**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended March 31, 2003**

 

 

**OR**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe transition period from          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 has: (1)filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes ý    No o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934).

 

Yes o      No ý

 

There were 1,746,113 shares of the Company’s CommonStock, par value $0.01, outstanding on May 4, 2003.

 

----

 

**OMTOOL, LTD. AND SUBSIDIARIES**

 

FORM 10-Q

For the Quarter EndedMarch 31, 2003

CONTENTS

 
| Item Number                                                                                               |   |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                      |   |
| PART I:FINANCIAL INFORMATION                                                                              |   |
|                                                                                                      |   |
| Item 1.   Consolidated Financial  Statements                                                         |   |
| Consolidated Balance Sheets  as of March 31, 2003 (Unaudited) and December 31, 2002                       |   |
| Consolidated  Statements of Operations for the three months ended March 31, 2003 and 2002  (Unaudited)    |   |
| Consolidated  Statements of Cash Flows for the three months ended March 31, 2003 and 2002  (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                                |   |
|                                                                                                      |   |
| Item 4.  Controls and Procedures                                                                     |   |
|                                                                                                      |   |
| PART II:OTHER INFORMATION                                                                                 |   |
|                                                                                                      |   |
|                                                                                                      |   |
| Item  6.  Exhibits and Reports on Form 8-K                                                           |   |
|                                                                                                      |   |
| Signatures                                                                                                |   |
|                                                                                                      |   |
| Certifications                                                                                            |   |

 

2

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**PART I:  FINANCIALINFORMATION**

Item 1.  Financial Statements

 

**OMTOOL, LTD. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

 

** **
|                                                                                                                                                                                                                          |   | **March 31,**   |       | **December  31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|-------------------|------------|
|                                                                                                                                                                                                                          |   | **2003**        |       | **2002**          |       |
|                                                                                                                                                                                                                          |   | **(Unaudited)** | ** ** |              | ** ** |
| **Assets**                                                                                                                                                                                                                    |   |            |       |              |       |
| Current assets:                                                                                                                                                                                                               |   |            |       |              |       |
| Cash and cash  equivalents                                                                                                                                                                                                    |   | $               | 6,908,974  |              | $          | 8,192,523 |   |
| Short-term  investments                                                                                                                                                                                                       |   | 1,999,449       |       | 1,597,155         |       |
| Accounts  receivable, less reserves of $446,000 at March 31, 2003 and $615,000 at  December 31, 2002                                                                                                                          |   | 1,222,662       |       | 1,664,849         |       |
| Inventory —  finished goods                                                                                                                                                                                              |   | 248,654         |       | 187,918           |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                    |   | 332,574         |       | 420,083           |       |
| Total current  assets                                                                                                                                                                                                         |   | 10,712,313      |       | 12,062,528        |       |
|                                                                                                                                                                                                                          |   |            |       |              |       |
| Property and  equipment, net                                                                                                                                                                                                  |   | 625,046         |       | 615,703           |       |
|                                                                                                                                                                                                                          |   |            |       |              |       |
| Other assets                                                                                                                                                                                                                  |   | 13,962          |       | 13,962            |       |
|                                                                                                                                                                                                                          |   |            |       |              |       |
| Total assets                                                                                                                                                                                                                  |   | $               | 11,351,321 |              | $          | 12,692,193 |   |
|                                                                                                                                                                                                                          |   |            |       |              |       |
|                                                                                                                                                                                                                          |   |            |       |              |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                |   |            |       |              |       |
| Current  liabilities:                                                                                                                                                                                                         |   |            |       |              |       |
| Accounts payable                                                                                                                                                                                                              |   | $               | 1,100,478  |              | $          | 1,019,584 |   |
| Accrued  liabilities                                                                                                                                                                                                          |   | 1,363,892       |       | 1,665,046         |       |
| Accrued state  sales tax                                                                                                                                                                                                      |   | 910,654         |       | 1,275,735         |       |
| Deferred revenue                                                                                                                                                                                                              |   | 3,338,668       |       | 3,397,568         |       |
| Total current  liabilities                                                                                                                                                                                                    |   | 6,713,692       |       | 7,357,933         |       |
|                                                                                                                                                                                                                          |   |            |       |              |       |
| Stockholders’  equity:                                                                                                                                                                                                   |   |            |       |              |       |
| Preferred Stock,  $.01 par value —                                                                                                                                                                                       |   |            |       |              |       |
| Authorized —  2,000,000 shares; Issued and outstanding — none                                                                                                                                                       |   | —          |       | —            |       |
| Common Stock,  $.01 par value —                                                                                                                                                                                          |   |            |       |              |       |
| Authorized — 35,000,000  shares; Issued — 1,858,482 shares at March 31, 2003 and December 31, 2002,  Outstanding —  1,746,113 and 1,744,542  shares at March 31, 2003 and December 31, 2002, respectively |   | 18,585          |       | 18,585            |       |
| Additional  paid-in capital                                                                                                                                                                                                   |   | 31,980,616      |       | 31,990,720        |       |
| Accumulated  deficit                                                                                                                                                                                                          |   | (26,337,245     | )          | (25,671,834       | )          |
| Treasury stock  (112,369 shares at cost at March 31, 2003 and 113,940 shares at cost at  December 31, 2002)                                                                                                                   |   | (911,826        | )          | (924,570          | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                         |   | (112,501        | )          | (78,641           | )          |
| Total  stockholders’ equity                                                                                                                                                                                              |   | 4,637,629       |       | 5,334,260         |       |
|                                                                                                                                                                                                                          |   |            |       |              |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                              |   | $               | 11,351,321 |              | $          | 12,692,193 |   |

 

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  March 31,** |     |
|-------------------------------------------------------|--------|------------------------------------|----------|
|                                                  |   | **2003**                           |     | **2002** |   |
| Revenues:                                             |   |                               |     |   |   |
| Software license                                      |   | $                                  | 877,491  |   | $ | 1,278,821 |   |
| Hardware                                              |   | 506,208                            |     | 783,041 |   |
| Service and  other                                    |   | 1,598,456                          |     | 1,900,762 |   |
|                                                  |   |                               |     |   |   |
| Total revenues                                        |   | 2,982,155                          |     | 3,962,624 |   |
|                                                  |   |                               |     |   |   |
| Cost of  revenues:                                    |   |                               |     |   |   |
| Software license                                      |   | 54,035                             |     | 74,213 |   |
| Hardware                                              |   | 348,190                            |     | 517,116 |   |
| Service and  other                                    |   | 791,754                            |     | 770,050 |   |
|                                                  |   |                               |     |   |   |
| Total cost of  revenues                               |   | 1,193,979                          |     | 1,361,379 |   |
|                                                  |   |                               |     |   |   |
| Gross profit                                          |   | 1,788,176                          |     | 2,601,245 |   |
|                                                  |   |                               |     |   |   |
| Operating  expenses:                                  |   |                               |     |   |   |
| Sales and  marketing                                  |   | 1,331,848                          |     | 1,646,830 |   |
| Research and  development                             |   | 584,605                            |     | 832,441 |   |
| General and  administrative                           |   | 731,800                            |     | 1,260,557 |   |
|                                                  |   |                               |     |   |   |
| Total operating  expenses                             |   | 2,648,253                          |     | 3,739,828 |   |
|                                                  |   |                               |     |   |   |
| Loss from  operations                                 |   | (860,077                           | )        | (1,138,583 | ) |
|                                                  |   |                               |     |   |   |
| Interest income                                       |   | 39,268                             |     | 51,181 |   |
|                                                  |   |                               |     |   |   |
| Loss before tax  benefit                              |   | (820,809                           | )        | (1,087,402 | ) |
|                                                  |   |                               |     |   |   |
| Tax benefit                                           |   | (155,398                           | )        | —— |   |
|                                                  |   |                               |     |   |   |
| Net loss                                              |   | $                                  | (665,411 | ) | $ | (1,087,402 | ) |
|                                                  |   |                               |     |   |   |
|                                                  |   |                               |     |   |   |
|                                                  |   |                               |     |   |   |
| Net loss per  share                                   |   |                               |     |   |   |
| Basic and  Diluted                                    |   | $                                  | (0.38    | ) | $ | (0.60 | ) |
|                                                  |   |                               |     |   |   |
| Weighted average number of common shares  outstanding |   |                               |     |   |
| Basic and  Diluted                                    |   | 1,745,956                          |     | 1,815,064 |   |
|                                                  |   |                               |     |   |   |

 

