Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended: December 31, 2002

OR

For the transition period from             to             

Commission file number: 0-25186

CAPTARIS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (425) 455-6000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value per share

Preferred Stock Purchase Rights

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

Aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2002 (the Company’s most recent completed second fiscal quarter) was $93,564,708 (based upon the closing sale price of $2.95 per share on the NASDAQ National Market on such date).

Number of shares of Common Stock outstanding as of March 10, 2003 was 30,244,058.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Captaris, Inc.’s Proxy Statement for its 2003 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after December 31, 2002 is incorporated by reference in Part III hereof.

Table of Contents

TABLE OF CONTENTS

i

Table of Contents

PART I

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements. These statements relate to future events or the Company’s future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” “continue,” or the negative of these terms or other terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the “Factors That May Affect Our Business, Future Operating Results, Financial Condition and Market Price of Our Stock” section included elsewhere in this report. These factors may cause the Company’s actual results to differ materially from any forward-looking statement. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Item 1.    BUSINESS

The Company is a leading provider of business communication software solutions for medium to large-sized enterprises, which the Company considers to be primarily enterprises with 250-5,000 employees. The Company provides flexible, cost-effective information delivery, unified communications, and mobile business solutions. These products address the electronic document (e-document) delivery, fax server, unified messaging, voice messaging, and mobile wireless markets and are distributed primarily through independent distributors and value-added resellers worldwide. The Company’s products run on industry-standard server hardware, support Windows-based operating systems, and interface with a wide variety of leading enterprise applications and telephony and computer equipment. The Company also offers an e-document delivery service, including both broadcast fax and permission-based e-mail services. These services are offered to customers primarily through a direct sales force. The Company was incorporated in the State of Washington in 1982.

Industry Background

Businesses are increasingly using information technology to improve customer service, increase employee productivity, decrease costs and more efficiently disseminate information. As the amount of information exchanged between organizations and departments increases, and the diversity of the delivery formats and combinations used by organizations to exchange this information becomes more complex, there is a growing need for organizations to find new ways to manage business information and resources in a more timely and cost-effective manner.

In response to the growth in overall business information traffic, organizations are increasingly using business communication systems that allow employees to more effectively manage communications and provide access to large amounts of corporate information via a variety of interfaces.

The growth in data communications presents additional opportunities for accessing and sending information. For example, organizations are utilizing electronic document exchange systems and services to store, forward and broadcast their growing volume of fax and e-document traffic in an efficient manner. Electronic messaging over LANs, the Internet and corporate intranets has emerged as another way to access data and disseminate information. This rapid increase in multiple forms of voice and data communication has further accentuated the need for enterprises to optimize their information management capabilities and integrate voice and data communications.

The Captaris Solution

The Company continues to be a leading provider of business communication software solutions for medium to large-sized enterprises. These solutions, which are designed to reduce costs and increase the return on investment in critical business information systems, are designed to integrate and automate the flow of a full range of paper and electronic messages, voice, data and documents. The Company produces a suite of proven products and services, in partnership with leading enterprise software companies, delivered through a global distribution network.

1

Table of Contents

Strategy

The Company’s global mission is to deliver business-to-business communications solutions by providing cost-effective, innovative software products and hosted / outsourced e-document delivery services that operate on industry-standard computer platforms that more fully leverage IT investments.

The Company believes that to maximize profitability and shareholder return, it must place a greater emphasis on focusing its resources on strategic products and services. The Company regularly evaluates its product lines and operating units not only for their contribution to current results, but also for their potential for benefiting the Company long-term. Based upon the results of such evaluations, the Company may discontinue, divest or take other actions to improve the performance of product lines and / or operating units.

