<PAGE> 1
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 July 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
incorporation or organization) Identification No.)
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 August 7, 1998 there were 11,781,897 shares of common stock, $.01 par
value, outstanding.
This Report on Form 10-Q includes 25 pages with the Index to Exhibits
located on page 23.
<PAGE> 2
JETFAX, INC.
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JULY 4, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1998
and December 31, 1997.................................... 3
Condensed Consolidated Statements of Operations - Three
Months and Six Months Ended June 30, 1998 and 1997....... 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 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................................. 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signature................................................... 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 (1)
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
Investments $ 6,442 $ 7,224
Accounts receivable, net 4,288 4,820
Inventories 3,894 4,029
Prepaid expenses 343 277
--------- ---------
Total current assets 14,967 16,350
Property, net 1,176 1,160
Other assets 1,663 1,346
--------- ---------
Total assets $ 17,806 $ 18,856
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,906 $ 1,672
Accrued liabilities 1,703 1,864
--------- ---------
Total current liabilities 3,609 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:
11,780,897 in 1998 and 11,741,383 in 1997 118 117
Additional paid-in capital 42,953 42,881
Accumulated deficit (28,899) (27,727)
--------- ---------
Total stockholders' equity 14,172 15,271
--------- ---------
Total liabilities and stockholders' equity $ 17,806 $ 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.
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE> 4
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Product $ 6,082 $ 3,971 $ 12,106 $ 8,221
Software and technology license
fees 1,072 826 2,415 1,460
Development fees 568 577 900 1,348
-------- -------- -------- --------
Total revenues 7,722 5,374 15,421 11,029
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 3,843 2,848 8,130 5,797
Cost of software and license
revenues 148 278 449 428
Research and development 1,339 1,148 2,789 2,414
Selling and marketing 1,680 1,181 3,909 2,791
General and administrative 648 689 1,404 1,366
Acquisition and related expenses -- 1,130 -- 1,681
-------- -------- -------- --------
Total costs and expenses 7,658 7,274 16,681 14,477
-------- -------- -------- --------
Income (loss) from operations 64 (1,900) (1,260) (3,448)
-------- -------- -------- --------
Other income (expense):
Interest income 83 43 162 44
Interest expense -- (58) (2) (73)
Other income (expense) (1) (5) (24) (32)
-------- -------- -------- --------
Total other income (expense) 82 (20) 136 (61)
-------- -------- -------- --------
Income (loss) before income taxes 146 (1,920) (1,124) (3,509)
Provision for income taxes 32 7 49 54
-------- -------- -------- --------
Net income (loss) 114 (1,927) (1,173) (3,563)
Less cumulative dividends on Series
P Redeemable Preferred Stock -- (32) -- (68)
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders $ 114 $ (1,959) $ (1,173) $ (3,631)
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.01 $ (0.21) $ (0.10) $ (0.42)
======== ======== ======== ========
Diluted $ 0.01 $ (0.21) $ (0.10) $ (0.42)
======== ======== ======== ========
Shares used in computing net income
(loss) per share:
Basic 11,755 9,196 11,748 8,714
======== ======== ======== ========
Diluted 13,136 9,196 11,748 8,714
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
JETFAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,173) $ (3,563)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 204 153
Warrant compensation expense -- 625
Changes in assets and liabilities:
Trade receivables 532 (789)
Inventories 135 (1,289)
Prepaid expenses (66) (247)
Accounts payable 234 1,674
Deferred revenue (24) 75
Accrued liabilities (84) (287)
-------- --------
Net cash used for operating activities (242) (3,648)
-------- --------
Cash flows from investing activities:
Purchase of property (220) (213)
(Increase) decrease in other assets (317) 367
-------- --------
Net cash provided by (used for) investing
activities (537) 154
-------- --------
Cash flows from financing activities:
Proceeds from sale of Common Stock (3) 20,023
Repayment of long-term debt -- 113
Line of credit borrowings, net -- (33)
Equipment term note borrowings -- 500
Redemption of Preferred Stock - Series P, net -- (2,795)
-------- --------
Net cash provided by (used for)
financing activities (3) 17,808
-------- --------
Increase (decrease) in cash and cash equivalents (782) 14,314
Cash and cash equivalents, beginning of period 7,224 369
-------- --------
Cash and cash equivalents, end of period $ 6,442 $ 14,683
======== ========
Supplemental cash flow information:
Interest paid $ 2 $ 73
======== ========
Taxes paid - foreign withholding $ -- $ 45
======== ========
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 $ -- $ 304
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
JETFAX, INC. AND SUBSIDIARIES
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
June 30, 1998 and for the three and six months ended June 30, 1998 and 1997
are unaudited. In the opinion of management, the condensed consolidated
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.
