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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 3, 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
JETFAX, INC.
(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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 23, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $38,491,905 based upon the
closing sales price of the Common Stock as reported on the Nasdaq National
Market on such date. Shares of Common Stock held by officers, directors and
holders of more than ten percent of the outstanding Common Stock have been
excluded from this calculation because such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 23, 1998, the Registrant had outstanding 11,742,238 shares of Common
Stock.
________________________
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference in this
report: Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders
which will be filed with the Securities and Exchange Commission no later than
120 days after January 3, 1998. (Part III).
This Report on Form 10-K includes 59pages with the Index to Exhibits located
on pages 33 to 35.
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JETFAX, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 3, 1998
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 9
Item 3 Legal Proceedings........................................... 9
Item 4 Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters................................. 10
Item 6 Selected Financial Data..................................... 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 13
Item 8 Financial Statements and Supplementary Data................. 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 29
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 30
Item 11 Executive Compensation...................................... 31
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................. 31
Item 13 Certain Relationships and Related Transactions.............. 31
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 32
Signatures............................................................ 55
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PART I
ITEM 1. BUSINESS
OVERVIEW
JetFax, Inc. is a leading developer and provider of integrated embedded system
technology, branded products and desktop software solutions for the
multifunction product ("MFP") market, which consists of electronic office
devices that combine print, fax, copy and scan capabilities in a single unit.
The Company focuses on two distinct segments of the MFP market, the small
office/home office ("SOHO") segment and the corporate segment.
The Company's embedded system technology is made up of proprietary ASICs,
software and firmware that reside on a modular controller circuit board (an
"embedded system"). This technology provides the intelligence of a MFP and
coordinates, controls and optimizes a MFP's printing, faxing, copying and
scanning operations. JetFax licenses and manufactures its embedded system and
desktop software for a range of MFP solutions sold under the JetFax brand name
and the brand names of its OEM customers. The Company believes its embedded
system technology and desktop software enable OEMs to offer more competitive
products with improved price/performance, shortened development cycles and
reduced development and product costs. The Company currently licenses its
embedded system technology or software to 25 licensees worldwide, including
Hewlett-Packard, Oki Data, and Samsung.
Since its inception in 1988, the majority of the Company's revenues have been
generated from sales of JetFax branded products and consumables, including the
Series M900, the Company's current line of branded products introduced in
September 1997. The Company believes that it offers the most advanced and
innovative MFP solutions currently available in its product class. For example,
the JetFax M5, the Company's branded product preceding the Series M900, was the
first MFP to support two telephone lines for simultaneous receiving and sending
of faxes, and the Company was one of the first to market a MFP with a high speed
33.6 Kbps modem.
The Company believes its JetSuite software will define a new category of all-
in-one software for MFPs that will replace the piecemeal software components
historically bundled by MFP vendors. As a result, corporate and SOHO workers can
increase productivity and realize substantial time and cost savings relative to
traditional office protocols and equipment usage. The Company's JetSuite desktop
software can be sold on a stand-alone basis or bundled with the JetFax embedded
system to provide a complete, integrated hardware and software solution.
JetSuite is currently bundled with products from Hewlett-Packard and Oki Data.
With the merger of DocuMagix, Inc. in December 1997, the Company also offers
PaperMaster electronic file cabinet software through bundling with OEM hardware
products, as well as in the retail software market. The Company additionally
offers JetPCL software, which provides high quality conversion of documents
encoded in Hewlett-Packard's Printer Control Language (''PCL''), the industry
standard.
PRODUCTS
JetFax offers the following products and solutions to its OEMs and other
customers:
JetFax Branded Products and Related Consumables. JetFax develops,
manufactures and markets a high quality MFP under the JetFax brand name. For
this branded solution, JetFax procures an integrated printing and scanning
engine and integrates its embedded system technology with the engine at its
facility.
The Company's current branded MFP is the Series M900, which the Company began
shipping commercially in September 1997. The Series M900 offers the
functionality of a high-volume, full-featured plain paper fax machine in
addition to its multifunction print, copy and scan capabilities. The Series M900
is based on a LED printer engine, which uses the same drum and toner print
technology as a laser printer ("laser/LED"). The Series M900 is comprised of
four models (M900, M910, M920 and M930) which include features such as a two-
line capability, which allows simultaneous receiving and sending of faxes,
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and a high-speed 33.6 Kbps modem for single-line models, which reduces the
transmission time of a typical fax. The models M920 and M930 are field
upgradeable from the base M910 unit. List prices of the Series M900 range from
approximately $2,000 to more than $3,500 depending on the options included.
The Company also sells consumables for its products, including toner
cartridges, imaging drums and inkjet cartridges. These consumables, which need
to be purchased periodically by customers over the life of the product, are
typically procured by the Company from the manufacturer of the printing engine
and are labeled with the JetFax brand name. Certain consumables not procured
from the Company or its suppliers are not easily used with JetFax products or do
not provide optimal functionality. Revenues from sales of consumables
represented 17%, 14% and 14% of the Company's total revenues in the year ended
December 31, 1997, the nine months ended December 31, 1996 and the year ended
March 31, 1996, respectively. The Company believes that such revenues will
increase as the installed base of JetFax branded MFPs grows.
Embedded System Technology. JetFax develops and licenses its embedded system
technology for manufacture and integration by its OEM customers into their MFPs.
This technology includes a complete embedded system design, modified to meet the
OEMs' specifications and requirements. Such hardware and software modifications
are performed by JetFax and typically include changes to the printer and scanner
interfaces and to the control panel and user interface. The Company generally
receives development fees in return for such modifications, in addition to
prepaid and per unit royalties for the license. The Company's embedded system
technology has been customized and licensed for use in the dex 855 currently
manufactured by Samsung and the Hewlett-Packard LaserJet 3100 introduced in
March 1998, as well as the previously sold Minoltafax 1000, the Xerox 3006, and
Xerox WorkCenter 250.
The Company offers completely assembled embedded system circuit boards to its
OEMs as well as systems integration services. An OEM can choose to procure the
embedded system boards directly from JetFax for integration at the OEM's
facility or the OEM can ship its printing/scanning engine to JetFax for final
assembly and testing. The Company believes its ability to offer a variety of
manufacturing and systems integration capabilities provides OEMs with a means to
reduce development costs and time-to-market.
JetSuite Software. The Company believes its JetSuite software will define a
new category of all-in-one software for MFPs that will replace the piecemeal
software components historically bundled by MFP vendors. JetSuite software is
designed to provide a comprehensive software solution for users of MFPs in a
Microsoft Windows (3.1, 95, NT) environment. JetSuite is installed on a user's
PC and combines low-level device drivers for printing, faxing, copying and
scanning with a visual "desktop" application that allows a user to organize,
convert and manage documents created or received using a MFP. Using JetSuite, a
user can create a self-viewing, portable version of any document, whether
"printed" electronically, captured from an Internet Web page, scanned or
faxed. Such a portable document can then be e-mailed and viewed without
requiring the recipient to have a specific software application or viewer
installed on their system. All of the document's original formatting, layout,
colors and look are maintained in a portable JetSuite document. JetSuite fully
supports both fax-based and e-mail-based document transmission and provides
links to popular third party software applications, such as word processors and
graphics programs, allowing users to move documents in and out of the JetSuite
desktop easily. The Company offers JetSuite to OEMs for use with the OEMs'
embedded system or bundled with JetFax's embedded system technology, as well as
an option with JetFax branded MFPs.