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)

 
|                                                                              |   | **Three  months ended  March 31,** |            |
|-----------------------------------------------------------------------------------|--------|------------------------------------|-----------------|
|                                                                              |   | **2003**                           |            | **2002** |   |
| Cash Flows from  Operating Activities:                                            |   |                               |            |   |   |
| Net loss                                                                          |   | $                                  |  (665,411  | ) | $ |  (1,087,402 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities— |   |                               |            |   |   |
| Depreciation and  amortization                                                    |   | 113,747                            |            | 136,901 |   |
| Accounts  receivable reserve                                                      |   | (166,799                           | )               | — |   |
| Changes in  assets and liabilities—                                          |   |                               |            |   |   |
| Accounts  receivable                                                              |   | 602,816                            |            | (739,015 | ) |
| Prepaid expenses  and other current assets                                        |   | 94,381                             |            | 88,304 |   |
| Inventory                                                                         |   | (61,064                            | )               | 73,135 |   |
| Accounts payable                                                                  |   | 82,966                             |            | 121,413 |   |
| Accrued  liabilities                                                              |   | (304,065                           | )               | (122,172 | ) |
| Accrued state  sales tax                                                          |   | (365,081                           | )               | 142,157 |   |
| Deferred revenue                                                                  |   | (50,170                            | )               | 243,630 |   |
|                                                                              |   |                               |            |   |   |
| Net cash used in  operating activities                                            |   | (718,680                           | )               | (1,143,049 | ) |
|                                                                              |   |                               |            |   |   |
| Cash Flows from  Investing Activities:                                            |   |                               |            |   |   |
| Purchases of  property and equipment                                              |   | (123,762                           | )               | (85,525 | ) |
| Purchases of  short-term investments                                              |   | (1,999,449                         | )               | — |   |
| Proceeds from  sale of short-term investments                                     |   | 1,597,155                          |            | 1,296,750 |   |
|                                                                              |   |                               |            |   |   |
| Net cash (used  in) provided by investing activities                              |   | (526,056                           | )               | 1,211,225 |   |
|                                                                              |   |                               |            |   |   |
| Cash Flows from  Financing Activities:                                            |   |                               |            |   |   |
| Net proceeds  from issuance of common stock                                       |   | 2,640                              |            | 10,893 |   |
| Net cash  provided by financing activities                                        |   | 2,640                              |            | 10,893 |   |
|                                                                              |   |                               |            |   |   |
| Foreign exchange  effect on cash                                                  |   | (41,453                            | )               | (2,527 | ) |
|                                                                              |   |                               |            |   |   |
| Net (decrease)  increase in cash and cash equivalents                             |   | (1,283,549                         | )               | 76,542 |   |
|                                                                              |   |                               |            |   |   |
| Cash and cash  equivalents, beginning of period                                   |   | 8,192,523                          |            | 11,194,118 |   |
|                                                                              |   |                               |            |   |   |
| Cash and cash  equivalents, end of period                                         |   | $                                  |  6,908,974 |   | $ |  11,270,660 |   |
|                                                                              |   |                               |            |   |   |

 

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)     Basisof 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, 2002 as filed with the SEC on March 11,2003. 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 resultsof operations for the three month period ended March 31, 2003 are not necessarilyindicative of the results to be expected for the full fiscal year.

 

The Company’s total revenues for the first three months of 2003declined substantially from total revenues for the first three months of 2002primarily due to the general decline in information technology spending  and a decrease in demand for enterprisesoftware solutions.  This decreasereflected the overall sluggishness of the United States economy in the firstthree months of 2003 causing customers and prospective customers to defertechnology purchases. As a result of this decrease in demand, the Company’srevenues for the three months ended March 31, 2003 decreased 25% from revenuesfor the three months ended March 31, 2002. The Company’s net operating loss improved from $1.1 million for thethree months ended March 31, 2002 to $821,000 for the three months ended March31, 2003 due primarily to reduced operating expenses associated with areduction in the Company’s workforce. The Company has experienced declining revenues and 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  limited forecasting visibility, the Companycannot  predict that the financial andoperating performance, financial position or cash flow will improve over thenext twelve months.  Although theCompany’s operating cash flow for the three months ended March 31, 2003resulted in a use of cash of $719,000, the Company’s cash, cash equivalents andshort-term investments at March 31, 2003 were $8.9 million. The Companyanticipates that its balance of cash, cash equivalents and short-terminvestments will be approximately $8 million at the end of the second quarterof 2003. The Company believes that its existing cash, cash equivalents andshort-term investments will be sufficient to meet the Company’s working capitaland capital expenditures for at least the next twelve months.

 

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

 

TheCompany reports earnings per share in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 128,*Earnings per Share*.  Diluted weighted average shares outstandingfor the three months ended March 31, 2003 and March 31, 2002 exclude thepotential common shares related to 376,650 and 339,001, respectively,outstanding stock options because to include them would have been antidilutivefor the periods presented.

 

**(3)     IncomeTaxes**

 

SFASNo. 109, *Accountingfor Income Taxes,* requires a valuation allowance to be recordedagainst deferred tax assets when it is more likely than not that some or all ofthe deferred tax assets will not be realized. As a result of continued economic uncertainty, the Company has provideda full valuation allowance against all of its net deferred tax assets and willdo so until it returns to an appropriate level of taxable income.  The ultimate realization of these deferredtax assets depends upon the Company’s ability to generate sufficient futuretaxable income. If the Company is successful in generating sufficient futuretaxable income, the Company will reduce the valuation allowance through areduction in income tax expense in the future.

 

Duringthe three months ended March 31, 2003, the Company recorded $155,398 of taxbenefit due to a tax refund that its United Kingdom subsidiary received duringthe first quarter of 2003.  Thissubsidiary had incurred a loss for the year

 

6

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ended December 31, 1999 whichresulted in an income tax benefit.  Thetax benefit was carried back to prior years’ taxes paid and resulted in a taxrefund.  Because the subsidiary wasundergoing an Inland Revenue audit for tax year 1999, there existed doubt aboutthe realizability of this refund and the Company did not record the benefit onits books until the audit was cleared and the cash was received, both of whichoccurred in the first quarter of 2003.

 

**(4)    ****ComprehensiveLoss**

 

The components of the Company’s comprehensive loss areas follows:

 
|                                      |   | **Three  months ended  March 31,** |     |
|-------------------------------------------|--------|------------------------------------|----------|
|                                      |   | **2003**                           |     | **2002** |   |
| Net loss                                  |   | $                                  | (665,411 | ) | $ | (1,087,402 | ) |
| Foreign currency  translation adjustments |   | (33,860                            | )        | 5,930 |   |
| Comprehensive  loss                       |   | $                                  | (699,271 | ) | $ | (1,081,472 | ) |

 

**(5)       StockBased Compensation**

 

TheCompany accounts for stock-based compensation for employees under therecognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,*and related interpretations.  Thefollowing table illustrates the effect on net loss and net loss per share ifthe Company had applied the fair value recognition provisions of FASB StatementNo. 123, *Accounting for Stock-BasedCompensation,* to stock-based employee compensation.

 
|                                                                                                        |   | **Three months Ended March 31,** |     |
|-------------------------------------------------------------------------------------------------------------|--------|----------------------------------|----------|
|                                                                                                        |   | **2003**                         |     | **2002** |   |
|                                                                                                        |   |                             |     |   |   |
| Net loss, as  reported                                                                                      |   | $                                | (665,411 | ) | $ | (1,087,402 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value method  for all awards |   | (265,994                         | )        | (250,620 | ) |
| Pro forma net  loss                                                                                         |   | $                                | (931,405 | ) | $ | (1,338,022 | ) |
|                                                                                                        |   |                             |     |   |   |
| Net loss per  share:                                                                                        |   |                             |     |   |   |
| Basic and  diluted, as reported                                                                             |   | $                                | (0.38    | ) | $ | (0.60 | ) |
| Basic and  diluted, pro forma                                                                               |   | $                                | (0.53    | ) | $ | (0.74 | ) |

 

**(6)     Segmentand Geographic Information**

 

To date, the Company hasviewed 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 $441,000 for the three months endedMarch 31, 2003 and $757,000 for the three months ended March 31, 2002. TheCompany’s revenues from international sources were primarily generated fromcustomers located in Europe. The following table represents amounts relating togeographic locations:

 
|               |   | **Three  months ended  March 31,** |      |
|--------------------|--------|------------------------------------|-----------|
| Total revenues (1) |   | **2003**                           |      | **2002** |   |
| United States      |   | $                                  | 2,541,377 |   | $ | 3,205,762 |   |
| Europe             |   | 350,498                            |      | 492,439 |   |
| Rest of World      |   | 90,280                             |      | 264,423 |   |
|               |   | $                                  | 2,982,155 |   | $ | 3,962,624 |   |

 

7

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|                   |   | **March 31,** |    | **December  31,** |   |
|------------------------|--------|---------------|---------|------------------------|--------|
| Long-lived  assets (2) |   | **2003**      |    | **2002**               |   |
| United States          |   | $             | 615,450 |                   | $      | 600,116 |   |
| United Kingdom         |   | 23,558        |    | 29,549                 |   |
|                   |   | $             | 639,008 |                   | $      | 629,665 |   |

----

(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 andfinancial instruments.

