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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, 2000
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)
8A 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. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 29, 2001, was approximately $6,429,909 (based upon the
closing price of the Registrant's Common Stock on March 29, 2001 of $0.83 per
share).
The number of shares outstanding of the Registrant's $.01 par value Common
Stock as of March 29, 2001 was 12,751,263.
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,
2000. 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 settlement of the Company's
class action shareholder lawsuit. 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 enable secure
business-to-business electronic document exchange. 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 in
multiple formats. With the introduction of Genifax and Genidocs, Omtool's
product solutions enable the integration of business processes that include the
confirmed and secure exchange of electronic documents such as legal contracts,
financial transactions and purchase order processing, in the form of electronic
faxes or confirmed, secure and digitally signed e-mail.
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. This capability is a key feature of Omtool's next generation
messaging platform, and the basis for the new family of enterprise faxing and
secure document delivery applications. Omtool intends to maintain a leadership
position in its traditional market, secure electronic document exchange, while
continuing to develop and expand into the secure confirmed e-mail market.
The Company's server products are available on Windows server operating
systems, with client applications that run in various versions of Microsoft
Windows. 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 existing Microsoft Outlook and Lotus Notes clients, eliminating the need
for and expense of deploying and managing proprietary applications to corporate
desktops. Through this integration with existing messaging infrastructure,
Omtool has enabled thousands of customers world-wide to send, receive and manage
faxes directly from the desktop. Genidocs, leveraging the same ease of use model
and integration with e-mail, is designed to enable integration of digital
signatures and confirmed e-mail into corporate workflows.
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 8A 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 both within their organizations and beyond the
enterprise. Growth in electronic communication is being driven by productivity
and efficiency demands on knowledge workers, the
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information sharing requirements of dispersed organizations, the emergence of
the virtual enterprise incorporating 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 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 continues to mature, the Company still believes
opportunities exist in the high volume application market for specific faxing
from data-centric applications, business transactions and critical business
processes where the fax is the standard for electronic document exchange.
As business-to-business transactions continue 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, that includes confirmation of receipt and the ability to affix a
digital signature, and the tracking required for business-to-business Internet
communication, customer management document delivery and e-commerce. Omtool
continues to leverage its experience in electronic document exchange and
enterprise client/server architecture to enhance its confirmed e-mail
application to meet the needs of businesses for secure electronic document
exchange.
THE OMTOOL SOLUTION
Omtool provides open client/server software solutions, 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 fax based 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 secure e-mail application integrates with existing e-mail
infrastructure, requires no proprietary software on the desktop, provides
multi-level document encryption and delivery confirmation and allows users to
easily work both secure e-mail delivery and digital signature into corporate
workflows. Omtool's product, Genidocs, is designed to provide medium level
document encryption, confirmed delivery and outbound digital signature
capability.
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 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:
DEVELOPMENT AND PROMOTION OF NEXT GENERATION SECURE MESSAGING
PRODUCTS. Omtool intends to focus on developing new products which offer its
customers a robust and reliable solution for confirmed and secure
business-to-business electronic document exchange. Additionally, the Company
intends to continue investing in sales and marketing and research and
development for Genifax and Genidocs.
MAINTAIN TECHNOLOGY LEADERSHIP IN THE ENTERPRISE MARKET. The Company
intends to invest in fax messaging technology by developing a new Exchange 2000
based gateway for its new Genifax product as
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well as for its legacy fax server product, Fax Sr. This strategy is intended to
enable customers to stay current with Microsoft technology and continue to
deploy Omtool 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 its solution/reseller
channel and focusing sales efforts on specific market segments in order to
facilitate product acceptance. The Company provides comprehensive post-sale
customer support and continues to focus on improving customer relations. In
addition, the Company believes that a highly-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.
EXPAND INTERNATIONAL SALES. The Company intends to expand its international
presence (primarily in Europe) via its European office in order to address its
target markets outside of North America and to serve multi-national customers.
In 1998, 1999 and 2000, approximately 17%, 22% and 14%, respectively, of the
Company's total revenues were derived from sales outside of North America
(primarily in Europe). In 2001, the Company plans 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.
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,
a provider 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. Additionally, Omtool has a
strategic 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. Most recently, Omtool announced a
relationship with First Use, a leading provider of digital timestamp and online
authentication, as part of its Genidocs product. 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
GENIDOCS
Genidocs is a client/server messaging application that enables users
throughout an enterprise to deliver confidential and secure e-mail over the
Internet. It is licensed typically on a shrink-wrap basis, primarily on the
Windows 2000 operating system. It can also be depolyed on Advanced Server and
Datacenter Server operating systems. Genidocs is a server application configured
to operate as part of a corporation's existing messaging infrastructure such as
Microsoft Exchange or Lotus Notes.
Genidocs is designed to authenticate the identity of both the sender and the
recipient, validate digital signatures and provide an audit trail of electronic
evidence of the transactions processed by the system. The Genidocs system
implements a modular, component-based architecture that is designed to work
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within a security infrastructure that a corporation has in place. Little
end-user training is required to use Genidocs. Additionally, Genidocs provides
Microsoft Management Console "MMC" based administration tools for ease of
deployment and management.
Genidocs uses a symmetric model that encrypts contents before transmitting
them over the Internet, using the ZIP file format and ZIP encryption algorithm.
Genidocs e-mail messages are generated within the users' e-mail program, using a
format that is similar to a standard e-mail format. Genidocs enables users to
send a document to a recipient, as an e-mail attachment over the Internet, and
automatically receive notification that the document has been delivered. The
electronic message includes instructions for retrieving the access code and
opening the secure document attachment. Genidocs confirmed e-mail messages can
include document attachments in virtually any format, and these documents can be
digitally signed and time stamped for proper authentication.
GENIFAX
Genifax is a multi-tiered client/server software solution for automating and
integrating fax communication throughout the enterprise. As a component of an
enterprise software system, Genifax is designed to be deployed on heterogeneous,
multi-platform networks and to integrate with desktop and enterprise software
applications. Genifax is licensed typically on a shrink-wrap basis, primarily on
the Windows 2000 system and can be configured with Windows 2000 networked
clients.
Genifax utilizes Windows 2000 MMC for easy system management, providing a
familiar interface for system administrators. Genifax is composed of three
primary structures: the dataflow tier, the data management tier and the data
core tier. The dataflow tier is the point of data access to and from the
application. The data management tier acts as the main processor of the
application. The data core tier directs the data that pass through the
application.
Genifax offers a comprehensive feature set with functionality for users,
business managers and IT professionals. Genifax 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. Genifax implements a modular component-based
architecture that is designed to support the Internet/network connected
enterprise and to seamlessly integrate with the server-oriented messaging
environment of Microsoft Windows 2000. It includes customizable application
faxing and it is specifically designed for customers who require large scale fax
messaging that is easy to administer, scaleable and reliable.
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, on the
Windows NT or Windows 2000 systems. In 2000, approximately 72% of the Company's
software license revenues were derived from Fax Sr. NT. Fax Sr. can be
configured on Windows 9x/ME/NT/2000 network clients.
Fax Sr. is comprised of three main components: Fax Sr. Client, Fax Sr.
Server and Fax Sr. Manager. The Fax Sr. Client allows users to send and receive
faxes directly from the desktop or enterprise application. The Fax Sr. Server
controls the function of prioritizing, queuing, and transmitting outbound faxes,
while receiving and distributing inbound faxes. The Fax Sr. Manager allows for
remote monitoring, control, and analysis of fax user activity from any Windows
or Windows NT system that is connected to the network.
Fax Sr. offers a comprehensive feature set with functionality important to
users, business managers and IT professionals. Fax Sr. users can fax documents,
together with attachments, from any desktop
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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 integrating 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.
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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 discontinued 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 continue to offer
these customer services in the future and has organized 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 Genidocs, Genifax, Fax Sr. and
LegalFax product lines, 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 intends
to maintain its reseller channel by continuing to dedicate sales resources
specifically to supporting its reseller partners. Additionally, the Company is
focusing its sales efforts on specific market segments in order to facilitate
product acceptance of its new products.
Outside of North America, the Company primarily utilizes independent
distributors to promote, license and support its products. The Company expects
to continue to market its products through independent distributors in strategic
international markets. In 1998, 1999 and 2000, sales outside of North America
(primarily Europe) represented approximately 17%, 22% and 14%, 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
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enterprise, client/server facsimile and electronic document exchange software
markets. 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, 2000, the Company had more than 5,000 customers
worldwide. The Company's customer base reflects the cross-industry applicability
of the Company's products and services.
No single customer accounted for 10% or more of total revenues in 1998, 1999
or 2000.
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
continue to develop its new products, Genifax and Genidocs as well as develop
other new products. 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
1998, 1999 and 2000 was approximately $5.1 million, $5.0 million and
$3.8 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
In the intensely competitive and rapidly changing business-to-business
secure document exchange market, the Company competes with Pitney Bowes, Sigaba,
Tumbleweed, UPS, the U.S. Postal Service and Zixit, as well as others 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 Documentum, Hummingbird and iManage, may develop
and deliver competitive products for this market. Additionally, companies such
as Jetform, PureEdge and Silanis may develop and deliver competitive digital
signature products in the future. The Company expects the competition in the
business-to-business secure document exchange market to increase.
The client/server facsimile solution market is also intensely competitive.
The Company believes its ability to compete successfully depends upon a number
of factors both within and beyond its control, including product performance,
reliability and features; ease of use; product 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.
