** **

**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, 2002**

** **

**OR**

 

**o****   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES 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 (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes ý   No     

 

There were 12,705,449shares of the Company’s Common Stock, par value $0.01, outstanding on May 8, 2002.

 

----

 

**OMTOOL, LTD. AND SUBSIDIARIES**

 

FORM 10-Q

For the Quarter EndedMarch 31, 2002

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

 

 

2

----

 

**PARTI   FINANCIAL INFORMATION**

**Item1.  Interim Financial Statements**

 

**OMTOOL, LTD. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

 

** **
|                                                                                         |   | **March 31,**   |       | **December  31,** |       |
|----------------------------------------------------------------------------------------------|--------|-----------------|------------|-------------------|------------|
|                                                                                         |   | **2002**        |       | **2001**          |       |
|                                                                                         |   | **(Unaudited)** |       |              |       |
| **Assets**                                                                                   |   |            |       |              |       |
| Current assets:                                                                              |   |            |       |              |       |
| Cash and cash  equivalents                                                                   |   | $               | 11,270,660 |              | $          | 11,194,118 |   |
| Short-term  investments                                                                      |   | —          |       | 1,296,750         |       |
| Accounts  receivable, less reserves of $626,000 and $630,000 in 2002 and 2001,  respectively |   | 2,601,087       |       | 1,867,332         |       |
| Prepaid expenses  and other current assets                                                   |   | 638,025         |       | 781,701           |       |
| Deferred tax  asset                                                                          |   | 1,225,350       |       | 1,225,350         |       |
| Total current  assets                                                                        |   | 15,735,122      |       | 16,365,251        |       |
|                                                                                         |   |            |       |              |       |
| Property and equipment, net                                                                  |   | 783,738         |       | 836,366           |       |
|                                                                                         |   |            |       |              |       |
| Other assets,  net                                                                           |   | 13,962          |       | 13,962            |       |
|                                                                                         |   |            |       |              |       |
| Total assets                                                                                 |   | $               | 16,532,822 |              | $          | 17,215,579 |   |
|                                                                                         |   |            |       |              |       |
| **Liabilities  and Stockholders’ Equity**                                               |   |            | ** ** |              | ** ** |
| Current  liabilities:                                                                        |   |            |       |              |       |
| Accounts payable                                                                             |   | $               | 851,927    |              | $          | 733,290 |   |
| Accrued  liabilities                                                                         |   | 2,057,471       |       | 2,023,601         |       |
| Deferred revenue                                                                             |   | 3,619,074       |       | 3,383,759         |       |
| Total current  liabilities                                                                   |   | 6,528,472       |       | 6,140,650         |       |
|                                                                                         |   |            |       |              |       |
| Stockholders’  equity:                                                                  |   |            |       |              |       |
| Preferred Stock,  $.01 par value —                                                      |   |            |       |              |       |
| Authorized —  2,000,000; Issued and outstanding — none                             |   | —          |       | —            |       |
| Common Stock,  $.01 par value —                                                         |   |            |       |              |       |
| Authorized —  35,000,000; Issued —                                                 |   |            |       |              |       |
| 13,009,372  shares                                                                           |   | 130,093         |       | 130,093           |       |
| Additional  paid-in capital                                                                  |   | 31,898,362      |       | 31,924,984        |       |
| Accumulated  deficit                                                                         |   | (21,239,481     | )          | (20,152,079       | )          |
| Treasury Stock  (303,923 shares and 320,305 shares at cost in 2002 and 2001, respectively)   |   | (696,571        | )          | (734,086          | )          |
| Cumulative  translation adjustment                                                           |   | (88,053         | )          | (93,983           | )          |
| Total  stockholders’ equity                                                             |   | 10,004,350      |       | 11,074,929        |       |
|                                                                                         |   |            |       |              |       |
| Total  liabilities and stockholders’ equity                                             |   | $               | 16,532,822 |              | $          | 17,215,579 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

3

----

 

**OMTOOL, LTD. AND SUBSIDIARIES**

**Consolidated Statements ofOperations**

(Unaudited)