 

**(7)     Guarantees**

 

In November 2002, the FASB issued FASB Interpretation45,*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (“FIN 45”). FIN 45 elaborateson the existing disclosure requirements for most guarantees, including loanguarantees such as standby letters of credit. It also clarifies that at thetime a company issues a guarantee, the company must recognize an initialliability for the fair value, or market value, and of the obligations it assumesunder the guarantee and must disclose that information in its interim andannual financial statements. The provisions related to recognizing a liabilityat inception of the guarantee for the fair value of the guarantor’s obligationsdoes not apply to product warranties or to guarantees accounted for asderivatives. The disclosure requirements are effective for financial statementsissued after December 15, 2002 and the recognition/measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002. The following is a summary of the Company’sagreements that it has determined are within the scope of FIN  45.

 

Aspermitted under Delaware law, the Company has agreements whereby it indemnifiesits officers and directors for certain events or occurrences while the officeror director is, or was serving, at the Company’s request in such capacity. Theterm of the indemnification period is for the officer’s or director’s lifetime.The maximum potential amount of future payments the Company could be requiredto make under these indemnification agreements is unlimited; however, theCompany has a Director and Officer insurance policy that limits its exposureand enables it to recover a portion of any future amounts paid. As a result ofits insurance policy coverage, the Company believes that the estimated fairvalue of these indemnification agreements is minimal.

 

TheCompany enters into standard indemnification agreements in its ordinary courseof business. Pursuant to these agreements, the Company indemnifies, holdsharmless, and agrees to reimburse the indemnified party for losses suffered orincurred by the indemnified party, generally its resellers or certaincustomers, in connection with any U.S. patent, or any copyright or otherintellectual property infringement claim by any third party with respect to itsproducts. The term of these indemnification agreements is generally perpetualany time after execution of the agreement. The maximum potential amount offuture payments the Company could be required to make under theseindemnification agreements is unlimited. The Company has never incurred coststo defend lawsuits or settle claims related to these indemnificationagreements. As a result, the Company believes that the estimated fair value ofthese agreements is minimal.

 

TheCompany warrants that its software products will perform in all materialrespects in accordance with its standard published specifications in effect atthe time of delivery of the licensed products to certain of its customers forthe life of the product. If necessary, the Company would provide for theestimated cost of product warranty based on specific warranty claims and claimhistory, however, the Company has never incurred significant expense under itsproduct warranty. As a result, the Company believes that the estimated fairvalue on these agreements is minimal.

 

**(8)     RecentlyIssued Accounting Standards**

 

InNovember 2002, the FASB Emerging Issues Task Force released Issue No. 00-21, *Accountingfor Revenue Arrangements with Multiple Deliverables* (“EITF 00-21”).EITF 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which it will perform multiple revenue-generatingactivities. EITF 00-21 establishes three principles: (a) revenue arrangementswith multiple deliverables should be divided into separate units of accounting;(b) arrangement consideration should be allocated among the separate units ofaccounting based on their relative fair values; and (c) revenue recognitioncriteria should be considered separately for separate units of accounting. EITF00-21 is effective for all arrangements entered into in fiscal periodsbeginning after June 15, 2003, with early adoption permitted. The Company is

 

8

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currently reviewing andevaluating the scope of EITF 00-21, but management currently believes that theCompany’s multiple element arrangements fall within the scope of SOP 97-2 andtherefore, EITF 00-21 will not be applicable to the Company.

 

9

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**Item2.**

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the accompanying consolidated financial statementsfor the periods specified and the associated notes.  Further reference should be made to the Company’s Annual Reporton Form 10-K as filed with the Securities Exchange Commission on March 11,2003.

# **Overview**

 

Omtool, Ltd. is a leading provider of e-mailand fax-based messaging software that enables secure, confirmed documentexchange between businesses. The Companywas incorporated in March 1991 and shipped its initial facsimile softwareproducts in 1991. Omtool’s GenidocsTM product family enables users throughout anenterprise to deliver 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 products directlyto end-users and indirectly through resellers.

 

TheCompany’s total revenues for the first three months of 2003 declinedsubstantially from total revenues for the first three months of 2002 primarilydue to the general decline in information technology spending and a decrease indemand for enterprise software solutions. This decrease reflected the overall sluggishness of the United States economyin the first three months of 2003 causing customers and prospective customersto defer technology purchases. As a result of this decrease in demand, theCompany’s revenues for the three months ended March 31, 2003 decreased 25% fromrevenues for the three months ended March 31, 2002.  The Company’s net operating loss improved from $1.1 million forthe three months ended March 31, 2002 to $821,000 for the three months endedMarch 31, 2003 due primarily to reduced operating expenses associated with areduction in the Company’s workforce. The Company has experienced declining revenues and 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 limitedforecasting visibility, the Company cannot predict that the financial andoperating performance, financial position or cash flow will improve over thenext twelve months.  Although theCompany’s operating cash flow for the three months ended March 31, 2003resulted in a use of cash of $719,000, the Company’s cash, cash equivalents andshort-term investments at March 31, 2003 were $8.9 million. The Companyanticipates that its balance of cash, cash equivalents and short-terminvestments will be approximately $8 million at the end of the second quarterof 2003. The Company believes that its existing cash, cash equivalents andshort-term investments will be sufficient to meet the Company’s working capitaland capital expenditures for at least the next twelve months.

 

TheCompany cannot predict when the market for enterprise software solutions willimprove. When the market does improve, the Company cannot predict whether, andto what extent, the demand for its products will increase.  The Company believes that the current lackof demand for enterprise software solutions will continue for the foreseeablefuture, and that its operations and financial results will continue to benegatively affected during that period. Any continued decline in the Company’srevenues will have a significant impact on the Company’s financial results,particularly because a significant portion of the Company’s operating costs(such as personnel, rent and depreciation) are fixed in advance of a particularquarter. As a result, 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.

 

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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, revenue from a large order may constitute asignificant portion of the Company’s total revenues in a particular quarter.

 

TheCompany has historically derived a substantial portion of its total revenuesfrom sales within North America. Sales outside of North America (primarily inEurope) represented approximately 13% and 14% of the Company’s total revenuesfor the three months ended March 31, 2003 and 2002, respectively.

 

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

 

TheCompany continues to actively recruit value-added resellers (“VARs”), systemsintegrators, resellers and distributors to expand its indirect distributionchannel. The Company is pursuing sales opportunities via its solution/resellerchannel as well as focusing sales efforts on specific market segments in orderto facilitate product acceptance.  Salesthrough the Company’s indirect distribution channels represented approximately22% and 20% of the Company’s total revenues for the three months ended March31, 2003 and 2002, respectively.

 

## **Critical AccountingPolicies and Estimates**

 

TheCompany has identified the policies and estimates below as critical to itsbusiness operations and the understanding of its results of operations. Theimpact and any associated risks related to these policies on the Company’sbusiness operations is discussed throughout Management’s Discussion andAnalysis of Financial Condition and Results of Operations where such policiesaffect the Company’s reported and expected financial results. Note that theCompany’s preparation of this Form 10-Q requires management to make estimatesand assumptions that affect the reported amount of assets and liabilities,disclosure of contingent assets and liabilities at the date of the Company’sfinancial statements, and the reported amounts of revenue and expenses duringthe reporting period. There can be no assurance that actual results will notdiffer from those estimates.

 

*RevenueRecognition and Accounts Receivable Reserves.*  The Companyderives its revenue from primarily two sources (i) product revenue, whichincludes software license and hardware revenue and (ii) services and supportrevenue, which includes software maintenance and support, installation,training and consulting revenue. The Company licenses its software products ona 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 orderstock.  The Company’s products are soldto resellers and directly to end-users without any specifically stated rightsof return. Occasionally, however, the Company, in its sole discretion, willaccept a product return if the end-user finds that the product does not fit itsneeds. The Company also sells hardware products, which are provided by athird-party, on a pass through basis, plus an additional mark-up, to end-usersand indirectly through resellers. To support its software products, the Companysells software maintenance and support, installation, training and consultingservices to end-users and indirectly through resellers.

