** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 
| **(Mark One)** |
|----------------|
|           |
| **ý****** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

** **

**Forthe quarterly period ended June 30, 2002**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|-------------------------------------------------------------------------------------------------|

 

**Forthe transition periodfrom               to                **

 

**CommissionFile Number 0-22871**

 

**OMTOOL,LTD.**

(Exact Name of Registrantas 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 the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes ý    No o

 

There were 12,717,493 shares of the Company’s CommonStock, par value $0.01, outstanding on August 12, 2002.

 

 

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**OMTOOL, LTD. AND SUBSIDIARIES**

 

FORM 10-Q

For the Quarter EndedJune 30, 2002

CONTENTS

 
| Item Number                    |
|--------------------------------|
|                           |
| PART I: FINANCIAL  INFORMATION |
|                           |
| Item 1.                        | Consolidated Financial  Statements |
|                           | Consolidated Balance Sheets  as of June 30, 2002 (Unaudited) and December 31, 2001 |
|                           | Consolidated Statements  of Operations for the three months and six months ended June 30, 2002 and  2001 (Unaudited) |
|                           | Consolidated  Statements of Cash Flows for the six months ended June 30, 2002 and 2001  (Unaudited) |
|                           | Notes to  Consolidated Financial Statements |
|                           |
| Item  2.                       | Management’s  Discussion and Analysis of Financial Condition and Resultsof Operations |
|                           |
| Item  3.                       |  Quantitative and Qualitative Disclosures  About Market Risk |
|                           |
| PART II: OTHER INFORMATION     |
|                           |
| Item 4.                        | Submissions of Matters to a Vote of Security  Holders |
|                           |
| Item 6.                        | Exhibits and  Reports on Form 8-K |
|                           |
| Signatures                     |
|                                |  |  |

 

2

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**PART I:  FINANCIAL INFORMATION**

Item 1.  Financial Statements

 

**OMTOOL, LTD. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                       |   | **June 30,  2002** |       | **December  31,  2001** |       |
|------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                       |   | **(Unaudited)**    | ** ** |                    | ** ** |
| **ASSETS**                                                                                                 |   |               |       |                    |       |
| Current assets:                                                                                            |   |               |       |                    |       |
| Cash and cash  equivalents                                                                                 |   | $                  | 10,429,631 |                    | $          | 11,194,118 |   |
| Short-term  investments                                                                                    |   | —             |       | 1,296,750               |       |
| Accounts  receivable, less reserves of $716,000 at June 30, 2002 and $630,000 at  December 31, 2001        |   | 1,365,181          |       | 1,867,332               |       |
| Inventory –  finished goods                                                                           |   | 292,637            |       | 168,039                 |       |
| Prepaid expenses  and other current assets                                                                 |   | 424,921            |       | 613,662                 |       |
| Deferred tax  asset                                                                                        |   | —             |       | 1,225,350               |       |
| Total current  assets                                                                                      |   | 12,512,370         |       | 16,365,251              |       |
|                                                                                                       |   |               |       |                    |       |
| Property and equipment, net                                                                                |   | 758,333            |       | 836,366                 |       |
|                                                                                                       |   |               |       |                    |       |
| Other assets,  net                                                                                         |   | 13,962             |       | 13,962                  |       |
|                                                                                                       |   |               |       |                    |       |
| Total assets                                                                                               |   | $                  | 13,284,665 |                    | $          | 17,215,579 |   |
|                                                                                                       |   |               | ** ** |                    | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                             |   |               |       |                    |       |
| Current  liabilities:                                                                                      |   |               |       |                    |       |
| Accounts payable                                                                                           |   | $                  | 578,448    |                    | $          | 733,290 |   |
| Accrued  liabilities                                                                                       |   | 2,821,676          |       | 2,023,601               |       |
| Deferred revenue                                                                                           |   | 3,269,398          |       | 3,383,759               |       |
| Total current  liabilities                                                                                 |   | 6,669,522          |       | 6,140,650               |       |
|                                                                                                       |   |               |       |                    |       |
| 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                                                                                |   | 31,898,362         |       | 31,924,984              |       |
| Accumulated  deficit                                                                                       |   | (24,615,774        | )          | (20,152,079             | )          |
| Treasury Stock  (309,623 shares at cost at June 30, 2002 and 320,305 shares at cost at  December 31, 2001) |   | (701,910           | )          | (734,086                | )          |
| Cumulative  translation adjustment                                                                         |   | (95,628            | )          | (93,983                 | )          |
| Total  stockholders’ equity                                                                           |   | 6,615,143          |       | 11,074,929              |       |
|                                                                                                       |   |               |       |                    |       |
| Total  liabilities and stockholders’ equity                                                           |   | $                  | 13,284,665 |                    | $          | 17,215,579 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

3

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**OMTOOL, LTD. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

 
|                                                 |   | **Three  months ended  June 30,** |       | **Six months  ended  June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                                 |   | **2002**                          |       | **2001**                        |   | **2002** |   | **2001** |   |
| Revenues:                                            |   |                              |       |                            |   |   |   |   |   |
| Software license                                     |   | $                                 | 862,591    |                            | $      | 1,230,726 |   | $ | 2,141,412 |   | $ | 2,571,274 |   |
| Hardware                                             |   | 648,258                           |       | 714,881                         |   | 1,431,299 |   | 1,550,867 |   |
| Service and  other                                   |   | 1,780,658                         |       | 1,855,011                       |   | 3,681,420 |   | 3,592,913 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Total revenues                                       |   | 3,291,507                         |       | 3,800,618                       |   | 7,254,131 |   | 7,715,054 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Cost of  revenues:                                   |   |                              |       |                            |   |   |   |   |   |
| Software license                                     |   | 78,632                            |       | 81,497                          |   | 152,845 |   | 220,789 |   |
| Hardware                                             |   | 443,701                           |       | 435,528                         |   | 960,817 |   | 990,587 |   |
| Service and  other                                   |   | 829,127                           |       | 1,183,854                       |   | 1,599,177 |   | 2,342,272 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Total cost of  revenues                              |   | 1,351,460                         |       | 1,700,879                       |   | 2,712,839 |   | 3,553,648 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Gross profit                                         |   | 1,940,047                         |       | 2,099,739                       |   | 4,541,292 |   | 4,161,406 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Operating  expenses:                                 |   |                              |       |                            |   |   |   |   |   |
| Sales and  marketing                                 |   | 1,875,410                         |       | 1,670,525                       |   | 3,522,240 |   | 3,077,378 |   |
| Research and  development                            |   | 863,484                           |       | 840,371                         |   | 1,695,925 |   | 1,697,811 |   |
| General and  administrative                          |   | 1,398,586                         |       | 883,031                         |   | 2,659,143 |   | 1,648,673 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Total operating  expenses                            |   | 4,137,480                         |       | 3,393,927                       |   | 7,877,308 |   | 6,423,862 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Loss from  operations                                |   | (2,197,433                        | )          | (1,294,188                      | )      | (3,336,016 | ) | (2,262,456 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Interest income                                      |   | 46,490                            |       | 178,260                         |   | 97,671 |   | 429,824 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Loss before tax  provision                           |   | (2,150,943                        | )          | (1,115,928                      | )      | (3,238,345 | ) | (1,832,632 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Tax provision                                        |   | 1,225,350                         |       | —                          |   | 1,225,350 |   | — |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Net loss                                             |   | $                                 | (3,376,293 | )                               | $      | (1,115,928 | ) | $ | (4,463,695 | ) | $ | (1,832,632 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Net loss per  share                                  |   |                              |       |                            |   |   |   |   |   |
| Basic and  Diluted                                   |   | $                                 | (0.27      | )                               | $      | (0.09 | ) | $ | (0.35 | ) | $ | (0.14 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Weighted average number of common shares outstanding |   |                              |       |                            |   |   |   |   |   |
| Basic and  Diluted                                   |   | 12,704,249                        |       | 12,747,484                      |   | 12,702,599 |   | 12,748,750 |   |

 

The accompanying notesare an integral part of these consolidated financial statements*.*

 

