OMTOOL LTD
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 assurance that we will be successful in developing and marketing new products or product enhancements on a timely basis, or that new products or product enhancements developed by us, such as our AccuRoute, Genidocs and Genifax products, will achieve market acceptance. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable. From time to time, we and our competitors may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycle of our existing product offerings. There can be no assurance that announcements of new product offerings by us or our competitors will not cause customers to defer or forego the licensing of our existing or planned products and have a material adverse effect on our business, financial condition and results of operations. The market for secure business-to-business document exchange solutions is new and evolving rapidly and there can be no assurance that our products will be successful in this market.   The market for Genidocs, our secure business-to-business electronic document exchange solution is relatively new and evolving rapidly. Our success will depend upon the extent and timing of adoption and use by current and potential customers of secure business-to-business electronic document exchange solutions. Our success will also depend upon acceptance of our technology as the standard for providing these solutions. The adoption and use of our secure business-to-business electronic document exchange solution will involve changes in the manner in which businesses have traditionally exchanged information. Our ability to influence usage of our secure business-to-business electronic document exchange solution by customers is limited. We intend to spend resources educating potential customers about the value of secure business-to-business electronic document exchange solutions. It is difficult to assess or to predict with any assurance the present and future size of the potential market for our secure business-to-business electronic document exchange solution, or the growth rate, if any, for this market. Moreover, we cannot predict whether our secure business-to-business electronic document exchange solution will achieve any market acceptance. We note that we did not make any sales of our Genidocs product in the fiscal year 2005. If any of our future  17    products or future product enhancements are not favorably received by our customers, we may be less or not profitable and we may therefore suffer damage to our reputation or brand name. Were we to suffer an unexpectedly large decline in our legacy fax business, our financial condition and results of operations would be significantly impaired.   We currently derive a significant though declining portion of our revenue from licenses of our Genifax product, related services and resale of related hardware. However, sales of Genifax, our multi-tiered client/server software for automating and integrating fax communications throughout an enterprise, were lower in 2005 than they were in 2004 or 2003. Though we expect our sales of our legacy fax products to continue to decline in 2006, an unexpectedly large decline in the market acceptance of our Genifax product would have a negative impact on our future success. As a result, any unexpectedly large decline in demand for or failure to maintain expected market acceptance of our Genifax product line as a result of competition, technological change or otherwise, would have a material adverse effect on our business, financial condition and results of operations. Our future financial performance will depend in part on new and enhanced versions of our Genifax product. There can be no assurance that we will continue to be successful in marketing our Genifax product or any new or enhanced versions of the Genifax product at expected levels. There can be no assurance that we will be successful in developing products for new or enhanced operating systems such as Microsoft’s Windows 2000 or Windows XP system, or that these systems will not obviate the need for our products. If any new or enhanced operating system gains widespread use and we fail to develop and provide our products for this operating system on a timely basis, our business, financial condition and results of operations could be materially adversely affected. We depend on the revenue generated by sales of our AccuRoute product and would be negatively impacted if market interest – whether in the legal vertical market that we have already targeted or the financial services and healthcare vertical markets that we are currently targeting – were to decline or fail to grow as expected.   We currently derive a significant portion of our revenue from licenses of our AccuRoute product and related services. Sales of AccuRoute were higher in 2005 than they were in 2004. Continued market acceptance of our AccuRoute product is critical to our future success. As a result, any decline in demand for or failure to maintain broad market acceptance of our AccuRoute product line as a result of competition, technological change or otherwise would have a material adverse effect on our business, financial condition and results of operations. Our future financial performance will depend in large part on new and enhanced versions of our AccuRoute product. There can be no assurance that we will continue to be successful in marketing our AccuRoute product in the legal vertical market or that our marketing efforts in the financial services and healthcare vertical markets will be successful. Further, there can be no assurance that any new or enhanced versions of our AccuRoute product will be successful. We have historically depended on our sales of fax products to generate revenue and could face a decline in overall revenue if the declines we face in this market are larger than expected.   Our enterprise client/server facsimile software products are intended to help organizations efficiently manage their facsimile communications, utilizing a client/server computing environment. There can be no assurance that organizations will move away from the use of stand-alone fax machines or continue to adopt client/server environments, or that those of our customers who have begun the migration to a client/server environment will broadly implement this model of computing. Our future financial performance will depend in large part on our ability to capture an expected portion of the market for client/server applications. The size of this market will depend in part on the growth in the number of organizations implementing client/server computing environments. There can be no assurance that these markets will continue to grow or that we will be able to capture sales to or respond effectively to the evolving requirements of these markets. If the market for client/server application products and services does not grow in the future, grows more slowly than we anticipate or if we fail to respond effectively to evolving requirements of this market, our business, financial condition and results of operations could be materially adversely affected. 18    Our common stock is listed on the Nasdaq Capital Market and any failure to maintain that listing could significantly impair our stock price and our ability to raise future capital.   We cannot predict our ability to maintain our listing in the future on the Nasdaq Capital Market. The delisting of our common stock from the Nasdaq Capital Market, if that were to occur, could materially impair stockholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. Furthermore, the delisting of our common stock could significantly impair our ability to raise capital should we desire to do so in the future. The markets in which we sell our products are characterized by intense and growing competition and our future success is dependent on our ability to distinguish our products from those of our competitors and reach our target customers.   In the distributed document capture and delivery market in which our AccuRoute software competes, we are likely to see competitive products being offered by hardware vendors such as Xerox Corporation, Canon, Inc., Ricoh Co., Ltd., Lexmark, Inc. and others . In some cases these products are the result of partnerships with U.S.-based software companies. We also expect competition in this market from a number of independent software vendors whose business focus was initially the high volume production scanning segment such as Kofax (a Dicom Group, plc company) and EMC Corporation (formerly Captiva Software), or forms management and process routing companies such as Cardiff Software (an Autonomy Group company). e-Copy, Inc., a former Omtool business partner, has formed a relationship with Canon and has embedded their document capture and routing capabilities into the front panel of the Canon ImageRunner® Multifunction Printer (“MFP”) device. Other potential software competitors include ScanSoft, as well as document management vendors like Hummingbird Ltd. and Interwoven, Inc. who are seeking to develop, either through partnerships or internal resources, scan-to-archive capabilities using standard e-mail as the transport and a generic document profile as a means of entering the content into their repository. We believe that our ability to compete successfully in the distributed document capture and delivery market depends upon a number of factors both within and beyond our control including product performance; reliability and 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 this market to mature and become increasingly competitive with success resulting from the formation of critical partnerships and alliances with both selected hardware and software partners. The market for client/server computer-based facsimile solutions is also competitive and is more established and mature than the markets in which the AccuRoute and Genidocs products compete. We believe that 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 and features; ease of use; product scalability; quality of support services; price/performance; timeliness of enhancements and new product releases by us and our competitors. Given these factors, we believe that in order to be successful, we must continue our focus on delivering a core, modular and scalable product on one of the most prolific system platforms, Microsoft Windows 2000 and Windows 2003, with features that appeal to the broadest segment of the electronic document exchange market, which includes fax and all of the other document control and management features that we offer. We compete directly with a number of vendors of facsimile products, including providers of facsimile software products for client/server networks such as Captaris (with its RightFax product), Dicom (with its TopCall product) and Biscom (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 Easylink Services Corporation (with its Document Capture and Management Sonic product) and Premiere Global Services/Xpedite (with its DocuManager product); operating systems containing facsimile and document e-mail features; low-end fax modem products; providers of desktop fax software; single-platform facsimile software products; and customized proprietary software solutions. In addition, providers of operating  19    systems or business software applications may bundle competitive facsimile solutions as part of their broader product offerings. In the intensely competitive and rapidly changing business-to-business secure document exchange market, we compete directly with Authentica, Inc.; Secure Data in Motion, Inc. (d/b/a Sigaba); Tumbleweed Communications Corp.; and Fix Corporation and a number of other providers. There are also other categories of technology solutions that overlap and compete in certain ways with aspects of our products. These include: ·       Document management solutions from vendors such as EMC Corporation (following its acquisitions of Documentum, Inc. and Captiva Software), Hummingbird Ltd. and Interwoven, Inc. (following its merger with iManage) whose electronic collaboration solutions compete with certain aspects of our solutions; ·       Electronic forms and electronic signature solutions from vendors such as Adobe Systems Incorporated, IBM Corporation (following its acquisition of PureEdge Solutions, Inc.) Silanis Technology, Inc. that offer the creation of electronic documents with electronic signatures; and ·       Security infrastructure solutions from vendors such as Verisign, Inc. and Entrust, Inc. whose solutions can be used to build applications that enable secure document communications. We expect the level of competition in the business-to-business secure document exchange market to increase over time. Many of our competitors 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, and new competition may arise either from expansion by established companies or from new emerging 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 terms of price and performance features – to those are developed. Further, our competitors may 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 can or do. In addition, no assurance can be given that we will not be required to make substantial additional investments in connection with our research, development, engineering, marketing, sales and customer service efforts in order to meet any competitive threat, or that those required investments will not have a material adverse effect on our operating margins. Changes in governing laws and regulations may also affect our ability to remain competitive. Increased competition may result in reduction in our market share, pressure for price reductions and related reductions in our gross margins, any of which could materially adversely affect our ability to achieve our financial and business goals. There can be no assurance that, in the future, we will be able to successfully compete against current and future competitors. 20     Our business is subject to seasonality and fluctuations on a quarterly and annual basis due to the long sales cycle for our products and numerous other factors and, therefore, our results may vary from quarter-to-quarter and year-to-year.   Our quarterly revenue and results of operations have fluctuated significantly in the past and will likely continue to fluctuate significantly in the future. Causes of these fluctuations have included and may include, among others: the demand for our products and services; the size and timing of orders; the number, timing and significance of new product announcements by us and our competitors; our ability to develop, introduce, market and ship new and enhanced versions of our current and planned products on a timely basis; the level of product and price competition; changes in operating expenses; changes in average selling prices and mix of our products; changes in our sales incentive strategy; the mix of direct and indirect sales; and general economic factors, including factors affecting the overall U.S. economy and the demand for enterprise information technology solutions. In addition, the sale of our products often involves delays because customers tend to implement the products they purchase from us on a large scale, requiring them first to establish certain minimum hardware capabilities. Moreover, we have historically experienced some seasonal fluctuations in the sales of our products, due to the fact that many companies make information technology purchases either early or late in their fiscal years (when they either have a replenished annual budget or leftover money in the budget) and more frequently scheduled vacations of key personnel at customers during the summer months (particularly in Europe). Our products therefore often have a lengthy sales cycle while potential customers evaluate and receive approvals for the purchase of our products. During these sales cycles, we may expend substantial funds and management efforts, yet receive no revenue. It is difficult to predict accurately the sales cycle of any large order. If one or more large orders fail to close as forecasted in a fiscal quarter, our revenue and operating results for that quarter could be materially adversely affected. Any one or more of these or other factors could have a material adverse effect on our business, financial condition and results of operations. The potential occurrence of any one or more of these factors makes the prediction of revenue and results of operations on a quarterly basis difficult and performance forecasts derived from these predictions unreliable. In addition, we may invest in research and development and marketing expenses in order to promote further our products within current or new vertical markets, including our current plan to incur additional sales and marketing expenses as we first target the financial services vertical market and then, shortly thereafter, the healthcare market with our AccuRoute software product. Because we must make these investments in advance of related market acceptance of and revenue from our AccuRoute product in those vertical markets, any failure of our products to achieve planned levels of acceptance would have a material adverse effect on our business, financial condition and results of operations on a quarter-to-quarter basis and overall. In general, it is difficult for us to forecast revenue because the market for secure business-to-business electronic document exchange, enterprise client/server facsimile solutions software and routing and distribution software is evolving rapidly and our sales cycle – from the customer’s initial evaluation through purchase of licenses and the related support services – varies substantially from customer to customer. License fee revenue in any quarter depends on orders received and shipped in that quarter, with a significant percentage of orders in any quarter arriving in the last weeks of the quarter. License fee revenue from quarter-to-quarter is difficult to forecast, as no significant order backlog exists at the end of any quarter because our products typically are shipped upon receipt of customers’ orders. A substantial portion of our operating expense is related to personnel, facilities, equipment and marketing programs. The level of spending for these expenses cannot be adjusted quickly and is therefore fixed in the short term. Our expense levels for personnel, facilities, equipment and marketing programs are based, in significant part, on our expectations of future revenue on a quarterly basis. If actual revenue levels on a quarterly basis are below our expectations, our results of operations are likely to be adversely affected by a similar amount because a relatively small amount of our expense varies with our revenue in the short term. 21    Due to all of the foregoing factors, it is likely that in some future periods our results of operations will be below the expectations of securities analysts and investors. In such event, the price of our common stock could be materially adversely affected. In addition to direct sales, we utilize indirect sales and distribution channels and strategic alliances with compatible partners in order to broaden sales of our products. Any failure on our part to form and leverage relationships with these indirect sales and distribution channel partners could have a material adverse affect on our business and results of operations.   We market our products and services directly through telesales and indirectly through marketing channels such as value added resellers (“VARs”), systems integrators, distributors and strategic business partners. Although we have historically focused our efforts on marketing through our direct sales force, we continue to utilize resources to develop and expand our indirect marketing channels. There can be no assurance that we will be able to attract and retain a sufficient number of qualified VARs, systems integrators, distributors and strategic business partners, or that those third parties will successfully market our products. In addition, there can be no assurance that our resellers and strategic business partners will not develop, acquire or market computer-based electronic document exchange, document routing and distribution and facsimile products that are competitive with our products. The failure to retain our VARs, systems integrators, distributors and strategic partners could have a material adverse effect on our business, financial condition and results of operations. The distributor agreements governing our relationships with third party distribution chain partners generally provide that either party may terminate the agreement without cause upon 30 days written notice to the other party. We also resell our products on a purchase order basis through other VARs, systems integrators and distributors. Generally, in those situations, either party may terminate the relationship at any time, and therefore there can be no assurance that any VAR, systems integrator or distributor will continue to represent and sell our products. Furthermore, our strategic alliances generally may be terminated by either party, at any time; there can therefore be no assurances that these strategic alliances will continue. The inability to retain certain VARs, systems integrators, distributors or strategic business partners, or the development or marketing by VARs, systems integrators, distributors or strategic business partners of competitive offerings, could have a material adverse effect on our business, financial condition and results of operations. Selling through indirect channels may limit our contacts with our customers, thereby hindering our ability to accurately forecast sales, evaluate customer satisfaction and recognize emerging customer requirements. Our strategy of marketing our products directly to end-users and indirectly through VARs, systems integrators and distributors may result in distribution channel conflicts. Our direct sales efforts may compete with those of our indirect channels and, to the extent different resellers target the same customers, resellers may also come into conflict with each other. As we strive to expand our indirect distribution channels, there can be no assurance that emerging channel conflicts will not materially adversely affect our relationships with existing VARs, systems integrators or distributors or adversely affect our ability to attract new VARs, systems integrators and distributors. The success of our business is dependent on our ability to expand our sales internationally, which will subject us to regulatory, exchange rate and other risks that might hinder our ability to meet our targets for international sales and might impair our results of operation.   An element of our strategy is to increase our international sales. We expect to face competition from secure business-to-business electronic document exchange solutions and local facsimile product providers in the foreign countries in which we attempt to sell our products. To maintain and grow our international sales, we need to recruit and retain additional international resellers and distributors. There can be no assurance that we will be able to maintain international sales of our products or that our international distribution channels will be able to adequately market, service and support our products. International operations generally are subject to certain risks, including dependence on independent resellers, fluctuations in foreign currency exchange rates, compliance with foreign regulatory and market requirements, variability of foreign economic conditions  22    and changing restrictions imposed by United States export laws. Additional risks inherent in our international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, difficulties in enforcing intellectual property rights and the burdens of complying with a wide variety of foreign laws. We currently have a sales office in the United Kingdom. Our non-United States presence subjects us to certain additional risks including difficulties in staffing and managing these foreign operations and potentially adverse tax consequences including restrictions on the repatriation of earnings. There can be no assurance that these factors will not have a material adverse effect on our future international sales and, consequently, our business, financial condition and results of operations. To date, a majority of our sales have been made in United States dollars and we have not engaged in any hedging transactions through the purchase of derivative securities or otherwise. Our United Kingdom subsidiary transacts business primarily in its local currency. We translate our United Kingdom subsidiary’s operating results into U.S. dollars and consolidate them with our domestic results for reporting purposes. As we make sales to customers in a variety of countries, significant currency exchange rate fluctuations could have a material impact on our results of operations. Given the nature of our business, we may not be able to obtain sufficient or attractive financing, should that become necessary.   