the Company employed 171 persons. The Company is
not subject to any collective bargaining agreements, has never experienced a
work stoppage and considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Salem, New Hampshire in a
leased facility consisting of approximately 30,000 square feet. The lease
expires on December 31, 2002, and the Company has an option to extend the lease
for a period of three years thereafter. The Company believes that such
facilities are adequate for its present operations. The Company, however,
expects in the future to expand into additional facilities. The Company also
leases additional facilities and offices for sales, customer service,
development, and support in Oregon and London, England.
ITEM 3. 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. The
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 contained misstatements. The Company believes that the
allegations contained in the 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on The Nasdaq Stock Market under
the symbol OMTL since August 8, 1997, the date of the Company's initial public
offering of Common Stock. Prior to August 8, 1997, there was not a public market
for the Company's Common Stock. The following table sets forth for the periods
indicated the high and low bid prices for the Common Stock as reported by The
Nasdaq Stock Market based on actual sales price.
STOCK PRICE
----------------------------------------
HIGH LOW
-------- --------
QUARTER ENDED:
1998
March 31, 1998.............................................. $14 1/8 $9 5/16
June 30, 1998............................................... $13 7/8 $7 3/16
September 30, 1998.......................................... $ 7 3/4 $2 1/4
December 31, 1998........................................... $ 3 1/4 $1 11/16
1999
March 31, 1999.............................................. $ 6 $2 3/4
June 30, 1999............................................... $ 4 3/4 $2 7/8
September 30, 1999.......................................... $ 3 3/8 $2
December 31, 1999........................................... $ 3 9/16 $1 3/4
On March 28, 2000, the closing price for the Common Stock was $5.00 per
share. As of March 28, 2000, there were approximately 73 stockholders of record.
The Company believes that shares of the Company's Common Stock held in bank,
money management, institution and brokerage house "nominee" names may account
for at least an estimated 1,309 additional beneficial holders.
The Company has not paid any cash dividends on its capital stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
intends to retain any earnings or other cash resources to finance future growth
of its business. Any future determinations to pay cash dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition and other factors deemed
relevant by the Board of Directors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The statements of consolidated operations data set forth below for each of
the fiscal years ended December 31, 1997, 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 have been derived from the Company's
consolidated financial statements, which statements have been audited by Arthur
Andersen LLP, independent public accountants, and are included herein. The
statements of consolidated operations data for the fiscal years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from the Company's financial statements, which
statements have been audited by Arthur Andersen LLP and are not included herein.
The selected financial data set forth below should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this 10-K.
10
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Revenues:
Software license............................... $2,780 $6,636 $14,232 $18,542 $12,394
Hardware....................................... 278 1,831 4,308 6,482 7,072
Service and other.............................. 870 1,879 3,032 6,088 7,620
------ ------ ------- ------- -------
Total revenues............................... 3,928 10,346 21,572 31,122 27,086
------ ------ ------- ------- -------
Cost of revenues:
Software license............................... 104 588 1,027 1,331 1,070
Hardware....................................... 209 1,310 2,867 3,925 4,891
Service and other.............................. 319 993 1,450 2,951 3,704
------ ------ ------- ------- -------
Total cost of revenues....................... 632 2,891 5,344 8,207 9,665
------ ------ ------- ------- -------
Gross profit................................. 3,296 7,455 16,228 22,905 17,421
------ ------ ------- ------- -------
Operating expenses:
Sales and marketing............................ 1,236 3,337 7,937 12,341 11,879
Research and development....................... 893 2,217 3,955 5,059 5,145
General and administrative..................... 750 1,129 2,140 4,755 5,562
Restructuring costs and asset write-off........ -- -- -- -- 2,853
Write-off of purchased, in-process research and
development.................................. -- -- 3,100 -- --
Loss on sale of AS/400 product line............ -- -- -- -- 2,668
------ ------ ------- ------- -------
Total operating expenses..................... 2,879 6,683 17,132 21,155 28,107
------ ------ ------- ------- -------
Income (loss) from operations.................... 417 772 (904) 750 (10,686)
Interest income (expense), net................... (1) 16 392 754 668
Income (loss) before provision (benefit) for
income taxes................................... 416 788 (512) 1,504 (10,018)
Provision (benefit) for income taxes............. -- 244 993 406 (857)
------ ------ ------- ------- -------
Net income (loss)................................ $ 416 $ 544 $(1,505) $ 1,098 $(9,161)
====== ====== ======= ======= =======
Net income (loss) per share (1)
Basic........................................ $ 0.07 $ 0.08 $ (0.18) $ 0.09 $ (0.73)
====== ====== ======= ======= =======
Diluted...................................... $ 0.07 $ 0.05 $ (0.18) $ 0.08 $ (0.73)
====== ====== ======= ======= =======
Weighted average number of common shares
outstanding (1)
Basic........................................ 6,400 6,596 8,499 12,713 12,600
====== ====== ======= ======= =======
Diluted...................................... 6,400 10,379 8,499 13,415 12,600
====== ====== ======= ======= =======
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 632 $ 2,123 $ 2,354 $ 2,706 $ 1,576
Working capital (deficit)....................... (9) 3,586 23,973 23,610 17,707
Total assets.................................. 1,721 7,044 37,132 36,403 27,473
Long-term debt, net of current portion.......... 21 212 -- -- --
Convertible redeemable preferred stock.......... -- 5,167 -- -- --
Total stockholders' equity (deficit).......... 120 (1,253) 29,736 29,765 20,185
- - ------------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, this Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, (i) the Company's growth strategies;
(ii) anticipated trends in the Company's business; (iii) the Company's ability
to expand its product and service offerings; (iv) the Company's ability to
satisfy working capital requirements and (v) the Company's Year 2000 readiness.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, certain of which are
beyond the Company's control. Actual results could differ materially from these
forward-looking statements as a result of a number of factors including, but not
limited to, those factors described in "Certain Factors Affecting Future
Operating Results."
OVERVIEW
Omtool, 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 majority of the Company's revenues are derived from licensing the
rights to use its Fax Sr. software product directly to end-users and indirectly
through resellers.
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 is dependent on licenses of its Fax Sr. NT product, first
licensed in March 1995, for a substantial portion of its revenues. In the years
ended December 31, 1999, 1998 and 1997, approximately 74%, 69% and 83%,
respectively, of the Company's software license revenues were derived from Fax
Sr. NT. In addition, a substantial portion of the Company's hardware and service
and other revenue is dependent on such licenses of Fax Sr. NT.
The Company also derives revenues from the sale of hardware products such as
intelligent fax boards and fax modems. Hardware sales are undertaken as a
convenience to the Company's customers and hardware is neither bundled with the
Company's software products nor required to be purchased from the Company.
Omtool primarily resells intelligent fax boards from third party vendors. The
Company purchases these hardware products as needed to ship to its customers and
the Company maintains a minimal inventory of these hardware products. Revenue
for hardware products is recognized upon shipment of the product.
Service and other revenues have consisted primarily of the sale of support
contracts. Revenue from support contracts is recognized ratably over the term of
the support contract period, which is typically one year. Although to date the
Company has not provided a significant amount of consulting, configuration and
installation services, the Company intends to offer these customer services in
the future as warranted by customer demand.
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 22%, 17% and 10% of the Company's total
revenues in 1999, 1998 and 1997, respectively. The Company's gross profit on
these sales approximates the gross profit on sales within North America. The
Company's strategy is to expand its international presence (primarily in Europe)
and to increase its investment in sales and
12
marketing efforts directed toward international markets. See "Acquisitions."
There can be no assurance that the Company will be able to maintain or increase
international sales of its products, and the failure to do so may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's United Kingdom subsidiary transacts business primarily in its
local currency. The Company manages its foreign exchange exposure by monitoring
its net monetary position using natural hedges of its assets and liabilities
denominated in local currencies. There can be no assurance that this policy will
eliminate all currency exposure. Foreign currency exposure has not been material
to the Company's financial position or results of operations to date. If the
Company's business denominated in foreign currencies increases, the Company may
be required to use derivatives to hedge foreign currency exposure.
Historically, the Company has marketed and sold its products principally
through its direct telesales force. However, the Company continues to actively
recruit VARs, systems integrators, resellers and distributors to expand its
indirect distribution channel. Sales through the Company's indirect distribution
channels represent approximately 30%, 23% and 28% of the Company's total
revenues for the years ended December 31, 1999, 1998 and 1997, respectively.
As of March 31, 2000, the Company will discontinue 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 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 to International Presence PLC which were acquired in the
Company's acquisition of CMA Ettworth. See "Acquisitions."
ACQUISITIONS
On December 5, 1997, the Company acquired all of the outstanding shares of
capital stock of CMA Ettworth Limited ("CMA Ettworth" or "CMA"). CMA Ettworth
(now known as Omtool Europe) is headquartered in London, England and designed,
marketed and supported fax solutions for the IBM AS/400 market. As a result of
the CMA Ettworth acquisition, the Company acquired the CMA Ettworth
Telex/Fax/400 software products for the IBM AS/400 market including related
know-how and goodwill. The purchase price was paid with a combination of 363,637
newly issued shares of common stock, $.01 par value, of the Company and
$4 million in cash. The cash used by the Company to fund the acquisition was
derived primarily from the proceeds of the Company's initial public offering,
which became effective on August 7, 1997. The acquisition was accounted for as a
purchase, in accordance with Accounting Principles Board (APB) Opinion No. 16,
BUSINESS COMBINATIONS. Based on an independent appraisal, a substantial portion
of the purchase price was allocated to purchased in-process research and
development (IPR&D) for which the Company incurred a one time charge against
earnings of approximately $3.1 million in the quarter ended December 31, 1997.
On February 19, 1998, the Company acquired all of the outstanding capital
stock of Desktop Paging Software, Inc. (DPSI) in exchange for 294,840 shares of
Omtool common stock. DPSI develops, markets and supports wireless messaging
software. This transaction was accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements were restated to
include the accounts and operations of DPSI for all periods presented prior to
the acquisition.