PaperMaster Software. PaperMaster began shipping in 1994 as one of the
leading retail packages of personal document management software. Since that
time, the product also shipped through OEM bundles with a number of scanner
products from several of the leading scanner manufacturers including Logitech,
Storm, and Microtek. PaperMaster uses a file cabinet metaphor as its user
interface, allowing one to unlock and open various file drawers and folders and
insert a variety of document types. The software indexes documents, allowing
users to search and retrieve documents based on text strings. Also included are
web links to allow users to easily save and retrieve web-based HTML documents.
Subsequent to the 1997 fiscal year end, Hewlett-Packard announced that it is
bundling PaperMaster with its new CD-Writer Plus storage system. The CD-Writer
allows a PaperMaster user to "publish" a file cabinet containing documents of
all types to a CD. This capability extends the market for PaperMaster to the
storage arena, opening a new market segment for PaperMaster and broadening the
product's scope beyond that for traditional desktop scanners.
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JetPCL Software. Hewlett-Packard's Printer Control Language (''PCL'') is the
industry standard method of delivering commands from a PC software package to a
printer. The Company's JetPCL software is a PCL-emulator that provides high-
quality conversion of documents encoded in PCL into various image formats,
including fax. JetPCL is currently a leading PCL conversion package for
suppliers of standalone fax and network fax server products and the Company has
licensed JetPCL to more than 25 OEM customers. JetPCL also supports host-based
conversion of PCL for print devices, allowing lower cost printers to support
legacy DOS applications that generate PCL output. JetPCL is included in the
Company's JetSuite software, providing PCL capability for DOS-based printing on
MFPs. JetPCL supports PCL versions 4, 5 and 5E and is available on the following
platforms: DOS, DOS Extender, OS/2, NetWare NLM, Microsoft Windows 3.1,
Microsoft Windows 95, Microsoft Windows NT and major UNIX platforms.
TECHNOLOGY
Embedded System Technology. JetFax's third generation embedded system
technology is based on the Company's application specific integrated circuit
(''ASIC'') semiconductor designs integrated with a Motorola 680X0
microprocessor. The specialized ASICs perform most of the heavy computational
tasks, allowing the single 680X0 microprocessor to drive the embedded system and
service all of the functions -- printing, faxing, copying and scanning --
required by a MFP. The ASICs perform a variety of imaging functions and provide
high-speed data paths for large image data files that are quickly moving through
the various processes in the system. The ASIC imaging functions include error
diffusion scanning, edge enhancement, background compensation, scaling and print
smoothing. A high-speed image bus and numerous direct memory access ("DMA")
channels are also provided by the ASICs to optimize system performance and
provide easy access to a specialized compression/decompression imaging
processor. The Company believes it has developed an economical hardware design
with enough modularity built in to support a range of products and speeds,
including such features as high speed 33.6 Kbps modems, quick scanning of under
three seconds per page and extensive battery-protected memory.
The firmware in JetFax's embedded system is centered on the Company's task-
swapping, real-time operating system. The operating system rotates among the
various functions such as printing, faxing, copying or scanning, allocating
enough processing time for each task to prevent any significant performance
deterioration when swapping among other tasks. The majority of firmware in the
Company's embedded system, including the operating system, is written in
assembly code, which the Company believes provides greater efficiency and
maximum use of available processing power. The Company constantly evaluates the
level of assembly coding used in its systems and incorporates higher-level
languages in those areas where the use of such languages may result in greater
efficiencies.
Software Technology. The foundation of JetSuite, is its portable document
technology which replicates documents for storage, transmission and viewing.
JetSuite portable documents use a highly compressed print-imaging format
containing a combination of text, fonts, color, graphic elements (such as lines
and circles) and bitmaps. This portable document technology allows a single
document data base to handle both hard copy images from scanned or faxed
documents and electronically created documents. JetSuite portable documents
(.JSD files) can easily be shared with others by using a freely distributable
compact version of the JetSuite viewer that combines with a .JSD file to create
a self-viewing document. Self-viewing documents can be transmitted to other PC
users through standard e-mail without requiring the recipient to have a
particular viewer or software application. JetSuite also provides a range of
imaging functionality for fast viewing, zooming and panning, as well as document
markup and cleanup functionality. The JetSuite scan function includes support of
the industry standard TWAIN interface, allowing users to scan documents directly
to other scanning applications. In its fax application, JetSuite includes full
functionality for both sending and receiving faxes, a phone book for managing
names, addresses, phone numbers and fax groups, and an inbox and outbox for
managing faxes. JetSuite also includes integrated third party OCR technology,
which allows users to convert scanned text documents to editable text files in a
variety of different word processor and spreadsheet formats.
PaperMaster Software. Due to its lengthy product history, PaperMaster
contains a number of key
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technologies that distinguish it from its competition. As new documents are
added to its file cabinets, documents are automatically indexed to a very
efficient and fast search and retrieval system. Furthermore, documents can be
automatically placed in the proper file cabinet and folder based on certain
criteria that are selected for certain files and folders. PaperMaster also
includes plug-ins and browser links that make it very easy to store, print and
file documents from the Internet. With its "publish" feature, PaperMaster now
allows users to write an entire file cabinet to external storage devices while
embedding a viewer and search engine for locating the documents within the file
cabinet. All of this is achieved through an intuitive file cabinet user
interface that closely resembles the operations that a user would perform with
standard hard copy documents.
CUSTOMERS
The Company's customers include office equipment dealers and distributors who
resell the Company's branded MFPs, options and consumables, as well as OEMs that
license the Company's embedded system technology and software in conjunction
with the manufacture and distribution of MFPs.
JetFax Branded Products. In the United States and Canada, the Company
distributes JetFax branded products, options and consumables through office
equipment dealers, primarily through IKON and dealers associated with BTA. In
the year ended December 31, 1997, the nine months ended December 31, 1996 and
fiscal year ended March 31, 1996 revenues recorded by the Company from dealers
associated with IKON represented 19%, 18% and 11%, respectively, of the
Company's total revenues. The Company also distributes its products through
regional distributors. As of December 31, 1997, the Company had approximately
200 dealer sales locations in the United States and Canada. The Company sells
its branded products internationally through office equipment dealers. Sales to
Messerli, one of the Company's office equipment dealers located in Switzerland,
accounted for 3%, 3% and 10% of the Company's total revenues in the year ended
December 31, 1997, the nine months ended December 31, 1996 and the fiscal year
ended March 31, 1996, respectively.