We expect that our current cash, cash equivalents and investments will meet our normal working capital and capital expenditure needs for at least the next twelve months. We may, however, need to raise additional funding at that time or earlier if we decide to undertake more rapid expansion, including acquisitions of complementary products or technologies, or if we increase our marketing and/or research and development efforts in order to respond to competitive pressures. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. We may obtain additional financing by issuing shares of our common stock, which could dilute our existing stockholders. If we cannot raise needed funds on acceptable terms, or at all, we may not be able to develop or enhance our products or respond appropriately to competitive pressures, which would seriously harm our business. We may not successfully complete acquisitions or integrate acquisitions we do make, which could impair our ability to compete and could harm our operating results.   We may augment our internal growth with acquisitions of businesses, products and technologies that could complement or expand our business. Certain of these businesses may be only marginally profitable or even unprofitable. In order to achieve anticipated benefits from these acquisitions, we will have to successfully integrate the acquired businesses with our existing operations. We cannot assure you that we will be successful in this regard. We have limited experience in integrating acquired companies into our operations, in expanding the scope of operations of required businesses, in managing geographically dispersed operations and in operating internationally. In the past, we have incurred one-time costs and expenses in connection with acquisitions and it is likely that we could incur similar one-time costs and expenses in connection with future acquisitions. In addition, we might be required to amortize significant intangible assets in connection with future acquisitions, which could adversely affect our operating results. Further, attractive acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the possible need to obtain regulatory approval. There can be no assurance that we will be able to complete future acquisitions. In order to finance potential future acquisitions, we may need to raise additional funds either through public or private financings, including bank borrowings. Any financing, if available at all, may be on terms that are not favorable to us. Finally, we may also issue shares of our common stock to acquire attractive businesses, which may dilute our existing stockholders. Our future success depends on our ability to manage the growth and expansion of our business.   We may expand our operations as we anticipate that expansion may be required in order to address potential  23    market opportunities. We may also increase the size of our sales and marketing and research and development expenditures as necessary. There can be no assurance that we will be able to complete this expansion successfully or that the expansion would generate sufficient revenue to cover our expenses. We will need to continue to attract and retain highly qualified technical, sales and managerial personnel. There can be no assurance that we will be able to retain or continue to hire this kind of personnel in the future or to retain this kind of personnel in a sufficiently timely manner. Our inability to effectively expand operations and manage growth, if any, could have a material adverse effect on our business, financial condition and results of operations. The effectiveness of our disclosure controls and procedures and internal control over financial reporting may be limited.   Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, we must maintain and enhance our internal control over financial reporting. Presently, we are not an “accelerated filer” or a “large accelerated filer” as those terms are defined in the Securities Act of 1933, as amended. As a result, we are not required to deliver a report regarding our determination of the effectiveness of our internal control over financial reporting until we file our annual report on Form 10-K for the fiscal year ending December 31, 2007. Further, under Section 404 of Sarbanes-Oxley, in connection with our annual report on Form 10-K for the fiscal year ending December 31, 2007, our independent registered public accounting firm will be required to deliver an attestation report regarding management’s assessment of the effectiveness of our internal control over financial reporting. As a result, during the fiscal year ended December 31, 2005, we expended considerable time, attention and resources to determining the strength and effectiveness of our internal control over financial reporting and, where appropriate, making improvements. In fiscal years 2006 and 2007, we will continue expending considerable time, attention and resources to determining the strength and effectiveness of our internal control over financial reporting and, where appropriate, making improvements. Our disclosure controls and procedures and internal control over financial reporting may not prevent all errors and intentional misrepresentations. Any system of internal controls can only provide reasonable assurance that all control objectives have been and will continue to be met. Some of the potential risks involved could include, without limitation, management judgments, simple errors or mistakes, willful misconduct regarding controls or misinterpretation. Though we believe that our disclosure controls and procedures and internal control over financial reporting are effective, there can be no guarantee that existing controls and procedures will prevent or detect all material issues, errors or intentional misrepresentations. Further, our existing controls may not be effective in future situations. Any failure of our disclosure controls and procedures or internal control over financial reporting could have a material impact on our financial condition and results of operation. Our assessment of our internal control over financial reporting may identify weaknesses in our internal control over financial reporting that we need to remedy or may raise other issues of concern for our investors. Should we determine that a material weakness exists in our internal control over financial reporting, the price of our common stock might decline. Our reliance on a sole hardware supplier could adversely impact our business.   We currently purchase hardware products for sale to our customers from a single third-party supplier. We do not have a long-term, fixed-price or minimum volume contract with this supplier. Instead, we order hardware equipment through purchase orders from time to time. We do not carry significant inventories of these hardware products and do not have a guaranteed supply arrangement with this supplier. Recently, our sole supplier of hardware products was sold to a third-party. We do not believe that this change of ownership will impact our ability to purchase hardware products from this supplier or the terms under which we make those purchases. Were this supplier to raise its prices or refocus its business, we might be negatively impacted as we would have to develop a new supply relationship for these products. Although we believe that we could secure these hardware products from alternative suppliers, in the event of a disruption of supply from this sole supplier, we might not be able to develop an alternative source in a timely manner or at favorable  24    prices. Even if we were able to purchase these hardware components from alternative sources, we would have little control over the costs of these products. Were we forced to pay significantly higher prices for these hardware products, it might limit the mark-up over the price paid by us that we can reasonably charge our customers. Were we unable to provide this hardware to our customers, forcing our customers to buy this hardware directly from third parties, or were we forced to decrease the size of our mark-up, our hardware and total revenue would be negatively impacted. We will face additional expenses and disruption due to the upcoming relocation of our corporate headquarters.   We lease office space, used as our headquarters and primary business location, at 8A Industrial Way in Salem, New Hampshire. Our current lease terminated on December 31, 2005 and we have remained in this space on a month-to-month arrangement. In January 2006, we entered into a lease for new office space at Six Riverside Drive in Andover, Massachusetts. We intend to move our headquarters to the new premises in April 2006. As a result, we will incur related expenses and will encounter disruption of operations related to the move, all of which could have a material adverse effect on our financial condition and results of operation. We are dependent on our key personnel and any inability to retain or hire key personnel could impact our business and results of operations.   Our future performance depends, in significant part, upon the continued service of our key technical, sales and senior management personnel, most of whom are not bound by employment agreements or noncompetition agreements. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our business, financial condition and results of operations. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel, particularly in light of our expanded AccuRoute sales and marketing strategy. Competition for highly qualified personnel is intense and we have historically experienced difficulty in recruiting qualified technical personnel. There can be no assurance that we will be able to retain or continue to hire key technical, sales and managerial personnel in the future. Item 2.                        Properties Our executive offices are located at 8A Industrial Way, Salem, New Hampshire in a leased facility consisting of approximately 30,000 square feet, of which we occupy 25,500 square feet and we sublease 4,500 square feet (at market rates) to a third party. Our lease for these facilities expired on December 31, 2005 and we arranged with the owner of this space to remain in those premises until April 2006. This facility is adequate for our present operations. Additionally, we lease a facility for sales, customer service, accounting and support in London, England, which lease expires in November 2006. In January 2006, we entered into a new lease agreement for space located at Six Riverside Drive, Andover, Massachusetts consisting of approximately 44,000 square feet. We intend to move our executive offices and headquarters to this new space in April 2006. The lease expires 10 years from the date of occupancy and we have the option to terminate the lease after six years upon payment of a penalty. We anticipate subleasing approximately 5,500 square feet of this new space to a third party at market rates. Item 3.                        Legal Proceedings None. Item 4.                        Submission of Matters to a Vote of Security Holders None. 25     PART II Item 5.                        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. From August 8, 1997, the date of our initial public offering of common stock, until November 19, 2002, our common stock was traded on The Nasdaq National Market under the symbol OMTL. Since November 26, 2002, our Common Stock has been trading on the Nasdaq Capital Market. On March 30, 2004, our Board of Directors approved a two-for-one forward split of our common stock. The stock split was effected in the form of a stock dividend and entitled each shareholder of record at the close of business on April 7, 2004 (record date) to receive one additional share for every share of Omtool common stock held on that date. Shares resulting from the split were distributed by our transfer agent on April 27, 2004. On January 14, 2003, our Board of Directors and stockholders, at a special meeting of stockholders, voted to approve an amendment to our certificate of incorporation that effected a one-for-seven reverse stock split of our common stock effective January 15, 2003. Prior to August 8, 1997, there was no public market for our common stock. The following table sets forth for the periods indicated the high and low bid prices for the common stock as reported by The Nasdaq Capital Market based on a split-adjusted actual sales price.             Stock Price                 High       Low         Quarter ended:                         2004                         March 31,   2004       $   8.63       $   3.13         June 30,   2004       $   12.49       $   8.68         September 30,   2004       $   11.25       $   6.00         December 31,   2004       $   9.03       $   7.00         2005                         March 31,   2005       $   8.40       $   6.25         June 30,   2005       $   7.70       $   4.90         September 30,   2005       $   9.89       $   5.76         December 31, 2005       $   8.89       $   5.81           On March 24, 2006, the closing price for the common stock was $7.15 per share. As of March 24, 2006, there were approximately 104 stockholders of record of our common stock. We have not paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the foreseeable future. We intend to retain any earnings or other cash resources we generate to finance future growth of our business. Any future determinations to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition and other factors deemed relevant by the Board of Directors. All references in the Consolidated Financial Statements included herein referring to shares, share prices, per share amounts and stock plans have been adjusted retroactively for the two-for-one stock split and the one-for-seven reverse stock split referred to above. Additional information is presented in Footnote 6(e) of Notes to the Consolidated Financial Statements. For information on our equity compensation plans, please see our definitive proxy statement pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2005. 26    Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities On March 29, 2004, we entered into a stock purchase agreement with certain institutional and other accredited investors named therein pursuant to which we completed the private placement of $3.6 million worth of shares of our common stock. We completed this transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended. In consideration of services provided as placement agent on this transaction, we issued 51,000 shares of our common stock and a warrant to purchase up to 51,000 shares of our common stock to Broadband Capital Management LLC. The exercise price for the warrant to purchase shares of our common stock is $6.00 per share. This warrant is exercisable at any time between October 1, 2004 and September 30, 2009. We used the proceeds from this transaction for additional working capital and other general corporate purposes. On April 29, 2004, we filed a registration statement related to the shares of our common stock issued and sold in this transaction. On June 17, 2004, we filed Amendment No. 1 to our registration statement on Form S-3. Subsequent to filing a request for acceleration, our registration statement on Form S-3 was declared effective on July 22, 2004. 27
Year Ended December 31,                 2001       2002       2003       2004       2005                 (in thousands, except per share data)         Statement of Consolidated   Operations Data:                                                 Revenue:                                                 Software license       $   5,051       $   4,373       $   4,102       $   4,505       $   4,732         Hardware       3,129       2,734       2,767       3,177       2,705         Service and other       7,174       7,370       6,878       7,108       6,859         Total revenue       15,354       14,477       13,747       14,790       14,296         Cost of revenue:                                                 Software license       431       347       280       196       154         Hardware       2,082       1,769       1,859       1,944       1,694         Service and other       4,091       3,282       3,152       2,743       2,782         Total cost of revenue       6,604       5,398       5,291       4,883       4,630         Gross profit       8,750       9,079       8,456       9,907       9,666         Operating expenses:                                                 Sales and marketing       6,254       6,150       4,745       4,100       5,256         Research and development       3,219       2,815       2,187       1,937       2,239         General and   administrative       3,616       4,559       2,948       2,417       2,672         Restructuring costs and   asset write-off       —       —       806       —       —         Total operating expenses       13,089       13,524       10,686       8,454       10,167         Income (loss) from   operations       (4,339   )   (4,445   )   (2,230   )   1,453       (501   )     Interest and other   income, net       631       181       140       140       186         Income (loss) before   provision (benefit) for income taxes       (3,708   )   (4,264   )   (2,090   )   1,593       (315   )     Provision (benefit) for   income taxes       —       1,255       (144   )   (7   )   (5   )     Net income (loss)       $   (3,708   )   $   (5,519   )   $   (1,946   )   $   1,600       $   (310   )     Net income (loss) per   share:                                                 Basic       $   (1.02   )   $   (1.54   )   $   (0.56   )   $   0.42       $   (0.08   )     Diluted       $   (1.02   )   $   (1.54   )   $   (0.56   )   $   0.41       $   (0.08   )     Weighted average number   of common shares outstanding:                                                 Basic       3,639       3,588       3,494       3,765       3,924         Diluted       3,639       3,588       3,494       3,946       3,924                       December 31,                 2001       2002       2003       2004       2005                 (in thousands)         Consolidated Balance Sheet Data:                                                 Cash, cash   equivalents and short-term investments       $   12,491       $   9,790       $   8,242       $   10,655       $   10,471         Working capital       10,225       4,734       3,237       6,862       6,655         Total assets       17,216       12,692       10,492       13,100       12,669         Total   stockholders’ equity       11,075       5,334       3,439       6,631       6,432                              28
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, e-mail and groupware systems. To address customer needs, our products are modular and scaleable. As a result, customers can add additional communication capacity through the addition of system components and connectors to keep pace with growing demands. In addition, due to this scalable, modular design, customers can 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 more 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 regulations or business practices require confidentiality, timely electronic delivery and archiving of critical documents in electronic and paper format. We expect to maintain an established position in our traditional market — secure electronic document exchange primarily via fax. 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 multi-functional devices and scanners. In this manner, we will pursue a leadership position in the broader document delivery/routing and management market that we believe will grow in response to increasingly regulated communications and stringent privacy requirements. We resell certain hardware products (such as intelligent fax boards) from third-party vendors. Typically, hardware sales are a result of either new sales or sales to existing customers who are upgrading their IT 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 our 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 typically maintain a minimal inventory of these hardware products. Service and other revenue has historically consisted primarily of the sale of support contracts to complement software products we license to our customers. We generate a smaller portion of our service and other revenue from consulting, training and installation services. We are focused on and are considering adding additional resources to increase our service and other revenue. In fiscal year 2005, we expanded our presence and penetration of the legal vertical market through the development of reference accounts and by proving AccuRoute’s viability as evidenced by adoption of our AccuRoute product by over 110 law firms. In parallel, we built a firm base upon which to launch our AccuRoute product in the financial services vertical market. During the second half of 2005, we dramatically increased our sales and marketing spending, as called for in our strategic plan. As expected, these investments in sales and marketing had no material impact on our revenue in 2005, which was a near break-even year. Going forward, our primary focus is to penetrate further targeted vertical and geographic markets, reaping the benefits of our sales and marketing investments. In both the United States and Europe, during 2006, we will focus our AccuRoute sales in the financial services, healthcare and legal vertical markets through direct sales efforts. In parallel, we will also expand our focus on distribution and reseller partners. During 2006, we will continue — in fact accelerate — our investment in sales and marketing and business development and we expect to start seeing the impact of these investments in growing our business during 2006. Achieving quarterly profitability with these investments will require an  30    overall increase in revenue. We expect revenue to increase gradually during 2006. We believe that our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months.            Total Revenue       Net (Loss)   Income       Software License   Revenue         Twelve months ended   December 31, 2005       $   14,296,165       $   (309,751   )       $   4,732,121             Twelve months   ended December 31, 2004       $   14,790,194       $   1,599,588           $   4,504,899             Change over same period of   prior fiscal year       $   (494,029)        $   (1,909,339    )       $   227,222                     or (3.3)%       or (119.4)%           or 5.0%             Twelve months   ended December 31, 2004       $   14,790,194       $   1,599,588           $   4,504,899             Twelve months ended   December 31, 2003       $   13,747,246       $   (1,945,765   )       $   4,101,588             Change over same   period of prior fiscal year       $   1,042,948        $   3,545,353            $   403,311                      or 7.6%       or 182.2%           or 9.8%               During 2005, we experienced an increase in our software license revenue as a result of continued market acceptance of our AccuRoute product. We achieved this increase in overall software license revenue despite a ten percent decrease in our fax software license revenue from in 2005 as compared to 2004. The increase in overall software license revenue, however, was offset by declines in our hardware and service and other revenue, resulting in an overall decline in our total revenue. The decline in our hardware revenue was due to a decrease in legacy fax product sales, which are the main driver for our hardware revenue, and an overall decrease in demand for our legacy fax products from existing customers who have upgraded information systems hardware in their worldwide locations. The decline in service and other revenue was due primarily to a decline in our fax related maintenance support revenue. This decrease was partially offset by increased overall service revenue from consulting services for the same periods. In January 2006, we entered into a new lease agreement for approximately 44,000 square feet of office space and plan to move our headquarters to this facility in Andover, Massachusetts in April 2006. The lease has a ten year term and we have an option to renew the lease for an additional five-year term at the then-applicable fair market rent. Under the terms of the lease, the landlord will provide us with a tenant improvement allowance of up to $308,000. Additionally, we have a one-time right to terminate the lease, upon twelve months’ written notice, after the sixth year of the lease term. If we decide to terminate the lease, we must pay a penalty of six months’ rent and the unamortized portion of the tenant improvement allowance. We believe the new facility will be suitable and sufficient for our needs for the foreseeable future. Any decrease in demand for our products would likely result in decreased revenue, which would, in turn, have a significant negative impact on our financial results because a significant portion of our operating costs such as personnel, rent and depreciation are fixed in advance of a particular quarter. As a result, our costs for sales and marketing, research and development and general and administrative could continue to increase as a percentage of revenue, thereby negatively affecting our operating results. Our future revenue and operating results may fluctuate from quarter to quarter based on the number and size of sales transactions we enter into with customers, the adequacy of provisions for losses, general economic conditions and other factors. In addition, revenue from one or more large orders may constitute a significant portion of our total revenue in a particular quarter, further exacerbating fluctuations in quarterly results. Commencing at the end of the third quarter of 2005, we increased the resources allocated to our United Kingdom subsidiary, an effort that we expect will result in increased European revenue in future quarters. Although we believe that, over the last several quarters, there has been some improvement in the demand for enterprise software solutions and increased market acceptance of our products in Europe, we  31    cannot predict whether or when that market will soften or if market acceptance of our products will occur. If the European market or the market acceptance of our products changes, we cannot predict whether and to what extent, the demand for our products will increase or decrease. We have historically derived a majority of our total revenue from sales within the United States. Revenue from our European operations decreased during the twelve months ended December 31, 2005, as compared to the same period in 2004, due to a decrease in Europe of sales of our legacy fax software. We will continue to leverage our AccuRoute base in Europe, as well as our indirect channel relationships in Europe, to focus sales resources on the legal vertical market. In addition, we have recently added new resources to our European operations, including a new managing director of Europe, Middle East and Africa, which we expect will help to improve our results in the region. There can be, however, no assurance that we will be able to increase international sales of our products and the failure to do so may have a material adverse effect on business, financial condition and results of operations. The following is a presentation of our domestic and international revenue:            Total Revenue       United States Revenue       Non-United States Revenue         Twelve months ended   December 31, 2005       $   14,296,165           $   11,536,784               $   2,759,381                                or 80.7% of                or 19.3% of                                 Total Revenue               Total Revenue             Twelve months ended December 31, 2004       $   14,790,194           $   11,502,207               $   3,287,987                                 or 77.8% of                or 22.2% of                                  Total Revenue               Total Revenue             Change from same period of   prior fiscal year       $   (494,029   )       $   34,577               $   (528,606   )                or (3.3)%           or 0.3%               or (16.1)%             Twelve months ended December 31, 2004       $   14,790,194           $   11,502,207               $   3,287,987                                 or 77.8% of                or 22.2% of                                  Total Revenue               Total Revenue             Twelve months ended   December 31, 2003       $   13,747,246           $   10,647,321               $   3,099,925                                or 77.5% of                or 22.5% of                                 Total Revenue               Total Revenue             Change from same period of prior fiscal year       $   1,042,948           $   854,886               $   188,062                     or 7.6%           or 8.0%               or 6.1%               Our United Kingdom subsidiary, Omtool Europe Limited, transacts business primarily in its local currency. We then translate results generated by that entity into United States dollars and consolidate them with our domestic results for reporting purposes. As we make sales to customers in a variety of countries, significant currency exchange rate fluctuations could have a material impact on our results of operations. We manage our foreign currency exchange exposure by monitoring our net monetary position using natural hedges of our assets and liabilities denominated in local currencies. There can be no assurance that this policy will eliminate all foreign currency exchange exposure. Foreign currency exposure has not been material to our financial position or results of operations to date. If the volume of our business denominated in foreign currencies increases, we may be required to use derivatives to hedge foreign currency exposure. 32    We will continue to leverage our existing distribution channels, where appropriate, to broaden our reach to our target vertical markets and further penetrate our installed base. We are pursuing sales opportunities via our solution/reseller channels, as well as focusing sales efforts on specific market segments, in order to facilitate acceptance of our products. However, we currently have more of our sales resources focused on the direct model. As a result, we derive a significant portion of our revenue from direct sales.            Total Software   License and   Hardware   Revenue       Software License    and Hardware   Revenue from   Indirect   Distribution   Channel Sales       Software License   and Hardware   Revenue From   Indirect Distribution   Channel Sales as a   Percentage of Total   Software License   and Hardware Revenue         Twelve months ended   December 31, 2005       $   7,437,230           $   2,742,598               36.9   %         Twelve months   ended December 31, 2004       $   7,682,242           $   2,885,926               37.6   %         Change from same period of   prior fiscal year       $   (245,012   )       $   (143,328   )           (0.7   )%                or (3.2)%           or (5.0)%                             Twelve months   ended December 31, 2004       $   7,682,242           $   2,885,926               37.6   %         Twelve months ended   December 31, 2003       $   6,869,158           $   3,517,217               51.2   %         Change from same   period of prior fiscal year       $   813,084           $   (631,291   )           (13.6   )%                 or 11.8%           or (17.9)%                               Critical Accounting Policies and Estimates We have identified the policies and estimates below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our reported and expected financial results and business operations are discussed in appropriate sections throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our preparation of this Form 10-K required us to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements included herein and the reported amounts of revenue and expenses during the period covered by this report. There can be no assurance that actual results will not differ materially from those estimates. Revenue Recognition and Accounts Receivable Reserves.   We derive our revenue primarily from two sources: (i) product revenue, which includes software license and hardware revenue, and (ii) service and support revenue, which includes software maintenance and support, installation, training and consulting revenue. We license our software products on a perpetual basis. We generate revenue from licensing the rights to use our software products and sales of hardware directly to end-users and indirectly through resellers. Our resellers order products from us based on purchase orders received from end-users and do not order stock. We generally sell our products to resellers and directly to end-users without any specifically stated rights of return. Occasionally, however, in our sole discretion, we will accept a product return if the end-user finds that the product does not fit its needs. We also sell hardware products, which are provided by a third-party, at cost plus an additional mark-up, to end-users and indirectly through resellers. The hardware products that we resell are not functional without our software. To support our software products, we sell software maintenance, support, installation, training and consulting services to end-users and indirectly through resellers. We apply the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, to all transactions involving the sale of multiple elements including software, hardware and service revenue. We apply the provisions of Statement of Financial Accounting Standards (“SFAS”)  33    No. 48, Revenue Recognition When Right of Return Exists, with respect to providing for potential future product returns. As described below, we must make and use significant judgments and estimates in connection with the revenue recognized in any accounting period. Material differences may have resulted in the amount and timing of our revenue if we had made different judgments or utilized different estimates. We recognize revenue from the sale of software products and hardware to both end-users and resellers when persuasive evidence of an arrangement exists, the products have been delivered, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and there are no uncertainties regarding customer acceptance. We maintain a reserve for potential product returns. We recognize software maintenance and support revenue over the term of the related maintenance period, which is typically a one-year period. On those occasions when we sell multiple-year maintenance contracts, we recognize the associated revenue over the multiple-year term of the maintenance contract. We recognize other service revenue as we perform the services. If an arrangement includes an acceptance provision and acceptance is uncertain, then we will defer all revenue until the customer accepts the products purchased. Acceptance in these instances generally occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. If an arrangement includes an acceptance provision tied to determination that our product meets published specifications and there are no uncertainties with regard to the customer’s acceptance, then we will recognize revenue at the time of sale, provided that all other revenue recognition criteria previously mentioned have been met and the acceptance period is of short duration. Our transactions frequently involve the sale of software, hardware and related services under multiple element arrangements. Revenue under multiple element arrangements is allocated to each element under the residual method, in accordance with SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Under this method, revenue is allocated first to all undelivered elements, such as services, based on the fair value of those elements, which is calculated to be the price charged when these elements are sold separately and unaccompanied by other elements. Our services generally are not essential to the functionality of the software, as these services do not alter the capabilities of the software and do not carry a significant degree of risk to perform. The amount allocated to the delivered elements, such as software license and hardware revenue, is the difference between the total arrangement value and the amount allocated to the undelivered elements. If the delivered elements include both software and hardware, the amount allocated to hardware revenue is based on the price charged to us by the third party vendor plus an additional mark up, with the remainder allocated to software revenue. To the extent that a discount is offered in the arrangement, the entire discount is allocated to the delivered element or elements. If the delivered elements include hardware and software, the discount is allocated to the hardware and software based on their respective list prices. For all sales, we use a binding purchase order, a signed contract or a credit card authorization as evidence of an arrangement. Sales through our resellers are evidenced by a master agreement governing the relationship, together with binding purchase orders on a transaction-by-transaction basis. At the time of a transaction, we assess whether the fee associated with the transaction is fixed or determinable and whether or not collection is reasonably assured. If a significant portion of a fee is due beyond our normal payment terms, which are thirty to sixty days from invoice date, we account for the fee as not being fixed or determinable. In these cases, we recognize revenue as the fees become due. We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We review Dunn & Bradstreet credit reports for all of our resellers and adjust our credit limits with those resellers accordingly. If a particular reseller does not have a favorable report or if we do not have enough credit information to determine if the reseller is credit-worthy then we predominantly sell to those resellers on cash on delivery terms. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, the fee is deferred and  34    revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of payment. We maintain reserves for potential product returns and make adjustments to these reserves as needed based on historical product return rates. We also consider the impact of new product introductions, changes in customer demand and acceptance of our products on the adequacy of these reserves. Our calculation of the estimated return reserve is based upon (1) an account specific review of potential returns, where a return probability is known and (2) an estimate based upon past historical returns as a percentage of revenue. We must make and use significant judgments and estimates in connection with establishing the product returns reserve in any accounting period. Material differences may have resulted in the amount and timing of revenue for this or any prior period if we made different judgments or utilized different estimates. As with the product return reserve, we must make estimates of our ability to collect on our accounts receivable. We record trade accounts receivable at the invoiced amount and these accounts do not bear interest. We specifically analyze accounts receivable, historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts. We review our allowance for doubtful accounts on a monthly basis. Our calculation of the estimated accounts receivable reserve is also based upon (1) an account specific review of potential uncollectible accounts, where a bad debt probability is known, and (2) an estimate based upon past historical bad debts as a percentage of accounts receivable. We do not have any off-balance-sheet credit exposure to our customers. Our combined accounts receivable and product returns reserve was $33,000 and $82,000 at December 31, 2005 and December 31, 2004, respectively. Both components of calculating the estimated reserve – specific identification and historic experience – are material judgments that we make. We base these judgments on historic trends, taking into consideration current business and economic conditions, which could change materially, thus changing the required reserve level materially. The potential change to the size of our required reserve could be positive, in the event the reserve estimate proves unnecessary, or negative, if the reserve proves inadequate. Our deferred revenue is comprised mainly of revenue that is deferred for software maintenance and support contracts. The other components of deferred revenue are amounts from sales transactions that were deferred because they did not meet all of the provisions of our revenue recognition policy. Software Development Costs.   We consider software development costs for capitalization when technological feasibility is established in accordance with SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed. We sell software in a market that is subject to rapid technological change, new product introductions and changing customer needs. Accordingly, we have determined that we cannot ascertain technological feasibility until the development state of the product is nearly complete. The time period during which cost could be capitalized from the point of reaching technological feasibility until the time of general product release is very short and, consequently, the amounts that might be capitalized are not material to our consolidated financial position or results of operations. Therefore, we charge all software development costs to operations in the period incurred. Taxes.   We are required to estimate our income and state sales taxes. This process involves estimating our actual current tax obligations, while also assessing differences resulting from the different treatment of items for tax and accounting purposes that result in deferred income tax assets and liabilities and accrued state sales tax liabilities. We include deferred income tax assets and liabilities and accrued state sales tax liabilities in our balance sheet. 35     We assess our deferred tax assets for each reporting period to determine whether it is more likely than not that we will recover from future taxable income. In making this assessment, we include assumptions regarding ongoing tax planning strategies. We establish a valuation allowance for assets when their recovery is not certain.  We include changes to the valuation allowance as an expense or benefit within the tax provision in our statement of operations. We provide a full valuation allowance against all of our net deferred tax assets and will continue to do so until we return to an appropriate level of sustained taxable income. The ultimate realization of these deferred tax assets depends upon our ability to generate sufficient future taxable income. If we are successful in generating sufficient future taxable income, we will reduce the valuation allowance through a reduction in income tax expense in the future. We estimate accrued state sales taxes for each reporting period based on tax rates in effect for the reporting periods in each of the states where we have a potential nexus and for the time period during which we have that nexus. The assumptions and estimates used to determine this liability are subject to change as they are difficult to measure or value. In the event that actual results differ from these estimates, our state sales taxes expense could be materially impacted. We had a $356,000 reduction in the state sales tax accrual for the year ended December 31, 2005. This reduction results from the settlement of sales tax obligations with certain states at an amount less than what we had estimated. A portion of this reduction is due to the fact that we received a refund from a particular state that we had previously settled state sales taxes in and we enrolled in the Streamlined Sales Tax Program in December 2005, which relieved us from any past sales tax liabilities from twelve states in which we were not reporting state sales taxes and had estimated and accrued an amount equal to our potential sales tax liability. As a result, we eliminated our accrual for these state sales taxes, as we are now required to pay applicable sales taxes only on a go-forward basis for those member states of the Streamlined Sales Tax Program. New Accounting Pronouncements In May 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). Previously, APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income of the period of the change. SFAS No. 154 instead requires companies to recognize a change in accounting principle, including a change required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods’ financial statements. We will assess the impact of a retrospective application of a change in accounting principle in accordance with SFAS No. 154 if such a change arises after the January 1, 2006 effective date. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) amends SFAS No. 123 to require that companies record as an expense the effect of equity-based compensation, including stock options over the requisite service period. Historically, we disclosed the effect on income that stock options would have had were they recorded as expense. SFAS No. 123(R) also requires more extensive disclosures concerning stock options than required under prior standards. The new rule applies to option grants made after a company’s adoption of the standard, as well as options that are not vested at the date of adoption. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: ·       A “modified prospective” method in which compensation cost is recognized beginning with the effective date, based on the requirements of SFAS No. 123(R) (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. 36    ·       A “modified retrospective” method that includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We will implement SFAS No. 123(R) in the first quarter of 2006 and intend to use the modified prospective method. We expect that the adoption will not have a material impact on our 2006 results. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4. SFAS No. 151 modifies the accounting for abnormal inventory costs and the manner in which companies allocate fixed overhead expenses to inventory. SFAS No. 151 is effective for inventory costs incurred during annual periods beginning after June 15, 2005. We do not expect SFAS No. 151 to have a material impact on our financial position and results of operations. Results of Operations The following table sets forth certain financial data for the periods indicated as a percentage of total revenue:             Year ended December 31,                 2005       2004       2003         Revenue:                                 Software license       33.1   %   30.4   %   29.9   %     Hardware       18.9       21.5       20.1         Service and other       48.0       48.1       50.0         Total revenue       100.0       100.0       100.0         Cost of revenue:                                 Software license       1.1       1.3       2.0         Hardware       11.8       13.2       13.6         Service and other       19.5       18.5       22.9         Total cost of   revenue       32.4       33.0       38.5         Gross profit       67.6       67.0       61.5         Operating expenses:                                 Sales and marketing       36.8       27.8       34.5         Research and development       15.6       13.1       15.9         General and administrative       18.7       16.3       21.4         Restructuring       —       —       5.9         Total operating   expenses       71.1       57.2       77.7         (Loss) income   from operations       (3.5   )   9.8       (16.2   )     Interest and   other income, net       1.3       1.0       1.0         Tax benefit       —       —       (1.0   )     Net (loss) income       (2.2   )%   10.8   %   (14.2   )%     Gross profit:                                 Software license       96.7   %   95.7   %   93.2   %     Hardware       37.4       38.8       32.8         Service and other       59.4       61.4       54.2           37    Fiscal Years Ended December 31, 2005 and 2004 Revenue Software License.   During the twelve months ended December 31, 2005, our total revenue was $14.3 million, a decrease of approximately $494,000 from $14.8 million for the twelve months ended December 31, 2004. However, our software license revenue increased by 5% to $4.7 million in the twelve months ended December 31, 2005 as compared to $4.5 million in the same period in 2004. Further, revenue from our AccuRoute product increased to $2.3 million during the twelve months ended December 31, 2005 as compared to $1.7 million during the twelve months ended December 31, 2004. This increase reflects the continued market acceptance of our AccuRoute product. Software revenue from our legacy fax product line decreased to $2.3 million during the twelve months ended December 31, 2005 from $2.5 million during the same period in 2004, as we continue to focus our resources on the expansion of our AccuRoute product line and we experience diminished sales from our maturing legacy fax market. Various other components of software license revenue, including sales returns and allowance adjustments and sales of our other software products such as Genidocs and Swiftwriter, have decreased to $17,000 for the twelve months ended December 31, 2005 as compared to $43,000 during the same period in 2004. During the twelve months ended December 31, 2005, as compared to the same period during 2004, the mix of products accounting for our revenue has continued shifting towards our AccuRoute product, as displayed in the table below, which table summarizes our revenue and particularly our software license revenue, by product category (excluding freight and allowances for returns) for the twelve months ended December 31, 2005, as compared to the same period in the prior fiscal year.            Total   Revenue       Software   License   Revenue       AccuRoute   License   Revenue       Legacy Fax   License   Revenue       Other   Software   License   Revenue         Twelve months ended   December 31, 2005       $   14,296,165       $   4,732,121       $   2,342,577       $   2,295,196       $   17,444         Twelve months   ended December 31, 2004       $   14,790,194       $   4,504,899       $   1,727,960       $   2,548,740       $   43,199         Change from same period of   prior fiscal year       $   (494,029   )   $   227,222       $   614,617       $   (253,544   )   $   (25,755   )            or (3.3)%       or 5.0%       or 35.6%       or (9.9)%       or (59.6)%           During the twelve months ended December 31, 2005, our software license revenue represented an increased percentage of our total revenue, based primarily on the fact that hardware and services revenue declined during the twelve months ended December 31, 2005 when compared to the same period in 2004.             Software License Revenue as a   Percentage of Total Revenue         Twelve months   ended December 31, 2005           33.1   %         Twelve months   ended December 31, 2004           30.5   %         Change from same period   of prior fiscal year           2.6   %           38    During the twelve months ended December 31, 2005 and 2004, our license revenue from each of our major product lines and other components of revenue (excluding freight and allowances for returns) represented the following percentages of our total software license revenue:             AccuRoute License   Revenue as   a Percentage of Software   License Revenue       Legacy Fax License   Revenue as  a   Percentage of   Software License   Revenue       Other Software   License   Revenue as a   Percentage of   Software License   Revenue         Twelve months   ended December 31, 2005           49.5   %           48.5   %           0.4   %         Twelve months   ended December 31, 2004           38.4   %           56.6   %           1.0   %         Change from same period   of prior fiscal year           11.1   %           (8.1   )%           (0.6   )%           Included in our software license revenue for the twelve months ended December 31, 2005 and 2004 is a reduction of $69,000 and $185,000, respectively, in our sales returns and allowance reserve relating primarily to a general estimate based upon past historical returns for fiscal year 2005 and to the recovery of specific accounts that were previously written off and to specific accounts from fiscal year 2004, where we determined that the risk of a return was no longer present. Although we cannot accurately predict the exact mix of products that we will sell in the future, we expect that software license revenue will constitute a larger percentage of our total revenue in the future if demand for our AccuRoute product, which generally does not require the purchase of additional hardware, continues to grow and if our AccuRoute product gains additional market acceptance. Hardware.   Hardware revenue decreased during the twelve month period ended December 31, 2005 as compared to the twelve month period ended December 31, 2004 due to a decrease in sales of our legacy fax product, which sales are the main driver for our hardware revenue, and an overall decrease in demand from our existing customers who have already upgraded information systems hardware in their worldwide locations.            Hardware Revenue       Hardware Revenue as a   Percentage of Total Revenue         Twelve months ended   December 31, 2005           $   2,705,109               18.9   %         Twelve months   ended December 31, 2004           $   3,177,343               21.5   %         Change from same period of   prior fiscal year           $   (472,234   )           (2.6   )%                    or (14.9)   %                           Included in hardware revenue for the twelve months ended December 31, 2005 and 2004 is a reduction of $17,000 and $63,000, respectively, in the sales returns and allowance reserve relating primarily to a general estimate based upon past historical returns for fiscal year 2005 and to the recovery of specific accounts that were previously written off and to specific accounts from fiscal year 2004 where we determined that the risk of a return is no longer present and to the recovery of specific accounts that were previously written off. We expect market demand for our AccuRoute product, which generally does not require our customers to purchase additional hardware, to increase and, if it does, we anticipate hardware revenue will constitute a smaller percentage of our total revenue. Service and Other.   Service and other revenue, which consists primarily of the sale of support contracts to complement software products we sell to our customers and, to a lesser extent, consulting, training and installation services, decreased in the twelve months ended December 31, 2005, as compared to the same period in the prior fiscal year. This decrease was due primarily to a 19% reduction in fax-related maintenance revenue for the twelve months ended December 31, 2005 as compared to the previous year as most of our historic service and other revenue is related to sales of our legacy fax product. This  39    decrease was partially offset by increased overall service revenue from consulting services for the same periods.             Service and Other Revenue       Service and Other Revenue as   a Percentage of Total Revenue         Twelve months   ended December 31, 2005           $   6,858,935               48.0   %         Twelve months   ended December 31, 2004           $   7,107,952               48.1   %         Change from same period   of prior fiscal year           $   (249,017)   or (3.5)   %           (0.1   )%           We are focused on improving the renewal rate of software maintenance contracts with our existing customer base in both our North American and European operations and we are focusing greater attention on generating additional service and other revenue in future periods. Cost of Revenue Software License.   Cost of software license revenue consists primarily of the costs we incur in sublicensing third-party software products, product media and product duplication. Cost of software license revenue for the twelve months ended December 31, 2005 decreased by 21% as compared to the corresponding period in the previous fiscal year. The decrease is due primarily to decreased royalty payments associated with sales of royalty-bearing products. We have recently added third-party software into our products and we expect that our software license cost as a percentage of software license revenue will increase slightly in the future. We believe that these newly licensed third-party software components will improve the capabilities and functionality of our products. As a result of the decrease in the cost of software license revenue that we incurred during the twelve months ended December 31, 2005, we incurred an increase in our software license gross margin percentage as set forth in the following table:             Software License   Gross Margin         Twelve months   ended December 31, 2005           96.7   %         Twelve months   ended December 31, 2004           95.7   %         Change from same period   of prior fiscal year           1.0   %           Hardware.   Cost of hardware revenue consists primarily of the costs we incur in purchasing third-party hardware products. Cost of hardware revenue represented 63% and 61% of hardware revenue for fiscal years 2005 and 2004, respectively. During the twelve months ended December 31, 2005, we incurred decreased costs related to hardware revenue due primarily to the decrease in our hardware unit sales. Further, our gross margin percentage for hardware sales decreased during this period due to a change in the mix of particular hardware products sold. We do not expect significant changes in unit prices for fiscal year 2006.             Hardware Gross Margin         Twelve months   ended December 31, 2005           37.4   %         Twelve months   ended December 31, 2004           38.8   %         Change from same period   of prior fiscal year           (1.4   )%           40     Service and Other.   Cost of service and other revenue consists primarily of the costs we incur in providing telephone support, as well as other miscellaneous customer service-related expenses. The gross margin percentage for service and other revenue decreased to 59% for the twelve months ended December 31, 2005, compared to 61% in the same period in 2004. The decrease in gross margin percentage is due to an increase in wage-related expenses and associated overhead costs of employees in the support department, as well as increased travel costs. We do not expect any significant variances in our service and other gross margin percentages for fiscal year 2006.             Cost of Service and   Other Revenue       Gross Margin for Service   and Other Revenue         Twelve months   ended December 31, 2005           $   2,781,828               59.4   %         Twelve months   ended December 31, 2004           $   2,743,258               61.4   %         Change from same   period of prior fiscal year           $   38,570               (2.0   )%                     or 1.4%                               Operating Expenses Sales and Marketing.   Sales and marketing expenses consist primarily of employee salaries, benefits, commissions and associated overhead costs, as well as the cost of marketing programs such as advertisements, direct mailings, public relations, trade shows, seminars and related communication costs. Sales and marketing expenses increased in the fiscal year ended December 31, 2005 as compared to the same period in 2004, due to an increased number of employees in our sales and marketing departments and the associated costs of supporting those employees. Additionally, we increased our general advertising and consulting expenditures during the fiscal year ended December 31, 2005 as compared to the same period in the prior fiscal year. These expense increases reflect our initiative to further penetrate the legal vertical market with our AccuRoute product, as well as our initiative to target new vertical markets. Building on the success of the current version of our AccuRoute product within the legal vertical market since its introduction in 2004, we intend to continue broadening our current sales and marketing strategy, which we began in the second quarter of 2005, to encompass first the financial services vertical market and, thereafter, the healthcare vertical market. In 2005, we experienced some delays in investing the full budgeted amount for these initiatives due primarily to some delays in the hiring of our executive sales and marketing team, all of whom have now been hired. During fiscal year 2006, we will continue—in fact accelerate—our investment in sales and marketing and business development and we expect to start seeing the impact of these investments in growing our business during 2006.             Sales and   Marketing Expenses       Sales and Marketing Expenses as   a Percentage of Total Revenue         Twelve months   ended December 31, 2005           $   5,256,283               36.8   %         Twelve months   ended December 31, 2004           $   4,100,765               27.8   %         Change from same   period of prior fiscal year           $   1,155,518               9.0   %                     or 28.2%                               Research and Development.   Research and development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities. These expenses consist primarily of employee salaries, benefits, associated overhead costs, consulting expenses and the cost of software development tools. In the most recently completed fiscal year, our research and development expenses increased as compared to the same period in the prior fiscal year due  41    to an increased number of employees in our research and development department during fiscal year 2005 and the associated costs of supporting those new personnel.             Research and   Development Expenses       Research and Development   Expenses as a Percentage of   Total Revenue         Twelve months   ended December 31, 2005           $   2,239,250               15.7   %         Twelve months   ended December 31, 2004           $   1,936,779               13.1   %         Change from same   period of prior   fiscal year           $   302,471               2.6   %                     or 15.6%                               Additionally, the increase in research and development expenses in dollars and as a percentage of total revenue is a result of an increase in consulting expenses in the research and development department during fiscal year 2005 as compared with the same period in 2004. We expect our research and development expenses to increase in absolute dollars as we hire additional engineers and engage in more third-party consulting arrangements to support our expansion of our AccuRoute product into other vertical markets. General and Administrative.   General and administrative expenses consist primarily of employee salaries and benefits for administrative, executive and finance personnel and associated corporate general and administrative expenses. In the most recently completed fiscal year, our general and administrative expenses increased as compared to the same period in the prior fiscal year.             General and   Administrative Expenses       General and Administrative Expenses   as a Percentage of Total Revenue         Twelve months   ended December 31, 2005           $   2,671,200               18.7   %         Twelve months   ended December 31, 2004           $   2,417,091               16.3   %         Change from same   period of prior fiscal year           $   254,109               2.4   %                     or 10.5%                               The increase in dollar amount and as a percentage of total revenue for the twelve months ended December 31, 2005 as compared to the corresponding period in 2004 is due primarily to an increase in management consulting expenses related to our initial compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002, fees paid to our board of directors and wage-related expenses. This increase was offset in part by decreases in accounting and legal fees and by a $356,000 reduction in the state sales tax accrual for the year ended December 31, 2005 compared to a $227,000 reduction in the state sales tax accrual in 2004. Each of these reductions results from the settlement of sales tax obligations with certain states at an amount less than what we had estimated. A portion of the 2005 reduction is due to the fact that we received a refund from a particular state that we had previously settled state sales taxes in and we enrolled in the Streamlined Sales Tax Program in December 2005, which relieved us from any past sales tax liabilities from twelve states in which we were not reporting state sales taxes and had estimated and accrued an amount equal to our potential sales tax liability. As a result, we eliminated our accrual for these state sales taxes, as we are now required to pay applicable sales taxes only on a go-forward basis for those member states of the Streamlined Sales Tax Program. We expect that we will continue to experience slight increases to general and administrative expenses in the form of additional professional fees. In addition, we expect fewer reductions, if any, to our state sales tax accrual. We expect that consulting expenditures may be relatively flat in 2006 as compared to 2005 due to recent pronouncements from the Securities and Exchange Commission delaying the applicability of Section 404 of the Sarbanes-Oxley Act of 2002 until at  42    least the first fiscal year ending on or after July 15, 2007 for companies like Omtool with public float of less than $75 million. Interest and Other Income.   Interest and other income consists principally of interest income earned on cash and cash equivalent balances. The following table sets forth our interest and other income for the fiscal years ended December 31, 2005 and 2004.             Interest and Other Income       Interest and Other Income as a   Percentage of Total Revenue         Twelve months   ended December 31,   2005           $   185,725               1.3   %         Twelve months   ended December 31,   2004           $   140,172               0.9   %         Change from same   period of prior   fiscal year           $   45,553               0.4   %                     or 32.5%                               The increase in interest income is primarily a result of higher interest rates earned on our investment accounts during the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004. We expect that interest and other income will be relatively stable quarter over quarter for fiscal year 2006. Income Tax Benefit.   We did not record an income tax benefit associated with any pre-tax loss for the twelve months ended December 31, 2005 due to uncertainty regarding future taxable income. We did, however, record $5,492 of tax benefit related to the true-up of certain income tax accounts during 2005 related to the twelve months ended December 31, 2004. During the twelve months ended December 31, 2004, we recorded a net tax benefit of $6,707 resulting primarily from a decrease in our estimated taxes payable as a result of a revised international transfer pricing agreement with our United Kingdom subsidiary. Our fiscal year 2004 tax position also benefited from a $28,800 adjustment related to a transfer pricing adjustment related to fiscal year 2003. Fiscal Years Ended December 31, 2004 and 2003 Revenue Software License.   During the twelve months ended December 31, 2004, our total revenue was $14.8 million, an increase of $1.1 million from $13.7 million for the twelve months ended December 31, 2003. Our software license revenue increased by approximately 10% to $4.5 million in the twelve months ended December 31, 2004 compared to $4.1 million in the same period in 2003. Software license revenue for the fiscal year ended December 31, 2004 reflected an overall increase in demand for our AccuRoute product, while offset by a decline in demand for our legacy fax product line as compared to the fiscal year ended December 31, 2003. 43    The following table summarizes our revenue and particularly our software license revenue, by product category (excluding freight and allowances for returns) for the twelve months ended December 31, 2004, as compared to the same period in the prior fiscal year.             Total   Revenue       Software License   Revenue       AccuRoute   License   Revenue       Legacy Fax   Product License   Revenue       Other Software   Product License   Revenue         Twelve months   ended December 31, 2004       $   14,790,194           $   4,504,899           $   1,727,960           $   2,548,740               $   43,199             Twelve months   ended December 31, 2003       $   13,747,246           $   4,101,588           $   276,821           $   3,559,129               $   118,638             Change from same   period of prior fiscal year       $   1,042,948           $   403,311           $   1,451,138           $   (1,010,389   )           $   (75,439   )                 or 7.6%           or 9.8%           or 524.2%           or (28.4)%               or (63.6)%               During the twelve months ended December 31, 2004 and 2003, our software license revenue as a percentage of total revenue remained relatively constant as set forth in the following table:             Software License Revenue as a   Percentage of Total Revenue         Twelve months   ended December 31, 2004           30.5   %         Twelve months   ended December 31, 2003           29.8   %         Change from same period   of prior fiscal year           0.7   %           During the twelve months ended December 31, 2004 and 2003, our license revenue from each of our major product lines and other components of revenue (excluding freight and allowances for returns) represented the following percentages of our total software license revenue:             AccuRoute License   Revenue as   a Percentage of Software   License Revenue       Legacy Fax Product License   Revenue as  Percentage of   Software License Revenue       Other Software   Product License   Revenue as a Percentage of   Software License Revenue         Twelve months   ended December 31, 2004           38.4   %           56.6   %           1.0   %         Twelve months   ended December 31, 2003           6.7   %           86.8   %           2.9   %         Change from same period   of prior fiscal year           31.7   %           (30.2   )%           (1.9   )%           Included in software license revenue for the years ended December 31, 2004 and 2003 is a reduction in the sales returns and allowance reserve of $185,000 and $147,000, respectively, relating to specific accounts where we have determined that the risk of a return is no longer present. Hardware.   Hardware revenue increased during the twelve month period ended December 31, 2004 as compared to the twelve month period ended December 31, 2003 due to an increase in demand from existing customers who upgraded information systems hardware in their worldwide locations.             Hardware Revenue       Hardware Revenue as a   Percentage of Total Revenue         Twelve months   ended December 31, 2004           $   3,177,343               21.5   %         Twelve months   ended December 31, 2003           $   2,767,570               20.1   %         Change from same   period of prior fiscal year           $   409,773               1.4   %                     or 14.8%                               44    Included in hardware revenue for the twelve months ended December 31, 2004 and 2003 is a reduction of $63,000 and $51,000, respectively, in the sales return and allowance reserve relating to specific accounts where the risk of a return is no longer present. Service and Other.   Service and other revenue were $7.1 million and $6.9 million for the twelve months ended December 31, 2004 and 2003, respectively, representing an increase of 3%. The increase in service and other revenue is due primarily to an increase in maintenance revenue from a larger installed customer base.             Service and Other Revenue       Service and Other Revenue as   a Percentage of Total Revenue         Twelve months   ended December 31, 2004           $   7,107,952               48.1   %         Twelve months   ended December 31, 2003           $   6,878,088               50.0   %         Change from same period   of prior   fiscal year           $   229,864   or 3.3%               (1.9   )%           The decrease in service and other revenue as a percentage of total revenue is due primarily to the increase in both software license and hardware revenue. Cost of Revenue Software License.   Cost of software license revenue was $195,000 and $280,000 for the twelve months ended December 31, 2004 and 2003, respectively. The decrease in cost and improvement in gross margin is due primarily to the fact that we replaced certain third-party software that was imbedded in our products with our own internally-developed solutions, thus reducing the royalties that we must pay when a product containing third-party software is sold. As a result of the decrease in the cost of software license revenue that we incurred during the fiscal year ended December 31, 2004, we incurred an increase in our software license gross margin percentage as set forth in the following table:             Software License Gross Margin         Twelve months   ended December 31, 2004           95.7   %         Twelve months   ended December 31, 2003           93.2   %         Change from same period   of prior fiscal year           2.5   %           Hardware.   Cost of hardware revenue was $1.9 million for each of the twelve months ended December 31, 2004 and 2003, respectively, representing 61% and 67% of hardware revenue for each respective period. The gross margin increase is due mainly to a change in the particular mix of hardware products sold.             Hardware Gross Margin         Twelve months   ended December 31, 2004           38.8   %         Twelve months   ended December 31, 2003           32.8   %         Change from same period   of prior fiscal year           6.0   %             45     Service and Other.   Cost of service and other revenue was $2.7 million and $3.2 million for the twelve months ended December 31, 2004 and 2003, respectively, representing 39% and 46% of service and other revenue for each respective period. The decrease in dollar amount of cost of service and other revenue is due to decreased wage expense and the associated overhead costs resulting from a decrease in the number of employees in the service department resulting from the restructuring that occurred in the third quarter of 2003.             Cost of Service and   Other Revenue       Gross Margin for Service   and Other Revenue         Twelve months   ended December 31, 2004           $   2,743,258               61.4   %         Twelve months   ended December 31, 2003           $   3,151,851               54.2   %         Change from same   period of prior fiscal year           $   (408,593   )           7.2   %                     or (13.0   )%                           Operating Expenses Sales and Marketing.   Our sales and marketing expenses decreased for the twelve months ended December 31, 2004 as compared to the same period in the prior fiscal year.                Sales and Marketing Expenses       Sales and Marketing Expenses as   a Percentage of Total Revenue         Twelve months   ended December 31, 2004           $   4,100,765               27.8   %         Twelve months   ended December 31, 2003           $   4,745,375               34.5   %         Change from same   period of prior fiscal year           $   (644,610   )           (6.7   )%                     or (13.6   )%                           The decrease in sales and marketing expenses, both in dollar amount and as a percentage of total revenue, is due to decreased wages, commissions and travel costs resulting from fewer management level personnel in the department as a result of the restructuring that occurred in the third quarter of 2003. The decrease is also due to reduced trade show expenses during 2004 as compared to 2003. Research and Development.   Our research and development expenses decreased for the twelve months ended December 31, 2004 as compared to the same period in the prior fiscal year.             Research and   Development Expenses       Research and Development   Expenses as a Percentage   of Total Revenue         Twelve months   ended December 31, 2004           $   1,936,779               13.1   %         Twelve months   ended December 31, 2003           $   2,186,615               15.9   %         Change from same   period of prior fiscal year           $   (249,836   )           (2.8   )%                     or (11.4   )%                           The decrease in the expense and in research and development expenses, both in dollar amount and as a percent of total revenue, is a result of fewer employees in the research and development department and the decreased associated costs of supporting those personnel due to the restructuring that occurred in the third quarter of 2003. 46    General and Administrative.   Our general and administrative expenses decreased for the twelve months ended December 31, 2004 as compared to the same period in the prior fiscal year.             General and   Administrative Expenses       General and Administrative   Expenses as a Percentage   of Total Revenue         Twelve months   ended December 31, 2004           $   2,417,091               16.3   %         Twelve months   ended December 31, 2003           $   2,947,869               21.4   %         Change from same   period of prior fiscal year           $   (530,778   )           (5.1   )%                     or (18.0   )%                           The decrease in general and administrative expenses, both in dollar amount and as a percentage of total revenue, is due to the reduction in general and administrative personnel and overhead costs associated with supporting those personnel. The decrease is also due to a $227,000 reduction in the state sales tax accrual for the year ended December 31, 2004 resulting from the settlement of sales taxes obligations with certain states at an amount less than what we had estimated. Restructuring costs.   In the third quarter of 2003, we announced a restructuring of certain of our operations and recorded a pretax charge of $806,581 in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The charge included severance-related costs associated with the workforce reduction, primarily in our domestic operations and costs associated with closing of our Oregon office. The reduction in workforce consisted of three employees in the sales and marketing department, two employees performing general and administrative functions, three employees performing technical support services and five employees in the research and development department. The following table summarizes the accrual and usage of the restructuring charges in 2003 and 2004:             Lease       Severance       Total         Total charge       $   17,420       $   789,161       $   806,581         Cash payments   2003       (17,420   )   (345,331   )   (362,751   )     Ending balance,   December 31, 2003       —       443,830       443,830         Cash payments,   2004       —       (443,830   )   (443,830   )     Ending balance,   December 31, 2004       —       —       —                        The total cash impact of the restructuring was $806,581, all of which was paid by the end of the third quarter of 2004. Interest and Other Income.   Interest and other income was $140,000 for the twelve months ended each of December 31, 2004 and 2003. Included in interest and other income the year ended December 31, 2003 interest and other income is other income of $51,000 related to the sale of common stock of Verso Technologies, Inc. In 2004, our interest and other income remained flat as compared to 2003 due to a change in our investment service provider, which change resulted in a higher rate of return on our investments.             Interest and Other Income       Interest and Other Income as a   Percentage of Total Revenue         Twelve months   ended December 31, 2004           $   140,172               1.0   %         Twelve months   ended December 31, 2003           $   139,894               1.0   %         Change from same   period of prior fiscal year           $   278               —                         or 0.2   %                           Benefit for Income Taxes.   During 2004, we recorded a net tax benefit of $6,707 resulting primarily from a decrease in our estimated taxes payable as a result of a revised international transfer pricing  47    agreement with our United Kingdom subsidiary. Our fiscal year 2004 tax position also benefited from a $28,800 adjustment related to a transfer pricing adjustment related to fiscal year 2003. During fiscal year 2003, we recorded $155,398 of tax benefit due to a tax refund that our United Kingdom subsidiary received during the first quarter of 2003. This subsidiary had incurred a loss for the year ended December 31, 1999 that resulted in an income tax benefit. The tax benefit was carried back to prior years’ taxes paid and resulted in a tax refund. Because this subsidiary was undergoing an Inland Revenue audit for tax year 1999, the realizability of this refund was not certain and therefore we did not record the benefit on its books until the audit was cleared and the cash was received, both of which occurred in the first quarter of 2003. We provided a tax provision of $11,076 for our United Kingdom subsidiary based on the level of profitability that this subsidiary generated in fiscal year 2003. Inflation During the fiscal years ended December 31, 2005, 2004 and 2003, neither inflation nor changing prices have had a material impact on our net sales, revenue or income from continuing operations. Liquidity and Capital Resources Since 1996, we have financed our operations primarily through cash flow from operations, private sales of preferred stock and common stock and our initial public offering of common stock completed in August 1997. As of December 31, 2005, we had cash and cash equivalents of $10.5 million and working capital of $6.7 million. We believe that our existing cash and cash equivalents will be sufficient to meet our working capital, capital expenditures and other liquidity requirements for at least the next twelve months.             Cash (Used) Provided                 Operating   Activities       Investing   Activities       Financing   Activities         Twelve months   ended December 31, 2005       $   (15,867   )   $   (120,339   )   $   38,263         Twelve months   ended December 31, 2004       $   873,297       $   (73,376   )   $   1,558,356         Change from same   period of prior fiscal year       $   (889,164   )   $   (46,963   )   $   (1,520,093   )             or (101.8   )%   or (64.0   )%   or (97.5   )%       Our operating activities used cash of $15,867 for the twelve months ended December 31, 2005 and provided cash of $873,297 for the twelve months ended December 31, 2004, respectively. We believe that the additional resources we are allocating to improve the success of our AccuRoute product in the legal vertical market and its expansion first into the financial services vertical market and, thereafter, the healthcare vertical market, will continue to put pressure on our earnings during 2006, but that our existing cash is sufficient for at least the next twelve months. Net cash used during the twelve months ended December 31, 2005 consisted primarily of a net loss from operations, a decrease to the accounts receivable reserve and accrued state sales tax, combined with an increase in prepaid expenses and other current assets and offset by the non-cash effects of depreciation and amortization and deferred compensation expense, decreases in accounts receivable and inventory and an increase in accounts payable and deferred revenue. The decrease to the accounts receivable reserve relates primarily to an estimate based upon historical returns, which estimate demonstrated a reduced need for this reserve. The increase in accounts payable is due to the timing of vendor payments. The decrease to accrued state sales tax is a result of a reduction in the state sales tax accrual for the year ended December 31, 2005 resulting from the settlement of sales tax obligations with certain states at an amount less than what was estimated. A portion of this reduction is due to the fact that we enrolled in the Streamlined Sales Tax Program in December 2005, which relieved us from any past sales tax liabilities from twelve states where we were not reporting state sales taxes and had  48    estimated and accrued an amount equal to our potential sales tax liability. We therefore eliminated that accrual as we are required to pay applicable sales taxes only on a go-forward basis for those member states of the Streamlined Sales Tax Program. The increase in prepaid expenses and other current assets is due primarily to cash paid for an annual contract with a market research firm in connection with our increased sales and marketing expenditures, in accordance with our strategic plan. The decrease to accounts receivable is primarily due to continued and successful efforts to expedite timely payments from our customers. The decrease to inventory is related to a reduction in onsite hardware inventory and continued emphasis on shipments directly from our third party vendor. The increase in deferred revenue is primarily related to the increase in software maintenance contracts sold during fiscal year 2005 that complement our AccuRoute product, offset by a decline in the software maintenance contracts sold during the same period that complement our legacy fax product line. Net cash provided during the twelve months ended December 31, 2004 consisted primarily of a net profit from operations, depreciation and a decrease in accounts receivable and an increase in deferred revenue, partially offset by an increase in inventory and a decrease to the accounts receivable reserve and decreases to accrued restructuring and accrued state sales tax. Investing activities used cash of $120,339 and $73,376 during the twelve months ended December 31, 2005 and 2004, respectively. The sole use of cash for investing activities for each period was for purchases of property and equipment related to computer-related software and hardware products. In January 2006, we entered into a new lease agreement for office space located at Six Riverside Drive, Andover, Massachusetts consisting of approximately 44,000 square feet. We intend to move our executive offices and headquarters to this new space in April 2006. We expect that we will increase our investments in computer-related software and hardware products in 2006 as we improve our information technology infrastructure as part of this relocation. Financing activities provided cash of $38,263 and $1,558,356 for the twelve months ended December 31, 2005 and 2004, respectively. Cash provided for the twelve months ended December 31, 2005 was due primarily to the net proceeds from the issuance of common stock from our employee stock purchase program and employee exercises of stock options. Cash provided for the twelve months ended December 31, 2004 was due to the net proceeds from the issuance of common stock. On March 29, 2004, we completed the sale of 600,000 shares of common stock, at a price of $6.00 per share, in a private placement to institutional and other accredited investors. The proceeds of that private placement, which totaled $3.6 million, are being used for additional working capital and other general corporate purposes. The cash we received on the consummation of this private placement was offset by our usage of $2.0 million in cash during the twelve months ended December 31, 2004, when we repurchased 350,000 shares of our outstanding common stock from ASA International Ltd., an existing shareholder, in a private transaction at a price of $5.75 per share. We repurchased those shares from ASA International Ltd. with generally available corporate funds and we hold those shares in treasury. Based on our performance for the twelve months ended December 31, 2005 and current expectations for fiscal year 2006, we believe that our current cash and cash equivalents balance, as well as the cash expected to be generated from operations during 2006, will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations through at least the next twelve months. We expect that principal uses of cash will be for operations, working capital, payment of sales taxes, purchases of property and equipment and payment of certain leasehold improvements resulting from our move to Andover, Massachusetts.  There can be no assurance that any necessary additional financing will be available to us on commercially reasonable terms, or at all. 49    The following table represents the approximate amounts of payments due under specified contractual obligations as of December 31, 2005:     Contractual Obligations               Total       Less than   one year       One to   three years       Three to   five years       More than   five years         Operating lease   obligations       $   201,000       $   201,000           —               —               —                                       Operating lease requirements consist mainly of our offices in London, England, United Kingdom. Our lease for our headquarters and primary business location in Salem, NH expired on December 31, 2005. We currently are a tenant-at-will with a monthly lease obligation of $21,000. In January 2006, we entered into a new lease agreement, the terms of which require us to make lease payments of $95,000 in less than one year, $758,000 in one to three years, $1.2 million in three to five years and $2.0 million in more than five years. The term of this new lease is for ten years and we have an option to renew the lease for an additional five-year term at the then-applicable fair market rent. Under the terms of this new lease, we are not required to pay rent for the first six months commencing upon the date of occupancy and the landlord will provide us with a tenant improvement allowance up to $308,000. Additionally, we have a one-time right to terminate the lease, upon twelve months’ written notice, after the sixth year of the lease term. If we decide to terminate the lease, we must pay a penalty of six months’ rent and the unamortized portion of the tenant improvement allowance. As of December 31, 2005, we did not have any long-term debt obligations, material commitments for capital expenditures, capital lease obligations or other long-term liabilities for which payments are required. However, in January 2006, we entered into a new lease agreement and we plan to move our headquarters to Andover, Massachusetts in April 2006. We will be required to make lease payments related to this new lease of $95,000, $379,000, $379,000, $395,000 and $401,000 for the years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively. The term of the lease is ten years and we have an option to renew the lease for an additional five-year term at the then-applicable fair market rent. Under the terms of the lease, we are not required to pay rent for the first six months commencing upon the date of occupancy and the landlord will provide us with a tenant improvement allowance up to $308,000. Additionally, we have a one-time right to terminate the lease, upon twelve months’ written notice, after the sixth year of the lease term. If we decide to terminate the lease, we must pay a penalty of six months’ rent and the unamortized portion of the tenant improvement allowance. On January 24, 2006, we entered into an agreement for construction projects with Prism Builders, Inc. Under the terms of the contract, the Prism Builders, Inc. will receive approximately $435,000 to perform certain interior renovations at our future corporate headquarters. Prism Builders, Inc. believes it will achieve substantial completion of the build-out project within eleven weeks from the date of its commencement of work. Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. Item 7(a).       Quantitative and Qualitative Disclosures About Market Risk Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments As of December 31, 2005, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required. All of the  50    Company’s investments consist of money market funds and commercial paper that are carried on the Company’s books at amortized cost, which approximates fair market value. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. Primary Market Risk Exposures The Company’s primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company’s current investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company’s exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of its United Kingdom subsidiary are almost exclusively conducted in the United Kingdom subsidiary’s local currency. The United Kingdom subsidiary operating results are translated into United States dollars and consolidated for reporting purposes. The impact of currency exchange rate movements on intercompany transactions was immaterial for the year ended December 31, 2005; however, significant currency exchange rate fluctuations could have a material impact on the Company’s results of operations in the future. Currently, the Company does not engage in foreign currency hedging activities. Item 8.                        Financial Statements and Supplementary Data The Company’s Consolidated Financial Statements, together with the independent registered public accounting firm report thereon, appear at pages F-1 through F-26, respectively, of this Form 10-K. Item 9.                        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9a.                 Controls and Procedures (a)           Evaluation of disclosure controls and procedures. As of December 31, 2005 (the “Evaluation Date”), the Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring that information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that this information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b)          Changes in internal controls There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended December 31, 2005 or in other factors that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting. 51     PART III Item 10.                 Directors and Executive Officers of the Registrant Directors The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2005. Executive Officers The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2005. Item 11.                 Executive Compensation and Other Information The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2005. Item 12.                 Security Ownership of Certain Beneficial Owners and Management and Certain Related Parties The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2005. Item 13.                 Certain Relationships and Related Transactions The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2005. Item 14.                 Principal Accountant Fees and Services The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2005. PART IV Item 15.                 Exhibits and Financial Statement Schedule (a)          List of documents filed as part of this report (1)          Consolidated Financial Statements listed under Part II, Item 8 and included herein by reference. (2)          Consolidated Financial Statement Schedules No schedules are submitted because they are not applicable, not required or because the information is included in the Consolidated Financial Statements as Notes to Consolidated Financial Statements. 52    (3)          Exhibits     Exhibit   Number       Description of Document         2   .1       Stock Repurchase   Agreement (filed as Exhibit 2.1 to the Company’s Current Report on   Form 8-K dated March 31, 2004 and incorporated herein by   reference)         3   .1       Amended and Restated   Certificate of Incorporation of the Company (filed as Exhibit 3.3 to the   Company’s Registration Statement on Form S-1, No. 333-29397   and incorporated herein by reference)         3   .2       Amended and Restated By-laws   of the Company (filed as Exhibit 3.4 to the Company’s Registration   Statement on Form S-1, No. 333-29397 and incorporated   herein by reference)         3   .3       Certificate of Amendment of Amended and Restated   Certificate of Incorporation         4   .1       Specimen certificate representing the common stock   (filed as Exhibit 4.1 to the Company’s Registration Statement on   Form S-1, No. 333-29397 and incorporated herein by   reference)         4   .2       Stock Purchase Agreement (filed as Exhibit 4.1   to the Company’s Current Report on Form 8-K dated March 30,   2004 and incorporated herein by reference)         4   .3       Registration Rights Agreement (filed as   Exhibit 4.2 to the Company’s Current Report on Form 8-K dated   March 30, 2004 and incorporated herein by reference)         4   .4       Common Stock Warrant (filed as Exhibit 4.3 to   the Company’s Current Report on Form 8-K dated March 30, 2004   and incorporated herein by reference)         *10   .1       1996 Stock Option Plan (filed as Exhibit 10.1   to the Company’s Registration Statement on Form S-1, No. 333-29397   and incorporated herein by reference)         *10   .2       1997 Stock Plan, as amended, (filed as   Exhibit 4.1 to the Company’s Registration Statement on Form S-8,   No. 333-91659 and incorporated herein by reference)         *10   .3       1997 Employee Stock Purchase Plan (filed as   Exhibit 10.3 to the Company’s Registration Statement on Form S-1,   No. 333-29397 and incorporated herein by reference)         10   .4       Lease dated November 26, 1997 between H.J.   Brooks Limited Liability Company and the Company (filed as Exhibit 10.4   to the Company’s Annual Report on Form 10-K dated March 31,   1998 and incorporated herein by reference)         10   .5       Form of Omtool Software License (filed as   Exhibit 10.12 to the Company’s Registration Statement on Form S-1,   No. 333-29397 and incorporated herein by reference)         10   .6       Agreement of Sublease dated as of October 31,   2000, by and between eSped.com, Inc. and the Company (filed as   Exhibit 10.6 to the Company’s Form 10-K for the fiscal year   ended December 31, 2000 and incorporated herein by reference)         *10   .7       Letter dated December 14, 1999 from the Company   to Robert L. Voelk (filed as Exhibit 10.9 to the Company’s Form 10-K   for the fiscal year ended December 31, 2000 and incorporated herein by   reference)         *10   .8       Letter dated July 19, 2000 from the Company to   Robert L. Voelk (filed as Exhibit 10.10 to the Company’s Form 10-K   for the fiscal year ended December 31, 2000 and incorporated herein by   reference)         *10   .9       Consulting Arrangement with Arnold E. Ditri (filed   as Exhibit 10.9 to Company’s Form 10-Q for the fiscal quarter   ended March 31, 2002 and incorporated herein by reference)         *10   .10       Severance Agreement with Robert L. Voelk, dated   August 29, 2003 (filed as Exhibit 10.13 to the Company’s   Form 10-Q for the fiscal quarter ended September 30, 2003 and   incorporated herein by reference)         53          *10   .11       Severance Agreement with Daniel A. Coccoluto, dated   August 29, 2003 (filed as Exhibit 10.14 to the Company’s   Form 10-Q for the fiscal quarter ended September 30, 2003 and   incorporated herein by reference)         *10   .12       Form of Incentive Stock Option Agreement (filed   as Exhibit 10.17 to the Company’s Form 10-Q for the fiscal   quarter ended September 30, 2004 and incorporated herein by reference)         *10   .13       Form of Incentive Stock Option Agreement (filed   as Exhibit 10.18 to the Company’s Form 10-Q for the fiscal   quarter ended September 30, 2004 and incorporated herein by reference)         *10   .14       Form of Non-Qualified Stock Option   Agreement (filed as Exhibit 10.19 to the Company’s Form 10-Q   for the fiscal quarter ended September 30, 2004 and incorporated herein   by reference)         *10   .15       Form of Non-Qualified Stock Option   Agreement (filed as Exhibit 10.20 to the Company’s Form 10-Q   for the fiscal quarter ended September 30, 2004 and incorporated herein   by reference)         *10   .16       Form of Stock Purchase and Restriction   Agreement—Officer (filed as Exhibit 10.1 to the Company’s Current Report   on Form 8-K dated February 2, 2005 and incorporated herein by   reference)         *10   .17       Form of Stock Purchase and Restriction   Agreement—Director (filed as Exhibit 10.2 to the Company’s Current   Report on Form 8-K dated February 2, 2005 and incorporated   herein by reference)         *10   .18       Form of Indemnification Agreement (filed as   Exhibit 10.1 to the Company’s Current Report on Form 8-K   dated July 28, 2005)         21           Subsidiaries of the Company (filed as   Exhibit 21 to the Company’s Form 10-K for the fiscal year   ended December 31, 2001 and incorporated herein by reference)         23   .1       Consent of Vitale, Caturano & Company         23   .2       Consent of PricewaterhouseCoopers         24           Power of Attorney (included on signature page)         31   .1       Rule 13a-14(a)/15d-14(a) Certification         31   .2       Rule 13a-14(a)/15d-14(a) Certification         32   .1       Certification of Chief Executive Officer Pursuant to   18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of   the Sarbanes-Oxley Act of 2002.         