 
|                                                  |   | **Three  months ended March 31,** |       |
|-------------------------------------------------------|--------|-----------------------------------|------------|
|                                                  |   | **2002**                          |       | **2001** |   |
| Revenues:                                             |   |                              |       |   |   |
| Software license                                      |   | $                                 | 1,278,821  |   | $ | 1,340,548 |   |
| Hardware                                              |   | 783,041                           |       | 835,986 |   |
| Service and  other                                    |   | 1,900,762                         |       | 1,737,902 |   |
|                                                  |   |                              |       |   |   |
| Total revenues                                        |   | 3,962,624                         |       | 3,914,436 |   |
|                                                  |   |                              |       |   |   |
| Cost of revenues:                                     |   |                              |       |   |   |
| Software license                                      |   | 74,213                            |       | 139,292 |   |
| Hardware                                              |   | 517,116                           |       | 555,059 |   |
| Service and  other                                    |   | 770,050                           |       | 1,158,418 |   |
|                                                  |   |                              |       |   |   |
| Total cost of  revenues                               |   | 1,361,379                         |       | 1,852,769 |   |
|                                                  |   |                              |       |   |   |
| Gross profit                                          |   | 2,601,245                         |       | 2,061,667 |   |
|                                                  |   |                              |       |   |   |
| Operating  expenses:                                  |   |                              |       |   |   |
| Sales and  marketing                                  |   | 1,646,830                         |       | 1,406,853 |   |
| Research and  development                             |   | 832,441                           |       | 857,440 |   |
| General and  administrative                           |   | 1,260,557                         |       | 765,642 |   |
|                                                  |   |                              |       |   |   |
| Total operating  expenses                             |   | 3,739,828                         |       | 3,029,935 |   |
|                                                  |   |                              |       |   |   |
| Loss from  operations                                 |   | (1,138,583                        | )          | (968,268 | ) |
|                                                  |   |                              |       |   |   |
| Interest income                                       |   | 51,181                            |       | 251,564 |   |
|                                                  |   |                              |       |   |   |
| Net loss                                              |   | $                                 | (1,087,402 | ) | $ | (716,704 | ) |
|                                                  |   |                              |       |   |   |
| Net loss per  share                                   |   |                              |       |   |   |
| Basic and  Diluted                                    |   | $                                 | (0.09      | ) | $ | (0.06 | ) |
|                                                  |   |                              |       |   |   |
| Weighted  average number of common shares outstanding |   |                              |       |   |   |
| Basic and  Diluted                                    |   | 12,705,449                        |       | 12,750,015 |   |

 

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

 

 

4

----

 

**OMTOOL, LTD. AND SUBSIDIARIES**

**Consolidated Statements of CashFlows**

(Unaudited)

 
|                                                                              |   | **Three  months ended March 31,** |       |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                              |   | **2002**                          |       | **2001** |   |
| Cash Flows from  Operating Activities:                                            |   |                              |       |   |   |
| Net loss                                                                          |   | $                                 | (1,087,402 | ) | $ | (716,704 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities— |   |                              |       |   |   |
| Depreciation and  amortization                                                    |   | 136,901                           |       | 176,619 |   |
| Changes in  assets and liabilities—                                          |   |                              |       |   |   |
| Accounts  receivable                                                              |   | (739,015                          | )          | 206,252 |   |
| Prepaid expenses  and other current assets                                        |   | 161,439                           |       | (29,968 | ) |
| Accounts payable                                                                  |   | 121,413                           |       | (101,762 | ) |
| Accrued  liabilities                                                              |   | 19,985                            |       | (182,598 | ) |
| Deferred revenue                                                                  |   | 243,630                           |       | 305,222 |   |
|                                                                              |   |                              |       |   |   |
| Net cash used in  operating activities                                            |   | (1,143,049                        | )          | (342,940 | ) |
|                                                                              |   |                              |       |   |   |
| Cash Flows from  Investing Activities:                                            |   |                              |       |   |   |
| Purchases of  property and equipment                                              |   | (85,525                           | )          | (56,575 | ) |
| Proceeds from  sale of short-term investments                                     |   | 1,296,750                         |       | 3,280,511 |   |
|                                                                              |   |                              |       |   |   |
| Net cash  provided by investing activities                                        |   | 1,211,225                         |       | 3,223,936 |   |
|                                                                              |   |                              |       |   |   |
| Cash Flows from  Financing Activities:                                            |   |                              |       |   |   |
| Net proceeds  from issuance of common stock                                       |   | 10,893                            |       | 17,895 |   |
|                                                                              |   |                              |       |   |   |
| Foreign exchange  effect on cash                                                  |   | (2,527                            | )          | (8,916 | ) |
|                                                                              |   |                              |       |   |   |
| Net increase in  cash and cash equivalents                                        |   | 76,542                            |       | 2,889,975 |   |
|                                                                              |   |                              |       |   |   |
| Cash and cash  equivalents, beginning of period                                   |   | 11,194,118                        |       | 14,599,350 |   |
|                                                                              |   |                              |       |   |   |
| Cash and cash  equivalents, end of period                                         |   | $                                 | 11,270,660 |   | $ | 17,489,325 |   |

 

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

 

5

----

 

**OMTOOL, LTD. AND SUBSIDIARIES**

**Notes to Consolidated FinancialStatements**

(Unaudited)

 

**(1)     Basis of Presentation**

 

The accompanying unaudited consolidated financial statements have beenprepared by Omtool, Ltd. (the “Company” or “Omtool”) pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) regarding interimfinancial reporting.  Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements and should beread in conjunction with the consolidated financial statements and notesthereto for the year ended December 31, 2001. The accompanying consolidatedfinancial statements reflect all adjustments (consisting of normal recurringadjustments), which are, in the opinion of management, necessary for a fairpresentation of results for the interim periods presented.  The results of operations for the threemonth period ended March 31, 2002 are not necessarily indicative of the resultsto be expected for the full fiscal year.