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The Company competes directly with a large number of vendors of facsimile
products, including providers of facsimile software products for client/server
networks such as RightFAX (a subsidiary of Applied Voice Technology), Fenestrae,
TopCall International and Biscom. The Company also competes with providers
offering a range of alternative facsimile solutions including outsourcing
network facsimile solutions, such as Mail.com; operating systems containing
facsimile and document e-mail features; low-end fax modem products; providers of
desktop fax software; single-platform facsimile software products; and
customized proprietary software solutions. In addition, providers of operating
systems or business software applications may bundle competitive facsimile
solutions as part of their broader product offerings.
Many of Omtool's competitors 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 one U.S.
patent, two U.S. patent applications, two foreign patent applications and four
pending trademark applications. The Company to date has not registered any
copyrights. The Company generally licenses its products under "shrink-wrap"
licenses (i.e., licenses included as part of the product packaging). Shrink-wrap
licenses are not negotiated with or signed by individual licensees, and purport
to take effect upon the opening of the product package. Certain provisions of
such licenses, including provisions protecting against unauthorized use,
copying, transfer and disclosure of the licensed program, may be unenforceable
under the laws of many jurisdictions. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and although the Company is unable to determine the extent to which piracy of
its products exists, such piracy can be expected to be a persistent problem,
particularly in international markets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
the laws of the United States. There can be no assurance that these protections
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies.
There has been substantial litigation in the software industry involving
intellectual property rights. There can be no assurance that claims of
infringement of intellectual property rights will not be asserted against the
Company and, if asserted, would not have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
inasmuch as the Company licenses certain components of its products from third
parties, its exposure to copyright and other infringement actions
8
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, 2000, the Company employed 113 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 at 8A Industrial Way, Salem, New
Hampshire in a leased facility consisting of approximately 30,000 square feet,
of which the Company occupies 25,500 square feet and 4,500 square feet of which
the Company has subleased to a third party. 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 leases facilities and offices for sales and
development in Oregon on a month to month basis. Additionally, the Company
leases facilities for sales, customer service, and support, in London, England
expiring in May 2005.
ITEM 3. LEGAL PROCEEDINGS
On October 5, 1999, a purported securities class action complaint was filed
in the United States District Court for the District of New Hampshire (the
"Court") against the Company and certain officers and directors of the Company.
The lawsuit (the "Class Action") alleges, among other things, that the Company,
during the purported class period of August 8, 1997 through October 6, 1998,
made misrepresentations and omissions to the investing public regarding its
financial results and its accounting practices in violation of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of
the Securities Act of 1933. The defendants moved to dismiss the complaint in its
entirety. The Court denied in part and granted in part defendants' motion,
dismissing plaintiffs' claim under Section 12(a)(2) of the Securities Act of
1933, but permitting all other claims to go forward.
As of March 31, 2001, the Company reached an agreement-in-principle to
settle the Class Action. The terms of the proposed $6 million settlement include
a contribution by the Company's directors' and officers' liability insurance
carriers of $4.3 million, and a contribution by the Company of $1.7 million. The
settlement is subject to negotiation and execution of a definitive settlement
agreement, and final approval by the Court. There can be no assurances, however,
that the settlement will be consummated or approved by the Court. The Company
continues to believe that the Class Action is without merit, and, in the event
the settlement is not consummated or approved, the Company intends to continue
defending the Class Action vigorously.
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 2000.
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 no 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:
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
2000
March 31, 2000.............................................. $ 5 7/16 $2 1/4
June 30, 2000............................................... $ 4 $1 3/8
September 30, 2000.......................................... $ 3 $ 7/8
December 31, 2000........................................... $ 3 1/4 $1 1/2
On March 29, 2001, the closing price for the Common Stock was $0.83 per
share. As of March 29, 2001, there were approximately 79 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 1,193 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, 1998, 1999 and 2000 and the balance sheet
data as of December 31, 1999 and 2000 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, 1996 and 1997 and the balance sheet data as of December 31, 1996,
1997 and 1998 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,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF CONSOLIDATED OPERATIONS DATA:
Revenues:
Software license............................. $ 6,636 $14,232 $18,542 $12,394 $ 6,032
Hardware..................................... 1,831 4,308 6,482 7,072 4,216
Service and other............................ 1,879 3,032 6,088 7,620 6,659
------- ------- ------- ------- -------
Total revenues............................. 10,346 21,572 31,112 27,086 16,907
------- ------- ------- ------- -------
Cost of revenues:
Software license............................. 588 1,027 1,331 1,070 423
Hardware..................................... 1,310 2,867 3,925 4,891 3,008
Service and other............................ 993 1,450 2,951 3,704 4,175
------- ------- ------- ------- -------
Total cost of revenues..................... 2,891 5,344 8,207 9,665 7,606
------- ------- ------- ------- -------
Gross profit............................... 7,455 16,228 22,905 17,421 9,301
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.......................... 3,337 7,937 12,341 11,879 6,328
Research and development..................... 2,217 3,955 5,059 5,003 3,767
General and administrative................... 1,129 2,140 4,755 5,562 3,879
Restructuring costs and asset write-off...... -- -- -- 2,995 708
Settlement costs............................. -- -- -- -- 1,700
Write-off of purchased, in-process research
and development............................ -- 3,100 -- -- --
(Recovery) loss on sale of AS/400 product
line....................................... -- -- -- 2,668 (447)
------- ------- ------- ------- -------
Total operating expenses................... 6,683 17,132 21,155 28,107 15,935
------- ------- ------- ------- -------
Income (loss) from operations.................. 772 (904) 750 (10,686) (6,634)
Interest income, net........................... 16 392 754 668 1,102
------- ------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes................................. 788 (512) 1,504 (10,018) (5,532)
Provision (benefit) for income taxes........... 244 993 406 (857) --
------- ------- ------- ------- -------
Net income (loss).............................. $ 544 $(1,505) $ 1,098 $(9,161) $(5,532)
======= ======= ======= ======= =======
Net income (loss) per share
Basic...................................... $ 0.08 $ (0.18) $ 0.09 $ (0.73) $ (0.44)
======= ======= ======= ======= =======
Diluted.................................... $ 0.05 $ (0.18) $ 0.08 $ (0.73) $ (0.44)
======= ======= ======= ======= =======
Weighted average number of common shares
outstanding
Basic...................................... 6,596 8,499 12,713 12,600 12,706
======= ======= ======= ======= =======
Diluted.................................... 10,379 8,499 13,415 12,600 12,706
======= ======= ======= ======= =======
DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ 2,973 $23,533 $20,745 $19,163 $17,883
Working capital................................ 3,586 23,973 23,610 17,707 13,639
Total assets................................... 7,044 37,132 36,403 27,473 22,463
Long-term debt, net of current portion......... 212 -- -- -- --
Convertible redeemable preferred stock......... 5,167 -- -- -- --
Total stockholders' equity (deficit)........... (1,253) 29,736 29,765 20,185 14,890
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 settlement of the Company's
class action shareholder lawsuit. 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." Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the accompanying consolidated financial statements for the
periods specified and the associated notes.
OVERVIEW
Omtool, Ltd. designs, develops, markets and supports open, client/server
software solutions that enable secure business-to-business electronic document
exchange. The Company was incorporated in March 1991 and shipped its initial
facsimile software products in 1991. Omtool's Genidocs product family enables
users throughout an enterprise to deliver confidential and secure e-mail over
the Internet. Omtool's Fax Sr., LegalFax and Genifax product families provide
users with an extensive, flexible feature set for transmitting and receiving
faxes, and improve an organization's management of its fax communications
process by providing a suite of utility and control functions. A significant
portion of the Company's revenues is 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, 2000, 1999 and 1998, approximately 72%, 74% and 69%,
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 continue to offer these customer
services in the future as warranted by customer demand.
12
The Company has historically derived substantially all of its total revenues
from sales within North America. Sales outside of North America (primarily in
Europe) represented approximately 14%, 22% and 17% of the Company's total
revenues in 2000, 1999 and 1998, 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 marketing efforts directed toward
international markets. 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. The Company intends to pursue sales opportunities
via its solution/reseller channel as well as focusing sales efforts on specific
market segments in order to facilitate product acceptance. Sales through the
Company's indirect distribution channels represent approximately 62%, 30% and
23% of the Company's total revenues for the years ended December 31, 2000, 1999
and 1998, respectively. The increase in indirect distribution sales as a percent
of total sales is due to the Company's efforts to grow it distribution channels.
As of March 31, 2000, the Company discontinued the sale and support of
U-Page, Fax Sr. Express, Fax Sr. Sun Solaris, Fax Sr. VMS and Fax Sr. Unix
products.
On January 4, 2000, the Company sold to International Presence PLC ("IPP")
certain business assets consisting of intellectual property, goodwill, customer
lists, customer contracts, equipment and other assets related to the Company's
software products and third party hardware products for facsimile and other
communication applications for the IBM AS/400 product line. The Company recorded
a loss of $2.7 million related to this sale as of December 31, 1999. The Company
received payments of $150,000, $149,831 and $147,152 from IPP in the second,
third and fourth quarters of 2000 respectively, and recorded those amounts as a
recovery in each of the quarters ended June 30, 2000, September 30, 2000 and
December 31, 2000 (see Note 14 of Notes to Consolidated Financial Statements).
On October 5, 1999, a purported securities class action complaint was filed
in the United States District Court for the District of New Hampshire (the
"Court") against the Company and certain officers and directors of the Company.
The lawsuit (the "Class Action") alleges, among other things, that the Company,
during the purported class period of August 8, 1997 through October 6, 1998,
made misrepresentations and omissions to the investing public regarding its
financial results and its accounting practices in violation of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of
the Securities Act of 1933. The defendants moved to dismiss the complaint in its
entirety.