 

TheCompany applies the provisions of Statement of Position (“SOP”) 97-2, *SoftwareRevenue Recognition*, as amended by SOP 98-9, Modification of SOP97-2, *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 ofReturn Exists*, with respect to providing for potential futureproduct returns.   As described below,significant management judgments and estimates must

 

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be made and used in connection with the revenue recognized in anyaccounting period.  Material differencesmay result in the amount and timing of the Company’s revenue if management madedifferent judgments or utilized different estimates.

 

TheCompany recognizes revenue from the sale of software products and hardware toboth end-users and resellers when persuasive evidence of an arrangement exists,the products have been delivered, the fee is fixed or determinable, collectionof the resulting receivable is reasonably assured and there are no customeracceptance provisions. The Company maintains a reserve for potential product returns.Software maintenance and support revenue is recognized ratably over the term ofthe related maintenance period, typically one-year.  Other services revenue is recognized as the services areperformed. If an arrangement includes an acceptance provision, the Company willdefer 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.

 

TheCompany’s transactions frequently involve the sales of software, hardware andrelated services under multiple element arrangements.   Revenue under multiple element arrangements is allocated to eachelement under the residual method, in accordance 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 allocated to the delivered elements, such assoftware license and hardware revenue, is the difference between the totalarrangement value and the amount allocated to the undelivered elements. If thedelivered elements include both software and hardware, the amount allocated tohardware revenue is based on the price charged to the Company by the thirdparty vendor plus an additional mark up, with the remainder allocated tosoftware revenue. To the extent that a discount is offered in the arrangement,the entire discount is allocated to the delivered element or elements. If thedelivered elements include hardware and software, the discount is allocated tothe hardware and software based on their respective list prices.

 

Forall sales, the Company uses a binding purchase order, a signed contract or acredit card authorization as evidence of an arrangement.  Sales through the Company’s resellers areevidenced by a master agreement governing the relationship, together with bindingpurchase orders, on a transaction-by-transaction basis. 

 

At thetime of the transaction, the Company assesses whether the fee associated withthe transaction is fixed or determinable and whether or not collection isreasonably assured.  If a significantportion of a fee is due beyond the Company’s normal payment terms, which arethirty to sixty days from invoice date, the Company accounts for the fee as notbeing fixed or determinable.  In thesecases, the Company recognizes revenue as the fees become due. The Companyassesses collection based on a number of factors, including past transactionhistory with 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 does nothave a favorable report or the Company does not have enough credit informationto determine 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.

 

TheCompany reserves for potential product returns and makes adjustments to thereserve as needed, based on historical product return rates, and considers theimpact of new product introductions, changes in customer demand and acceptanceof the Company’s products.  Management’scalculation of the estimated return reserve is based upon (1) an accountspecific review of potential returns, where a return probability is known, and(2) a general estimate based upon past historical returns as a percentage ofrevenue.   Significant managementjudgments and estimates must be made and used in connection with establishingthe sales returns reserve in any accounting period. Material differences mayresult in the amount and timing of revenue for any period if management made differentjudgments or utilized different estimates. Similarly, management must make estimates of the uncollectability of theCompany’s accounts receivable. Management specifically analyzes accounts receivable and historical baddebts, customer credit-worthiness, current economic trends and changes incustomer payment patterns when evaluating the adequacy of the allowance fordoubtful accounts.  Management’scalculation of the estimated accounts receivable reserve is based upon (1) anaccount specific review of potential uncollectible accounts, where a bad debtprobability is known, and (2) a general estimate based upon past historical baddebts as a percentage of accounts receivable.

 

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TheCompany’s combined accounts receivable and returns reserve was approximately$446,000 and $626,000 as of March 31, 2003 and 2002, respectively.  Both components of calculating the estimatedreserve, specific identification and historic ratio, are materialjudgments.  These judgments are based onhistoric trends, taking into consideration current business and economicconditions, which could change materially, thus changing the required reservelevel materially.  The potential changecould be positive, in the event the reserve estimate proves unnecessary, ornegative, if the reserve proves inadequate.

 

TheCompany’s deferred revenue is comprised mainly of revenue that is deferred forsoftware maintenance and support contracts. The other components of deferred revenue are the amounts from salestransactions****that were deferred because they did not meet all of theprovisions of the Company’s revenue recognition policy.

 

* Software Development Costs*. Software development costs are considered for capitalization whentechnological feasibility is established in accordance with SFAS No. 86, *Accountingfor the Costs of Computer Software To Be Sold, Leased or**OtherwiseMarketed*. The Company sells software in a market that is subject torapid technological change, new product introductions and changing customerneeds. Accordingly, the Company has determined that it cannot determinetechnological feasibility until the development state of the product is nearlycomplete. The time period during which cost could be capitalized from the pointof reaching technological feasibility until the time of general product releaseis very short and, consequently, the amounts that might be capitalized are notmaterial to the Company’s consolidated financial position or results ofoperations. Therefore, the Company charges all software development costs tooperations in the period incurred.

 

*Taxes*. The Company is required to estimate its income and state sales taxes.This process involves estimating the Company’s actual current tax obligationstogether with assessing differences resulting from the different treatment ofitems for tax and accounting purposes which result in deferred income taxassets and liabilities and accrued state sales tax liabilities. The Company hasdeferred income tax assets and liabilities and accrued state sales taxliabilities included within its balance sheet.

 

TheCompany’s deferred tax assets are assessed for each reporting period as towhether it is more likely than not that they will be recovered from futuretaxable income, including assumptions regarding on-going tax planningstrategies. To the extent the Company believes that recovery is uncertain, theCompany must establish a valuation allowance for assets not expected to berecovered. Changes to the valuation allowance are included as an expense orbenefit within the tax provision in the statement of operations.

 

TheCompany will continue to provide a valuation allowance against all of its netdeferred tax assets until it returns to an appropriate level of taxable income.The ultimate realization of these deferred tax assets depends upon theCompany’s ability to generate sufficient future taxable income. If the Companyis successful in generating sufficient future taxable income, the Company willreduce the valuation allowance through a reduction in income tax expense in thefuture.

 

Accruedstate sales taxes are estimated for each reporting period based on tax rates ineffect for the reporting periods in each of the states where the Company haspotential nexus. In the event that actual results differ from these estimates,the Company’s state sales taxes expense could be materially impacted.

 

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**Resultsof Operations**

 

The following table sets forth certain financial datafor the periods indicated as a percentage of total revenues:

 
|                        |   | **Three  months ended  March 31,** |   |
|-----------------------------|--------|------------------------------------|--------|
|                        |   | **2003**                           |   | **2002** |   |
| Revenues:                   |   |                               |   |   |   |
| Software license            |   | 29.4                               | %      | 32.2 | % |
| Hardware                    |   | 17.0                               |   | 19.8 |   |
| Service and  other          |   | 53.6                               |   | 48.0 |   |
| Total revenues              |   | 100.0                              |   | 100.0 |   |
| Cost of revenues:           |   |                               |   |   |   |
| Software license            |   | 1.8                                |   | 1.9 |   |
| Hardware                    |   | 11.7                               |   | 13.0 |   |
| Service and  other          |   | 26.6                               |   | 19.5 |   |
| Total cost of  revenues     |   | 40.0                               |   | 34.4 |   |
| Gross profit                |   | 60.0                               |   | 65.6 |   |
| Operating  expenses:        |   |                               |   |   |   |
| Sales and  marketing        |   | 44.6                               |   | 41.5 |   |
| Research and  development   |   | 19.6                               |   | 21.0 |   |
| General and  administrative |   | 24.5                               |   | 31.8 |   |
| Total operating  expenses   |   | 88.8                               |   | 94.3 |   |
| Loss from  operations       |   | (28.9                              | )      | (28.7 | ) |
| Interest income             |   | 1.3                                |   | 1.3 |   |
| Tax benefit                 |   | (5.2                               | )      | — |   |
|                        |   |                               |   |   |   |
| Net loss                    |   | (22.4                              | )%     | (27.4 | )% |
|                        |   |                               |   |   |   |
| Gross profit:               |   |                               |   |   |   |
| Software license            |   | 93.8                               | %      | 94.2 | % |
| Hardware                    |   | 31.2                               |   | 34.0 |   |
| Service and  other          |   | 50.5                               |   | 59.5 |   |

 

**ThreeMonths Ended March 31, 2003 and 2002**

## ***Revenues***

 

*Total Revenues.* The Company’s total revenues were approximately $3.0 million forthe three months ended March 31, 2003 and $4.0 million for the three monthsended March 31, 2002.

 

*Software License.*  The Company’s 2003 software license revenues arecomprised of the following:  95% fromits fax related product lines and 5% from its non-fax related productlines.  The Company’s 2002 softwarelicense revenues are comprised of the following:  89% from its fax related product lines and 11% from its non-faxrelated product lines.  Softwarelicense revenues were approximately $877,000 for the three months endedMarch 31, 2003 and $1.3 million for the three months ended March 31, 2002,representing a decrease of 31%.  Thedecline in software license revenue can be attributed to a number of factorsthat include a general decline in information technology spending, a decreasein demand for enterprise software solutions and continued sluggishness of theUnited States economy causing customers and prospective customers to defertechnology purchases.  Software licenserevenues accounted for 29% and 32% of total revenues for each respectiveperiod.  The decrease in softwarelicense revenue as a percentage of total revenues is a result of higherrelative service and other revenues in the first quarter of 2003 compared tothe first quarter of 2002.

 

*Hardware.* Hardware revenues were approximately $506,000 for the three months endedMarch 31, 2003 and $783,000 for the three months ended March 31,2002, representing a decrease of 35%. Hardware revenues accounted for 17% and20% of

 

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total revenues foreach respective period.  The decrease inhardware revenues was due primarily to the decrease in the number of softwaresales in the three month period ended March 21, 2003 resulting in a decrease inaccompanying hardware sales.  Thedecrease in hardware revenue as a percentage of total revenues is a result ofhigher relative service and other revenues in the first quarter of 2003compared to the first quarter of 2002.

 

*Service and Other.* Service and other revenues were approximately $1.6 million for thethree months ended March 31, 2003 and $1.9 million for the three monthsended March 31, 2002, representing a decrease of 16%. Service and otherrevenues accounted for 54% and 48% of total revenues for each respective period.The decrease in service and other revenues is due primarily to decreases insoftware maintenance and support revenues and consulting service revenues.  The increase in service and other revenuesas a percent of total revenues is due to the fact that license and hardwarerevenue declined in total resulting in an increased percentage in servicerevenue to total revenue.

 

*Cost of Revenues*

 

*Software License.* Cost of software license revenues consists primarily of the costs ofsublicensing third-party software products, product media and productduplication.  Cost of software licenserevenues was approximately $54,000 and $74,000 for the three months endedMarch 31, 2003 and 2002, respectively, representing a decrease of 27%.  The decrease is due to a decrease in softwarelicense revenue as the cost of software license revenues as a percentage ofsoftware license revenue remained consistent at 6% for each respectiveperiod.  Software license gross marginpercentages remained consistent at 94% for the three month periods ended March31, 2003 and March 31, 2002.

 

*Hardware.* Cost of hardware revenues consists primarily of the costs of third-partyhardware products. Cost of hardware revenues was approximately $348,000 and$517,000 for the three months ended March 31, 2003 and 2002,respectively, representing 69% and 66% of hardware revenues for each respectiveperiod. The decrease in dollar amount for the cost of hardware revenues was dueprimarily to the decrease of hardware unit sales accompanying the Company’sproducts. The gross margin percentage for hardware sales was 31% and 34% foreach of the three month periods ended March 31, 2003 and 2002 representing achange in the mix of hardware products sold.

 

*Service and Other.* Cost of service and other revenues consists primarily of the costsincurred in providing telephone support as well as other miscellaneous customerservice-related expenses.  Cost ofservice and other revenues was approximately $792,000 and $770,000 for thethree months ended March 31, 2003 and 2002, respectively, representing 50% and41% of service and other revenues for each respective period.  The gross margin percentage for service andother revenues decreased to 50% for the three months ended March 31, 2003,compared to 59% in the same period in 2002. The decrease in gross margin and the increase in the cost of service andother revenues was due primarily to an increased number of employees in theinstallation services area and the associated costs of supporting suchemployees combined with the decrease in service and other revenue.

 

*Operating Expenses*

 

*Sales and 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 wereapproximately $1.3 million and $1.6 million for the three monthsended March 31, 2003 and 2002, respectively, or 45% and 42% of total revenuesfor each respective period.  The decrease in dollar amount was due to adecrease in the number of sales personnel and their associated costs as well asa decrease in advertising expenses during the quarter.  The Company expects that sales and marketingexpenses are likely to remain consistent in absolute dollars.

 

*Research and Development.* Research and development expensesinclude expenses associated with the development of new products, enhancementsof existing products and quality assurance activities. These expenses consistprimarily of employee salaries, benefits, associated overhead costs, consultingexpenses and the cost of software development tools. Research and developmentexpenses were approximately $585,000 for the three months ended March 31, 2003and $832,000 for the three months ended March 31, 2002, representing 20% and21% of total revenues for each respective period.  The decrease in the expenseand in the expense as a percent of total revenues was due to a fewer number ofemployees in the research and development department.  The Company expects research and developmentexpenses to remain consistent in absolute dollars.

 

*Generaland Administrative.*  General and administrative expenses consistprimarily of employee salaries, benefits for administrative, executive andfinance personnel and associated corporate general and administrative expenses.General and

 

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administrative expenses were approximately $732,000 and $1.3 millionfor the three months ended March 31, 2003 and 2002, respectively, or 25% and32% of total revenues for each period. The decrease, in dollar amount and as apercent of total revenues, is due to the reduction in the number of general andadministrative personnel and overhead costs associated with supporting suchpersonnel, a decrease in management consulting expenses and a decrease in statesales tax accruals during the quarter. The Company expects general and administrative expenses to remainconsistent in absolute dollars.

 

*Interest Income.*  Interest income consists principally ofinterest income earned on cash balances.  Interestincome was approximately $39,000 for the three months ended March 31, 2003and $51,000 for the three months ended March 31, 2002.  The decrease is due to changes in principalbalances of the Company’s investments.

 

### **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. AtMarch 31, 2003, the Company had cash, cash equivalents and short-terminvestments of $8.9 million and working capital of $4.0 million.

 

The Company’soperating activities used cash of approximately $719,000 and $1.1 million forthe three months ended March 31, 2003 and 2002, respectively. Net cashused during the three months ended March 31, 2003 consisted primarily of a netloss from operations and decreases in accrued liabilities, accrued sales taxand accounts receivable reserve offset by depreciation and amortization and adecrease in accounts receivable.  Thedecrease in accrued liabilities is due primarily to the timing of payments forthe Company’s payroll expenses and legal and accounting expenses.  The decrease to accrued sales tax is due topayments made to various states in the first quarter of 2003 for sales taxesdue.  The decrease to the accountsreceivable reserve is due primarily to the collection of certain accounts thatmanagement had previously specifically reserved for.  The decline in the accounts receivable balance is a function ofboth decreased sales activities as well as continued efforts by management tocontinue to improve its working capital by expediting the collection ofaccounts receivable.  Net cash usedduring the three months ended March 31, 2002 resulted from a net loss fromoperations and an increase in accounts receivable offset by an increase in deferredrevenue. Due to the anticipation of continuing economic softness, the Companyanticipates that it may use approximately $2 million of cash through theremainder of 2003.

 

Investingactivities used cash of approximately $526,000 and provided cash of $1.2million during the three months ended March 31, 2003 and 2002,respectively.  During the three monthsended March 31, 2003, the principal uses were purchases of property andequipment and short-term investments, offset by proceeds from the sale of short-terminvestments.  The Company has its investmentsprofessionally managed and has instructed its broker to earn the highest rateof interest it can in very low-risk securities.  The Company’s broker primarily purchases cash equivalentsecurities but will, on occasion, purchase short-term investments.  During the three months ended March 31,2002, the principal uses were purchases of property and equipment offset byproceeds from the sale of short-term investments.

 

Financingactivities  provided cash ofapproximately $2,600 and $11,000 for the three months ended March 31, 2003 and2002, respectively, due primarily to proceeds from the issuing of common stockrelated to the Company’s employee stock purchase program.

 

The Company hasexperienced declining revenues and operating losses over an extended period oftime.  Based upon the current economicenvironment, general softness in information technology spending, the releaseof new and emerging products that may not achieve market acceptance, andshortened forecasting visibility, the Company cannot estimate that thefinancial and operating performance, financial position or cash flow willimprove over the next twelve months. Subject to the factors contained herein, the Company believes that ithas sufficient liquidity and cash available to meet the operating needs of thecompany for at least the next twelve months. There can be no assurance that any necessary additional financing willbe available to the Company on commercially reasonable terms, or at all.

 

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The followingtable represents the approximate amounts of payments due under specifiedcontractual obligations as of March 31, 2003:

 
|                        |   | **Less than  one year** |    | **One to  three years** |   | **Three to  five years** |   | **More than  Five years** |   |
|-----------------------------|--------|-------------------------|---------|-------------------------|--------|--------------------------|--------|---------------------------|--------|
|                        |   |                    |    |                    |   |                     |   |                      |   |
| Operating lease obligations |   | $                       | 307,000 |                    | $      | 620,000                  |   | —                    |   | — |   |
| Total obligations           |   | $                       | 307,000 |                    | $      | 620,000                  |   | —                    |   | — |   |

 

                Operating lease requirementsconsist mainly of lease payments for the Company’s offices in Salem, NH andLondon, England.  As of March 31, 2003,the Company did not have any long-term debt obligations, material commitmentsfor capital expenditures, capital lease obligations, or other long-termliabilities for which payments are required.

 

** Recently Issued Accounting Standards**

 

        InNovember 2002, the FASB Emerging Issues Task Force released Issue No. 00-21, *Accountingfor Revenue Arrangements with Multiple Deliverables* (“EITF 00-21”).EITF 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which it will perform multiple revenue-generatingactivities. EITF 00-21 establishes three principles: (a) revenue arrangementswith multiple deliverables should be divided into separate units of accounting;(b) arrangement consideration should be allocated among the separate units of accountingbased on their relative fair values; and (c) revenue recognition criteriashould be considered separately for separate units of accounting. EITF 00-21 iseffective for all arrangements entered into in fiscal periods beginning afterJune 15, 2003, with early adoption permitted. The Company is currentlyreviewing and evaluating the scope of EITF 00-21, but management currentlybelieves that the Company’s multiple element arrangements fall within the scopeof SOP 97-2 and therefore, EITF 00-21 will not be applicable to the Company.

 

**Certain Factors Affecting FutureOperating Results**

 

The Company operates in a rapidly changing environment that involves anumber of risks, some of which are beyond the Company’s control. The discussionhighlights some of the risks which may affect future operating results.

 

                Informationprovided by the Company from time to time including statements in thisForm 10-Q which are not historical facts are so-called “forward-lookingstatements” that involve risks and uncertainties, made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of 1995. Inparticular, statements contained in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations which are not historical facts(including, but not limited to, statements concerning:  the plans and objectives of management;expectations for sales and marketing, research and development and general andadministrative expenses; developments relating to the Company’s product and serviceofferings, markets and acquisitions; anticipated trends in the Company’sbusiness; the Company’s strategic alliances; changes in the regulatoryenvironment; the Company’s expected liquidity and capital resources and theCompany’s critical accounting policies) 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 discussed below, and the other risk discussed from timeto time in the Company’s other filings with the Securities and ExchangeCommission.

 

*FutureOperating Results Uncertain.*  The Companyincorporated and shipped its initial facsimile software products in 1991.  In the years ending December 31, 2000,2001, 2002 and the quarter ending March 31, 2003, the Company had operatinglosses and decreasing revenues. There can be no assurance that the Company willbe able to increase its level of revenues or return to profitability in thefuture as the Company’s operating history makes the prediction of futureoperating results difficult or impossible.  Increases in operating expenses may continue and, together withpricing pressures and a continued decline in the growth rate of the overallU.S. economy, may result in a continued decrease in operating income and operatingmargin percentage.  The Company’sability to improve its operating results will depend upon, among other things,its ability to increase sales of the Company’s secure business-to-businesselectronic document exchange solutions and client/server facsimile solutions tonew customers as well as increased product penetration into existingcustomers.  The Company commenced itsstrategic expansion into secure business-to-business electronic documentexchange solutions market in the

 

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fourth quarter of 2000, and has limited financial and operating dataand a limited 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.*  To date, much of the Company’s revenues havebeen attributable to licenses of the Company’s facsimile-based enterprisesolutions and related products and services. The Company expects such productsand related services to continue to account for much of the Company’s futurerevenues. However, recently the amount of revenues attributable to the licensesof such products has declined and there can be no assurances that such declinewill not continue. Furthermore, in September 2000, the Company changed itsstrategic focus to the development of secure business-to-business electronic documentexchange solutions. The Company introduced its secure business-to-businesselectronic document exchange products, Genidocs and Genifax, to the market inthe fourth quarter of 2000 and it introduced its proprietary document androuting software, Accuroute, in the second quarter of 2002.  To date, the Company has not recognized asignificant amount of revenues from its Genidocs and Accuroute products. TheCompany expects that its Genidocs and Accuroute products may account for anincreasing portion of future revenueshowever, there can be no assurances thatthese products will be financially successful or result in any significantrevenues. Factors adversely affecting the pricing of or demand for suchproducts, such as competition or technological change, could have a materialadverse effect on the Company’s business, financial condition and results ofoperations. The Company’s prospects must be considered in light of the risksand difficulties frequently encountered by companies dependent upon operatingrevenues from a new product line in an emerging and rapidly evolving market.

 

*NewProducts and Technological Change.*  The marketsfor the Company’s products are relatively new and are characterized by rapidtechnological change, evolving industry standards, changes in end-userrequirements and frequent new product introductions and enhancements. TheCompany’s future success will depend upon its ability to enhance its currentproducts and to develop and introduce new products that keep pace withtechnological developments and respond to evolving end-user requirements. Therecan be no assurance that the Company will be successful in developing andmarketing new products or product enhancements on a timely basis, or that newproducts or product enhancements developed by the Company, such as theGenidocs, Genifax and Accuroute 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 ExchangeSolutions.*  The market for Genidocs, the Company’ssecure business-to-business electronic document exchange solution is new andevolving rapidly. The Company’s success will depend upon the adoption and useby current and potential customers of secure business-to-business electronicdocument exchange solutions. The Company’s success will also depend uponacceptance of its technology as the standard for providing these solutions. Theadoption and use of the Company’s secure business-to-business electronicdocument exchange solution will involve changes in the manner in whichbusinesses have traditionally exchanged information. The Company’s ability toinfluence usage of its secure business-to-business electronic document exchangesolution by customers is limited. The Company intends to spend considerableresources educating potential customers about the value of securebusiness-to-business electronic document exchange solutions. It is difficult toassess, or to predict with any assurance, the present and future size of thepotential market for the Company’s secure business-to-business electronicdocument exchange solution, or its growth rate, if any. Moreover, the Companycannot predict whether the Company’s secure business-to-business electronicdocument exchange solution will achieve any market acceptance. Any futureproducts or future product enhancements that are not favorably received by customersmay not be profitable and, furthermore, could damage the Company’s reputationor brand name.

 

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*Dependenceon Genifax and Fax Sr. NT Product Lines and the Windows NT/2000 Environment.* The Company currently derives a significant portion of its revenues fromlicenses of the Genifax and Fax Sr. NT products and related services andresale of related hardware. Continued market acceptance of the Genifax and FaxSr. NT products are critical to the Company’s future success. As a result, anydecline in demand for or failure to maintain broad market acceptance of theGenifax and Fax Sr. NT product lines as a result of competition,technological change or otherwise, would have a material adverse effect on theCompany’s business, financial condition and results of operations. TheCompany’s future financial performance will depend in large part on new andenhanced versions of the Genifax product and customer acceptance of theFax Sr. NT product. There can be no assurance that the Company willcontinue to be successful in marketing the Genifax and Fax Sr. NT productsor any new or enhanced versions of the Genifax product. In addition, there canbe no assurance that the Windows NT operating system will not be replaced by anew or enhanced operating system. There can be no assurance that the Companywill be successful in developing products for new or enhanced operating systemssuch as Windows 2000 or Windows XP, or that such systems will not obviate theneed for the Company’s products. If any new or enhanced operating system gainswidespread use and the Company fails to develop and provide its products forthis operating system on a timely basis, the Company’s business, financialcondition and results of operations would be materially adversely affected.

 

*Dependenceon Client/Server Environment.*  The Company’senterprise, client/server facsimile software products are intended to helporganizations efficiently manage their facsimile communications, utilizing aclient/server computing environment. The client/server market is relatively newand there can be no assurance that organizations will move away from the use ofstand-alone fax machines or continue to adopt client/server environments,or that customers of the Company that have begun the migration to aclient/server environment will broadly implement this model of computing. TheCompany’s future financial performance will depend in large part on continuedgrowth in the market for client/server applications, which in turn will dependin part on the growth in the number of organizations implementing client/servercomputing environments. There can be no assurance that these markets willcontinue to grow or that the Company will be able to respond effectively to theevolving requirements of these markets. If the market for client/serverapplication products and services does not grow in the future, grows moreslowly than the Company anticipates, or if the Company fails to respondeffectively to evolving requirements of this market, the Company’s business,financial condition and results of operations would be materially adverselyaffected.

 

*RisksAssociated with Listing on the Nasdaq SmallCap Market*. In August 2002, the Nasdaq National Market (“Nasdaq”) informed the Companythat its common stock had traded for 30 consecutive trading days below theminimum bid price and that the Company had until November 4, 2002, todemonstrate compliance with Nasdaq’s listing requirements by maintaining a bidprice for its common stock of at least $1.00 for a minimum of ten consecutivetrading days.  The Company did notregain compliance and on October 29, 2002, the Company applied to transfer fromthe Nasdaq National Market to the Nasdaq SmallCap Market. On November 26, 2002,the Company transferred to The Nasdaq SmallCap Market and it was afforded theremainder of this market’s 180 calendar day grace period, or until February 3,2003, to regain compliance with the minimum bid price per share requirement. On January 14, 2003, Omtool’s Board of Directorsvoted a one-for-seven stock split of the Company’s Common Stock effectiveJanuary 15, 2003 pursuant to a special meeting of stockholders that was held onthe same day approving an amendment to the Company’s Amended and RestatedCertificate of Incorporation of the Company to effect a reverse stocksplit.  On February 5, 2003, theCompany was notified by Nasdaq that it had regained compliance and the matteris now closed.  The Company cannotpredict the impact, if any, of a change in listing to the SmallCap Market. Inaddition, the Company cannot predict the continuance of its listing status inthe future including the possibility of delisting from the Nasdaq SmallCapMarket.  The delisting of the Company’scommon stock from Nasdaq may materially impair the stockholder’s ability to buyand sell shares of the Company’s common stock and could have an adverse effecton the market price of, and the efficiency of the trading market for, theCompany’s common stock.  Furthermore,the delisting of the Company’s common stock could significantly impair theCompany’s ability to raise capital should it desire to do so in the future.

 

*IntenseCompetition.*  The secure business-to-business electronicdocument exchange solution and enterprise, client/server facsimile solutionmarkets are intensely competitive and rapidly changing and the Company expectscompetition to continue to increase. The Company believes its ability tocompete successfully depends upon a number of factors both within and beyondits control, including product performance; reliability and features; productadoption; ease of use; product scalability; quality of support services;price/performance; timeliness of enhancements and new product releases by theCompany and its competitors; the emergence of new computer-basedfacsimile and secure business-to-business electronic document exchangesolutions and standards; name recognition; the establishment of strategicalliances with industry leaders and industry and general economic trends.

 

The Company maynot be able to compete successfully against current and future competitors inthe secure business-to-business electronic document exchange solutions market,and the competitive pressures the Company faces could harm its business andprospects. In the intensely competitive andrapidly changing business-to-business secure document exchange market,

 

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theCompany competes directly with Authentica, Sigaba, Tumbleweed, and Zixit and anumber of other providers.  There arealso other categories of technology solution that overlap and compete incertain ways with aspects of the Company’s products.  These include:

 

•                  Document management solutionsfrom vendors such as Documentum, Hummingbird and iManage whose electroniccollaboration solutions compete with certain aspects of the Company’ssolutions;

•                  Electronic forms and electronicsignature solutions from vendors such as Adobe, PureEdge, CreateForm andSilanis that offer the creation of electronic documents with electronicsignatures; and

•                  Security infrastructuresolutions from vendors such as Verisign and Entrust whose solutions can be usedto build applications that enable secure document communications.

 

TheCompany expects the competition in the business-to-business secure documentexchange market to increase over time.

 

The Company competes directly with a large number of vendors offacsimile products, including providers of facsimile software products forclient/server networks such as RightFAX (a subsidiary of Captaris), Fenestrae,TopCall International and Biscom. The Company also competes with providersoffering a range of alternative facsimile solutions including outsourcingnetwork facsimile solutions, such as Easylink Services; operating systems containingfacsimile and document e-mail features; low-end fax modem products; providersof desktop fax software; single-platform facsimile software products; andcustomized proprietary software solutions. In addition, providers of operatingsystems or business software applications may bundle competitive facsimilesolutions as part of their broader product offerings.

 

Many of theCompany’s competitors and potential competitors have longer operating historiesand greater financial, technical, sales, marketing and other resources, as wellas greater name recognition and market acceptance of their products andtechnologies than the Company. In addition, there are relatively low barriersto entry in the markets in which the Company operates and intends to operate, andnew competition may arise either from expansion by established companies orfrom new emerging companies or from resellers of the Company’s products. Therecan be no assurance that current or potential competitors of the Company willnot develop products comparable or superior—in terms of price and performancefeatures—to those developed by the Company, adapt more quickly than the Companyto new or emerging technologies and changes in market opportunities or customerrequirements, establish alliances with industry leaders, or take advantage ofacquisition opportunities more readily than the Company. In addition, noassurance can be given that the Company will not be required to makesubstantial additional investments in connection with its research, development,engineering, marketing, sales and customer service efforts in order to meet anycompetitive threat, or that such required investments will not have a materialadverse effect on operating margins. Changes in government laws and regulations may also affect our abilityto maintain competitiveness.  Increasedcompetition may result in reduction in market share, pressure for pricereductions and related reductions in gross margins, any of which couldmaterially adversely affect the Company’s ability to achieve its financial andbusiness goals. There can be no assurance that in the future the Company willbe able to successfully compete against current and future competitors.

 

*Fluctuationsin Quarterly Results of Operations; Seasonality.*  The Company’squarterly revenues and results of operations have fluctuated significantly inthe past and will likely fluctuate significantly in the future. Causes of suchfluctuations have included and may include, among others, the demand for theCompany’s products and services; the size and timing of orders; the number,timing and significance of new product announcements by the Company and itscompetitors; the ability of the Company to develop, introduce, market and shipnew and enhanced versions of the Company’s current and planned products on atimely basis; the level of product and price competition; changes in operatingexpenses; changes in average selling prices and mix of the Company’s products;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 they also must establish certain minimumhardware capabilities. The Company’s products therefore often have a lengthysales cycle while the customer evaluates and receives approvals for thepurchase of the Company’s products. During such sales cycles, the Company mayexpend substantial funds and management efforts yet receive no revenues. It isdifficult to accurately predict the sales cycle of any large order. If one ormore large orders fail to close as forecasted in a fiscal quarter, the Company’srevenues and operating results for such quarter could be materially adverselyaffected. Any one or more of these or other factors could have a materialadverse effect on the Company’s business, financial condition and results ofoperations. The potential occurrence of any one or more of these factors makesthe prediction of revenues and results of operations on a quarterly basisdifficult and performance forecasts derived from such predictions unreliable.

 

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In general,revenues are difficult to forecast because the market for securebusiness-to-business electronic document exchange, enterprise client/serverfacsimile solutions software and routing and distribution software is evolvingrapidly and the Company’s sales cycle—from the customer’s initial evaluationthrough purchase of licenses and the related support services—variessubstantially from customer to customer. License fee revenues in any quarterdepend on orders received and shipped in that quarter with an increasingpercentage of orders in any quarter being received in the last weeks of thequarter.  License fee revenues fromquarter to quarter are difficult to forecast, as no significant order backlogexists at the end of any quarter because the Company’s products typically areshipped upon receipt of customers’ orders.

 

A substantialportion of the Company’s operating expense is related to personnel, facilities,equipment and marketing programs. The level of spending for such expense cannotbe adjusted quickly and is therefore fixed in the short term. The Company’sexpense levels for personnel, facilities, equipment and marketing programs arebased, in significant part, on the Company’s expectations of future revenues ona quarterly basis. If actual revenue levels on a quarterly basis are belowmanagement’s expectations, results of operations are likely to be adverselyaffected by a similar amount because a relatively small amount of the Company’sexpense varies with its revenue in the short term.

 

Due to all of theforegoing factors, it is likely that in some future periods the Company’sresults of operations will be below the expectations of securities analysts andinvestors. In such event, the price of the Company’s common stock would likelybe materially adversely affected.