 

**(2)****              ****Summary of Significant AccountingPolicies**

 

*(a) Cashand Cash Equivalents*

 

The Company considers all highly liquid investmentswith original maturities of three months or less to be cash equivalents.  Cash equivalents consist primarily ofinvestments in money market funds and commercial paper.

* *

*(b) Foreign CurrencyTranslation*

 

The Company translates the financial statementsof its foreign subsidiaries in accordance with SFAS No. 52, *ForeignCurrency Translation*. Accordingly, assets and liabilities are translated at exchange rates ineffect at the end of the period, and revenues and expenses are translated atthe average exchange rates during the period. All cumulative translation gains or losses from the translation into theCompany’s reporting currency are included as a separate component ofstockholders’ equity in the accompanying consolidated balance sheets. Theforeign currency translation gains and losses were immaterial during  the periods ended March 31, 2002 and 2001,respectively.

* *

*(c) Net Loss per CommonShare*

 

          The Company reports earnings pershare in accordance with SFAS No. 128, *Earnings per Share*. Diluted weightedaverage shares outstanding for the three months ended March 31, 2002 and 2001exclude the potential common shares from stock options because to include themwould have been antidilutive for the periods presented. For the three monthsended March 31, 2002 and 2001, there were 2,373,013 and 1,989,388outstanding stock options, respectively, which have an antidilutive effect.

 

**(3)****              ****Comprehensive Income (Loss)**

 

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

 
|                                      |   | **Three  months ended March 31,** |       |
|-------------------------------------------|--------|-----------------------------------|------------|
|                                      |   | **2002**                          |       | **2001** |   |
| Net loss                                  |   | $                                 | (1,087,402 | ) | $ | (716,704 | ) |
| Foreign currency  translation adjustments |   | 5,930                             |       | 1,667 |   |
| Comprehensive  loss                       |   | $                                 | (1,081,472 | ) | $ | (715,037 | ) |

 

6

----

 

**Segment and Geographic Information**

 

  To date, the Company views its operationsand manages its business principally as one segment, software sales andassociated services. As a result, the financial information disclosed hereinrepresents all of the material financial information related to the Company’sprincipal operating segment in accordance with SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information.*

 

Totalrevenues from international sources were approximately $757,000 for the threemonths ended March 31, 2002, and $597,000 for the three months ended March 31,2001. The Company’s revenues from international sources were primarilygenerated from customers located in Europe. The following table representsamounts relating to geographic locations:

 
|                         |   | **Three  months ended March 31,** |      |
|------------------------------|--------|-----------------------------------|-----------|
| Total revenues (1)           |   | **2002**                          |      | **2001** |   |
| United States                |   | $                                 | 3,205,762 |   | $ | 3,317,357 |   |
| United Kingdom               |   | 408,778                           |      | 209,860 |   |
| Other North  America         |   | 190,085                           |      | 265,610 |   |
| Other Europe                 |   | 83,661                            |      | 59,354 |   |
| Latin America /  Pacific Rim |   | 24,445                            |      | 17,024 |   |
| Middle East /  Far East      |   | 43,928                            |      | 36,496 |   |
| Australia                    |   | 5,965                             |      | 8,735 |   |
|                         |   | $                                 | 3,962,624 |   | $ | 3,914,436 |   |

 
|                   |   | **March 31,** |    | **December  31,** |       |
|------------------------|--------|---------------|---------|-------------------|------------|
| Long-lived  assets (2) |   | **2002**      |    | **2001**          | ** ** |
| North America          |   | $             | 740,807 |              | $          | 789,915 |   |
| Europe                 |   | 56,893        |    | 60,413            |       |
|                   |   | $             | 797,700 |              | $          | 850,328 |   |

 

(1) Revenues are attributed to geographic regions based on location ofcustomer.  

 

(2) Long-lived assets include all long-term assets except thosespecifically excluded under SFAS No. 131, such as deferred income taxes andfinancial instruments.

 

 

7

----

 

** **

**Item2.**

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

 

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

** **

**Overview**

 

                Omtool, Ltd. is a leading provider of e-mail andfax-based messaging software that enables secure, confirmed document exchangebetween businesses. The Company wasincorporated 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 from licensingrights to use its Fax Sr. software product directly to end-users andindirectly through resellers.

 

                Revenues from software licensesare recognized upon shipment of the software if there is persuasive evidence ofan arrangement, the fee is fixed and determinable, there are no significantpost-delivery obligations and collection of the resulting receivable is deemedprobable.  Payments received in advancefor services or products are initially recorded as deferred revenue. TheCompany reserves for potential product returns and allowances at the time ofshipment. Historically, the Company has adequately reserved for such potentialreturns and allowances.

 

The Company hashistorically derived substantially all of its total revenues from sales withinNorth America. Sales outside of North America (primarily in Europe) representedapproximately 14% and 8% of the Company’s total revenues for the three monthsended March 31, 2002 and 2001, respectively.

