OMTOOL LTD (OMTL) - Description of business
; our ability to expand our product and service
offerings; and the Company’s ability to satisfy working-capital requirements.
These forward-looking statements are based largely on the Company’s
expectations and are subject to a number of risks and uncertainties, certain of
which are beyond the Company’s control. In addition, we may face additional
risks and uncertainties not presently known to us or that we presently deem to
be immaterial. If any of those known or unknown risk or uncertainties were
actually to occur, our actual results could differ materially from these
forward-looking statements. Further, our actual results could materially
differ from those forward-looking statements as a result of a number of factors
including, but not limited to, those factors described in Item 1A. Risk
Factors. PART I Item 1. Business We provide document routing solutions and services
that enable organizations to manage the capture, processing and distribution of
“mixed-mode” documents (i.e., documents that contain both paper and electronic
components) to electronic information systems such as enterprise content
management systems, document management systems, records management systems,
e-mail systems and document-archiving systems, leveraging application
interfaces with which users are already familiar. Our enterprise-class products
are used by organizations that manage paper-based documents as part of their
standard business processes and/or have stringent compliance requirements for
secure document handling, storage, integration and tracking of a variety of
documents to or from corporate information systems. We help companies manage document routing by
leveraging existing information technology (“IT”) infrastructures and
integrating our products with industry-leading electronic information systems. We
add secure document management and routing functions along with high-volume fax
functionality to a company’s existing communication infrastructure. Since paper
remains integral to many business processes, we also provide technology that
incorporates electronic delivery, security and billing functionality into
industry-leading multi-function and scanning devices. AccuRoute ® , our flagship product, is a software
platform for simplified, simultaneous and secure document distribution.
AccuRoute allows companies to control the integration and distribution of
mixed-mode documents into ever-changing corporate information systems and
processes. Similar in concept to a network router, our AccuRoute product is the
document routing hub, transforming between both paper and electronic-based
documents and routing the information within and outside an organization. Working with virtually all multi-function devices and
electronic information systems (whether enterprise content management systems,
document management systems, records management systems and archival systems as
well as fax and e-mail systems), our AccuRoute product provides a
device-independent, personalized solution so users can distribute documents
from a multi-function device (“MFD”) panel or right from their desktop computer
using a familiar and comfortable interface. In addition, our AccuRoute product
supports the movement of electronic documents and information, enabling
companies to increase employee productivity by quickly capturing hardcopy
documents, distributing them in electronic form and complying with privacy
regulations related to health, financial or other confidential information. Genidocs™, our secure document-delivery application
product, integrates with existing e-mail systems and provides multiple options
for content and attachment encryption, authentication, audit trail, delivery
confirmation and digital signatures. Genifax™, our enterprise fax product,
offers a scalable, server-based feature set and shares a
common Microsoft ® Windows ® server-based
architecture with our Genidocs product line. Our AccuRoute product further unifies the code bases
and architecture of our Genidocs and Genifax products. With its routing
capabilities, our AccuRoute product provides a customer-specific software that
easily manages both paper and electronic documents with little or no user
training required. Companies can deploy our software products on
heterogeneous, multi-platform networks and digital scanning and MFDs and can
integrate them with both desktop and enterprise software applications such as
content management systems, e-mail systems and groupware systems. To address
our users’ needs, our products are modular and scaleable. Our customers can
implement additional communication capacity through the addition of system
components and connectors to keep pace with growing demand. Our customers can
also add additional Omtool product servers to a configuration to provide
failover redundancy, helping to ensure continuous operation. We license our
products on a combination server/seat basis and as external hardware devices
become increasingly technologically advanced, we will extend a portion of our
license fees to a device-based model. We will continue to focus on those vertical markets
where industry or governmental regulations or business practices require
confidentiality, timely electronic delivery and archiving of critical documents
in electronic and paper format. We also expect to maintain our established
position in our traditional market – secure electronic document exchange
(primarily fax-based business). In addition, we plan to continue the evolution
of our AccuRoute product line; encapsulate the functionality of all our
products into a single, configurable platform; expand our integration with
complementary technologies (such as document and records management tools);and
to extend our document capture capabilities to continue to include
compatibility with virtually all MFDs and scanners. In this manner, we will
pursue a leadership position in the broader document delivery, routing and
management markets that we believe will grow in response to increasingly
regulated communications and stringent privacy requirements. We were incorporated in
New Hampshire in March 1991 and we reincorporated in Delaware in January 1996.
Our principal executive offices are located at 8A Industrial Way, Salem, New
Hampshire 03079 and our telephone number is (603) 898-8900. Our Web
site is at http: // www.omtool.com.
