----

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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549**

 

**FORM10-Q**

**(MarkOne)**
| **ý** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------------------------------------------------------------------------------------------|
|       |                                                                                           |
|       | **For  the quarterly period ended June 30, 2001**                                              |
|       |                                                                                           |
|       | **OR**                                                                                         |
|       |                                                                                           |
| **o**      | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |                                                                                           |
|       | **For  the transition period from _________ to _______**                                       |
|       |                                                                                           |
|       | **Commission  File Number 0-22871**                                                            |

 

**OMTOOL,LTD.**(Exact Name ofRegistrant as Specified in Its Charter)

 
| **Delaware**                                                     | **02-0447481**                           |
|------------------------------------------------------------------|------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) | (I.R.S. Employer  Identification Number) |
|                                                             |                                     |
| **8A Industrial Way, Salem, NH**                                 | **03079**                                |
| (Address of Principal  Executive Offices)                        | (Zip Code)                               |
|                                                             |                                     |
| **(603) 898-8900**                                               |
| (Registrant’s  Telephone Number Including Area Code)        |
|                                                             |

 

Indicate by check mark whether theRegistrant (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 (orfor 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.

YesýNo o

There were 12,758,225 shares of theCompany’s Common Stock, par value $0.01, outstanding on August 10, 2001.

----

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**OMTOOL, LTD. AND SUBSIDIARIES**

FORM10-QFor the Quarter Ended June 30, 2001CONTENTS

 

| Item  Number |
|--------------|
|              |   |
| PART  I:     | FINANCIAL  INFORMATION |
|         |   |   |
| Item  1.     | Consolidated  Financial Statements |
|         |   | Consolidated Balance Sheets  as of June 30, 2001 (Unaudited) and December 31, 2000 |
|         |   | Consolidated  Statements of Operations for the three months and six months ended June 30,  2001 and 2000 (Unaudited) |
|         |   | Consolidated  Statements of Cash Flows for the six months ended June 30, 2001 and 2000  (Unaudited) |
|         |   | Notes  to Consolidated Financial Statements |
|         |   |   |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|         |   |   |
| Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk |
|         |   |   |
| PART  II:    | OTHER  INFORMATION |
|         |   |   |
| Item  1.     | Litigation |
|         |   |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders |
|         |   |   |
| Item  6.     | Exhibits  and Reports on Form 8-K |
|         |   |   |
| Signatures   |

 

**OMTOOL,LTD. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**
|                                           | **June  30, 2001**                                                                     | ** **  | **December  31, 2000** | ** **  |
|------------------------------------------------|---------------------------------------------------------------------------------------------|-------------|-----------------------------|-------------|
|                                           | ****                                                                                        |        | ****                        |        |
|                                           | (Unaudited)                                                                                 |        |                        |        |
| **ASSETS**                                     |                                                                                        |        |                        |        |
| Current assets:                                |                                                                                        |        |                        |        |
|                                           | Cash and cash  equivalents                                                                  | $           | 14,999,642                  |        | $ | 14,599,350 |   |
|                                           | Short-term investments                                                                      | -           |                        | 3,283,708   |   |
|                                           | Accounts receivable,  less reserves of $745,000 and $980,000 in 2001 and 2000, respectively | 1,062,992   |                        | 1,563,373   |   |
|                                           | Prepaid expenses and  other current assets                                                  | 430,032     |                        | 506,187     |   |
|                                           | Deferred tax asset                                                                          | 1,225,350   |                        | 1,258,978   |   |
|                                           |                                                                                             |        |                             |        |
|                                           | Total current assets                                                                        | 17,718,016  |                        | 21,211,596  |   |
|                                           |                                                                                        |        |                        |        |
| Property and  equipment, net                   | 1,008,112                                                                                   |        | 1,236,745                   |        |
|                                           |                                                                                        |        |                        |        |
| Other assets, net                              | 13,962                                                                                      |        | 14,425                      |        |
|                                           |                                                                                             |        |                             |        |
|                                           |                                                                                        |        |                        |        |
|                                           | Total assets                                                                                | $           | 18,740,090                  |        | $ | 22,462,766 |   |
|                                           |                                                                                             |        |                             |        |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY** |                                                                                        | ** **  |                        | ** **  |
| Current liabilities:                           |                                                                                        |        |                        |        |
|                                           | Accounts payable                                                                            | $           | 736,131                     |        | $ | 633,413 |   |
|                                           | Accrued liabilities                                                                         | 1,704,281   |                        | 3,972,231   |   |
|                                           | Deferred revenue                                                                            | 3,231,194   |                        | 2,966,716   |   |
|                                           |                                                                                             |        |                             |        |
|                                           | Total current  liabilities                                                                  | 5,671,606   |                        | 7,572,360   |   |
|                                           |                                                                                             |        |                             |        |
|                                           |                                                                                        |        |                        |        |
| Contingencies (Note 5)                         |                                                                                        |        |                        |        |
|                                           |                                                                                        |        |                        |        |
| Stockholders’ equity:                     |                                                                                        |        |                        |        |
|                                           | Preferred Stock, $.01  par value —                                                     |        |                        |        |   |
|                                           | Authorized —  2,000,000; Issued and outstanding — none                            | -           |                        | -           |   |
|                                           | Common Stock, $.01 par  value —                                                        |        |                        |        |   |
|                                           | Authorized —  35,000,000; Issued — 13,009,372 shares                              | 130,093     |                   | 130,093     |     |
|                                           | Additional paid-in  capital                                                                 | 32,051,948  |                        | 32,074,193  |   |
|                                           | Accumulated deficit                                                                         | (18,276,430 | )                           | (16,443,798 | ) |
|                                           | Treasury Stock  (268,154 shares and 272,144 shares at cost respectively)                    | (748,761    | )                           | (778,636    | ) |
|                                           | Cumulative translation  adjustment                                                          | (88,366     | )                           | (91,446     | ) |
|                                           |                                                                                             |        |                             |        |
|                                           | Total stockholders’  equity                                                            | 13,068,484  |                        | 14,890,406  |   |
|                                           |                                                                                             |        |                             |        |
|                                           |                                                                                        |        |                        |        |
|                                           | Total liabilities and  stockholders’ equity                                            | $           | 18,740,090                  |        | $ | 22,462,766 |   |
|                                           |                                                                                             |        |                             |        |
|                                                |                                                                                             |             |                             |             |  |  |  |  |  |

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

**OMTOOL,LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS**(Unaudited)

 