Key components of the Company’s strategy include the following:

Leverage E-document Data and Telephony Expertise.    The Company has established a knowledge-base in the development of call processing, voice processing, call switching, fax processing, e-document delivery and mobility applications that integrate with LAN, Internet and corporate intranet software applications and services. The Company believes that its expertise in these areas enables it to efficiently bring to market innovative software products and services that unify and exchange information between businesses. The Company intends to continue to leverage its expertise in e-document delivery and computer telephony to develop products and services in markets that are complementary to its current offerings and markets it believes it can profitably exploit. Going forward, the Company may place additional emphasis on leveraging its capabilities in the e-document solutions market or markets adjacent thereto.

Complete Software-Based Solutions.    The Company is focused on providing a comprehensive and affordable set of software-based business communication solutions designed to enhance productivity, improve customer service, reduce business-operating costs and simplify access to data and dissemination of information. The Company’s products provide enhanced voice and data integration through applications such as fax, unified voice and data messaging, and e-document delivery products and services.

Focus on the Enterprise Market.    The Company primarily targets enterprises with 250-5,000 employees, including divisions and subsidiaries of Fortune 1000 companies. The Company’s strategy is to continue to invest in new development and marketing initiatives to gain market share and further meet the needs of medium to large-sized enterprises.

Capitalize on Installed Base.    The Company intends to capitalize on its installed base by offering add-on modules, software upgrades and new products, many of which provide increased capacity and functionality.

Utilize Capabilities of Multiple Distribution Channels.    The Company targets enterprises primarily through computer-oriented value-added resellers and telephony-oriented distributors, as well as strategic partners and a global accounts sales force. The Company believes that some enterprises will evaluate business-to-business solutions from a telephony perspective while others will focus on data-centric solutions. The use of multiple distribution channels that target many of the same potential customers increases the likelihood that the Company’s products and services will be sold to a particular customer. The Company continues to broaden its distribution channels by expanding its direct enterprise relationships efforts and by continuing to enter into distribution agreements with private label OEMs and other strategic partners. The Company’s hosted e-document delivery services are primarily sold through a direct end user sales force.

Growth Through Strategic Acquisitions.    The Company believes that growth through strategic acquisitions of complementary technologies, products and distribution channels offers the potential for significant competitive advantage and from time to time the Company examines potential acquisition alternatives.

Pursue Mobile Business Solutions Market.    In March 2001, the Company announced that it was expanding its business strategy to focus on the mobile business solutions market, and particularly mobile access to

2

Table of Contents

groupware and corporate data, which the Company believed were markets likely to experience significant growth. Such growth has not materialized at the rate expected. As such, the Company intends to invest cautiously in this area until such time as management believes market adoption for such products is likely to increase to the level necessary for the Company to experience a profitable contribution.

Pursue Global Opportunities.    The Company believes that the markets for business-to-business communications solutions outside the U.S. will experience accelerated growth when the global economy stabilizes. The Company intends to invest cautiously in international opportunities given current economic conditions, but expects to increase its global presence and international investments once economic conditions outside the U.S. improve. To pursue these opportunities, the Company intends to continue to localize its products for specific markets and to actively recruit, and potentially acquire, resellers, distributors and strategic partners internationally.

Products and Services

The Company’s product lines include computer, telephony, and mobility-oriented products, which comprise the Company’s software products segment, and outsourced e-document delivery services, which comprise the Company’s services segment. Please see Note 16 to the Company’s consolidated financial statements included elsewhere in this report for financial information regarding these two segments.

The Company’s telephony-oriented product lines serve the messaging markets and focus on voice and call processing, unified messaging, and personal and workgroup call management. The Company’s computer-oriented product lines target the fax server, document delivery and information exchange markets and focus on high-performance fax processing and unified messaging, as well as Internet, corporate intranet and phone-based information access. The mobility market adds a new dimension to the Company’s unified communications offering by allowing customers to use the Company’s products to enhance productivity and to access information from a wide variety of Web-enabled devices. E-document delivery services target the outsourced mass fax and e-mail markets for time-critical business-to-business communications. These services include high-volume, instantaneous IP fax and e-mail broadcast and merge offerings, fax reply and fax-on-demand applications, as well as industry-specific services and custom workflow solutions for unique customer requirements. The following summary provides an overview of the Company’s products. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a summary of net sales by product.