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 and 26-week periods ended July 4, 1998 and July 5,
1997 as the three and six months ended June 30, 1998 and 1997, respectively.
Per Share Information
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average common shares outstanding for the period
while diluted earnings (loss) per share also includes the dilutive impact of
stock options and warrants. The Company completed its initial public
offering of its common stock in June 1997. Basic and diluted per share
amounts presented for the period 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. The dilutive
effect of options was not included in the calculation of diluted loss per
share for the six months ended June 30, 1998 and the three and six months
ended June 30, 1997 because to do so would have had an anti-dilutive effect
as the Company had net loss for these periods.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 114 $ (1,959) $ (1,173) $ (3,631)
======== ======== ======== ========
SHARES USED IN COMPUTATION
Weighted average common shares
outstanding used in computation
of basic earnings (loss) per share 11,755 9,196 11,748 8,714
Dilutive effect of stock options
and warrants 1,381 -- -- --
-------- -------- --------- ---------
Shares used in computation of diluted
net income (loss) per share 13,136 9,196 11,748 8,714
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.21) $ (0.10) $ (0.42)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.21) $ (0.10) $ (0.42)
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
JETFAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 1,092,270 shares of common stock at prices ranging
from $5.87 to $9.87 were outstanding as of June 30, 1998, but not included
in the computation of diluted earnings per share because the options' prices
were greater than the average market price of the common shares as of such
date and, therefore, would be antidilutive under the treasury stock method.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Materials and supplies $ 1,286 $ 1,776
Work-in-process 671 143
Finished goods 1,937 2,110
-------- --------
Total $ 3,894 $ 4,029
======== ========
</TABLE>
3. Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Compensation and related benefits $ 742 $ 509
Royalties 212 215
Acquisition related accruals 68 375
Product warranty 74 94
Other 607 671
-------- --------
Total $ 1,703 $ 1,864
======== ========
</TABLE>
4. Comprehensive Income
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 June 30, 1998 and 1997, there were no
differences between the Company's comprehensive income and net income.
5. Effect Of Changes In Accounting Principles
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,
7
<PAGE> 8
results of operations or cash flows. The Company will adopt this statement
in its financial statements for the year ending December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires
that all derivatives be carried at fair value, and provides for hedging
accounting when certain conditions are met. This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. In a
forward-looking basis, although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption of
this statement will have a material impact on the Company's financial
position or results of operations.
8
<PAGE> 9
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. 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 April 5, 1998 to July 4,
1998 and from April 6, 1997 to July 5, 1997 are referred to herein as the
quarters ended June 30, 1998 and June 30, 1997, respectively. The 26-week
periods from January 4, 1998 to July 4, 1998 and from January 5, 1997 to
July 5, 1997 are referred to herein as the six months ended June 30, 1998
and June 30, 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 June 30, 1998, product revenues, software and technology fees,
and development fees as a percentage of total revenues, were 79%, 14%, and
7%, respectively, as compared to 74%, 15%, and 11% for the comparable period
in the prior year. For the six months ended June 30, 1998, product revenues,
software and technology fees, and development fees as a percentage of total
revenues, were 79%, 16%, and 6%, respectively, as compared to 75%, 13%, and
12% 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 discussed
under the heading "Factors That May Affect Operating Results".