On February 27, 1998, the Company acquired all of the outstanding capital
stock of TRS Technologies, Inc. (TRS) in exchange for 384,430 shares of Omtool
common stock. TRS develops, markets and supports LAN fax and cost recovery
systems for law firms. This transaction was accounted for as a pooling
13
of interests and, accordingly, the Company's consolidated financial statements
were restated to include the accounts and operations of TRS for all periods
presented prior to the acquisition.
Regarding Omtool's acquisition of CMA, the transaction was structured as a
purchase of the assets and the business of CMA. Subsequent to the acquisition,
it was appropriate to immediately expense the purchased in-process technology
that had not yet reached technological feasibility without any alternative use.
The value was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the purchased
in-process technology.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
Software license............................. 45.8% 59.6% 66.0%
Hardware..................................... 26.1 20.8 20.0
Service and other............................ 28.1 19.6 14.0
----- ----- -----
Total revenues............................. 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software license............................. 4.0 4.3 4.8
Hardware..................................... 18.1 12.6 13.3
Service and other............................ 13.7 9.5 6.7
----- ----- -----
Total cost of revenues..................... 35.8 26.4 24.8
----- ----- -----
Gross profit................................... 64.2 73.6 75.2
----- ----- -----
Operating expenses:
Sales and marketing.......................... 43.9 39.7 36.8
Research and development..................... 19.0 16.3 18.3
General and administrative................... 20.5 15.2 9.9
Restructuring costs and asset write-off...... 10.5 -- --
Loss on sale of AS/400 product line.......... 9.8 -- --
Write-off of purchased, in-process research
and development............................ -- -- 14.4
----- ----- -----
Total operating expenses................... 103.7 71.2 79.4
----- ----- -----
Income (loss) from operations.................. (39.5) 2.4 (4.2)
Interest income, net........................... 2.5 2.4 1.8
----- ----- -----
Income (loss) before provision (benefit) for
income taxes................................. (37.0) 4.8 (2.4)
Provision (benefit) for income taxes........... (3.2) 1.3 4.6
----- ----- -----
Net income (loss).............................. (33.8)% 3.5% (7.0)%
===== ===== =====
Gross profit:
Software license............................. 91.4% 92.8% 92.8%
Hardware..................................... 30.9 39.4 33.4
Service and other............................ 51.4 51.5 52.2
14
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
TOTAL REVENUES. The Company's revenues are currently derived primarily from
licensing fees of the Company's software products and, to a lesser extent, from
related sales of hardware and services. The Company's total revenues were
$27.1 million and $31.1 million for the years ended December 31, 1999 and 1998,
respectively, representing a decrease of 13%.
SOFTWARE LICENSE. The Company's software license revenues are derived
primarily from the licensing of the Company's Fax Sr. product. Software license
revenues were $12.4 million for the year ended December 31, 1999 and
$18.5 million for the year ended December 31, 1998, representing a decrease of
33%. Software license revenues accounted for 46% and 60% 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 and longer customer purchasing cycles typical of
Fortune 500 customers. The Company believes this is a result of customers'
preoccupation with other technology priorities and delayed implementation of
large-scale projects, such as enterprise wide e-mail and server replacement, due
to the uncertainty of the Year 2000 date change and its effect on customers'
existing computer systems and software. 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 increase in service and other revenue due to the Company's
larger installed customer base.
HARDWARE. Hardware revenues are derived from the resale of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. Hardware revenues were $7.1 million for the
year ended December 31, 1999 and $6.5 million for the year ended December 31,
1998, representing an increase of 9%. Hardware revenues accounted for 26% and
21% of total revenues for each respective period. The increase in hardware
revenues was due primarily to the increase of hardware unit sales accompanying
the Company's products and a change in the sales mix of third-party hardware
products from less expensive modem products to high-end multi-channel modem
boards.
SERVICE AND OTHER. Service and other revenues are primarily comprised of
fees from maintenance contracts. Service and other revenues were $7.6 million
and $6.1 million for 1999 and 1998, respectively, representing an increase of
25%. Service and other revenues accounted for 28% and 20% of total revenues for
each respective period. The increase in dollar amount was due primarily to an
increase in maintenance revenues as a result of a larger installed customer
base. The Company anticipates that service revenue will continue to increase as
the Company's installed base grows.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues consists primarily of
the costs of sublicensing third-party software products, product media, and
product duplication. Cost of software license revenues was $1.1 million and
$1.3 million in 1999 and 1998, respectively, representing 9% 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 fiscal year
1999 compared to the same period in 1998. Software license gross margin
percentages decreased to 91% in 1999 from 93% in 1998. The decrease in gross
margin is attributable to a larger number of upgrade units produced as a result
of a larger installed base and as a result of additional product versions
released in 1999.
HARDWARE. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $4.9 million and
$3.9 million in 1999 and 1998, respectively, representing 69% and 61% of
hardware revenues for each respective period. The increase in dollar amount for
the cost of hardware revenues for the fiscal year ended December 31, 1999 was
due primarily to the increase of hardware unit sales accompanying the Company's
products and a change in the sales mix
15
of third-party hardware products from less expensive modem products to high-end
multi-channel modem boards. The gross margin percentage for hardware sales
decreased to 31% for 1999 from 39% in 1998. The gross margin decrease is due
mainly to the write-off of obsolete third-party hardware.
SERVICE AND OTHER. Cost of service and other revenues consists primarily of
the costs incurred in providing telephone support as well as other miscellaneous
customer service-related expenses. Cost of service and other revenues was
$3.7 million and $3.0 million in 1999 and 1998, respectively, representing 49%
of service and other revenues for each respective period. The increase in dollar
amount of cost of service and other revenues during the period was due primarily
to the hiring of incremental personnel to support growth in the customer base.
The gross margin percentage for service and other revenues decreased to 51% for
1999 from 52% in 1998.
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 $11.9 million and $12.3 million in 1999 and 1998, respectively, or 44% and
40% of total revenues for each respective period. The decrease in dollar amount
was due to a decrease in commissions paid due to lower sales levels. The
increase in sales and marketing expenses as a percentage of total revenues was
primarily due to decreased revenue. The Company expects that sales and marketing
expenses will remain relatively consistent with the current sales and marketing
expenses in absolute terms.
RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities, and consist primarily of
employee salaries, benefits, and associated overhead costs as well as consulting
expenses and the cost of software development tools. Research and development
expenses were $5.1 million for each of the years ended December 31, 1999 and
1998, representing 19% and 16% of total revenues for each respective period. The
increase in the expense as a percent of revenue is due to decreased revenue. The
Company expects research and development expenses will increase in connection
with the development of electronic document exchange products and as other new
products are developed.
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
$5.6 million and $4.8 million in 1999 and 1998, respectively, or 21% and 15% of
total revenues for each respective period. The increase in dollar amount and as
a percentage of revenues was primarily attributable to an increase in executive
level personnel and the overhead costs allocated to support such personnel. The
Company expects general and administrative expenses are likely to continue to
increase in absolute terms.
RESTRUCTURING COSTS AND ASSET WRITE-OFF In the first quarter of 1999, the
Company announced a restructuring of certain of its operations, and recorded a
non-recurring pretax charge of $1,128,000 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 includes 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 includes a write-down of assets associated with the
closure of the company's Florida facility.
16
The components of the restructuring were as follows:
Employee severance, benefits and related costs.............. $ 939,000
Write-off and write-down of assets to be disposed........... 78,600
Lease termination and relocation costs...................... 60,400
Other....................................................... 50,000
----------
$1,128,000
==========
In the fourth quarter of 1999, the Company announced a restructuring of
certain of its operations, and recorded a non-recurring pretax charge of
$1,725,000 in accordance with EITF 94-3, LIABILITY RECOGNITION FOR CERTAIN
EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING
CERTAIN COSTS INCURRED IN A RESTRUCTURING) and SEC Staff Accounting Bulletin
No. 100. The non-recurring charge includes severance-related costs and an asset
write-off charge. The severance-related costs are associated with a workforce
reduction, primarily in the Company's Salem, NH and European operations, of
approximately three persons in sales, two persons in research and development,
three persons in support, and one person in general and administrative.
During 1998, the Company was granted a perpetual license to utilize certain
patented fax technology. The cost to obtain this license was capitalized and was
being amortized over its estimated useful life of five years. In accordance with
SFAS No. 121, the Company determined during 1999 that the carrying value of this
asset should be reduced to reflect its impairment, based upon an undiscounted
cash flow analysis, resulting from the Company's future product plans in which
this patented technology is no longer expected to be utilized.
The components of the restructuring and asset write-off at December 31, 1999
are as follows:
Employee severance, benefits and related costs.............. $ 925,000
Asset write-off............................................. 800,000
----------
$1,725,000
==========
LOSS 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 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 for the year ended
December 31, 1999.
The components of the loss at December 31, 1999 are as follows:
Consideration received for assets sold...................... $ (600,000)
Less: Reserve for proceeds receivable....................... 450,000
----------
Net Proceeds................................................ (150,000)
Carrying value of assets sold, net of deferred taxes........ 2,644,500
Additional reserve required for AS/400 receivables not
sold...................................................... 173,000
----------
Loss on sale of AS/400 product line......................... $2,667,500
==========
17
INTEREST INCOME, NET. Interest income, net consists principally of interest
earned on cash, cash equivalents, and short-term investments, offset by interest
expense associated with equipment financing and borrowings. Interest income, net
represented income of $668,000 for the fiscal year ended December 31, 1999 and
$754,000 for the fiscal year ended December 31, 1998, due primarily to interest
income earned on excess cash. The decrease is due to a lower average principal
balance for the year ended December 31, 1999 than that of the year ended
December 31, 1998.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for income
taxes was $(857,000) and $406,000 for fiscal years ended December 31, 1999 and
1998, respectively. The Company recorded an income tax benefit of $857,000 in
1999 as a result of its net operating losses. The effective income tax rate was
approximately 27% in 1998 which is lower than the combined federal and state tax
rates due to tax credits and tax exempt interest. See Note 8 of Notes to
Consolidated Financial Statements.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
TOTAL REVENUES. The Company's revenues are currently derived primarily from
licensing fees of the Company's software products and, to a lesser extent, from
related sales of hardware and services. The Company's total revenues were
$31.1 million and $21.6 million for the years ended December 31, 1998 and 1997,
respectively, representing an increase of 44%.