As of March 31, 2001, the Company reached an agreement-in-principle to
settle the Class Action. The terms of the proposed $6 million settlement include
a contribution by the Company's directors' and officers' liability insurance
carriers of $4.3 million, and a contribution by the Company of $1.7 million. The
settlement is subject to negotiation and execution of a definitive settlement
agreement, and final approval by the Court. There can be no assurances, however,
that the settlement will be consummated or approved by the Court. The Company
continues to believe that the Class Action is without merit, and, in the event
the settlement is not consummated or approved, the Company intends to continue
defending the Class Action vigorously.
13
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,
--------------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Software license................................ 35.7% 45.8% 59.6%
Hardware........................................ 24.9 26.1 20.8
Service and other............................... 39.4 28.1 19.6
----- ----- -----
Total revenues................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software license................................ 2.5 4.0 4.3
Hardware........................................ 17.8 18.1 12.6
Service and other............................... 24.7 13.7 9.5
----- ----- -----
Total cost of revenues........................ 45.0 35.8 26.4
----- ----- -----
Gross profit...................................... 55.0 64.2 73.6
----- ----- -----
Operating expenses:
Sales and marketing............................. 37.4 43.9 39.7
Research and development........................ 22.3 18.4 16.3
General and administrative...................... 22.8 20.5 15.2
Restructuring costs and asset write-off......... 4.2 11.1 --
Settlement costs................................ 10.1 -- --
(Recovery) loss on sale of AS/400 product
line.......................................... (2.6) 9.8 --
----- ----- -----
Total operating expenses...................... 94.2 103.7 71.2
----- ----- -----
Income (loss) from operations..................... (39.2) (39.5) 2.4
Interest income................................... 6.5 2.5 2.4
----- ----- -----
Income (loss) before provision (benefit) for
income taxes.................................... (32.7) (37.0) 4.8
Provision (benefit) for income taxes.............. -- (3.2) 1.3
----- ----- -----
Net income (loss)................................. (32.7)% (33.8)% 3.5%
===== ===== =====
Gross profit:
Software license................................ 93.0% 91.4% 92.8%
Hardware........................................ 28.7 30.9 39.4
Service and other............................... 37.3 51.4 51.5
FISCAL YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES
TOTAL REVENUES. The Company's revenues are currently derived from licensing
fees of the Company's software products and from related sales of hardware and
services. The Company's total revenues were $16.9 million and $27.1 million for
the years ended December 31, 2000 and 1999, respectively, representing a
decrease of 38%.
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 $6.0 million for the year ended December 31, 2000 and
$12.4 million for the year ended December 31, 1999, representing a decrease of
51%. Software license revenues accounted for 36% and 46% of total revenues for
each respective period. The decline in software license revenue can be
attributed to a number of factors which include softness in demand for
enterprise fax solutions, the elimination of several of the Fax Sr. product
lines, including
14
AS/400, Sun Solaris, VMS and Unix, along with longer customer purchasing cycles
typical of Fortune 500 companies. The Company did not recognize a significant
amount of revenue from its new products, Genidocs and Genifax, released in the
fourth quarter of 2000.
HARDWARE. Hardware revenues are derived from the resale of third-party
hardware products sold to the Company's customers in conjunction with the
licensing of the Company's software. Hardware revenues were $4.2 million for the
year ended December 31, 2000 and $7.1 million for the year ended December 31,
1999, representing a decrease of 40%. Hardware revenues accounted for 25% and
26% of total revenues for each respective period. The decrease in hardware
revenues in dollars and as a percent of total revenues is due primarily to the
decrease of hardware unit sales accompanying the Company's products consistent
with the decline in software licenses.
SERVICE AND OTHER. Service and other revenues are primarily comprised of
fees from maintenance contracts. Service and other revenues were $6.7 million
and $7.6 million for 2000 and 1999, respectively, representing a decrease of
13%. Service and other revenues accounted for 39% and 28% of total revenues for
each respective period. The decrease in dollar amount was due primarily to the
decrease in software license revenues and the resulting decrease in new service
revenues that generally accompany new software license sales. Additionally, the
Company is no longer receiving support renewal revenue from those customers that
own one of the Company's discontinued product lines. The increase in maintenance
revenues as a percent of total revenues is due to the combined effect of a
decrease in software license revenues and the increase in maintenance service
renewals from the expanding customer base.
COST OF REVENUES
SOFTWARE LICENSE. Cost of software license revenues consists primarily of
the costs of sublicensing third-party software products, product media, and
product duplication. Cost of software license revenues was $423,000 and
$1.1 million in 2000 and 1999, respectively, representing 7% and 9% of software
license revenues for each respective period. The decrease in dollar amount was
primarily due to the lower volume of products shipped during fiscal year 2000
compared to the same period in 1999. Software license gross margin percentages
increased to 93% in 2000 from 91% in 1999. The increase in gross margin is
attributable to a larger number of upgrade units produced as a result of
additional product versions released in 1999. Such costs were not incurred in
2000.
HARDWARE. Cost of hardware revenues consists primarily of the costs of
third-party hardware products. Cost of hardware revenues was $3.0 million and
$4.9 million in 2000 and 1999, respectively, representing 71% and 69% of
hardware revenues for each respective period. The decrease in dollar amount for
the cost of hardware revenues for the fiscal year ended December 31, 2000 was
due primarily to the decrease of hardware unit sales accompanying the Company's
products and a decrease in hardware sales. The gross margin percentage for
hardware sales decreased to 29% for 2000 from 31% in 1999. The gross margin
decrease is due mainly to the write-off in 2000 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
$4.2 million and $3.7 million in 2000 and 1999, respectively, representing 63%
and 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 37% for 2000 from 51% in 1999. The decrease in gross margin is
attributable to the increased expenses associated with the hiring of the
incremental personnel while new product maintenance revenue declined
significantly due to the reduction in software license revenues.
15
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 advertisements, direct mailings, public
relations, trade shows, seminars, and related communication costs. Sales and
marketing expenses were $6.3 million and $11.9 million in 2000 and 1999,
respectively, or 37% and 44% of total revenues for each respective period. The
decrease in dollar amount and as a percent of total revenues was due to a
decrease in commissions paid as a result of lower sales levels as well as fewer
trade show expenditures in 2000. The Company expects sales and marketing
expenses are likely to increase in absolute terms due to new product
introductions.
RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities, and consist primarily of
employee salaries, benefits, and associated overhead costs as well as consulting
expenses and the cost of software development tools. Research and development
expenses were $3.8 million and $5.0 million in 2000 and 1999, representing 22%
and 18% of total revenues for each respective period. The decrease in the
expense was due to a fewer number of employees in the research and development
department. The increase in research and development expense as a percent of
revenue is due to decreased revenue. The Company expects research and
development expenses will increase in both absolute terms and as a percentage of
revenues in connection with the enhancement of the new 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
$3.9 million and $5.6 million in 2000 and 1999, respectively, or 23% and 21% of
total revenues for each respective period. The decrease in dollar amount is due
to the fewer numbers of executive level personnel and the overhead costs
allocated to support such personnel. The increase in general and administrative
expenses as a percent of total revenues is due to decreased revenue. The Company
expects general and administrative expenses are likely to remain consistent in
absolute terms.
RESTRUCTURING COSTS AND ASSET WRITE-OFFS. 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) and Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin ("SAB") No. 100, RESTRUCTURING AND IMPAIRMENT CHARGES. The
non-recurring charge included severance-related costs associated with a
workforce reduction, primarily in the Company's European and Florida operations,
of approximately nine persons in sales, twelve persons in general and
administrative and three persons in research and development. The balance of
this charge included a write-down of assets associated with the closure of the
Company's Florida facility.
In the fourth quarter of 1999, the Company announced a restructuring of
certain of its operations, and recorded a non-recurring pretax charge of
$1,866,666 in accordance with EITF 94-3 and SAB No. 100. The non-recurring
charge included severance-related costs and an asset write-off charge. The
severance-related costs were associated with a workforce reduction, primarily in
the Company's Salem, New Hampshire, 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 acquired a perpetual license to utilize certain
patented fax technology which was capitalized and was being amortized over its
estimated useful life of five years. During 1999, the Company determined that
the carrying value of this asset should be reduced to reflect its impairment in
accordance with SFAS No. 121. The carrying value was reduced based upon an
undiscounted cash flow
16
analysis reflecting the Company's future product plans in which this patented
technology is no longer expected to be utilized.
In the fourth quarter of 2000, in accordance with SFAS No. 121, the Company
assessed the carrying value of an investment in certain intellectual property
and determined that an impairment charge of $708,335 was required to write the
asset down to fair value.
The components of the restructurings and asset write-offs in 2000 and 1999
are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
--------- -----------
Employee severance, benefits and related costs........ $ -- $1,864,000
Asset write-off....................................... 708,335 1,020,266
Lease termination and relocation costs................ -- 60,400
Other................................................. -- 50,000
-------- ----------
$708,335 $2,994,666
======== ==========
The rollforward of the reserve is as follows:
BALANCE AT ASSET SEVERANCE BALANCE AT
BEGINNING OF IMPAIRMENT AND OTHER END OF
DESCRIPTION YEAR PROVISION WRITE-OFFS PAYMENTS YEAR
- ----------- ------------ --------- ---------- ---------- ----------
RESTRUCTURING RESERVE
December 31, 1999..... $ -- 2,994,666 (1,020,266) (1,190,665) $783,735
December 31, 2000..... $783,735 708,335 (708,335) (783,735) $ --
SETTLEMENT COSTS. In March of 2001, the Company reached an
agreement-in-principle to settle the class action shareholder lawsuit
outstanding against it for $6.0 million. In the fiscal year ended December 31,
2000, the Company recorded a provision of $1.7 million to accrue the estimated
costs to be borne by the Company upon the negotiation and execution of a
definitive settlement agreement and its final approval by the federal district
court in New Hampshire (see Note 15 of Notes to Consolidated Financial
Statements).