OEM Relationships and JetSuite and PaperMaster Software. The Company
receives license fees and development fees for the Company's embedded system
technology and desktop software from a number of manufacturers of MFPs. JetFax
currently licenses embedded system technology or desktop software to 25
companies and has OEM relationships with Hewlett-Packard, Oki Data, and Samsung.
Hewlett-Packard Company. Effective in January 1997, the Company entered into
a development and license agreement with Hewlett-Packard for the inclusion of
the JetFax embedded system technology and JetSuite software in a Hewlett-Packard
product. The development was completed in early 1998 and the HP LaserJet 3100
was launched in March 1998.
Oki Data Corporation. In September 1996, the Company entered into a license
agreement with Oki Data for the inclusion of JetSuite software with a number of
Oki Data MFPs which are currently in the market.
Samsung Electronics Corporation. In June 1995, the Company entered into a
development agreement with Samsung for the use of the Company's third generation
embedded system technology in a new laser multifunction product. This product is
marketed by Danka Corporation in the United States as the dex 855.
SALES AND MARKETING
The Company markets and sells its products worldwide to OEMs, dealers and
distributors. The Company maintains separate sales forces for its branded
products and OEM/licensing businesses, and its marketing department supports all
aspects of the Company's worldwide business. As of December 31, 1997, the sales
and marketing department (including order entry, technology support and customer
service personnel) consisted of 33 employees and contractors.
OEM Relationships. The Company licenses its embedded system technology,
JetSuite software, PaperMaster software and JetPCL software to OEMs. The Company
continues to enhance its relationships
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with existing OEMs and seeks to obtain new OEM customers through dedicated
account management and marketing programs. The Company works closely with OEM
accounts to define product requirements, create development plans and manage
development programs. The marketing group promotes JetFax as a leading provider
to OEMs of MFP solutions through a combination of public relations and press
coverage, exhibits and presentations at trade shows, product brochures and other
marketing promotions.
JetFax Branded Products. The Company's branded products are primarily sold
in the United States through office equipment dealers. The Company's sales force
provides dealer training programs, sales incentive programs which include cash
incentives, group trips, volume discounts and market development funds.
Marketing activities to promote JetFax branded products include direct mail,
print advertising and an ongoing public relations program.
Software. The Company's software marketing strategy is to license both
JetSuite and PaperMaster software for bundling with multiple OEM products. In
addition, the Company intends to promote software upgrades and add-on software
products in a number of ways, including in-box flyers, software installation and
reminder screens, mailings to registered users, website advertisements and co-
promotions with OEMs.
The Company's international sales efforts are focused on Western Europe,
Australia and New Zealand. The Company's branded products are sold
internationally through office equipment distributors in Australia, Canada, the
Netherlands, New Zealand, Scandinavia, Switzerland and the United Kingdom. The
Company also sells directly to office equipment dealers in the United Kingdom
and through a subsidiary, JetFax GmbH, in Germany. The Company has sales,
service or support personnel located in Germany, the Netherlands, Ireland and
the United Kingdom. International marketing efforts are focused on providing
country specific marketing materials, sales incentive programs for dealers and
participation in trade shows.
RESEARCH AND DEVELOPMENT
JetFax's principal research and development activities are located at the
Company's headquarters in Menlo Park, California and at its software
applications division located in Santa Barbara, California. As of December 31,
1997, the Company's research and development department consisted of 45
employees. The primary activities of these employees are new product
development, enhancement of existing products, product testing and technical
documentation.
The Company's research and development efforts focus on ongoing development of
both the Company's MFP embedded system technology and desktop software. The
Company is in the process of developing future MFPs with both improved feature
sets and reduced manufacturing costs. These improvements are expected to include
increased printing speed, additional base memory, higher speed scanning, simpler
PC connectivity and advanced compression algorithms that will decrease fax
transmission cost while increasing memory storage. The Company believes that its
branded product development efforts provide the Company with a competitive
advantage for its embedded system technology and software by defining the needs
for new products, guiding future enhancements and testing new implementations.
By introducing advanced new features in the corporate market, the Company
believes that it is able to maintain its technology lead while further refining
such features before introducing them to its OEMs.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
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.
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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.
MANUFACTURING AND OPERATIONS
The Company manufactures its JetFax branded products for distribution to the
corporate segment of the MFP market. The Company generally outsources materials
from suppliers and performs final assembly and testing at its main facility in
Menlo Park, California. As of December 31, 1997, the Company's manufacturing and
operations department consisted of 24 employees.
The Series M900 is the Company's current product line of branded MFPs. The
major components of the Series M900 products are the print engine, the scanner,
the user interface and the multifunction embedded system technology and modem
electronics, all of which are outsourced. The JetFax embedded system and modem
assemblies are built to specification by an external printer circuit board
assembler. Final product assembly at the Company's headquarters consists of
integrating the components on a progressive assembly line. Each Series M900
product is tested at the Company by an internal self test for a period of not
less than 24 hours, followed by a series of functional and margin tests to help
ensure reliable performance at the customer's site. The Company's final assembly
and test facilities have recently been improved to allow for better material
flow, process definition and production efficiency.
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. 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, would have a material adverse effect on
the Company's business and financial condition and results of operations. The
Company
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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, 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 AMI to
provide unique ASICs incorporating the Company's imaging and logic circuitry,
Motorola to provide microprocessors, Pixel, to provide a specialized imaging
processor and 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 would 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 the Company's customers and thereby adversely affect the
Company's business and customer relationships. Any disruption in the Company's
sources of supply could limit or delay production or shipment of products
incorporating the Company's technology, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
COMPETITION
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.
7
<PAGE>
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 revenue, 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.
BACKLOG
The Company had essentially no backlog at either December 31, 1997 or December
31, 1996, which is in line with the normal practice in the markets in which it
operates. The office equipment dealer channel for MFPs typically requires
shipment at time of order placement, and the Company has managed operations to
fully satisfy customer demand within each fiscal quarter. The software business
conventionally does not have backlog, and revenues from the Company's
development programs are recognized on a percentage of completion basis.
EMPLOYEES
As of December 31, 1997, the Company had 118 employees and 3 full-time
equivalent contractors. There is no labor union representation for any of the
Company's employees. The Company has never experienced a work stoppage, and
relations with employees are considered good. The Company hires contract
employees on an as-needed basis to meet temporary or specific needs.
8
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters and principal operations are in leased facilities
totaling approximately 38,000 square feet in Menlo Park, California, and the
lease for this facility has been amended to expire in January 2003. In September
and December 1997, the Company entered into a lease for additional office and
administrative facilities in an adjacent building totaling approximately 17,000
square feet. The lease for this additional facility is coterminous with the
expiration date of the initial lease agreement and expires in January 2003. The
Company has a month-to-month lease for approximately 2,400 square feet in Santa
Barbara, California for its software application organization. The Company
believes that suitable additional or alternative space at commercially
reasonable terms will be available in the future as required.