We make available free of charge through our Web site our annual
reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after we electronically file these materials
with the Securities and Exchange Commission. Industry Background Industry leading companies today are striving to
increase employee productivity so as to remain competitive while complying with
emerging government mandates and regulatory frameworks. As a result, companies
must focus on improving and streamlining the exchange and management of
documents within the context of complete enterprise content management. While
many enterprises have invested heavily in powerful and reliable IT
infrastructures, these investments address only a portion of the problem. A
significant percentage of a company’s critical business information remains
locked in the company’s file drawers in the form of paper documents. As a result, many companies are encountering
content-management challenges. According to the Enterprise Strategy Group,
unstructured content (including such things as audio, video and unstructured text
such as the body of an e-mail or word processor document) is growing annually
at a ninety-two percent compound rate. This growing amount of unstructured
content has a direct impact on employee productivity as employees are forced to
deal with the growing influx of documents. Studies show that a typical office
worker spends forty percent of his or her time looking for information while
professionals spend more than 500 hours annually reviewing and routing
documents and another 150 hours annually looking for incorrectly
filed documents. The cost of this time
is significant. An industry study found
that an average organization spends $20 in labor to file each document, while
one out of every 20 documents is lost. We believe companies seeking to remain
competitive must address this lost productivity and we believe that our
products are well-suited to tackle this challenge. In the wake of confidence-shattering corporate fraud
and misrepresentations, new and revised compliance requirements are forcing
companies to address the way in which they handle their documents (both paper
and electronic) and manage their associated information management
infrastructure. To ensure that they retain required documents for the
prescribed periods of time and that retained documents are immediately
accessible, enterprises are revisiting their document retention policies based
on specific compliance requirements such as the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”);
Section 17(a) of the Securities Exchange Act of 1934, as amended;
anti-money laundering statutes; and other similar laws and regulations. At the
same time, consumer privacy continues to be a growing concern. Compliance
requirements in support of privacy – such as the Gramm-Leach Bliley Act
and the Health Information Portability and Accountability Act (“HIPAA”) – dictate
specific policies and procedures for capturing, distributing and storing
consumer and patient records and securing their privacy and security. To remain competitive and comply with these regulatory
mandates, companies must improve and streamline the exchange and management of
documents both within and beyond their organizations. Further, companies desire
enterprise content management strategies that encompass the paper portion of
their business processes and integrate mixed-mode documents. A comprehensive
content management strategy dictates how the company will capture, process and
route documents. Industry analysts at Gartner, Inc. such as Toby Bell
indicate that the enterprise content management market is evolving toward
distributed workgroup enablement and that the office document solutions
provider that delivers a distributed document routing product and provides
enterprise savings by supplementing or replacing centralized scanning solutions
where appropriate will be positioned for long-term growth. Understanding this
market potential and the suitability of our products to these challenges, we
have targeted our technology and market focus on just this type of solution. The paperless office is a myth – paper remains a
primary medium for exchange, collaboration and final delivery of documents.
Recognizing the continued prevalence of hardcopy documents and the need to
store and distribute them electronically, we have – through direct sales,
strategic partnerships and continued product development – delivered our
AccuRoute product to the marketplace. Our AccuRoute product is a server-based
software application that leverages existing electronic delivery and management
tools embodied in our Genifax and Genidocs products to enable users to capture,
process and deliver hardcopy documents electronically. These products
collectively enable efficient, secure and controlled electronic delivery and
archiving, making hardcopy content available across an enterprise for easy
reuse and redistribution. We believe that opportunities exist for us to sell
our products in the legal, financial services and health care vertical markets.
We believe our solutions are well suited to markets that require document
distribution and faxing from data-centric applications; paper integration in
mission critical business processes; and fax as the standard for electronic
document exchange. Our products enable users
to streamline the handling and management of their documents and assist
businesses in complying with government regulations such as Sarbanes-Oxley
and HIPAA. Our technology also helps businesses track and archive their
documents and transactions, as well as secure and protect private information. Our
products include a suite of utility and control functions that enable the
conversion of paper documents to standard electronic formats and integrate with
industry-standard document and records management systems. Our products
integrate business processes that include the exchange of hard copy and
electronic documents such as legal contracts, records of financial
transactions, medical records and purchase orders. Further, our products
minimize risks by preserving the security of high-value documents, increasing
productivity through their user-friendly designs, reducing costs by saving lost productivity
time and meeting emerging business requirements through the integration of
paper into the corporate electronic information infrastructure. The Omtool Solution Facilitated by
increasingly simple, portable and affordable technologies, document capture is
increasingly moving from a centralized, back-office process into an everyday,
network-enabled, front-office function . Simultaneously,
the need for companies to integrate paper documents with their electronic
counterparts and integrate them into business workflows is becoming commonplace.