(RECOVERY) LOSS ON SALE OF AS/400 PRODUCT LINE. On January 4, 2000, Omtool
sold to 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 Company believed at
the time of the sale of the AS/400 Assets that collectibility of the future
payments was not assured and reserved for those future payments in recognizing
the loss on sale of the AS/400 Assets. The purchase price for the AS/400 Assets
was determined through arm's-length negotiations between management of IPP and
management of Omtool.
The components of the loss from the sale of the AS/400 Assets during 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
The Company received payments of $150,000, $149,831 and $147,152 from IPP in
the second, third and fourth quarters of 2000 respectively, and recorded those
amounts as a recovery in each of the quarters ended June 30, 2000,
September 30, 2000 and December 31, 2000 (see Note 14 of Notes to Consolidated
Financial Statements).
INTEREST INCOME. Interest income consists principally of interest income
earned on excess cash. Interest income was $1.1 million for the fiscal year
ended December 31, 2000 and $668,000 for the fiscal year ended December 31,
1999. The increase of 65% is due the fact that the Company changed its
investment strategy from tax-free, low interest, municipal bonds that comprised
the portfolio at December 31, 1999 to taxable higher interest commercial paper
which comprised the portfolio at December 31, 2000.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company recorded a net loss for
the year ended December 31, 2000 and did not record a benefit from income taxes
as realizability of net operating loss carryforwards is uncertain. The Company
recorded an income tax benefit of $857,000 in 1999 as a result of its net
operating losses (see Note 7 of Notes to Consolidated Financial Statements).
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. 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 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 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.
18
COST OF REVENUES
SOFTWARE LICENSE. 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 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 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 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 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.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$5.0 million for the year ended December 31, 1999 and $5.1 million for the year
ended December 31, 1998, representing 18% and 16% of total revenues for each
respective period. The decrease in dollar amount is due to nominal changes in
employee related expenditures. The increase in the expense as a percent of
revenue is due to decreased revenue.
GENERAL AND ADMINISTRATIVE. 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.
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 and SAB
No. 100. The non-recurring charge included severance-related costs associated
with a workforce reduction, primarily in the Company's European and Florida
operations, of approximately nine persons in sales, twelve persons in general
and administrative and three persons in research and development. The balance of
this charge included a write-down of assets associated with the closure of the
company's Florida facility.
In the fourth quarter of 1999, the Company announced a restructuring of
certain of its operations, and recorded a non-recurring pretax charge of
$1,866,666 in accordance with EITF 94-3 and SAB No. 100. The non-recurring
charge includes severance-related costs and asset write-off charges. The
severance-related costs were associated with a workforce reduction, primarily in
the Company's Salem, New Hampshire, and
19
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 acquired a perpetual license to utilize certain
patented fax technology which was capitalized and was being amortized over its
estimated useful life of five years. During 1999, the Company determined that
the carrying value of this asset should be reduced to reflect its impairment in
accordance with SFAS No. 121. The carrying value was reduced based upon an
undiscounted cash flow analysis reflecting the Company's future product plans in
which this patented technology is no longer expected to be utilized.
The components of the restructurings and asset write-offs for the year ended
December 31, 1999 are as follows:
Employee severance, benefits and related costs.............. $1,864,000
Write-off and write-down of assets to be disposed........... 1,020,266
Lease termination and relocation costs...................... 60,400
Other....................................................... 50,000
----------
$2,994,666
==========
(RECOVERY) LOSS ON SALE OF AS/400 PRODUCT LINE. On January 4, 2000, Omtool
sold the AS/400 Assets to IPP for $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 Company believed at the time of the sale of the
AS/400 Assets that collectibility of the future payments was not assured and
reserved for those future payments in recognizing the loss on sale of the AS/400
Assets.
The components of the loss from the sale of the AS/400 Assets during 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
==========
INTEREST INCOME Interest income was $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 7 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, 2000, the Company had cash and cash equivalents of $14.6 million,
short-term investments of $3.3 million and working capital of $13.6 million.
20
The Company's operating activities used cash of $1.2 million for the year
ended December 31, 2000, and provided cash of $742,000 for the year ended
December 31, 1999. Net cash used during the year ended December 31, 2000,
consisted primarily of a net loss from operations offset by depreciation and
amortization, asset write-offs, a decrease in accounts receivable and prepaid
expenses. 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 an increase in accrued liabilities.
Investing activities provided cash of $14.0 million during the year ended
December 31, 2000, and used cash of $1.5 million during the year ended
December 31, 1999. During the year ended December 31, 2000 the principal uses
were purchases of short-term investments and purchases of property and
equipment, offset by proceeds from the sale of short-term investments. During
the year ended December 31, 1999, the principal uses were purchases of
short-term investments, an increase in other assets and purchases of property
and equipment, offset by proceeds from the sale of short-term investments.
Financing activities provided cash of $282,000 and used cash of $380,000
during the years ended December 31, 2000 and 1999, respectively. This is due
primarily to the issuance of common stock in 2000 and the purchase of treasury
stock in 1999.
At December 31, 2000, the Company did not have any material commitments for
capital expenditures.
Subject to the factors discussed below, the Company believes that the
existing cash balances, short-term investments and cash generated from
operations will be sufficient to finance the Company's operations for the next
twelve months. Although operating activities may provide cash in certain
periods, to the extent the Company grows in the future, its operating and
investing activities may use cash. There can be no assurance that any necessary
additional financing will be available to the Company on commercially reasonable
terms, or at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires entities to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133,
which defers the effective date of SFAS No. 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The adoption of this new accounting
standard is not expected to have a material impact on the Company's financial
statements.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF ACCOUNTING
PRINCIPLES BOARD ("APB") OPINION NO. 25. The interpretation clarifies the
application of APB Opinion No. 25 in certain situations, as defined. The
interpretation is effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998, but before the effective date. The
impact of FASB Interpretation No. 44 was not material to the Company's financial
position, results of operations or cash flows.
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.
Information provided by the Company from time to time including statements
in this Form 10-K which are not historical facts are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act
21
of 1995. In particular, statements contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical facts (including, but not limited to, statements concerning the plans
and objectives of management; expectations for sales and marketing, research and
development and general and administrative expenses; developments relating to
the Company's product and service offerings, markets and acquisitions;
anticipated trends in the Company's business; and the Company's expected
liquidity and capital resources) may constitute forward-looking statements.
These forward-looking statements are neither promises nor guarantees, but are
subject to risk and uncertainties that could cause actual results to differ
materially from the expectations set forth in the forward-looking statements.
Factors that may cause such differences include, but are not limited to, the
factors discussed below, and the other risks discussed from time to time in the
Company's other filings with the Securities and Exchange Commission.
PRODUCT CONCENTRATION. To date, much of the Company's revenues have been
attributable to 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 much of the Company's future revenues.
However, recently the amount of revenues attributable to the licenses of such
products has declined and there can be no assurances that such decline will not
continue. In March 2000, the Company changed its strategic focus to the
development of secure business-to-business electronic document exchange
solutions. The Company introduced its secure business-to-business electronic
document exchange products, Genidocs and Genifax, to the market in the fourth
quarter of 2000. The Company expects that Genidocs may account for an increasing
portion of future revenues. However, there can be no assurances that Genidocs
will be financially successful or result in any significant 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 are relatively new and are characterized by rapid technological change,
evolving industry standards, changes in end-user requirements and frequent new
product introductions and enhancements. The Company's future success will depend
upon its ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments and respond to
evolving end-user requirements. There can be no assurance that the Company will
be successful in developing and marketing new products or product enhancements
on a timely basis, or that new products or product enhancements developed by the
Company, such as Genidocs and Genifax, 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 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 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.
THE MARKET RISKS FOR SECURE BUSINESS-TO-BUSINESS ELECTRONIC DOCUMENT
EXCHANGE SOLUTIONS. The market for Genidocs, the Company's secure
business-to-business electronic document exchange solution is new and evolving
rapidly. The Company's success will depend upon the adoption and use by current
and potential customers of secure business-to-business electronic document
exchange solutions. The Company's success will also depend upon acceptance of
its technology as the standard for providing these solutions. The adoption and
use of the Company's secure business-to-business electronic document exchange
solution 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
22
document exchange solution 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 solution, or its growth rate, if any. Moreover, the Company
cannot predict whether the Company's secure business-to-business electronic
document exchange solution 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.
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.