|                                                  | **Three  months ended** **June 30,** |       | **Six  months ended** **June 30,** |       |
|-------------------------------------------------------|-------------------------------------------|------------|-----------------------------------------|------------|
|                                                  | ****                                      |       | ****                                    |       |
|                                                  | **2001**                                  | ** ** | **2000**                                | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                  | ****                                      |       | ****                                    |       | **** |   | **** |   |
| Revenues:                                             |                                      |       |                                    |       |   |   |   |   |
|                                                  | Software license                          | $          | 1,230,726                               |       | $ | 1,439,472 |   | $ | 2,571,274 |   | $ | 3,208,224 |   |
|                                                  | Hardware                                  | 714,881    |                                    | 947,237    |   | 1,550,867 |   | 1,899,848 |   |
|                                                  | Service and other                         | 1,855,011  |                                    | 1,634,011  |   | 3,592,913 |   | 3,440,061 |   |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
|                                                  | Total revenues                            | 3,800,618  |                                    | 4,020,720  |   | 7,715,054 |   | 8,548,133 |   |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
| Cost of revenues:                                     |                                      |       |                                    |       |   |   |   |   |
|                                                  | Software license                          | 81,497     |                                    | 70,445     |   | 220,789 |   | 185,187 |   |
|                                                  | Hardware                                  | 435,528    |                                    | 509,123    |   | 990,587 |   | 1,269,499 |   |
|                                                  | Service and other                         | 1,183,854  |                                    | 1,041,363  |   | 2,342,272 |   | 2,141,951 |   |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
|                                                  | Total cost of revenues                    | 1,700,879  |                                    | 1,620,931  |   | 3,553,648 |   | 3,596,637 |   |
|                                                  |                                      |            |                                    |            |   |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |   |
|                                                  | Gross profit                              | 2,099,739  |                                    | 2,399,789  |   | 4,161,406 |   | 4,951,496 |   |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
| Operating expenses:                                   |                                      |       |                                    |       |   |   |   |   |
|                                                  | Sales and marketing                       | 1,670,525  |                                    | 1,752,179  |   | 3,077,378 |   | 3,864,385 |   |
|                                                  | Research and  development                 | 840,371    |                                    | 986,867    |   | 1,697,811 |   | 2,141,275 |   |
|                                                  | General and  administrative               | 883,031    |                                    | 1,018,459  |   | 1,648,673 |   | 2,235,051 |   |
|                                                  | Gain on sale of AS/400  product line      | ---        |                                    | (150,000   | ) | --- |   | (150,000 | ) |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
|                                                  | Total operating  expenses                 | 3,393,927  |                                    | 3,607,505  |   | 6,423,862 |   | 8,090,711 |   |
|                                                  |                                      |            |                                    |            |   |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |   |
|                                                  | Loss from operations                      | (1,294,188 | )                                       | (1,207,716 | ) | (2,262,456 | ) | (3,139,215 | ) |
|                                                  |                                      |       |                                    |       |   |   |   |   |
| Interest income                                       | 178,260                                   |       | 277,335                                 |       | 429,824 |   | 523,680 |   |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
|                                                  | Net loss                                  | $          | (1,115,928                              | )          | $ | (930,381 | ) | $ | (1,832,632 | ) | $ | (2,615,535 | ) |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
| Net loss per share                                    |                                      |       |                                    |       |   |   |   |   |
|                                                  | Basic and Diluted                         | $          | (0.09                                   | )          | $ | (0.07 | ) | $ | (0.14 | ) | $ | (0.21 | ) |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                  |                                      |       |                                    |       |   |   |   |   |
| Weighted  average number of common shares outstanding |                                      |       |                                    |       |   |   |   |   |
|                                                  | Basic and Diluted                         | 12,747,484 |                                    | 12,720,561 |   | 12,748,750 |   | 12,678,280 |   |
|                                                  |                                           |       |                                         |       |  |   |  |   |
|                                                       |                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of these consolidated financialstatements*.*

 

**OMTOOL,LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)

|                                                  | **Six  months ended  June 30,**                                                   |        |       |
|-------------------------------------------------------|-----------------------------------------------------------------------------------|-------------|------------|
|                                                  | ****                                                                              |        |       |
|                                                  | **2001**                                                                          | ** **  | **2000**   | ** ** |   |
|                                                  | ****                                                                              |        | ****       |   |   |
| Cash Flows from  Operating Activities:                |                                                                              |        |       |   |   |
|                                                  | Net loss                                                                          | $           | (1,832,632 | ) | $ | (2,615,535 | ) |   |
|                                                  | Adjustments to  reconcile net loss to net cash used in operating activities– |        |       |   |   |   |
|                                                  | Depreciation and  amortization                                                    | 368,731     |       | 440,061 |   |   |
|                                                  | Deferred taxes                                                                    | 33,628      |       | - |   |   |
|                                                  | Changes in assets and  liabilities–                                          |        |       |   |   |   |
|                                                  | Accounts receivable                                                               | 473,492     |       | 1,681,869 |   |   |
|                                                  | Prepaid expenses and  other current assets                                        | 22,927      |       | 514,526 |   |   |
|                                                  | Accounts payable                                                                  | 113,513     |       | (475,593 | ) |   |
|                                                  | Accrued liabilities                                                               | (2,232,967  | )          | (636,295 | ) |   |
|                                                  | Deferred revenue                                                                  | 290,061     |       | (319,745 | ) |   |
|                                                  |                                                                              |             |       |  |   |   |
|                                                  |                                                                              |        |       |   |   |
|                                                  | Net cash used in  operating activities                                            | (2,763,248  | )          | (1,410,712 | ) |   |
|                                                  |                                                                              |             |       |  |   |   |
|                                                  |                                                                              |        |       |   |   |
| Cash Flows from  Investing Activities:                |                                                                              |        |       |   |   |
|                                                  | Purchases of property  and equipment                                              | (145,735    | )          | (273,241 | ) |   |
|                                                  | Purchases of  short-term investments                                              | (55,419,914 | )          | (100,796,038 | ) |   |
|                                                  | Proceeds from sale of  short-term investments                                     | 58,700,000  |       | 101,692,745 |   |   |
|                                                  | Decrease in other  assets                                                         | 463         |       | 143,266 |   |   |
|                                                  |                                                                              |             |       |  |   |   |
|                                                  |                                                                              |        |       |   |   |
|                                                  | Net cash provided by  investing activities                                        | 3,134,814   |       | 766,732 |   |   |
|                                                  |                                                                              |             |       |  |   |   |
|                                                  |                                                                              |        |       |   |   |
| Cash Flows from  Financing Activities:                |                                                                              |        |       |   |   |
|                                                  | Net proceeds from  issuance of common stock                                       | 17,895      |       | 256,172 |   |   |
|                                                  | Purchases of treasury  stock                                                      | (10,265     | )          | - |   |   |
|                                                  |                                                                              |             |       |  |   |   |
|                                                  | Net cash provided by  financing activities                                        | 7,630       |       | 256,172 |   |   |
|                                                  |                                                                              |             |       |  |   |   |
|                                                  |                                                                              |        |       |   |   |
| Foreign exchange  effect on cash                      | 21,096                                                                            |        | 3,555      |   |   |
|                                                  |                                                                                   |        |            |   |   |
|                                                  |                                                                              |        |       |   |   |
| Net increase  (decrease) in cash and cash equivalents | 400,292                                                                           |        | (384,253   | ) |   |
|                                                  |                                                                              |        |       |   |   |
| Cash and cash  equivalents, beginning of period       | 14,599,350                                                                        |        | 1,576,283  |   |   |
|                                                  |                                                                                   |        |            |   |   |
|                                                  |                                                                              |        |       |   |   |
| Cash and cash  equivalents, end of period             | $                                                                                 | 14,999,642  |       | $ | 1,192,030 |   |   |
|                                                  |                                                                                   |        |            |   |   |
|                                                       |                                                                                   |             |            |  |  |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

**OMTOOL,LTD. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**(Unaudited)

**(1)        Basis ofPresentation**

             Theaccompanying unaudited consolidated financial statements have been prepared byOmtool, Ltd. (the “Company” or “Omtool”) pursuant to the rules and regulationsof the Securities and Exchange Commission regarding interim financialreporting.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements and should be read inconjunction with the consolidated financial statements and notes thereto forthe year ended December 31, 2000. The accompanying consolidated financialstatements reflect all adjustments (consisting of normal recurring adjustments)which are, in the opinion of management, necessary for a fair presentation ofresults for the interim periods presented. The results of operations for the three month and six month periodsended June 30, 2001 are not necessarily indicative of the results to beexpected for the full fiscal year.

**(2)        Summary ofSignificant Accounting Policies**

*(a)        Cash and Cash Equivalents*

             TheCompany considers all highly liquid investments with maturities of three monthsor less at the time of purchase to be cash equivalents.  Cash equivalents consist primarily ofinvestments in money market funds.  Inaccordance with Statement of FinancialAccounting Standards (SFAS) No. 115, *Accountingfor Investments in Certain Debt and Equity Securities*, the Company’scash equivalents are classified as held-to-maturity securities.

* (b)       Foreign CurrencyTranslation*

             The Company translates thefinancial statements of its foreign subsidiaries in accordance with SFAS No.52, *Foreign Currency Translation*.  Accordingly, assets and liabilities are translatedat exchange rates in effect at the end of the period, and revenues and expensesare translated at the average exchange rates during the period.  All cumulative translation gains or lossesfrom the translation into the Company’s reporting currency are included as aseparate component of stockholders’ equity in the accompanying consolidatedbalance sheets.

* (c)       Net Loss per CommonShare*

             TheCompany reports earnings per share in accordance with SFAS No. 128.  Diluted weighted average shares outstandingfor the three and six months ended June 30, 2001 and June 30, 2000 exclude thepotential common shares related to 1,906,263 and 2,115,534, respectivelyoutstanding stock options because to include them would have been antidilutivefor the periods presented.