SOFTWARE LICENSE. The Company's software license revenues are derived
primarily from the licensing of the Company's Fax Sr. product. Software license
revenues were $18.5 million for the year ended December 31, 1998 and
$14.2 million for the year ended December 31, 1997, representing an increase of
30%. Software license revenues accounted for 60% and 66% of total revenues for
each respective period. The increase in dollar amount was primarily due to
increased market acceptance of the Company's facsimile software products for
various operating systems as well as the expansion into new markets as a result
of recent acquisitions. Approximately $2.0 million of the increase in software
license revenue is attributable to the Company's acquisition of CMA-Ettworth
Limited in December 1997. The decrease in software license revenue as a
percentage of total revenues is primarily attributable to the increase in
service and other revenue due to the Company's larger installed customer base.
HARDWARE. Hardware revenues are derived from the resale of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. Hardware revenues were $6.5 million for the
year ended December 31, 1998 and $4.3 million for the year ended December 31,
1997, representing an increase of 50%. Hardware revenues accounted for 21% and
20% of total revenues for each respective period. The increase in hardware
revenues was due primarily to the increase of hardware unit sales accompanying
the Company's products and a change in the sales mix of third-party hardware
products from less expensive modem products to high-end multi-channel modem
boards.
SERVICE AND OTHER. Service and other revenues are primarily comprised of
fees from maintenance contracts. Service and other revenues were $6.1 million
and $3.0 million for 1998 and 1997, respectively, representing an increase of
101%. Service and other revenues accounted for 20% and 14% of total revenues for
each respective period. The increase in dollar amount was due primarily to an
increase in maintenance revenues as a result of a larger installed customer
base. The Company anticipates that service revenue will continue to increase as
the Company's installed base grows.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues consists primarily of
the costs of sublicensing third-party software products, product media, and
product duplication. Cost of software license revenues was $1.3 million and
$1.0 million in 1998 and 1997, respectively, representing 7% of software license
revenues for each respective period. The increase in dollar amount was primarily
due to the higher volume
18
of products shipped during the fiscal year 1998 compared to the same period in
1997. Software license gross margin percentages remained constant at 93% for the
years ended December 31, 1998 and 1997.
HARDWARE. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $3.9 million and
$2.9 million in 1998 and 1997, respectively, representing 61% and 67% of
hardware revenues for each respective period. The increase in dollar amount for
the cost of hardware revenues for the fiscal year ended December 31, 1998 was
due primarily to the increase of hardware unit sales accompanying the Company's
products and a change in the sales mix of third-party hardware products from
less expensive modem products to high-end multi-channel modem boards. The gross
margin percentage for hardware sales increased to 39% for 1998 from 33% in 1997
due to the change in the hardware sales mix.
SERVICE AND OTHER. Cost of service and other revenues consists primarily of
the costs incurred in providing telephone support as well as other miscellaneous
customer service-related expenses. Cost of service and other revenues was
$3.0 million and $1.4 million in 1998 and 1997, respectively, representing 48%
of service and other revenues for each respective period. The increase in dollar
amount of cost of service and other revenues during the period was due primarily
to the hiring of incremental personnel to support growth in the customer base.
The gross margin percentage for service and other revenues remained constant at
52% for the years ended December 31, 1998 and 1997.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, and associated overhead costs, and the
cost of marketing programs such as direct mailings, public relations, trade
shows, seminars, and related communication costs. Sales and marketing expenses
were $12.3 million and $7.9 million in 1998 and 1997, respectively, or 40% and
37% of total revenues for each respective period. The increase in dollar amount
and the increase in sales and marketing expenses as a percentage of total
revenues was primarily due to the Company's effort to expand its direct
telesales force and marketing organization, higher sales commissions associated
with increased revenues, and planned increases in marketing program activities.
The Company expects that sales and marketing expenses will remain relatively
consistent with the current sales and marketing expenses in absolute terms.
RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities, and consist primarily of
employee salaries, benefits, and associated overhead costs as well as consulting
expenses and the cost of software development tools. Research and development
expenses were $5.1 million and $4.0 million in 1998 and 1997, respectively, or
16% and 18% of total revenues for each respective period. The increase in dollar
amount was primarily attributable to the employment of additional staff to
develop and enhance the Company's products and provide quality assurance as well
as the additional personnel added as a result of recent acquisitions. The
Company expects research and development expenses will remain relatively
consistent with current research and development expenses in absolute terms.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee salaries and benefits for administrative, executive and
finance personnel and associated overhead costs, as well as consulting,
accounting and legal expenses. General and administrative expenses were
$4.8 million and $2.1 million in 1998 and 1997, respectively, or 15% and 10% of
total revenues for each respective period. The increase in dollar amount and as
a percentage of revenues was primarily attributable to an increase in personnel
and the overhead costs allocated to support such personnel as well as additional
administrative expenses and amortization expense incurred as a result of recent
acquisitions. The Company expects general and administrative expenses are likely
to continue to increase in absolute terms.
19
WRITE-OFF OF PURCHASED, IN-PROCESS RESEARCH AND DEVELOPMENT. In connection
with the acquisition of CMA Ettworth, the Company expensed $3.1 million of
in-process research and development costs that did not have a future alternative
use during the quarter ended December 31, 1997. See Note 4 of Notes to
Consolidated Financial Statements.
INTEREST INCOME, NET. Interest income, net consists principally of interest
earned on cash, cash equivalents, and short-term investments, offset by interest
expense associated with equipment financing and borrowings. Interest income, net
represented income of $754,000 for the fiscal year ended December 31, 1998 and
$392,000 for the fiscal year ended December 31, 1997, due primarily to interest
income earned on excess cash from the proceeds of the Company's initial public
offering which was completed in August 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes was $406,000 and
$993,000 for fiscal years ended December 31, 1998 and 1997, respectively. The
effective income tax rate in 1998 was approximately 27% which is lower than the
combined federal and state statutory rates primarily as a result of tax credits
and tax-exempt interest. The effective income tax rate was approximately 38% in
1997, calculated based on pre-tax income before a non-deductible charge for
purchased, in-process research and development of $3.1 million, which
approximates the Company's respective federal and state statutory rates. See
Note 8 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since 1996, the Company has financed its operations primarily through cash
flow from operations, the private sales of preferred stock and the Company's
initial public offering of Common Stock completed in August 1997. At
December 31, 1999, the Company had cash and cash equivalents of $1.6 million,
short-term investments of $17.6 million and working capital of $17.7 million.
The Company's operating activities provided cash of $600,000 and
$1.1 million for the years ended December 31, 1999 and 1998, respectively. Net
cash provided during the year ended December 31, 1999 consisted primarily of a
net loss from operations, offset by depreciation and amortization, restructuring
charges, loss on sale of AS/400 product line, a decrease in accounts receivable
and prepaid expenses and other current assets. Net cash provided during the year
ended December 31, 1998 consisted primarily of net income from operations,
depreciation and amortization, and increases in deferred revenue and accounts
payable, offset by increased accounts receivable and income taxes payable.
Investing activities used cash of $1.3 million during the year ended
December 31, 1999 and provided cash of $560,000 during the year ended
December 31, 1998. During the year ended December 31, 1999 and 1998, the
principal uses were purchases of short-term investments, increases in other
assets and purchases of property and equipment, offset by proceeds from the sale
of short-term investments.
Financing activities used cash of $380,000 and $1.3 million during the year
ended December 31, 1999 and 1998, respectively due primarily to the purchases of
treasury stock.
At December 31, 1999, 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.
20
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 is not expected to have a material impact on the Company's consolidated
financial statements.
In March 1998, the AICPA issued SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF
A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, which amends certain
provisions of SOP 97-2. The Company believes it is in compliance with the
provisions of SOP 97-2 as amended by SOP 98-4. In December 1998, the AICPA
issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN TRANSACTIONS, which amends certain provisions of SOP 97-2 and
extends the deferral of the application of certain passages of SOP 97-2 provided
by SOP 98-4 until the beginning of the Company's fiscal year 2000. The Company
does not expect the adoption of SOP 98-9 will have a material effect on its
financial position or operating results.
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 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
21
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
22
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 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
23
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 has
significantly increased its operating expenses in recent periods as it has
continued to expand its organization to support sales growth and product
development. Although the Company has experienced 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 maintain profitability in the future.
Increases in operating expenses, primarily research and development spending,
are expected to continue and, together with pricing pressures, may result in a
decrease in operating income and operating margin percentage. The Company's
limited operating history makes the prediction of future operating results
difficult or impossible. Future operating results will depend on many factors,
including, without limitation, the degree and rate of growth of the markets in
which the Company competes and the accompanying demand for the Company's
products, the level of acceptance of the Windows NT 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,
24
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 rapidly and significantly
expanded its operations and anticipates that significant expansion will continue
to be required in order to address potential market opportunities. The Company
anticipates that it will continue to significantly increase the size of its
sales and marketing, research and development, customer support and
administrative operations. There can be no assurance that such expansion will be
successfully completed or that it will generate sufficient revenues to cover the
Company's expenses. The Company will need to continue to attract and retain
highly qualified technical, sales and managerial personnel. There can be no
assurance that the Company will be able to retain or continue to hire such
personnel in the future. The inability of the Company to effectively expand
operations and manage growth, if any, could have a material adverse effect on
the Company's business, financial condition and results of operations.