FUTURE OPERATING RESULTS UNCERTAIN. The Company was incorporated in
March 1991 and shipped its initial facsimile software products in 1991. The
Company does not believe that prior growth rates are sustainable or indicative
of future operating results. In the years ending December 31, 1999 and 2000, the
Company's total revenue declined from $27.0 million to $16.9 million and the
Company has had net losses of approximately $9.1 million and $5.5 million,
respectively. There can be no assurance that the Company will be able to
increase its level of revenues or return to profitability in the future, as the
Company's limited operating history makes the prediction of future operating
results difficult or impossible. Increases in operating expenses, primarily
sales and marketing, are expected to continue and, together with pricing
pressures, may result in a decrease in operating income and operating margin
percentage. The Company's ability to improve its operating results will depend
upon, among other things, its ability to increase sales of the Company's secure
business-to-business electronic document exchange solutions and client/server
23
facsimile solutions to new customers as well as increased product penetration
into existing customers. As the Company commenced its strategic expansion into
secure business-to-business electronic document exchange solutions market in the
fourth quarter of 2000, the Company has limited financial and operating data and
a limited operating history relevant to these solutions. Accordingly, it is
difficult to evaluate the prospects for the level of acceptance of the Company's
secure business-to-business electronic document exchange solutions. In addition,
the Company's future operating results are subject to the risk that a definitive
class action shareholder settlement agreement may not be executed, or, if
executed, may not be approved by the federal district court in New Hampshire,
and, in the event of continued litigation, the possibility of outcomes adverse
to the Company. Future operating results will depend on many other factors,
including, without limitation, the degree and rate of growth of the markets in
which the Company competes, the level of acceptance of the Windows NT and
Windows 2000 operating systems, 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. As a result, it is possible that in the future the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
INTENSE COMPETITION. The secure business-to-business electronic document
exchange solution and enterprise, client/server facsimile solution 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; 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 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, among others, by Federal Express Corporation, UPS 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 Pitney
Bowes, Sigaba, Tumbleweed, UPS, the U.S. Postal Service and Zixit. In addition,
many companies with which the Company does not presently compete may become
competitors in the future. This could occur either through the expansion of the
Company's products or through other companies' product development in the area
of secure online communication. These companies could include Documentum,
Hummingbird and iManage. Additionally, companies such as JetForm, PureEdge and
Silanis may develop and deliver competitive digital signature products in the
future.
The Company competes directly with a large number of vendors of facsimile
products, including providers of facsimile software products for client/server
networks such as RightFAX (a subsidiary of Applied Voice Technology), Fenestrae,
TopCall International and Biscom. The Company also competes with vendors
offering a range of alternative facsimile solutions including outsourcing
network facsimile solutions, such as Mail.com; 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.
24
Many of the Company'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 the
Company will not develop products comparable or superior in terms of price and
performance features to those developed by the Company, adapt more quickly than
the Company to new or emerging technologies and changes in market opportunities
or customer requirements, establish alliances with industry leaders, or take
advantage of acquisition opportunities more readily than the Company. In
addition, no assurance can be given that the Company will not be required to
make substantial additional investments in connection with its research,
development, engineering, marketing, sales and customer service efforts in order
to meet any competitive threat, or that such required investments will not have
a material adverse effect on operating margins. Increased competition will
result in reduction in market share, pressure for price reductions and related
reductions in gross margins, any of which could materially adversely affect the
Company's ability to achieve its financial and business goals. There can be no
assurance that in the future the Company will be able to successfully compete
against current and future competitors.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company may augment its internal
growth with acquisitions of businesses, products and technologies that could
complement or expand the Company's business. Certain of these businesses may be
marginally profitable or unprofitable. In order to achieve anticipated benefits
from these acquisitions, the Company must successfully integrate the acquired
businesses with its existing operations, and no assurance can be given that the
Company will be successful in this regard. The Company has limited experience in
integrating 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.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS; SEASONALITY. The Company's
quarterly revenues and results of operations have fluctuated significantly in
the past and will likely fluctuate significantly in the future. Causes of such
fluctuations have included and may include, among others, the demand for the
Company's products and services, the size and timing of orders, the number,
timing and significance of new product announcements by the Company and its
competitors, the ability of the Company to develop, introduce, market and ship
new and enhanced versions of the Company's current and planned products on a
timely basis, the level of product and price competition, changes in operating
expenses, changes in average selling prices and mix of the Company's products,
changes in the Company's sales incentive strategy, the mix of direct and
indirect sales, and general economic factors. In addition, the sale of the
Company's products often involves delays because customers have tended to
implement the products on a large scale and customers also must establish
certain minimum hardware capabilities. The Company's products therefore often
have a lengthy sales cycle while the customer evaluates and receives approvals
for the purchase of the Company's products. During such sales cycles, the
Company may expend substantial funds and management effort yet receive no
revenues. It may be difficult to accurately predict the sales cycle of any large
order. If one or more large orders fails to close as forecasted in a fiscal
quarter, the
25
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 secure
business-to-business electronic document exchange and enterprise, client/server
facsimile solutions software 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 expanded its operations and
anticipates that expansion will continue to be required in order to address
potential market opportunities. The Company anticipates that it will continue to
increase the size of its sales and marketing and research and development as
necessary. There can be no assurance that such expansion will be successfully
completed or that it will generate sufficient revenues to cover the Company's
expenses. The Company will need to continue to attract and retain highly
qualified technical, sales and managerial personnel. There can be no assurance
that the Company will be able to retain or continue to hire such personnel in
the future. The inability of the Company to effectively expand operations and
manage growth, if any, could have a material adverse effect on the Company's
business, financial condition and results of operations.
EXPANSION OF INDIRECT CHANNELS; POTENTIAL FOR CHANNEL CONFLICT. The Company
markets its products and services directly through telesales and indirectly
through marketing channels such as value-added resellers ("VARs"), systems
integrators and distributors. Although the Company has historically focused its
efforts on marketing through its telesales force, the Company is increasing
resources dedicated to developing and expanding indirect marketing channels.
There can be no assurance that the Company will be able to attract and retain a
sufficient number of qualified VARs, systems integrators and distributors to
market successfully the Company's products. In addition, there can be no
assurance that the Company's resellers will not develop, acquire or market
computer-based facsimile products competitive with the Company's products. The
failure to retain its VARs, systems integrators and distributors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The distributor agreements generally provide that either party may terminate
the agreement without cause upon 30 days written notice to the other party. The
Company also resells its products on a purchase
26
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 secure business-to-business electronic
document exchange solutions and local facsimile product providers in their
native countries. To successfully expand international sales, the Company will
need to recruit and retain additional international resellers and distributors.
There can be no assurance that the Company will be able to maintain or increase
international sales of its products or that the Company's international
distribution channels will be able to adequately market, service and support the
Company's products. International operations generally are subject to certain
risks, including dependence on independent resellers, fluctuations in foreign
currency exchange rates, compliance with foreign regulatory and market
requirements, variability of foreign economic conditions and changing
restrictions imposed by United States export laws. Additional risks inherent in
the Company's international business activities generally include unexpected
changes in regulatory requirements, tariffs and other trade barriers, costs of
localizing products for foreign countries, lack of acceptance of localized
products in foreign countries, longer accounts receivable payment cycles,
difficulties in managing international operations, difficulties in enforcing
intellectual property rights and the burdens of complying with a wide variety of
foreign laws. With the acquisition of CMA Ettworth, based in London, England, in
December 1997, the Company obtained its first sales offices outside of the
United States. Such operations are subject to certain additional risks,
including difficulties in staffing and managing such operations and potentially
adverse tax consequences including restrictions on the repatriation of earnings.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, the
Company's business, financial condition and results of operations. To date, a
majority of the Company's sales have been made in United States dollars and the
Company has not engaged in any hedging transactions through the purchase of
derivative securities or otherwise.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends, in
significant part, upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement or
by a noncompetition agreement. 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.
27
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
As of December 31, 2000, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments consist of money market funds and commercial paper 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, 2000.
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-21, respectively, of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
28
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, 2000.
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, 2000.
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, 2000.
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, 2000.
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, 2000.
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) Consolidated Financial Statements Listed under Part II, Item 8 and included
herein by reference.
(2) Consolidated Financial Statement Schedules
All schedules are not submitted because they are not applicable, not
required or because the information is included in the Consolidated Financial
Statements as Notes to Consolidated Financial Statements.
29
(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, as amended, (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8, No. 333-91659
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 the Company (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)
10.6 Agreement of Sublease dated as of October 31, 2000, by and
between eSped.com, Inc. and the Company
10.7 Consulting Agreement dated as of December 31, 1999, by and
between Martin Schultz and the Company
10.8 Letter dated December 31, 1999 from the Company to Martin
Schultz
10.9 Letter dated December 14, 1999 from the Company to Robert L.
Voelk
10.10 Letter dated July 19, 2000 from the Company to Robert L.
Voelk
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
(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, 2000.
(c) Exhibits.
The exhibits required by this Item are listed under Item 14(a)(3).
(d) Financial Statement Schedules.
The financial statement schedules required by this Item are listed under
Item 14(a)(2).
30
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 2nd day of April 2001.
OMTOOL, LTD.