Results of Operations
The following table sets forth certain items in the Company's
statements of operations for the periods indicated (in thousands).
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product $ 6,082 $ 3,971 $ 12,106 $ 8,221
Software and technology
license fees 1,072 826 2,415 1,460
Development fees 568 577 900 1,348
-------- -------- -------- --------
Total revenues 7,722 5,374 15,421 11,029
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 3,843 2,848 8,130 5,797
Cost of software and license
revenues 148 278 449 428
Research and development 1,339 1,148 2,789 2,414
Selling and marketing 1,680 1,181 3,909 2,791
General and administrative 648 689 1,404 1,366
Acquisition and related
expenses -- 1,130 -- 1,681
-------- -------- -------- --------
Total costs and expenses 7,658 7,274 16,681 14,477
-------- -------- -------- --------
Income (loss) from operations 64 (1,900) (1,260) (3,448)
Other income (expense), net 82 (20) 136 (61)
-------- -------- -------- --------
Income (loss) before income
taxes 146 (1,920) (1,124) (3,509)
Provision for income taxes 32 7 49 54
-------- -------- -------- --------
Net income (loss) $ 114 $ (1,927) $ (1,173) $ (3,563)
======== ======== ======== ========
</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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product 78.8% 73.9% 78.5% 74.6%
Software and technology
license fees 13.9 15.4 15.7 13.2
Development fees 7.3 10.7 5.8 12.2
-------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues 49.8 53.0 52.7 52.6
Cost of software and license
revenues 1.9 5.2 2.9 3.9
Research and development 17.3 21.4 18.1 21.9
Selling and marketing 21.8 22.0 25.4 25.3
General and administrative 8.4 12.8 9.1 12.4
Acquisition and related
expenses -- 21.0 -- 15.2
-------- -------- -------- --------
Total costs and expenses 99.2 135.4 108.2 131.3
-------- -------- -------- --------
Income (loss) from operations 0.8 (35.4) (8.2) (31.3)
Other income (expense), net 1.1 (0.4) 0.9 (0.5)
-------- -------- -------- --------
Income (loss) before income
taxes 1.9 (35.8) (7.3) (31.8)
Provision for income taxes 0.4 0.1 0.3 0.5
-------- -------- -------- --------
Net income (loss) 1.5% (35.9)% (7.6)% (32.3)%
======== ======== ======== ========
</TABLE>
10
<PAGE> 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Quarter and Six Months Ended June 30, 1998 Compared to Quarter and Six
Months Ended June 30, 1997
Revenues. Total revenues increased to $7.7 million for the quarter
ended June 30, 1998, a 44% increase from $5.4 million of revenue in the
quarter ended June 30, 1997 and flat with the quarter ended March 31, 1997.
For the six month period, total revenues of $15.4 million increased 40% from
the prior year level.
Product revenues advanced 53% for the quarter to $6.1 million from $4.0
million in the same quarter of the prior year and rose 1% from the previous
record of $6.0 million in the preceding quarter, as the Company benefited
from positive market reaction to the Series M900 MFDs introduced in
September 1997. For the six month period, product revenues of $12.1 million
rose 47% from the $8.2 million for the comparable year ago period. MFP unit
shipments exceeded 3,000 units for the quarter ended June 30, 1998, more
than a 70% increase from the year ago quarter, while the revenue from MFPs
increased a lesser 60% due to erosion in average selling price. Consumable
and upgrade revenue increased 67% and 1%, respectively, in the second
quarter versus the year ago quarter.
Development fees fell 2% to $568,000 for the quarter ended June 30,
1998 from $577,000 in the same quarter of the prior year. For the six month
period, development fees of $900,000 fell 33% from the $1.3 million for the
comparable year ago period. The major development milestones on the
original Hewlett-Packard contract were completed during 1997, which led to
reduced development revenue recognized during the first quarter of 1998, as
the revenue stream converts to per unit royalties from development revenue.
With the advent of a new Hewlett-Packard development program in the second
quarter of 1998, total development fees rose 71% from the immediately
preceding quarter.