 

The Company’sUnited Kingdom subsidiary transacts business primarily in its localcurrency.  The Company manages itsforeign exchange exposure by monitoring its net monetary position using naturalhedges of its assets and liabilities denominated in local currencies.  There can be no assurance that this policy willeliminate all currency exposure. Foreign currency exposure has not beenmaterial to the Company’s financial position or results of operations todate.  If the Company’s businessdenominated in foreign currencies increases, the Company may be required to usederivatives to hedge foreign currency exposure.

 

The Companycontinues 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. Sales through the Company’s indirectdistribution channels represent approximately 39% and 43% of the Company’stotal revenues for the three months ended March 31, 2002 and 2001,respectively.

 

8

----

 

**Resultsof Operations**

 

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

 
|                        |   | **Three  months ended March 31,** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **2002**                          |   | **2001** |   |
| Revenues:                   |   |                              |   |   |   |
| Software license            |   | 32.2                              | %      | 34.2 | % |
| Hardware                    |   | 19.8                              |   | 21.4 |   |
| Service and  other          |   | 48.0                              |   | 44.4 |   |
| Total revenues              |   | 100.0                             |   | 100.0 |   |
| Cost of  revenues:          |   |                              |   |   |   |
| Software license            |   | 1.9                               |   | 3.6 |   |
| Hardware                    |   | 13.0                              |   | 14.2 |   |
| Service and  other          |   | 19.5                              |   | 29.7 |   |
| Total cost of  revenues     |   | 34.4                              |   | 47.3 |   |
| Gross profit                |   | 65.6                              |   | 52.7 |   |
| Operating  expenses:        |   |                              |   |   |   |
| Sales and  marketing        |   | 41.5                              |   | 36.0 |   |
| Research and  development   |   | 21.0                              |   | 21.9 |   |
| General and  administrative |   | 31.8                              |   | 19.6 |   |
| Total operating  expenses   |   | 94.3                              |   | 77.4 |   |
| Loss from  operations       |   | (28.7                             | )      | (24.7 | ) |
| Interest income             |   | 1.3                               |   | 6.4 |   |
|                        |   |                              |   |   |   |
| Net loss                    |   | (27.4%                            | )      | (18.3% | ) |
|                        |   |                              |   |   |   |
| Gross profit:               |   |                              |   |   |   |
| Software license            |   | 94.2                              | %      | 89.6 | % |
| Hardware                    |   | 34.0                              |   | 33.6 |   |
| Service and  other          |   | 59.5                              |   | 33.3 |   |

 

**ThreeMonths Ended March 31, 2002 and 2001**

## ***Revenues***

 

*Total Revenues.*  The Company’s revenues are currently derived fromlicensing fees of the Company’s software products and from related sales ofhardware and services.  TheCompany’s total revenues were $4.0 million for the three months endedMarch 31, 2002 and $3.9 million for the three months ended March 31, 2001.

 

*Software License.*  The Company’s software license revenues arederived primarily from the licensing of the Company’s Fax Sr. and Genifaxproducts.  Software licenserevenues were $1.3 million for each of the three months endedMarch 31, 2002 and 2001.  Softwarelicense revenues accounted for 32% and 34% of total revenues for eachrespective period.  The decrease insoftware license revenue as a percentage of total revenues is a result ofhigher service and other revenues as a percentage of total revenues for thethree months ended March 31, 2002 compared to service and other revenues as apercentage of total revenues for the three months ended March 31, 2001.

 

*Hardware.* Hardware revenues are derived from the resale of third–partyhardware products sold to the Company’s customers in conjunction with thelicensing of the Company’s software. Hardware revenues were $783,000 for thethree months ended March 31, 2002 and $836,000 for the three months endedMarch 31, 2001, representing a decrease of 6%. Hardware revenues accountedfor 20% and 21% of total revenues for each respective period.  The decrease in hardware revenues was due 

 

9

----

 

primarily to thedecrease in the number of software sales in the three month period ended March31, 2002 resulting in a decrease in accompanying hardware sales.

 

*Service and Other.* Service and other revenues are primarily comprised of fees frommaintenance contracts. Service and other revenues were $1.9 million forthe three months ended March 31, 2002 and $1.7 million for the threemonths ended March 31, 2001, representing an increase of 9%. Service and otherrevenues accounted for 48% and 44% of total revenues for each respectiveperiod. The increase in service and other revenues is due to the continuedgrowth in deferred support revenues and an increase in other revenues resultingfrom consulting services performed in connection with providing customers withcustomized software functionality.

 

*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 $74,000 and $139,000 for the three months ended March 31,2002 and 2001, respectively, representing 6% and 10% of software licenserevenues for each respective period. Software license gross margin percentages increased to 94% for the threemonths ended March 31, 2002 from 90% for the three months ended March 31,2001.  The increase in gross margin andthe decrease in dollar amount is due to a decrease in royalty paymentsassociated with certain software sales.

 

*Hardware.* Cost of hardware revenues consists primarily of the costs of third–partyhardware products. Cost of hardware revenues was $517,000 and $555,000 forthe three months ended March 31, 2002 and 2001, respectively, representing66% of hardware revenues for each respective period. The decrease in dollaramount for the cost of hardware revenues was due primarily to the decrease ofhardware unit sales accompanying the Company’s products. The gross marginpercentage for hardware sales was 34% for each of the three month periods endedMarch 31, 2002 and 2001.