By: /s/ ROBERT L. VOELK
-----------------------------------------
Robert L. Voelk
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
POWER OF ATTORNEY
We, the undersigned officers and directors of Omtool, Ltd., hereby severally
constitute and appoint Robert Voelk 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/ ROBERT L. VOELK Chairman, Chief Executive Officer and April 2, 2001
------------------------------------ President
Robert L. Voelk
/s/ KIRA A. NELSON Vice President, Finance, Chief April 2, 2001
------------------------------------ Financial Officer, Secretary and
Kira A. Nelson Treasurer (principal financial and
accounting officer)
/s/ MARTIN A. SCHULTZ Director April 2, 2001
------------------------------------
Martin A. Schultz
/s/ RICHARD D. CRAMER Director April 2, 2001
------------------------------------
Richard D. Cramer
31
NAME TITLE DATE
---- ----- ----
/s/ BRUCE R. EVANS Director April 2, 2001
------------------------------------
Bruce R. Evans
/s/ WILLIAM C. STYSLINGER, III Director April 2, 2001
------------------------------------
William C. Styslinger, III
32
OMTOOL, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 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, 2000
and 1999 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 2000. 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 18, 2001
(except for the matter
discussed in Note 15, as to
which the date is March 31, 2001)
F-2
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $14,599,350 $ 1,576,283
Short-term investments.................................... 3,283,708 17,587,195
Accounts receivable, less reserves of $980,000 and
$2,090,000 in 2000 and 1999, respectively............... 1,563,373 3,049,161
Prepaid expenses and other current assets................. 506,187 1,523,279
Deferred tax asset........................................ 1,258,978 1,258,978
----------- -----------
Total current assets.................................... 21,211,596 24,994,896
Property and equipment, net................................. 1,236,745 1,630,125
Other assets, net........................................... 14,425 848,178
----------- -----------
$22,462,766 $27,473,199
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 633,413 $ 1,055,197
Accrued liabilities....................................... 3,972,231 3,329,576
Deferred revenue.......................................... 2,966,716 2,903,549
----------- -----------
Total current liabilities............................... 7,572,360 7,288,322
----------- -----------
Commitments and contingencies (Notes 11 and 15)
Stockholders' equity:
Preferred Stock, $.01 par value
Authorized--2,000,000 shares; Issued and
outstanding--none..................................... -- --
Common Stock, $.01 par value
Authorized--35,000,000 shares; Issued--13,009,372
shares................................................ 130,093 130,093
Additional paid-in capital................................ 32,074,193 32,215,321
Accumulated deficit....................................... (16,443,798) (10,912,010)
Treasury Stock (272,144 and 420,125 at cost in 2000 and
1999, respectively)..................................... (778,636) (1,201,998)
Cumulative translation adjustment......................... (91,446) (46,529)
----------- -----------
Total stockholders' equity.............................. 14,890,406 20,184,877
----------- -----------
$22,462,766 $27,473,199
=========== ===========
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,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
Software license..................................... $ 6,031,647 $12,394,329 $18,542,007
Hardware............................................. 4,216,231 7,072,337 6,482,562
Service and other.................................... 6,659,139 7,619,851 6,087,615
----------- ----------- -----------
Total revenues..................................... 16,907,017 27,086,517 31,112,184
----------- ----------- -----------
Cost of revenues:
Software license..................................... 423,127 1,070,295 1,331,068
Hardware............................................. 3,008,066 4,890,412 3,925,421
Service and other.................................... 4,175,093 3,704,314 2,950,718
----------- ----------- -----------
Total cost of revenues............................. 7,606,286 9,665,021 8,207,207
----------- ----------- -----------
Gross profit....................................... 9,300,731 17,421,496 22,904,977
----------- ----------- -----------
Operating expenses:
Sales and marketing.................................. 6,327,999 11,879,346 12,340,919
Research and development............................. 3,767,167 5,003,070 5,058,579
General and administrative........................... 3,878,359 5,562,467 4,755,179
Restructuring costs and asset write-off.............. 708,335 2,994,666 --
Settlement costs..................................... 1,700,000 -- --
(Recovery)loss on sale of AS/400 product line........ (446,983) 2,667,500 --
----------- ----------- -----------
Total operating expenses........................... 15,934,877 28,107,049 22,154,677
----------- ----------- -----------
Income (loss) from operations...................... (6,634,146) (10,685,553) 750,300
Interest income........................................ 1,102,358 666,707 753,887
----------- ----------- -----------
Income (loss) before provision (benefit) for income
taxes............................................ (5,531,788) (10,018,846) 1,504,187
Provision (benefit) for income taxes................... -- (857,432) 406,435
----------- ----------- -----------
Net income (loss).................................. $(5,531,788) $(9,161,414) $ 1,097,752
=========== =========== ===========
Net income (loss) per share
Basic.............................................. $ (0.44) $ (0.73) $ 0.09
=========== =========== ===========
Diluted............................................ $ (0.44) $ (0.73) $ 0.08
=========== =========== ===========
Weighted average number of common shares outstanding
Basic.............................................. 12,706,044 12,600,018 12,713,169
=========== =========== ===========
Diluted............................................ 12,706,044 12,600,018 13,414,958
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
OMTOOL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK
---------------------- ------------------------ ADDITIONAL CUMULATIVE
NUMBER OF $0.01 PAR NUMBER OF PAID-IN ACCUMULATED TRANSLATION
SHARES VALUE SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
---------- --------- ---------- ----------- ----------- ------------ -----------
Balance, December 31,
1997................. 12,525,410 $125,253 -- $ -- $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........ 483,962 4,840 -- -- 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................. 13,009,372 130,093 (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 and issuance
of shares through
Employee Stock
Purchase Plan........ -- -- 431,655 1,280,553 (1,138,277) -- --
Change in cumulative
translation
adjustment........... -- -- -- -- -- -- (39,829)
Net loss............... -- -- -- -- -- (9,161,414) --
---------- -------- -------- ----------- ----------- ------------ --------
Balance, December 31,
1999................. 13,009,372 130,093 (420,125) (1,201,998) 32,215,321 (10,912,010) (46,529)
Exercise of stock
options and issuance
of shares through
Employee Stock
Purchase Plan........ -- -- 147,981 423,362 (141,128) -- --
Change in cumulative
translation
adjustment........... -- -- -- -- -- -- (44,917)
Net loss............... -- -- -- -- -- (5,531,788) --
---------- -------- -------- ----------- ----------- ------------ --------
Balance, December 31,
2000................. 13,009,372 $130,093 (272,144) $ (778,636) $32,074,193 $(16,443,798) $(91,446)
========== ======== ======== =========== =========== ============ ========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
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 and issuance
of shares through
Employee Stock
Purchase Plan........ 142,276
Change in cumulative
translation
adjustment........... (39,829)
Net loss............... (9,161,414)
-----------
Balance, December 31,
1999................. 20,184,877
Exercise of stock
options and issuance
of shares through
Employee Stock
Purchase Plan........ 282,234
Change in cumulative
translation
adjustment........... (44,917)
Net loss............... (5,531,788)
-----------
Balance, December 31,
2000................. $14,890,406
===========
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,
-------------------------------------------
2000 1999 1998
------------- ------------ ------------
Cash Flows from Operating Activities:
Net (loss) income................................ $ (5,531,788) $ (9,161,414) $ 1,097,752
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating
activities--
Depreciation and amortization.................. 813,627 3,007,532 2,488,644
Deferred income taxes.......................... -- (869,813) (555,595)
Loss on sale of AS/400 product line............ -- 2,667,500 --
Tax benefit from exercise of stock options..... -- -- 678,505
Non-cash restructuring costs and asset
write-off.................................... 708,335 1,020,266 --
Changes in assets and liabilities--
Accounts receivable.......................... 1,397,859 2,994,570 (1,270,151)
Prepaid expenses and other current assets.... 1,089,441 546,522 (367,577)
Accounts payable............................. (393,337) (266,029) 327,740
Accrued liabilities.......................... 604,091 856,427 (418,670)
Income taxes payable......................... -- -- (813,101)
Deferred revenue............................. 101,546 (15,033) 699,453
Long-term liabilities........................ -- (38,935) (59,474)
------------- ------------ ------------
Net cash (used in) provided by operating
activities............................... (1,210,226) 741,593 1,807,526
------------- ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment.............. (313,852) (1,193,804) (1,206,151)
Purchases of short-term investments.............. (147,915,052) (41,735,767) (41,409,484)
Proceeds from sale of short-term investments..... 162,192,745 42,177,162 44,550,000
Decrease (increase) in other assets.............. 1,600 (701,302) (1,374,077)
------------- ------------ ------------
Net cash provided by (used in) investing
activities............................... 13,965,441 (1,453,711) 560,288
------------- ------------ ------------
Cash Flows from Financing Activities:
Net repayments on line of credit................. -- -- (244,563)
Payments on capital lease obligations............ -- -- (22,841)
Net proceeds from issuance of common stock....... 282,234 142,276 228,811
Purchase of treasury stock....................... -- (521,425) (1,961,126)
------------- ------------ ------------
Net cash provided by (used in) financing
activities............................... 282,234 (379,149) (1,999,719)
------------- ------------ ------------
Exchange rate effect on cash....................... (14,382) (38,488) (15,737)
------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 13,023,067 (1,129,755) 352,358
Cash and cash equivalents, beginning of year....... 1,576,283 2,706,038 2,353,680
------------- ------------ ------------
Cash and cash equivalents, end of year............. $ 14,599,350 $ 1,576,283 $ 2,706,038
------------- ------------ ------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Interest....................................... $ -- $ -- $ 10,435
============= ============ ============
Income taxes................................... $ -- $ -- $ 1,033,000
============= ============ ============
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 enable secure
business-to-business electronic document exchange. 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 in
multiple formats. With the introduction of Genifax and Genidocs, Omtool's
product solutions enable the integration of business processes that include the
confirmed and secure exchange of electronic documents such as legal contracts,
financial transactions and purchase order processing, in the form of electronic
faxes or confirmed, secure and digitally signed e-mail. 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. Additionally, the Company is
subject to the risk that a definitive class action shareholder settlement
agreement may not be executed, or, if executed, may not be approved by the
federal district court in New Hampshire, and, in the event of continued
litigation, the possibility of outcomes adverse to the Company.
(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 98-9 and records license revenue in accordance with the residual method as
proscribed by SOP 97-2 and SOP 98-9.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. This bulletin establishes guidelines for revenue recognition. The
Company's revenue recognition policy complies with this pronouncement.
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.
F-7
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the license fee payment is
contingent upon the acceptance of services, revenues from both the license and
the service elements are deferred until the acceptance criteria are met.
Cost of license revenues consists of the cost of media on which the product
is delivered and any related royalties. Cost of service revenues consists
primarily of salaries and benefits related to consulting personnel and the
customer support group.
(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 and commercial paper. 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, 2000 and 1999, the Company had $3,283,708 invested in
securities consisting of commercial paper and $17,587,195 invested in securities
consisting of municipal bonds, respectively. 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, 2000 and 1999.