 

*Expansionof Indirect Channels; Potential for Channel Conflict; Strategic Alliances.* The Company markets its products and services directly through telesalesand indirectly through marketing channels such as VARs, systems integrators,distributors and strategic business partners. Although the Company hashistorically focused its efforts on marketing through its sales force, theCompany is increasing resources dedicated to developing and expanding indirectmarketing channels. There can be no assurance that the Company will be able toattract and retain a sufficient number of qualified VARs, systems integrators,distributors and strategic business partners to successfully market theCompany’s products. In addition, there can be no assurance that the Company’sresellers and strategic business partners will not develop, acquire or marketcomputer-based facsimile products that are competitive with the Company’sproducts. The failure to retain its VARs, systems integrators, distributors andstrategic partners could have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

 

The distributoragreements generally provide that either party may terminate the agreementwithout cause upon 30 days written notice to the other party.  The Company also resells its products on apurchase order basis through other VARs, systems integrators anddistributors.  Either party mayterminate such relationships, at any time, and therefore there can be no assurancethat any VAR, systems integrator or distributor will continue to represent theCompany’s products.  Furthermore, theCompany’s strategic alliances may be terminated by either party, at any time;there can be no assurances that such strategic alliances will continue.  The inability to retain certain VARs,systems integrators, distributors or strategic business partners, or thedevelopment or marketing by VARs, systems integrators, distributors orstrategic business partners of competitive offerings, could have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

Selling throughindirect channels may limit the Company’s contacts with its customers.  As a result, the Company’s ability toaccurately forecast sales, evaluate customer satisfaction and recognizeemerging customer requirements may be hindered. The Company’s strategy ofmarketing its products directly to end-users and indirectly through VARs,systems integrators and distributors may result in distribution channelconflicts. The Company’s direct sales efforts may compete with those of itsindirect channels and, to the extent different resellers target the samecustomers, resellers may also come into conflict with each other. As theCompany strives to expand its indirect distribution channels, there can be noassurance that emerging channel conflicts will not materially adversely affectits relationships with existing VARs, systems integrators or distributors oradversely affect its ability to attract new VARs, systems integrators anddistributors.

 

*RisksAssociated with Acquisitions.*  The Companymay augment its internal growth with acquisitions of businesses, products andtechnologies that could complement or expand the Company’s business. Certain ofthese businesses may be marginally profitable or unprofitable. In order toachieve anticipated benefits from these acquisitions, the Company mustsuccessfully integrate the acquired businesses with its existing operations andno assurance can be given that the Company will be successful in this regard.The Company has limited experience in integrating acquired companies into itsoperations, in expanding the scope of operations of required businesses, inmanaging geographically dispersed operations and in operating internationally.In the past the Company has incurred one-time costs and expenses in connectionwith acquisitions and it is likely that similar one-time costs and expenseswould be incurred in connection with future acquisitions.  In addition, attractive

 

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acquisitions are difficult to identify and complete for a number ofreasons, including competition among prospective buyers and the possible needto obtain regulatory approval. There can be no assurance that the Company willbe able to complete future acquisitions. In order to finance such acquisitions,it may be necessary for the Company to raise additional funds either throughpublic or private financings, including bank borrowings.  Any financing, if available at all, may beon terms which are not favorable to the Company.  The Company may also issue shares of its common stock to acquiresuch businesses, which may dilute the Company’s existing stockholders.

 

*Abilityto Manage Growth.*  The Company may expand its operations andanticipates that expansion may be required in order to address potential marketopportunities. The Company may increase the size of its sales and marketing andresearch and development expenditures as necessary. There can be no assurancethat such expansion would be completed successfully or that it would generatesufficient revenues to cover the Company’s expenses. The Company will need tocontinue to attract and retain highly qualified technical, sales and managerialpersonnel. There can be no assurance that the Company will be able to retain orcontinue to hire such personnel in the future. The inability of the Company toeffectively expand operations and manage growth, if any, could have a materialadverse effect on the Company’s business, financial condition and results ofoperations.

 

*RisksAssociated with the Use of Arthur Andersen as Independent Auditors. *Arthur Andersen LLP (“Andersen”), the Company’s former independentpublic accountants that audited the Company’s financial statements until June28, 2002, was found guilty by a jury on June 15, 2002 of federal obstruction ofjustice in connection with the government’s investigation of EnronCorporation.  Andersen ceased practicingbefore the SEC effective August 31, 2002. Although the Company has no reason to believe that those financialstatements are incorrect, it is possible that events arising out of theindictment may adversely affect Andersen’s ability to satisfy any claimsarising from its provision of auditing and other services to the Company,including claims that may arise out of Andersen’s audit of the Company’sfinancial statements.  The SEC hasindicated that it will continue accepting financial statements audited orreviewed by Andersen provided that the Company comply with the applicable rulesand orders issued by the SEC in March 2002 for such purpose.

 

*RisksAssociated with International Expansion.*  An element ofthe Company’s strategy is to continue to maintain its international sales. TheCompany expects to face competition from secure business-to-business electronicdocument exchange solutions and local facsimile product providers in theirnative countries. To successfully maintain international sales, the Companyneeds to recruit and retain additional international resellers anddistributors. There can be no assurance that the Company will be able tomaintain international sales of its products or that the Company’sinternational distribution channels will be able to adequately market, serviceand support the Company’s products. International operations generally aresubject to certain risks, including dependence on independent resellers,fluctuations in foreign currency exchange rates, compliance with foreignregulatory and market requirements, variability of foreign economic conditionsand changing restrictions imposed by United States export laws. Additionalrisks inherent in the Company’s international business activities generallyinclude unexpected changes in regulatory requirements, tariffs and other tradebarriers, costs of localizing products for foreign countries, lack ofacceptance of localized products in foreign countries, longer accountsreceivable payment cycles, difficulties in managing international operations,difficulties in enforcing intellectual property rights and the burdens ofcomplying with a wide variety of foreign laws. The Company has a sales office outside of the United States, suchoperations are subject to certain additional risks, including difficulties instaffing and managing such operations and potentially adverse tax consequencesincluding restrictions on the repatriation of earnings. There can be noassurance that such factors will not have a material adverse effect on theCompany’s future international sales and, consequently, the Company’s business,financial condition and results of operations. To date, a majority of theCompany’s sales have been made in United States dollars and the Company has notengaged in any hedging transactions through the purchase of derivativesecurities or otherwise.

 

*Dependenceon Key Personnel.*  The Company’s future performance depends, insignificant part, upon the continued service of its key technical, sales andsenior management personnel, most of who are not bound by an employment agreementor by a 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 of March 31,2003, the Company did not participate in any derivative financial instrumentsor other financial and commodity instruments for which fair value disclosurewould be required under SFAS No. 107,*Disclosures about Fair Value of FinancialInstruments*. All of the Company’s investments consist of moneymarket funds and municipal bonds that are carried on the Company’s books atamortized cost, which approximates fair market value. Accordingly, the Companyhas no quantitative information concerning the market risk of participating insuch investments.

 

**Primary Market Risk Exposures**

 

The Company’sprimary market risk exposures are in the areas of interest rate risk andforeign currency 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 March 31, 2003. Currently theCompany does not engage in foreign currency hedging activities.

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures.

 

As of a date (the “Evaluation Date”) withinninety days prior to the filing date of this****Quarterly Report on Form10-Q, the Company, under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures pursuant to Rule 13a-15promulgated under the Securities Exchange Act of 1934, as amended (the“Exchange Act”).  Based upon that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat, as of the Evaluation Date, the Company’s disclosure controls andprocedures are effective in ensuring that information relating to the Company(including its consolidated subsidiaries) required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, including ensuringthat such information is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

(b) Changes in internal controls

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect the Company’s internalcontrols subsequent to the date of their evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

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**PARTII:  OTHER INFORMATION**

 
| Item 6. |   | Exhibits and Reports on Form 8-K |
|---------|--------|----------------------------------|
|    |   |                             |
|    | (a)    |                             | Exhibits |
|         |        |                                  |  |

 
| 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 Companyfiled a Report on Form 8-K dated January 14, 2003 to report that at aspecial meeting of the stockholders of the Company, an amendment to theCompany’s Amended and Restated Certificate of Incorporation to effect a reversestock split was approved by a majority of the outstanding shares of theCompany’s Common Stock.

 

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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. |
|-------------|--------------|
|        |         |
|        |         |
| May 5, 2003 | By:          | /s/ Timothy P. Losik |
|        |         | Timothy P. Losik |
|        |         | Vice President, Chief Financial Officer,  Chief Operating Officer, Secretary and  Treasurer |

 

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**CERTIFICATIONS**

 

I, Robert L. Voelk, certify that:

 

1.                                       I have reviewed this quarterly report onForm 10-Q of Omtool, Ltd.;

 

2.                                       Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                                       The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)                                    Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      Presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a)                                      Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

 

b)                                     Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                       The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

Date: May 5, 2003

 
|   | By:    | /s/ Robert L. Voelk     |
|--------|--------|-------------------------|
|   |   | Robert L. Voelk         |
|   |   | Chief Executive Officer |

 

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I, Timothy P. Losik, certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q of Omtool, Ltd.;

 

2.                                       Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.                                       The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)                                    Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      Presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a)                                Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

 

b)                                     Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

Date: May 5, 2003

 
|   | By:    | /s/ Timothy P. Losik    |
|--------|--------|-------------------------|
|   |   | Timothy P. Losik        |
|   |   | Chief Financial Officer |

 

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