UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to_____________.
Commission File Number 0-22561
J E T F A X, I N C.
(Exact name of Registrant as specified in its charter)
Delaware 77-0182451
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1378 Willow Road, Menlo Park, California 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 324-0600
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 [ ]
As of May 11, 1998 there were 11,753,405 shares of common stock, $.01 par
value, outstanding.
This Report on Form 10-Q includes 22 pages with the Index to Exhibits
located on page 20.
<PAGE>
JETFAX, INC.
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED APRIL 4, 1998
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - March 31,
1998 and December 31, 1997............................ 3
Condensed Consolidated Statements of Operations -
For the Three Months Ended March 31, 1998 and 1997.... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997............ 5
Notes to Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations.................... 8
PART II. OTHER INFORMATION
Item 5. Other Information........................................ 19
Item 6. Exhibits and Reports on Form 8-K......................... 20
Signature................................................ 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, December 31,
1998 1997 (1)
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,872 $ 7,224
Accounts receivable, net 4,254 4,820
Inventories 3,407 4,029
Prepaid expenses 256 277
---------- ---------
Total current assets 14,789 16,350
Property, net 1,268 1,160
Other assets 1,429 1,346
---------- ---------
Total assets $ 17,486 $ 18,856
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,363 $ 1,672
Accrued liabilities 2,040 1,864
--------- ---------
Total current liabilities 3,403 3,536
Deferred revenue 25 49
Stockholders' equity:
Convertible preferred stock, $0.01 par
value; 5,000,000 shares authorized,
shares outstanding: none in 1998 and 1997 -- --
Common stock, $0.01 par value; 35,000,000
shares authorized, shares outstanding:
11,742,237 in 1998 and 11,741,383 in 1997 117 117
Additional paid-in capital 42,957 42,881
Accumulated deficit (29,016) (27,727)
Total stockholders' equity 14,058 15,271
--------- ---------
Total liabilities and stockholders' equity $ 17,486 $ 18,856
========== =========
(1) Derived from the December 31, 1997 audited consolidated balance
sheet included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Product $ 6,024 $ 4,250
Software and technology license fees 1,342 633
Development fees 332 772
-------- --------
Total revenues 7,698 5,655
-------- --------
Costs and expenses:
Cost of product revenues 4,286 2,949
Cost of software and license revenues 301 150
Research and development 1,451 1,265
Selling and marketing 2,230 1,611
General and administrative 755 677
Acquisition and related expenses -- 551
-------- --------
Total costs and expenses 9,023 7,203
-------- --------
Loss from operations (1,325) (1,548)
Other income (expense):
Interest income 78 1
Interest expense (2) (15)
Other income (expense) (23) (27)
-------- --------
Total other income (expense) 53 (41)
-------- --------
Loss before income taxes (1,272) (1,589)
Provision for income taxes 17 47
-------- --------
Net loss (1,289) (1,636)
Less cumulative dividends on Series P
Redeemable Preferred Stock -- (36)
-------- --------
Net loss applicable to common stockholders $ (1,289) $ (1,672)
======== ========
Net loss per share:
Basic $ (0.11) $ (0.20)
======== ========
Diluted $ (0.11) $ (0.20)
======== ========
Shares used in computing net loss per share:
Basic 11,741 8,233
======== ========
Diluted 11,741 8,233
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, (1)
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,289) $ (1,636)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 98 78
Warrant compensation expense -- 525
Changes in assets and liabilities:
Trade receivables 566 (520)
Inventories 622 (883)
Prepaid expenses 21 (52)
Accounts payable (309) 1,351
Deferred revenue (24) 2
Accrued liabilities 252 32
-------- --------
Net cash used for operating activities (63) (1,103)
-------- --------
Cash flows from investing activities:
Purchase of property (206) (125)
Increase in other assets (83) (152)
-------- --------
Net cash used for investing activities (289) (277)
-------- --------
Cash flows from financing activities:
Proceeds from sale of Common Stock -- 3
Line of credit borrowings, net -- 1,300
Equipment term note borrowings -- (6)
Redemption of Preferred Stock - Series P, net -- 37
-------- --------
Net cash provided by financing activities -- 1,334
-------- --------
Decrease in cash and cash equivalents (352) (46)
Cash and cash equivalents, beginning of period 7,224 369
-------- --------
Cash and cash equivalents, end of period $ 6,872 $ 323
======== ========
Supplemental cash flow information:
Interest paid $ 2 $ 15
======== ========
Taxes paid - foreign withholding $ -- $ 38
======== ========
Supplemental noncash investing and financial
information:
Conversion of accrued ESPP for purchase of Common Stock $ 76
========
Cumulative dividends on Series F Convertible
and Series P Redeemable Preferred Stock $ 272
========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
JETFAX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Information
The accompanying condensed consolidated financial statements of
JetFax, Inc. and its wholly-owned subsidiaries ("JetFax" or the "Company")
as of March 31, 1998 and for the three months ended March 31, 1998 and
1997 are unaudited. In the opinion of management, the condensed financial
statements include all adjustments (consisting of normal recurring
accruals) that management considers necessary for a fair presentation of
its financial position, operating results and cash flows for the interim
periods presented. Operating results and cash flows for interim periods
are not necessarily indicative of results for the entire year.
The Company acquired DocuMagix, Inc. on December 5, 1997 in a
transaction accounted for as a pooling-of-interests. All financial data
of the Company has been restated to include the historical information of
DocuMagix, Inc.
This financial data should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Fiscal Period End
The Company uses a 52-53 week fiscal year ending on the first Saturday
on or after December 31. For presentation purposes, the Company refers
herein to the 13-week periods ended April 4, 1998 and April 5, 1997 as the
quarters ended March 31, 1998 and 1997.
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share has been computed using the
weighted average of common shares outstanding. The Company completed its
initial public offering of its common stock in June 1997. Basic and
diluted per share amounts presented for periods prior to the IPO represent
the pro forma computation including the common equivalent shares from
convertible preferred stock which converted in connection with the IPO.
Common stock equivalents from options, warrants and redeemable preferred
stock have been excluded from the computation during all periods presented
as their effect is antidilutive due to the Company's net losses. Such
options and warrants will be included, using the treasury stock method, in
periods where the Company reports net income and the average fair market
value of the Company's common stock exceeds the exercise price. The net
loss applicable to common stockholders and the shares, used for the
computation of both basic and diluted loss per share, are the same.
2. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
---------- -----------
<S> <C> <C>
Materials and supplies $ 1,370 $ 1,776
Work-in-process 566 143
Finished goods 1,471 2,110
-------- --------
Total $ 3,407 $ 4,029
======== ========
</TABLE>
6
<PAGE
3. Accrued Liabilities
<TABLE>
<CAPTION>
Accrued liabilities consist of (in thousands):
March 31, December 31,
1998 1997
---------- -----------
<S> <C> <C>
Compensation and related benefits $ 741 $ 509
Royalties 227 215
Acquisition related accruals 105 375
Product warranty 100 94
Other 867 671
-------- --------
Total $ 2,040 $ 1,864
======== ========
</TABLE>
4. EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from non-owner
sources. For the quarters ended March 31, 1998 and 1997, there were no
differences between the Company's comprehensive income and net income.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic
areas and major customers. Adoption of this statement will not impact the
Company's consolidated financial position, results of operations or cash
flows. The Company will adopt this statement in its financial statements
for the year ending December 31, 1998.
7
<PAGE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the ''Securities Act'') and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"),
including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. When used herein, the words
''may,'' ''will,'' ''expect,'' ''anticipate,'' ''continue,'' ''estimate,''
''project,'' ''intend'' and similar expressions are intended to identify
forward-looking statements within the meaning of the Securities Act and the
Exchange Act. Forward-looking statements include: statements regarding
events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, results of operations and
financial position. All forward-looking statements included in this
document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to
risks and uncertainties and that actual results may differ materially from
those included within the forward-looking statements as a result of various
factors. These forward-looking statements are made in reliance upon the
safe harbor provision of The Private Securities Litigation Reform Act of
1995. Factors that could cause or contribute to such differences include,
but are not limited to, those described below, under the heading "Factors
That May Affect Operating Results" and elsewhere in this Report on Form 10-
Q.
The Company was incorporated in Delaware in August 1988 and since that
time has engaged in the development, manufacture and sale of its branded
multifunction products (''MFPs'') which consist of electronic office
devices that combine print, fax, copy and scan capabilities in a single
unit. The Company also entered into agreements with manufacturers ("OEMs")
of MFPs for the customization and integration of the Company's embedded
system technology and desktop software in several OEM products.
Effective December 31, 1996, the Company changed its fiscal year end
from March 31 to a 52-53 week reporting year ending on the first Saturday
on or following December 31. The 13-week periods from January 4, 1998 to
April 4, 1998 and from January 5, 1997 to April 5, 1997 are referred to
herein as the quarters ended March 31, 1998 and March 31, 1997,
respectively.
The Company's revenues are derived from three sources: (i) product
revenues consisting of sales of JetFax branded MFPs, consumables and
upgrades; (ii) software and technology license fees related to both its
embedded system technology for MFPs and its desktop software.; and (iii)
development fees for engineering services. Historically, product revenues
have accounted for the majority of the Company's total revenues. For the
quarter ended March 31, 1998, product revenues, software and technology
fees, and development fees as a percentage of total revenues, were 78%,
18%, and 4%, respectively, as compared to 75%, 11%, and 14% for the
comparable period in the prior year.
The Company in the past has experienced, and in the future may
experience, significant fluctuations in quarterly operating results that
have been or may be caused by many factors including: the timing of
introductions of new products or product enhancements; initiation or
termination of arrangements between the Company and significant OEM
customers or dealers and distributors; and the size and timing of and
fluctuations in end user demand: currency fluctuations; and general
economic conditions. The Company expects that its operating results will
continue to fluctuate significantly as a result of these and other factors.
Results of Operations
The following table sets forth certain items in the Company's
statements of operations for the periods indicated (in thousands).
8
<PAGE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Product $ 6,024 $ 4,250
Software and technology license fees 1,342 633
Development fees 332 772
-------- --------
Total revenues 7,698 5,655
-------- --------
Costs and expenses:
Cost of product revenues 4,286 2,949
Cost of software and license revenues 301 150
Research and development 1,451 1,265
Selling and marketing 2,230 1,611
General and administrative 755 677
Acquisition and related expenses -- 551
-------- --------
Total costs and expenses 9,023 7,203
-------- --------
Loss from operations (1,325) (1,548)
Other income (expense), net 53 (41)
-------- --------
Loss before income taxes (1,272) (1,589)
Provision for income taxes 17 47
-------- --------
Net loss $ (1,289) $ (1,636)
======== ========
</TABLE>
The following table sets forth, as a percentage of total revenues,
certain items in the Company's statements of operations for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- -------
<S> <C> <C>
Revenues:
Product 78.3% 75.2%
Software and technology license fees 17.4 11.2
Development fees 4.3 13.6
-------- --------
Total revenues 100.0% 100.0%
-------- --------
Costs and expenses:
Cost of product revenues 55.7 52.1
Cost of software and license revenues 3.9 2.7
Research and development 18.8 22.4
Selling and marketing 29.0 28.5
General and administrative 9.8 12.0
Acquisition and related expenses -- 9.7
-------- --------
Total costs and expenses 117.2 127.4
-------- --------
Loss from operations (17.2) (27.4)
Other income (expense), net 0.7 (0.7)
-------- --------
Loss before income taxes (16.5) (28.1)
Provision for income taxes 0.2 0.8
-------- --------
Net loss (16.7)% (28.9)%
======== ========
</TABLE>
9
<PAGE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The results for all periods presented include the consolidation of
DocuMagix, Inc., which was acquired through a pooling of interests
transaction that closed December 5, 1997. (See Note 2 of Notes to
Consolidated Financial Statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.)
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
Revenues. Total revenues increased to $7.7 million for the quarter
ended March 31, 1998, a 36% increase from $5.7 million of revenue in both
the quarters ended March 31, 1997 and December 31, 1997. Product revenues
advanced 42% for the quarter to $6.0 million from $4.2 million in the same
quarter of the prior year and rose 50% from $4.0 million in the preceding
quarter. All elements of product revenues rose strongly in the quarter
ended March 31, 1998 as MFPs, consumables, and upgrades increased 43%, 30%,
and 31%, respectively, from the year ago quarter and 61%, 23%, and 63%,
respectively, from the preceding quarter.