Enhanced Electronic Document Delivery Products

RightFax

RightFax provides mid-sized to Fortune 1000 organizations with fax and advanced electronic document delivery solutions. The RightFax product suite offers a range of solutions that provide software for simple desktop faxing over a network to capturing high volumes of business-critical data from back-office applications and delivering it electronically to multiple recipients.

With the release of the RightFax 8.5 product line, new product bundles now offer customers simple solutions that are designed to fit their corporate IT infrastructure. As their business needs expand, clear upgrade packages make it easy for them to move beyond day-to-day faxing to automating their key business processes and optimizing workflow. This is accomplished by using the more advanced RightFax solutions that are designed to integrate with enterprise applications developed by companies such as Microsoft, IBM/Lotus, Oracle, Siebel, SAP, Xerox, Hewlett Packard and FileNet.

RightFax products allow end-users to fax any document directly from applications running on their desktop or workstation. In addition, incoming faxes can be directly routed to end user’s desktops and can also be sent from or received into their e-mail inbox. The product is designed to ensure that faxes are secure, kept confidential and to eliminate the need for individuals to walk to fax machines, wait in line, or search for faxes. The same fax system can also integrate with other critical business applications, including operational and accounting

3

Table of Contents

applications that generate documents typically printed on forms and mailed. RightFax automates this process by creating electronic images of the documents and delivering them automatically and instantaneously via fax, e-mail or over the Internet. For organizations that receive substantial amounts of inbound faxes, such as mortgage or insurance companies, these documents are received electronically and automatically routed to the intended recipient. This saves companies time and money while improving accuracy and reliability by eliminating manual processes and the expense of mailing documents. RightFax products are also designed to improve cash flow by reducing the time necessary to exchange invoices, statements and other electronic commerce documents with customers, vendors and partners.

The primary offerings in the RightFax product line include the following:

Messaging Products

CallXpress

The Company’s voice and unified messaging product offering, CallXpress, for which the current version 6.5 was released in 2002, consists of a modular offering of unified messaging solutions.

With the release of CallXpress 6.5, the Company continues to offer a clear upgrade path to meet customers’ messaging needs. CallXpress 6.5 advanced the product offering by offering additional localized product versions, additional integrations with switch offerings, a new Telephone User Interface alternative, and support for Universal PCI versions of certain voice cards.

CallXpress is a high-capacity, network-enabled voice and unified messaging system designed specifically for the enterprise market. CallXpress supports thousands of users on a single server, and integrates with over 100 PBX solutions. CallXpress supports full unified messaging for users of Microsoft Exchange or Lotus Notes. Users can access their voice, fax and e-mail messages from any telephone, desktop computer, laptop, or remote computing device, using a common interface for all message types. CallXpress delivers full call processing, voice messaging, automated attendant, and message notification capabilities companies expect from a leading messaging solution.

4

Table of Contents

CallXpress application modules consist of software programs that operate in an integrated, multi-tasking environment and are not dependent on secondary hardware processors. Modules may be purchased either at the time of initial installation or as subsequent add-ons. Additional modules include:

In addition to the CallXpress product line, the Company offers an entry-level call processing and messaging product branded as PhoneXpress Professional. PhoneXpress Professional is a call processing, voice messaging and desktop messaging solution for small businesses, scaling from 4 to 12 ports.

Mobile Business Solutions Products

Infinite Mobile Delivery

In 2002 the mobile delivery reporting unit was consolidated with the remainder of the software products group upon the closure of the Company’s office in Owings Mills, MD, which it had acquired in the Infinite Technologies acquisition. The Company invested in this acquisition and its own development efforts due to its belief that the mobility market was likely to experience significant growth. Although growth has not materialized at the rate expected, the Company believes that its mobility offerings represent a competitive differentiator and an extension of its core product offerings. The Company intends to invest cautiously in this area until such time as management believes market adoption for such products is likely to increase to the level necessary for the Company to experience a profitable contribution.

Captaris acquired Infinite Technologies in January 2001 and launched the Infinite Mobile Delivery (IMD) products to the marketplace in May 2001. The IMD family of mobile wireless products extends the reach of enterprise e-mail, groupware and other database information to Web-enabled devices to assist in increasing the productivity of employees while away from their desks. Access to e-mail, calendars, task lists and contact databases is available in real-time. Not only can users read and respond to e-mails in text, users can also listen to e-mail messages using the text-to-speech option and respond to e-mail messages with voice messages. IMD, a platform and network independent solution, extends valuable mission-critical information including CRM, ERP, legacy, and other systems and integrates with CallXpress and RightFax solutions.

IMD is comprised of software server applications that are installed and managed by the customer and located behind the corporate firewall for security and control. The Company has employed industry-standard technology to support the widest range of mobile devices, allowing customers to take advantage of existing devices and maximize their wireless hardware investments. In December 2002, the Company launched IMD 2.6, an improved version that

5

Table of Contents

includes an open data connector and enhanced messaging features. The IMD Server integrates with a variety of enterprise applications such as e-mail, calendar, contacts, tasks and company databases.

Key modules associated with the Company’s mobility offering include the following:

Infinite WAP Gateway

Infinite WAP Gateway is a scalable product designed to meet the needs of mobile operators, ISPs and enterprise markets. WAP Gateways are an essential component in WAP communications processes and a necessity for providing WAP services to customers, particularly in international markets. In addition, Infinite WAP Gateways have been purchased by financial services companies interested in managing and securing their wireless communications flow from end-to-end, by deploying the WAP Gateway behind their own corporate firewall.

Outsourced e-Document Delivery Services

MediaLinq Services

MediaLinq Services, headquartered in San Francisco, California, represents the Company’s services segment, offering e-document delivery services, primarily consisting of a broadcast fax and permission e-mail service. The Company sells this service through a direct sales force located throughout North America. MediaLinq Services’ primary offerings include the following:

6

Table of Contents

subscribe/unsubscribe, click-through tracking, bounce-back handling and on-line reporting. In 2002, new capabilities were added including multi-format e-mail, advanced tracking and reporting features and broadcast self-service functions.

MortgageExpress is a full-featured service for mortgage bankers and lenders that automates the complex rate sheet set-up and distribution process. Passwords provide selected access to regional or custom-tailored pricing scenarios. In addition, MortgageExpress customers are supported by a mortgage-industry account and customer support team, which is focused on and understands the needs of the mortgage industry.

TravelExpress is a specially designed database that allows precise, targeted marketing of promotions and travel industry news to selected travel agencies. TravelExpress consists of over 35,000 U.S. listings that can be selected on over 50 different criteria to identify specific types of travel agencies (e.g., destination specialty, annual sales volume, business or leisure focus).

7

Table of Contents

Distribution

The Company sells its products primarily through an indirect channel of resellers and distributors, as well as through direct sales, OEM and private label agreements. The Company believes that some enterprises will evaluate computer-telephony solutions from a telephony perspective, while others will be more data-focused. The use of multiple distribution channels that access many of the same potential customers increases the likelihood that the Company’s products will be sold to a particular customer.

The Company’s services segment, comprised of MediaLinq Services Group headquartered in San Francisco, California, offers its e-document delivery services primarily through direct distribution with offices located in Reston, VA, New York, NY, Chicago, IL and Newport Beach, CA.

No single customer represented 10% or more of the Company’s net sales during 2000, 2001 or 2002.

Domestic Distribution

In the U.S., the Company’s products sales force sells most of the Company’s messaging and electronic document delivery products through an indirect channel of value-added resellers, independent software vendors, and professional services companies specializing in custom systems development. These resellers are small to medium-sized, regionally focused organizations. In addition, the Company markets its products directly to end-user customers through a direct sales force and a diverse mix of direct marketing activities.

Resellers attend Company-sponsored training sessions on system usage, installation, maintenance and customer support. Advanced training is also available from the Company on an ongoing basis. All resellers are subject to agreements with the Company covering matters such as payment terms, protection of proprietary rights and non-exclusivity of sales territories. These agreements generally do not restrict the dealer’s ability to carry competitive products.

International Distribution

The Company continues to develop broad coverage of international markets through a variety of dealer, distributor, and strategic relationships. The Company is actively recruiting new resellers and distributors in international markets. The Company has sales and support offices in the United Kingdom, the Netherlands, Hong Kong, Australia and Dubai. The company conducts business transactions in US dollars, UK pounds and the Euro.

International sales were 18.8%, 20.0% and 18.2% of total net sales for 2000, 2001, and 2002, respectively. For net sales by country, see Note 16 to the Company’s consolidated financial statements included with this report.

8

Table of Contents

OEM/Strategic Accounts

The Company has a Business Development Group dedicated to managing strategic relationships. To broaden its access to certain markets, the Company has entered into distribution, private label/OEM and other strategic distribution agreements. The Company currently intends to pursue such additional agreements in the future. Such agreements enable the Company to expand market share, enhance revenue streams and increase awareness of the Company and its products by leveraging the resources of others who generally have significantly greater resources than the Company.

In January 2002, the Company entered into an original equipment manufacturing (OEM) agreement with Cisco Systems, Inc. Pursuant to this agreement, the Company granted Cisco an exclusive third-party license to certain enabling technology that is designed to enhance an enterprise customer’s ability to migrate from legacy messaging systems to Cisco’s open, Internet Protocol (IP)-based messaging architecture. The enabling software developed by the Company allows the exchange of Cisco Unity voice and fax messages in a diverse, multi-vendor environment. We currently have other OEM/strategic relationships with Ericsson, IBM (Lotus), Verizon (which the Company expects to result in revenue beginning in the second half of 2003), Xerox Corporation, and others.

Product Support

The Company’s product segment offers technical training for both telephony and computer-oriented products to its resellers. The majority of product support is provided within three months of product shipment, and the estimated cost of such support is recognized as product revenues are recorded. With respect to its messaging and mobility products, the Company generally does not provide primary support to end-users. This support is primarily handled by the Company’s distribution channel. For these products, the Company generally charges its customers separately for post-sale updates and upgrades.

The Company’s software product segment sells a variety of support packages primarily to end-users of the Company’s e-document products. Support provided is telephone-based technical support via support specialists located in the Company’s offices in Tucson, Arizona, Portland, Oregon and Bellevue, Washington. The Company recognizes revenue from the sale of these support agreements over the life of the contract and such agreements generally include product upgrades.

The Company’s services segment delivers customer support directly to end-users through a call center located in San Francisco and web-based self-service.

Product Development

The Company has established expertise in the development of systems that route, process and render a variety of message types and documents, including fax, voice, e-mail and other components of groupware. These systems handle message and document delivery spanning a wide range of input and output types. Additionally, the Company has expertise in call switching applications and other advanced telephony services, as well as in the development of LAN and Internet software applications, integrations and services. The Company believes that its expertise in these areas enables it to efficiently bring to market innovative software products that unify and exchange information between end users, business applications, telephones and computers.

The Company’s development of its product offerings is centrally coordinated in its corporate headquarters in Bellevue, Washington. The Company maintains three product development centers: Bellevue, Washington, Tucson, Arizona, and Portland, Oregon for the purpose of developing and maintaining its electronic document, messaging and mobile business solutions offerings. The Company’s services offerings are developed and managed in its San Francisco, California location. In total, the Company employed, as of December 31, 2002, 80 engineers, technicians and quality assurance specialists in its development centers. While development efforts in the past have been separate, the convergence of technologies has allowed the Company to consolidate and leverage development efforts among these groups.

9

Table of Contents

The Company internally develops its defining core technologies, but believes that it is more cost-effective to license from third parties certain components of its products, such as database software, imaging, and network connectors. Whenever practical, the Company will license and integrate such technology into its product offerings in order to decrease the cost of development and shorten the time to market. In addition, the Company also believes that the acquisition of new technology and new product offerings is consistent with its strategic initiatives and will continue to pursue such opportunities as they become available.

The Company believes that, for its product offerings to continue to achieve acceptance and remain competitive, it will be necessary to continue to develop enhanced versions of its document delivery, computer-telephony and mobile business applications. The Company expects to continue to expend significant research and development efforts in developing new technology.

The Company intends to continue to develop versions of its products that have been prepared for localization in foreign markets. This globalization effort includes converting client interfaces, documentation, and voice-prompt sets into foreign languages. The effort will also include the expansion of internal character sets to accommodate a broader set of potential foreign languages. The Company expects to continue to expend research and development resources on these efforts.

Proprietary Rights

Captaris relies on a combination of patents, copyrights, trademarks and trade secret laws, nondisclosure and other agreements, and technical measures to protect its proprietary technology. The Company owns seven U.S. patents, including one patent received in the area of unified messaging, five patents in the area of fax technology that were purchased in 2000, and one patent in the area of speech compression that was purchased in 2002. The issued patents will expire between 2014 and 2019. The Company also owns 16 pending patent applications in the U.S. and internationally in a wide range of areas, including telephony, fax, unified messaging and mobility-related messaging. There can be no assurance that the Company’s efforts to protect its proprietary rights will be successful. In particular, there can be no assurance that the Company’s current or future patent applications will be granted or that its current or future issued patents will not be challenged, invalidated or circumvented, or that the rights granted under any such patents will provide competitive advantages to the Company.

Captaris has periodically received letters and other communications from third parties asserting patent rights and requesting royalty payments. Following analysis, the Company has not believed it necessary, in most cases, to license any of the patent rights. In those cases in which the Company has determined a license of patent rights was necessary, it has entered into a license agreement. The Company believes that any necessary licenses or other rights under patents for products or features could be obtained on conditions that would not have a material adverse effect on its financial condition, results of operations or cash flows, although there can be no assurance in this regard.

The Company licenses certain portions of its technology from third parties under written agreements, some of which contain provisions for ongoing royalty payments. Total royalty expense for the Company in 2002 was less than 1% of net sales.

Competition

The business communication market is quickly evolving, highly competitive and subject to rapid technological change. Moreover, the Company expects to face increasing competitive pressures from both current and future competitors in the markets it serves. The principal competitive factors applicable to the Company’s products and services include:

10

Table of Contents

The Company’s competitive position with respect to these factors varies depending on the market. With respect to the Company’s messaging and enhanced electronic document delivery products, and e-document delivery services, the Company believes that it competes favorably in its target markets. With respect to the mobility market, which has not developed as originally anticipated, the Company’s experience in this area is less than with its other products and services. While the Company believes that its mobile products are feature-rich and compare favorably against other entrants in the mobility market, the newness of this market and the lack of market acceptance of mobility products in general, creates an increased level of uncertainty with respect to the Company’s competitive position.

Because the Company offers a wide range of products and services for several types of enterprises, it has a broad range of competitors. Many of the Company’s competitors are substantially larger than the Company and have significantly greater financial, sales, marketing, distribution, technical, manufacturing and other resources.

In the market for LAN-based fax systems, our principal competitors are Esker, S.A., ACCPAC International, Inc., TOPCALL International AG, Omtool, Ltd., Optus Software, Inc., and Biscom, Inc. Our fax server products also compete with vendors offering a range of alternative fax solutions, including operating systems containing fax and document transmission features, low-end fax modem products, desktop fax software, single-platform fax software products and customized proprietary software solutions. In the market for production fax systems, our principal competitors are Biscom, Inc., Esker, S.A. and Topcall International AG.