 

*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 $770,000 and $1.2 million for the three monthsended March 31, 2002 and 2001, respectively, representing 41% and 67% ofservice and other revenues for each respective period.  The gross margin percentage for service andother revenues increased to 59% for the three months ended March 31, 2002,compared to 33% in the same period in 2001. The increase in gross margin and the decrease in the dollar amount ofcost of service and other revenues was due primarily to a fewer number ofemployees in the service and support department.

 

*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 were$1.6 million and $1.4 million for the three months ended March 31,2002 and 2001, respectively, or 42% and 36% of total revenues for eachrespective period.  The increase in dollar amount and as apercent of total revenues was due to an increase in commissions paid to salespersonnel as well as an increase in the number of sales personnel and theirassociated expenses.  The Companyexpects that sales and marketing expenses are likely to increase in absoluteterms.

 

*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 $832,000 for the three months ended March 31, 2002 and $857,000for the three months ended March 31, 2001, representing 21% and 22% of totalrevenues for each respective period.  The decrease in the expense and in the expense asa percent of total revenues was due to a fewer employees in the research anddevelopment department.  TheCompany expects research and development expenses to remain consistent inabsolute terms.

 

*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 administrative expenses were $1.3 million and $766,000 for the threemonths ended March 31, 2002 and 2001, respectively, or 

 

10

----

 

32% and 20% of total revenues for each period. The increase, in dollaramount and as a percent of total revenues, is due to the addition of certaingeneral and administrative personnel and overhead costs associated withsupporting such personnel, an increase in management consulting expenses and anincrease in state sales tax accruals during the quarter.  The Company expects general and administrativeexpenses to remain consistent in absolute terms.

 

*Interest Income.*  Interest income consists principally ofinterest income earned on cash balances.  Interestincome was $51,000 for the three months ended March 31, 2002 and $252,000for the three months ended March 31, 2001.  The decrease is due to changes in principal balances and anapproximate 66% reduction in interest rates that the Company was earning on itsinvestments.

 

 

### **Liquidity andCapital Resources**

 

Since 1996, theCompany has financed its operations primarily through cash flow fromoperations, private sales of preferred stock and its initial public offering ofCommon Stock completed in August 1997. At March 31, 2002, the Companyheld cash and cash equivalents of $11.3 million and working capital of $9.2million.

 

The Company’soperating activities used cash of $1.1 million and $343,000 for the threemonths ended March 31, 2002 and 2001, respectively. Net cash used duringthe three months ended March 31, 2002 consisted primarily of a net lossfrom operations and a decrease in accounts receivable offset by an increase indeferred revenue.  Net cash used duringthe three months ended March 31, 2001 resulted from a net loss from operationsand decreases in accounts payable and accrued liabilities offset by a decreaseto accounts receivable and an increase in deferred revenue.

 

Investingactivities provided cash of $1.2 million and $3.2 million during the threemonths ended March 31, 2002 and 2001, respectively.  During the three months ended March 31, 2002 and 2001, theprincipal use of this cash was purchases of property and equipment offset byproceeds from the sale of short-term investments.

 

Financingactivities provided cash to the Company in the amount of $11,000 and $18,000during the three months ended March 31, 2002 and 2001, respectively, due to thenet proceeds from the issuance of common stock.

 

At March 31,2002, the Company did not have any material commitments for capitalexpenditures.

 

Subject to thefactors discussed below, the Company believes that the existing cash balances,short-term investments and cash generated from operations will be sufficient tofinance the Company’s operations for the next twelve months. Although operatingactivities may provide cash in certain periods, to the extent the Company growsin the future, its operating and investing activities may use cash.  There can be no assurance that any necessaryadditional financing will be available to the Company on commercially reasonableterms, or at all.

 

 

**Certain Factors Affecting FutureOperating Results**

 

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

 

                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.  In particular, statements contained inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations which are not historical facts (including, but not limited to,statements concerning:  the plans andobjectives of management; expectations for sales and marketing, research anddevelopment and general and administrative expenses; developments relating tothe Company’s product and service offerings, markets and acquisitions;anticipated trends in the Company’s business; the Company’s strategicalliances; changes in the regulatory environment; and the Company’s expectedliquidity and capital resources) may constitute forward–lookingstatements. These forward–looking statements are neither promises norguarantees, but are subject to risk and uncertainties that could cause actualresults to differ materially from the expectations 

 

11

----

 

set forth in the forward–looking statements. Factorsthat may cause such differences include, but are not limited to, the factorsdiscussed below, and the other risks discussed from time to time in theCompany’s other filings with the Securities and Exchange Commission.