ITEM 3. LEGAL PROCEEDINGS
To the Company's knowledge, there are no pending legal proceedings which are
material to the Company or its business to which it is a party or to which any
of its properties is subject.
In the event of an adverse ruling in any intellectual property litigation that
might arise in the future, the Company might be required to discontinue the use
of certain processes, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses to the infringing technology. There can be no assurance,
however, that under such circumstances, a license would be available under
reasonable terms or at all. In the event of a successful claim against the
Company and the Company's failure to develop or license a substitute technology
on commercially reasonable terms, the Company's financial position and results
of operations could be adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information and Recent sales of Unregistered Securities
The Company's Common Stock is traded on the Nasdaq National Market tier of
The Nasdaq Stock Market under the trading Symbol "JTFX".
The Company completed an initial public offering of 3.5 million shares of
Common Stock (2.75 million shares offered by the Company and 0.75 million shares
offered by selling stockholders) in June 1997. The Company's Common Stock began
trading on June 11, 1997. Prior to the initial public offering, the Company's
Common Stock was not publicly traded.
The range of daily closing prices per share for the Company's common stock
from June 11, 1997 to January 3, 1998 was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997: HIGH LOW
<S> <C> <C>
Fourth quarter.......................................... $ 9.375 $5.188
Third quarter........................................... $11.000 $8.000
Second quarter (from June 11, 1997)..................... $ 8.125 $6.875
</TABLE>
The reported last sale price of the Company's Common Stock on the Nasdaq
National Market on March 23, 1998 was $4.75. The approximate number of holders
of record of the shares of the Company's Common Stock was 213 as of March 23,
1998. This number does not include stockholders whose shares are held in trust
by other entities. The actual number of stockholders is greater than this number
of holders of record. The approximate number of beneficial stockholders of the
shares of the Company's Common Stock as of March 23, 1998 was 3,202.
The Company has authorized Common Stock of $0.01 par value and Preferred
Stock. In connection with the initial public offering, all of the convertible
preferred stock, except the Series P Redeemable Preferred Stock, and related
accrued dividends outstanding at the time of the initial public offering
automatically converted into 6,456,681 shares of Common Stock. Approximately
$2.8 million of the net proceeds were used for the mandatory redemption of the
Series P Redeemable Preferred Stock following the closing of the Company's
initial public offering in June 1997. Subsequent to the Company's initial public
offering, the Company has not issued any Preferred Stock.
The Company has not paid any cash dividends on its capital stock. The
Company currently intends to retain its earnings to fund the development and
growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's existing credit
facilities prohibit the payment of cash or stock dividends on the Company's
capital stock without the bank's prior written consent. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 6 of Notes to
Consolidated Financial Statements contained in Item 14.
During the year ended December 31, 1997, the Company did not sell any equity
securities that were not registered under the Securities Act of 1933, as
amended, except for the issuance of an aggregate of 900,000 shares of the
Company's Common Stock on December 5, 1997 which were issued to the shareholders
of
10
<PAGE>
DocuMagix, Inc. with and into the Company in connection with the merger of
DocuMagix, Inc. (see Note 2 of Notes to Consolidated Financial Statements). The
sales of the above securities were deemed to be exempt from registration under
the Securities Act in reliance on Rule 506 of Regulation D as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificate and instruments issued in such transactions. All receipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
(b) 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.
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 December 31, 1997, 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:..................... $ 468,154
Acquisition of other businesses.......................................... 1,250,000
Working capital:......................................................... 7,690,209
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.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below for the year
ended December 31, 1997, the nine months ended December 31, 1996 and the fiscal
year ended March 31, 1996, and the consolidated balance sheet data at December
31, 1997 and 1996 are derived from the consolidated financial statements of the
Company included elsewhere in this Report on Form 10-K. The selected financial
data for the fiscal years ended March 31, 1996, 1995 and 1994 and the
consolidated balance sheet data at March 31, 1995 and 1994, have been derived
from unaudited financial statements that have been prepared on the same basis as
the audited financial statements and which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's results of operations. The
following financial data is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Report on Form 10-K.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, FISCAL YEAR ENDED MARCH 31,
------------ ------------- ---------------------------------
1997 1996(1) 1996 1995 1994
------------ ------------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product....................................................... $16,281 $10,205 $11,143 $6,413 $6,086
Software and technology license fees.......................... 4,493 3,200 3,413 484 --
Development fees.............................................. 2,246 1,468 720 1,200 75
------- ------- ------- ------ ------
Total revenues.............................................. 23,020 14,873 15,276 8,097 6,161
------- ------- ------- ------ ------
Costs and expenses:
Cost of product revenues...................................... 11,886 8,441 11,102 5,249 5,486
Cost of software and license fees............................. 770 517 587 124 --
Research and development...................................... 5,355 2,554 2,318 1,794 1,776
Selling and marketing......................................... 6,046 5,212 5,216 1,928 1,476
General and administrative.................................... 3,031 1,726 1,652 1,632 881
Acquisition and related expenses.............................. 2,106 -- -- -- --
------- ------- ------- ------ ------
Total costs and expenses.................................... 29,194 18,450 20,875 10,727 9,619
------- ------- ------- ------ ------
Loss from operations........................................... (6,174) (3,577) (5,599) (2,630) (3,458)
------- ------- ------- ------ ------
Interest and other income (expense), net....................... 111 -- (259) (119) (4)
------- ------- ------- ------ ------
Loss before extraordinary item and income taxes................ (6,063) (3,577) (5,858) (2,749) (3,462)
Provision for income taxes..................................... 96 107 35 -- --
------- ------- ------- ------ ------
Loss before extraordinary item................................. (6,159) (3,684) (5,893) (2,749) (3,462)
Extraordinary item (2)......................................... -- -- -- 349 --
------- ------- ------- ------ ------
Net loss....................................................... $(6,159) $(3,684) $(5,893) $(2,400) $(3,462)
Series P Redeemable Preferred Stock dividends.................. (68) (116) ======= ======= =======
------- -------
Net loss applicable to common stockholders..................... $(6,227) $(3,800)
======= =======
Net loss per share (3):
Basic......................................................... $ (0.61) $ (0.46)
======= =======
Diluted....................................................... $ (0.61) $ (0.46)
======= =======
Shares used in computing per share amounts:
Basic......................................................... 10,170 8,203
======= =======
Diluted....................................................... 10,170 8,203
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ----------------------------------
1997 1996(1) 1996 1995 1994
--------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................. $12,814 $ 542 $ 4,978 $(2,772) $(4,970)
Total assets.................................................... 18,856 7,092 12,031 3,849 2,700
Long-term note payable, less current portion.................... -- 198 -- 2,372 4
Redeemable preferred stock...................................... -- 2,726 2,610 -- --
Total stockholders' equity (deficit)............................ 15,271 (861) 2,708 (4,779) (4,710)
</TABLE>
____________________
(1) 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
after December 31. The 40-week period from April 1, 1996 to January 4, 1997
is referred to herein as the nine months ended December 31, 1996. For
presentation purposes, the Company refers to its reporting year ended
January 3, 1998 as ending on December 31, 1997 and its reporting year ended
January 4, 1997 as ending on December 31, 1996.
(2) Represents a gain on exchange of stockholder debt and receivables for notes
payable.
(3) For an explanation of the determination of the number of shares used in
computing net loss per share, see Note 1 of Notes to Consolidated Financial
Statements. Net loss per share for fiscal March 31, 1996 and earlier
periods has not been presented because of the significant change in the
Company's capital structure from the conversion of preferred stock in
connection with the Company's initial public offering in June 1997. The
common stock equivalents from the conversion of the preferred stock would
be antidilutive for such loss years.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The statements contained in this Report on Form 10-K 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-K.
JetFax, Inc. is a leading developer and provider of integrated embedded system
technology, branded products and desktop software solutions for the MFP market,
which consists of electronic office devices that combine print, fax, copy and
scan capabilities in a single unit. The Company was incorporated in August 1988
and since that time has engaged in the development, manufacture and sale of its
branded MFPs, including the 8000-D, the JetFax 4, the JetFax M5, and the current
offering, the Series M900. The Company has also entered into agreements with a
number of OEMs for the customization and integration of the Company's embedded
system technology and desktop software in OEMs' MFPs. The desktop software
includes JetSuite, which resulted from the Company's July 1996 purchase of
substantially all of the assets of the Crandell Group, Inc., and PaperMaster,
which was acquired in a December 1997 pooling of interests transaction with
DocuMagix, Inc.
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. For presentation purposes, the Company refers to its
reporting year ended January 3, 1998 as ending on December 31, 1997 and its
reporting year ended January 4, 1997 as ending on December 31, 1996. The most
recent fiscal year discussion and analysis is based on the twelve months ended
December 31, 1997 compared to the twelve months ended December 31, 1996.
Revenues increased to $23.0 million for the twelve months ended December 31,
1997 from $20.4 million for the twelve months ended December 31, 1996 and $15.3
million for the fiscal year ended March 31, 1996. In June 1997, the Company
completed an initial public offering of 3.5 million shares (2.75 million shares
offered by the Company and 0.75 million shares offered by selling shareholders)
at $8.00 per share with net proceeds to the Company of $19.7 million. At
December 31, 1997, the Company had an accumulated deficit of $27.7 million and
total stockholders' equity of $15.3 million.
The Company's revenues are derived from three sources: (i) product revenues
consisting of sales of JetFax branded MFPs, consumables and upgrades; (ii)
development fees for engineering services; and (iii) software and technology
license fees related to both its embedded system technology for MFPs and its
desktop software. Historically, product revenues have accounted for the
majority of the Company's total revenues. For the twelve months ended December
31, 1997, product revenues, development fees, and software and technology
license fees, as a percentage of total revenues, were 71%, 10% and 19%,
respectively.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Product revenues result from the sale of the Company's branded MFP products
into the corporate market through business equipment dealers. Revenues from
product sales to resellers, international distributors, OEMs and end users are
recognized upon shipment. OEMs, end users, and international distributors have
no rights of return while resellers have limited return rights. Allowances for
potential returns and exchanges from resellers are provided at the time of sale
based on historical returns and exchange experience. The Company defers revenue
on sales to domestic distributors and recognizes the revenue when the
distributor sells the product to resellers. The Company provides a ninety day
warranty for parts and service on its hardware products as well as ongoing
technical support to the dealer network. The Company provides a limited amount
of telephone technical support to its software customers. Estimated cost of
warranty work and post contract software customer support obligations are
accrued when the revenue is recognized. Development fee revenues are derived
from customizing the Company's embedded system technology and software for
inclusion in specific applications for its OEMs' products. Development fee
revenues are recognized on the percentage of completion method over the
development period. See Note 1 of Notes to Consolidated Financial Statements.
The Company's development contracts with certain OEM customers have enabled
JetFax to accelerate its product development efforts. The Company classifies all
development costs related to such contracts as research and development expenses
because such development fees have only partially funded the Company's product
development activities, and the Company generally retains ownership of the
technology developed under these agreements.
Software and technology license fees result from licensing the Company's
proprietary embedded system technology and desktop software to OEMs for
integration into their products. These payments can take the form of one-time
license fees, non-refundable prepaid royalties, or recurring per unit royalties.
One-time license fees and non-refundable prepaid royalties are recognized upon
the later of delivery of the contracted technology or satisfaction of
contractual milestones, if any. Recurring license revenues from per unit fees
paid by the Company's OEMs are recognized upon the manufacture or shipment of
products incorporating the Company's technology as specified in the related
agreements. The recurring license revenues reported by the Company are
dependent on the timing and accuracy of product manufacturing or sales reports
received from the Company's OEM customers. These reports are provided on a
quarterly basis which may not coincide with the Company's quarter end. However,
the Company attempts to get verbal estimates more frequently. The quarterly
reports, as well as any verbal estimates, are subject to delay and potential
revision by the OEM. Therefore, the Company may be unable to estimate such
revenues accurately prior to public announcement of the Company's quarterly
results. In such an event, the Company may subsequently be required to revise
its previously reported revenues when it publishes its financial statements 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 on the price of the Company's Common Stock.
A substantial portion of the Company's branded products sales is to dealers in
the IKON network. These IKON dealers accounted for 19% of the Company's total
revenues in 1997. The Company's current OEM customers for engineering
development and technology licenses are Hewlett-Packard, Oki Data, and Samsung;
Hewlett-Packard accounted for 13% of the Company's total revenues in 1997. The
Company expects that the ongoing obligations under existing OEM contracts will
generate future royalty payments. The termination of a major dealer
relationship or an OEM agreement would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Dependence on Dealers and Distributors" and "--Dependence on OEMs."
International revenues accounted for 29% and 27% of total revenues for the
twelve month periods ended December 31, 1997 and December 31, 1996,
respectively. All of the development fees and software and technology license
revenues, and most of the product revenues, have been denominated and collected
in United States dollars. The Company has not hedged the foreign currency
exposure related to product sales denominated in foreign currencies as the
impact has not been significant. See "Risk Factors--International
Activities."
The gross margins for the Company's branded MFP products have been and are
expected to continue to be constrained by the competitive nature of the
marketplace, pricing pressures and the greater name recognition of the larger
companies with which JetFax competes. The Company believes that sales of its
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
branded MFP products provide a substantial revenue base, an opportunity to stay
in close touch with evolving customer and market needs, and a high level of
credibility in demonstrating the Company's advanced technology. The margins on
consumables, such as toner cartridges and drums, and on upgrades, such as the
two-line upgrade, are typically higher than on the base unit. In addition, the
Company's consumables generate recurring revenues which tend to increase as the
cumulative number of units sold increases.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's statements of
operations for the periods indicated (in thousands). For comparability purposes,
the Company is presenting unaudited information for the twelve month period
ended December 31, 1996 (due to its change in fiscal year -- see Note 1 of Notes
to Consolidated Financial Statements).
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED FISCAL
DECEMBER 31, YEAR ENDED
--------------------- MARCH 31,
1997 1996 1996
-------- -------- ----------
(unaudited)
<S> <C> <C> <C>
Revenues:
Product $16,281 $14,012 $11,143
Software and technology license fees 4,493 4,623 3,413
Development fees 2,246 1,722 720
------- ------- -------
Total revenues 23,020 20,357 15,276
------- ------- -------
Costs and expenses:
Cost of product revenues 11,886 11,750 11,102
Cost of software and license revenues 770 716 587
Research and development 5,355 3,211 2,318
Selling and marketing 6,046 7,115 5,216
General and administrative 3,031 2,284 1,652
Acquisition and related expenses 2,106 -- --
------- ------- -------
Total costs and expenses 29,194 25,076 20,875
------- ------- -------
Loss from operations (6,174) (4,719) (5,599)
Other income (expense), net 111 (76) (259)
------- ------- -------
Loss before income taxes (6,063) (4,795) (5,858)
Provision for income taxes 96 107 35
------- ------- -------
Net loss $(6,159) $(4,902) $(5,893)
======= ======= =======
</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>
TWELVE MONTHS ENDED FISCAL
DECEMBER 31, YEAR ENDED
------------------- MARCH 31,
1997 1996 1996
------- -------- ----------
<S> <C> <C> <C>
Revenues:
Product 71% 69% 73%
Software and technology license fees 19 23 22
Development fees 10 8 5
---- ---- ----
Total revenues 100 100 100
---- ---- ----
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
Costs and expenses:
Cost of product revenues 52 58 73
Cost of software and license revenues 3 3 4
Research and development 24 16 15
Selling and marketing 27 35 34
General and administrative 13 11 11
Acquisition and related expenses 9 -- --
---- ---- ----
Total costs and expenses 127 123 137
---- ---- ----
Loss from operations (27) (23) (37)
Other income (expense), net -- -- (2)
---- ---- ----
Loss before income taxes (27) (23) (39)
Provision for income taxes -- 1 --
---- ---- ----
Net loss (27)% (24)% (39)%
==== ==== ====
</TABLE>
- -------------
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.)
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996
Revenues. Total revenues increased 13% to $23.0 million for the twelve
months ended December 31, 1997 from $20.4 million for the twelve months ended
December 31, 1996. Revenues from the historical JetFax operations rose 18% to
$20.8 million from $17.6 million and those of DocuMagix decreased 20% to $2.2
million from $2.8 million.
Product revenue from the sale of the Company's MFPs and related consumables
and accessories were $16.3 million in 1997, a 16% increase from $14.0 million
during the twelve month period ended December 31, 1996. Consumable revenue
advanced 44% year to year and accounted for two-thirds of the increase in
product revenues, while revenue from accessories fell 3% in 1997. Revenue from
MFPs rose 9% year to year, which mirrored the 9% increase in MFP units.
Although the MFP revenue and unit increase were symmetrical, this resulted from
an improved product mix in 1997 neutralized by price declines in the Company's
major MFP product lines. The twelve months ended December 31, 1996 included
revenues from the lower priced inkjet based JetFax 4, which accounted for 16% of
total units in 1996 and less than 1% in 1997, but this improvement in product
mix was offset by a decline of 10% in the average selling price of the Company's
baseline JetFax M5 and Series M900 laser/LED MFPs from 1996 to 1997. The number
of units sold each quarter was relatively flat during the four quarters of 1997.
The Series M900, the new product line of MFPs, was introduced at the end of the
third quarter, but did not lead to higher unit shipments in the fourth quarter,
due to competitive pricing in the market and delays in the placement of orders
in the business equipment dealer channel.
Development fees increased 30% to $2.2 million for the twelve month period
ended December 31, 1997 from $1.7 million for the twelve month period ended
December 31, 1996 as major development programs were initiated or continued for
OEMs licensing the Company's embedded systems and PC software. The Company has
previously reported delays on completion of the last milestone of a development
agreement with one of its OEMs. The OEM has been shipping the product for
several months and has agreed that the final milestone payment will be
completely paid. Accordingly, the Company recognized the remaining $247,000 of
revenue during 1997 relating to this final development milestone.
Software and technology licensing fees decreased 2% to $4.5 million for the
twelve month period ended December 31, 1997 from $4.6 million for the twelve
month period ended December 31, 1996. The software and technology licensing
fees from historical JetFax operations grew 24% to $2.4 million in 1997 from
$1.9
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
million in 1996. The 1997 year included significant licensing fees from the
Company's software licensing and from the Hewlett-Packard project, which more
than offset the decline due to the end of life of Xerox products for which
JetFax earned royalties. Software and technology licensing fees for DocuMagix
fell 25% to $2.1 million for 1997 from $2.7 million in 1996, as its separate
Internet software products were withdrawn from the market and emphasis was
focused on the third quarter launch of a new version of PaperMaster which
incorporated Internet capabilities.
International revenues increased to 29% of total revenues for 1997 compared to
27% for 1996, primarily as a result of higher international product shipments to
Europe. The Company does not sell its product in any Asian countries, though the
product is sold in New Zealand and Australia. In both 1997 and 1996, development
fees were generated from both Japan and Korea. Two customers, IKON Office
Solutions and Hewlett-Packard, accounted for $4.4 million (19%) and $3.1 million
(13%), respectively, of total revenues for the twelve month period ended
December 31, 1997. One of the customers, IKON Office Solutions, accounted for
approximately 15% of total revenues for the twelve month period ended December
31, 1996.
Cost of Product Revenues. Cost of product revenues consists primarily of
purchased materials; direct production labor and supervision for assembly and
test; subcontracted manufacturing, mainly for printed circuit boards; indirect
labor for inventory management, shipping and receiving, purchasing,
manufacturing engineering, document control and operations management; and
related facility and support costs. Cost of product revenues may vary as a
percentage of total revenues in the future as a result of a number of factors
including: relative production volumes; the mix of product shipped and the
varying proportion of MFPs versus consumables and upgrades; changes in
production yields, especially those associated with the introduction of new
products; risk of inventory obsolescence and excess inventory; pricing pressures
in the market; and vendor quality or supply problems.
Cost of product revenues increased 1% to $11.9 million in 1997 from $11.8
million in 1996. Given the higher product revenue level in 1997, the product
gross margins advanced to 27.0% from 16.1% in the prior year. The improvements
in the gross margin for the JetFax branded products and consumables were due to
manufacturing efficiencies, higher volumes, and a shift in mix to the newer
JetFax M5 and Series M900 product lines; the aggregate of these improvements
more than offset a decline in average selling price of MFPs.