For many companies, as their document management, storing, routing and delivery
needs grow and become more diverse, document-management challenges are rising
to the top of the agenda. In identifying the features necessary to tackle these
challenges, companies desire solutions that provide: · Continuous
and spontaneous document integration; · MFD
hardware independence that enables the capture of documents from different
devices and platforms; · Simultaneous
distribution of documents to multiple destinations such as fax, e-mail or
document or records management systems; · Capture
of paper, electronic and mixed-mode documents and integration of them into electronic
file structures (including document management and storage systems); · Decentralized
document integration and scanning; and · Creation
of personal document-routing instructions for greater flexibility. Our products address these
needs and deliver sim plified, distributed document handling for common
and daily use by end users and workgroups. Working with virtually all MFDs and
electronic information systems, our products are positioned as the document
routing hub that provides all points of connectivity within an enterprise for
mixed-mode documents. To effectively provide our comprehensive document
routing solution, we continue to invest in our AccuRoute product, which
supports virtually all MFDs. We continue to advance AccuRoute’s document
processing functionality while incrementally adding support for electronic
information systems such as e-mail systems, enterprise content management
systems, records management systems, archival systems and more. Our products add the functionality and security that are
missing from existing messaging, enterprise resource planning and document
management systems and MFDs. Along with our hardcopy and fax archive features,
the document routing and delivery security that our products provide helps
companies meet government mandates and best-practice policies regarding the
protection and preservation of confidential business and personal information
that is transmitted electronically. Our enterprise software cost-effectively
adds accountability, improved security, archiving and easy access to popular
document management systems. Our products provide users
with an extensive and flexible feature set that captures, processes,
distributes, archives and integrates documents in electronic formats,
regardless of their original format. As a result, users of our products can
streamline the handling and management of business documents and comply more
easily with government regulations regarding document storage and personal
privacy. Corporate customers deploy our products as a key component of business
process systems. Our customers deploy our products to facilitate the storage,
routing, capture, sharing and archiving of documents crucial to financial and
legal transactions, insurance claims, purchase order processing and sales
quoting. Our customers also use our products to process – easily and
securely – medical records and legal documents. AccuRoute Our AccuRoute product captures, processes and
distributes paper and electronic documents. AccuRoute 2.1 – the current
version of our product – lets business users administer their documents
from either their desktop computer or from a MFD panel, all while seamlessly
integrating with their business workflow. With our AccuRoute product, users capture and convert
hardcopy documents to either un-editable image-based format, such as a
tagged image file format (“TIFF”) or Adobe’s Portable Document Format (“PDF”),
or an editable and searchable text-based format such as PDF text, Microsoft
Word document, or Rich Text Format. The users of our AccuRoute product can then
route and archive documents to various document delivery and document storage
systems. Our AccuRoute product works with nearly all brands of scan-enabled
MFDs by allowing the definition of document capture and delivery options at the
end user’s desktop computer. During 2005, we extended this technology to
include AccuRoute capabilities not only at the desktop, but also at MFD panels
or cost recovery systems to conform to varying business practices and varying
end user needs. Our AccuRoute product is particularly flexible and
functional because a user can, at his or her desktop, pre-define the document
routing workflow, taking full advantage of systems that are present on his or
her desktop, including access to the corporate global address list and personal
contacts. In addition, our AccuRoute product takes advantage of the document
import/indexing functionality of a company’s enterprise content management
systems and document/records management systems. Once defined, this routing
information is stored on the AccuRoute server and assigned a unique code, known
as an “embedded directive.” That embedded
directive is then inserted into an intelligent routing sheet and a scanned
document is then automatically delivered back to the end user on his or her
desktop. Alternatively, workers who prefer to use the front panel of a MFD or
other scanning device may access the same routing list from the device itself. Stored
as a PDF, the intelligent routing sheet can be archived for re-use, distributed
to team members or posted on a corporate Web site for general use routing
documents to a predefined set of destinations. The modular design of the Omtool message server
underlying AccuRoute systems allows an organization to deploy a basic AccuRoute
scan-to-route system for document capture, delivery and archive, while also
allowing the addition of full enterprise fax functionality, including desktop
and scan-to-fax, as needed simply by purchasing the appropriate components and
fax modem hardware from our Genifax product line. The document routing
instructions in an embedded directive that our AccuRoute product creates can be
combined with server routing rule automatically to archive inbound faxes
or route them to multiple recipients and locations. This type of automated
document routing streamlines paper-intensive processes by eliminating in-house
scanning (as a document is essentially scanned when it is faxed) and
efficiently routes electronic documents. Our fax-based client/server software
platform – deployed as part of a full AccuRoute system or solely as part
of our Genifax product – can be configured to automatically process data
streams from back-office manufacturing and other applications for automatic
electronic exchange, reducing material and manpower costs. Strategy We aim to maintain our position as a leading provider
of enterprise-class document-routing software solutions and strive to become a
leading provider of electronic document exchange solutions that include
capture, processing and distribution of paper or electronically formatted
documents. We intend to take advantage of our penetration of the legal vertical
market, our existing customer base, our partnerships and our extensive
knowledge of enterprise content management and document routing to implement
the following business strategy: Establish
Omtool as the Preeminent Enterprise-Class Software Provider. Through our increased investment in sales and
marketing, we plan to establish the Omtool brand in enterprise-class document
routing solutions while maintaining our strong position as an enterprise-level
fax software provider. Maintain
Technology Leadership Position in the Enterprise Market and Continue to Enhance
Products. We
intend to continue to extend our existing product offerings and form strategic
technology and distribution partnerships to further penetrate our target
markets. We intend to continue investments in our electronic document delivery
strategy by integrating with other document and records management systems, by
continuing to refine our message server based platform with additional features
and by integrating with other third-party systems. In addition, where
appropriate, we will continue to invest in and refine our fax and
secure-messaging technologies as part of the evolution of our AccuRoute
platform in order to keep pace with customer requirements. Where opportunities
exist, we will investigate repackaging portions of our existing technology to
address opportunities that we believe exist for low-cost, distributed products
that provide limited document exchange capabilities. Establish
AccuRoute as the Universal Document Routing Hub. Through product development and targeted marketing
efforts, we plan to establish AccuRoute as a universal document routing hub
supporting virtually all devices related to document capture, document