 

*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 June 2000, the Company changed itsstrategic focus to the development of secure business-to-business electronicdocument exchange solutions. The Company introduced its securebusiness-to-business electronic document exchange products, Genidocs andGenifax, to the market in the fourth quarter of 2000.  To date, the Company has not recognized a significant amount ofrevenues from its Genidocs product. The Company expects that its Genidocsproduct may account for an increasing portion of future revenues. However,there can be no assurances that the Genidocs product will be financiallysuccessful or result in any significant revenues. Factors adversely affectingthe pricing of or demand for such products, such as competition ortechnological change, could have a material adverse effect on the Company’sbusiness, financial condition and results of operations. The Company’sprospects must be considered in light of the risks and difficulties frequentlyencountered by companies dependent upon operating revenues from a new productline 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 the Genidocsand Genifax products will achieve market acceptance. The introduction ofproducts embodying new technologies and the emergence of new industry standardscould render the Company’s existing products obsolete and unmarketable. Fromtime to time, the Company and its competitors may announce new products,capabilities or technologies that have the potential to replace or shorten thelife cycle of the Company’s existing product offerings. There can be noassurance that announcements of new product offerings by the Company or its competitorswill not cause customers to defer or forego the licensing of the Company’sexisting or planned products and have a material adverse effect on theCompany’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 bycustomers may not be profitable and, furthermore, could damage the Company’sreputation or brand name.

 

*Dependenceon Fax Sr. NT and the Windows NT/2000 Environment.* The Company currently derives a significant portion of its revenues fromlicenses of the Fax Sr. NT product and related services and resale ofrelated hardware. Continued market acceptance of the Fax Sr. NT product iscritical to the Company’s future success. As a result, any decline in demandfor or failure to maintain broad market acceptance of the Fax Sr. NTproduct line as a result of competition, technological change or otherwise,would have a material adverse effect on the Company’s business, financialcondition and results of operations. The Company’s future financial performancewill depend in large part on customer acceptance of new and enhanced versionsof the 

 

 

12

----

 

Fax Sr. NT product. There can be no assurance that the Companywill continue to be successful in marketing the Fax Sr. NT product or anynew or enhanced versions of the Fax Sr. NT 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.

 

*FutureOperating Results Uncertain.*  The Companyincorporated and shipped its initial facsimile software products in 1991.  In the years ending December 31, 1999,2000 and 2001 the Company had operating losses and decreasing revenues and inthe three months ended March 31, 2002, the Company had operating losses. Therecan be no assurance that the Company will be able to increase its level ofrevenues or return to profitability in the future, as the Company’s operatinghistory makes the prediction of future operating results difficult orimpossible.  Increases in operatingexpenses, primarily sales and marketing, 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 andoperating margin percentage.  TheCompany’s ability to improve its operating results will depend upon, amongother things, its ability to increase sales of the Company’s securebusiness-to-business electronic document exchange solutions and client/serverfacsimile solutions to new customers as well as increased product penetrationinto existing customers.  The Companycommenced its strategic expansion into secure business-to-business electronicdocument exchange solutions market in the fourth quarter of 2000, and haslimited financial and operating data and a limited operating history relevantto these solutions. Accordingly, it is difficult to evaluate the prospects forthe level of acceptance of the Company’s secure business-to-business electronicdocument exchange solutions. Future operating results will depend on many otherfactors, including, without limitation, the degree and rate of growth of themarkets in which the Company competes, the level of acceptance of the WindowsNT, Windows 2000 and Windows XP operating systems, the level of product andprice competition, the ability of the Company to establish strategicrelationships and develop and market new and enhanced products and to controlcosts, the ability of the Company to expand its direct telesales force andindirect distribution channels both domestically and internationally and theability of the Company to attract and retain key personnel. As a result, it ispossible that in the future the Company’s operating results will be below theexpectations of public market analysts and investors.  In such event, the price of the Company’s common stock wouldlikely 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 Delisting From the Nasdaq National Market*. In February 2002, the Nasdaq National Market (“Nasdaq”) informed theCompany that its common stock had traded for 30 consecutive trading days belowthe minimum bid price and that the Company had until May 15, 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.  On April 16, 2002, theCompany received confirmation that it had achieved compliance with thoselisting requirements.   In addition, theSEC recently approved certain changes to the Nasdaq continued listingquantitative standards.  EffectiveNovember 30, 2002, Nasdaq’s current $4 million net tangible asset standard isbeing replaced with a $10 million stockholder’s equity requirement for continuedlisting on Nasdaq.  The other requirementsfor continued listing on Nasdaq are: $750,000 in public float; $5 million value of public float; $1 minimumbid price and 400 round lot holders.  Ifthe Company’s stockholder’s equity is below $10 million on November 1, 2002,the Company will be subject to possible delisting unless it takes action toincrease its stockholder equity. Stockholder’s equity decreased in each of the fiscal years endedDecember 31, 1999, 2000 and 2001.  Thedelisting of the Company’s common stock from Nasdaq may materially impair thestockholder’s ability to buy and sell shares of the Company’s common stock andcould have an adverse effect on the market price of, and the efficiency of thetrading 

 

13

----

 

market for, the Company’s common stock.  In addition, the delisting of the Company’s common stock couldsignificantly impair the Company’s ability to raise capital should it desire todo so in the future.  The Company’slisting on Nasdaq is highly important to the Company and the Company intends totake all reasonable measures to maintain compliance.