 

 

**(3)        ComprehensiveIncome (Loss)**

             The components of the Company’scomprehensive loss are as follows:

 

|   |                                      | **Three  months ended  June 30,** |       | **Six  months ended****June  30,** |       |
|--------|-------------------------------------------|-----------------------------------|------------|------------------------------------|------------|
|   |                                      | ****                              |       | ****                               |       |
|   |                                      | **2001**                          | ** ** | **2000**                           | ** ** | **2001** | ** ** | **2000** | ** ** |
|   |                                      | ****                              |       | ****                               |       | **** |   | **** |   |
|   | Net loss                                  | $                                 | (1,115,928 | )                                  | $          | (930,381 | ) | $ | (1,832,632 | ) | $ | (2,615,535 | ) |
|   | Foreign currency  translation adjustments | 1,413                             |       | (15,131                            | )          | 3,080 |   | (20,411 | ) |
|   |                                      |                                   |       |                                    |       |  |   |  |   |
|   | Comprehensive loss                        | $                                 | (1,114,515 | )                                  | $          | (945,512 | ) | $ | (1,829,552 | ) | $ | (2,635,946 | ) |
|   |                                      |                                   |       |                                    |       |  |   |  |   |

 

**(4)        Segment andGeographic Information**

               To date, theCompany has viewed its operations and manages its business as principally onesegment, software sales and associated services. As a result, the financialinformation disclosed herein, represents all of the material financial informationrelated to the Company's principal operating segment in accordance with SFASNo. 131.

             Total revenues from international sources wereapproximately $603,000 and $1.2 million for the three months and six monthsended June 30, 2001, respectively and $555,000 and $1.8 million for the threemonths and six months ended June 30, 2000, respectively. The Company's revenuesfrom international sources were primarily generated from customers located inEurope. The following table represents amounts relating to geographiclocations:

 

|   |                         | **Three  months ended  June 30,** |      | **Six  months ended  June 30,** |      |
|--------|------------------------------|-----------------------------------|-----------|---------------------------------|-----------|
|   |                         | ****                              |      | ****                            |      |
|   | Total revenues (1)           | **2001**                          |      | **2000**                        |      | **2001** |   | **2000** |   |
|   |                         | ****                              |      | ****                            |      | **** |   | **** |   |
|   | United States                | 3,197,426                         |      | $                               | 3,465,501 |   | $ | 6,514,782 |   | $ | 6,748,373 |   |
|   | United Kingdom               | 298,464                           |      | 200,916                         |      | 508,324 |   | 866,176 |   |
|   | Other North America          | 191,247                           |      | 234,349                         |      | 456,857 |   | 447,565 |   |
|   | Other Europe                 | 99,953                            |      | 86,582                          |      | 159,307 |   | 380,701 |   |
|   | Latin America /  Pacific Rim | 3,003                             |      | 11,870                          |      | 20,027 |   | 23,340 |   |
|   | Middle East / Far East       | 10,526                            |      | 20,007                          |      | 47,022 |   | 72,037 |   |
|   | Australia                    | -                                 |      | 1,495                           |      | 8,735 |   | 9,941 |   |
|   |                         |                                   |      |                                 |      |  |   |  |   |
|   |                         | $                                 | 3,800,618 |                            | $         | 4,020,720 |   | $ | 7,715,054 |   | $ | 8,548,133 |   |
|   |                         |                                   |      |                                 |      |  |   |  |   |
|        |                              |                                   |           |                                 |           |  |  |  |  |  |  |  |  |

 

|   |                  | **June  30,** |       | **December  31,** |   |
|--------|-----------------------|---------------|------------|-------------------|--------|
|   | Long-lived assets (2) | **2001**      | ** ** | **2000**          |   |
|   |                  | ****          |       | ****              |   |
|   | North America         | $             | 945,445    |              | $      | 1,154,219 |   |
|   | Europe                | 76,629        |       | 96,951            |   |
|   |                  |               |       |                   |   |
|   |                  | $             | 1,022,074  |              | $      | 1,251,170 |   |
|   |                  |               |       |                   |   |

----

| (1) | Revenues are  attributed to geographic regions based on location of customer.                                                                                   |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Long-lived assets  include all long-term assets except those specifically excluded under SFAS  No. 131 such as deferred income taxes and financial instruments. |

 

**(5)        Litigation**

             On October 5, 1999, a purportedsecurities class action complaint was filed against the Company and certainofficers and directors of the Company. As of March 31, 2001, the Company reached an agreement-in-principle tosettle the lawsuit.  On June 28, 2001,the parties filed a definitive settlement agreement with the United StatesDistrict Court for the District of New Hampshire (the “Court”) and, on July 6,2001, the Court preliminarily approved the proposed terms of the definitivesettlement agreement and set October 23, 2001, as the date for the hearing onfinal approval of the settlement.  Theterms of the proposed $6 million settlement include a contribution by the Company'sdirectors' and officers' liability insurance carriers of $4.3 million, and acontribution by the Company of $1.7 million. The Company accrued its portion of the settlement as of December 31,2000.  The Company continues to believethat the lawsuit is without merit, and, in the event the settlement is notfinally approved by the Court, the Company intends to continue defending thelawsuit vigorously.

 

             
Item 2.

**MANAGEMENT’S DISCUSSION ANDANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

             Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the accompanying consolidated financial statementsfor the periods specified and the associated notes.  Further reference should be made to the Company’s Annual Reporton Form 10-K as filed with the Securities Exchange Commission on April 2, 2001.

**Overview**

             Omtool, Ltd. (“Omtool” or the“Company”) designs, develops, markets and supports open, client/server softwaresolutions that enable secure business-to-business electronic document exchange.The Company was incorporated in March 1991 and shipped its initialfacsimile software products in 1991. Omtool's Genidocs product family enablesusers throughout an enterprise to deliver confidential and secure e-mail overthe Internet. Omtool's Fax Sr., LegalFax and Genifax product familiesprovide users with an extensive, flexible feature set for transmitting andreceiving faxes, and improve an organization's management of its faxcommunications process by providing a suite of utility and control functions. Asignificant portion of the Company's revenues is derived from licensing therights to use its Fax Sr. software product directly to end-users andindirectly through resellers.

             Revenues from software licenses arerecognized upon shipment of the software if there are no significantpost-delivery obligations and collection of the resulting receivable is deemedprobable. Payments received in advance for services or products are initiallyrecorded as deferred revenue. The Company reserves for potential productreturns and allowances at the time of shipment.  Historically, the Company has adequately reserved for suchpotential returns and allowances.

             TheCompany has historically derived substantially all of its total revenues fromsales within North America. Sales outside of North America (primarily inEurope) represented approximately 10% and 16% of the Company's total revenuesfor the six months ended June 30, 2001 and 2000, respectively.

             TheCompany's United Kingdom subsidiary transacts business primarily in its localcurrency. The Company manages its foreign exchange exposure by monitoring itsnet monetary position using natural hedges of its assets and liabilitiesdenominated in local currencies. There can be no assurance that this policywill eliminate all currency exposure. Foreign currency exposure has not beenmaterial to the Company's financial position or results of operations to date.If the Company's business denominated in foreign currencies increases, theCompany may be required to use derivatives to hedge foreign currency exposure.

             Historically,the Company has marketed and sold its products principally through its directtelesales force. However, the Company continues to actively recruit VARs,systems integrators, resellers and distributors to expand its indirectdistribution channel. The Company intends to pursue sales opportunities via itssolution/reseller channel as well as focusing sales efforts on specific marketsegments in order to facilitate product acceptance. Sales through the Company'sindirect distribution channels represent approximately 43% and 63% of theCompany's total revenues for the six months ended June 30, 2001 and 2000,respectively.

 

**Results of Operations**

             Thefollowing table sets forth certain financial data for the periods indicated asa percentage of total revenues:

 
 Three  months ended  June 30, Six  months ended  June 30,     2001 2000 2001 2000      Revenues:         Software license32.4%35.8%33.3 %37.6% Hardware18.8 23.6 20.1 22.2  Service and other48.8 40.6 46.6 40.2        Total revenues100.0 100.0 100.0 100.0       Cost of revenues:         Software license2.1 1.7 2.9 2.1  Hardware11.5 12.7 12.8 14.9  Service and other31.2 25.9 30.4 25.1        Total cost of revenues44.8 40.3 46.1 42.1       Gross profit55.2 59.7 53.9 57.9      Operating expenses:         Sales and marketing44.0 43.6 39.9 45.2  Research and  development22.1 24.5 22.0 25.0  General and  administrative23.2 25.3 21.3 26.1  Gain on sale of AS/400  product---- (3.7)---- (1.7)       Total operating  expenses89.3 89.7 83.2 94.6       Loss from operations(34.1)(30.0)(29.3)(36.7)Interest income4.7 6.9 5.6 6.1               Net loss(29.4)%(23.1)%(23.7)%(30.6)%              Gross profit:         Software license93.4 %95.1%91.4 %94.2% Hardware39.1 46.3 36.1 33.2  Service and other36.2 36.3 34.8 37.7 
 

**Three Months Ended June 30, 2001 and 2000**

*Revenues*

*Total Revenues.*  TheCompany's revenues are currently derived from licensing fees of the Company'ssoftware products and from related sales of hardware and services. TheCompany's total revenues were $3.8 million and $4.0 million for thethree months ended June 30, 2001 and 2000, respectively, representing adecrease of 5%.

*Software License.*  TheCompany's software license revenues are derived primarily from the licensing ofthe Company's Fax Sr. product. Software license revenues were $1.2 million for the three monthsended June 30, 2001 and $1.4 million for the three months endedJune 30, 2000, representing a decrease of 15%.  Software license revenues accounted for 32% and 36% of totalrevenues for each respective period. The decline in software license revenues can be attributed to a numberof factors which include softness in demand for enterprise fax solutions alongwith longer customer purchasing cycles typical of Fortune 500 customers and adecline in the growth rate of the overall U.S. economy causing customers andprospective customers to defer technology purchases.  The decrease in software license revenue as a percentage of totalrevenues is primarily attributable to the decrease in software revenues.  The Company did not recognize a significantamount of revenue from its Genidocs products.

 

*Hardware.*  Hardware revenues are derived from theresale of third–party hardware products sold to the Company's customersin conjunction with the licensing of the Company's software. Hardware revenueswere $715,000 for the three months ended June 30, 2001 and $947,000 forthe three months ended June 30, 2000, representing a decrease of 25%.Hardware revenues accounted for 19% and 24% of total revenues for eachrespective period.  The decrease inhardware revenues was due primarily to the decrease in the number of softwaresales made in the second quarter of 2001 resulting in a decrease inaccompanying hardware sales.

*Service and Other.*  Service and other revenues are primarilycomprised of fees from maintenance contracts. Service and other revenues were$1.9 million for the three months ended June 30, 2001 and $1.6million for the three months ended June 30, 2000, representing an increase of14%. Service and other revenues accounted for 49% and 41% of total revenues foreach respective period. The increase in service and other revenues is due tothe increase in support renewals from the Company’s increased installedcustomer base, resulting in an increase in service and other revenues as apercentage of total revenues.

*Cost of Revenues*

*Software License.*  Cost of software license revenues consistsprimarily of the costs of sublicensing third–party software products,product media, and product duplication. Cost of software license revenues was $81,000 and $70,000 for the threemonths ended June 30, 2001 and 2000, respectively, representing 7% and 5%of software license revenues for each respective period.  Software license gross margin percentagesdecreased to 93% for the three months ended June 30, 2001 from 95% for thethree months ended June 30, 2000.  Thedecrease in gross margin is due to increased product duplication costs andincreased royalty payments due to increased sales of product with associatedroyalty payments.

*Hardware.*  Cost of hardware revenues consists primarilyof the costs of third–party hardware products. Cost of hardware revenueswas $436,000 and $509,000 for the three months ended June 30, 2001and 2000, respectively, representing 61% and 54% of hardware revenues for eachrespective period. The decrease in dollar amount for the cost of hardwarerevenues was due primarily to the decrease of hardware unit sales accompanyingthe Company's products.  The grossmargin percentage for hardware sales was 39% and 46% for the three months endedJune 30, 2001 and 2000, respectively. The gross margin decrease is due mainlyto a change in the mix of the particular hardware products sold.

*Service and Other.*  Cost of service and other revenues consistsprimarily of the costs incurred in providing telephone support as well as othermiscellaneous customer service–related expenses.  Cost of service and other revenues was$1.2 million and $1.0 million for the three months ended June 30, 2001 and2000, respectively, representing 64% of service and other revenues for each respectiveperiod.  The gross margin percentage forservice and other revenues was 36% for each of the three month periods endedJune 30, 2001 and 2000. The increase in dollar amount of cost of service andother revenues was due primarily to the severance costs associated with the eliminationof several positions within the department.

*Operating Expenses*

*Sales and Marketing.*  Salesand marketing expenses consist primarily of employee salaries, benefits,commissions, and associated overhead costs, and the cost of marketing programssuch as advertisements, direct mailings, public relations, trade shows,seminars, and related communication costs. Sales and marketing expenses were $1.7 million and$1.8 million for the three months ended June 30, 2001 and 2000,respectively, or 44% of total revenues for each respective period.  Thedecrease in dollar amount was due to a decrease in commissions paid as a resultof lower sales levels as well as fewer marketing expenditures during the firstsix months of 2001.  The Company expectssales and marketing expenses are likely to increase in absolute terms due tonew product introductions.

*Research and Development.*Research and development expenses include expenses associated with thedevelopment of new products, enhancements of existing products and qualityassurance activities, and consist primarily of employee salaries, benefits, andassociated overhead costs as well as consulting expenses and the cost ofsoftware development tools. Research and development expenses were $840,000 forthe three months ended June 30, 2001 and $987,000 for the three months endedJune 30, 2000, representing 22% and 25% of total revenues for each respectiveperiod.  The decrease in the dollar amount and in the expenses as a percentageof revenue was due to a fewer number of employees in the research anddevelopment department.  TheCompany expects research and development expenses to remain consistent inabsolute terms.

 

*General and Administrative.*  General and administrative expenses consistprimarily of employee salaries and benefits for administrative, executive andfinance personnel and associated overhead costs, as well as consulting,accounting and legal expenses. General and administrative expenses were$883,000 and $1.0 million for the three months ended June 30, 2001 and2000, respectively, or 23% and 25% of total revenues for each respectiveperiod. The decrease in dollar amount and the expenses as a percentage of totalrevenues is due to the fewer numbers of executive level personnel and theoverhead costs associated with supporting such personnel.  The Company expects general andadministrative expenses to remain consistent in absolute terms.

*Gain on Sale of AS/400 Product Line.*OnJanuary 4, 2000, the Company sold to International Presence PLC (“IPP”) certainbusiness assets consisting of intellectual property, goodwill, customer lists,customer contracts, equipment and other assets related to the Company’ssoftware products and third party hardware products for facsimile and othercommunication applications for the IBM AS/400 product line which were acquiredin the Company’s acquisition of CMA Ettworth. The Company recorded a loss of$2.7 million related to this sale as of December 31, 1999. During the secondquarter of 2000, the Company received a payment of $150,000 from the buyer andrecorded that amount as a gain in the quarter ended June 30, 2000.

*Interest Income.*  Interest incomeconsists principally of interest income earned on excess cash.  Interest income was $178,000 for the threemonths ended June 30, 2001 and $277,000 for the three months endedJune 30, 2000.  The decrease is dueto changes in principal balances and interest rates.

**Six Months Ended June 30, 2001 and 2000**

*Revenues*

*Total Revenues*.  The Company’s total revenues were $7.7million and $8.5 million for the six months ended June 30, 2001 and 2000,respectively, representing a decrease of 10%.

*Software License. *Softwarelicense revenues were $2.6 million for the six months ended June 30, 2001 and$3.2 million for the six months ended June 30, 2000, representing a decrease of20%.  Software license revenuesaccounted for 33% and 38% of total revenues for each respective period. Thedecline in software license revenue can be attributed to a number of factorswhich include softness in demand for enterprise fax solutions, along withlonger customer purchasing cycles typical of Fortune 500 customers and adecline in the growth rate of the overall U.S. economy causing customers andprospective customers to defer technology purchases. The decrease in softwarelicense revenue as a percentage of total revenues is primarily attributable tothe decrease in software revenues.

*Hardware. *Hardwarerevenues were $1.6 million for the six months ended June 30, 2001 and $1.9million for the six months ended June 30, 2000, representing a decrease of18%.  Hardware revenues accounted for20% and 22% of total revenues for each respective period.  The decrease in hardware revenues was due primarilyto the decrease in the number of software sales made in the six months endedJune 30, 2001 resulting in a decrease in accompanying hardware sales.

*Service and Other. *Serviceand other revenues were $3.6 million for the six months ended June 30, 2001 and$3.4 million for the six months ended June 30, 2000, representing an increaseof 4%.  Service and other revenuesaccounted for 47% and 40% of total revenues for each respective period. Theincrease in service and other revenues is due to the increase in supportrenewals from the Company’s increased installed customer base. The increase inservice and other revenues as a percentage of total revenues is due to thedecrease in software and hardware revenues for the six months ended June 30,2001.

*Cost of Revenues*

*Software License*.  Cost of software license revenues was$221,000 and $185,000 for the six months ended June 30, 2001 and 2000,respectively, representing 9% and 6% of software license revenues for eachrespective period, resulting in respective gross margins of 91% and 94%. Theincrease in dollar amount and the decrease in gross margin is attributable toincreased product duplication costs and increased royalty payments due toincreased sales of product with associated royalty payments.
**Hardware.*  Cost of hardware revenues was $991,000 and$1.3 million for the six months ended June 30, 2001 and 2000, respectively,representing 64% and 67% of hardware revenues for each respective period.  The decrease in dollar amount for the costof hardware revenues for the six months ended June 30, 2001 was due primarilyto the decrease of hardware unit sales accompanying the Company’sproducts.  The gross margin percentagefor hardware sales was 36% for the six months ended June 30, 2001 compared to33% in the same period in 2000.  Theincrease in gross margin is due mainly to a change in the mix of the particularhardware products sold.

*Service and Other.*  Cost of service and other revenue was $2.3million and $2.1 million for the six months ended June 30, 2001 and 2000,respectively, representing 65% of service and other revenues versus 62% for thesame period last year. The gross margin percentage for service and otherrevenues decreased to 35% from 38% for the six month periods ended June 30,2001 and 2000, respectively.  Theincrease in dollar amount of cost of services and the decrease in gross marginduring the period was due primarily to the severance costs associated with theelimination of several positions within the department.

*Operating Expenses*

*Sales and Marketing.*  Sales and marketing expenses were $3.1million and $3.9 million for the six months ended June 30, 2001 and 2000,respectively, or 40% and 45% of total revenues for each respective period.  The decrease in dollar amount and thedecrease in the percentage of total revenues was due to a decrease in spendingassociated with marketing programs and fewer number of employees in the salesand marketing departments due to Company restructurings, along with lowercommissions paid as a result of lower sales levels.

*Research and Development.*  Research and development expenses were $1.7million and $2.1 million for the six months ended June 30, 2001 and 2000,respectively, or 22% and 25% of total revenues for each respective period.  The decrease in dollar amount and as apercentage of revenue is due to the fewer number of employees in the researchand development department.

*General and Administrative.*  General and administrative expenses were$1.6 million and $2.2 million for the six months ended June 30, 2001 and 2000,respectively, or 21% and 26% of total revenues for each respective period.  The decrease in dollar amount and expensesas a percentage of total revenues was primarily attributable to the fewernumber of executive level personnel and the overhead costs associated withsupporting such personnel.

*Gain on Sale of AS/400 Product Line.*  As noted above, the gain on sale of theAS/400 product line recognized in the quarter ended June 30, 2000 representsthe payment received from IPP in April 2000.

*Interest Income, Net.*Interest income consists principally of interest income earnedon excess cash. Interest income was$430,000 for the six months ended June 30, 2001 and $524,000 for the six monthsended June 30, 2000.  The decrease isdue to changes in principal balances and interest rates.

**Liquidity and Capital Resources**

             Since1996, the Company has financed its operations primarily through cash flow fromoperations, the private sales of preferred stock and the Company's initialpublic offering of Common Stock completed in August 1997. At June 30,2001, the Company had cash and cash equivalents of $15.0 million and workingcapital of $12.0 million.

             TheCompany's operating activities used cash of $2.8 million and $1.4 million forthe six months ended June 30, 2001 and 2000, respectively. Net cash usedduring the six months ended June 30, 2001 consisted primarily of a netloss from operations and a decrease in accrued liabilities offset bydepreciation and amortization and a decrease to accounts receivable.   Net cash provided during the six monthsended June 30, 2000 resulted from a net loss from operations and decreases inaccounts payable, accrued liabilities and deferred revenue offset bydepreciation and amortization and a decrease in accounts receivable and prepaidand other current assets.

             Investingactivities provided cash of $3.1 million and $767,000 during the six monthsended June 30, 2001 and 2000, respectively. During the six months ended June 30, 2001 and 2000, the principaluses were purchases of short-term investments and purchases of property andequipment, offset by proceeds from the sale of short-term investments.

 

             Financingactivities provided cash of $8,000 and $256,000 for the six months ended June30, 2001 and 2000, respectively, due primarily to the net proceeds from theissuance of common stock.

             AtJune 30, 2001, the Company did not have any material commitments forcapital expenditures.

             Subjectto the factors discussed below, the Company believes that the existing cashbalances, short-term investments and cash generated from operations will besufficient to finance the Company's operations for the next twelve months.Although operating activities may provide cash in certain periods, to theextent the Company grows in the future, its operating and investing activitiesmay use cash. There can be no assurance that any necessary additional financingwill be available to the Company on commercially reasonable terms, or at all.

**Recent Accounting Pronouncements**

             InJuly 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,*BusinessCombinations*.  SFAS No. 141requires all business combinations initiated after June 30, 2001 to beaccounted for using the purchase method. This statement is effective for all business combinations initiatedafter June 30, 2001.

             InJuly 2001, the FASB issued SFAS No. 142, *Goodwill and Other Intangible Assets*.  This statement applies to goodwill andintangible assets acquired after June 30, 2001, as well as goodwill andintangible assets previously acquired. Under this statement goodwill as well as certain other intangibleassets, determined to have an infinite life, will no longer be amortized,instead these assets will be reviewed for impairment on a periodic basis. Thisstatement is effective for the Company for the first quarter in the fiscal yearended December 2002. Management is currently evaluating the impact that thisstatement will have on the Company's financial statements.

**Certain Factors Affecting Future Operating Results**

             TheCompany operates in a rapidly changing environment that involves a number of risks,some of which are beyond the Company's control. The discussion highlights someof the risks which may affect future operating results.

             Informationprovided by the Company from time to time including statements in thisForm 10-Q which are not historical facts are so-called "forward–lookingstatements" that involve risks and uncertainties, made pursuant to thesafe harbor provisions of the Private Securities Litigation Reform Act of 1995.In particular, statements contained in Management's Discussion and Analysis ofFinancial Condition and Results of Operations which are not historical facts(including, but not limited to, statements concerning the plans and objectivesof management; expectations for sales and marketing, research and developmentand general and administrative expenses; developments relating to the Company'sproduct and service offerings, markets and acquisitions; anticipated trends inthe Company's business; and the Company's expected liquidity and capitalresources) may constitute forward–looking statements. These forward–lookingstatements are neither promises nor guarantees, but are subject to risk anduncertainties that could cause actual results to differ materially from theexpectations set forth in the forward–looking statements. Factors thatmay cause such differences include, but are not limited to, the factorsdiscussed below, and the other risks discussed from time to time in theCompany's other filings with the Securities and Exchange Commission.

*Product Concentration.*  To date, muchof the Company's revenues have been attributable to licenses of the Company'sfacsimile based enterprise solutions and related products and services. TheCompany expects such products and related services to continue to account formuch of the Company's future revenues. However, recently the amount of revenuesattributable to the licenses of such products has declined and there can be noassurances that such decline will not continue. Furthermore, in June 2000,the Company changed its strategic focus to the development of securebusiness-to-business electronic document exchange solutions. The Companyintroduced its secure business-to-business electronic document exchangeproducts, Genidocs and Genifax, to the market in the fourth quarter of 2000.  To date, the Company has not recognized asignificant amount of revenues from its Genidocs and Genifax products. TheCompany expects that Genidocs may account for an increasing portion of futurerevenues. However, there can be no assurances that Genidocs will be financiallysuccessful or result in any significant revenues.   Factors adversely affecting the pricing of or demand for suchproducts, such as competition or technological change, could have a materialadverse effect on the Company's business, financial condition and results ofoperations. The Company's prospects must be considered in light of the risksand difficulties frequently encountered by companies dependent upon operatingrevenues from a new product line in an emerging and rapidly evolving market.

 

*NewProducts and Technological Change.*  The markets forthe Company's products are relatively new and are characterized by rapidtechnological change, evolving industry standards, changes in end-userrequirements and frequent new product introductions and enhancements. TheCompany's future success will depend upon its ability to enhance its currentproducts and to develop and introduce new products that keep pace withtechnological developments and respond to evolving end-user requirements. Therecan be no assurance that the Company will be successful in developing andmarketing new products or product enhancements on a timely basis, or that newproducts or product enhancements developed by the Company, such as Genidocs andGenifax, will achieve market acceptance. The introduction of products embodyingnew technologies and the emergence of new industry standards could render theCompany's existing products obsolete and unmarketable. From time to time, theCompany and its competitors may announce new products, capabilities ortechnologies that have the potential to replace or shorten the life cycle ofthe Company's existing product offerings. There can be no assurance thatannouncements of new product offerings by the Company or its competitors willnot cause customers to defer or forego the licensing of the Company's existingor planned products and have a material adverse effect on the Company'sbusiness, financial condition and results of operations.

 *The MarketRisks for Secure Business-to-Business Electronic Document Exchange Solutions.*  The market for Genidocs, the Company'ssecure business-to-business electronic document exchange solution is new andevolving rapidly. The Company's success will depend upon the adoption and useby current and potential customers of secure business-to-business electronicdocument exchange solutions. The Company's success will also depend uponacceptance of its technology as the standard for providing these solutions. Theadoption and use of the Company's secure business-to-business electronicdocument exchange solution will involve changes in the manner in whichbusinesses have traditionally exchanged information. The Company's ability toinfluence usage of its secure business-to-business electronic document exchangesolution by customers is limited. The Company intends to spend considerableresources educating potential customers about the value of securebusiness-to-business electronic document exchange solutions. It is difficult toassess, or to predict with any assurance, the present and future size of thepotential market for the Company's secure business-to-business electronicdocument exchange solution, or its growth rate, if any. Moreover, the Companycannot predict whether the Company's secure business-to-business electronicdocument exchange solution will achieve any market acceptance. Any futureproducts or future product enhancements that are not favorably received bycustomers may not be profitable and, furthermore, could damage the Company'sreputation or brand name.

 *Dependenceon Fax Sr. NT and the Windows NT Environment.*  The Company currently derives a substantialportion of its revenues from licenses of Fax Sr. NT and related servicesand resale of related hardware. Continued market acceptance of Fax Sr. NTis critical to the Company's future success. As a result, any decline in demandfor or failure to maintain broad market acceptance of Fax Sr. NT as aresult of competition, technological change or otherwise, would have a materialadverse effect on the Company's business, financial condition and results ofoperations. The Company's future financial performance will depend in largepart 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 inmarketing 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 systemwill not be replaced by a new or enhanced operating system. There can be no assurancethat the Company will be successful in developing products for new or enhancedoperating systems such as Windows 2000 or Windows XP, or that such systems willnot obviate the need for the Company's products. If any new or enhancedoperating system gains widespread use and the Company fails to develop andprovide its products for this operating system on a timely basis, the Company'sbusiness, financial condition and results of operations would be materiallyadversely affected.

 *Dependenceon Client/Server Environment.* The Company's enterprise, client/server facsimile software products areintended to help organizations efficiently manage their facsimilecommunications, utilizing a client/server computing environment. The client/servermarket is relatively new and there can be no assurance that organizations willmove away from the use of stand–alone fax machines or continue to adoptclient/server environments, or that customers of the Company that have begunthe migration to a client/server environment will broadly implement this modelof computing. The Company's future financial performance will depend in largepart on continued growth in the market for client/server applications, which inturn will depend in part on the growth in the number of organizations implementingclient/server computing environments. There can be no assurance that thesemarkets will continue to grow or that the Company will be able to respondeffectively to the evolving requirements of these markets. If the market forclient/server application products and services does not grow in the future, orgrows more slowly than the Company anticipates, or if the Company fails torespond effectively to evolving requirements of this market, the Company'sbusiness, financial condition and results of operations would be materiallyadversely affected.

 

 *FutureOperating Results Uncertain.* The Company was incorporated in March 1991 and shipped its initialfacsimile software products in 1991. The Company does not believe that priorgrowth rates are sustainable or indicative of future operating results. In theyears ending December 31, 1999 and 2000, and the two quarters ended June30, 2001 the Company had operating losses and decreasing revenues. There can beno assurance that the Company will be able to increase its level of revenues orreturn to profitability in the future, as the Company's limited operatinghistory makes the prediction of future operating results difficult orimpossible. Increases in operating expenses, primarily sales and marketing, areexpected to continue and, together with pricing pressures and a decline in thegrowth rate of the overall U.S. economy, may result in a decrease in operatingincome and operating margin percentage. The Company's ability to improve itsoperating results will depend upon, among other things, its ability to increasesales of the Company's secure business-to-business electronic document exchangesolutions and client/server facsimile solutions to new customers as well asincreased product penetration into existing customers. As the Company commencedits strategic expansion into secure business-to-business electronic documentexchange solutions market in the fourth quarter of 2000, the Company haslimited financial and operating data and a limited operating history relevantto these solutions. Accordingly, it is difficult to evaluate the prospects forthe level of acceptance of the Company's secure business-to-business electronicdocument exchange solutions. In addition, the Company's future operatingresults are subject to the risk that a definitive class action shareholdersettlement agreement may not be finally approved by the federal district courtin New Hampshire, and, in the event of continued litigation, the possibility ofoutcomes adverse to the Company. Future operating results will depend on manyother factors, including, without limitation, the degree and rate of growth ofthe markets in which the Company competes, the level of acceptance of theWindows NT and Windows 2000 operating systems, the level of product and pricecompetition, the ability of the Company to establish strategic relationshipsand develop and market new and enhanced products and to control costs, theability of the Company to expand its direct telesales force and indirectdistribution channels both domestically and internationally, and the ability ofthe Company to attract and retain key personnel. As a result, it is possiblethat in the future the Company's operating results will be below theexpectations of public market analysts and investors. In such event, the priceof the Company's Common Stock would likely be materially adversely affected.

*Risks Associated withDelisting From the Nasdaq National Market*.  In June, 2001 the Nasdaq National Marketinformed the Company that its common stock had traded for 30 consecutivetrading days below the minimum bid price and that the Company has untilSeptember 10, 2001 to demonstrate compliance with the Nasdaq National Marketlisting requirements by maintaining a bid price for its common stock of atleast $1.00 for a minimum of ten consecutive trading days.  If compliance is not regained by September10, 2001, the Company will be informed by the Nasdaq National Market that itwill be delisted.  However, if theCompany requests and is granted a hearing with the Nasdaq ListingQualifications Panel, the Company’s delisting will be stayed pending theoutcome of the hearing.  There can be noassurances that the outcome of such a hearing would result in the Company’scontinued listing on the Nasdaq National Market.  The delisting of the Company’s common stock from the NasdaqNational Market may materially impair the ability of stockholders to buy andsell shares of the Company’s common stock and could have an adverse effect onthe market price of, and the efficiency of the trading market for, theCompany’s common stock.  In addition,the delisting of the Company’s common stock could significantly impair theCompany’s ability to raise capital should it desire to do so in thefuture.  The Company intends to take allreasonable measures to regain compliance. The Company’s listing on the Nasdaq National Market is highly importantto the Company.

 *IntenseCompetition.*  The securebusiness-to-business electronic document exchange solution and enterprise,client/server facsimile solution markets are intensely competitive and rapidlychanging and the Company expects competition to continue to increase. TheCompany believes its ability to compete successfully depends upon a number offactors 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 andnew product releases by the Company and its competitors; the emergence of newcomputer–based facsimile and secure business-to-business electronicdocument exchange solutions and standards; name recognition; the establishmentof strategic alliances with industry leaders; and industry and general economictrends.

 

             TheCompany may not be able to compete successfully against current and futurecompetitors in the secure business-to-business electronic document exchangesolutions market, and the competitive pressures the Company faces could harmits business and prospects. The Company's solutions provide an alternative totraditional mail and courier document delivery services, such as those offered,among others, by Federal Express, UPS or the U.S. Postal Service. The Company'ssolution is also an alternative to general purpose e-mail applications andservices. In the area of secure online document exchange, the Company'scompetition comes from secure online document exchange services providers. Someof these providers have products that are intended to compete with theCompany's products. Examples of these companies include Pitney Bowes, Sigaba,Tumbleweed, UPS, the U.S. Postal Service and Zixit. In addition, many companieswith which the Company does not presently compete may become competitors in thefuture. This could occur either through the expansion of the Company's productsor through other companies' product development in the area of secure onlinecommunication. These companies could include Documentum, Hummingbird andiManage. Additionally, companies such as JetForm, PureEdge and Silanis maydevelop and deliver competitive digital signature products in the future.

             TheCompany competes directly with a large number of vendors of facsimile products,including providers of facsimile software products for client/server networkssuch as RightFAX (a subsidiary of Applied Voice Technology), Fenestrae, TopCallInternational and Biscom. The Company also competes with vendors offering arange of alternative facsimile solutions including outsourcing network facsimilesolutions, such as Mail.com; operating systems containing facsimile anddocument transmission features; low-end fax modem products; desktop faxsoftware; single–platform facsimile software products; and customizedproprietary software solutions. In addition, providers of operating systems orbusiness software applications may bundle competitive facsimile solutions aspart of their broader product offerings.

             Manyof the Company's competitors and potential competitors have longer operatinghistories and greater financial, technical, sales, marketing and otherresources, as well as greater name recognition and market acceptance of theirproducts and technologies than the Company. In addition, there are relativelylow barriers to entry in the markets in which the Company operates and intendsto operate, and new competition may arise either from expansion by establishedcompanies or from new emerging companies or from resellers of the Company'sproducts. There can be no assurance that current or potential competitors ofthe Company will not develop products comparable or superior in terms of priceand performance features to those developed by the Company, adapt more quicklythan the Company to new or emerging technologies and changes in marketopportunities or customer requirements, establish alliances with industryleaders, or take advantage of acquisition opportunities more readily than theCompany. In addition, no assurance can be given that the Company will not berequired to make substantial additional investments in connection with itsresearch, development, engineering, marketing, sales and customer serviceefforts in order to meet any competitive threat, or that such requiredinvestments will not have a material adverse effect on operating margins.Increased competition will result in reduction in market share, pressure forprice reductions and related reductions in gross margins, any of which couldmaterially adversely affect the Company's ability to achieve its financial andbusiness goals. There can be no assurance that in the future the Company willbe able to successfully compete against current and future competitors.

 *RisksAssociated with Acquisitions.* The Company may augment its internal growth with acquisitions ofbusinesses, products and technologies that could complement or expand theCompany's business. Certain of these businesses may be marginally profitable orunprofitable. In order to achieve anticipated benefits from these acquisitions,the Company must successfully integrate the acquired businesses with itsexisting operations, and no assurance can be given that the Company will besuccessful in this regard. The Company has limited experience in integratingacquired companies into its operations, in expanding the scope of operations ofrequired businesses, in managing geographically dispersed operations, and inoperating internationally. In the past the Company has incurred one-time costsand expenses in connection with acquisitions and it is likely that similarone-time costs and expenses may be incurred in connection with futureacquisitions. In addition, attractive acquisitions are difficult to identifyand complete for a number of reasons, including competition among prospectivebuyers and the possible need to obtain regulatory approval. There can be noassurance that the Company will be able to complete future acquisitions. Inorder to finance such acquisitions, it may be necessary for the Company toraise additional funds either through public or private financings, includingbank borrowings. Any financing, if available at all, may be on terms which arenot favorable to the Company. The Company may also issue shares of its commonstock to acquire such businesses, which may result in dilution to the Company'sexisting stockholders.

*Fluctuationsin Quarterly Results of Operations; Seasonality.*  The Company'squarterly revenues and results of operations have fluctuated significantly inthe past and will likely fluctuate significantly in the future. Causes of suchfluctuations have included and may include, among others, the demand for theCompany's products and services, the size and timing of orders, the number,timing and significance of new product announcements by the Company and itscompetitors, the ability of the Company to develop, introduce, market and shipnew and enhanced versions of the Company's current and planned products on atimely basis, the level of product and price competition, changes in operatingexpenses, changes in average selling prices and mix of the Company's products, changesin the Company's sales incentive strategy, the mix of direct and indirectsales, and general economic factors, including a decline in the growth rate ofthe overall U.S. economy. In addition, the sale of the Company's products ofteninvolves delays because customers have tended to implement the products on alarge scale and customers also must establish certain minimum hardwarecapabilities. The Company's products therefore often have a lengthy sales cyclewhile the customer evaluates and receives approvals for the purchase of theCompany's products. During such sales cycles, the Company may expendsubstantial funds and management effort yet receive no revenues. It may bedifficult to accurately predict the sales cycle of any large order. If one or morelarge orders fails to close as forecasted in a fiscal quarter, the Company'srevenues and operating results for such quarter could be materially adverselyaffected. Any one or more of these or other factors could have a materialadverse effect on the Company's business, financial condition and results ofoperations. The potential occurrence of any one or more of these factors makesthe prediction of revenues and results of operations on a quarterly basisdifficult and performance forecasts derived from such predictions unreliable.

 

             TheCompany's business has experienced and is expected to continue to experienceseasonality. The Company has historically had and expects to continue to haveweaker sales in the months of July and August which may have an adverse affecton third quarter sales. The Company believes that these fluctuations are causedprimarily by customer budgeting and purchasing patterns.

             Ingeneral, revenues are difficult to forecast because the market for securebusiness-to-business electronic document exchange and enterprise, client/serverfacsimile solutions software is evolving rapidly and the Company's sales cycle,from the customer's initial evaluation through purchase of licenses and therelated support services, varies substantially from customer to customer.License fee revenues in any quarter depend on orders received and shipped inthat quarter with an increasing percentage of orders in any quarter beingreceived in the last weeks of the quarter. License fee revenues from quarter toquarter are difficult to forecast, as no significant order backlog exists atthe end of any quarter because the Company's products typically are shippedupon receipt of customers' orders.

             Asubstantial portion of the Company's operating expense is related to personnel,facilities, equipment and marketing programs. The level of spending for suchexpense cannot be adjusted quickly and is therefore fixed in the short term.The Company's expense levels for personnel, facilities, equipment and marketingprograms are based, in significant part, on the Company's expectations offuture revenues on a quarterly basis. If actual revenue levels on a quarterlybasis are below management's expectations, results of operations are likely tobe adversely affected by a similar amount because a relatively small amount ofthe Company's expense varies with its revenue in the short term.

             Due toall of the foregoing factors, it is likely that in some future periods theCompany's results of operations will be below the expectations of securitiesanalysts and investors. In such event, the price of the Company's Common Stockwould likely be materially adversely affected.