25
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
26
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.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
As of December 31, 1999, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments consist of money market funds and municipal bonds that are carried
on the Company's books at amortized cost, which approximates fair market value.
Accordingly, the Company has no quantitative information concerning the market
risk of participating in such investments.
PRIMARY MARKET RISK EXPOSURES
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's exposure to currency
exchange rate fluctuations has been and is expected to continue to be modest due
to the fact that the operations of its United Kingdom subsidiary are almost
exclusively conducted in its local currency. The United Kingdom subsidiary
operating results are translated into U.S. dollars and consolidated for
reporting purposes. The impact of currency exchange rate movements on
intercompany transactions was immaterial for the year ended December 31, 1999.
Currently the Company does not engage in foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the auditors'
reports thereon, appear at pages F-1 through F-23, respectively, of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information concerning directors of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than
120 days after the close of the Company's fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS
The information concerning officers of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than
120 days after the close of the Company's fiscal year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission within 120 days after the close of the Company's
fiscal year ended December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report
(1) Financial Statements Listed under Part II, Item 8 and included herein by
reference.
(2) Financial Statement Schedules
All schedules are not submitted because they are not applicable, not
required or because the information is included in the Financial Statements as
Notes to Financial Statements.
28
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - --------------------- ------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the
Company (filed as Exhibit 3.3 to the Company's Registration
Statement on Form S-1, No. 333-29397 and incorporated herein
by reference)
3.2 Amended and Restated By-laws of the Company (filed as
Exhibit 3.4 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
4.1 Specimen certificate representing the Common Stock (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
10.1 1996 Stock Option Plan (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1, No. 333-29397
and incorporated herein by reference)
10.2 1997 Stock Plan (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, No. 333-29397 and
incorporated herein by reference)
10.3 1997 Employee Stock Purchase Plan (filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
10.4 Lease dated November 26, 1997 between H.J. Brooks Limited
Liability Company and Omtool, Ltd. (filed as Exhibit 10.4 to
the Company's Form 10-K, No. 0-22871 and incorporated herein
by reference)
10.5 Form of Omtool Software License (filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Current Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any current report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1999.
(c) Exhibits.
The exhibits required by this Item are listed under Item 14(a)(3).
(d) Financial Statement Schedules.
The financial statement schedules required by this Item are listed under
Item 14(a)(2).
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Salem,
State of New Hampshire, on the 30th day of March 2000.
OMTOOL, LTD.
By: /s/ ADRIAN A. PETERS
-----------------------------------------
Adrian A. Peters
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHIEF OPERATING OFFICER
POWER OF ATTORNEY
We, the undersigned officers and directors of Omtool, Ltd., hereby severally
constitute and appoint Adrian A. Peters and Kira Nelson, and each of them
singly, our true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution in each of them, to sign for us and in our names
in the capacities indicated below, and generally to do all such things in our
names and on our behalf in our capacities as officers and directors to enable
Omtool, Ltd. to comply with the provisions of the Securities Exchange Act of
1934, as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated.
NAME TITLE DATE
---- ----- ----
/s/ ADRIAN A. PETERS President, Chief Executive Officer March 30, 2000
------------------------------------ and Chief Operating Officer
Adrian A. Peters (principal executive officer)
/s/ ROBERT L. VOELK Chairman March 30, 2000
------------------------------------
Robert L. Voelk
/s/ KIRA A. NELSON Vice President, Finance, Acting Chief March 30, 2000
------------------------------------ Financial Officer, Secretary and
Kira A. Nelson Treasurer (principal financial and
accounting officer)
/s/ MARTIN A. SCHULTZ Director March 30, 2000
------------------------------------
Martin A. Schultz
30
NAME TITLE DATE
---- ----- ----
/s/ RICHARD D. CRAMER Director March 30, 2000
------------------------------------
Richard D. Cramer
/s/ BRUCE R. EVANS Director March 30, 2000
------------------------------------
Bruce R. Evans
/s/ WILLIAM C. STYSLINGER, III Director March 30, 2000
------------------------------------
William C. Styslinger, III
31
OMTOOL, LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Convertible Redeemable Preferred
Stock and Stockholders' Equity (Deficit) for the years
ended December 31, 1999, 1998 and 1997.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Omtool, Ltd.:
We have audited the accompanying consolidated balance sheets of
Omtool, Ltd. (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, convertible
redeemable preferred stock and stockholders' equity (deficit) and cash flows for
the years ended December 31, 1999, 1998, and 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Omtool, Ltd. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 25, 2000
F-2
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1999 1998
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,576,283 $ 2,706,038
Short-term investments.................................... 17,587,195 18,039,250
Accounts receivable, less reserves of $2,090,000 and
$1,345,000 in 1999 and 1998, respectively............... 3,049,161 6,209,390
Prepaid expenses and other current assets................. 1,523,279 1,912,404
Deferred tax asset........................................ 1,258,978 697,000
------------ -----------
Total current assets.................................... 24,994,896 29,564,082
Property and equipment, net................................. 1,630,125 1,770,800
Other assets, net........................................... 848,178 5,068,029
------------ -----------
$ 27,473,199 $36,402,911
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,055,197 $ 1,328,442
Accrued liabilities....................................... 3,329,576 1,682,011
Deferred revenue.......................................... 2,903,549 2,943,848
------------ -----------
Total current liabilities............................... 7,288,322 5,954,301
------------ -----------
Deferred tax liability...................................... -- 644,406
------------ -----------
Long-term liabilities....................................... -- 38,935
------------ -----------
Commitments and contingencies (Notes 11 and 16)
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................................ 32,215,321 33,353,598
Accumulated deficit....................................... (10,912,010) (1,750,596)
Treasury Stock (420,125 and 660,780 shares at cost in 1999
and 1998, respectively)................................. (1,201,998) (1,961,126)
Cumulative translation adjustment......................... (46,529) (6,700)
------------ -----------
Total stockholders' equity.............................. 20,184,877 29,765,269
------------ -----------
$ 27,473,199 $36,402,911
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Software license.................................... $12,394,329 $18,542,007 $14,232,539
Hardware............................................ 7,072,337 6,482,562 4,308,086
Service and other................................... 7,619,851 6,087,615 3,031,867
----------- ----------- -----------
Total revenues.................................... 27,086,517 31,112,184 21,572,492
----------- ----------- -----------
Cost of revenues:
Software license.................................... 1,070,295 1,331,068 1,026,934
Hardware............................................ 4,890,412 3,925,421 2,867,227
Service and other................................... 3,704,314 2,950,718 1,449,795
----------- ----------- -----------
Total cost of revenues............................ 9,665,021 8,207,207 5,343,956
----------- ----------- -----------
Gross profit...................................... 17,421,496 22,904,977 16,228,536
----------- ----------- -----------
Operating expenses:
Sales and marketing................................. 11,879,346 12,340,919 7,937,094
Research and development............................ 5,144,736 5,058,579 3,954,792
General and administrative.......................... 5,562,467 4,755,179 2,140,412
Restructuring costs and asset write-off............. 2,853,000 -- --
Loss on sale of AS/400 product line................. 2,667,500 -- --
Write-off of purchased, in-process research and
development (Note 4).............................. -- -- 3,100,000
----------- ----------- -----------
Total operating expenses.......................... 28,107,049 22,154,677 17,132,298
----------- ----------- -----------
Income (loss) from operations..................... (10,685,553) 750,300 (903,762)
Interest income....................................... 666,707 764,322 447,306
Interest expense...................................... -- (10,435) (55,042)
----------- ----------- -----------
Income (loss) before provision (benefit) for
income taxes.................................... (10,018,846) 1,504,187 (511,498)
Provision (benefit) for income taxes.................. (857,432) 406,435 993,345
----------- ----------- -----------
Net income (loss)................................. $(9,161,414) $ 1,097,752 $(1,504,843)
=========== =========== ===========
Net income (loss) per share
Basic............................................. $ (0.73) $ 0.09 $ (0.18)
=========== =========== ===========
Diluted........................................... $ (0.73) $ 0.08 $ (0.18)
=========== =========== ===========
Weighted average number of common shares outstanding
Basic............................................. 12,600,018 12,713,169 8,498,953
=========== =========== ===========
Diluted........................................... 12,600,018 13,414,958 8,498,953
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
SERIES B CONVERTIBLE SERIES A
REDEEMABLE CONVERTIBLE
PREFERRED STOCK, PREFERRED STOCK, COMMON STOCK,
$0.01 PAR VALUE $0.01 PAR VALUE $0.01 PAR VALUE
------------------------ --------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- -------- ---------- --------
Balance, December 31, 1996...................... 1,356,116 5,166,667 162,500 1,625 5,994,278 59,942
Exercise of stock options..................... -- -- -- -- 130,263 1,302
Accrued dividends on Series B Convertible
Redeemable Preferred Stock.................. -- 233,333 -- -- -- --
Conversion of Series A and B Preferred
Stock....................................... (1,356,116) (5,400,000) (162,500) (1,625) 3,037,232 30,373
Issuance of common stock in initial public
offering net of issuance costs.............. -- -- -- -- 3,000,000 30,000
Issuance of common stock for acquisition...... -- -- -- -- 363,637 3,636
Tax benefit from exercise of stock options.... -- -- -- -- -- --
Change in cumulative translation adjustment... -- -- -- -- -- --
Net loss...................................... -- -- -- -- -- --
---------- ----------- -------- ------ ---------- --------
Balance, December 31, 1997...................... -- -- -- -- 12,525,410 125,253
Purchase of Treasury Stock.................... -- -- -- -- -- --
Exercise of stock options and issuance of
shares through Employee Stock Purchase
Plan........................................ -- -- -- -- 483,962 4,840
Tax benefit from exercise of stock options.... -- -- -- -- -- --
Change in cumulative translation adjustment... -- -- -- -- -- --
Net income.................................... -- -- -- -- -- --
---------- ----------- -------- ------ ---------- --------
Balance, December 31, 1998...................... -- -- -- -- 13,009,372 130,093
Purchase of Treasury Stock.................... -- -- -- -- -- --
Exercise of stock options..................... -- -- -- -- -- --