 

*The Use of Arthur Andersen as the Company’s IndependentAuditors*. In March 2002, Arthur Andersen LLP ("ArthurAndersen") was indicted on federal obstruction of justice charges arisingfrom the government’s investigation of Enron Corporation. Arthur Andersen haspublicly stated that it intends to contest vigorously the indictment. As apublic company, Omtool is required to file with the Securities and ExchangeCommission annual financial statements audited by independent auditors. TheSecurities and Exchange Commission has said that it will continue acceptingfinancial statements audited by Arthur Andersen, and interim financialstatements reviewed by it, so long as Arthur Andersen is able to make certainrepresentations to its clients. Certain investors, including significant fundsand institutional investors, may choose not to hold or invest in securities ofa company that does not have current financial reports available. The Company’saccess to the capital markets and its ability to make timely Securities andExchange Commission filings could be impaired if the Securities and ExchangeCommission ceases accepting financial statements audited or reviewed by ArthurAndersen, if Arthur Andersen becomes unable to make required representations tothe Company or if for any reason (including the loss of key members of theCompany’s audit team from Arthur Andersen) Arthur Andersen is unable to performrequired audit-related services for the Company in a timely manner.  Currently in view of the highly publicizedevents involving Arthur Andersen and the other developments relating to thefirm, the Board of Directors has delegated to the Audit Committee theresponsibility to work with management to review the qualifications of themajor national accounting firms to serve as the Company’s independent auditorsfor the fiscal year ending December 31, 2002. The Audit Committee is in the process of assembling a list of candidatefirms, evaluating their qualifications and shall make a recommendation to thefull Board of Directors.  This processdoes not reflect any criticism of Arthur Andersen’s services rendered to theCompany.  The Board of Director’sselection will be announced after the Company completes its deliberations butat the time of preparing this Report on Form 10-Q no decision has beenmade.  The Board of Directors selectionof independent auditor for the fiscal year ending December 31, 2002 may have adisruptive effect on the Company’s operations and affect the price andliquidity of the Company’s Common Stock.

 

*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 scaleability; 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. The Company’s solutions provide an alternative to traditional mailand courier document delivery services, such as those offered, among others, byFederal Express, United Parcel Service (“UPS”) or the U.S. Postal Service. TheCompany’s solution is also an alternative to general-purpose e-mailapplications and services. In the area of secure online document exchange, theCompany’s competition comes from secure online document exchange servicesproviders. Some of these providers have products that are intended to competewith the Company’s products. Examples of these companies include Pitney Bowes,Sigaba, Tumbleweed, UPS, the U.S. Postal Service and Zixit.  In addition, many companies with which theCompany does not presently compete may become competitors in the future. Thiscould occur either through the expansion of the Company’s products or throughother companies’ product development in the area of secure onlinecommunication. These companies could include Documentum, Hummingbird andiManage.  Additionally, companies suchas JetForm, PureEdge and Silanis may develop and deliver competitive digitalsignature products in the future.

 

                The Companycompetes directly with a large number of vendors of facsimile products,including providers of facsimile software products for client/server networkssuch as RightFAX (a subsidiary of Captaris), Fenestrae, TopCall Internationaland Biscom. The Company also competes with vendors offering a range ofalternative facsimile solutions including outsourcing network facsimilesolutions, such as Mail.com; operating systems containing facsimile anddocument transmission features; low-end fax modem products;desktop faxsoftware; single–platform facsimile software products; and 

 

 

14

----

 

customized proprietary software solutions. In addition, providers ofoperating systems or business software applications may decide to bundlecompetitive facsimile solutions 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,and new 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 inorder to meet any competitive threat, or that such required investments willnot have a material adverse effect on operating margins.  Changes in government laws and regulationsmay also affect our ability to maintain competitiveness.  Increased competition may result inreduction in market share, pressure for price reductions and related reductionsin gross margins, any of which could materially adversely affect the Company’sability to achieve its financial and business goals. There can be no assurancethat in the future the Company will be able to successfully compete againstcurrent and future competitors.

 

*Fluctuationsin Quarterly Results of Operations; Seasonality.*  The Company’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 the purchaseof the Company’s products. During such sales cycles, the Company may expendsubstantial 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 fails to close as forecasted in a fiscal quarter, theCompany’s revenues and operating results for such quarter could be materiallyadversely affected. Any one or more of these or other factors could have amaterial adverse effect on the Company’s business, financial condition andresults of operations. The potential occurrence of any one or more of thesefactors makes the prediction of revenues and results of operations on aquarterly basis difficult and performance forecasts derived from suchpredictions unreliable.

 

                The Company’sbusiness has experienced and is expected to continue to experience seasonality.The Company has historically had and expects to continue to have weaker salesin the months of July and August which may have an adverse affect on thirdquarter sales. The Company believes that these fluctuations are causedprimarily by customer budgeting and purchasing patterns.