 *Ability toManage Growth.*  The Companyhas expanded its operations and anticipates that expansion will be required inorder to address potential market opportunities. The Company anticipates thatit will continue to increase the size of its sales and marketing and researchand development as necessary. There can be no assurance that such expansionwill be successfully completed or that it will generate sufficient revenues tocover the Company's expenses. The Company will need to continue to attract andretain highly qualified technical, sales and managerial personnel. There can beno assurance that the Company will be able to retain or continue to hire suchpersonnel in the future. The inability of the Company to effectively expandoperations and manage growth, if any, could have a material adverse effect onthe Company's business, financial condition and results of operations.

 *Expansion ofIndirect Channels; Potential for Channel Conflict.*  The Company markets its products andservices directly through telesales and indirectly through marketing channelssuch as value-added resellers ("VARs"), systems integrators anddistributors. Although the Company has historically focused its efforts onmarketing through its telesales force, the Company is increasing resourcesdedicated to developing and expanding indirect marketing channels. There can beno assurance that the Company will be able to attract and retain a sufficientnumber of qualified VARs, systems integrators and distributors to marketsuccessfully the Company's products. In addition, there can be no assurancethat the Company's resellers will not develop, acquire or market computer-basedfacsimile products competitive with the Company's products. The failure toretain its VARs, systems integrators and distributors could have a materialadverse effect on the Company's business, financial condition and results of operations.

             Thedistributor agreements generally provide that either party may terminate theagreement without cause upon 30 days written notice to the other party.The Company also resells its products on a purchase order basis through otherVARs, systems integrators and distributors. Such relationships may beterminated by either party, at any time, and therefore, there can be noassurance that any VAR, systems integrator or distributor will continue torepresent the Company's products. The inability to retain certain VARs, systemsintegrators or distributors, or the development or marketing by VARs, systemsintegrators or distributors of competitive offerings, could have a materialadverse effect on the Company's business, financial condition and results ofoperations.

 

             Sellingthrough indirect channels may limit the Company's contacts with its customers.As a result, the Company's ability to accurately forecast sales, evaluatecustomer satisfaction and recognize emerging customer requirements may be hindered.The Company's strategy of marketing its products directly to end-users andindirectly through VARs, systems integrators and distributors may result indistribution channel conflicts. The Company's direct sales efforts may competewith those of its indirect channels and, to the extent different resellerstarget the same customers, resellers may also come into conflict with eachother. As the Company strives to expand its indirect distribution channels,there can be no assurance that emerging channel conflicts will not materiallyadversely affect its relationships with existing VARs, systems integrators ordistributors or adversely affect its ability to attract new VARs, systemsintegrators and distributors.

 *RisksAssociated with International Expansion.*  A key element of the Company's strategy is to continue toincrease its international sales. The Company expects to face competition fromsecure business-to-business electronic document exchange solutions and localfacsimile product providers in their native countries. To successfully expandinternational sales, the Company will need to recruit and retain additionalinternational resellers and distributors. There can be no assurance that theCompany will be able to maintain or increase international sales of itsproducts or that the Company's international distribution channels will be ableto adequately market, service and support the Company's products. Internationaloperations generally are subject to certain risks, including dependence onindependent resellers, fluctuations in foreign currency exchange rates,compliance with foreign regulatory and market requirements, variability offoreign economic conditions and changing restrictions imposed by United Statesexport laws. Additional risks inherent in the Company's international businessactivities generally include unexpected changes in regulatory requirements,tariffs and other trade barriers, costs of localizing products for foreigncountries, lack of acceptance of localized products in foreign countries,longer accounts receivable payment cycles, difficulties in managinginternational operations, difficulties in enforcing intellectual propertyrights and the burdens of complying with a wide variety of foreign laws.   The Company has a sales office outside ofthe United States. Such operations are subject to certain additional risks,including difficulties in staffing and managing such operations and potentiallyadverse tax consequences including restrictions on the repatriation ofearnings. There can be no assurance that such factors will not have a materialadverse 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 andthe Company has not engaged in any hedging transactions through the purchase ofderivative securities or otherwise.

 *Dependenceon Key Personnel.*  TheCompany's future performance depends, in significant part, upon the continuedservice of its key technical, sales and senior management personnel, none ofwhom is bound by an employment agreement or by a noncompetition agreement. Theloss of the services of one or more of the Company's executive officers orother key employees could have a material adverse effect on the Company'sbusiness, financial condition and results of operations. The Company's futuresuccess also depends on its continuing ability to attract and retain highlyqualified technical, sales and managerial personnel. Competition for suchpersonnel is intense, and the Company has experienced difficulty in recruitingqualified technical personnel. There can be no assurance that the Company willbe able to retain or continue to hire key technical, sales and managerialpersonnel in the future.

 

Item3.Quantitative and QualitativeDisclosures About Market Risk

 

**Derivative Financial Instruments, Other FinancialInstruments, and Derivative Commodity Instruments**

             Asof June 30, 2001, the Company did not participate in any derivativefinancial instruments or other financial and commodity instruments for whichfair value disclosure would be required under SFAS No. 107. All of theCompany's investments consist of money market funds and municipal bonds thatare carried on the Company's books at amortized cost, which approximates fairmarket value. Accordingly, the Company has no quantitative informationconcerning the market risk of participating in such investments.

**Primary Market Risk Exposures**

             TheCompany's primary market risk exposures are in the areas of interest rate riskand foreign currency exchange rate risk. The Company's investment portfolio ofcash equivalent and short-term investments is subject to interest ratefluctuations, but the Company believes this risk is immaterial due to theshort-term nature of these investments. The Company's exposure to currencyexchange rate fluctuations has been and is expected to continue to be modestdue to the fact that the operations of its United Kingdom subsidiary are almostexclusively conducted in its local currency. The United Kingdom subsidiaryoperating results are translated into U.S. dollars and consolidated forreporting purposes. The impact of currency exchange rate movements onintercompany transactions was immaterial for the quarter ended June 30,2001. Currently the Company does not engage in foreign currency hedgingactivities.

 

 

** **
**PART II****OTHER INFORMATION**
Item1. Litigation

             On October 5, 1999, a purportedsecurities class action complaint was filed against the Company and certainofficers and directors of the Company. As of March 31, 2001, the Company reached an agreement-in-principle tosettle the lawsuit.  On June 28, 2001,the parties filed a definitive settlement agreement with the United StatesDistrict Court for the District of New Hampshire (the “Court”) and, on July 6,2001, the Court preliminarily approved the proposed terms of the definitivesettlement agreement and set October 23, 2001, as the date for the hearing onfinal approval of the settlement.  Theterms of the proposed $6 million settlement include a contribution by theCompany's directors’ and officers’ liability insurance carriers of $4.3million, and a contribution by the Company of $1.7 million.  The Company accrued its portion of the settlementas of December 31, 2000.  The Companycontinues to believe that the lawsuit is without merit, and, in the event thesettlement is not finally approved by the Court, the Company intends tocontinue defending the lawsuit vigorously.

Item4. Submission of Matters to a Vote of Security Holders

             Theannual meeting of security-holders of the Company was held on May 30, 2001. Thefollowing nominee was re-elected as a Class I director to serve for a threeyear term or until his successor is elected and qualified.
 Nominee Total  Votes for Nominee Total  Votes Withheld  for Nominee    Richard  D. Cramer 10,612,317 20,700      
             Theterm of office for the following directors continued after the meeting:  Bruce R. Evans (Class II), William C. Styslinger,III (Class II), Robert L. Voelk (Class III) and Martin A. Schultz (Class III).Andrew E. Lietz and Arnold E. Ditri were appointed to the Board of Directors onJuly 11, 2001, as a Class I Director and a Class II Director, respectively.  Mr. Evans subsequently resigned from theBoard of Directors on July 12, 2001. 

             Theelection of Arthur Andersen LLP as independent auditors for the fiscal yearending December 31, 2001 was ratified, with 10,559,267 shares voting in favor,69,550 voting against, and 4,200 abstaining.
Item 6.Exhibits and Reports  on Form 8-K   (a)Exhibits     None    (b)Reports  on Form 8-K     None
 

OMTOOL,LTD.

Signatures

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
 OMTOOL,  LTD.    August  13, 2001By:  /s/ Kira A. Nelson          Kira  A. Nelson  Chief  Financial Officer, Secretary and Treasurer
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