Change in cumulative translation adjustment... -- -- -- -- -- --
Net loss...................................... -- -- -- -- -- --
---------- ----------- -------- ------ ---------- --------
Balance, December 31, 1999...................... -- $ -- -- $ -- 13,009,372 $130,093
========== =========== ======== ====== ========== ========
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------
TREASURY STOCK
------------------------ ADDITIONAL CUMULATIVE
NUMBER OF PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
---------- ----------- ----------- ------------ -----------
Balance, December 31, 1996...................... -- -- 195,458 (1,510,172) --
Exercise of stock options..................... -- -- 53,024 -- --
Accrued dividends on Series B Convertible
Redeemable Preferred Stock.................. -- -- -- (233,333) --
Conversion of Series A and B Preferred
Stock....................................... -- -- 4,971,252 400,000 --
Issuance of common stock in initial public
offering net of issuance costs.............. -- -- 23,963,981 -- --
Issuance of common stock for acquisition...... -- -- 3,032,733 -- --
Tax benefit from exercise of stock options.... -- -- 234,674 -- --
Change in cumulative translation adjustment... -- -- -- -- 7,704
Net loss...................................... -- -- -- (1,504,843) --
-------- ----------- ----------- ------------ --------
Balance, December 31, 1997...................... -- -- 32,451,122 (2,848,348) 7,704
Purchase of Treasury Stock.................... (660,780) (1,961,126) -- -- --
Exercise of stock options and issuance of
shares through Employee Stock Purchase
Plan........................................ -- -- 223,971 -- --
Tax benefit from exercise of stock options.... -- -- 678,505 -- --
Change in cumulative translation adjustment... -- -- -- -- (14,404)
Net income.................................... -- -- -- 1,097,752 --
-------- ----------- ----------- ------------ --------
Balance, December 31, 1998...................... (660,780) (1,961,126) 33,353,598 (1,750,596) (6,700)
Purchase of Treasury Stock.................... (191,000) (521,425) -- -- --
Exercise of stock options..................... 431,655 1,280,553 (1,138,277) -- --
Change in cumulative translation adjustment... -- -- -- -- (39,829)
Net loss...................................... -- -- -- (9,161,414) --
-------- ----------- ----------- ------------ --------
Balance, December 31, 1999...................... (420,125) $(1,201,998) $32,215,321 $(10,912,010) $(46,529)
======== =========== =========== ============ ========
STOCKHOLDERS' EQUITY (DEFICIT)
-------------
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
Balance, December 31, 1996...................... (1,253,147)
Exercise of stock options..................... 54,326
Accrued dividends on Series B Convertible
Redeemable Preferred Stock.................. (233,333)
Conversion of Series A and B Preferred
Stock....................................... 5,400,000
Issuance of common stock in initial public
offering net of issuance costs.............. 23,993,981
Issuance of common stock for acquisition...... 3,036,369
Tax benefit from exercise of stock options.... 234,674
Change in cumulative translation adjustment... 7,704
Net loss...................................... (1,504,843)
-----------
Balance, December 31, 1997...................... 29,735,731
Purchase of Treasury Stock.................... (1,961,126)
Exercise of stock options and issuance of
shares through Employee Stock Purchase
Plan........................................ 228,811
Tax benefit from exercise of stock options.... 678,505
Change in cumulative translation adjustment... (14,404)
Net income.................................... 1,097,752
-----------
Balance, December 31, 1998...................... 29,765,269
Purchase of Treasury Stock.................... (521,425)
Exercise of stock options..................... 142,276
Change in cumulative translation adjustment... (39,829)
Net loss...................................... (9,161,414)
-----------
Balance, December 31, 1999...................... $20,184,877
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ----------- ------------
Cash Flows from Operating Activities:
Net income (loss)......................................... $ (9,161,414) $ 1,097,752 $ (1,504,843)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization........................... 3,007,532 2,488,644 501,139
Write-off of purchased, in-process research and
development........................................... -- -- 3,100,000
Deferred income taxes................................... (869,813) (555,595) (225,000)
Loss on sale of AS/400 product line..................... 2,667,500 -- --
Non-cash restructuring costs and asset write-off........ 878,600 -- --
Changes in assets and liabilities, net of acquisition--
Accounts receivable................................... 2,994,570 (1,270,151) (1,891,089)
Prepaid expenses and other current assets............. 546,522 (367,577) (815,615)
Accounts payable...................................... (266,029) 327,740 26,860
Accrued liabilities................................... 856,427 (418,670) 949,367
Income taxes payable.................................. -- (813,101) 424,305
Deferred revenue...................................... (15,033) 699,453 792,291
Long-term liabilities................................. (38,935) (59,474) (205,620)
------------ ----------- ------------
Net cash provided by operating activities........... 599,928 1,129,021 1,151,795
------------ ----------- ------------
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (1,193,804) (1,206,151) (957,186)
Purchases of short-term investments....................... (41,735,767) (41,409,484) (39,307,947)
Proceeds from sale of short-term investments.............. 42,177,162 44,550,000 19,058,800
Cash paid for acquisition of CMA Ettworth, net of cash
acquired of $631,284.................................... -- -- (3,868,716)
Increase in other assets.................................. (559,636) (1,374,077) (1,412)
------------ ----------- ------------
Net cash provided by (used in) investing
activities........................................ (1,312,045) 560,288 (25,076,461)
------------ ----------- ------------
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit............. -- (244,563) 151,699
Payments on long-term debt................................ -- -- (250,000)
Payments on capital lease obligations..................... -- (22,841) (31,000)
Net proceeds from issuance of common stock................ 142,276 228,811 24,048,307
Purchase of treasury stock................................ (521,425) (1,961,126) --
Tax benefit from exercise of stock options................ -- 678,505 234,674
------------ ----------- ------------
Net cash provided by (used in) financing
activities........................................ (379,149) (1,321,214) 24,153,680
------------ ----------- ------------
Exchange rate effect on cash................................ (38,489) (15,737) 1,713
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents........ (1,129,755) 352,358 230,727
Cash and cash equivalents, beginning of year................ 2,706,038 2,353,680 2,122,953
------------ ----------- ------------
Cash and cash equivalents, end of year...................... $ 1,576,283 $ 2,706,038 $ 2,353,680
============ =========== ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Interest................................................ $ -- $ 10,435 $ 55,042
============ =========== ============
Income taxes............................................ $ -- $ 1,033,000 $ 479,324
============ =========== ============
Supplemental Disclosure of Noncash Investing and Financing
Transactions:
Accrued dividends on Series B Convertible Redeemable
Preferred Stock......................................... $ -- $ -- $ 233,333
============ =========== ============
Conversion of Series A and Series B Preferred Stock....... $ -- $ -- $ 5,401,625
============ =========== ============
Acquisition of CMA Ettworth, Ltd.--
Fair value of net assets acquired......................... $ -- $ -- $ (6,905,085)
Issuance of common stock.................................. -- -- 3,036,369
============ =========== ============
Cash paid for acquisition, net of cash acquired of
$631,284................................................ $ -- $ -- $ (3,868,716)
============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Omtool, Ltd. ("Omtool" or the "Company") designs, develops, markets and
supports open, client/ server software solutions that integrate communication
throughout the enterprise. 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 processes by providing a suite of utility and control functions.
The Company predominantly does business in markets located within North America
and Europe.
The Company is subject to a number of risks associated with emerging,
technology-oriented companies with a limited operating history, including
continued market acceptance of the Company's products, competition from
substitute products and larger companies, and the continued ability to manage
and finance the Company's anticipated future growth.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described in this note and elsewhere in the
notes to consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany transactions
have been eliminated in consolidation.
(B) REVENUE RECOGNITION
The Company generates revenue from licensing the rights to use its software
products directly to end users and indirectly through resellers. The Company
also generates revenue from sales of support contracts and consulting services
to customers who license its products and from resale of related hardware
products.
The Company recognizes revenue in accordance with the provisions of
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by
SOP 98-4. Additionally, the American Institute of Certified Public Accountants
recently issued SOP 98-9, which provides certain amendments to SOP 97-2, which
is effective for transactions entered into beginning January 1, 2000. This
pronouncement is not expected to materially impact the Company's revenue
recognition practices.
Revenues from software license agreements are recognized upon shipment of
the software, if there are no significant post-delivery obligations and if
payment is due within one year. Revenues are recorded net of an allowance for
estimated future returns. If an acceptance period is required, revenues are
recognized upon the earlier of the customer's acceptance or the expiration of
the acceptance period.
Revenues from support contracts are recognized ratably over the term of the
support period, which is generally one year. Service and other revenue is
primarily related to implementation services performed on a time-and-material
basis under separate service agreements related to the installation of the
Company's software products.
Service and other revenues are recognized as services are performed. If a
transaction includes both license and service elements, license fee revenues are
recognized upon shipment of the software, provided services do not include
customization or modification of the base product and the payment terms for
licenses are not subject to acceptance criteria. In cases where license fee
payment is contingent upon the
F-7
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acceptance of services, revenues from both the license and the service elements
are deferred until the acceptance criteria are met.
Cost of license revenues consists of the cost of media on which the product
is delivered and any related royalties. Cost of service revenues consists
primarily of salaries and benefits related to consulting personnel and the
customer support group.
(C) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Software development costs are considered for capitalization when
technological feasibility is established in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The Company sells
software in a market that is subject to rapid technological change, new product
introductions and changing customer needs. Accordingly, the Company has
determined that it cannot determine technological feasibility until the
development state of the product is nearly complete. The time period during
which cost could be capitalized from the point of reaching technological
feasibility until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material to the
Company's consolidated financial position or results of operations. Therefore,
the Company charges all research and development expenses to operations in the
period incurred.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
consist primarily of investments in money market funds. In accordance with SFAS
No. 115, ACCOUNTING FOR INVESTMENTS IN CERTAIN DEBT AND EQUITY SECURITIES, the
Company's cash equivalents are classified as held-to-maturity securities.
Held-to-maturity securities are carried at amortized cost, which approximates
market value.
(E) SHORT-TERM INVESTMENTS
As of December 31, 1999 and 1998, the Company had $17,587,195 and
$18,039,250, respectively, invested in securities consisting of municipal bonds.
In accordance with SFAS No. 115, the Company has classified its short-term
investments as available-for-sale. These securities have been recorded at
amortized cost, which approximates market value at December 31, 1999 and 1998.
(F) DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company does not have any derivative or other financial instruments as
defined by SFAS No. 119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND
FAIR VALUE OF FINANCIAL INSTRUMENTS.
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
short-term investments, accounts receivable, accounts payable and debt. The
estimated fair value of these financial instruments approximates their carrying
value at December 31, 1999 and 1998 due to the short-term nature of these
instruments.
F-8
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization is calculated using accelerated
and straight-line methods over the following useful lives:
DECEMBER 31,
-----------------------
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE 1999 1998
- - -------------------- --------------------------------- ---------- ----------
Computer equipment........................ 1--5 years $2,650,634 $1,570,549
Computer software......................... 2--3 years 767,930 1,191,366
Furniture and equipment................... 5--7 years 706,230 600,628
Leasehold improvements.................... Shorter of the life of the lease
or the estimated useful life 174,464 172,964
Motor vehicles............................ 4 years 65,733 93,111
Equipment under capital leases............ Shorter of the life of the lease
or the estimated useful life -- 95,802
---------- ----------
4,364,991 3,724,420
Less--accumulated depreciation and
amortization............................ 2,734,866 1,953,620
---------- ----------
$1,630,125 $1,770,800
========== ==========
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred.
(H) USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(I) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance sheet and credit risk
concentrations. As of December 31, 1999, the Company has no significant
off-balance sheet or credit risk concentrations, such as foreign currency
exchange contracts or other hedging instruments. Financial instruments that
potentially expose the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, short-term investments and trade
accounts receivable. The Company places its temporary cash investments in
established financial institutions. The Company has not experienced significant
losses related to receivables from individual customers or groups of customers
in any specific industry or by geographic area. Due to these factors, no
additional credit risk beyond amounts provided for collection losses is believed
by management to be inherent in the Company's accounts receivable.
F-9
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following schedule summarizes the activity of the Company's accounts
receivable reserve for the three years ended December 31, 1999:
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES WRITE-OFFS OTHER (1) PERIOD
----------- ------------ ---------- ---------- --------- ----------
ACCOUNTS RECEIVABLE RESERVE
December 31, 1997....................... $ 375,000 689,000 -- 181,000 $1,245,000
December 31, 1998....................... $1,245,000 100,000 -- -- $1,345,000
December 31, 1999....................... $1,345,000 572,000 -- 173,000 $2,090,000
- - ------------------------------
(1) The 1997 amount represents additional reserves resulting from the purchase
of all of the outstanding common stock of CMA Ettworth Limited in December
1997. The 1999 amount represents additional reserves resulting from the sale
of the Company's AS/400 product line.
For the years ended December 31, 1999, 1998 and 1997, no single customer
accounted for greater than 10% of the Company's revenues.
(J) RECLASSIFICATIONS
The Company has reclassified certain prior year information to conform with
the current year's presentation.
(K) FOREIGN CURRENCY TRANSLATION
The Company translates the financial statements of its foreign subsidiaries
in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Accordingly,
assets and liabilities are translated at exchange rates in effect at the end of
the year, and revenues and expenses are translated at the average exchange rates
during the year. All cumulative translation gains or losses from the translation
into the Company's reporting currency are included as a separate component of
stockholders' equity (deficit) in the accompanying consolidated balance sheets.
(L) NET INCOME (LOSS) PER SHARE
The Company reports earnings per share in accordance with SFAS No. 128.
Diluted weighted average shares outstanding for 1999 exclude the potential
common shares from stock options because to include them would have been
anti-dilutive for the year presented. The dilutive effect of potential common
shares in 1998, consisting of outstanding stock options, is determined using the
treasury stock method, in accordance with SFAS No. 128. Diluted weighted average
shares outstanding for 1997 exclude the potential common shares from stock
options and redeemable convertible preferred stock outstanding
F-10
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
because to include them would have been antidilutive for the year presented. A
reconciliation of basic and diluted common shares outstanding is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
Weighted average number of common shares outstanding...... 12,600,018 12,713,169 8,498,953
Potential common shares pursuant to stock options......... -- 701,789 --
---------- ---------- ---------
Diluted weighted average shares........................... 12,600,018 13,414,958 8,498,953
========== ========== =========
Basic net income (loss) per share......................... $(0.73) $0.09 $(0.18)
Diluted net income (loss) per common and potential common
share................................................... $(0.73) $0.08 $(0.18)
For the year ended December 31, 1999, the calculation above excludes the
potential common shares related to 2,214,209 outstanding stock options which
have an anti-dilutive effect. For the year ended December 31, 1998, the
calculation above excludes the potential common shares related to 1,500
outstanding stock options which have an anti-dilutive effect. For the year ended
December 31, 1997, the calculation above excludes the potential common shares
related to 971,285 outstanding stock options and 1,822,339 shares of redeemable
convertible preferred stock which have an anti-dilutive effect.
(M) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 is not expected to have a material impact on the Company's consolidated
financial statements.
In March 1998, the AICPA issued SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF
A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, which amends certain
provisions of SOP 97-2. The Company believes it is in compliance with the
provisions of SOP 97-2 as amended by SOP 98-4. In December 1998, the AICPA
issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN TRANSACTIONS, which amends certain provisions of SOP 97-2 and
extends the deferral of the application of certain passages of SOP 97-2 provided
by SOP 98-4 until the beginning of the Company's fiscal year 2000. The Company
does not expect the adoption of SOP 98-9 will have a material effect on its
financial position or operating results.
F-11
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income (loss) and its components in financial statements. The
components of the Company's comprehensive income (loss) are as follows:
DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ---------- -----------
Net income (loss)....................................... $(9,161,414) $1,097,752 $(1,504,843)
Foreign currency translation adjustments, net of
taxes................................................. (24,447) (8,841) 4,729
----------- ---------- -----------
Comprehensive income (loss)............................. $(9,185,861) $1,088,911 $(1,500,114)
=========== ========== ===========
(4) ACQUISITIONS
(A) CMA ETTWORTH
On December 5, 1997 the Company acquired all of the outstanding common stock
of CMA Ettworth Limited (CMA). The purchase price was paid in a combination of
363,637 shares of common stock valued at approximately $3.0 million and
$4.0 million in cash. The Company also incurred approximately $500,000 in
acquisition related costs resulting in a total purchase price of approximately
$7.5 million. The acquisition was accounted for as a purchase in accordance with
Accounting Principle Board (APB) Opinion No. 16, BUSINESS COMBINATIONS, and
accordingly, CMA's operating results since December 5, 1997 are included in the
accompanying consolidated financial statements. For tax purposes, the Company
has recorded the transaction at CMA's carryover basis of assets and liabilities.
In accordance with APB Opinion No. 16, the Company allocated the purchase
price based on the fair value of assets acquired and liabilities assumed. A
significant portion of the purchase price, was identified in an independent
appraisal as intangible assets using proven valuation procedures and techniques,
including approximately $3,100,000 of in-process research and development
projects (IPR&D) that had not reached technological feasibility without any
alternative future use. Accordingly, the portion allocated to IPR&D was expensed
immediately. Acquired intangibles include developed technology and assembled
workforce. These intangibles are being amortized over their estimated useful
lives of 4 to 7 years. Due to a difference in the bases of certain assets for
financial statement and income tax purposes, deferred income taxes of $836,000
were provided as part of the purchase price allocation in accordance with SFAS
No. 109, ACCOUNTING FOR INCOME TAXES.
The value allocated to IPR&D was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from such projects, and discounting the
net cash flows back to their present value. The discount rate included a factor
that took into account the uncertainty surrounding the successful development of
the purchased in-process
F-12
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS (CONTINUED)
technology. This valuation was based on accepted appraisal methodologies used at
the time of the allocation. The allocation of the purchase price follows:
Current assets.............................................. $ 1,452,891
Property and equipment...................................... 397,891
Acquired intangible assets.................................. 2,090,000
IPR&D....................................................... 3,100,000
Goodwill.................................................... 2,925,430
Deferred income taxes....................................... (836,000)
Liabilities assumed......................................... (1,593,843)
-----------
$ 7,536,369
===========
(B) OTHER ACQUISITIONS
On February 19, 1998, the Company acquired all of the outstanding capital
stock of Desktop Paging Software, Inc. (DPSI) in exchange for 294,840 shares of
Omtool common stock. DPSI develops, markets and supports wireless messaging
software. This transaction has been accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of DPSI for all periods presented prior
to the acquisition.
On February 27, 1998, the Company acquired all of the outstanding capital
stock of TRS Technologies, Inc. (TRS) in exchange for 384,430 shares of Omtool
common stock. TRS develops, markets and supports LAN fax and cost recovery
systems for law firms. This transaction has been accounted for as a pooling of
interests and, accordingly, the Company's consolidated financial statements have
been restated to include the accounts and operations of TRS for all periods
presented prior to the acquisition.
Separate total revenues and net income (loss) amounts of the acquired
entities are presented in the following table.