 

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

 

 

15

----

 

Company’s expectations of future revenues on a quarterly basis. Ifactual revenue levels on a quarterly basis are below management’s expectations,results of operations are likely to be adversely affected by a similar amountbecause a relatively small amount of the Company’s expense varies with itsrevenue in the short term.

 

                Due to all of 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 anddistributors and strategic business partners. Although the Company hashistorically focused its efforts on marketing through its telesales 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.  Such relationships may beterminated by either party, at any time, and therefore there can be noassurance that any VAR, systems integrator or distributor will continue torepresent the Company’s products. Furthermore, the Company’s strategic alliances may be terminated byeither party, at any time, there can be no assurances that such strategicalliances will continue.  The inabilityto retain certain VARs, systems integrators, distributors or strategic businesspartners, or the development or marketing by VARs, systems integrators,distributors or strategic business partners of competitive offerings, couldhave a material adverse effect on the Company’s business, financial conditionand results of operations.

 

                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 acquisitions aredifficult to identify and complete for a number of reasons, includingcompetition among prospective buyers and the possible need to obtain regulatoryapproval. There can be no assurance that the Company will be able to completefuture acquisitions. In order to finance such acquisitions, it may be necessaryfor the Company to raise additional funds either through public or privatefinancings, including bank borrowings. Any financing, if available at all, may be on terms which are notfavorable to the Company.  The Companymay also issue shares of its common stock to acquire such businesses, which mayresult in dilution to the Company’s existing stockholders.

 

*Abilityto Manage Growth.*  The Company has expanded its operations andanticipates that expansion will be required in order to address potentialmarket opportunities. The Company may increase the size of its sales andmarketing and research and 

 

 

16

----

 

development expenditures as necessary. There can be no assurance thatsuch 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.

 

 *Risks Associated with InternationalExpansion.*  An element of theCompany’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 to maintaininternational sales of its products or that the Company’s internationaldistribution channels will be able to adequately market, service and supportthe Company’s products. International operations generally are subject tocertain risks, including dependence on independent resellers, fluctuations inforeign currency exchange rates, compliance with foreign regulatory and marketrequirements, variability of foreign economic conditions and changingrestrictions imposed by United States export laws. Additional risks inherent inthe Company’s international business activities generally include unexpectedchanges in regulatory requirements, tariffs and other trade barriers, costs oflocalizing products for foreign countries, lack of acceptance of localized productsin foreign countries, longer accounts receivable payment cycles, difficultiesin managing international operations, difficulties in enforcing intellectualproperty rights and the burdens of complying with a wide variety of foreignlaws.  The Company has a sales officeoutside of the United States, such operations are subject to certain additionalrisks, including difficulties in staffing and managing such operations andpotentially adverse tax consequences including restrictions on the repatriationof earnings. There can be no assurance that such factors will not have amaterial adverse effect on the Company’s future international sales and,consequently, the Company’s business, financial condition and results ofoperations. To date, a majority of the Company’s sales have been made in UnitedStates dollars and the Company has not engaged in any hedging transactionsthrough the purchase of derivative securities or otherwise.

 

 *Dependence on Key Personnel.*  The Company’s future performance depends, insignificant part, upon the continued service of its key technical, sales andsenior management personnel, none of whom is 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.

 

 

17

----

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

 

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

 

As ofMarch 31, 2002, the Company did not participate in any derivativefinancial instruments or other financial and commodity instruments for whichfair value disclosure would be required under SFAS No. 107,*Disclosuresabout Fair Value of Financial Instruments*. All of the Company’sinvestments consist of money market funds and municipal bonds that are carriedon the Company’s books at amortized cost, which approximates fair market value.Accordingly, the Company has no quantitative information concerning the marketrisk of participating in such 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 rate fluctuationshas been and is expected to continue to be modest due to the fact that theoperations of its United Kingdom subsidiary are almost exclusively conducted inits local currency. The United Kingdom subsidiary operating results aretranslated into U.S. dollars and consolidated for reporting purposes. Theimpact of currency exchange rate movements on intercompany transactions wasimmaterial for the quarter ended March 31, 2002. Currently the Companydoes not engage in foreign currency hedging activities.

 

 

18

----

 
| **PART II** | **OTHER  INFORMATION**           |
|-------------|----------------------------------|
|        |                             |
| Item 6.     | Exhibits and Reports on Form 8-K |
|        |
|        | (a)                              | Exhibits |
|        |
|        | Exhibit Number                   | Description |
|        |
|        | 10.9                             | Consulting Arrangement with Arnold E. Ditri |
|        |
|        | (b)                              | Reports on Form 8-K |
|        |
|        | None                             |   |
|        |
|             |                                  |  |  |  |  |

 

 

 

 

 

 

 

 

 

 

19

----

 

 

**SIGNATURES**

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|         | OMTOOL, LTD.                                                                               |
|--------------|--------------------------------------------------------------------------------------------|
|         |                                                                                       |
| May 13, 2002 | By:                                                                                        | /s/ Timothy P. Losik |   |
|         | Timothy P. Losik                                                                           |
|         | Vice President, Chief Financial Officer, Chief  Operating Officer, Secretary and Treasurer |

 

20

----