32   .2       Certification of   Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as   Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          (*)          Indicates a management contract or any compensatory plan, contract or arrangement. (b)          Exhibits. The exhibits required by this Item are listed under Item 15(a)(3). (c)           Financial Statement Schedules. The financial statement schedules required by this Item are listed under Item 15(a)(2). 54     SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Salem, State of New Hampshire, on the 28th day of March 2006.        OMTOOL, LTD.         By:   /s/   DANIEL A. COCCOLUTO             Daniel A.   Coccoluto             Chief   Financial Officer, Secretary and Treasurer       POWER OF ATTORNEY We, the undersigned officers and directors of Omtool, Ltd., hereby severally constitute and appoint Robert L. Voelk and Daniel A. Coccoluto and each of them singly, our true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution in each of them, to sign for us and in our names in the capacities indicated below and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable Omtool, Ltd. to comply with the provisions of the Securities Exchange Act of 1934, as amended and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.        Name              Title              Date         /s/   ROBERT L. VOELK       Chairman, Chief   Executive Officer and              Robert L. Voelk       President (principal   executive officer)       March 28, 2006     /s/   DANIEL A. COCCOLUTO       Chief Financial Officer,   Secretary and              Daniel A.   Coccoluto       Treasurer (principal   financial and accounting officer)       March 28, 2006     /s/   RICHARD D. CRAMER        Director             Richard D. Cramer               March 28, 2006     /s/   ARNOLD E. DITRI       Director             Arnold E. Ditri               March 28, 2006     /s/   WILLIAM J. DRUMMEY       Director             William J.   Drummey               March 28, 2006     55          /s/   ANDREW E. LIETZ       Director             Andrew E. Lietz               March 28, 2006     /s/   JAMES O’HALLORAN       Director             James O’Halloran               March 28, 2006     /s/   MARTIN A. SCHULTZ       Director             Martin A. Schultz               March 28, 2006         56     OMTOOL, LTD. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS            Page         Reports of Independent Registered Public Accounting Firms           F-2             Consolidated   Balance Sheets as of December 31, 2005 and 2004           F-4             Consolidated Statements of Operations for the years   ended December 31, 2005, 2004 and 2003           F-5             Consolidated Statements of Stockholders’ Equity for   the years ended December 31, 2005, 2004 and 2003           F-6             Consolidated Statements of Cash Flows for the years   ended December 31, 2005, 2004 and 2003           F-7             Notes to   Consolidated Financial Statements           F-8               F-1     Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Omtool, Ltd.: We have audited the accompanying consolidated balance sheet of Omtool, Ltd. as of December 31, 2005 and the related statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal controls over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Omtool, Ltd. as of December 31, 2005 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Vitale, Caturano and Company, Ltd. Boston, Massachusetts January 24, 2006 F-2     Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Omtool, Ltd.: In our opinion, the consolidated balance sheet as of December 31, 2004 and the related consolidated statements of operations, of stockholders’ equity and of cash flows for each of two years in the period ended December 31, 2004 (appearing on pages F-4 through F-7 of the Omtool, Ltd. Annual Report on Form 10K) present fairly, in all material respects, the financial position of Omtool, Ltd. and its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers, LLP Boston, Massachusetts March 28, 2005 F-3     OMTOOL, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS             December 31,                 2005       2004         ASSETS                         Current assets:                         Cash and cash equivalents       $   10,471,272       $   10,655,121         Accounts receivable, net of reserves of $33,000 and   $82,000 at December 31, 2005 and 2004, respectively       1,618,799       1,802,784         Inventories       58,380       137,992         Prepaid expenses and other current assets       333,419       278,972         Total current assets       12,481,870       12,874,869         Property and   equipment, net       175,566       213,512         Other assets       11,562       11,562                 $   12,668,998       $   13,099,943         LIABILITIES   AND STOCKHOLDERS’ EQUITY                         Current liabilities:                         Accounts payable       $   905,288       $   849,572         Accrued liabilities       1,222,972       1,258,672         Accrued state sales tax       290,815       699,816         Deferred revenue, current       3,408,002       3,205,072         Total current liabilities       5,827,077       6,013,132         Long term liabilities:                         Deferred revenue, long-term       410,232       455,604         Total liabilities       6,237,309       6,468,736         Commitments,   contingencies and guarantees (Notes 9 and 11)                         Stockholders’ equity:                         Preferred stock,   $0.01 par value                         Authorized—2,000,000 shares; Issued and   outstanding—none       —       —         Common stock,   $0.01 par value                         Authorized—35,000,000 shares; Issued—4,367,878   shares in 2005 and 2004, Outstanding—3,977,022 and 3,851,472 shares in   2005 and 2004, respectively       43,679       43,679         Deferred compensation       (775,865   )   —         Additional paid-in capital       35,556,639       35,259,706         Accumulated deficit       (26,327,762   )   (26,018,011   )     Treasury stock, at cost, 390,856 and 516,406 shares   in 2005 and 2004, respectively       (2,005,618   )   (2,649,756   )     Accumulated other comprehensive loss       (59,384   )   (4,411   )     Total stockholders’ equity       6,431,689       6,631,207                 $   12,668,998       $   13,099,943           The accompanying notes are an integral part of these consolidated financial statements. F-4     OMTOOL, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS             Years ended December 31,                 2005       2004       2003         Revenue:                                 Software license       $   4,732,121       $   4,504,899       $   4,101,588         Hardware       2,705,109       3,177,343       2,767,570         Service and other       6,858,935       7,107,952       6,878,088         Total revenue       14,296,165       14,790,194       13,747,246         Cost of revenue:                                 Software license       154,165       195,299       279,573         Hardware       1,694,407       1,944,293       1,859,363         Service and other       2,781,828       2,743,258       3,151,851         Total cost of revenue       4,630,400       4,882,850       5,290,787         Gross profit       9,665,765       9,907,344       8,456,459         Operating expenses:                                 Sales and marketing       5,256,283       4,100,765       4,745,375         Research and development       2,239,250       1,936,779       2,186,615         General and administrative       2,671,200       2,417,091       2,947,869         Restructuring       —       —       806,581         Total operating expenses       10,166,733       8,454,635       10,686,440         Income (loss) from operations       (500,968   )   1,452,709       (2,229,981   )     Interest and   other income, net       185,725       140,172       139,894         Income (loss) before income tax benefit       (315,243   )   1,592,881       (2,090,087   )     Income tax   benefit       (5,492   )   (6,707   )   (144,322   )     Net income (loss)       $   (309,751   )   $   1,599,588       $   (1,945,765   )     Net income (loss) per   share:                                 Basic       $   (0.08   )   $   0.42       $   (0.56   )     Diluted       $   (0.08   )   $   0.41       $   (0.56   )     Weighted average shares   used in per share calculations:                                 Basic       3,923,963       3,764,809       3,494,474         Diluted       3,923,963       3,946,306       3,494,474           The accompanying notes are an integral part of these consolidated financial statements. F-5     OMTOOL, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003             Common Stock       Treasury Stock               Additional               Accumulated   Other       Total                 Number of   Shares       $0.01 Par   Value       Number of   Shares       Amount       Deferred   Compensation       Paid-in   Capital       Accumulated   Deficit       Comprehensive   Loss       Stockholders’   Equity         Balance, December 31, 2002           3,716,878               $   37,169               (227,878   )       $   (924,570   )       $   —           $   31,972,136           $   (25,671,834   )           $   (78,641   )           $   5,334,260             Comprehensive loss:                                                                                                                                         Net loss           —               —               —           —           —           —           (1,945,765   )           —               (1,945,765   )         Change in cumulative translation adjustment           —               —               —           —           —           —           —               40,194               40,194             Total comprehensive loss           —               —               —           —           —           —           —               —               (1,905,571   )         Exercise of stock options and issuance of shares   through Employee Stock Purchase Plan           —               —               11,500           46,636           —           (36,098   )       —               —               10,538             Balance, December 31, 2003           3,716,878               37,169               (216,378   )       (877,934   )       —           31,936,038           (27,617,599   )           (38,447   )           3,439,227             Comprehensive loss:                                                                                                                                         Net income           —               —               —           —           —           —           1,599,588               —               1,599,588             Change in cumulative translation adjustment           —               —               —           —           —           —           —               34,036               34,036             Total comprehensive income           —               —               —           —           —           —           —               —               1,633,624             Purchase of treasury stock           —               —               (350,000   )       (2,012,500   )       —           —           —               —               (2,012,500   )         Issuance of common stock and a warrant in a private   placement to institutional and accredited investors, net of issuance costs of   $154,135           651,000               6,510               —           —           —           3,439,355           —               —               3,445,865             Exercise of stock options and issuance of shares   through Employee Stock Purchase Plan           —               —               49,972           240,678           —           (115,687   )       —               —               124,991             Balance, December 31, 2004           4,367,878               43,679               (516,406   )       (2,649,756   )       —           35,259,706           (26,018,011   )           (4,411   )           6,631,207             Comprehensive loss:                                                                                                                                         Net loss           —               —               —           —           —           —           (309,751   )           —               (309,751   )         Change in cumulative translation adjustment           —               —               —           —           —           —           —               (54,973   )           (54,973   )         Total comprehensive loss           —               —               —           —           —           —           —               —               (364,724   )         Exercise of stock options and issuance of shares   through Employee Stock Purchase Plan           —               —               11,290           57,918           —           (20,798   )       —               —               37,120             Issuance of restricted stock           —               —               114,260           586,220           (902,808   )       317,731           —               —               1,143             Deferred compensation expense                                                                   126,943                                                       126,943             Balance,   December 31, 2005           4,367,878               $   43,679               (390,856   )       $   (2,005,618   )       $   (775,865   )       $   35,556,639           $   (26,327,762   )           $   (59,384   )           $   6,431,689               The accompanying notes are an integral part of these consolidated financial statements. F-6     OMTOOL, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS             Years ended December 31,                 2005       2004       2003         Cash Flows from   Operating Activities:                                 Net income (loss)       $   (309,751   )   $   1,599,588       $   (1,945,765   )     Adjustments to   reconcile net income (loss) to net cash provided by (used in) operating   activities—                                 Depreciation       157,338       255,649       413,525         Accounts receivable reserves       (47,806   )   (287,692   )   (260,609   )     Amortization of deferred compensation       126,943       —       —         Changes in assets   and liabilities—                                 Accounts receivable       205,101       79,998       420,432         Prepaid expenses and other current assets       (58,528   )   (8,896   )   157,691         Inventory       79,612       (100,193   )   151,904         Accounts payable       62,998       (58,089   )   (146,238   )     Accrued liabilities       (20,183   )   34,836       (487,997   )     Accrued restructuring       —       (443,830   )   443,830         Other assets       —       2,400       —         Accrued state sales tax       (409,001   )   (310,680   )   (265,239   )     Deferred revenue       197,410       110,206       71,697         Net cash (used in) provided by operating activities       (15,867   )   873,297       (1,446,769   )     Cash Flows from   Investing Activities:                                 Purchases of property and equipment       (120,339   )   (73,376   )   (189,120   )     Purchases of short-term investments       —       —       (1,999,449   )     Proceeds from sale of short-term investments       —       —       3,596,604         Net cash (used in) provided by investing activities       (120,339   )   (73,376   )   1,408,035         Cash Flows from   Financing Activities:                                 Net proceeds from issuance of common stock and   common stock warrant       37,120       3,570,856       10,538         Net proceeds from issuance of restricted common   stock       1,143       —       —         Purchase of treasury stock       —       (2,012,500   )   —         Net cash provided by financing activities       38,263       1,558,356       10,538         Exchange rate   effect on cash and cash equivalents       (85,906   )   54,777       77,740         Net (decrease)   increase in cash and cash equivalents       (183,849   )   2,413,054       49,544         Cash and cash   equivalents, beginning of year       10,655,121       8,242,067       8,192,523         Cash and cash   equivalents, end of year       $   10,471,272       $   10,655,121       $   8,242,067           The accompanying notes are an integral part of these consolidated financial statements. F-7     OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Operations Omtool, Ltd. (“Omtool” or the “Company”) provides 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, document management, records management, e-mail and document-archiving systems, leveraging application interfaces with which users are already familiar. AccuRoute® is the software platform for simplified, simultaneous and secure document distribution. It lets companies control the integration and distribution of “mixed-mode” documents into ever-changing corporate information systems and processes. Similar in concept to a network router, the Company’s AccuRoute product is the document routing hub, transforming between both paper and electronic-based formats and routing the information within and outside the company. Genidocs™, the Company’s 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™, the Company’s enterprise fax product, offers a scalable, server-based feature set and shares a common Microsoft Windows® server-based architecture with the Genidocs ™ product line. The Company’s AccuRoute product further unifies the code bases and architecture of the Genidocs and Genifax products. With its routing capabilities, the Company’s  AccuRoute product provides a customer-specific software that easily manages both paper and electronic documents, with little or no user training required. The Company resells certain hardware products (such as intelligent fax boards) from third-party vendors. Typically, hardware sales are a result of either new sales or existing customers upgrading their information technology infrastructure. Occasionally, where the Company’s customers also want fax capabilities, it sells hardware products with its AccuRoute product. These hardware sales are undertaken 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 are resold are not functional without the Company’s product software and it is not generally in the business of selling fax boards and modems. The Company purchases these hardware products as needed to ship to its customers and it maintains a minimal inventory of these hardware products. Service and other revenue has historically consisted primarily of the sale of support contracts to complement software products licensed to customers. The Company generates a smaller portion of its service and other revenue from consulting, training and installation services. (2) Summary of Significant Accounting Policies and Estimates The accompanying consolidated financial statements reflect the application of certain accounting policies and estimates as described in this note and elsewhere in the notes to the consolidated financial statements. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. F-8    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Summary of Significant Accounting Policies and Estimates (Continued) (b) Revenue Recognition The Company derives its revenue from primarily two sources (i) product revenue, which includes software license and hardware revenue and (ii) service and support revenue, which includes software maintenance and support, installation, training and consulting revenue. The Company licenses its software products on a perpetual basis. The Company generates revenue from licensing the rights to use its software products and sales of hardware directly to end-users and indirectly through resellers. The Company’s resellers order products from the Company based on purchase orders received from end-users and do not order stock. The Company’s products are sold to resellers and directly to end-users without any specifically stated rights of return. Occasionally, however, the Company, in its sole discretion, will accept a product return if the end-user finds that the product does not fit its needs. The Company also sells hardware products, which are provided by a third-party, on a pass through basis plus an additional mark-up, to end-users and indirectly through resellers. The hardware products that are resold are not functional without the Company’s software. To support its software products, the Company sells software maintenance and support, installation, training and consulting services to end-users and indirectly through resellers. The Company applies the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, “Software Revenue Recognition, With Respect to Certain Transactions,” to all transactions involving the sale of multiple elements including software, hardware and service revenue. The Company applies the provisions of SFAS No. 48, “Revenue Recognition When Right of Return Exists,” with respect to providing for potential future product returns. The Company recognizes revenue from the sale of software products and hardware to both end-users and resellers when persuasive evidence of an arrangement exists, the products have been delivered, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and there are no uncertainties regarding customer acceptance. The Company maintains a reserve for potential product returns. Software maintenance and support revenue is recognized over the term of the related maintenance period. Typically this is a one-year period, but occasionally the Company sells multiple-year maintenance contracts, in which case the associated revenue is recognized over the multiple-year term of the contract. Other service revenue is recognized as the services are performed. If an arrangement includes an acceptance provision and acceptance is uncertain then the Company will defer all revenue until the customer accepts the products. Acceptance in these instances generally occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. If an arrangement includes an acceptance provision regarding the Company’s product meeting published specifications and there are no uncertainties with regard to the customer’s acceptance then the Company will recognize revenue at the time of sale, provided that all other revenue recognition criteria previously mentioned have been met and the acceptance period is of short duration. The Company’s transactions frequently involve the sales of software, hardware and related services under multiple element arrangements. Revenue under multiple element arrangements is allocated to each element under the residual method, in accordance with SOP 98-9, Modification of SOP 97-2, “Software Revenue Recognition, With Respect to Certain Transactions.” Under this method, revenue is allocated first to all undelivered elements, such as services, based on the fair value of