F-8
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 and accounts payable. The estimated
fair value of these financial instruments approximates their carrying value at
December 31, 2000 and 1999 due to the short-term nature of these instruments.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization is calculated using accelerated
and straight-line methods over the following useful lives:
DECEMBER 31,
-----------------------
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE 2000 1999
- -------------------- --------------------------------------- ---------- ----------
Computer equipment................ 1 -- 5 years $2,466,992 $2,650,634
Computer software................. 2 -- 3 years 1,055,711 767,930
Furniture and equipment........... 5 -- 7 years 893,441 706,230
Leasehold improvements............ Shorter of the life of the lease or the
estimated useful life 174,464 174,464
Motor vehicles.................... 4 years 22,429 65,733
---------- ----------
4,613,037 4,364,991
Less--Accumulated depreciation and
amortization.................... 3,376,292 2,734,866
---------- ----------
$1,236,745 $1,630,125
========== ==========
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred.
(H) USE OF ESTIMATES
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, 2000, the Company has no significant
off-balance sheet or credit risk concentrations, such as foreign currency
exchange contracts or other hedging
F-9
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The following schedule summarizes the activity of the Company's accounts
receivable reserve for the three years ended December 31, 2000:
CHARGED TO
BALANCE AT REVENUES, COSTS BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION YEAR EXPENSES WRITE-OFFS OTHER (1) YEAR
- ----------- ------------ --------------- ---------- --------- ----------
ACCOUNTS RECEIVABLE RESERVE
December 31, 1998.......................... $1,245,000 100,000 -- -- $1,345,000
December 31, 1999.......................... $1,345,000 572,000 -- 173,000 $2,090,000
December 31, 2000.......................... $2,090,000 (1,110,000)(2) -- -- $ 980,000
- ------------------------------
(1) The 1999 amount represents additional reserves resulting from the sale of
the Company's AS/400 product line.
(2) The 2000 amount represents the reversal of reserves no longer required.
For the years ended December 31, 2000, 1999 and 1998, no single customer
accounted for greater than 10% of the Company's revenues or accounts receivable
at December 31, 2000.
(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 in the accompanying consolidated balance sheets.
(L) NET (LOSS) INCOME PER SHARE
The Company reports earnings per share in accordance with SFAS No. 128,
EARNINGS PER SHARE. Diluted weighted average shares outstanding for 2000 and
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
F-10
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
treasury stock method, in accordance with SFAS No. 128. A reconciliation of
basic and diluted common shares outstanding is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Weighted average number of common shares outstanding..... 12,706,044 12,600,018 12,713,169
Potential common shares pursuant to stock options........ -- -- 701,789
---------- ---------- ----------
Diluted weighted average shares.......................... 12,706,044 12,600,018 13,414,958
========== ========== ==========
Basic net (loss) income per share........................ $ (0.44) $ (0.73) $ 0.09
Diluted net (loss) income per common and potential common
share.................................................. $ (0.44) $ (0.73) $ 0.08
For the year ended December 31, 2000, 1999 and 1998, the calculation above
excludes the potential common shares related to 1,392,013, 2,214,209 and 1,500
outstanding stock options, respectively, which have an antidilutive effect.
(M) RECENTLY ISSUED ACCOUNTING STANDARD
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires entities to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133,
which defers the effective date of SFAS No. 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The adoption of this new accounting
standard is not expected to have a material impact on the Company's financial
statements.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF ACCOUNTING
PRINCIPLES BOARD (APB) OPINION NO. 25. The interpretation clarifies the
application of APB Opinion No. 25 in certain situations, as defined. The
interpretation is effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998, but before the effective date. The
impact of FASB Interpretation No. 44 was not material to the Company's financial
position, results of operations or cash flows.
(3) COMPREHENSIVE (LOSS) INCOME
The components of the Company's comprehensive (loss) income are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
----------- ----------- ----------
Net (loss) income....................................... $(5,531,788) $(9,161,414) $1,097,752
Foreign currency translation adjustments................ (44,917) (39,829) (14,404)
----------- ----------- ----------
Comprehensive (loss) income............................. $(5,576,705) $(9,201,243) $1,083,348
=========== =========== ==========
F-11
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) 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 was accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements include the
accounts and operations of DPSI for all periods presented.
On February 27, 1998, the Company acquired all of the outstanding capital
stock of TRS Technologies, Inc. ("TRS") in exchange for 384,430 shares of Omtool
common stock. TRS develops, markets and supports LAN fax and cost recovery
systems for law firms. This transaction was accounted for as a pooling of
interests and, accordingly, the Company's consolidated financial statements
include the accounts and operations of TRS for all periods presented.
Separate total revenues and net income (loss) amounts of the acquired
entities are presented in the following table.
TWO MONTHS ENDED
FEBRUARY 1998
----------------
Total revenues
Omtool.................................................... $3,737,353
TRS....................................................... 323,816
DPSI...................................................... 72,900
----------
$4,134,069
==========
Net income (loss)
Omtool.................................................... $ (230,451)
TRS....................................................... 113,735
DPSI...................................................... 11,516
----------
$ (105,200)
==========
(5) RELATED PARTY TRANSACTIONS
On October 31, 2000, the Company entered into an agreement with
eSped.com, Inc. ("eSped") to sublease from the Company 4,500 square feet of the
premises the Company is occupying at the Company's Salem, New Hampshire,
headquarters. The Company's chairman, president and chief executive officer is
also the chairman and chief executive officer of eSped. The lease is a tenancy
at will and commences on February 1, 2001. Either party may terminate the lease
with 120 days written notice to the other party. The annual amount of rent
payments to be received is $36,000 plus a percentage of building maintenance
charges. As a result of a check by management of comparable real estate rates,
the Company believes that this sublease is on terms no less favorable to the
Company than could be obtained from an unrelated third party.
F-12
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Accrued salaries and salary-related.................. $ 927,397 $1,091,982
Accrued settlement costs............................. 1,700,000 --
Accrued restructuring charge......................... -- 783,735
Accrued professional fees............................ 372,507 441,799
Other accrued expenses............................... 972,327 1,012,060
---------- ----------
$3,972,231 $3,329,576
========== ==========
(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, 2000, the Company had
available, subject to review and possible adjustment by the Internal Revenue
Service (IRS), net operating loss carryforwards of approximately $8.5 million to
be used to offset future taxable income, if any. The Company also has federal
tax credits carryforwards of approximately $808,000. If not utilized, these
carryforwards expire through 2020 and are subject to review and possible
adjustment by the IRS. If certain ownership changes occur, as defined by
Section 382 of the Internal Revenue Code (IRC), there could be annual
limitations on the amount of carryforwards that can be realized in future
periods.
The components of the deferred tax asset are as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Net operating loss carryforward...................... $2,889,000 $1,484,000
Loss on disposal of AS/400 product line.............. -- 1,030,000
Research and development tax credit carryforwards.... 808,000 570,000
Accrued liabilities and reserves..................... 1,721,000 1,390,000
Valuation allowance.................................. (4,159,022) (3,215,022)
---------- ----------
Net deferred tax asset............................... $1,258,978 $1,258,978
========== ==========
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 asset
for which realization is uncertain.
F-13
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Income tax (benefit) provision at federal
statutory rate.................................. (34.0)% (34.0)% 34.0%
(Decrease) increase in tax resulting from--
State tax (benefit) provision, net of federal
benefit....................................... (2.7) (4.3) 2.7
Non-deductible goodwill......................... -- (3.1) 1.2
Tax-exempt interest............................. 0.6 2.0 (15.0)
Research and development tax credits............ 2.6 1.0 (5.4)
Difference in foreign tax rates................. (0.5) (0.4) (1.0)
Increase in valuation allowance................. 33.8 28.9 10.0
Other........................................... 0.2 1.3 0.5
----- ----- -----
(Benefit) provision for income taxes.............. --% (8.6)% 27.0%
===== ===== =====
The (benefit) provision for income taxes in the accompanying consolidated
statements of operations consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- ----------- ---------
Current
Federal...................................... $ -- $ (149,618) $ 460,000
State........................................ -- (37,404) 108,000
Foreign...................................... -- 535,974 394,030
--------- ----------- ---------
-- 348,952 962,030
--------- ----------- ---------
Deferred
Federal...................................... -- $ (470,382) $(274,000)
State........................................ -- (117,596) (64,000)
Foreign...................................... -- (618,406) (217,594)
--------- ----------- ---------
-- (1,206,384) (555,595)
--------- ----------- ---------
(Benefit) provision for income taxes........... $ -- $ (857,432) $ 406,435
========= =========== =========
The components of domestic and foreign income (loss) before income taxes are
as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ------------ ----------
Domestic............................... $(4,966,005) $ (9,225,310) $1,460,354
Foreign................................ (565,783) (793,536) 43,833
----------- ------------ ----------
$(5,531,788) $(10,018,846) $1,504,187
=========== ============ ==========
F-14
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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, 2000, the Company repurchased 851,780 shares.
(B) RESERVED COMMON STOCK
As of December 31, 2000, 4,508,784 shares of common stock were reserved for
issuance pursuant to stock option plans and the employee stock purchase plan.
(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 IRC of 1986, as amended, and nonqualified stock options.
Incentive stock options under the 1996 Plan are granted at not less than the
fair market value per share of common stock on the date of grant or 110% of fair
market value for any stockholder who holds more than 10% of the total combined
voting power of all classes of stock of the Company. Under the terms of the 1996
Plan, options vest and become exercisable as determined by the Board of
Directors and expire 10 years after the date of grant. In 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 IRC of 1986, as amended, and the grant of nonqualified
stock options, stock awards or opportunities to make direct purchases of stock
in the Company to employees, consultants, directors and officers of the Company.