Software and technology licensing fees increased 112% to $1.3 million
for the quarter ended March 31, 1998 from $633,000 for the quarter ended
March 31, 1997. The year ago period had no royalties from Hewlett-
Packard, while for quarter ended March 31, 1998 the Company recognized
revenue from royalties which had been prepaid in earlier quarters from the
H-P LaserJet 3100, as well as per unit royalties from the inclusion of:
1) the Company's PaperMaster software with the H-P SureStore CD-Writer,
which began shipping in February 1998 and 2) the MFP controller design
and JetSuite software with the H-P LaserJet 3100, which began shipping in
March 1998. International revenues decreased to 16% of total revenues for
the quarter ended March 31, 1998 from 21% for the comparable period in
1997, due to the large increase in domestic product sales in the quarter
ended March 31, 1998.
Development fees fell 57% to $332,000 for the quarter ended March 31,
1998 from $772,000 in the same quarter of the prior year. The major
development milestones on the Hewlett-Packard contract were completed
during 1997, which led to reduced development revenue recognized during
the most recent quarter, as the revenue stream converted to royalties
rather than development fees. The Company had previously reported delays
on completion of the last milestone of a development agreement with one of
its OEM's. All work under the contract has been completed and the Company
has been paid in full.
Two customers, Hewlett-Packard and IKON Office Solutions, accounted
for $1.7 million (22%) and $1.5 million (20%), respectively, of total
revenues for the quarter ended March 31, 1998. One of the customers, IKON
Office Solutions, accounted for $1.8 million (15%) of total revenues for
the quarter ended March 31, 1997.
Cost of Product Revenues. Cost of product revenues increased 45%
to $4.3 million from $2.9 million for the quarter ended March 31, 1998
from the same quarter in the prior year. The product gross margins
decreased to 28.9% for the quarter ended March 31, 1998 from 30.6% for the
year ago period. The reduced cost of the Series M900 MFPs over the
preceding M5 product line has partially offset the 10-15% average selling
price erosion over the past year.
The Company purchases print engines for its new Series M900 product
line in Yen from Oki Data Corporation. In order to reduce the potential
volatility related to the ongoing Yen liability, the Company entered into
a Yen hedge in August 1997, which generated a loss of $30,000 for the
quarter ended March 31, 1998 that was included in cost of goods sold.
This loss somewhat counteracted the benefit of purchasing the print
engines in a currency which is declining in value versus the dollar. The
Yen hedge reduces foreign exchange gains or losses that would otherwise
result from changes in foreign currency exchange rates., but there can be
no assurance that these strategies will be effective or that transaction
losses can be minimized or forecasted accurately.
Cost of Software and License Revenues. Cost of software and
license revenues of $301,000 in the 1998 first quarter rose 101% from
$150,000 in the first quarter of 1997. The higher level of expenses
resulted from increased amortization of purchased technology and purchase
of external engineering services.
Research and Development. Research and development expenses
increased 15% to $1.5 million for the quarter ended March 31, 1998 from
$1.3 million for the quarter ended March 31, 1997. As a percentage of
revenues, research and development expenses decreased to 18.8% for the
1998 first quarter from 22.4% for the corresponding year ago quarter.
10
<PAGE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Average headcount during the first quarter of 1998 was 32% higher than
during the first quarter of 1997, as the Company built up its technical
infrastructure to handle ongoing development programs. Partially
offsetting the headcount increase, non-personnel charges for prototypes,
outside consulting and services, materials and supplies, and travel were
reduced, as was the overall research and development expense for the
DocuMagix software operation.
Selling and Marketing. Selling and marketing expenses increased
38% to $2.2 million for the quarter ended March 31, 1998 from $1.6 million
for the comparable quarter in the prior year. Headcount was relatively
flat while there was an incremental rise in non-personnel marketing
expenses due to higher dealer incentives related to the increased product
shipments and additional expenses related to international sales. As a
percentage of revenues, selling and marketing expenses increased slightly
to 29.0% for the quarter ended March 31, 1998 from 28.5% for the
comparable period of 1997.
General and Administrative. General and administrative expenses
increased 12% to $755,000 in the quarter ended March 31, 1998 from
$677,000 in the comparable 1997 quarter. As a percentage of revenues,
general and administrative expenses declined to 9.8% for the first quarter
of 1998 from 12.0% for the year ago quarter. Headcount increased slightly
from the year ago period. General and administrative expenses related to
DocuMagix operations for the quarter ended March 31, 1998 were
substantially reduced from the year ago quarter, while expenses related to
the Company's annual report, Form 10-K, proxy, and director and officer
liability insurance were all incremental to the year ago quarter, which
was prior to the Company being public.
Acquisition Charges and Related Expense. Acquisition charges in
1997 related to the purchase of substantially all the assets of the
Crandell Group, Inc. in July 1996. There were no acquisition related
charges in the quarter ended March 31, 1998, while such charges of
$551,000 in the first quarter of 1997 were due to the Crandell Group
acquisition and consisted of $525,000 for a variable equity award
classified as compensation and $26,000 associated with royalties related
to the continuing employment of the founders.
Interest and Other Income (Expense). Interest and other income
(expense) was income of $53,000 for the quarter ended March 31, 1998
compared with expense of $41,000 for the comparable quarter of the prior
year. Net interest income and foreign exchange loss were $76,000 and
$22,000, respectively, for the quarter ended March 31, 1998. Net interest
expense, foreign exchange loss, and other expense were $14,000, $20,000,
and $6,000 respectively, for the quarter ended March 31, 1997.
Provision for Income Taxes. Due to the Company's net losses,
there was no provision for federal or state income taxes for the quarters
ended March 31, 1998 and 1997, respectively. The $17,000 and the $47,000
income tax provisions for the first quarter of 1998 and 1997,
respectively, were related to foreign withholding taxes on certain
development fees and state franchise taxes.
Net loss. The Company reported a net loss for the quarter ended
March 31, 1998 of $1.3 million or $0.11 per share compared to a net loss
of $1.6 million for the comparable period in the prior year. The revenue
increase in the first quarter 1998 from the year ago quarter was primarily
related to growth in the lower margin product revenues. The additional
gross profit in the first quarter of 1998 was partially offset by higher
operating expenses, though the year ago quarter included acquisition and
related charges not repeated in 1998. The differential in net loss per
share for the quarter ended March 31, 1998 compared to the quarter ended
March 31, 1997 was accentuated versus the net loss for such periods due to
the Company having fewer shares outstanding prior to the initial public
offering.