4

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**OMTOOL, LTD. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(Unaudited)

 
|                                                                               |   | **Six months  ended  June 30,** |       |
|------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                               |   | **2002**                        |       | **2001** |   |
| Cash Flows from  Operating Activities:                                             |   |                            |       |   |   |
| Net loss                                                                           |   | $                               | (4,463,695 | ) | $ | (1,832,632 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities – |   |                            |       |   |   |
| Depreciation and  amortization                                                     |   | 267,470                         |       | 368,731 |   |
| Deferred taxes                                                                     |   | 1,225,350                       |       | 33,628 |   |
| Changes in  assets and liabilities—                                           |   |                            |       |   |   |
| Accounts  receivable                                                               |   | 514,457                         |       | 473,492 |   |
| Prepaid expenses  and other current assets                                         |   | 170,575                         |       | 856 |   |
| Inventory                                                                          |   | (123,911                        | )          | 22,070 |   |
| Accounts payable                                                                   |   | (161,332                        | )          | 113,514 |   |
| Accrued  liabilities                                                               |   | 806,478                         |       | (2,232,967 | ) |
| Deferred revenue                                                                   |   | (133,811                        | )          | 290,060 |   |
|                                                                               |   |                            |       |   |   |
| Net cash used in  operating activities                                             |   | (1,898,419                      | )          | (2,763,248 | ) |
|                                                                               |   |                            |       |   |   |
| Cash Flows from  Investing Activities:                                             |   |                            |       |   |   |
| Purchases of  property and equipment                                               |   | (186,509                        | )          | (145,697 | ) |
| Proceeds from  sale of short-term investments                                      |   | 1,296,750                       |       | 3,280,511 |   |
|                                                                               |   |                            |       |   |   |
| Net cash  provided by investing activities                                         |   | 1,110,241                       |       | 3,134,814 |   |
|                                                                               |   |                            |       |   |   |
| Cash Flows from  Financing Activities:                                             |   |                            |       |   |   |
| Net proceeds  from issuance of common stock                                        |   | 10,893                          |       | 17,895 |   |
| Purchases of  treasury stock                                                       |   | (5,339                          | )          | (10,265 | ) |
| Net cash  provided by financing activities                                         |   | 5,554                           |       | 7,630 |   |
|                                                                               |   |                            |       |   |   |
| Foreign exchange  effect on cash                                                   |   | 18,137                          |       | 21,096 |   |
|                                                                               |   |                            |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | (764,487                        | )          | 400,292 |   |
|                                                                               |   |                            |       |   |   |
| Cash and cash  equivalents, beginning of period                                    |   | 11,194,118                      |       | 14,599,350 |   |
|                                                                               |   |                            |       |   |   |
| Cash and cash  equivalents, end of period                                          |   | $                               | 10,429,631 |   | $ | 14,999,642 |   |

 

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

 

5

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**OMTOOL, LTD. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited)

 

**(1)     Basis of Presentation**

 

The accompanying unaudited consolidated financial statements have beenprepared by Omtool, Ltd. (the “Company” or “Omtool”) pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) regarding interimfinancial reporting.  Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements and should beread in conjunction with the consolidated financial statements and notesthereto for the year ended December 31, 2001 as filed with the SEC on March 22,2002. The accompanying consolidated financial statements reflect alladjustments (consisting of normal recurring adjustments) which are, in theopinion of management, necessary for a fair presentation of results for theinterim periods presented.  The results ofoperations for the three month and six month periods ended June 30, 2002 arenot necessarily indicative of the results to be expected for the full fiscalyear.

 

The Company’s financial results for the first half of 2002 declinedsubstantially from financial results for the first half of 2001, due primarilyto the general economic softness ininformation technology spending as reflected in a decrease in demand for enterprise softwaresolutions.  This decrease reflected thedeclining economic climate in the United States in the first half of 2002 ascompared to that of 2001 causing customers and prospective customers to defertechnology purchases. As a result of this decrease in demand, the Company’srevenues for the six months ended June 30, 2002 decreased 6% from revenuesfor the six months ended June 30, 2001, and the Company’s net lossworsened from $1.8 million for the six months ended June 30, 2001 to a netloss of $4.4 million for the six months ended June 30, 2002.  TheCompany has experienced declining revenues and increasing operating losses overan extended period of time.  Based uponthe current economic environment, general softness in information technologyspending, products that may not achieve market acceptance, and shortforecasting visibility, the Company cannot estimate that the financial andoperating performance, financial position or cash flow will improve over thenext twelve months.  As a resultof the losses incurred for the six months ended June 30, 2002 and theanticipation of a continuing decline in the United States economy, the Companyreduced its work force and office space in June 2002 to lower the overall costof operations by approximately $750,000 annually.  Although the Company’s operating cash flow for the six monthsended June 30, 2002 resulted in a use of cash of $1.9 million, theCompany’s cash and cash equivalents at June 30, 2002 were approximately$10.4 million.  The Companyanticipates that its balance of cash and cash equivalents will be approximately$9 million at the end of the third quarter of 2002. The Company believes thatits existing cash and cash equivalents will be sufficient to meet the Company’sworking capital and capital expenditures for at least the nexttwelve months.

 

 

***(2)***     **Net Loss per Common Share**

 

The Company reports earnings per share in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 128,*Earnings per Share*.  Diluted weighted average shares outstandingfor the three and six months ended June 30, 2002 and June 30, 2001 exclude thepotential common shares related to 2,409,013 and 1,906,263, respectively,outstanding stock options because to include them would have been antidilutivefor the periods presented.

 

 

**(3)      Income Taxes**

 

During the quarter ended June 30, 2002, the Company recorded anadditional valuation allowance of approximately $1.2 million against all of itsnet deferred tax assets. SFAS No. 109, *Accounting for Income Taxes*  requires a valuation allowance to berecorded against deferred tax assets when it is more likely than not that someor all of the deferred tax assets will not be realized. As a result of thedownturn in the economy, the Company has incurred significant and previouslyunanticipated losses in the first half of the current fiscal year, and the currentoutlook indicates that significant uncertainty will continue for the remainderof this fiscal year and into the next fiscal year. These cumulative losses,together with the Company’s prior losses, resulted in management’s decision inthe current period that it is more likely than not that all of its

 

6

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deferred taxassets will not be realized in the foreseeable future.  Accordingly, the remaining net deferred taxasset was written off in the second quarter of 2002.

 

The Company will continue to provide a valuation allowance against allof its net deferred tax assets until it returns to an appropriate level oftaxable income. The ultimate realization of these deferred tax assets dependsupon the Company’s ability to generate sufficient future taxable income. If theCompany is successful in generating sufficient future taxable income, theCompany will reduce the valuation allowance through a reduction in income taxexpense in the future.

 

***(4)    *****Comprehensive Loss**

 

The components of the Company’s comprehensiveloss are as follows:

 
|                                      |   | **Three  months ended  June 30,** |       | **Six months  ended  June 30,** |   |
|-------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                      |   | **2002**                          |       | **2001**                        |   | **2002** |   | **2001** |   |
| Net loss                                  |   | $                                 | (3,376,293 | )                               | $      | (1,115,928 | ) | $ | (4,463,695 | ) | $ | (1,832,632 | ) |
| Foreign currency  translation adjustments |   | (7,575                            | )          | 1,413                           |   | (1,645 | ) | 3,080 |   |
| Comprehensive  loss                       |   | $                                 | (3,383,868 | )                               | $      | (1,114,515 | ) | $ | (4,465,340 | ) | $ | (1,829,552 | ) |

 

***(5)     Segement and Geographic Information***

* *

To date, the Companyhas viewed its operations and manages its business as principally one segment,software sales and associated services. As a result, the financial informationdisclosed herein, represents all of the material financial information relatedto the Company’s principal operating segment in accordance with SFAS No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information*.

 

Total revenues frominternational sources were approximately $509,000 and $1.3 million for thethree months and six months ended June 30, 2002, respectively, and $603,000 and$1.2 million for the three months and six months ended June 30, 2001,respectively. The Company’s revenues from international sources were primarilygenerated from customers located in Europe. The following table representsamounts relating to geographic locations:

 
|                                |   | **Three  months ended  June 30,** |      | **Six months  ended  June 30,** |   |
|-------------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                                |   | **2002**                          |      | **2001**                        |   | **2002** |   | **2001** |   |
| Total revenues (1)                  |   |                              |      |                            |   |   |   |   |   |
| United States                       |   | $                                 | 2,782,918 |                            | $      | 3,197,426 |   | $ | 5,988,679 |   | $ | 6,514,782 |   |
| United Kingdom                      |   | 281,294                           |      | 298,464                         |   | 690,072 |   | 508,324 |   |
| Other North America                 |   | 140,595                           |      | 191,247                         |   | 330,680 |   | 456,857 |   |
| Other Europe                        |   | 64,454                            |      | 99,953                          |   | 148,115 |   | 159,307 |   |
| Latin America /  Pacific Rim        |   | 22,246                            |      | 3,003                           |   | 46,691 |   | 20,027 |   |
| Middle East /  Far East / Australia |   | —                            |      | 10,525                          |   | 49,894 |   | 55,757 |   |
|                                |   | $                                 | 3,291,507 |                            | $      | 3,800,618 |   | $ | 7,254,131 |   | $ | 7,715,054 |   |

 
|                   |   | **June 30,  2002** |       | **December  31,  2001** |       |
|------------------------|--------|--------------------|------------|------------------------------|------------|
| Long-lived  assets (2) |   |               | ** ** |                         | ** ** |
| North America          |   | $                  | 724,253    |                         | $          | 789,915 |   |
| Europe                 |   | 48,042             |       | 60,413                       |       |
|                   |   | $                  | 772,295    |                         | $          | 850,328 |   |

 

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(1)               Revenuesare attributed to geographic regions based on location of customer.