In the telephony-oriented market for messaging systems, our principal competitors include Avaya, Inc., Cisco Systems, Inc., Mitel Corporation, NEC America, Inc., Nortel Networks Corporation, Siemens and Callware Technologies, Inc. In addition, there are independent suppliers of computer-telephony solutions such as Cycos AG and Callware Technologies, Inc. These independent manufacturers offer integrated voice-messaging systems and unified messaging systems of their own design or under various OEM agreements.

The competitors of mobility products include Research In Motion Limited, Microsoft Corporation (Mobile Information Server-MIS), IBM Corporation (International Business Machine’s Lotus Domino Everyplace), Aether Systems, Inc., Wireless Knowledge, Fenestrae BV, Mobeon AB, and Openwave Systems, Inc.

In the e-document delivery services market, the Company’s services segment, principal competitors are the Xpedite division of PTEK Holdings, telecommunications companies who provide fax services and other regionally-based specialty providers.

Order Fulfillment

The Company’s products segment order fulfillment operations consist primarily of compact disc duplication, documentation fulfillment, and distribution of fax and voice-circuit boards. The Company contracts with outside vendors to provide full systems integration and assembly in certain product distribution situations.

The Company’s products incorporate a number of commercially available application cards, fax cards, voice cards and circuit boards that enable integration with certain telephone switches. The Company currently purchases voice cards from the Dialogic division of Intel, Natural Microsystems and Mitel Corporation. The Company purchases fax cards from Brooktrout and the Dialogic division of Intel. The Company depends upon these third-party manufacturers for voice and fax cards. If these manufacturers terminate their relationships with

11

Table of Contents

the Company or are unable to fill orders on a timely basis, or experience quality performance issues, the Company may be unable to meet customer demands, which could delay or decrease the Company’s revenue or otherwise have an adverse impact on the Company’s operations.

The Company’s services segment depends on long distance service providers to provide access to the public-switched telephone network (PSTN) and on ISP’s to provide access to the Internet.

Employees

As of December 31, 2002, the Company had 432 full-time employees, including 72 in finance and administration, 13 in order fulfillment, 80 in engineering and product development, and 267 in sales, marketing and technical support. The Company’s employees enter into agreements containing confidentiality restrictions. The Company has never had a work stoppage and no employees are represented by a labor organization. The Company considers its employee relations to be good.

In January 2002, the Company announced a reduction in force across all groups of the Company, which resulted in a reduction of approximately 90 employees or 18% of its workforce.

In October 2002, the Company announced to its employees a voluntary layoff program, which subsequently resulted in a reduction of approximately 40 employees or 9% of its workforce.

Available Information

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge on the Company’s website at http://www.captaris.com under “About—Investor Relations—SEC Filings.”

FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS,

FINANCIAL CONDITION AND MARKET PRICE OF OUR STOCK

The following factors may materially adversely affect the Company’s business, financial condition or results of operations. In that event, the trading price of the Company’s common stock could decline and shareholders may lose part or all of their investment, therefore, shareholders should carefully consider the risks described below before making an investment decision.

Our stock price may be highly volatile.

The market price of our common stock may continue to be highly volatile. The future price of our common stock may fluctuate in response to factors, involving our competitors, or us, such as

In addition, the market prices of securities issued by many companies, particularly in high-technology industries, are volatile for reasons unrelated to the operating performance of the specific companies. This industry volatility, along with broad market fluctuations may adversely affect the market price of our common stock.

12

Table of Contents

Our operating results fluctuate from quarter to quarter, which could cause our operating results to fall below expectations of securities analysts and investors.

We expect our operating results to fluctuate significantly from quarter to quarter in the future. Because of these fluctuations, our operating results for a particular quarter may fall below the expectations of securities analysts and investors. If this occurs, the trading price of our common stock may decline. Such fluctuations could cause period-to-period comparisons to be less than meaningful. Numerous factors contribute to the unpredictability of our operating results, including