The Company purchases print engines for its new Series M900 product line in
Yen from Oki Data Corporation. As the Yen weakened since mid-year 1997, the
Company's cost of goods sold related to the print engine was lowered by
$106,000. 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 $94,000 for the twelve months ended December 31, 1997 that
was included in cost of goods sold. Additionally, the translation of the
Company's intercompany receivables had a small negative impact, which was
partially offset by lower operating expenses of the Company's international
operations. The Yen hedge may minimize foreign exchange risks that would
otherwise result from changes in foreign currency exchange rates. There can be
no assurance that these strategies will be effective or that transaction losses
can be minimized or forecasted accurately. Exchange gains and losses did not
have a significant effect on the Company's results of operations for the twelve
month periods ended December 31, 1997 and 1996, respectively.
Cost of Software and License Revenues. Cost of software and license revenues
consists primarily of royalties paid for licensed technology included in the
Company's products, amortization of purchased technology, and the duplication
and packaging expense associated with software sold in the retail market. Cost
of software and license revenues increased 8% to $770,000 in 1997 from $716,000
in 1996.
Research and Development. Research and development expenses were comprised
mainly of personnel related costs, engineering prototypes and supplies, payments
to engineering contractors, computer equipment depreciation and facilities
expenses. Research and development expenses increased 67% to $5.4 million in
1997 from $3.2 million in the prior year. As a percentage of revenues, research
and development
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
expenses increased to 23.3% for 1997 from 15.8% for 1996. The year to year
research and development increase for the historical JetFax operations was $2.2
million or 106%, while such expenses at DocuMagix (which include $150,000 of
retention bonuses payable to research and development employees) fell $17,000 or
1%. The increases in research and development expense resulted primarily from:
(i) the additional software development personnel added with the acquisition of
the Crandell Group in July 1996, (ii) additional personnel added in 1997 as the
year end research and development headcount for historical JetFax operations
increased from 22 to 41, (iii) external consultant and prototype expenses, and
(iv) DocuMagix retention bonuses. The Company believes that the development and
introduction of new products is critical to its success and expects that
research and development expenses will increase on a dollar basis in the future,
although at a lower rate than that experienced in 1997.
Selling and Marketing. Selling and marketing expenses consisted primarily of
personnel related costs and commissions, travel and entertainment expenses of
direct sales and marketing personnel, advertising and promotional expenses,
marketing communications, customer support, and service and facilities expenses.
Selling and marketing expenses decreased 15% to $6.0 million in 1997 from $7.1
million in the prior year. The year to year selling and marketing expenses
increase for the historical JetFax operations was $105,000 or 2.8%, while such
expenses at DocuMagix (which include $77,000 of retention bonuses payable to
selling and marketing employees) fell $1.2 million or 35% in conjunction with
scaling back expenses to match the lower revenues and the change in product
direction away from Internet related products. As a percentage of revenues,
selling and marketing expenses fell to 26.3% in 1997 from 34.9% in 1996 due to
marketing expenses decreasing as revenues increased.
General and Administrative. General and administrative expenses included
personnel related costs for administrative, finance, and executive personnel;
outside professional fees; facilities expenses; and retention bonuses for
DocuMagix employees. General and administrative expenses increased 33% to $3.0
million in 1997 from $2.3 million in 1996. The increase in the year to year
general and administrative expenses for the historical JetFax operations was
$649,000 or 60.5%, while such expenses at DocuMagix (which include $169,000 of
retention bonuses payable to general and administrative employees) increased
$99,000 or 1%. The increases were primarily due to higher expenses for
personnel, facilities, business insurance, hiring, and DocuMagix retention
bonuses. As a percentage of revenues, general and administrative expenses rose
to 13.2% in 1997 from 11.2% in 1996.
Acquisition Charges and Related Expense. Acquisition charges related to 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 a total of $2.1 million in
acquisition charges in 1997 and none in 1996. The Crandell Group's $1.7 million
portion of the 1997 acquisition charges was comprised of: a $1.0 million final
payment in July 1997 to the Crandell Group in lieu of future royalty payments
(which would have been recorded as compensation as they related to continued
employment); Crandell acquisition charges of $0.6 million for a variable equity
award classified as compensation; and compensation expenses of $56,000
associated with royalties related to the continuing employment of the founders
of the Crandell Group. The $425,000 DocuMagix portion of the 1997 acquisition
charges was primarily comprised of legal and accounting costs related to the
pooling of interests transaction and the estimated lease obligation for the
previous DocuMagix facility.
Interest and Other Income (Expense). Interest and other income (expense)
consisted primarily of interest income (expense), foreign exchange gains
(losses), and miscellaneous items of other income (expense). Interest and other
income (expense) increased to $111,000 for the twelve months ended December 31,
1997 from $(76,000) for the comparable period of the prior year. The historical
JetFax operations generated $262,000 of interest income during 1997 while
DocuMagix incurred interest expense of $75,000 for the same time period. Total
interest expense for 1996 was $104,000. Foreign exchange losses were $58,000 for
1997 versus $13,000 for 1996.
Provision for Income Taxes. Due to the Company's net losses, there were no
provisions for federal or state income taxes for the twelve months ended
December 31, 1997 or the twelve months ended December 31, 1996. The income tax
provisions of $96,000 for 1997 and $107,000 for 1996 primarily related to
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
foreign withholding taxes on certain development fees.
At December 31, 1997, net operating loss carryforwards attributable to JetFax,
Inc. of approximately $13.9 million and $4.2 million (not including amounts
related to the Company's DocuMagix subsidiary) were available to offset future
Federal and state taxable income, respectively, and research and development tax
credits of $170,000 and $121,000 were available to offset future Federal and
state income taxes, respectively. Current Federal and California tax law
includes certain provisions limiting the annual use of net operating loss
carryforwards in the event of certain defined changes in stock ownership, as
defined. The Company's ability to utilize its net operating loss and tax credit
carryforwards could be limited according to these provisions. Management
believes such limitation could result in the loss of carryforward benefits which
expire from 2004 through 2012. The use of the above loss carryforwards is
dependent upon the Company's ability to achieve profitability. The Company's net
operating loss carryforwards attributable to it's DocuMagix subsidiary are
limited according to these provisions to approximately $380,000 per year or
approximately $5.7 million and $1.9 million in total through the applicable
Federal and California carryforward periods, respectively. See Note 9 of Notes
to Consolidated Financial Statements.
The Company recognizes deferred tax assets and liabilities based on the
difference between financial reporting and tax bases of assets and liabilities
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Based on the weight of available evidence,
which includes the Company's historical losses since inception, and the
uncertainties regarding future results of operations, the Company has provided a
full valuation allowance against its net deferred tax assets of $8.5 million at
December 31, 1997, as it is more likely than not that the deferred tax assets
will not be realized. See Note 9 of Notes to Consolidated Financial Statements.