TWO MONTHS
ENDED YEAR ENDED
FEBRUARY, DECEMBER 31,
1998 1997
---------- ------------
Total revenues
Omtool............................................ $3,737,353 $19,367,832
TRS............................................... 323,816 1,705,525
DPSI.............................................. 72,900 499,135
---------- -----------
$4,134,069 $21,572,492
========== ===========
Net income (loss)
Omtool............................................ $ (230,451) $ (877,668)
TRS............................................... 113,735 (612,758)
DPSI.............................................. 11,516 (14,417)
---------- -----------
$ (105,200) $(1,504,843)
========== ===========
F-13
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INTANGIBLE ASSETS
The Company assesses the realizability of intangible assets in accordance
with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. Under SFAS No. 121, the Company is required
to assess the valuation of its long-lived assets, including intangible assets,
based on the estimated undiscounted cash flows to be generated by such assets.
In connection with the disposition of the Company's AS/400 product line, the
Company disposed of certain of its intangible assets directly attributable to
the AS/400 product line (see Note 14). Intangible assets are included in "Other
Assets" on the face of the balance sheet and are amortized on a straight-line
basis, based on their estimated lives, as follows:
ESTIMATED DECEMBER 31, DECEMBER 31,
LIFE 1999 1998
--------- ------------ ------------
Developed technology....................... 4 Years -- $1,900,000
Assembled workforce........................ 7 Years -- 190,000
Goodwill................................... 5 Years -- 2,925,430
--------- ----------
-- 5,015,430
Less--accumulated amortization............. -- 1,087,224
--------- ----------
-- $3,928,206
========= ==========
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Accrued salaries and salary-related.................. $1,091,982 $1,033,486
Accrued restructuring charge......................... 783,735 --
Accrued professional fees............................ 441,799 151,600
Other accrued expenses............................... 1,012,060 496,925
---------- ----------
$3,329,576 $1,682,011
========== ==========
(7) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, the
objective of which is to recognize the amount of current and deferred income
taxes at the date of the financial statements as a result of all differences in
the tax basis and financial statement carrying amount of assets and liabilities
as measured by enacted tax laws. At December 31, 1999, the Company had
available, subject to review and possible adjustment by the Internal Revenue
Service, net operating loss carryforwards of approximately $4,400,000 to be used
to offset future taxable income, if any. The Company also has federal tax
credits carryforwards of approximately $570,000. If not utilized, these
carryforwards expire through 2014 and are subject to review and possible
adjustment by the Internal Revenue Service. If certain ownership changes occur,
as defined by Section 382 of the Internal Revenue Code, there could be annual
limitations on the amount of carryforwards which can be realized in future
periods.
F-14
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The components of the deferred tax assets and the deferred tax liabilities
are as follows:
DECEMBER 31,
-----------------------
1999 1998
----------- ---------
Deferred tax asset
Net operating loss carryforward.................... $ 1,484,000 $ 212,000
Loss on disposal of AS/400 product line............ 1,030,000 --
Research and development tax credit
carryforwards.................................... 570,000 275,000
Accrued liabilities and reserves................... 1,390,000 525,000
Valuation allowance................................ (3,215,022) (315,000)
----------- ---------
Total deferred tax asset........................... $ 1,258,978 $ 697,000
=========== =========
Deferred tax liability
Depreciation....................................... $ -- $ (26,000)
Acquisition related intangibles.................... -- (618,406)
----------- ---------
Total deferred tax liability....................... $ -- $(644,406)
=========== =========
Under SFAS No. 109, the Company recognizes a deferred tax asset for the
future benefit of its temporary differences if it concludes that it is more
likely than not that the deferred tax asset will be realized. The Company has
recorded a valuation allowance relating to a portion of its deferred tax assets
for which realization is uncertain.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
DECEMBER 31,
------------------------------------
1999 1998 1997 (1)
-------- -------- --------
Income tax provision (benefit) at federal statutory
rate.............................................. (34.0)% 34.0% 34.0%
Increase (decrease) in tax resulting from--
State tax provision (benefit), net of federal
benefit......................................... (4.3) 2.7 5.0
Non-deductible goodwill........................... (3.1) 1.2 1.8
Tax-exempt interest............................... 2.0 (15.0) (3.8)
Research and development tax credits.............. 1.0 (5.4) (6.0)
Difference in foreign tax rates................... (0.4) (1.0) --
Increase in valuation allowance................... 28.9 10.0 6.4
Other............................................. 1.3 0.5 1.0
----- ----- ----
Provision (benefit) for income taxes................ (8.6)% 27.0% 38.4%
===== ===== ====
- - ------------------------
(1) Calculated based on pre-tax income, before non-deductible charge for
purchased, in-process research and development of $3.1 million for 1997.
F-15
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes in the accompanying consolidated
statements of operations consists of the following:
DECEMBER 31,
------------------------------------
1999 1998 1997
----------- --------- ----------
Current
Federal................................ $ (149,618) $ 460,000 $ 951,345
State.................................. (37,404) 108,000 249,000
Foreign................................ 535,974 394,030 18,000
----------- --------- ----------
348,952 962,030 1,218,345
----------- --------- ----------
Deferred
Federal................................ $ (470,382) $(274,000) $ (173,000)
State.................................. (117,596) (64,000) (52,000)
Foreign................................ (618,406) (217,594) --
----------- --------- ----------
(1,206,384) (555,595) (225,000)
----------- --------- ----------
Provision (benefit) for income taxes..... $ (857,432) $ 406,435 $ 993,345
=========== ========= ==========
The components of domestic and foreign income (loss) before taxes are as
follows:
DECEMBER 31,
-------------------------------------
1999 1998 1997
------------ ---------- ---------
Domestic.............................. $ (9,225,310) $1,460,354 $(572,498)
Foreign............................... (793,536) 43,833 61,000
------------ ---------- ---------
$(10,018,846) $1,504,187 $(511,498)
============ ========== =========
(8) STOCKHOLDERS' EQUITY
(A) TREASURY STOCK
In October 1998, the Company's Board of Directors authorized the repurchase
of up to 1.0 million shares of the Company's Common Stock. Subject to price and
market considerations and applicable securities laws, such purchases will be
made from time to time on the open market. No time limit was placed on the
duration of the repurchase programs. The Company may use the repurchased shares
to offset shares issued in connection with various Company employee stock plans.
As of December 31, 1999, the Company has repurchased 851,780 shares.
(B) RESERVED COMMON STOCK
As of December 31, 1999, 4,721,515 shares of common stock were reserved for
issuance pursuant to stock option plans and the employee stock purchase plan.
F-16
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK PLANS
(A) STOCK OPTION PLANS
The Company's 1996 Stock Option Plan provided for the granting of options
covering 1,500,000 shares of common stock. The 1996 Plan, administered by the
Board of Directors, allows for the granting of "incentive stock options" within
the meaning of the Internal Revenue Code of 1986, as amended, and non-qualified
stock options. Incentive stock options under the 1996 Plan are granted at not
less than the fair market value per share of common stock on the date of grant
or 110% of fair market value for any stockholder who holds more than 10% of the
total combined voting power of all classes of stock of the Company. Under the
terms of the 1996 Plan, options vest and become exercisable as determined by the
Board of Directors and expire 10 years after the date of grant. In 1997, the
Company's Board of Directors voted that no further options may be granted or
issued under the 1996 Plan.
The Company's 1997 Stock Plan (the 1997 Plan) provides for the issuance of
Common Stock pursuant to the grant to employees of "incentive stock options"
within the meaning of the Internal Revenue Code of 1986, as amended, and the
grant of non-qualified stock options, stock awards or opportunities to make
direct purchases of stock in the Company to employees, consultants, directors
and officers of the Company. The aggregate number of shares of Common Stock
which may be issued pursuant to the 1997 Plan is 4,300,000.
The following is a summary of all stock option activity:
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ----------------------- --------------
Outstanding, December 31, 1996......... 1,096,400 0.25 -- 1.85 0.39
Granted.............................. 435,150 1.85 -- 12.13 5.77
Exercised............................ (130,263) 0.25 -- 1.85 0.42
Canceled............................. (69,333) 0.25 -- 11.00 4.19
--------- ----------------------- --------------
Outstanding, December 31, 1997......... 1,331,954 0.25 -- 12.13 1.94
Granted.............................. 709,900 2.63 -- 11.88 9.91
Exercised............................ (480,284) 0.25 -- 8.25 0.43
Canceled............................. (185,622) 0.25 -- 12.13 5.55
--------- ----------------------- --------------
Outstanding, December 31, 1998......... 1,375,948 0.25 -- 9.00 3.00
Granted.............................. 1,794,500 2.00 -- 4.38 3.25
Exercised............................ (417,114) 0.25 -- 1.85 0.26
Canceled............................. (539,125) 1.85 -- 4.88 4.63
--------- ----------------------- --------------
Outstanding, December 31, 1999......... 2,214,209 $0.25 -- $9.00 $3.32
========= ======================= ==============
Exercisable, December 31, 1999....... 314,908 $0.25 -- $9.00 $3.65
========= ======================= ==============
Exercisable, December 31, 1998....... 270,341 $0.25 -- $9.00 $1.45
========= ======================= ==============
Exercisable, December 31, 1997....... 326,992 $0.25 -- $1.85 $0.48
========= ======================= ==============
At December 31, 1999, options to purchase 2,558,130 shares of commons stock
were available for future grants under the 1997 Plan.
F-17
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK PLANS (CONTINUED)
The range of exercise prices for options outstanding and options exercisable
at December 31, 1999 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
$0.25 -- $0.25 15,334 6.0 $ 0.25 15,334 $0.25
1.85 -- 2.75 966,675 9.3 2.09 82,375 1.86
2.94 -- 4.38 945,900 9.3 4.16 86,000 4.06
4.88 -- 7.25 285,300 7.6 4.88 130,699 4.88
9.00 -- 9.00 1,000 7.6 9.00 500 9.00
--------- ----- -------- -------- -----
2,214,209 9.0 $ 3.32 314,908 $3.65
========= ===== ======== ======== =====
On August 13, 1998, the Company's Board of Directors authorized a repricing
of certain employee stock options. A total of 761,550 options with exercise
prices ranging from $5.50 to $12.13 were affected by the repricing. These
options were repriced to $4.875, the closing market price of the Company's
common stock on that date. Substantially all other terms and conditions of the
options remain the same. For employees that opted to participate in the
repricing, the original options were amended to reflect the terms of the
repricing. These amended options are not reflected as canceled and granted in
the option rollforward above.
(B) 1997 EMPLOYEE STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan (the 1997 Purchase Plan) provides for
the issuance of a maximum of 200,000 shares of Common Stock pursuant to the
exercise of nontransferable options granted to participating employees. The
exercise price for the option for each six-month purchase period is 85% of the
lesser of the market price of the Common Stock on the first or last business day
of the six-month purchase period. As of December 31, 1999, 18,219 shares had
been issued under the plan.
(C) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elects the disclosure-only
alternative under SFAS No. 123 for options granted using the Black-Scholes
option pricing model prescribed by SFAS No. 123. Based on the use of the Black-
Scholes option pricing model, options granted in 1999, 1998 and 1997 had a
weighted average fair value of $2.10, $3.52 and $3.31, respectively. The
weighted average assumptions are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Risk-free interest rate.......................... 5.38% 5.34% 6.16%
Volatility....................................... 85.0% 80.0% 70.0%
Expected dividend yield.......................... -- -- --
Expected lives................................... 4 Years 4 Years 4 Years
The pro forma effect on the Company of applying SFAS No. 123 for all options
to purchase common stock would be as follows:
F-18
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK PLANS (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
------------ -------- -----------
Net income (loss), pro forma............ $(10,176,029) $139,582 $(1,650,622)
Net income (loss) per share, pro forma
Basic................................... $ (0.81) $ 0.01 $ (0.19)
Diluted................................. $ (0.81) $ 0.01 $ (0.19)
(10) 401(K) AND PROFIT-SHARING PLAN
On December 1, 1995, the Company adopted a 401(k) and profit-sharing plan
(the Profit-Sharing Plan) to cover all eligible employees. The Profit-Sharing
Plan allows for voluntary contributions by eligible employees. The Company
matches 50% of eligible employee contributions up to a specified amount. The
Company contributed approximately $178,000, $169,000, and $124,000 to the
Profit-Sharing Plan for the years ended December 31, 1999, 1998 and 1997,
respectively. Additional profit-sharing contributions to the Profit-Sharing Plan
are at the discretion of the Company's management. During 1999, 1998, and 1997
the Company made no additional discretionary contributions.
(11) LEASE COMMITMENTS
The Company leases certain equipment and its office facility under operating
leases that expire at various times through December 2003.
Future minimum lease payments under these leases at December 31, 1999 are as
follows:
YEAR ENDING DECEMBER 31,
- - ------------------------
2000........................................................ $ 390,000
2001........................................................ 384,000
2002........................................................ 326,000
2003........................................................ 18,000
----------
$1,118,000
==========
Rent expense included in the accompanying statements of operations was
approximately $595,000, $623,000, and $472,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
(12) SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision-maker, as defined
under SFAS No. 131, is the Chief Executive Officer. To date, the Company has
viewed its operations and manages its business as principally one segment,
software sales and associated services. As
F-19
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
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 $6.7 million,
$6.5 million and $3.1 million in 1999, 1998 and 1997, 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 for the years ended December 31, 1999, 1998 and 1997:
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Total revenues (1)
US.................................. $20,416,251 $24,603,267 $18,442,492
United Kingdom...................... 3,682,532 3,655,705 1,503,379
Other North America................. 717,861 1,108,917 996,621
Other Europe........................ 1,648,186 1,466,731 499,735
Latin America/Pacific Rim........... 486,799 122,244 70,265
Middle East/Far East................ 84,220 116,490 49,568
Australia........................... 50,668 38,830 10,432
----------- ----------- -----------
$27,086,517 $31,112,184 $21,572,492
=========== =========== ===========
Long-lived assets (2)
North America....................... $ 2,239,778 $ 2,673,211 $ 1,522,862
Europe.............................. 238,525 4,165,618 5,221,528
----------- ----------- -----------
$ 2,478,303 $ 6,838,829 $ 6,744,390
=========== =========== ===========
- - ------------------------
(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.
(13) RESTRUCTURING COSTS AND ASSET WRITE-OFF
In the first quarter of 1999, the Company announced a restructuring of
certain of its operations, and recorded a non-recurring pretax charge of
$1,128,000 in accordance with 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 includes
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 includes a write-down of
assets associated with the closure of the company's Florida facility.
F-20
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) RESTRUCTURING COSTS AND ASSET WRITE-OFF (CONTINUED)
The components of the restructuring were as follows:
Employee severance, benefits and related costs.............. $ 939,000
Write-off and write-down of assets to be disposed........... 78,600
Lease termination and relocation costs...................... 60,400
Other....................................................... 50,000
----------
$1,128,000
==========
In the fourth quarter of 1999, the Company announced a restructuring of
certain of its operations, and recorded a non-recurring pretax charge of
$1,725,000 in accordance with EITF 94-3, LIABILITY RECOGNITION FOR CERTAIN
EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING
CERTAIN COSTS INCURRED IN A RESTRUCTURING) and SEC Staff Accounting Bulletin
No. 100. The non-recurring charge includes severance-related costs and an asset
write-off charge. The severance-related costs are associated with a workforce
reduction, primarily in the Company's Salem, NH and European operations, of
approximately three persons in sales, two persons in research and development,
three persons in support, and one person in general and administrative.
During 1998, the Company was granted a perpetual license to utilize certain
patented fax technology. The cost to obtain this license was capitalized and was
being amortized over its estimated useful life of five years. In accordance with
SFAS No. 121, the Company determined during 1999 that the carrying value of this
asset should be reduced to reflect its impairment, based upon an undiscounted
cash flow analysis, resulting from the Company's future product plans in which
this patented technology is no longer expected to be utilized.
The components of the restructuring and asset write-off at December 31, 1999
are as follows:
Employee severance, benefits and related costs.............. $ 925,000
Asset write-off............................................. 800,000
----------
$1,725,000
==========
A rollforward of the restructuring reserve is as follows:
DECEMBER 31,
1999
------------
Restructuring reserve
Balance, beginning of period.............................. $ --
Provision................................................. 2,853,000
Asset impairment write-offs............................... (878,600)
Severance and other payments.............................. (1,190,665)
----------
Balance, end of period.................................... $ 783,735
==========
The balance of the restructuring reserve is expected to be paid by
December 31, 2000.
(14) LOSS ON DISPOSAL 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
F-21
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) LOSS ON DISPOSAL OF AS/400 PRODUCT LINE (CONTINUED)
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 for the year ended December 31,
1999.
The components of the loss at December 31, 1999 are as follows:
Consideration received for assets sold...................... $ (600,000)
Less: Reserve for proceeds receivable....................... 450,000
----------
Net Proceeds................................................ (150,000)
Carrying value of assets sold, net of deferred taxes........ 2,644,500
Additional reserve required for AS/400 receivables not
sold...................................................... 173,000
----------
Loss on sale of AS/400 product line......................... $2,667,500
==========
Pro forma operating results for the Company, assuming the sale of the AS/400
product line occurred on January 1, 1998 are as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
Pro forma total revenues........................... $18,488,748 $27,698,572
=========== ===========
Pro forma net income (loss)........................ $(2,894,589) $ 1,070,089
=========== ===========
Pro forma net income (loss) per share
Pro forma basic.................................. $ (0.23) $ 0.08
=========== ===========
Pro forma diluted................................ $ (0.23) $ 0.08
=========== ===========
Pro forma weighted average number of common shares
outstanding
Pro forma basic (2).............................. 12,603,780 12,713,169
=========== ===========
Pro forma diluted (2)............................ 12,603,780 13,414,958
=========== ===========
(15) 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. The
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 contained misstatements. The Company believes that the
allegations contained in the 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.
F-22
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 1999, 1998 and 1997.
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ----------- ---------- -----------
Total revenues.......... $7,412,988 $ 6,604,765 $7,002,716 $ 6,066,048
Gross profit............ 5,344,139 4,293,508 4,481,387 3,302,462
Net loss................ (771,029) (1,204,264) (684,822) (6,501,299)
Net loss per share
Basic................. $ (0.06) $ (0.09) $ (0.05) $ (0.52)
Diluted............... $ (0.06) $ (0.09) $ (0.05) $ (0.52)
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ----------- ---------- -----------
(RESTATED) (RESTATED) (RESTATED)
Total revenues.......... $8,011,931 $ 7,675,218 $7,382,265 $ 8,042,770
Gross profit............ 5,780,537 5,645,252 5,503,891 5,975,297
Net income.............. 696,193 28,145 5,302 368,112
Net income per share
Basic................. $ 0.06 $ 0.00 $ 0.00 $ 0.03
Diluted............... $ 0.05 $ 0.00 $ 0.00 $ 0.03
F-23
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - --------------------- ------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the
Company (filed as Exhibit 3.3 to the Company's Registration
Statement on Form S-1, No. 333-29397 and incorporated herein
by reference)
3.2 Amended and Restated By-laws of the Company (filed as
Exhibit 3.4 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
4.1 Specimen certificate representing the Common Stock (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1, No. 333-29397 and incorporated herein by reference)
10.1 1996 Stock Option Plan (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1, No. 333-29397
and incorporated herein by reference)
10.2 1997 Stock Plan (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, No. 333-29397 and
incorporated herein by reference)
10.3 1997 Employee Stock Purchase Plan (filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
10.4 Lease dated November 26, 1997 between H.J. Brooks Limited
Liability Company and Omtool, Ltd. (filed as Exhibit 10.4 to
the Company's Form 10-K, No. 0-22871 and incorporated herein
by reference)
10.5 Form of Omtool Software License (filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-1, No.
333-29397 and incorporated herein by reference)
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Current Financial Data Schedule