management and electronic information systems. We plan to support these efforts
through general and vertical-market-specific marketing. Leverage
Installed Base of Customers. We believe that with our AccuRoute product,
opportunities exist to expand our user base and expand the use of our software
applications at our existing customer installations. We intend to pursue these
opportunities by leveraging both our solution/reseller channels and increasing
our direct sales force. In addition, we believe that our ability to maintain a
high level of customer satisfaction among our customer base is critically
important in marketing our products. We will actively seek opportunities to license
our AccuRoute product to existing customers who are currently using our Genifax
or FaxSr. software, specifically highlighting how our AccuRoute product
improves processes, reduces costs and addresses regulatory issues relating to
information archiving, access and privacy. Focus
on Vertical-Market Opportunities. We believe that opportunity exists
for our electronic document delivery solutions in specific vertical markets. We
have achieved market penetrations in the legal, health care, financial services
and Fortune 1000 markets and we intend to continue focusing on those markets. We plan to continue to broaden our position in the
legal vertical market. Our products are particularly well-suited to the
document-centric environment of law firms that need to convert current as
well as legacy paper-based documents into electronic files for archiving in
document or records management systems. Ideally, these electronic documents
should be in a searchable format and properly profiled for easy and fast
retrieval. Our AccuRoute product enables law firms quickly,
easily and conveniently to convert paper documents using a one-scan process on
virtually all leading networked, scan-enabled office devices. These scan files
are converted (through our AccuRoute application) to selected formats including
searchable PDF—a format required by many law firms. Our AccuRoute product can
deliver these files to multiple recipients via fax and e-mail and store them in
a document repository. Our AccuRoute product is tightly integrated with popular
document management systems offered by EMC Corporation (with its Documentum ® product), Interwoven, Inc. (with its iManage ® product),
Hummingbird, Ltd. (with its Hummingbird Enterprise DM™ product) and World
Software Corporation (with its WORLDOX ® product) to name a few. Further, through
AccuRoute, users have access to the native profiling screens of their document
management systems so as to be able to capture document information prior to
scanning, allowing law firms to take full advantage of their document
management and archiving systems. In addition to the need for increased productivity, we
have identified compliance initiatives and government mandates such as
Sarbanes-Oxley that prescribe corporate policies for tracking, securing and
archiving any and all communications and documents relating to financial
reporting. These compliance requirements are driving enterprises to pay close
attention to their document management strategies. We believe these initiatives
will create the need for AccuRoute not just in the financial services markets, but
in the broader enterprise marketplace where compliance and related document
management requirements are a horizontal problem, spanning more than one
vertical market. We believe that government regulations regarding
privacy and the need to better manage paper documents will drive many health
care organizations to re-examine their methods for managing patient-related
information and investigate ways to streamline paper-based processes to
improve efficiency and eliminate redundancy while improving security. Today,
health care organizations use e-mail and fax to communicate patient information
among health care providers, payors and private corporations. Under HIPAA
regulations for document portability and privacy, both e-mail and fax
communications must undergo significant changes to ensure the confidentiality
of patient information. Our products provide a fully capable fax and e-mail
solution that supports HIPAA-compliant processes. Our solutions combine both
procedural changes to physical workflows and technological changes. The health
care market represents a major opportunity for our products and, although we
have achieved some penetration into the health care market already, we will
make it a vertical market focus this year and in the future so that we can
increase our penetration into this market. Expand
and Build Distribution Channels while Maintaining Our Direct Sales Organization. We believe our success requires an
expanded distribution base to broaden both our reach into targeted vertical
markets and to penetrate further our installed base. We will continue to use
direct sales efforts where appropriate to focus on account management. We
continue to refine our domestic and international distribution network with the
goal of developing close partner relationships that will augment our
distribution channels, complement our direct sales efforts and provide market
strength in various geographic regions. Increase
International Sales Presence. We intend to increase our
international presence (primarily in Europe) to address target markets outside
of the United States and serve customers that operate on a multinational basis.
In 2003, 2004 and 2005, we derived approximately 23 percent, 22 percent and
19 percent of our total revenue from sales outside of United States
(primarily in Europe, Canada and South Africa). Promote
Leadership in the Enterprise Content Management and Document Routing Software
Environment. Our
AccuRoute product provides a common set of document capture, processing and
distribution tools that operate on a broad set of MFDs from virtually all
leading manufacturers, while providing integration with installed enterprise
content management and document management systems. We believe that
organizations will adopt policies to control more effectively information
exchange and archiving as reliance on paper documents increasingly becomes an
obstacle. In today’s business environment—which is an e-mail centric culture—managing
paper documents is both inefficient and ineffective given present day corporate
document management strategies and infrastructures. Our AccuRoute product
provides a clear solution to bridge seamlessly the paper/electronic gap and is
becoming necessary infrastructure for efficient and effective enterprise
content management. Continue to Pursue
Strategic Relationships. We have and will continue to form strategic
relationships with leading providers of products and services that complement
our product offerings. We believe that these relationships will provide a
valuable means of market expansion, a solid source of sales leads and exposure
of our products to new markets and prospective customers. We have strategic alliances with Xerox
Corporation, Ricoh Co., Ltd.; Hewlett-Packard Company and Lexmark
International, Inc. — providers of digital scanning MFDs that, when
combined with our software products, enable users easily to integrate hardcopy
documents into their electronic workflow. We believe these strategic alliances
will expose us to additional opportunities in the corporate, legal and health
care markets. Current Products
and Services Contrary to industry
predictions, the “paperless office” remains a goal for the distant future. For
the foreseeable future, companies will continue to rely on paper documents to
support virtually every significant business process. Our products help
enterprises manage critical aspects of the flow of paper documents throughout
their organizations. AccuRoute ® AccuRoute is the product for enterprise document
capture, processing and distribution that enables businesses to handle complex
document-routing requirements efficiently and cost-effectively. By integrating
paper and electronic documents into a single, efficient and managed system, our
AccuRoute product allows users to define document distribution rules and
integrate those documents into their electronic workflows. As a result, end
users can accomplish multiple, complex document routing tasks easily – right
from their desktop computers or front panels of MFDs – while providing
their enterprises with increased control over security and compliance-related
issues. Our AccuRoute product is a sophisticated document
routing hubthat provides all points of
connectivity within an enterprise for both paper and electronic documents.
Users can quickly and easily use virtually any MFD (such as a digital copier or
printer) to scan, fax, store, send, receive, archive and more easily share
documents with others. Our unique use of “embedded directives” enables users
to define their own process and distribution rules at their desktop
computers, leveraging familiar user interfaces and saving valuable employee
time previously wasted performing manual entry at the physical device. Further,
our AccuRoute product allows users to store embedded directives for future use
or modification, saving valuable employee time on repetitive document
distribution tasks. The key features of
our AccuRoute product include: · Document
capture and conversion into a variety of formats; · Creation
of text-searchable documents; · User-friendly
desktop interface leveraging native and familiar user interfaces; · “Embedded
directives” for automated, user-defined distribution; · Empower end users to
define their document distribution from their desktop; · Can be re-used and shared,
increasing productivity; · Simultaneous
distribution of mixed-mode documents to multiple recipients and multiple
electronic information systems; · Device-independence
to support any networked scanner, scan-enabled digital printer, copier, fax or
MFD; and · Comprehensive security and
tracking. Designed to enable “in-process” document capture and processing, our AccuRoute
product provides a personalized solution that automatically distributes content
in multiple formats to multiple destinations from a single action, making
documents immediately accessible. The result: faster processes, increased
productivity and lower costs. Genifax™ Our Genifax product
is a multi-tiered client/server solution for automating and integrating
fax communication throughout an enterprise. As a component of an enterprise
software system, our Genifax product is deployed on heterogeneous, multi-platform
networks and integrates with desktop and enterprise software applications. Our
Genifax product provides high availability and high volume enterprise fax
capabilities, incorporating features and functions that include: · Redundancy
and failover that ensure availability where fax-based messaging is mission
critical; · Approval
workflow that allows administrative review and approval for both inbound and
outbound activity; · The
ability to receive fax messages as image-based (non-editable) or text
based (editable) PDF files; · An
enhanced web client that enables users to send, receive, manage and view the
status of their fax inboxes; providing an alternative to e-mail based forms for
organizations wishing to separate e-mail and fax traffic; and · A
private fax feature that ensures senders that the receiving fax machine is
identified prior to actual fax delivery. Genifax’s private fax
feature makes this product ideal for the legal, healthcare and financial
services markets as well as other markets where confidentiality of faxed
documents is either a regulatory requirement or a best practice. Further, our
Genifax product is designed to allow an administrator also to take advantage of
password/security features native to the Windows server operating system to
provide needed protections. Genidocs™ Our Genidocs product is a client/server messaging
application that enables users to deliver documents – with comprehensive
security and tracking – through the Internet to external parties. Genidocs
offers the security features and functionality of traditional, paper-based
communications with the speed, efficiency and cost advantages of electronic
communications. Our Genidocs product also integrates with popular e-mail
applications and digital paper-scanning devices. Our Genidocs product implements a modular, component-based
architecture that works within an enterprise’s existing security
infrastructure. Genidocs provides multifaceted security that combines
encryption with authentication, a time-stamped audit trail and digital
signatures. A Genidocs system can be configured for ad hoc
communications in which each transmission is encrypted, delivered and processed
individually. Our Genidocs product also provides an enterprise solution for
creating and distributing documents in PDF format. Our Genidocs product’s
confirmed and secure electronic document delivery capabilities integrate
readily with existing e-mail, document management and time and billing systems
to provide: · Automated
PDF conversion and delivery; · Cost-recovery
tracking and client bill-back reporting; · Document
management archiving; · Encryption
(including public-key infrastructure); · Digital
signatures; · Sender/recipient
authentication; · Certified
delivery notification, audit trails, third-party time stamps; and · Secure reply. Fax Sr. Fax Sr., our legacy
network fax product, is a client/server software solution for automating and
integrating fax communication throughout an enterprise. As an integrated
component of an enterprise software system, our Fax Sr. product is deployed on
heterogeneous, multi-platform networks and integrates with desktop and
enterprise software applications. Our Fax Sr. product is licensed typically on
a shrink-wrap basis, primarily for Microsoft Windows NT ® and Microsoft Windows 2000™ server operating
systems. Hardware We resell certain hardware
products (such as intelligent fax boards) from third-party vendors. Typically,
we make hardware sales as a result of either new sales or sales to existing
customers upgrading their information technology infrastructure. Occasionally,
where our customers also want fax capabilities, we sell hardware products with
our AccuRoute product. We undertake these hardware sales as a convenience to
customers, who alternatively can opt to obtain hardware directly from a
third-party vendor. The fax boards and fax modems that we resell are not
functional without our product software and we are not generally in the
business of selling fax boards and modems. We purchase these hardware products
as needed to ship to our customers and we only maintain a minimal inventory of
these hardware products. Customer Service To aid in
successful customer deployments, our customer service organization provides
technical support for all of our products. For an additional fee at the time of
the initial licensing of our products, we provide support services to our
customers for a typical period of twelve months. Support services
typically include telephone support and software support (such as maintenance
releases, minor feature enhancement releases, technical bulletins and
replacement of damaged media). Customers may renew their support services at
their discretion on an annual basis. We currently price our annual support
services based on a percentage of our product license fee. We provide
additional services on an as-needed basis including installation, training and
consulting. Our professional services include: · Site
survey, assessment and recommendations; · Training,
installation and integration; · Advantage
support for maintenance, upgrades and support; and · Full range of professional
services, including software customization and consulting. Sales and Marketing While our products have broad horizontal applicability
through compliance and business continuity initiatives, our direct sales
efforts will remain focused on vertical-specific solutions, primarily in the
areas of legal, financial services and health care. We will build upon our
success in the legal vertical market while continuing to expand into the
financial services and health care vertical markets. When we introduced our
AccuRoute product to the legal vertical market, we enhanced our core products
with features that address workflow needs and integrate with products that are
specific to the legal market. In addition, we invested in marketing programs
and branding initiatives targeted to the legal vertical market. Through these
effort and based on the capabilities of our AccuRoute product, today we have
more than 110 legal vertical market customers, including nearly thirty percent
of the top one hundred US-based law firms. Fueled by compliance and privacy regulatory issues and
the early selection of AccuRoute by customers within the financial services and
health care vertical markets, we believe that opportunity exists in these
vertical markets. We also believe that government regulations regarding
confidentiality, portability and security of patient records may indicate a
shift toward electronic delivery methods that are consistent with the
capabilities of our products. To address the broad range of sales opportunities for
our products, we have relied on the coordinated efforts of our sales
organization, key executives and our marketing department. We also offer our
product lines through indirect sales channels such as resellers, systems
integrators, value added distributors and strategic partners — channels
that we plan to expand in 2006. In order to establish a strong reseller
channel, we have dedicated sales resources specifically to finding, qualifying
and managing our channel partners. We will increase our efforts to expand and
strengthen our partner relations in 2006 and the coming years. In addition to
support of our direct vertical sales and marketing initiatives, we will align
with strategic partners that can provide access to a broad and horizontal base
of potential customers to complement our existing vertical market focus. Outside of the United States, we have a renewed
presence and will continue to use independent distributors to promote, license
and support our products. In addition to our direct sales efforts, we expect to
continue to market our products through independent distributors in strategic
international markets. In 2003, 2004 and 2005, sales outside of the United
States (primarily Europe) represented approximately 23 percent, 22 percent
and 19 percent, respectively, of total revenue. In 2003, 2004 and 2005, total
revenue within the United States accounted for 77 percent, 78 percent and 81
percent, respectively, of total revenue. To support our sales
organization, we will continue to implement comprehensive marketing programs
that promote our products and position us in the enterprise-class document
delivery and management software and client/server fax markets. These efforts
may include product advertising, public relations, trade show participation,
educational seminars, direct mail and telemarketing campaigns (both online and
offline), as well as participation in industry programs and forums. Customers As of December 31,
2005, we had more than 8,400 customers worldwide across many industries illustrating the
cross-industry applicability of our products and services. No single customer
accounted for 10 percent or more of our total revenue in 2003, 2004 or 2005. Research and
Development We continue to invest in research and development,
believing our future success depends largely on our ability to continue to
consolidate and enhance our Genifax, Genidocs and AccuRoute products into a
single comprehensive, feature-rich extendable platform. Our engineering teams
focus on the concurrent development of a range of product enhancements that
leverage modular product architectures. Our product development efforts focus
on new products, the exploration of emerging technologies and the continued
enhancement of existing products. We also continually review opportunities to
form alliances with third-party vendors of complementary technologies and
products to enhance the functionality of our product families. We may, based on
timing and cost considerations, continue to explore opportunities to license or
acquire technologies or products from third-parties. We expect to retain
skilled development engineers whose services are in short supply. Should we
need to replace these skilled engineers and should we face any delays or
difficulties in doing so, our business, financial condition and results of
operations could be adversely affected. Our research and development expense
for fiscal years 2003, 2004 and 2005 was approximately $2.2 million,
$1.9 million and $2.2 million, respectively. Since our inception, we
have not capitalized any software development costs. We plan to continue
to make significant investments in research and development, expenses comprised
primarily of the compensation of skilled engineers, independent contractors and
outside vendors. Competition In the market for distributed document processing,
capture and distribution where our AccuRoute product competes, the perceived
competition is derived from four different categories. Other technology
providers vie for the same technology budgetary dollars as we do by offering
competitive products, including MFDs with embedded scan capabilities,
OEM-enhanced scanning solutions, production scanning devices and document
imaging and routing technology from independent software providers. The functionality and focus of the providers of each
of these types of products is significantly different, ranging from highly
centralized production scanning solutions to distributed and decentralized
enterprise platforms for handling both paper and electronic documents, each
suitable for differing business needs. Most major MFD vendors provide basic
scanning capability with each digital device at little or no cost. OEM-enhanced solutions extend the baseline embedded
scanning functionality device and address a portion of the scanning needs of an
enterprise. This solution is very specific to a particular MFD hardware and is
typically displaced as the hardware is refreshed. In a heterogeneous
environment, users will employ differing scanning functionality at each device,
something that can be inefficient and confusing. In this area, we are likely to see competitive products from
hardware vendors such as Xerox Corporation, Canon Inc., Hewlett-Packard Company
and Ricoh Co., Ltd. In some cases, these products are the result of
partnerships with United States-based software companies. Prior to the availability of MFDs with
enterprise-level scanning support, many organizations created centralized
scanning departments equipped with specialized (and expensive) high-speed scanners.
These departments continue to handle large-volume forms-based scanning
requirements. While these scanning departments functioned well, especially with
batch scanning tasks, they solve a completely different problem than that
addressed by our AccuRoute product and do not address distributed workgroup
scanning requirements. Production scanning requirements exist in parallel to
the daily business and ad hoc (or
asynchronously processed) scanning requirements that our AccuRoute product
addresses. We face competition in this
market from a few independent software vendors, for example Kofax (a Dicom
Group, plc company) and EMC Corporation (formerly Captiva Software), whose
business focus was initially the high-volume production scanning segment. Given our transition from a fax software company to an
enterprise application provider for document capture and distribution, there
may continue to be a perception that our previous competitors are current
competitors. While the marketing messages of these companies may in some
instances create confusion, there are significant differences between our
products and those of these competitors. In addition, there are vast
differences between the approach that these other companies take to solving the
problems of paper handling in business enterprises. We believe our ability to compete successfully in the
distributed document capture and delivery market depends on a number of factors
both within and beyond our control, including product performance, reliability,
features, ease of use, product scalability, quality of support services, price
as compared to performance, timeliness of enhancements and new product releases
by us and our competitors. We expect the document capture, routing, storage and
delivery market to mature and become increasingly competitive with success
resulting from critical partnerships and alliances with select hardware and
software partners. The market for enterprise-class computer-based
facsimile solutions is intensely competitive and is more established and mature
than the markets in which our AccuRoute product competes. We believe our ability to compete
successfully in the fax market depends upon a number of factors both within and
beyond our control, including product performance, reliability, features, ease
of use, product scalability, quality of support services, price as compared to
performance and, most importantly, market dynamics and maturity of the
fax-based business. Given these factors, we anticipate a natural, continued
steady decrease in sales of our fax products. We compete directly with several vendors of facsimile
products, including providers of facsimile software products for client/server
networks such as Captaris, Inc. (with its RightFax ® product), Dicom Group, plc (with its TopCall™
product) and Biscom, Inc. (with its suite of fax products). We also
compete with providers offering a range of alternative facsimile solutions
including outsourcing network facsimile solutions, such as eFax ® (a
j2 Global Communications, Inc. product), Easylink Document Capture and
Management Service™ (an Easylink Services Corporation product), and
DocuManager™ (a Premiere Global Services, Inc./Xpedite product); operating
systems containing facsimile and document e-mail features; low-end fax modems;
desktop fax software; single-platform facsimile software; and customized
proprietary software solutions. In addition, providers of operating systems or
business software applications may bundle competitive facsimile solutions as
part of their broader product offerings. Many of our actual and
potential competitors have longer operating histories and greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and market acceptance of their products and technologies than we
do. In addition, there are relatively low barriers to entry in the markets in
which we operate and intend to operate. New competition may arise either from
expansion by established companies, from new companies or from resellers of our
products. There can be no assurance that our current or potential competitors
will not develop products comparable or superior in price and performance
features to those that we develop, adapt more quickly than we do to new or emerging
technologies and changes in market opportunities or customer requirements,
establish alliances with industry leaders or take advantage of acquisition
opportunities more readily than we do. In addition, we cannot assure you that
we will not be required to make substantial additional investments in research,
development, engineering, marketing, sales and customer service efforts to meet
competitive threats or that we will be able to compete successfully in the
future. Increased competition could reduce market share or create downward
pressure on our stock and related reductions in our gross margins—any of which
could materially and adversely affect our ability to achieve our financial and
business goals. We cannot assure you that in the future we will be able to
successfully compete against current and future competitors. Proprietary Rights We regard our software as a trade secret and attempt
to protect it under a combination of copyright and trade secret laws, employee
nondisclosure and assignment of invention agreements and nondisclosure
agreements with other businesses, including current and prospective business
partners. We have one United States patent, three pending United States patent
applications, one United States trademark and six foreign trademarks. We
currently intend to pursue one pending United States trademark application and
one pending foreign trademark application. To date, we have not registered any
copyrights. We generally license our products to our customers under “shrink-wrap”
or “click-wrap” licenses (i.e., licenses included as part of the product
packaging or as part of the installation process). We do not negotiate these
shrink-wrap and click-wrap licenses with individual licensees and these
licensees do not affirmatively sign a license agreement with us. Instead, these
licenses purport to take effect upon the opening by a customer of the product
package. Certain provisions of these licenses, including provisions protecting
against unauthorized use, copying, transfer and disclosure of the licensed
program, may be unenforceable under the laws of many jurisdictions. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is difficult and,
although we are unable to determine the extent to
which piracy of our products exists, we expect this kind of piracy to be a
persistent problem, particularly in international markets. In addition, the
laws of some foreign countries do not protect our proprietary rights to the
same extent as the laws of the United States. We cannot assure you that these
protections will be adequate or that our competitors will not independently
develop technologies that are substantially equivalent or superior to our
technologies. The software industry has seen substantial litigation
involving intellectual property rights. We cannot assure you that we will not
be the target of claims of infringement of intellectual property rights. Further,
if asserted, a claim of intellectual property infringement might have a
material adverse effect on our business, financial condition and results of
operations. In addition, as we license certain components of our products from
third-parties, our exposure to copyright and other infringement actions
may increase because we must rely on those third-parties for information
as to the origin and ownership of the licensed components. In the future, we
may be required to initiate litigation to enforce and protect our trade
secrets, copyrights and other intellectual property rights. We may also be subject to
litigation to defend against claimed infringement of the rights of others or to
determine the scope and validity of the intellectual property rights of others.