Software and technology licensing fees increased 30% to $1.1 million
for the quarter ended June 30, 1998 from $826,000 for the quarter ended June
30, 1997. For the six month period, software and technology licensing fees
of $2.4 million rose 65% from the $1.5 million for the comparable year ago
period. The quarter ended June 30, 1997 had no royalties from Hewlett-
Packard, while the quarter ended June 30, 1998 generated per unit royalties
for 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. Partially offsetting these increases in per
unit royalties, revenue from DocuMagix software products fell over $300,000
in the quarter ended June 30, 1998 from the year ago quarter, primarily
related to reserves established for the withdrawal of products from the
retail distribution channel.
International revenues increased to 24% of total revenues for the
quarter ended June 30, 1998 from 14% for the comparable period in 1997, as a
result of higher European shipments, primarily due to the OEM shipments in
the second quarter of 1998 to Oki Europe Limited. Two customers, Hewlett-
Packard and IKON Office Solutions, each accounted for $1.4 million (19%) of
total revenues for the quarter ended June 30, 1998 compared with $560,000
(10%) and $1.2 million (23%), respectively, for the year ago quarter.
Cost of Product Revenues. Cost of product revenues increased 35% to
$3.8 million for the quarter ended June 30, 1998 from $2.8 million from the
same quarter in the prior year and increased 40% to $8.1 million from $5.8
million for the six months ended June 30, 1998 and 1997, respectively.
Given the higher revenue in the current year, product gross margins expanded
to 36.8% from 28.3% and to 32.8% from 29.5% for the quarters and six months
ended June 30, 1998 and 1997, respectively. The reduced cost of the Series
M900 MFPs relative to the preceding M5 product line has more than 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 $26,000 for the quarter
ended June 30, 1998 that was included in cost of goods sold. This loss
partially offset the benefit of purchasing the print engines in a currency
which is declining in value versus the dollar. The Yen hedge may minimize
foreign exchange risks 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.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cost of Software and License Revenues. Cost of software and
license revenues of $148,000 in the 1998 second quarter fell 47% from
$278,000 in the second quarter of 1997, while rising 5% to $449,000 from
$428,000 for the six months ended June 30, 1998 and 1997, respectively. The
significant reduction in the cost of software and license revenues in the
second quarter of 1998 compared to the second quarter of 1997 was due to
lower expenses for DocuMagix, as sales were redirected from the retail
channel to lower cost channels including internet online sales and OEM
bundling arrangements.
Research and Development. Research and development expenses
increased 17% to $1.3 million for the quarter ended June 30, 1998 from $1.1
million for the quarter ended June 30, 1997 and increased 16% to $2.8
million from $2.4 million for the six months ended June 30, 1998 and 1997,
respectively. While growing in absolute dollars, research and development
expenses as a percentage of revenues decreased to 17.3% for the 1998 second
quarter from 21.4% for the corresponding year ago quarter. Average
engineering headcount during the second quarter of 1998 was approximately 5%
higher than during the second quarter of 1997. Both software and hardware
R&D incurred higher expenses, primarily due to higher personnel costs
related to increased headcount, turnover, and escalation in engineering
salaries.
Selling and Marketing. Selling and marketing expenses increased 42%
to $1.7 million for the quarter ended June 30, 1998 from $1.2 million for
the comparable quarter in the prior year and increased 40% to $3.9 million
from $2.8 million for the six months ended June 30, 1998 and 1997,
respectively. As a percentage of revenues, selling and marketing expenses
remained approximately flat at 21.8% for the quarter ended June 30, 1998
versus 22.0% for the comparable period of 1997. Headcount increased by
approximately 21%. The higher personnel costs and higher dealer incentives
related to the increased product shipments were partially offset by a
reduction in DocuMagix expenses related to the discontinuance of selling
software in the retail channel.