Liquidity and Capital Resources
The Company has financed its operations to date principally through
private placements of debt and equity securities, proceeds from borrowings
under a bank line of credit, debt associated with the Crandell Acquisition,
and most recently, its initial public offering of common stock declared
effective on June 10, 1997. The total amount of equity raised through
March 31, 1998 was $43 million through a series of private financing rounds
at both JetFax and DocuMagix, as well as the Company's June 1997 initial
public offering.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
At March 31, 1998, the Company had $1.5 million available under its bank
credit facility under which there were no borrowings at March 31, 1998.
This lending facility is collateralized by substantially all of the
Company's assets. The maximum amount available under the line of credit is
the lesser of $1.5 million or 80% of the Company's eligible outstanding
domestic accounts receivable. The revolving line of credit was
renegotiated on September 17, 1997, terminates on August 23, 1998, and is
subject to renegotiation at that time. The line of credit contains certain
covenants which include the requirements that the Company maintain tangible
net worth (as defined) of $3.0 million, quarterly net income, a quick ratio
of at least 1.0 to 1.0, a maximum debt to net worth ratio (as defined) of
1.5 to 1.0, and certain minimum liquidity and debt service coverage. In
addition, the agreement prohibits the payment of cash dividends. The
Company was in compliance with all such covenants at March 31, 1998, except
the quarterly net income covenant for which the Company received a waiver
through March 31, 1998 and is currently in the process of obtaining a
further waiver to June 30, 1998.
The Company's working capital decreased by $1.4 million to $11.4
million as of March 31, 1998 from $12.8 million as of December 31, 1997.
Cash and short term investments decreased modestly to $6.9 million at March
31, 1998 from $7.2 million at December 31, 1997. Inventories of $3.4
million at March 31, 1998 decreased from $4.0 million at December 31, 1997,
resulting primarily from a sharp reduction of finished goods inventory.
Collection of development fees and prepaid royalties caused a reduction of
accounts receivable to $4.3 million at March 31, 1998 from $4.8 million at
December 31, 1997. Accounts payable decreased to $1.4 million at March 31,
1998 from $1.7 million at December 31, 1997, primarily resulting from a
reduction in the DocuMagix payables and lower payables related to the
reduced inventory levels.
Investing activities for the three months ended March 31, 1998 used
$289,000 of cash: $206,000 for property purchases, and $83,000 for
investment in other assets.
The Company currently believes that the its cash and equivalents,
together with available borrowings under its line of credit, and funds from
current and anticipated operations, will be sufficient to meet the
Company's working capital and capital expenditure requirements for the next
twelve months. If the Company acquires one or more businesses or products,
the Company's capital requirements could increase substantially. In the
event of such an acquisition or should any unanticipated circumstances
arise which significantly increase the Company's capital requirements,
there can be no assurance that necessary additional capital will be
available on terms acceptable to the Company, if at all.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the ''Securities Act'') and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"),
including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. When used herein, the words
''may,'' ''will,'' ''expect,'' ''anticipate,'' ''continue,'' ''estimate,''
''project,'' ''intend'' and similar expressions are intended to identify
forward-looking statements within the meaning of the Securities Act and the
Exchange Act. Forward-looking statements include: statements regarding
events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, results of operations and
financial position. All forward-looking statements included in this
document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to
risks and uncertainties and that actual results may differ materially from
those included within the forward-looking statements as a result of various
factors. These forward-looking statements are made in reliance upon the
safe harbor provision of The Private Securities Litigation Reform Act of
1995. Factors that could cause or contribute to such differences include,
but are not limited to, those described below, under the heading "Factors
That May Affect Operating Results" and elsewhere in this Report on Form 10-
Q.
The Company operates in a dynamic and rapidly changing environment
that involves numerous risks and uncertainties. The following section
lists some, but not all, of those risks and uncertainties which may have a
material adverse effect on the Company's business, financial condition or
results of operations. This section should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and Notes thereto
included in Part I -
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Item 1 of this Quarterly Report on Form 10-Q and the audited Consolidated
Financial Statements and Notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year
ended December 31, 1997, contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
History of Operating Losses; Accumulated Deficit. The Company had
annual net losses since inception. The Company's historical losses and
certain preferred stock dividends have resulted in an accumulated deficit
of approximately $29.0 million as of March 31, 1998. There can be no
assurance that the Company will achieve profitability on a quarterly or
annual basis in the future.
Potential Fluctuations in Quarterly Results. The Company in the past
has experienced, and in the future may experience, significant fluctuations
in quarterly operating results that have been or may be caused by many
factors including: the timing of introductions of new products or product
enhancements by the Company, its OEMs and their competitors; initiation or
termination of arrangements between the Company and its existing and
potential significant OEM customers or dealers and distributors; the size
and timing of and fluctuations in end user demand for the Company's branded
products and OEM products incorporating the Company's technology;
inventories of the Company's branded products or products incorporating the
Company's technology carried by the Company, its distributors or dealers,
its OEMs or the OEMs' distributors that exceed current or projected end
user demand; the phase-out or early termination of the Company's branded
products or OEM products incorporating the Company's technology; the amount
and timing of development agreements, one-time software licensing
transactions and recurring licensing fees; non-performance by the Company,
its suppliers or its OEM or other customers pursuant to their plans and
agreements; seasonal trends; competition and pricing; customer order
deferrals and cancellations in anticipation of new products or product
enhancements; industry and technology developments; changes in the
Company's operating expenses; software and hardware defects; product delays
or product quality problems; currency fluctuations; and general economic
conditions. The Company expects that its operating results will continue to
fluctuate significantly as a result of these and other factors. A
substantial portion of the Company's operating expenses is related to
personnel, development of new products, marketing programs and facilities.
The level of spending for such expenses cannot be adjusted quickly and is
based, in significant part, on the Company's expectations of future
revenues and anticipated OEM commitments. If such commitments do not result
in revenues or operating expenses are significantly higher, the Company's
business, financial condition and results of operations will be adversely
affected, which could have a material adverse effect on the price of the
Company's Common Stock.