Any litigation of this nature could be costly and require the diversion of
management’s attention from other matters, either of which could have a
material adverse effect on our business, financial condition and results of
operations. Were any litigation of this kind to be adversely determined, we
might lose our proprietary rights, become subject to significant liabilities or
be forced to seek licenses from third-parties or prevented from selling
our products, any one of which would have a material adverse effect on our
business, financial condition and results of operations. Employees As of December 31, 2005, we employed 87 people
worldwide. We are not subject to any collective bargaining agreements, have
never experienced a work stoppage and consider our relations with our
employees to be good. Item 1A. Risk
Factors We operate in a rapidly changing environment that
involves a number of risks, some of which are beyond our control. The
discussion below highlights some of the risks that may affect future operating
results. Information provided by us from time to time,
including statements in this Form 10-K that are not historical
facts, consists of so-called “forward-looking statements” that involve risks
and uncertainties, made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. In particular, statements contained
in Management’s Discussion and Analysis of Financial Condition and Results of
Operations that are not historical facts (including, but not limited to,
statements concerning: our plans and objectives; expectations for sales and
marketing, research and development and general and administrative expenses;
developments relating to our product and service offerings, markets and
acquisitions; anticipated trends in our business; our strategic alliances; changes
in the regulatory environment; our expected liquidity and capital resources and
our critical accounting policies) may constitute forward-looking statements. These
forward-looking statements are neither promises nor guarantees, but are subject
to risk and uncertainties that could cause actual results to differ materially
from the expectations set forth in the forward-looking statements. Factors that
may cause these kinds of differences include, but are not limited to, the
factors discussed below and the other risks discussed from time to time in our
other filings with the Securities and Exchange Commission. Our future
operating results are uncertain and difficult to predict. We incorporated and shipped our
initial facsimile software products in 1991. We had an operating loss in the
year ended December 31, 2005 and, although we recorded an operating profit
in the year ended December 31, 2004, we had an operating loss and a
decline in revenue for the year ending December 31, 2003. We introduced
the initial version of our AccuRoute product in the second quarter of 2002 and
the current version in the first quarter of 2004. Ultimately, our AccuRoute
product represented 50% and 38% of software revenue for the years ended December 31,
2005 and 2004. There can be no assurance that we will be able to increase our
level of revenue or become profitable again in the future, as our operating
history makes the accurate prediction of future operating results difficult or
impossible. We do, however, anticipate increases in operating expenses and,
together with pricing pressures and any decline in the growth rate of the
overall United States economy or our industry in particular, we may experience
a decrease in our operating income and operating margin percentage. Our ability to improve our operating results will
depend upon, among other things, our ability to increase sales of our
AccuRoute, Genifax and Genidocs products to new customers, as well as our
ability to increase product penetration into existing customers. We recently
expanded our strategic focus to include document routing and distribution
software. To date, we have limited financial and operating data and a limited
operating history relevant to this strategy. Accordingly, it is difficult to
evaluate the prospects for the level of acceptance of this strategy. In
addition, we plan to continue investing significantly in the expansion of our
AccuRoute product into new vertical markets, specifically first the financial
services vertical market and then the healthcare vertical market, in advance of
significant related revenue from those markets. We cannot predict the timing or
level of revenue resulting from these investments. Future operating results
will depend on many other factors, including, without limitation, the degree
and rate of growth of the markets in which we compete; the level of acceptance
of the Microsoft Windows NT, Windows 2000™, Windows 2003™ and Windows XP ® operating systems; the level of product and
price competition; our ability to establish strategic relationships and develop
and market new and enhanced products; our ability to control costs; our ability
to expand our direct sales force and indirect distribution channels both
domestically and internationally; and our ability to attract and retain key
personnel. As a result, it is possible that in the future, our operating
results will be below the expectations of public market analysts and investors.
In that event, the price of our common stock would likely be materially
adversely affected. All of our products
are concentrated in the electronic document exchange market. To date, much of our revenue has
been attributable to licenses of our facsimile-based enterprise solutions and
related products and services. We expect these products and related services to
continue to account for significant amounts of our future revenue. However,
recently the amount of revenue attributable to licenses of these products has
declined and there can be no assurances that this decline will not continue. Furthermore,
we introduced our secure business-to-business electronic document exchange
products, Genidocs and Genifax, to the market in the fourth quarter of 2000. Further,
we introduced the initial version of our proprietary document and routing
software, AccuRoute, in the second quarter of 2002 and the current version of
that product in the first quarter of 2004. We have only recently begun to
recognize a significant amount of revenue from our AccuRoute product. We expect
this product to account for an increasing portion of future revenue. However,
there can be no assurances that our AccuRoute product will be financially
successful or result in any significant revenue in the future. Factors
adversely affecting the pricing of or demand for this product, such as
competition or technological change, could have a material adverse effect on
our business, financial condition and results of operations. All of our
products are concentrated in the electronic document exchange market and,
therefore, any factors affecting demand for these sorts of solutions could
cause our operating results to decline. Investors must evaluate our prospects
in light of the risks and difficulties frequently encountered by companies
dependent upon operating revenue from a new product line in an emerging and
rapidly evolving market. The markets for our
products are subject to rapid technological change and we may not be able to
keep pace with evolving industry standards or end-user requirements. The markets for our products
are relatively new and are characterized by rapid technological change,
evolving industry standards, changes in end-user requirements and frequent new
product introductions and enhancements. Our future success will depend upon our
ability to enhance our current products and to develop and introduce new
products that keep pace with technological developments and respond to evolving
end-user requirements. There can be no ass