those elements, which is the price charged when these elements are sold separately and unaccompanied by other elements. The Company’s services are not essential to the functionality of the software as these services do not alter the capabilities of the software and do not carry a significant degree of risk to perform. The amount allocated to the delivered elements, such as software license and hardware revenue, is the difference between the total  F-9    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Summary of Significant Accounting Policies and Estimates (Continued) arrangement value and the amount allocated to the undelivered elements. If the delivered elements include both software and hardware, the amount allocated to hardware revenue is based on the price charged to the Company by the third party vendor plus an additional mark up, with the remainder allocated to software revenue. To the extent that a discount is offered in the arrangement, the entire discount is allocated to the delivered element or elements. If the delivered elements include hardware and software, the discount is allocated to the hardware and software based on their respective list prices. The Company’s short term deferred revenue and long term deferred revenue is comprised mainly of revenue that is deferred for software maintenance and support contracts. The other components of deferred revenue are the amounts from sales transactions that were deferred because they did not meet all of the provisions of the Company’s revenue recognition policy. At December 31, 2005 and 2004, deferred revenue consisted of the following:             December 31,                 2005       2004         Deferred revenue—licenses       $   15,594       $   152,116         Deferred   maintenance and support, current       $   3,392,408       $   3,052,956         Deferred   maintenance and support, long-term       $   410,232       $   455,604                 $   3,818,234       $   3,660,676           (c) Software Development Costs Software development costs are considered for capitalization when technological feasibility is established in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed.” The Company sells software in a market that is subject to rapid technological change, new product introductions and changing customer needs. Accordingly, the Company has determined that it cannot determine technological feasibility until the development state of the product is nearly complete. The time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release is very short and, consequently, the amounts that could be capitalized are not material to the Company’s consolidated financial position or results of operations. Consequently, no amounts have been capitalized. (d) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents were $6,944,924 and $6,812,560 at December 31, 2005 and 2004, respectively. Cash equivalents at December 31, 2005 and 2004 primarily consisted of investments in money market funds. (e) Advertising Expense The Company recognizes advertising expense as incurred. For the years ended December 31, 2005, 2004 and 2003, the Company recognized $195,925, $64,211 and $78,803, respectively, as advertising expense. F-10    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Summary of Significant Accounting Policies and Estimates (Continued) (f) Inventory Inventories consist of circuit boards purchased from third-party vendors, all of which are finished goods and are stated at lower of cost or market, with cost determined on the first-in, first-out basis. The Company reviews its inventory at the end of each month to ensure that there are no factors that would render the inventory excess or obsolete. To determine obsolescence, the Company considers current market conditions as well as specific vendor information related to the hardware products sold by the Company. If inventory is considered obsolete, then the Company will write the inventory down to zero value. (g) Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated using straight-line methods over the following useful lives:                     December 31           Asset Classification               Estimated Useful Life       2005       2004           Computer   equipment       1—5   years       $   3,193,669       $   3,132,632           Computer software       2—3   years       $   1,316,035       $   1,333,107           Furniture and   fixtures       5—7   years       $   923,169       $   945,309           Leasehold   improvements       Shorter   of the life of the lease or   the estimated useful life       $   231,821       $   229,061                           $   5,664,694       $   5,640,109           Less—Accumulated   depreciation and amortization               $   (5,489,128   )   $   (5,426,597   )                     $   175,566       $   213,512                                     Depreciation expense was $157,338, $255,649 and $413,525 for the years ended December 31, 2005, 2004 and 2003, respectively. The Company capitalizes expenditures that materially increase asset lives and charges ordinary repairs and maintenance to operations as incurred. (h) Stock Based Compensation The Company accounts for stock-based compensation for employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.”  SFAS No. 123(R) amends SFAS No. 123. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: ·       A “modified prospective” method in which compensation cost is recognized beginning with the effective date based on the requirements of SFAS No. 123(R) (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. ·       A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption. F-11    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Summary of Significant Accounting Policies and Estimates (Continued) The Company will implement SFAS No. 123(R) in the first quarter of 2006 and intends to use the modified prospective method. The Company expects the adoption will not have a material effect on its 2006 results. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” to stock-based employee compensation.             Year Ended December 31,                 2005       2004       2003         Net (loss)   income, as reported       $   (309,751   )   $   1,599,588       $   (1,945,765   )     Add: Stock   compensation included in net (loss) income       $   126,943       —       —         Deduct: Total   stock-based employee compensation expense determined under fair value method   for all awards       $   (187,036   )   $   (232,995   )   $   (662,166   )     Pro forma net   (loss) income       (369,844   )   $   1,366,593       $   (2,607,931   )     Net (loss) income   per share:                                 Basic, as reported       $   (0.08   )   $   0.42       $   (0.56   )     Diluted, as reported       $   (0.08   )   $   0.41       $   (0.56   )     Basic, pro forma       $   (0.09   )   $   0.36       $   (0.75   )     Diluted, pro   forma       $   (0.09   )   $   0.35       $   (0.75   )       See the assumptions used in calculating the pro-forma stock option expense described in Note 7. (i) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates include the reserve for returns and bad debts, valuation of income taxes and the accrual for state sales tax. Actual results could differ from the recorded estimates. (j) Concentration of Credit Risk, Fair Value of Financial Instruments and Significant Customers The amount reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their short-term maturities. Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The Company’s cash and cash equivalents are held with financial institutions and, at times, may exceed federally insured limits that the Company believes to be of high credit standing. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in any specific industry or by geographic area. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be inherent in the Company’s accounts receivable. F-12    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Summary of Significant Accounting Policies and Estimates (Continued) As of December 31, 2005, one customer accounted for 11% of the Company’s accounts receivable balance. As of December 31, 2004, one customer accounted for 12% of the Company’s accounts receivable balance. The Company does not believe that this concentration of credit risk represents a material risk of loss with respect to its financial position as of December 31, 2005 and 2004. For the years ended December 31, 2005, 2004 and 2003, no single customer accounted for greater than 10% of the Company’s total revenue. (k) Accounts Receivable and Related Reserves The Company records trade accounts receivable at the invoiced amount; these accounts do not bear interest. The Company maintains reserves for potential product returns and makes adjustments to these reserves as needed based on historical product return rates and considers the impact of new product introductions, changes in customer demand and acceptance of the Company’s products. Management’s calculation of the estimated return reserve is based upon (1) an account specific review of potential returns from recent sales, where a return probability is known and (2) an estimate based upon past historical returns as a percentage of revenue. Management specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. The Company reviews the allowance for doubtful accounts on a monthly basis. Management’s calculation of the estimated accounts receivable reserve is also based upon (1) an account specific review of potential uncollectible accounts, where a bad debt probability is known and (2) an estimate based upon past historical bad debts, as a percentage of accounts receivable. The Company does not have any off-balance-sheet credit exposure to its customers. The following schedule summarizes the activity of the Company’s accounts receivable reserve for the three years ended December 31, 2005:     Year Ended               Balance at   Beginning of   Year       Increases       Reductions       Balance at   End of   Year         December 31,   2003           $   615,000           345,000(1)           (593,000   )(2)       $   367,000         December 31,   2004           $   367,000           50,000(1)           (335,000   )(2)       $   82,000         December 31, 2005           $   82,000           58,000(1)           (107,000   )(2)       $   33,000          (1)          Amounts represent the establishment of reserves for potential sales returns or uncollectible accounts receivable. Increases to the reserve were made by decreasing revenue for sales returns and by increasing bad debt expense, respectively, for those accounts receivable that were deemed to be uncollectible. (2)          Amounts represent the reversal of reserves that were no longer required. These reversals were made to revenue for sales returns and to bad debt expense on collection of accounts receivable previously deemed to be uncollectible or to accounts receivable for accounts that were written off during the period. F-13     OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Summary of Significant Accounting Policies and Estimates (Continued) In accordance with APB Opinion No. 20, Accounting Changes, the following table displays the effects of the net reduction in the accounts receivable reserve which impacted net income (loss) and net income (loss) per share (excludes write-offs):     Year Ended               Net Income    (Loss)       Net Income (Loss)   per Basic and Diluted Share         December 31,   2003           $   (218,000   )           $   (0.06   )         December 31,   2004           $   272,000               $   0.07             December 31, 2005           $   40,000               $   0.00               (l) Foreign Currency Translation The Company translates the financial statements of its foreign subsidiaries in accordance with SFAS No. 52, “Foreign Currency Translation.” Accordingly, assets and liabilities are translated at exchange rates in effect at the end of the year and revenue and expenses are translated at the average exchange rates during the year. All cumulative translation gains or losses from the translation into the Company’s reporting currency are included as a separate component of stockholders’ equity (accumulated other comprehensive income) in the accompanying consolidated balance sheets. Net gains and losses resulting from foreign exchange transactions were not material for the years ended December 31, 2005, 2004 and 2003. (m) Earnings Per Share The Company reports earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Diluted weighted average shares outstanding for the year ended December 31, 2005 exclude 157,475 potential common shares from stock options and a stock warrant because to include them would have been anti-dilutive for the period presented as the Company reported a net loss during the period. The dilutive effect of potential common shares in 2004, consisting of outstanding stock options and a stock warrant, is determined using the treasury stock method, in accordance with SFAS No. 128. For the year ended December 31, 2004, the dilutive calculation excludes the potential common shares related to 179,990 outstanding stock options that have an anti-dilutive effect since their exercise price exceeds the market value of the Company’s common stock. Diluted weighted average shares outstanding for the year ended December 31, 2003 exclude 495,586 potential common shares from stock options because to include them would have been anti-dilutive for the period presented as the Company reported a net loss during the period. A reconciliation of basic and diluted common shares outstanding is as follows:             Year Ended December 31,                 2005       2004       2003         Weighted average   number of common shares outstanding       3,923,963       3,764,809       3,494,474         Potential common   shares pursuant to stock options and warrant       —       181,497       —         Diluted weighted   average shares       3,923,963       3,946,306       3,494,474         Basic net (loss)   income per common share       $   (0.08   )   $   0.42       $   (0.56   )     Diluted net (loss)   income per common and potential common share       $   (0.08   )   $   0.41       $   (0.56   )       F-14    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (2) Summary of Significant Accounting Policies and Estimates (Continued) (n) New Accounting Pronouncements In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS No. 154). Previously, APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income of the period of the change. SFAS No. 154 requires companies to recognize a change in accounting principle, including a change required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods’ financial statements. We will assess the impact of a retrospective application of a change in accounting principle in accordance with SFAS No. 154 if such a change arises after the effective date of January 1, 2006. In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.”  SFAS No. 151 modifies the accounting for abnormal inventory costs and the manner in which companies allocate fixed overhead expenses to inventory. SFAS No. 151 is effective for inventory costs incurred during annual periods beginning after June 15, 2005. The Company does not expect SFAS No. 151 to have a material impact on its financial position and results of operations. (3) Related Party Transactions On October 31, 2000, the Company entered into an agreement with eSped.com, Inc. (“eSped”) to sublease from the Company 4,500 square feet of the premises the Company is occupying at its Salem, New Hampshire, headquarters. Robert L. Voelk, the Chief Executive Officer and Chairman of the Board of Omtool, is also the Chief Executive Officer and Chairman of the Board of eSped and Mr. Schultz, a Director of Omtool, is a Director of eSped. The sub-lease is a tenancy at will and commenced on February 1, 2001. Either party may terminate the sublease with 120 days written notice to the other party. The amount of rent payments and building maintenance charges received was $62,037 in each of the years ended December 31, 2005, 2004 and 2003 and has been recorded as a reduction in general and administrative expenses in the accompanying consolidated financial statements. The Company believes that the terms of the sublease have been negotiated at arms-length. (4) Accrued Liabilities Accrued liabilities consist of the following:             December 31,                 2005       2004         Accrued health   insurance expense       $   169,811       $   178,464         Accrued salary   and salary-related       639,297       688,622         Accrued   professional fees       128,801       141,322         Other accrued   expenses       285,063       250,264                 $   1,222,972       $   1,258,672           (5) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” the objective of which is to recognize the amount of current and deferred income taxes at the date  F-15    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (5) Income Taxes (Continued) of the financial statements as a result of all differences in the tax basis and financial statement carrying amount of assets and liabilities as measured by enacted tax laws. At December 31, 2005, the Company had available federal net operating loss carryforwards of approximately $20.0 million to be used to offset future taxable income, if any. The Company also has federal tax credit carryforwards of approximately $1.1 million. If not utilized, these carryforwards expire through 2024. If certain ownership changes occur, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”), there could be annual limitations on the amount of carryforwards that can be realized in future periods. The components of the net deferred tax asset are as follows:             December 31,                 2005       2004         Net operating   loss carryforward       $   6,961,000       $   6,811,000         Research and   development tax credit carryforwards       1,137,000       954,000         Capital loss   carryforward       309,000       309,000         Accrued   liabilities and reserves       514,000       628,000         Valuation   allowance       (8,921,000   )   (8,702,000   )     Net deferred tax asset       $   —       $   —           SFAS No. 109 requires a valuation allowance to be recorded against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. As a result of cumulative losses in recent years and continued economic uncertainty, the Company has provided a full valuation allowance against all of its net deferred tax assets and will continue to do so until it returns to an appropriate level of sustained taxable income. If the Company is successful in generating sufficient future taxable income, the Company will reduce the valuation allowance through a reduction in income tax expense in the future for that portion not related to the exercise of stock options. At December 31, 2005, the Company has approximately $331,000 of net operating loss carryforwards and related valuation allowance in the United States resulting from the exercise of stock options. The Company will realize the benefit of these losses through increases to stockholders’ equity in the periods in which the losses are utilized to reduce tax payments. A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:             Year Ended December 31,                 2005       2004       2003         Income tax   (benefit) provision at federal statutory rate       (34.0   )%   34.0   %   (34.0   )%     (Decrease)   increase in tax resulting from—                                 State tax provision, net of federal benefit       4.1       3.6       2.8         Research and development tax credits       (58.1   )   (3.8   )   (3.6   )     (Decrease) increase in valuation allowance       81.0       (34.0   )   37.9         Difference in foreign tax rates       (0.9   )   (1.0   )   (6.9   )     Other       6.2       0.8       (3.1   )     Income tax benefit       (1.7   )%   (0.4   )%   (6.9   )%       F-16    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (5) Income Taxes (Continued) The income tax benefit in the accompanying consolidated statements of operations consists of the following:             Year Ended December 31,                 2005       2004       2003         Current                                 Federal       $   (2,619   )   $   8,681       $   —         State       —       —       —         Foreign       (2,873   )   (15,388   )   (144,322   )     Deferred                                 Federal       —       —       —         State       —       —       —         Foreign       —       —       —                 —       —       —         Income tax benefit       $   (5,492   )   $   (6,707   )   $   (144,322   )       The components of domestic and foreign (loss) income before income taxes are as follows:             Year Ended December 31,                 2005       2004       2003         Domestic       $   2,943       $   1,496,137       $   (2,601,795   )     Foreign       (318,186   )   96,744       511,708                 $   (315,243   )   $   1,592,881       $   (2,090,087   )       (6) Stockholders’ Equity (a) Private Placement to Institutional Investors and Other Accredited Investors On March 29, 2004, the Company raised $3.6 million through the private placement to institutional and other accredited investors of 600,000 shares of its common stock at a price of $6.00 per share (the “Private Placement”). The fees associated with issuing the shares in connection with the Private Placement were $154,135 and were recorded as a reduction of additional paid-in capital. Furthermore, Omtool issued 51,000 shares of common stock and a warrant to purchase an additional 51,000 shares of common stock, exercisable over a five year period at a price of $6.00 per share, to its financial advisor or the advisor’s designees as payment for advisory services related to the Private Placement. In conjunction with the transaction, the Company repurchased shares of its outstanding common stock from an existing shareholder. See Treasury Stock below for more information. (b) Treasury Stock In October 1998 and in October 2002, the Company’s Board of Directors authorized the repurchase of up to 285,714 shares and $250,000 worth of shares, respectively, of the Company’s common stock. Subject to price and market considerations and applicable securities laws, such purchases will be made from time to time on the open market. No time limit was placed on the duration of the repurchase programs. The Company may use the repurchased shares to offset shares issued in connection with various Company employee stock plans. F-17    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) Stockholders’ Equity (Continued) In March 2004, the Company’s Board of Directors authorized the repurchase of 350,000 shares of its outstanding common stock from ASA International, an existing shareholder, in a private transaction at a price of $5.75 per share. The shares were purchased with the use of generally available corporate funds and are held in treasury. As of December 31, 2005, the Company had repurchased a total of 280,446 shares under the 1998 program and $250,000 worth, or 142,856 shares, under the 2002 program. The combined total of all repurchases is $773,302. (c) Reserved Common Stock As of December 31, 2005, 1,104,746 shares of common stock were reserved for issuance pursuant to all stock option plans, the employee stock purchase plan and the outstanding warrant. (d) Preferred Stock The Company’s Amended and Restated Certificate of Incorporation provides for and the Board of Directors and stockholders authorized, 2,000,000 shares of $0.01 par value preferred stock. The Board of Directors has the authority to issue such shares in one or more series and to fix the relative rights and preferences without vote or action by the stockholders. No shares have been issued as of December 31, 2005. (e) Stock Splits On March 30, 2004, Omtool’s Board of Directors approved a two-for-one forward stock split of the Company’s common stock in the form of a dividend, effective April 27, 2004, payable to each stockholder of record as of April 7, 2004. All references in the consolidated financial statements referring to shares, share prices, per share amounts and stock plans have been adjusted retroactively for this two-for-one stock split. On January 14, 2003, Omtool’s Board of Directors approved a one-for-seven reverse stock split of the Company’s common stock, effective January 15, 2003. All references in the consolidated financial statements referring to shares, share prices, per share amounts and stock plans have been adjusted retroactively for this one-for-seven stock split. (f) Stock Warrant As described above, in conjunction with the Private Placement, the Company issued a warrant to purchase 51,000 shares of common stock exercisable over a five year period at a price of $6.00 per share to the Company’s financial advisor or the advisor’s designees as payment for advisory services related to the transaction. The warrant may only be exercised during the period commencing on October 1, 2004 and ending on September 30, 2009. The warrant has not been exercised as of December 31, 2005. (g) Restricted Common Stock During 2005, the Company sold a total of 115,516 shares of restricted common stock shares under the Company’s 1997 Stock Plan, as amended, to its Board of Directors and certain employees of the Company at a price per share of $0.01. The shares of restricted common stock vest ratably over a four year service  F-18    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (6) Stockholders’ Equity (Continued) period. In the event that a restricted stockholder ceases to provide services to the Company prior to the vesting of any of the then unvested shares held by that stockholder, the restricted stockholder is required to sell all such unvested shares of restricted common stock back to the Company at the original purchase price of $0.01 per share. During 2005, 1,256 shares of unvested restricted common stock were forfeited. The Company recorded deferred compensation of approximately $903,000 during 2005 for the intrinsic value of the restricted common stock. Compensation expense included in net loss for the year ended December 31, 2005 was approximately $127,000. The Company is recognizing deferred compensation as compensation expense ratably over the expected four year vesting period. (7) Stock Plans (a) Stock Option Plans The Company’s 1996 Stock Option Plan (the “1996 Plan”) provided for the granting of options covering 428,572 shares of common stock. The 1996 Plan, administered by the Board of Directors, allowed for the granting of “incentive stock options” within the meaning of the IRC and nonqualified stock options. Incentive stock options under the 1996 Plan were granted at not less than the fair market value per share of common stock on the date of grant or 110% of fair market value for any stockholder who holds more than 10% of the total combined voting power of all classes of stock of the Company. Under the terms of the 1996 Plan, options vest and become exercisable as determined by the Board of Directors and expire 10 years after the date of grant. In 1997, the Company’s Board of Directors voted that no further options may be granted or issued under the 1996 Plan. The Company’s 1997 Stock Plan, as amended, (the “1997 Plan”) provides for the issuance of common stock pursuant to the grant to employees of “incentive stock options” within the meaning of the IRC and the grant of nonqualified stock options, stock awards or opportunities to make direct purchases of stock in the Company to employees, consultants, directors and officers of the Company. Under the terms of the 1997 Plan, options vest and become exercisable as determined by the Board of Directors and expire 10 years after the date of grant. The aggregate number of shares of common stock which may be issued pursuant to the 1997 Plan is 1,228,570. In accordance with the 1997 Plan, stock options that are canceled or expired are added back to the potential options available for future issuance. The Company accounts for stock-based compensation for employees under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and follows the disclosure-only alternative under SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” for options granted using the Black-Scholes option pricing model prescribed by SFAS No. 123. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.”  SFAS No. 123(R) amends SFAS No. 123. The Company is required to adopt  SFAS 123(R) in the first quarter of 2006 and does not expect it to have a material impact on its future results of operations. Based on the use of the Black-Scholes option pricing model, options granted in 2004 and 2003 had a weighted average grant date fair value per share of $4.57 and $1.10, respectively. No options were granted in 2005. F-19     OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) Stock Plans (Continued) The assumptions used are as follows:             Year Ended December 31,                 2005       2004       2003         Risk-free   interest rate       N/A   %   2.67   %   2.68   %     Volatility       N/A   %   95.0   %   95.0   %     Expected dividend   yield       N/A       —       —         Expected lives       N/A       4 Years       4 Years           The following is a summary of all stock option activity:             Number of   Shares       Exercise Price   Per Share       Weighted   Average   Exercise Price         Outstanding,   December 31, 2002           757,396           $   0.74-$28.88           $   6.14             Granted           50,000           0.74-1.85           1.63             Exercised           (572   )       0.88           0.88             Canceled and expired           (311,238   )       0.74-17.06           3.85             Outstanding, December 31, 2003           495,586           0.74-19.25           6.17             Granted           5,260           6.76           6.76             Exercised           (42,206   )       0.74-4.10           2.55             Canceled and expired           (12,264   )       2.63-17.06           9.87             Outstanding, December 31, 2004           446,376           0.74-19.25           6.41             Granted           —           —           —             Exercised           (6,992   )       0.74-4.10           1.40             Canceled and expired           (75,670   )       2.63-17.06           10.15             Outstanding,   December 31, 2005           363,714           $   0.74-$19.25           $   5.73             Exercisable,   December 31, 2005           335,320           $   1.85-$19.25           $   6.05               At December 31, 2005, options to purchase 687,869 shares of common stock were available for future grants under the 1997 Plan. F-20    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) Stock Plans (Continued) The range of exercise prices for options outstanding and options exercisable at December 31, 2005 are as follows:             Options Outstanding               Options Exercisable         Range of Exercise Prices       Options   Outstanding       Weighted Average   Remaining   Contractual Life       Weighted Average   Exercise Price Per Share       Options   Exercisable       Weighted Average   Exercise Price   Per Share                         (Years)                                 $0.74-0.74           5,000               7.3               $   0.74               —               $   —             1.85-2.63           206,748               5.9               2.47               185,783               2.54             3.19-4.20           7,332               5.4               3.64               6,328               3.57             6.48-8.54           69,820               4.5               7.71               68,395               7.73             10.06-12.69           33,430               4.0               10.11               33,430               10.11             15.31-19.25           41,384               3.0               16.12               41,384               16.12                         363,714               5.1               $   5.73               335,320               $   6.05               (b) 1997 Employee Stock Purchase Plan The 1997 Employee Stock Purchase Plan (the “1997 Purchase Plan”) provides for the issuance of a maximum of 57,142 shares of common stock pursuant to the exercise of nontransferable options granted to participating employees. The exercise price for the option for each six-month purchase period is 85% of the lesser of the market price of the common stock on the first or last business day of the six-month purchase period. As of December 31, 2005, 49,046 shares had been issued under the 1997 Purchase Plan. (8) 401(k) and Profit-Sharing Plan The Company’s 401(k) and Profit-Sharing Plan (the “Profit-Sharing Plan”) covers all eligible employees and allows for voluntary contributions by eligible employees. The Company matches 50% of eligible employee contributions up to a specified amount. The Company contributed $131,000, $109,000 and $114,000 to the Profit-Sharing Plan for the years ended December 31, 2005, 2004 and 2003, respectively. Additional profit-sharing contributions to the Profit-Sharing Plan are at the discretion of the Company’s management. During 2005, 2004 and 2003, the Company made no additional discretionary contributions. (9) Lease Commitments The Company leases certain equipment and its office facilities under operating leases that expire at various times through December 2006. Future minimum lease payments under these leases at December 31, 2005 are $201,000 for the year ending December 31, 2006. At December 31, 2005, the Company had no other operating lease commitments. The Company’s lease of its current office space used as its headquarters and primary business location in Salem, New Hampshire expired on December 31, 2005 and the Company is currently a tenant-at-will at this location and is making monthly lease payments of $21,000. In January 2006, the Company entered into a new lease agreement and plans to move its headquarters to Andover, Massachusetts in April 2006. The Company will be required to make lease payments related to this new lease of $95,000, $379,000, $379,000, $395,000 and $401,000 for the years ended December 31,  F-21    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (9) Lease Commitments (Continued) 2006, 2007, 2008, 2009 and 2010, respectively. The term of the lease is ten years and the Company has an option to renew the lease for an additional five-year term at the then-applicable fair market rent. Under the terms of the lease, the Company is not required to pay rent for the first six months commencing upon the date of occupancy and the landlord will provide the Company with a tenant improvement allowance up to $308,000. Additionally, the Company has a one-time right to terminate the lease, upon twelve months’ written notice, after the sixth year of the lease term. If the Company decides to terminate the lease, it must pay a penalty of six months’ rent and the unamortized portion of the tenant improvement allowance. On January 24, 2006, the Company entered into an agreement for construction projects with a contractor whereby the Company will pay approximately $435,000 to the contractor in exchange for the contractor performing certain interior renovations at the Company’s future corporate headquarters located at Six Riverside Drive, Andover, Massachusetts. Rent expense, net of sub-lease rentals, included in the accompanying consolidated statements of operations was $516,000, $476,000 and $444,000 for the years ended December 31, 2005, 2004 and 2003, respectively. (10) Restructuring Costs In the third quarter of 2003, the Company announced a restructuring of certain of its operations and recorded a pretax charge of $806,581 in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The charge included severance-related costs associated with the workforce reduction in the Company’s domestic operations and costs associated with the closing of its Oregon office. The reduction in workforce consisted of three employees in the Company’s sales and marketing department, two employees performing general and administrative functions, three employees performing technical support and five employees in the Company’s research and development department. The balance of this charge consisted of costs incurred as a result of the closure of the Company’s Oregon facility. The following table summarizes the accrual and usage of the restructuring charges in 2003 and 2004:             Lease       Severance       Total         Total charge       $   17,420       $   789,161       $   806,581         Cash payments   2003       (17,420   )   (345,331   )   (362,751   )     Ending balance,   December 31, 2003       —       443,830       443,830         Cash payments   2004       —       (443,830   )   (443,830   )     Ending balance,   December 31, 2004       $   —       $   —       $   —           The total cash impact of the restructuring was $806,581, all of which was paid by the end of the third quarter of 2004. (11) Guarantees In November 2002, the FASB issued FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must  F-22    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (11) Guarantees (Continued) recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties or to guarantees accounted for as derivatives. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The following is a summary of the Company’s agreements that it has determined are within the scope of FIN 45. The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its resellers or certain customers, in connection with any United States patent, or any copyright or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes that the estimated amounts of potential liability arising out of these agreements is minimal. The Company warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to certain of its customers for the life of the product. If necessary, the Company would provide for the estimated cost of product warranty based on specific warranty claims and claim history, however, the Company has never incurred significant expense under its product warranty. As a result, the Company believes that the estimated amounts of potential liability arising out of these agreements is minimal. (12) Segment and Geographic Information To date, the Company has viewed its operations and manages its business as principally one segment — software and hardware sales and associated services. As a result, the financial information disclosed herein represents all of the material financial information related to the Company’s principal operating segment in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” Total revenue from international sources was approximately $2.8 million, $3.3 million and $3.1 million in 2005, 2004 and 2003, respectively. The Company’s revenue from international sources was primarily generated from customers located in Canada, Europe and South Africa. F-23    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (12) Segment and Geographic Information (Continued) The following table represents amounts relating to geographic locations for the years ended December 31, 2005, 2004 and 2003:             Year Ended December 31,                 2005       2004       2003         Total revenue(1)                                 United States       $   11,536,784       $   11,502,207       $   10,647,321         United Kingdom       985,129       1,228,182       1,281,283         Canada       656,280       784,927       503,222         South Africa       294,243       296,816       264,784         Rest of World       823,729       978,062       1,050,636                 $   14,296,165       $   14,790,194       $   13,747,246         Long-lived assets(2)                                 United States       $   168,360       $   215,879                 United Kingdom       18,768       9,195                         $   187,128       $   225,074                  (1)          Revenue is attributed to geographic regions based on location of customer. (2)          Long-lived assets include property and equipment and other assets. (13) Asset Write-off In April 1999, the Company purchased 262,346 shares of Series B Preferred Stock (“Preferred Stock”) of .comfax, Inc. (which later changed its name to MessageClick, Inc. (“MessageClick”)), a development-stage company that developed and marketed Internet-based facsimile communications devices. As part of the transaction, the Company purchased a patent, United States Patent No. 5,872,845, entitled Method and Apparatus for Interfacing Fax Machines to Digital Communication Networks from MessageClick. The Company paid $850,000 for the Preferred Stock and the patent. The Company initially recorded its investment in MessageClick at the total purchase price of $850,000 and placed no value on the patent, which patent, to date, the Company has not used . At the end of each quarter following this purchase, the Company evaluated the carrying cost of this investment and adjusted the balance, if it was deemed appropriate, to what the Company believed to be its realizable value. In making this decision, the Company reviewed the most recent MessageClick financial statements that were made available to the Company’s management, had discussions with MessageClick’s management and reviewed documents relating to subsequent rounds of financing received by MessageClick. Based on the aforementioned, the Company determined that as of December 31, 1999, the carrying value of the investment was $708,335. During each of the first, second and third quarters of fiscal year 2000, the Company reduced the carrying value of the investment by $70,833. During the fourth quarter of 2000, the Company wrote-off the entire remaining carrying value of the investment. The decision to write-off the investment is described below. On November 3, 2000, MessageClick was acquired by Verso Technologies, Inc. (“Verso”), a company publicly traded on the Nasdaq National Market under the symbol VRSO. The Company received 45,487 shares of Verso common stock, $243.47 cash, which included cash the Company was entitled to and cash in  F-24    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (13) Asset Write-off (Continued) lieu of fractional shares of Verso and a warrant to purchase 8,580 shares of Verso common stock in exchange for its 262,346 shares of Preferred Stock. The 45,487 shares of Verso common stock received by the Company were unregistered and the Company was restricted from selling these shares for twelve months from the date of the acquisition. Additionally, the Company only had “piggy back” registration rights for those shares of Verso common stock. Furthermore, the Company potentially would receive an additional 20,642 shares of Verso common stock if certain conditions of the purchase agreement were met. At the time of the acquisition, Verso was trading at $3.38 per share and at December 31, 2000, Verso was trading at $1.50 (resulting in $68,230.50 in value for the 45,487 shares). Additionally, as of March 30, 2001 (prior to the Company filing its Form 10-K for the year ended December 31, 2000), Verso was trading at $0.75 a share, thus providing a trading value as of March 30, 2001 of the Company’s investment of $34,115.25. Due to the rapid and significant decline in Verso’s common stock, the restriction on sale of the stock, the uncertainty of the ultimate realizability of the stock and the immateriality of the value of the shares, the Company decided to write-off the entire carrying value of $708,335 of the investment as of December 31, 2000. In 2002, the Company sold 45,487 of its Verso Common Stock for approximately $11,000 and recorded the realized value in Interest and Other Income at that time. On July 18, 2003, the Company received an additional 11,029 shares of Verso Common Stock as certain conditions described in the purchase agreement were met. The Company sold those shares on September 8, 2003 for $4.63 per share for total gross proceeds of $51,000. This amount is included in Interest and Other Income. The Company does not expect to receive any additional shares of Verso common stock. The Company’s warrant to purchase 8,580 shares of Verso common stock expired in November 2005. F-25    OMTOOL, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (14) Quarterly Results of Operations (unaudited) The following table presents a condensed summary of quarterly results of operations for the years ended December 31, 2005 and 2004.             Year Ended December 31, 2005                 First   Quarter       Second   Quarter       Third   Quarter       Fourth   Quarter         Total revenue       $   3,861,484       $   3,570,299       $   3,165,770       $   3,698,612         Gross profit       2,579,665       2,354,409       2,107,130       2,624,561         Net income (loss)       142,040       11,764       (343,430   )   (120,125   )     Net income (loss) per share:                                         Basic       $   0.04       $   0.00       $   (0.09   )   $   (0.03   )     Diluted       $   0.04       $   0.00       $   (0.09   )   $   (0.03   )                   Year Ended December 31, 2004                 First   Quarter       Second   Quarter       Third   Quarter       Fourth   Quarter         Total revenue       $   4,028,078       $   3,367,581       $   3,448,004       $   3,946,531         Gross profit       2,575,083       2,322,234       2,334,727       2,675,300         Net income       379,755       277,680       394,209       547,944         Net income per share:                                         Basic       $   0.11       $   0.07       $   0.10       $   0.14         Diluted       $   0.10       $   0.07       $   0.10       $   0.14           F-26        EX-23.1 2 a06-2638_1ex23d1.htm CONSENTS OF EXPERTS AND COUNSEL       Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM As independent registered public accountants, we hereby consent to the inclusion of our report dated January 24, 2006 relating to the consolidated financial statements of Omtool, Ltd. for the year ended December 31, 2005 included in this form 10-K, into the Company’s previously filed Registration Statements on Form S-3 (File No. 333-115016) and Form S-8 (File Nos. 333-39571 and 333-91659). /s/ Vitale Caturano & Company, Ltd. VITALE, CATURANO & COMPANY, LTD. Boston, Massachusetts March 28, 2006        EX-23.2 3 a06-2638_1ex23d2.htm CONSENTS OF EXPERTS AND COUNSEL       Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-115016) and Form S-8 (File Nos. 333-39571 and 333-91659) of Omtool, Ltd. of our report dated March 28, 2005 relating to the consolidated financial statements which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 28, 2006        EX-31.1 4 a06-2638_1ex31d1.htm 302 CERTIFICATION       Exhibit 31.1 CERTIFICATIONS I, Robert L. Voelk, certify that: 1.                I have reviewed this annual report on Form 10-K of Omtool, Ltd.; 2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4.                The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a)                Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b)               [Paragraph omitted in accordance with SEC transition instructions contained in SEC Releases 34-47986 and 33-8618.] c)                Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)               Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.                The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: a)                All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)               Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.     Date: March 28, 2006                             By:       /s/ ROBERT L.   VOELK                     Robert L. Voelk                      Chief Executive Officer              EX-31.2 5 a06-2638_1ex31d2.htm 302 CERTIFICATION       Exhibit 31.2 CERTIFICATIONS I, Daniel A. Coccoluto, certify that: 1.                I have reviewed this annual report on Form 10-K of Omtool, Ltd.; 2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4.                The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a)                Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b)               [Paragraph omitted in accordance with SEC transition instructions contained in SEC Releases 34-47986 and 33-8618.] c)                Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)               Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.                The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: a)                All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)               Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.     Date: March 28, 2006                             By:       /s/ DANIEL A. COCCOLUTO                     Daniel A. Coccoluto                     Chief Financial Officer              EX-32.1 6 a06-2638_1ex32d1.htm 906 CERTIFICATION       Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Omtool, Ltd. (the “Company”) on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert L. Voelk, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that: (1)         The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2)         The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.     /s/   ROBERT L. VOELK              Robert L. Voelk             Chief Executive Officer             March 28, 2006                      EX-32.2 7 a06-2638_1ex32d2.htm 906 CERTIFICATION       Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Omtool, Ltd. (the “Company”) on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel A. Coccoluto, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.     /s/ DANIEL   A. COCCOLUTO             Daniel A. Coccoluto             Chief Financial Officer             March 28, 2006                      -----END PRIVACY-ENHANCED MESSAGE-----