(2)               Long-livedassets include all long-term assets except those specifically excluded underSFAS No. 131 such as deferred income taxes and financial instruments.

 

7

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***(6)     Recently Issued Accounting Pronouncements***

 

In July 2002, theFinancial Accounting Standards Board issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*.  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*. SFAS No. 146 requires that a liability be recognized when it is incurredand should initially be measured and recorded at fair value.  This statement is effective for exit ordisposal activities that are initiated after December 31, 2002 and the adoptionis not expected to have a material impact on the consolidated financialstatements of the Company.

 

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**Item2.**

**MANAGEMENT’S DISCUSSIONAND ANALYSIS**

**OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with theaccompanying consolidated financial statements for the periods specified andthe associated notes.  Further referenceshould be made to the Company’s Annual Report on Form 10-K as filed with theSecurities Exchange Commission on March 22, 2002.

 

## **Overview**

 

Omtool, Ltd. is a leading provider of e-mail and fax-basedmessaging software that enables secure, confirmed document exchange betweenbusinesses. The Company was incorporated inMarch 1991 and shipped its initial facsimile software products in 1991.Omtool’s GenidocsTM product family enables users throughout an enterprise todeliver confidential and secure e-mail over the Internet.  Omtool’s Fax Sr.TM, LegalFaxTM andGenifaxTM product families provide users with an extensive, flexible feature setfor transmitting and receiving faxes, and improve an organization’s managementof its fax communications process by providing a suite of utility and controlfunctions. A significant portion of the Company’s revenues is derived fromlicensing rights to use its Genifax and Fax Sr. software product directlyto end-users and indirectly through resellers.

 

The Company’sfinancial results for the first half of 2002 declined substantially fromfinancial results for the first half of 2001, due primarily to the general economic softness in informationtechnology spending as reflected in a decrease in demand for enterprisesoftware solutions.  This decreasereflected the declining economic climate in the United States in the first halfof 2002 as compared to that of 2001 causing customers and prospective customersto defer technology purchases. As a result of this decrease in demand, theCompany’s revenues for the six months ended June 30, 2002 decreased 6%from revenues for the six months ended June 30, 2001, and the Company’snet loss worsened from $1.8 million for the six months ended June 30, 2001to a net loss of $4.4 million for the six months ended June 30, 2002.  TheCompany has experienced declining revenues and increasing operating losses overan extended period of time.  Based uponthe current economic environment, general softness in information technologyspending, products that may not achieve market acceptance, and shortforecasting visibility, the Company cannot estimate that the financial andoperating performance, financial position or cash flow will improve over thenext twelve months.  As a resultof the losses incurred for the six months ended June 30, 2002 and theanticipation of a continuing decline in the United States economy, the Companyreduced its work force and office space in June 2002 to lower the overall costof operations by approximately $750,000 annually.    Although the Company’s operating cash flow for the six monthsended June 30, 2002 resulted in a use of cash of $1.9 million, theCompany’s cash and cash equivalents at June 30, 2002 were approximately$10.4 million.  The Companyanticipates that its balance of cash and cash equivalents will be approximately$9 million at the end of the third quarter of 2002. The Company believes thatits existing cash and cash equivalents will be sufficient to meet the Company’sworking capital and capital expenditures for at least the nexttwelve months.

 

The Company cannotpredict when the market for enterprise software solutions will improve. Whenthe market does improve, the Company cannot predict whether, and to whatextent, the demand for its products will increase.  The Company believes that the current lack of demand forenterprise software solutions will continue during the second half of 2002, andthat its operations and financial results will continue to be negativelyaffected during that period. Any continued decline in the Company’s revenueswill have a significant impact on the Company’s financial results, particularlybecause a significant portion of the Company’s operating costs (such aspersonnel, rent and depreciation) are fixed in advance of a particular quarter.As a result, despite cost savings realized from the Company’s June 2002restructuring, the Company’s costs for sales and marketing, research anddevelopment and general and administrative could continue to increase as apercentage of revenues, thereby affecting the Company’s operating results.

 

9

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The Company’sfuture revenues and operating results may fluctuate from quarter to quarterbased on the number and size of sales transactions the Company enters into withcustomers, the adequacy of provisions for losses, general economic conditionsand other factors. In addition, revenues from a large order may constitute asignificant portion of the Company’s total revenues in a particular quarter.

 

The Company hashistorically derived substantially all of its total revenues from sales withinNorth America. Sales outside of North America (primarily in Europe) representedapproximately 13% and 10% of the Company’s total revenues for the six monthsended June 30, 2002 and 2001, respectively.

 

The Company’sUnited Kingdom subsidiary transacts business primarily in its local currency.The Company manages its foreign exchange exposure by monitoring its netmonetary 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.

 

The Companycontinues to actively recruit value added resellers (“VARs”), systemsintegrators, resellers and distributors to expand its indirect distribution channel.The Company is pursuing sales opportunities via its solution/reseller channelas well as focusing sales efforts on specific market segments in order tofacilitate product acceptance.  Salesthrough the Company’s indirect distribution channels represent approximately20% and 23% of the Company’s total revenues for the six months ended June 30,2002 and 2001, respectively.

 

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**Results of Operations**

 

The following table setsforth certain financial data for the periods indicated as a percentage of totalrevenues:

 
|                        |   | **Three  months ended**

**June 30,** |   | **Six months  ended  June 30,** |   |
|-----------------------------|--------|---------------------------------------|--------|---------------------------------|--------|
|                        |   | **2002**                              |   | **2001**                        |   | **2002** |   | **2001** |   |
| Revenues:                   |   |                                  |   |                            |   |   |   |   |   |
| Software license            |   | 26.2                                  | %      | 32.4                            | %      | 29.5 | % | 33.3 | % |
| Hardware                    |   | 19.7                                  |   | 18.8                            |   | 19.7 |   | 20.1 |   |
| Service and  other          |   | 54.1                                  |   | 48.8                            |   | 50.8 |   | 46.6 |   |
| Total revenues              |   | 100.0                                 |   | 100.0                           |   | 100.0 |   | 100.0 |   |
| Cost of  revenues:          |   |                                  |   |                            |   |   |   |   |   |
| Software license            |   | 2.4                                   |   | 2.1                             |   | 2.1 |   | 2.9 |   |
| Hardware                    |   | 13.5                                  |   | 11.5                            |   | 13.2 |   | 12.8 |   |
| Service and  other          |   | 25.2                                  |   | 31.2                            |   | 22.1 |   | 30.4 |   |
| Total cost of  revenues     |   | 41.1                                  |   | 44.8                            |   | 37.4 |   | 46.1 |   |
| Gross profit                |   | 58.9                                  |   | 55.2                            |   | 62.6 |   | 53.9 |   |
| Operating  expenses:        |   |                                  |   |                            |   |   |   |   |   |
| Sales and  marketing        |   | 57.0                                  |   | 44.0                            |   | 48.5 |   | 39.9 |   |
| Research and  development   |   | 26.2                                  |   | 22.1                            |   | 23.4 |   | 22.0 |   |
| General and  administrative |   | 42.5                                  |   | 23.2                            |   | 36.7 |   | 21.3 |   |
| Total operating  expenses   |   | 125.7                                 |   | 89.3                            |   | 108.6 |   | 83.2 |   |
| Loss from  operations       |   | (66.8                                 | )      | (34.1                           | )      | (46.0 | ) | (29.3 | ) |
| Interest income             |   | 1.4                                   |   | 4.7                             |   | 1.3 |   | 5.6 |   |
| Tax provision               |   | (37.2                                 | )      | —                          |   | (16.9 | ) | — |   |
|                        |   |                                  |   |                            |   |   |   |   |   |
| Net loss                    |   | (102.6                                | )%     | (29.4                           | )%     | (61.6 | )% | (23.7 | )% |
|                        |   |                                  |   |                            |   |   |   |   |   |
| Gross profit:               |   |                                  |   |                            |   |   |   |   |   |
| Software license            |   | 90.9                                  | %      | 93.4                            | %      | 92.9 | % | 91.4 | % |
| Hardware                    |   | 31.6                                  |   | 39.1                            |   | 32.9 |   | 36.1 |   |
| Service and  other          |   | 53.4                                  |   | 36.2                            |   | 56.6 |   | 34.8 |   |

 

**ThreeMonths Ended June 30, 2002 and 2001**

## *** ***

## ***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 $3.3 million and $3.8 million for thethree months ended June 30, 2002 and 2001, respectively, representing adecrease of 13%.

 

*Software License.*  TheCompany’s software license revenues are derived primarily from the licensing ofthe Company’s Fax Sr. and Genifax products.  Software license revenues were $863,000 forthe three months ended June 30, 2002 and $1.2 million for the threemonths ended June 30, 2001, representing a decrease of 30%.  Software license revenues accounted for 26%and 32% of total revenues for each respective period.  The decline in software license revenues can be attributed to anumber of factors which include the generalsoftness in information technology spending which is reflected in adecrease in demand for enterprise software solutions and a decline in thegrowth rate of the overall United States 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 revenuescombined with the relative stability of the level of service and otherrevenues.  The Company did not recognizea significant amount of revenue from its Genidocs products.

 

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*Hardware.*  Hardware revenues are derived from the resaleof third–party hardware products sold to the Company’s customers inconjunction with the licensing of the Company’s software. Hardware revenueswere $648,000 for the three months ended June 30, 2002 and $715,000 forthe three months ended June 30, 2001, representing a decrease of 9%.Hardware revenues accounted for 20% and 19% 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 2002 resulting in a corresponding decreasein accompanying hardware sales.

* *

*Service and Other.*  Service and other revenues are primarilycomprised of fees from maintenance contracts. Service and other revenues were$1.8 million for the three months ended June 30, 2002 and $1.9million for the three months ended June 30, 2001, representing a decrease of4%. Service and other revenues accounted for 54% and 49% of total revenues foreach respective period.  The increase inservice and other revenue as a percentage of total revenues is due to thedecrease in software and hardware sales.

 

*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 $79,000 and $81,000 for the threemonths ended June 30, 2002 and 2001, respectively, representing 9% and 7%of software license revenues for each respective period.  Software license gross margin percentagesdecreased to 91% for the three months ended June 30, 2002 from 93% for thethree months ended June 30, 2001.  Thedecrease in gross margin is primarily attributable to the decrease in softwarelicense revenue.

 

*Hardware.*  Cost of hardware revenues consists primarilyof the costs of third–party hardware products. Cost of hardware revenueswas $444,000 and $436,000 for the three months ended June 30, 2002and 2001, respectively, representing 68% and 61% of hardware revenues for eachrespective period. The gross margin percentage for hardware sales was 32% and39% for the three months ended June 30, 2002 and 2001, respectively. Theincrease in dollar amount for the cost of hardware revenues and the decrease ingross margin is due mainly to a change in the mix of the particular hardwareproducts sold as well as the level of discounts at which the products are sold.

 

*Service and Other.*  Cost of service and other revenues consistsprimarily of the costs incurred in providing technical support as well as othermiscellaneous customer service–related expenses.  Cost of service and other revenues was$829,000 and $1.2 million for the three months ended June 30, 2002 and 2001,respectively, representing 47% and 64% of service and other revenues for eachrespective period.  The gross marginpercentage for service and other revenues was 53% and 36% for the three monthsended June 30, 2002 and 2001, respectively. The improved gross margin, thedecrease in dollar amount and as a percentage of service and other revenues wasdue primarily to the reduction of overhead costs associated with theelimination of several positions within the department that occurred in fiscal2001.

 

*Operating Expenses*

 

*Salesand Marketing.*  Sales and marketing expenses consist primarily ofemployee salaries, benefits, commissions, and associated overhead costs, andthe cost of marketing programs such as advertisements, direct mailings, publicrelations, trade shows, seminars, and related communication costs.  Sales and marketing expenses were$1.9 million and $1.7 million for the three months ended June 30,2002 and 2001, respectively, or 57% and 44% of total revenues for eachrespective period.  The increase in dollar amount and as apercentage of total revenues was due to an increase in overhead costsassociated with supporting an increased number of employees in the sales andmarketing departments throughout the quarter. In conjunction with a corporaterestructuring, however, several positions were eliminated at the end of thequarter. The severance paid to those employees of approximately $128,000partially contributed to the increase in expenses.

 

*Researchand Development.* Research and development expenses includeexpenses associated with the development of new products, enhancements ofexisting products and quality assurance activities and consist primarily ofemployee salaries, benefits, and associated overhead costs as well asconsulting expenses and the cost of software development tools. Research anddevelopment expenses were $863,000 and $840,000 for the respective three monthperiods ended June 30, 2002 and June 30, 2001, representing 26% and 22% oftotal revenues for each respective period. The increase in the dollar amountwas

 

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partially due to an increase in consultingexpenses associated with the utilization of outside consultants. Theconsulting services were related to the continuing enhancement of the Company’snew Genifax and Genidocs products. Inconjunction with a corporate restructuring, several positions were eliminatedat the quarter ended June 30, 2002. The severance paid to those employees ofapproximately $40,000 also contributed to the increase in expenses.  Theincrease in the expense as a percentage of total revenue is primarilyattributable to the decrease in total revenue.

 

*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 $1.4million and $883,000 for the three months ended June 30, 2002 and 2001,respectively, or 43% and 23% of total revenues for each respective period. Theincrease in dollar amount and the expenses as a percentage of total revenues isdue mainly to an increase in state sales tax accruals.

 

*Interest Income.*  Interestincome consists principally of interest income earned on cash balances.  Interest income was $46,000 for the threemonths ended June 30, 2002 and $178,000 for the three months endedJune 30, 2001.  The decrease is dueto a reduction in cash balances and an approximate 56% reduction in interestrates the Company was earning on its investments.

* *

*TaxProvision*.  TheCompany recorded a provision of $1.2 million against the valuation of its netdeferred tax asset in the three months ended June 30, 2002. See also Note 3.Income Taxes of the Notes to the Consolidated Financial Statements for moreinformation.

 

**SixMonths Ended June 30, 2002 and 2001**

## *** ***

## ***Revenues***

 

*TotalRevenues*.  TheCompany’s total revenues were $7.3 million and $7.7 million for the six monthsended June 30, 2002 and 2001, respectively, representing a decrease of 6%.

 

*SoftwareLicense. *Software licenserevenues were $2.1 million for the six months ended June 30, 2002 and $2.6million for the six months ended June 30, 2001, representing a decrease of17%.  Software license revenuesaccounted for 30% and 33% of total revenues for each respective period. Thedecline in software license revenue can be attributed to a number of factorswhich include the general softness in information technology spending which isreflected in a decrease in demand for enterprise software solutions 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 percent of total revenue is primarily attributable to thedecrease in software revenues.

 

*Hardware. *Hardware revenues were$1.4 million for the six months ended June 30, 2002 and $1.6 million for thesix months ended June 30, 2001, representing a decrease of 8%.  Hardware revenues accounted for 20% of totalrevenues for each respective period. The decrease in hardware revenues was due primarily to the decrease inthe number of software sales made in the six months ended June 30, 2002resulting in a decrease in accompanying hardware sales.

 

*Service and Other. *Service and other revenueswere $3.7 million for the six months ended June 30, 2002 and $3.6 million forthe six months ended June 30, 2001, representing an increase of 2%.  Service and other revenues accounted for 51%and 47% of total revenues for each respective period.  The increase in support revenue as a percentage of total revenuesis due to the decrease in software and hardware sales.

 

## ***Cost of Revenues***

 

*Software License*.  Cost of software license revenues was$153,000 and $221,000 for the six months ended June 30, 2002 and 2001,respectively, representing 7% and 9% of software license revenues for eachrespective period, resulting in respective gross margins of 93% and 91%. Thedecrease in dollar amount and the improvement in gross margin is attributableto decreased product duplication costs and decreased royalty payments due tolower sales volume of products with associated royalty payments.

 

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*Hardware.*  Cost of hardware revenues was $961,000 and$991,000 for the six months ended June 30, 2002 and 2001, respectively,representing 67% and 64% of hardware revenues for each respective period.  The decrease in dollar amount for the costof hardware revenues for the six months ended June 30, 2002 was due primarilyto the decrease of hardware unit sales accompanying the Company’sproducts.  The gross margin percentagefor hardware sales was 33% for the six months ended June 30, 2002 compared to36% in the same period in 2001.  Thedecrease in gross margin is due mainly to a change in the mix of the particularhardware products sold as well as the level of discounts at which the productis sold.

 

*Serviceand Other.*  Cost ofservice and other revenue was $1.6 million and $2.3 million for the six monthsended June 30, 2002 and 2001, respectively, representing 43% of service andother revenues versus 65% for the same period last year. The gross marginpercentage for service and other revenues improved from 35% to 57% for the sixmonth periods ended June 30, 2001 and 2002, respectively.  The decrease in dollar amount of cost ofservices and the improvement in gross margin during the period is due primarilyto the elimination of several positions within the department.

## ** **

## ***Operating Expenses***

 

*Salesand Marketing.*  Salesand marketing expenses were $3.5 million and $3.1 million for the six monthsended June 30, 2002 and 2001, respectively, or 49% and 40% of total revenuesfor each respective period. The increase in dollar amount and as a percentageof total revenues was due to an increase in the number of employees in thesales and marketing departments. However, in conjunction with a corporaterestructuring, several positions were eliminated at the quarter ended June 30,2002. The severance paid to those employees of approximately $128,000 alsocontributed to the increase in expenses.

 

*Researchand Development.* Research and development expenses were $1.7 million for each of the sixmonth periods ended June 30, 2002 and 2001, respectively, or 23% and 22% oftotal revenues for each respective period. The increase in expenses as a percentage of revenue is due primarily tothe decrease in total revenues.

 

*Generaland Administrative.* General and administrative expenses were $2.7 million and $1.6 millionfor the six months ended June 30, 2002 and 2001, respectively, or 37% and 21%of total revenues for each respective period. The increase in dollar amount and expenses as a percentage of totalrevenues was primarily attributable to an increase in management consultingexpenses and an increase in state sales tax accruals.

 

*InterestIncome.*Interest incomeconsists principally of interest income earned on cash balances. Interestincome was $98,000 for the six months ended June 30, 2002 and $430,000 for thesix months ended June 30, 2001. The decrease is due to a reduction in cashbalances and an approximate 61% reduction in interest rates the Company wasearning on its investments.

 

*TaxProvision*.  TheCompany recorded a provision of $1.2 million against the valuation of its netdeferred tax asset in the six months ended June 30, 2002. See also Note 3.Income Taxes of the Notes to the Consolidated Financial Statements for moreinformation.

 

### **Liquidity andCapital Resources**

 

Since 1996, theCompany 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 30,2002, the Company had cash and cash equivalents of $10.4 million and workingcapital of $5.8 million.

 

The Company’soperating activities used cash of $1.9 million and $2.8 million for the sixmonths ended June 30, 2002 and 2001, respectively. Net cash used duringthe six months ended June 30, 2002 consisted primarily of a net loss fromoperations and a decrease in deferred revenues and accounts payable offset bythe deferred tax change, depreciation and amortization, a decrease in accountsreceivable and an increase in accrued liabilities. Net cash used during the sixmonths ended June 30, 2001 resulted from a net loss from operations and adecrease in accrued liabilities offset by depreciation and amortization and adecrease to accounts receivable.  Due tothe anticipation of continuing economic softness, the Company anticipates thatit will use approximately $1.1 million of cash per quarter for at least thenext four quarters.

 

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Investingactivities provided cash of $1.1 million and $3.1 million during the six monthsended June 30, 2002 and 2001, respectively. During the six months ended June 30, 2002 and 2001, the principaluses were purchases of property and equipment, offset by proceeds from the saleof short-term investments.

 

Financingactivities provided cash of $6,000 and $8,000 for the six months ended June 30,2002 and 2001, respectively, due primarily to the net proceeds from theissuance of common stock.

 

At June 30,2002, the Company did not have any material commitments for capitalexpenditures.

 

The Company has experienced declining revenues and increasing operatinglosses over an extended period of time. Based upon the current economic environment, general softness ininformation technology spending, the release of new and emerging products thatmay not achieve market acceptance, and shortened forecasting visibility, theCompany cannot estimate that the financial and operating performance, financialposition or cash flow will improve over the next twelve months.  Subject to the factors contained herein, theCompany believes that it has sufficient liquidity and cash available to meetthe operating needs of the company for at least the next twelve months.  There can be no assurance that anynecessary additional financing will be available to the Company on commerciallyreasonable terms, or at all.

 

## **CriticalAccounting Policies**

 

The Company has identified the policies below ascritical to its business operations and the understanding of its results ofoperations. The impact and any associated risks related to these policies onthe Company’s business operations is discussed throughout Management’sDiscussion and Analysis of Financial Condition and Results of Operations wheresuch policies affect the Company’s reported and expected financial results.Note that the Company’s preparation of this Form 10-Q requires management tomake estimates and assumptions that affect the reported amount of assets andliabilities, disclosure of contingent assets and liabilities at the date of theCompany’s financial statements, and the reported amounts of revenue andexpenses during the reporting period. There can be no assurance that actualresults will not differ from those estimates.

 

*RevenueRecognition and Accounts Receivable Reserves.*  The Company derives its revenue fromprimarily two sources (i) product revenue, which includes software license andhardware revenue and (ii) services and support revenue, which includes softwaremaintenance and support, installation, training and consulting revenue.  The Company licenses its software productson a perpetual basis.  The Companygenerates revenue from licensing the rights to use its software products andsales of hardware directly to end-users and indirectly through resellers.  The Company’s resellers order products fromthe Company based on purchase orders received from end-users and do not orderto stock.  The Company’s products aresold to resellers and directly to end-users without any specifically statedrights of return. Occasionally, however, the Company, in its sole discretion,will accept a product return if the end-user finds that the product does notfit its needs. The Company also sells hardware products, which are provided bya third party, on a pass through basis, plus an additional mark up, toend-users and indirectly through resellers. To support its software products,the Company sells software maintenance and support, installation, training andconsulting services to end-users and indirectly through resellers.

 

The Company applies the provisions of Statement ofPosition (“SOP”) 97-2, *Software Revenue Recognition*, as amendedby SOP 98-9, Modification of SOP 97-2, *SoftwareRevenue Recognition, With Respect to Certain Transactions*, to alltransactions involving the sale of multiple elements including software,hardware and service revenue.  InDecember 1999, the SEC issued Staff Accounting Bulletin (“SAB”) No. 101, *RevenueRecognition in Financial Statements*. This bulletin establishesguidelines for revenue recognition. The Company’s revenue recognition policycomplies with this pronouncement as well. The Company applies the provisions of SFAS No. 48, *Revenue Recognition When Right of Return Exists*,with respect to providing for potential future product returns.  As described below, significant managementjudgments and estimates must be made and used in connection with the revenue recognizedin any accounting period.  Materialdifferences may result in the amount and timing of the Company’s revenue ifmanagement made different judgments or utilized different estimates.

 

The Company recognizes revenue from the sale ofsoftware products and hardware to both end-users and resellers when persuasiveevidence of an arrangement exists, the products have been delivered, the fee isfixed or determinable, collection of the resulting receivable is reasonablyassured and there are no customer acceptance provisions. The Company maintainsa reserve for potential product returns. Software maintenance and supportrevenue is recognized ratably over

 

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the term of the related maintenance period, typically one year.  Other services revenue is recognized as theservices are performed. If an arrangement includes an acceptance provision, theCompany will defer all revenue until the customer accepts the products.  Acceptance generally occurs upon the earlierof receipt of a written customer acceptance or expiration of the acceptanceperiod.

 

The Company’s transactions frequently involve thesales of software, hardware and related services under multiple elementarrangements.  Revenue under multipleelement arrangements is allocated to each element under the residual method, inaccordance with SOP 98-9, *Modification ofSOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions*.Under this method, revenue is allocated first to all undelivered elements, suchas services, based on the fair value of those elements, which is the pricecharged when these elements are sold separately and unaccompanied by otherelements.  The Company's services arenot essential to the functionality of the software as these services do notalter the capabilities of the software and do not carry a significant degree ofrisk to perform.  The amount allocatedto the delivered elements, such as software license and hardware revenue, isthe difference between the total arrangement value and the amount allocated tothe undelivered elements. If the delivered elements include both software andhardware, the amount allocated to hardware revenue is based on the pricecharged to the Company by the third party vendor plus an additional mark up,with the remainder allocated to software revenue.  To the extent that a discount is offered in the arrangement, theentire discount is allocated to the delivered element or elements.  If the delivered elements include hardwareand software, the discount is allocated to the hardware and software based ontheir respective list prices.

 

 For all sales,the Company uses either a binding purchase order, a signed contract or a creditcard authorization as evidence of an arrangement.  Sales through the Company’s resellers are evidenced by a masteragreement governing the relationship, together with binding purchase orders, ona transaction-by-transaction basis.

 

At the time of thetransaction, the Company assesses whether the fee associated with the transactionis fixed or determinable and whether or not collection is reasonablyassured.  If a significant portion of afee is due beyond the Company’s normal payment terms, which are thirty to sixtydays from invoice date, the Company accounts for the fee as not being fixed ordeterminable.  In these cases, theCompany recognizes revenue as the fees become due. The Company assessescollection based on a number of factors, including past transaction historywith the customer and the credit-worthiness of the customer.  The Company reviews D&B credit reportsfor all of its resellers and adjusts its credit limits with those resellersaccordingly.  If the reseller should nothave a favorable report or the Company does not have enough credit informationto distinguish if the reseller is credit-worthy then the Company predominantlysells to such resellers on C.O.D. terms. The Company does not request collateral from its customers.  If the Company determines that collection ofa fee is not reasonably assured, the fee is deferred and revenue is recognizedat the time collection becomes reasonably assured, which is generally uponreceipt of payment.

 

The Company reserves for potential product returns andmakes adjustments to the reserve as needed, based on historical product returnrates, and considers the impact of new product introductions, changes incustomer demand and acceptance of the Company’s products.  Significant management judgments andestimates must be made and used in connection with establishing the salesreturns reserve in any accounting period. Material differences may result in the amount and timing of revenue forany period if management made different judgments or utilized differentestimates.  Similarly, management mustmake estimates of the uncollectability of the Company’s accountsreceivables.  Management specificallyanalyzes accounts receivable and historical bad debts, customercredit-worthiness, current economic trends and changes in customer payment patternswhen evaluating the adequacy of the allowance for doubtful accounts.

 

The Company’s deferred revenue is comprised mainly of revenue that isdeferred for software maintenance and support contracts.  The other components of deferred revenue arethe amounts from transactions that were deferred because they did not meet allof the provisions of the Company’s revenue recognition policy.

 

*Researchand Development and Software Development Costs*.  Software development costs are consideredfor capitalization when technological feasibility is established in accordancewith SFAS No. 86, *Accounting for the Costs of Computer Software To Be Sold, Leased or**OtherwiseMarketed*. The Company sells software in a market that is subject torapid technological

 

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change, new product introductions and changing customer needs.Accordingly, the Company has determined that it cannot determine technologicalfeasibility until the development state of the product is nearly complete. Thetime period during which cost could be capitalized from the point of reachingtechnological feasibility until the time of general product release is veryshort and, consequently, the amounts that might be capitalized are not materialto the Company’s consolidated financial position or results of operations.Therefore, the Company charges all research and development expenses tooperations in the period incurred.

 

*Income Taxes*.  The Company is required to estimate itsincome taxes. This process involves estimating the Company’s actual current taxobligations together with assessing differences resulting from the differenttreatment of items for tax and accounting purposes which result in deferred taxassets and liabilities. The Company has deferred tax assets and liabilitiesincluded within its balance sheet. The Company’s deferred tax assets areassessed for each reporting period as to whether it is more likely than notthat they will be recovered from future taxable income, including assumptionsregarding on-going tax planning strategies. To the extent the Company believesthat recovery is uncertain, the Company must establish a valuation allowancefor assets not expected to be recovered. Changes to the valuation allowance areincluded as an expense or benefit within the tax provision in the statement ofoperations. In the event that actual results differ from these estimates, theCompany’s provision for income taxes could be materially impacted.

 

*Recent Accounting Pronouncements*

 

In July 2002, the Financial Accounting Standards Boardissued SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*.  SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force Issue No. 94-3, *Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring*).  SFAS No. 146requires that a liability be recognized when it is incurred and shouldinitially be measured and recorded at fair value.  This statement is effective for exit or disposal activities thatare initiated after December 31, 2002 and the adoption is not expected to havea material impact on the consolidated financial statements of the Company.

 

**Certain Factors Affecting FutureOperating Results**

 

The Company operates in a rapidly changing environmentthat involves a number of risks, some of which are beyond the Company’scontrol. The discussion highlights some of the risks which may affect futureoperating results.

 

Information provided bythe Company from time to time including statements in this Form 10-Q whichare not historical facts are so-called “forward-looking statements” thatinvolve risks and uncertainties, made pursuant to the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995.  In particular, statements contained in Management’s Discussionand Analysis of Financial Condition and Results of Operations and Notes toConsolidated Financial Statements which are not historical facts (including,but not limited to, statements concerning: the plans and objectives of management; expectations for sales andmarketing, research and development and general and administrative expenses;developments relating to the Company’s product and service offerings, marketsand acquisitions; anticipated trends in the Company’s future operating results;the Company’s strategic alliances; changes in the regulatory environment; andthe Company’s expected liquidity and capital resources) may constitute forward–lookingstatements. These forward–looking statements are neither promises norguarantees, but are subject to risk and uncertainties that could cause actualresults to differ materially from the expectations set forth in the forward–lookingstatements. Factors that may cause such differences include, but are notlimited to, the factors contained herein, and the other risks discussed fromtime to time in the Company’s other filings with the Securities and ExchangeCommission.

 

*FutureOperating Results Uncertain.* The Company incorporated and shipped its initial facsimile softwareproducts in 1991.  In the years endingDecember 31, 1999, 2000 and 2001 the Company had operating losses anddecreasing revenues and in the six months ended June 30, 2002, the Company hadoperating losses. There can be no assurance that the Company will be able toincrease its level of revenues or return to profitability in the future, as theCompany’s operating history makes the prediction of future operating results difficultor impossible.  Increases in operatingexpenses may continue and, together with pricing pressures and a continueddecline in the growth rate of the overall U.S. economy, may result in acontinued decrease in operating income and operating margin percentage.  The Company’s ability to improve itsoperating results will depend upon,

 

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among other things, its ability to increase sales of the Company’ssecure business-to-business electronic document exchange solutions andclient/server facsimile solutions to new customers as well as increased productpenetration into existing customers. The Company commenced its strategic expansion into securebusiness-to-business electronic document exchange solutions market in thefourth quarter of 2000, and has limited financial and operating data and alimited operating history relevant to these solutions. Accordingly, it isdifficult to evaluate the prospects for the level of acceptance of theCompany’s secure business-to-business electronic document exchange solutions.Future operating results will depend on many other factors, including, withoutlimitation, the degree and rate of growth of the markets in which the Companycompetes, the level of acceptance of the Windows NT, Windows 2000 and WindowsXP operating systems, the level of product and price competition, the abilityof the Company to establish strategic relationships and develop and market newand enhanced products and to control costs, the ability of the Company toexpand its direct sales force and indirect distribution channels bothdomestically and internationally and the ability of the Company to attract andretain key personnel. As a result, it is possible that in the future theCompany’s operating results will be below the expectations of public marketanalysts and investors.  In such event,the price of the Company’s common stock would likely be materially adverselyaffected.

 

*ProductConcentration.*  Todate, much of the Company’s revenues have been attributable to licenses of theCompany’s facsimile based enterprise solutions and related products andservices. The Company expects such products and related services to continue toaccount for much of the Company’s future revenues. However, recently the amountof revenues attributable to the licenses of such products has declined andthere can be no assurances that such decline will not continue. Furthermore, inJune 2000, the Company changed its strategic focus to the development ofsecure business-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 of2000.  To date, the Company has notrecognized a significant amount of revenues from its Genidocs product. TheCompany expects that its Genidocs product may account for an increasing portionof future revenues. However, there can be no assurances that the Genidocsproduct will be financially successful or result in any significant revenues.Factors adversely affecting the pricing of or demand for such products, such ascompetition or technological change, could have a material adverse effect onthe Company’s business, financial condition and results of operations. TheCompany’s prospects must be considered in light of the risks and difficultiesfrequently encountered by companies dependent upon operating revenues from anew product line in an emerging and rapidly evolving market.

 

*NewProducts and Technological Change.*  The markets for the Company’s products are relatively new and arecharacterized by rapid technological change, evolving industry standards,changes in end-user requirements and frequent new product introductions andenhancements. The Company’s future success will depend upon its ability toenhance its current products and to develop and introduce new products thatkeep pace with technological developments and respond to evolving end-userrequirements. There can be no assurance that the Company will be successful indeveloping and marketing new products or product enhancements on a timelybasis, or that new products or product enhancements developed by the Company,such as the Genidocs and Genifax products will achieve market acceptance. Theintroduction of products embodying new technologies and the emergence of newindustry standards could render the Company’s existing products obsolete andunmarketable. From time to time, the Company and its competitors may announcenew products, capabilities or technologies that have the potential to replaceor shorten the life cycle of the Company’s existing product offerings. Therecan be no assurance that announcements of new product offerings by the Companyor its competitors will not cause customers to defer or forego the licensing ofthe Company’s existing or planned products and have a material adverse effecton the Company’s business, financial condition and results of operations.

 

*TheMarket Risks 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 electronic documentexchange solution will involve changes in the manner in which businesses havetraditionally exchanged information. The Company’s ability to influence usageof its secure business-to-business electronic document exchange solution bycustomers is limited. The Company intends to spend considerable resourceseducating potential customers about the value of secure business-to-businesselectronic document exchange solutions. It is difficult to assess, or topredict with any assurance, the present and future size of the potential marketfor the Company’s secure business-to-business electronic document exchangesolution, or its growth rate, if any. Moreover, the Company cannot predictwhether the Company’s secure business-to-business electronic

 

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document exchange solution will achieve any market acceptance. Anyfuture products or future product enhancements that are not favorably receivedby customers may not be profitable and, furthermore, could damage the Company’sreputation or brand name.

 

*Dependenceon Fax Sr. NT, Genifax and the Windows NT/2000 Environment.*  The Company currently derives a significantportion of its revenues from licenses of the Fax Sr. NT and Genifaxproducts and related services and resale of related hardware. Continued marketacceptance of the Fax Sr. NT and Genifax products are critical to theCompany’s future success. As a result, any decline in demand for or failure tomaintain broad market acceptance of the Fax Sr. NT and Genifax productlines as a result of competition, technological change or otherwise, would havea material adverse effect on the Company’s business, financial condition andresults of operations. The Company’s future financial performance will dependin large part on customer acceptance of the Fax Sr. NT product and new andenhanced versions of the Genifax product. There can be no assurance that theCompany will continue to be successful in marketing the Fax Sr. NT andGenifax products or any new or enhanced versions of the Genifax product. Inaddition, there can be no assurance that the Windows NT operating system willnot be replaced by a new or enhanced operating system. There can be noassurance that the Company will be successful in developing products for new orenhanced operating systems such as Windows 2000 or Windows XP, or that suchsystems will not obviate the need for the Company’s products. If any new orenhanced operating system gains widespread use and the Company fails to developand provide its products for this operating system on a timely basis, theCompany’s business, financial condition and results of operations would bematerially adversely affected.

 

*Dependenceon Client/Server Environment.*  The Company’s enterprise, client/server facsimile softwareproducts are intended to help organizations efficiently manage their facsimilecommunications, utilizing a client/server computing environment. Theclient/server market is relatively new and there can be no assurance thatorganizations will move away from the use of stand–alone fax machines orcontinue to adopt client/server environments, or that customers of the Companythat have begun the migration to a client/server environment will broadlyimplement this model of computing.  The Company’sfuture financial performance will depend in large part on continued growth inthe market for client/server applications, which in turn will depend in part onthe growth in the number of organizations implementing client/server computingenvironments.  There can be no assurancethat these markets will continue to grow or that the Company will be able torespond effectively to the evolving requirements of these markets. If themarket for client/server application products and services does not grow in thefuture, grows more slowly than the Company anticipates, or if the Company failsto respond effectively to evolving requirements of this market, the Company’sbusiness, financial condition and results of operations would be materiallyadversely affected.

 

*RisksAssociated with Delisting From the Nasdaq National Market*.  In August 2002, the Nasdaq National Market(“Nasdaq”) informed the Company that its common stock had traded for 30consecutive trading days below the minimum bid price and that the Company haduntil November 4, 2002, to demonstrate compliance with Nasdaq’s listingrequirements by maintaining a bid price for its common stock of at least $1.00for a minimum of ten consecutive trading days. If compliance is not regained by November 4, 2002, the Company will beinformed by Nasdaq that it will be delisted. In addition, the SEC recently approved certain changes to the Nasdaqcontinued listing quantitative standards. Effective November 1, 2002, Nasdaq’s current $4 million net tangibleasset standard is being replaced with a $10 million stockholder’s equityrequirement for continued listing on Nasdaq. The other requirements for continued listing on Nasdaq are:  $750,000 in public float; $5 million valueof public float; $1 minimum bid price and 400 round lot holders.  If the Company’s stockholder’s equity isbelow $10 million on November 1, 2002, the Company will be subject to possibledelisting unless it takes action to increase its stockholder equity.  Stockholder’s equity decreased in each ofthe fiscal years ended December 31, 1999, 2000 and 2001.  In the likely event that the Company cannotmaintain the Nasdaq’s listing requirements, the Company may take appropriateaction, on or before November 4, 2002, to list the Company’s securities on theNasdaq SmallCap market.  The delistingof the Company’s common stock from Nasdaq may materially impair thestockholder’s ability to buy and sell shares of the Company’s common stock andcould have an adverse effect on the market price of, and the efficiency of thetrading market for, the Company’s common stock.  In addition, the delisting of the Company’s common stock couldsignificantly impair the Company’s ability to raise capital should it desire todo so in the future.  The Company’slisting on the Nasdaq Stock Market is highly important to the Company and theCompany intends to take reasonable measures to maintain compliance.

 

*IntenseCompetition.*  Thesecure business-to-business electronic document exchange solution andenterprise, client/server facsimile solution markets are intensely competitiveand rapidly changing and the Company expects competition to continue to

 

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increase. The Company believes its ability to compete successfullydepends upon a number of factors both within and beyond its control, includingproduct performance, reliability and features; product adoption; ease of use;product scalability; quality of support services; price/performance; timelinessof enhancements and new product releases by the Company and its competitors;the emergence of new computer–based facsimile and securebusiness-to-business electronic document exchange solutions and standards; namerecognition; the establishment of strategic alliances with industry leaders andindustry and general economic trends.

 

The Company may not be able to compete successfullyagainst current and future competitors in the secure business-to-businesselectronic document exchange solutions market, and the competitive pressuresthe Company faces could harm its business and prospects. The Company’ssolutions provide an alternative to traditional mail and courier documentdelivery services, such as those offered, among others, by Federal Express,United Parcel Service or the U.S. Postal Service. The Company’s solution isalso an alternative to general-purpose e-mail applications and services. In thearea of secure online document exchange, the Company’s competition comes fromsecure online document exchange services providers. Some of these providershave products that are intended to compete with the Company’s products.Examples of these companies include Pitney Bowes, Sigaba, Tumbleweed, the U.S.Postal Service and Zixit.  In addition,many companies with which the Company does not presently compete may becomecompetitors in the future. This could occur either through the expansion of theCompany’s products or through other companies’ product development in the areaof secure online communication. These companies could include Documentum,Hummingbird and iManage.  Additionally,companies such as JetForm, PureEdge and Silanis may develop and delivercompetitive digital signature products in the future.

 

The Company competes directly with a large number ofvendors of facsimile products, including providers of facsimile softwareproducts for client/server networks such as RightFAX (a subsidiary ofCaptaris), Fenestrae, TopCall International and Biscom. The Company alsocompetes with vendors offering a range of alternative facsimile solutionsincluding outsourcing network facsimile solutions, such as Mail.com; operatingsystems containing facsimile and document transmission features; low-end faxmodem products;desktop fax software; single–platform facsimile softwareproducts; and customized proprietary software solutions. In addition, providersof operating systems or business software applications may decide to bundlecompetitive facsimile solutions as part of their broader product offerings.

 

Many of the Company’s competitors and potentialcompetitors have longer operating histories and greater financial, technical,sales, marketing and other resources, as well as greater name recognition andmarket acceptance of their products and technologies than the Company. Inaddition, there are relatively low barriers to entry in the markets in whichthe Company operates and intends to operate, and new competition may ariseeither from expansion by established companies or from new emerging companiesor from resellers of the Company’s products. There can be no assurance that currentor potential competitors of the Company will not develop products comparable orsuperior—in terms of price and performance features—to those developed by theCompany, adapt more quickly than the Company to new or emerging technologiesand changes in market opportunities or customer requirements, establishalliances with industry leaders, or take advantage of acquisition opportunitiesmore readily than the Company. In addition, no assurance can be given that theCompany will not be required to make substantial additional investments inconnection with its research, development, engineering, marketing, sales andcustomer service efforts in order to meet any competitive threat, or that suchrequired investments will not have a material adverse effect on operatingmargins.  Changes in government laws andregulations may also affect our ability to maintain competitiveness.  Increased competition may result inreduction in market share, pressure for price reductions and related reductionsin gross margins, any of which could materially adversely affect the Company’sability to achieve its financial and business goals. There can be no assurancethat in the future the Company will be able to successfully compete againstcurrent and future competitors.

 

*Fluctuationsin Quarterly Results of Operations; Seasonality.*  The Company’s quarterly revenues and resultsof operations have fluctuated significantly in the past and will likelyfluctuate significantly in the future. Causes of such fluctuations haveincluded and may include, among others, the demand for the Company’s productsand services; the size and timing of orders; the number, timing andsignificance of new product announcements by the Company and its competitors;the ability of the Company to develop, introduce, market and ship new andenhanced versions of the Company’s current and planned products on a timelybasis; the level of product and price competition: changes in operatingexpenses; changes in average selling prices and mix of the Company’s products:changes in the Company’s sales incentive strategy; the mix of direct andindirect sales, and general economic factors, including a continued decline inthe growth rate of the overall U.S. economy. In addition, the sale of theCompany’s products often involves delays because customers tend to implementthe products on a large scale and

 

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they also must establish certain minimum hardware capabilities. TheCompany’s products therefore often have a lengthy sales cycle while thecustomer evaluates and receives approvals for the purchase of the Company’sproducts. During such sales cycles, the Company may expend substantial fundsand management efforts yet receive no revenues. It is difficult to accuratelypredict the sales cycle of any large order. If one or more large orders failsto close as forecasted in a fiscal quarter, the Company’s revenues andoperating results for such quarter could be materially adversely affected. Anyone or more of these or other factors could have a material adverse effect onthe Company’s business, financial condition and results of operations. Thepotential occurrence of any one or more of these factors makes the predictionof revenues and results of operations on a quarterly basis difficult andperformance forecasts derived from such predictions unreliable.

 

The Company’s business has experienced and is expectedto continue to experience seasonality. The Company has historically had andexpects to continue to have weaker sales in the months of July and August whichmay have an adverse affect on third quarter sales. The Company believes thatthese fluctuations are caused primarily by customer budgeting and purchasingpatterns.

 

In general, revenues are difficult to forecast becausethe market for secure business-to-business electronic document exchange andenterprise, client/server facsimile solutions software is evolving rapidly andthe Company’s sales cycle, from the customer’s initial evaluation throughpurchase of licenses and the related support services, varies substantiallyfrom customer to customer. License fee revenues in any quarter depend on ordersreceived and shipped in that quarter with an increasing percentage of orders inany quarter being received in the last weeks of the quarter.  License fee revenues from quarter to quarterare difficult to forecast, as no significant order backlog exists at the end ofany quarter because the Company’s products typically are shipped upon receiptof customers’ orders.

 

A substantial portion of the Company’s operatingexpense is related to personnel, facilities, equipment and marketing programs.The level of spending for such expense cannot be adjusted quickly and istherefore fixed in the short term. The Company’s expense levels for personnel,facilities, equipment and marketing programs are based, in significant part, onthe Company’s expectations of future revenues on a quarterly basis. If actualrevenue levels on a quarterly basis are below management’s expectations,results of operations are likely to be adversely affected by a similar amountbecause a relatively small amount of the Company’s expense varies with itsrevenue in the short term.

 

Due to all of the foregoing factors, it is likely thatin some future periods the Company’s results of operations will be below theexpectations of securities analysts and investors. In such event, the price ofthe Company’s common stock would likely be materially adversely affected.

 

*Expansionof Indirect Channels; Potential for Channel Conflict; Strategic Alliances.*  The Company markets its products andservices directly through telesales and indirectly through marketing channelssuch as VARs, systems integrators and distributors and strategic businesspartners. Although the Company has historically focused its efforts onmarketing through its sales 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, distributors and strategicbusiness partners to successfully market the Company’s products. In addition,there can be no assurance that the Company’s resellers and strategic businesspartners will not develop, acquire or market computer–based facsimileproducts that are competitive with the Company’s products. The failure toretain its VARs, systems integrators, distributors and strategic partners couldhave a material adverse effect on the Company’s business, financial conditionand results of operations.

 

The distributor agreements generally provide thateither party may terminate the agreement without cause upon 30 dayswritten notice to the other party.  TheCompany also resells its products on a purchase order basis through other VARs,systems integrators and distributors. Such relationships may be terminated by either party, at any time, andtherefore there can be no assurance that any VAR, systems integrator or distributorwill continue to represent the Company’s products.  Furthermore, the Company’s strategic alliances may be terminatedby either party, at any time, there can be no assurances that such strategicalliances will continue.  The inabilityto retain certain VARs, systems integrators, distributors or strategic businesspartners, or the development or marketing by VARs, systems integrators,distributors or strategic business partners of competitive offerings, couldhave a material adverse effect on the Company’s business, financial condition andresults of operations.

 

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Selling through indirect channels may limit theCompany’s contacts with its customers. As a result, the Company’s ability to accurately forecast sales,evaluate customer satisfaction and recognize emerging customer requirements maybe hindered. The Company’s strategy of marketing its products directly toend-users and indirectly through VARs, systems integrators and distributors mayresult in distribution channel conflicts. The Company’s direct sales effortsmay compete with those of its indirect channels and, to the extent differentresellers target the same customers, resellers may also come into conflict witheach other. As the Company strives to expand its indirect distributionchannels, there can be no assurance that emerging channel conflicts will notmaterially adversely affect its relationships with existing VARs, systemsintegrators or distributors or adversely affect its ability to attract newVARs, systems integrators and distributors.

 

*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 would be incurred in connection with futureacquisitions.  In addition, attractiveacquisitions are difficult to identify and complete for a number of reasons,including competition among prospective buyers and the possible need to obtainregulatory approval. There can be no assurance that the Company will be able tocomplete future acquisitions. In order to finance such acquisitions, it may benecessary for the Company to raise additional funds either through public orprivate financings, including bank borrowings. Any financing, if available at all, may be on terms which are notfavorable to the Company.  The Companymay also issue shares of its common stock to acquire such businesses, which mayresult in dilution to the Company’s existing stockholders.

 

*Abilityto Manage Growth.*  TheCompany may expand its operations and anticipates that expansion may be requiredin order to address potential market opportunities. The Company may increasethe size of its sales and marketing and research and development expendituresas necessary. There can be no assurance that such expansion would be completedsuccessfully or that it would generate sufficient revenues to cover theCompany’s expenses. The Company will need to continue to attract and retainhighly qualified technical, sales and managerial personnel. There can be noassurance 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.

 

*RisksAssociated with International Expansion.*  An element of the Company’s strategy is tocontinue to maintain its international sales. The Company expects to facecompetition from secure business-to-business electronic document exchangesolutions and local facsimile product providers in their native countries. Tosuccessfully maintain international sales, the Company needs to recruit andretain additional international resellers and distributors. There can be noassurance that the Company will be able to maintain 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, most ofwhom are not bound by an employment agreement or by a

 

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noncompetition agreement. The loss of the services of one or more ofthe Company’s executive officers or other key employees could have a materialadverse effect on the Company’s business, financial condition and results ofoperations. The Company’s future success also depends on its continuing abilityto attract and retain highly qualified technical, sales and managerialpersonnel. Competition for such personnel is intense, and the Company hasexperienced difficulty in recruiting qualified technical personnel. There canbe no assurance that the Company will be able to retain or continue to hire keytechnical, sales and managerial personnel in the future.

 

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Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk

 

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

 

As ofJune 30, 2002, the Company did not participate in any derivative financialinstruments or other financial and commodity instruments for which fair valuedisclosure would be required under SFAS No. 107,*Disclosures about Fair Value ofFinancial Instruments*. All of the Company’s investments consist ofmoney market funds and municipal bonds that are carried on the Company’s booksat amortized cost, which approximates fair market value. Accordingly, theCompany has no quantitative information concerning the market risk ofparticipating in such investments.

 

**Primary Market Risk Exposures**

 

The Company’sprimary market risk exposures are in the areas of interest rate risk and foreigncurrency exchange rate risk. The Company’s investment portfolio of cashequivalent and short-term investments is subject to interest rate fluctuations,but the Company believes this risk is immaterial due to the short-term natureof these investments. The Company’s exposure to currency exchange ratefluctuations has been and is expected to continue to be modest due to the factthat the operations of its United Kingdom subsidiary are almost exclusivelyconducted in its local currency. The United Kingdom subsidiary operatingresults are translated into U.S. dollars and consolidated for reportingpurposes. The impact of currency exchange rate movements on intercompanytransactions was immaterial for the quarter ended June 30, 2002. Currentlythe Company does not engage in foreign currency hedging activities.

 

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**PART II:  OTHER INFORMATION**

Item 4. Submission of Matters to a Vote of SecurityHolders

 

The annual meeting ofsecurity-holders of the Company was held on May 29, 2002.  The following nominees were re-elected asClass II Directors of the Company each to serve for a three-year term or untilhis successor is elected and qualified.

 
| **Nominee**                 |   | **Total  Votes for Nominee** |   | **Total  Votes Withheld  for Nominee** |   |
|-----------------------------|--------|------------------------------|--------|----------------------------------------|--------|
|                        |   |                         |   |                                   |   |
| Arnold E. Ditri             |   | 11,927,708                   |   | 16,528                                 |   |
|                        |   |                         |   |                                   |   |
| William C.  Styslinger, III |   | 11,927,708                   |   | 16,528                                 |   |

 

 

The term of office forthe following directors continued after the meeting:  Richard D. Cramer (Class I), Andrew E. Lietz (Class I), Robert L.Voelk (Class III) and Martin A. Schultz (Class III).

 

Item 6.        Exhibitsand Reports on Form 8-K

 

(a)       Exhibits

 
| 10.10  |   | Severance Letter with Timothy P. Losik                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                 |
| 99.1   |   | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                 |
| 99.2   |   | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

(b)       Reports on Form 8-K

 

The Company filed aReport on Form 8-K dated June 28, 2002 to report a change in the Company’scertifying accountant pursuant to Item 4.

 

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OMTOOL, LTD.

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|            | OMTOOL, LTD. |
|-----------------|--------------|
|            |         |   |
| August 14, 2002 | By:          | /s/ Timothy P. Losik |   |
|            |         | Timothy P. Losik |
|            |         | Vice President, Chief Financial Officer, Chief  Operating Officer, Secretary and Treasurer |

 

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