Furthermore, the Company has often recognized a substantial portion of
its revenues in the last month of a quarter, with such revenues frequently
concentrated in the last weeks or days of a quarter. The Company's branded
products are primarily sold through dealers, and such dealers often place
orders for products at or near the end of a quarter. As a result, because
one or more key orders that are scheduled to be booked and shipped at the
end of a quarter may be delayed until the beginning of the next quarter or
cancelled, revenues for future quarters are not predictable with any
significant degree of accuracy. For these and other reasons, the Company
believes that period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indicators of
future performance. It is likely that in future quarters, the Company's
operating results, from time to time, will be below the expectations of
public market analysts and investors, which could have a material adverse
effect on the price of the Company's Common Stock.
The accuracy of quarterly license revenues from OEMs reported by the
Company has been, and the Company believes will continue to be, dependent
on the timing and accuracy of product sales reports received from the
Company's OEMs. These reports are provided only on a quarterly basis (which
may not coincide with the Company's quarter) and are subject to delay and
potential revision by the Company's OEMs. Therefore, the Company is
required to estimate all of the recurring license revenues from OEMs for
each quarter. As a result, the Company will record an estimate of such
revenues prior to public announcement of the Company's quarterly results.
In the event the product sales reports received from the Company's OEMs are
delayed or subsequently revised, the Company may be required to restate its
recognized revenues or adjust revenues for subsequent periods, which could
have a material adverse effect on the Company's business, financial
condition and results of operations and the price of the Company's Common
Stock.
Dependence on the MFP Market. The market for MFPs is relatively new
and rapidly evolving. The Company's future success is dependent to a
significant degree upon broad market acceptance of the type of MFPs on
which the Company is focusing its development efforts. This success will be
dependent in part on the ability of the Company and its
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OEM customers to develop MFPs that provide the functionality, performance,
speed and connectivity demanded by the market at acceptable price points
and to convince end users to broadly adopt MFPs for office and home office
use. There can be no assurance that the market for MFPs will continue to
develop, that the Company and its OEM customers will be successful in
developing MFPs that gain broad market acceptance, that the Company will be
able to offer in a timely manner its embedded system technology, branded
products or desktop software or that the Company's OEM customers will
choose the Company's technology for use in their MFPs. The failure of any
of these events to occur would have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with Change in Focus of the Company's Business. The
Company has historically focused primarily on the development, manufacture
and sale of its branded MFPs and currently derives a substantial portion of
its revenues from the sale of its branded MFPs. The Company expects that
its revenue growth will be dependent, in part, on increased licensing of
the Company's embedded system technology and desktop software products.
However, there can be no assurance that the Company will realize growth in
revenues from sales and licensing of its embedded system technology or
desktop software. If such growth in revenues does not occur and if revenues
from the sale of the Company's branded MFPs were not to continue at past
growth rates, due either to a change in the Company's deployment of
resources or otherwise, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with Increased Focus on PC Software Business. The
Company expects that its business, financial condition and results of
operations will be more dependent on sales of its PC software for JetSuite
MFP desktop and PaperMaster personal document handling, which will be sold
both separately and bundled with the Company's branded products and
embedded system technology. The Company's on-going ability to develop its
MFP desktop software products business will depend upon several factors,
including, but not limited to, the commercial acceptance of the Company's
MFP desktop software products, upgrades and add-on software products, the
ability of the Company's personnel and distribution channels to sell and
support MFP desktop software products and the Company's ability to continue
to integrate the recent acquisition of DocuMagix, Inc. into the Company.
Because the market for MFP desktop software products is new and emerging,
there can be no assurance that a significant market, if any, will develop
for sales of the Company's MFP desktop software products, or for sales of
upgrades and add-on software products, and such a failure would likely have
a material adverse effect on the Company's MFP desktop software products
business. There can be no assurance that the Company's PC software products
business will be successful. Any failure by the Company to develop a
successful PC software products business would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Dependence on Dealers and Distributors. The Company has derived a
substantial portion of its revenues from sales of its branded MFPs through
dealers and distributors. The Company expects that sales of these products
through its dealers and distributors will continue to account for a
substantial portion of its revenues for the foreseeable future. The Company
currently maintains distribution relationships with dealers associated with
IKON Office Solutions (formerly Alco Standard), a national group of office
equipment dealers (''IKON''). The Company has also derived substantial
sales to A. Messerli AG (''Messerli''), one of the Company's office
equipment dealers located in Switzerland. Each of the Company's dealers and
distributors can cease marketing the Company's products with limited notice
and with little or no penalty. There can be no assurance that the Company's
dealers and distributors will continue to offer the Company's products or
that the Company will be able to recruit additional or replacement dealers
and distributors. The loss of one or more of the Company's major dealers
and distributors could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
dealers and distributors also offer competitive products manufactured by
third parties. There can be no assurance that the Company's dealers and
distributors will give priority to the marketing of the Company's products
as compared to its competitors' products. Any reduction or delay in sales
of the Company's products by its dealers and distributors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on OEMs. The Company has derived a significant portion of
its revenues from licensing of its embedded system technology and software
and from development services to OEMs. The Company currently has OEM
relationships with Hewlett-Packard Company (''Hewlett-Packard''), Oki Data
Corporation (''Oki Data''), and Samsung Electronics Corporation
(''Samsung''). The Company anticipates that a significant portion of its
revenues will be derived from OEMs in the future and that the Company's
revenues will be increasingly dependent upon, among other things, the
ability and willingness of OEMs to timely develop and promote MFPs that
incorporate the Company's technology. The
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ability and willingness of these OEMs to do so is based upon a number of
factors, such as the timely development by the Company and the OEMs of new
products with additional functionality, increased speed and enhanced
performance at acceptable prices to end users; development costs of the
OEMs; licensing and development fees of the Company; compatibility with
emerging industry standards; technological advances; intellectual property
issues; general industry competition; and overall economic conditions. Many
of these factors are beyond the control of the Company and its OEMs. Many
OEMs, including some of the Company's OEM customers, are concurrently
developing and promoting MFPs that do not incorporate the Company's
technology. In such cases, the OEMs may have profitability or other
incentives to promote internal solutions or competing products in lieu of
products incorporating the Company's technology. No assurance can be given
as to the ability or willingness of the Company's OEMs to continue
developing, marketing and selling products incorporating the Company's
technology. For example, the Company no longer receives royalties from the
Xerox WorkCenter 250 MFP, which incorporated the Company's embedded system
technology, as Xerox has ceased production of that model due to the product
reaching the end of its life cycle and pricing pressures from competitors'
products. The loss of any of the Company's significant OEMs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Technological Change. The market for the
Company's products and services is characterized by rapidly changing
technology, evolving industry standards and needs, and frequent new product
introductions. The Company currently derives all of its revenues from the
sale of its branded MFPs and related consumables, the licensing of its
technology and software, and the provision of related development services.
The Company anticipates that these sources of revenues will continue to
account for substantially all of its revenues for the foreseeable future.
The market expects the Company and its OEMs to develop and release, in a
regular and timely manner, new MFPs with better performance and improved
features at competitive price points. As the complexity of product
development increases and the expected time-to-market continues to
decrease, the risk and difficulty in meeting such schedules increase as
well as the costs to the Company and its OEMs. In addition, the Company,
its OEMs and their competitors, from time to time, may announce new
products, capabilities or technologies that may replace or shorten the life
cycles of the Company's branded products and software and the OEM products
incorporating the Company's technology. The Company's success will depend
on, among other things, market acceptance of the Company's branded
products, software and embedded system technology and the demand for MFPs
by the Company's OEM customers; the ability of the Company and its OEM
customers to respond to industry changes and market demands in a timely
manner; achievement of new design wins by the Company in the Company's
development of its branded products as well as the OEMs' development of
associated new MFPs; the ability of the Company and its OEM customers to
reduce production costs; and the regular and continued introduction of new
and enhanced technology, services and products by the Company and its OEMs
on a timely and cost-effective basis. There can be no assurance that the
products and technology of competitors of the Company or its OEMs will not
render the Company's branded products, technology, software or its OEMs'
products noncompetitive or obsolete. Any failure by the Company or its OEMs
to anticipate or respond adequately to the rapidly changing technology and
evolving industry standards and needs, or any significant delay in
development or introduction of new and enhanced products and services,
could result in a loss of competitiveness or revenues, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Reliance on Limited Product Line. The Company has been primarily
engaged in the development, manufacture and sale of MFPs and related
technology and has derived a substantial portion of its revenues from sales
of its branded MFPs and consumables. Dependence on a single product line
makes the Company particularly vulnerable to the successful introduction of
competitive products. The Company currently derives a substantial portion
of its branded product revenues from sales of the Series M900. Sales of the
Series M900 began shipping commercially in the third quarter of 1997. A
reduction in demand for the Series M900, or the Company's failure to timely
introduce its next MFP, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with Product Development and Introduction; Product
Delays. The Company's future success is dependent to a significant degree
on its ability to further develop its embedded system technology and
software for MFPs in the time frame required by its OEM and other customers
and to develop technology with the quality, speed and other specifications
required by its OEM and other customers. The Company in the past has
experienced delays in product development, and the Company may experience
similar delays in the future. Prior delays have resulted from numerous
factors such as changing OEM product specifications, delays in receiving
necessary components, difficulties in hiring and retaining necessary
personnel, difficulties in reallocating engineering resources and other
resource limitation difficulties
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
with independent contractors, changing market or competitive product
requirements and unanticipated engineering complexity. The Company
experienced delays in one of its development projects in the past which
resulted in delays in receiving payment. In addition, the Company's
software and hardware have in the past, and may in the future, contain
undetected errors or failures that become evident upon product introduction
or as product production volumes increase. There can be no assurance that
errors will not be found; that the Company will not experience problems or
delays in meeting the delivery schedules for or in the acceptance of
products by the Company's OEMs or other customers; that there will not be
problems or delays in shipments of the Company's branded products or OEMs'
products; or that the Company's new products and technology will meet
performance specifications under all conditions or for all anticipated
applications. Given the short product life cycles in the MFP market, any
delay or difficulty associated with new product development, introductions
or enhancements could have a material adverse effect on the Company's
business, financial condition and results of operations.
Highly Competitive Industry. The market for MFPs and related
technology and software is highly competitive and characterized by
continuous pressure to enhance performance, to introduce new features and
to accelerate the release of new products. The Company's branded products
compete primarily with the dominant vendors in the fax market, all of whom
have substantially greater resources than the Company and include, among
others, Canon Inc., Panasonic, a division of Matsushita Electrical
Industrial Co., Ltd., Pitney Bowes Inc., Ricoh Co. Ltd., Sharp Electronics
Corporation and Xerox. The Company also competes on the basis of vendor
name and recognition, technology and software expertise, product
functionality, development time and price.
The Company's technology, development services and software primarily
compete with solutions developed internally by OEMs. Virtually all of the
Company's OEMs have significant investments in their existing solutions and
have the substantial resources necessary to enhance existing products and
to develop future products. These OEMs have or may develop competing
multifunction technologies and software which may be implemented into their
products, thereby replacing the Company's proposed or current technologies,
eliminating a need for the Company's services and products to these OEMs.
The Company also competes with technologies, software and development
services provided in the MFP market by other systems and software suppliers
to OEMs. With respect to MFP embedded system technologies, the Company
competes with, among others, Peerless Systems Corporation, Personal
Computer Products, Inc. and Xionics Document Technologies, Inc. With
respect to desktop software, the Company competes with, among others, Caere
Corporation, Simplify Development Corporation, Smith Micro Software, Inc.,
Visioneer Inc., Wordcraft International and Xerox.
As the MFP market continues to develop, the Company expects that
competition and pricing pressures will increase from OEMs, existing
competitors and other companies that may enter the Company's existing or
future markets with similar or substitute products or technologies.
Software solutions may also be introduced by competitors that are less
costly or provide better performance or functionality. The Company
anticipates increasing competition for its MFPs, technologies and software
under development. Most of the Company's existing competitors, many of its
potential competitors and all of the Company's OEMs have substantially
greater financial, technical, marketing and sales resources than the
Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the price of its branded
products, to reduce the amount of royalties received on new licenses and to
reduce the fees for its development services in order to maintain existing
business and generate additional product sales and license and development
revenues, which could reduce profit margins and result in losses and a
decrease in market share. No assurances can be given as to the ability of
the Company to compete favorably with the internal development capabilities
of its current and prospective OEM customers or with other third-party
vendors, and the inability to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
Effect of Rapid Growth on Existing Resources; Potential Acquisitions.
The Company has grown rapidly in recent years. A continuing period of rapid
growth could place a significant strain on the Company's management,
operations and other resources. The Company's ability to manage its growth
will require it to continue to invest in its operational, financial and
management information systems, procedures and controls, and to attract,
retain, motivate and effectively manage its employees. There can be no
assurance that the Company will be able to manage its growth effectively
and to successfully utilize the current management information system, and
failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company may, from time to time, pursue the acquisition of other
companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely
affect the Company's operating results, including the diversion of
management's attention, the assimilation of the operations and personnel of
the acquired companies, the amortization of acquired intangible assets and
the potential loss of key employees. JetFax has no present commitments nor
is it engaged in any discussions or negotiations with respect to possible
acquisitions. No assurance can be given that any acquisition by the Company
will not materially and adversely affect the Company or that any such
acquisition will enhance the Company's business.
Dependence on Outside Suppliers; Dependence on Sole Source Suppliers.
The Company relies on various suppliers of components for its products.
Many of these components are standard and generally available from multiple
sources. However, there can be no assurance that alternative sources of
such components will be available at acceptable prices or in a timely
manner. The Company generally buys components under purchase orders and
does not have long-term agreements with its suppliers. Although alternate
suppliers may be readily available for some of these components, for other
components it could take an undetermined amount of time to qualify a
replacement supplier and order and receive replacement components. The
Company does not always maintain sufficient inventory to allow it to fill
customer orders without interruption during the time that would be required
to obtain an adequate supply of single sourced components. Although the
Company believes it could develop other sources for single source
components, no alternative source currently exists and the process could
take several months or longer. Therefore, any interruption in the supply of
such components could have a material adverse effect on the Company's
business, financial condition and results of operations.
Many of the components used in the Company's products are purchased
from suppliers located outside the United States. Foreign manufacturing
facilities are subject to risk of changes in governmental policies,
imposition of tariffs and import restrictions and other factors beyond the
Company's control. There can be no assurance that United States or foreign
trading policies will not restrict the availability of components or
increase their cost. Any significant increase in component prices or
decrease in component availability could have a material adverse effect on
the Company's business, financial condition and results of operations.
Certain components used in the Company's products are available only
from one source. The Company is dependent on Oki America, Inc. (''Oki
America''), as the supplier of major components, including the printer
engine, of the Series M900. Oki America is also a competitor of the
Company. The Company is also dependent on American Microsystems, Inc.
(''AMI'') to provide unique application specific integrated circuits
(''ASICs'') incorporating the Company's imaging and logic circuitry,
Motorola, Inc. (''Motorola'') to provide microprocessors, Pixel Magic,
Inc., a subsidiary of Oak Technology, Inc. (''Pixel''), to provide a
specialized imaging processor and Rockwell Semiconductor Systems
(''Rockwell'') to provide modem chips. If Oki America, AMI, Motorola, Pixel
or Rockwell were to limit or reduce the sale of such components to the
Company, or if such suppliers were to experience financial difficulties or
other problems which prevented them from supplying the Company with the
necessary components, it could have a material adverse effect on the
Company's business, financial condition and results of operations. These
sole source providers are subject to quality and performance issues,
materials shortages, excess demand, reduction in capacity and/or other
factors that may disrupt the flow of goods to the Company or its customers
and thereby adversely affect the Company's business and customer
relationships. Any shortage or interruption in the supply of any of the
components used in the Company's products, or the inability of the Company
to procure these components from alternate sources on acceptable terms,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Intellectual Property Rights; Risk of Infringement.
The Company's success is heavily dependent upon its proprietary technology.
To protect its proprietary rights, the Company relies on a combination of
copyright, trade secret and trademark laws and nondisclosure and other
contractual restrictions. The Company has no patents or patent applications
pending. As part of its confidentiality procedures, the Company generally
enters into nondisclosure agreements with its employees, consultants, OEMs
and strategic partners and limits access to and distribution of its
designs, software and other proprietary information. Despite these efforts,
the Company may be unable to effectively protect its proprietary rights
and, in any event, enforcement of the Company's proprietary rights may be
expensive. The Company's source code also is protected as a trade secret.
However, the Company from time to time licenses portions of its source code
and designs to OEMs and also places such source code and designs in escrow
to be released to OEMs in certain circumstances, which subjects the Company
to the risk of unauthorized use or misappropriation despite the contractual
terms restricting disclosure. In addition, it may be possible for
unauthorized third parties to copy the Company's products
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
or to reverse engineer or obtain and use the Company's proprietary
information. Further, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the
United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
As the number of patents, copyrights, trademarks and other
intellectual property rights in the Company's industry increases, products
based on the Company's technology increasingly may become the subject of
infringement claims. The Company has in the past received communications
from third parties asserting that the Company's trademarks or products
infringe the proprietary rights of third parties or seeking indemnification
against such infringement. The Company is generally required to agree to
indemnify its OEMs from third party claims asserting such infringement.
There can be no assurance that third parties will not assert infringement
claims against the Company or its OEMs in the future. Any such claims,
regardless of merit, could be time consuming, result in costly litigation,
cause product shipment delays or require the Company to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required,
may not be available on terms acceptable to the Company, or at all, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company may initiate
claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims,
whether or not such litigation is determined in favor of the Company, could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from daily operations. In
addition, the Company may lack sufficient resources to initiate a
meritorious claim. In the event of an adverse ruling in any litigation
regarding intellectual property, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing or substituted technology. The failure of the
Company to develop, or license on acceptable terms, a substitute technology
could have a material adverse affect on the Company's business, financial
condition and results of operations.
Dependence on Key Personnel. The Company is largely dependent upon
the skills and efforts of its senior management, particularly Edward R.
Prince, III (''Rudy Prince''), its President and Chief Executive Officer,
and Lon Radin, its Vice President of Engineering, and other officers and
key employees, some of whom only recently have joined the Company. The
Company maintains key person life insurance policies on Rudy Prince and Lon
Radin. None of the Company's officers or key employees, other than Michael
Crandell, Vice President of Software, are covered by an employment
agreement with the Company. The Company believes that its future success
will depend in large part upon its ability to attract and retain highly
skilled engineering, managerial, sales, marketing and operations personnel,
many of whom are in great demand. Competition for such personnel,
especially engineering, has recently increased significantly. The loss of
key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect on the Company's business, financial
condition and results of operations.