The aggregate number of shares of Common Stock which may be issued pursuant to
the 1997 Plan is 4,300,000.
F-15
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK PLANS (CONTINUED)
The following is a summary of all stock option activity:
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------- ------------------- --------------
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
Granted........................................... 892,104 0.91-2.88 2.52
Exercised......................................... (127,225) 1.85-2.94 1.94
Canceled.......................................... (1,587,075) 1.85-9.00 3.42
---------- ------------------- -----
Outstanding, December 31, 2000...................... 1,392,013 $0.25-$5.50 $2.82
========== =================== =====
Exercisable, December 31, 2000...................... 269,059 $0.25-$5.50 $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
========== =================== =====
At December 31, 2000, options to purchase 3,253,101 shares of commons stock
were available for future grants under the 1997 Plan.
The range of exercise prices for options outstanding and options exercisable
at December 31, 2000 are as follows:
OPTIONS OUTSTANDING
------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------------
OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
$0.25 15,334 5.0 $0.25 15,334 $0.25
0.91 43,500 9.6 .91 -- --
1.85-2.75 780,704 9.2 2.30 119,350 2.15
2.88-3.63 271,625 9.0 2.91 3,125 3.54
4.38-5.50 280,850 7.8 4.63 131,250 4.74
--------- --- ----- ------- -----
1,392,013 8.8 $2.82 269,059 $3.32
========= === ===== ======= =====
(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
F-16
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK PLANS (CONTINUED)
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, 2000, 38,975 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 ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and FASB Interpretation No. 44, and follows 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 2000, 1999 and 1998 had a
weighted average fair value of $1.65, $2.10 and $3.52, respectively. The
weighted average assumptions are as follows:
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
Risk-free interest rate.......................... 6.25% 5.38% 5.34%
Volatility....................................... 85.0% 85.0% 80.0%
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:
YEAR ENDED DECEMBER 31
-------------------------------------
2000 1999 1998
----------- ------------ --------
Net (loss) income, pro forma............ $(6,500,733) $(10,176,029) $139,582
Net (loss) income per share, pro forma
Basic................................... $(0.51) $(0.81) $0.01
Diluted................................. $(0.51) $(0.81) $0.01
(10) 401(K) AND PROFIT-SHARING PLAN
The Company's 401(k) and profit-sharing plan (the "Profit-Sharing Plan")
covers all eligible employees and allows for voluntary contributions by eligible
employees. The Company matches 50% of eligible employee contributions up to a
specified amount. The Company contributed approximately $60,000, $178,000 and
$169,000 to the Profit-Sharing Plan for the years ended December 31, 2000, 1999
and 1998, respectively. Additional profit-sharing contributions to the
Profit-Sharing Plan are at the discretion of the Company's management. During
2000, 1999 and 1998 the Company made no additional discretionary contributions.
F-17
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) LEASE COMMITMENTS
The Company leases certain equipment and its office facility under operating
leases that expire at various times through May 2005.
Future minimum lease payments under these leases at December 31, 2000 are as
follows:
YEAR ENDING DECEMBER 31,
- ------------------------
2001................................. $348,000
2002................................. 345,000
2003................................. 141,000
2004................................. 115,000
2005................................. 31,000
--------
$980,000
========
Rent expense included in the accompanying statements of operations was
approximately $568,000, $595,000 and $623,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
(12) SEGMENT AND GEOGRAPHIC INFORMATION
To date, the Company has viewed its operations and manages its business as
principally one segment, software sales and associated services. As a result,
the financial information disclosed herein represents all of the material
financial information related to the Company's principal operating segment in
accordance with SFAS No. 131.
Total revenues from international sources were approximately $3.1 million,
$6.7 million and $6.5 million in 2000, 1999 and 1998, 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, 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Total revenues (1)
United States............................................ $13,835,107 $20,416,251 $24,603,267
United Kingdom........................................... 1,399,838 3,682,532 3,655,705
Other North America...................................... 789,247 717,861 1,108,917
Other Europe............................................. 490,761 1,648,186 1,466,731
Latin America/Pacific Rim................................ 53,076 486,799 122,244
Middle East/Far East..................................... 308,209 84,220 116,490
Australia................................................ 30,779 50,668 38,830
----------- ----------- -----------
$16,907,017 $27,086,517 $31,112,184
=========== =========== ===========
Long-lived assets (2)
North America............................................ $ 1,154,219 $ 2,239,778 $ 2,673,211
Europe................................................... 96,951 238,525 4,165,618
----------- ----------- -----------
$ 1,251,170 $ 2,478,303 $ 6,838,829
=========== =========== ===========
- --------------------------
(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.
F-18
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 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), and
SEC Staff Accounting Bulletin SAB No. 100, RESTRUCTURING AND IMPAIRMENT CHARGES.
The nonrecurring charge included severance-related costs associated with a
workforce reduction, primarily in the Company's European and Florida operations,
of approximately nine persons in sales, twelve persons in general and
administrative and three persons in research and development. The balance of
this charge included a write-down of assets associated with the closure of the
Company's Florida facility.
In the fourth quarter of 1999, the Company announced a restructuring of
certain of its operations and recorded a nonrecurring pretax charge of
$1,866,666 in accordance with EITF 94-3 and SAB No. 100. The nonrecurring charge
included severance-related costs and an asset write-off charge. The
severance-related costs were associated with a workforce reduction, primarily in
the Company's Salem, New Hampshire, 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 acquired a perpetual license to utilize certain
patented fax technology which was capitalized and was being amortized over its
estimated useful life of five years. During 1999, the Company determined that
the carrying value of this asset should be reduced to reflect its impairment in
accordance with SFAS No. 121 ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and has included such impairment
totaling approximately $1.0 million within the charges described above. The
carrying value was reduced based upon an undiscounted cash flow analysis
reflecting the Company's future product plans, in which this patented technology
is no longer expected to be utilized.
In the fourth quarter of 2000, in accordance with SFAS No. 121, the Company
assessed the carrying value of an investment and determined that an impairment
charge of $708,335 was required to write the asset down to fair value.
The components of the restructurings and asset write-offs in 2000 and 1999
are as follows:
YEAR ENDED DECEMBER 31
-----------------------
2000 1999
--------- -----------
Employee severance, benefits and related costs........ $ -- $1,864,000
Asset write-off....................................... 708,335 1,020,266
Lease termination and relocation costs................ -- 60,400
Other................................................. -- 50,000
-------- ----------
$708,335 $2,994,666
======== ==========
F-19
OMTOOL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) RESTRUCTURING COSTS AND ASSET WRITE-OFF (CONTINUED)
The rollforward of the reserve is as follows:
BALANCE AT ASSET SEVERANCE BALANCE AT
BEGINNING OF IMPAIRMENT AND OTHER END OF
DESCRIPTION YEAR PROVISION WRITE-OFFS PAYMENTS YEAR
- ----------- ------------ --------- ---------- ---------- ----------
RESTRUCTURING RESERVE
December 31, 1999..................... $ -- 2,994,666 (1,020,266) (1,190,665) $783,735
December 31, 2000..................... $783,735 708,335 (708,335) (783,735) $ --
(14) (RECOVERY) 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 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 Company believed at the time of
the sale of the AS/400 Assets that collectibility of the future payments was not
assured and reserved for those future payments in recognizing the loss on sale
of the AS/400 Assets. The purchase price for the AS/400 Assets was determined
through arm's-length negotiations between management of IPP and management of
Omtool.
The components of the loss from the sale of the AS/400 Assets during 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
==========
The Company received payments of $150,000, $149,831 and $147,152 from IPP in
the second, third and fourth quarters of 2000, respectively, and recorded those
amounts as a recovery in each of the quarters ended June 30, 2000,
September 30, 2000 and December 31, 2000.
(15) LITIGATION
On October 5, 1999, a purported securities class action complaint was filed
against the Company and certain officers and directors of the Company. As of
March 31, 2001, the Company reached an agreement-in-principle to settle the
lawsuit. The terms of the proposed $6 million settlement include a contribution
by the Company's directors' and officers' liability insurance carriers of
$4.3 million, and a contribution by the Company of $1.7 million. The settlement
is subject to negotiation and execution of a definitive settlement agreement,
and final approval by the federal district court in New Hampshire (the "Court").
There can be no assurances, however, that the settlement will be consummated or
approved by the Court. The Company continues to believe that the lawsuit is
without merit, and, in the event the settlement is not consummated or approved,
the Company intends to continue defending the lawsuit vigorously.
F-20
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, 2000 and 1999.
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
Total revenues................................ $4,527,413 $4,020,720 $4,319,433 $4,039,451
Gross profit.................................. 2,551,707 2,399,789 2,136,025 2,213,210
Net loss...................................... (1,685,154) (930,381) (525,778) (2,390,475)
Net loss per share
Basic and diluted........................... $ (0.13) $ (0.07) $ (0.04) $ (0.19)
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 and diluted........................... $ (0.06) $ (0.09) $ (0.05) $ (0.52)
F-21
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, as amended (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8, No. 333-91659
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 the Company (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)
10.6 Agreement of Sublease dated as of October 31, 2000, by and
between eSped.com, Inc. and the Company
10.7 Consulting Agreement dated as of December 31, 1999, by and
between Martin Schultz and the Company
10.8 Letter dated December 31, 1999 from the Company to Martin
Schultz
10.9 Letter dated December 14, 1999 from the Company to Robert L.
Voelk
10.10 Letter dated July 19, 2000 from the Company to Robert L.
Voelk
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP