OMTOOL LTD (OMTL) - Description of business

Company Description
; 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: // 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