International Activities. Revenues from sales to the Company's
customers outside the United States account for a substantial portion of
the Company's total revenues. The Company expects that revenues from
customers located outside the United States may increase in both absolute
dollars and as a percentage of total revenues in the future. The
international market for the Company's branded products and products
incorporating the Company's technology and software is highly competitive,
and the Company expects to face substantial competition in this market from
established and emerging companies and technologies developed internally by
its OEM customers. Risks inherent in the Company's international business
activities also include currency fluctuations and restrictions, the burdens
of complying with a wide variety of foreign laws and regulations, including
Postal, Telephone and Telegraph (''PTT'') regulations, longer accounts
receivable cycles, the imposition of government controls, risks of
localizing and internationalizing products to local requirements in foreign
countries, trade restrictions, tariffs and other trade barriers,
restrictions on the repatriation of earnings and potentially adverse tax
consequences, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Substantially all of the Company's international sales are currently
denominated in U.S. dollars and, therefore, increases in the value of the
U.S. dollar relative to foreign currencies could make the Company's
products less competitive in foreign markets. Because of the Company's
international activities, it faces certain currency exposure and
translation risks. For example, late in 1997 the Company established a
subsidiary in Germany which will increase the Company's exposure to foreign
exchange risk, and the Company purchases certain key components pursuant to
purchase contracts denominated in foreign currency. In connection
therewith, the Company has Yen cash deposits designated as a hedge against
the firm purchases under supply contract.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Dependence on Single Manufacturing Facility; Risks Related to
Potential Disruption. The Company's manufacturing operations are located
in its facility in Northern California. In addition, a number of the
suppliers of components for the Company's products and providers of
outsourced assembly, upon which the Company relies, are located in Northern
California. Since the Company does not currently operate multiple
facilities in different geographic areas, or have alternative sources for
many of its components or outsourced assembly, a disruption of the
Company's manufacturing operations, or the operations of its suppliers,
resulting from sustained process abnormalities, human error, government
intervention or natural disasters such as earthquakes, fires or floods
could cause the Company to cease or limit its manufacturing operations and
consequently have a material adverse effect on the Company's business,
financial condition and results of operations.
No Present Intention to Pay Dividends; Restriction on Payment of
Dividends. The Company has never declared or paid cash dividends on its
Common Stock and intends to retain all available funds for use in the
operation and expansion of its business. The Company therefore does not
anticipate that any cash dividends will be declared or paid in the
foreseeable future. In addition, the Company's credit facility prohibits
the payment of cash dividends without the consent of the lender.
Readiness for Year 2000. The Company has and will continue to make
certain investments in its software systems and applications to ensure the
Company's information systems are Year 2000 compliant. The financial impact
to the Company of the Company's Year 2000 compliance effort has not been
and is not anticipated to be material to its financial position or results
of operations in any given year. The Company believes that its current
products are Year 2000 compliant. The approach of Year 2000 presents
significant issues for many computer systems, since much of the software in
use today may not accurately process data beyond 1999. The Company has
recently implemented new information systems and accordingly does not
anticipate any internal Year 2000 issues from its own information systems,
databases or programs. However, the Company could be adversely impacted by
Year 2000 issues faced by major distributors, suppliers, customers, vendors
and financial service organizations with which the Company interacts. The
Company is currently taking steps to address the impact, if any, of the
Year 2000 issue on the operations of the Company. There can be no
assurances that the Company will be able to detect all potential failures
of the Company's and/or third parties' computer systems. A significant
failure of the Company's or a third party's computer system could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PART II. OTHER INFORMATION
ITEM 5. Other Information
Report of offering securities and use of proceeds therefrom:
In connection with its initial public offering in 1997, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-23763 (the
"Registration Statement"), which was declared effective by the Commission
on June 10, 1997. The Company registered 4,025,000 shares of its Common
Stock, $0.001 par value per share. The offering commenced on June 11, 1997
and 3,500,000 shares were sold. The over-allotment option was not exercised
and the Company deregistered 525,000 shares on July 11, 1997. The
aggregate offering price of the registered shares was $28,000,000. The
managing underwriters of the offering were Prudential Securities
Incorporated and Cowen & Company. The Company incurred the following
expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions $ 1,960,000
Other expenses 800,000
-----------
Total expenses $ 2,760,000
===========
</TABLE>
All of such expenses were direct or indirect payments to others.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The net offering proceeds to the Company after deducting the total
expenses above and the proceeds to selling shareholders were approximately
$19,662,000. From June 11, 1997 to March 31, 1998, the Company used such
net offering proceeds, in direct or indirect payments to others, as
follows:
<TABLE>
<S> <C>
Purchase and installment of machinery
and equipment $ 674,154
Acquisition of other businesses 1,250,000
Working capital 7,484,209
Investment in short-term,
interest-bearing obligations 5,429,629
Repayment of indebtedness 1,705,342
Redemption of Series P Preferred 2,794,000
Investment in Minority Interest 325,000
------------
Total $ 19,662,334
============
</TABLE>
Each of such amounts is a reasonable estimate of the application of
the net offering proceeds. This use of proceeds does not represent a
material change in the use of proceeds described in the prospectus of the
Registration Statement.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ---------------------------------------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. On February 20, 1998 the Registrant
--------------------
filed Form 8-K/A as Amendment Number 1 which amended Item 7.
Financial Statements, Pro Forma Financial Information and
Exhibits of its Form 8-K Report filed December 22, 1997 in
connection with the Registrant's acquisition of DocuMagix, Inc.
20
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
JETFAX, INC.
----------------------
(Registrant)
Date: May 15, 1998 By /s/ ALLEN K. JONES
----------------------------
Allen K. Jones
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Accounting and
Financial Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,872
<SECURITIES> 0
<RECEIVABLES> 4,254
<ALLOWANCES> 0
<INVENTORY> 3,407
<CURRENT-ASSETS> 14,789
<PP&E> 1,268
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,486
<CURRENT-LIABILITIES> 3,403
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 13,941
<TOTAL-LIABILITY-AND-EQUITY> 17,486
<SALES> 6,024
<TOTAL-REVENUES> 7,698
<CGS> 4,286
<TOTAL-COSTS> 4,587
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,272)
<INCOME-TAX> 17
<INCOME-CONTINUING> (1,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,289)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
<PAGE>
</TABLE>