General and Administrative. General and administrative expenses
decreased 6% to $648,000 in the quarter ended June 30, 1998 from $689,000 in
the comparable 1997 quarter and were approximately flat at $1.4 million for
the six month periods. As a percentage of revenues, general and
administrative expenses declined to 8.4% for the second quarter of 1998 from
12.8% for the year ago quarter. Headcount decreased approximately 12% from
the year ago period. Specific general and administrative expenses related
to DocuMagix operations for the quarter ended June 30, 1998 were essentially
eliminated compared to the year ago quarter, which was partially offset by
increased public company expense for JetFax for items such as SEC reporting
and director and officer liability insurance.
Acquisition Charges and Related Expense. Acquisition charges
emanated from the purchase of substantially all the assets of the Crandell
Group, Inc. in July 1996 and the purchase of DocuMagix, Inc. through a
pooling of interests transaction which closed in December 1997. There were
no acquisition related charges in the quarter ended June 30, 1998, while
such charges of $1.1 million in the second quarter of 1997 were due to the
Crandell Group acquisition and consisted of a $1.0 million payment to the
Crandell Group in lieu of future royalty payments and $30,000 associated
with royalties related to the continuing employment of the founders. The
first quarter of 1997 included Crandell Group acquisition charges of
$551,000 comprised 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 $82,000 for the quarter ended June 30, 1998 compared
with expense of $20,000 for the comparable quarter of the prior year and was
income of $136,000 compared with expense of $61,000 for the six months ended
June 30, 1998 and 1997, respectively. Net interest income, foreign exchange
gain, and other expense were $84,000, $14,000, and $16,000, respectively,
for the quarter ended June 30, 1998. Net interest expense, foreign exchange
loss, and other expense were $15,000, $4,000, and $1,000 respectively, for
the quarter ended June 30, 1997.
Provision for Income Taxes. Due to the Company's cumulative net
losses, there was no provision for federal or state income taxes for the
quarters ended June 30, 1998 and 1997, respectively. The $32,000 and $7,000
income tax provisions for the second quarters of 1998 and 1997,
respectively, were related to state franchise taxes and foreign withholding
taxes on certain development fees, as were the $49,000 and $54,000 for the
first half of 1998 and 1997.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Net income (loss). The Company reported net income for the quarter
ended June 30, 1998 of $114,000 or $0.01 per share compared to a net loss of
$1.9 million or $0.21 per share for the comparable period in the prior year.
The net loss for the six months ended June 30, 1998 was $1.2 million
compared to $3.6 million for the comparable period in the prior year.
Without the prior year acquisition related charges, the most recent
quarter's net income of $114,000 compared to a year ago quarterly loss of
$797,000. The improvement from loss to income was due to a combination of:
1) revenues increasing 44%, 2) gross margin improving by 6.5 percentage
points, and 3) operating expense dropping 8.7 percentage points in relation
to revenue. The differential in earnings (loss) per share is accentuated
versus the net loss due to the fewer shares outstanding prior to the initial
public offering, as well as the common stock equivalents included in the
most recent quarter's diluted per share calculation due to profitability.
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 sales of common stock. The total amount of equity raised through June
30, 1998 was $43 million through a series of private financing rounds at
both JetFax and DocuMagix, and sales of common stock.
At June 30, 1998, the Company had $1.5 million available under its bank
credit facility under which there were no borrowings at June 30, 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 expected to be
renegotiated 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 June 30, 1998.
The Company's working capital decreased by $1.4 million to $11.4
million as of June 30, 1998 from $12.8 million as of December 31, 1997.
Cash and short term investments decreased modestly to $6.4 million at June
30, 1998 from $7.2 million at December 31, 1997. Inventories of $3.9
million at June 30, 1998 remained relatively unchanged from $4.0 million at
December 31, 1997. Collection of development fees and royalties caused a
reduction of accounts receivable to $4.3 million at June 30, 1998 from $4.8
million at December 31, 1997. Accounts payable increased to $1.9 million at
June 30, 1998 from $1.7 million at December 31, 1997, primarily resulting
from inventory purchases late in the quarter, which was partially offset by
a reduction in the DocuMagix payables.
Investing activities for the six months ended June 30, 1998 used
$537,000 of cash: $220,000 for property purchases, and $317,000 for
investment in other assets due principally to a $400,000 investment in its
minority interest in Oasis, Inc.
The Company currently believes that 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,
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 - 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 June 30, 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.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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,
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
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
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
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 assessing the potential impact of these ancillary
issues and is taking steps to minimize 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.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on May 13, 1998 at 2:00 p.m., local time, at the Stanford Park Hotel,
100 El Camino Real, Menlo Park, California. The Annual Meeting was held for
the purpose of (a) electing eight members of the Board of Directors to serve
for the ensuing year and until their successors are elected, (b) ratifying
and approving the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998 and (c)
transacting such other business as may properly come before the Annual
Meeting. The two matters below were voted upon and approved:
Matter No. 1 - Election of five members of the Board of Directors:
The following persons were duly elected to the Board by the
stockholders for a one year term and until their successors are elected and
qualified:
<TABLE>
<CAPTION>
NOMINATION FOR ABSTAINED
---------- --- ---------
<S> <C> <C>
Rudy Prince 9,202,361 33,846
Thomas B. Akin 9,208,381 27,826
Douglas Y. Bech 9,208,381 27,826
Steven J. Carnevale 9,197,889 38,318
Chung Chiu 9,208,381 27,826
Edward R. Prince, Jr. 9,208,381 27,826
Lon B. Radin 9,208,381 27,826
Albert E. Sisto 9,208,381 27,826
</TABLE>
Matter No. 2 - Ratification of the Appointment of Deloitte & Touche LLP as
the Company's Independent Auditors for the Fiscal Year Ending December 31,
1998:
<TABLE>
NOMINATION FOR AGAINST ABSTAINED
---------- --- ------- ---------
<S> <C> <C> <C>
Deloitte & Touche LLP 9,214,484 14,038 7,685
</TABLE>
ITEM 5. Other Information
Change in Proxy Rules:
Pursuant to a recent change to the proxy rules, unless a stockholder
who wishes to bring a matter before the stockholders at the Company's 1999
annual meeting of stockholders notifies the Company of such matter prior to
February 26, 1999, management will have discretionary authority to vote all
shares for which it has proxies in opposition to such matter.
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
21
<PAGE> 22
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.
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 June 30, 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 $ 688,154
Acquisition of other businesses 1,250,000
Working capital 7,470,209
Investment in short-term, interest-bearing obligations 5,029,629
Repayment of indebtedness 1,705,342
Redemption of Series P Preferred 2,794,000
Investment in Minority Interest 725,000
-------------
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. The Company did not file any reports on Form
--------------------
8-K in the quarter ended June 30, 1998.
22
<PAGE> 23
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: August 18, 1998 By: /s/ ALLEN K. JONES
--------------------------
Allen K. Jones
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Accounting and
Financial Officer)
23
<PAGE> 24
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-
Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,442
<SECURITIES> 0
<RECEIVABLES> 4,288 <F2>
<ALLOWANCES> 0
<INVENTORY> 3,894
<CURRENT-ASSETS> 14,967
<PP&E> 1,176 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,806
<CURRENT-LIABILITIES> 3,609
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 14,054
<TOTAL-LIABILITY-AND-EQUITY> 17,806
<SALES> 12,106
<TOTAL-REVENUES> 15,421
<CGS> 8,130
<TOTAL-COSTS> 8,579
<OTHER-EXPENSES> 2,789 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,124)
<INCOME-TAX> 49
<INCOME-CONTINUING> (1,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,173)
<EPS-PRIMARY> (0.10)<F4>
<EPS-DILUTED> (0.10)
<FN>
<F1> The Company changed its fiscal year end from March 31 to a 52-53 week
reporting year. The 26-week period from January 5, 1998 to July 4,
1998 is referred to herein as the six months ended June 30, 1998.
Year to date data is for quarters presented.
<F2> Item shown net of allowance, consistent with the balance sheet
presentation.
<F3> Item consists of research and development.
<F4> Item consists of basic earnings per share.
</FN>
</TABLE>