Net income (loss). The net loss for 1997 was $6.2 million or $0.61 per share
including acquisition-related charges of $2.1 million related to the acquisition
of the Crandell Group ($1.7 million) and DocuMagix ($425,000). Excluding
acquisition-related charges and a one-time retention bonus ($396,000) associated
with the retention of DocuMagix employees prior to the acquisition, the pro
forma net loss for 1997 was $3.7 million or $0.36 per share compared with a net
loss of $4.9 million for the twelve months ended December 31, 1996. Prior to the
acquisition-related charges and the one-time retention bonus, $905,000 of the
1997 loss resulted from the historical JetFax operations and $2.8 million was
attributable to the operations of DocuMagix.
Twelve months Ended December 31, 1996 Compared to Twelve Months Ended March 31,
1996
Revenues. Total revenues increased 33% to $20.4 million for the twelve
months ended December 31, 1996 from $15.3 million for the twelve months ended
March 31, 1996. The increased revenues primarily reflected increased unit
shipments and higher average selling prices of the Company's MFPs as the Company
transitioned from the JetFax 4, an inkjet MFP, to the JetFax M5, a high
performance, laser/LED MFP, which began commercial shipment in June 1995. In
addition, during the twelve months ended December 31, 1996, the Company expanded
the number of large business equipment dealers marketing the Company's products.
Product revenues increased 25% to $14.0 million for the twelve months ended
December 31, 1996 from $11.1 million for the twelve months ended March 31, 1996.
Development fees increased 139% to $1.7 million for the twelve months ended
December 31, 1996 from $720,000 for the fiscal year ended March 31, 1996, as
major programs were initiated or continued for OEMs. Correspondingly, software
and technology license fees increased 35% to $4.6 million for the twelve months
ended December 31, 1996 from $3.4 million for the twelve months ended March 31,
1996. This increase was primarily due to an increase of $728,000 or 33% in the
DocuMagix software license fees, as well as the Crandell Acquisition in July
1996 which added software license fees of $628,000 for the last two quarters of
the twelve months ended December 31, 1996; these increases were partially offset
by a decline in royalties from Xerox due to the end of life of a related Xerox
product.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Cost of Product Revenues. Cost of product revenues increased 6% to $11.8
million for the twelve months ended December 31, 1996 from $11.1 million for the
twelve months ended March 31, 1996. The product gross margin increased to 16.1%
for the twelve months ended December 31, 1996 from 0.4% for the twelve months
ended March 31, 1996. The product gross margin for the twelve months ended March
31, 1996 was adversely affected by reserves of $760,000 taken in the quarter
ended September 30, 1995 for the write-down of certain inventory to net
realizable value and to record estimated losses on purchase commitments related
to the pricing decline on the JetFax 4. The Company had a fixed price order from
Xerox for JetFax 4 units, but the price at which the units could be sold in the
market had declined substantially due to competition from other manufacturers'
new product introductions. A settlement of the purchase commitment from Xerox
was negotiated in the quarter ended September 30, 1996, which resulted in a
reduction of the inventory reserve and a credit to cost of product revenues of
$280,000.
Excluding the impact of these reserves, the product gross margin was 14.1% for
the twelve months ended December 31, 1996 as compared to 7.2% for the twelve
months ended March 31, 1996. The lower product gross margin in the prior twelve
month period primarily reflected the impact of competitive pricing pressures in
the inkjet MFP market and the startup and higher initial production costs
associated with the June 1995 commercial release of the JetFax M5.
Cost of Software and License Revenues. The cost of software and license
revenues increased 22% to $716,000 for the twelve months ended December 31, 1996
from $587,000 for the twelve months ended March 31, 1996. The year to year
increase in costs of software and license revenues was approximately equally
divided between higher costs at DocuMagix and incremental costs added with the
acquisition of the Crandell Group in July 1996.
Research and Development. Research and development expenses increased 39% to
$3.2 million for the twelve months ended December 31, 1996 from $2.3 million for
the twelve months ended March 31, 1996, but increased only slightly as a
percentage of total revenues to 15.8% from 15.2%, respectively. This increase
resulted primarily from: (i) the software development personnel added with the
Crandell Acquisition in July 1996; (ii) certain compensation expenses associated
with the continuing employment of the founders of the Crandell Group, which are
based on a percentage of ongoing desktop software sales; and (iii) quick
turnaround engineering prototype expenses for the development of an embedded
system.
Selling and Marketing. Selling and marketing expenses increased 36% to $7.1
million for the twelve months ended December 31, 1996 from $5.2 million for the
twelve months ended March 31, 1996, but increased only slightly as a percentage
of total revenues to 35.0% from 34.1%, respectively. Just over half of the
increase was due to higher expenses in the JetFax historical operations related
primarily to higher personnel costs and building the Company's network of
business equipment dealers; the balance was increased selling and marketing
expense at DocuMagix related to establishing the PaperMaster software product in
the retail channel.
General and Administrative. General and administrative expenses increased
38% to $2.3 million for the twelve months ended December 31, 1996 from $1.7
million for the twelve months ended March 31, 1996, but increased only slightly
as a percentage of total revenues to 11.2% from 10.8%, respectively.
Interest and Other Income (Expense). Interest and other income (expense) was
$(76,000) for the twelve months ended December 31, 1996 compared with $(259,000)
for the twelve months ended March 31, 1996. The $183,000 decrease in interest
and other income (expense) was related to interest on 10% senior secured
convertible notes which increased from $2.0 million to $3.0 million during the
twelve month period ended March 31, 1996. Such notes were either repaid or
converted in March 1996 into shares of Convertible Preferred Stock.
Provision for Income Taxes. Due to the Company's net losses, there were no
provisions for federal or state income taxes for the twelve month periods ended
December 31, 1996 and March 31, 1996. The $107,000 and $35,000 income tax
provisions for the twelve month periods ended December 31, 1996 and March 31,
1996, respectively, were primarily related to foreign withholding taxes.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net income (loss). The net loss for the twelve months ended December 31,
1996 was $4.9 million compared to $5.9 million for the twelve months ended March
31, 1996. The $4.9 million loss for the twelve months ended December 31, 1996
was comprised of a $3.6 million loss attributable to DocuMagix and a $1.3
million loss related to the historical JetFax operations. The $5.9 million loss
for the twelve months ended March 31, 1996 was comprised of a $3.0 million loss
attributable to DocuMagix and a $2.9 million loss related to the historical
JetFax operations, of which $760,000 related to the write-down of inventory
discussed above in Cost of Product Revenues.
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 December 31, 1997 was $42.6
million through a series of private financing rounds at both JetFax and
DocuMagix, as well as the Company's June 1997 initial public offering.
At December 31, 1997, the Company had $1.5 million available under its bank
credit facility under which there were no borrowings at December 31, 1997. 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 December
31, 1997, except the quarterly net income covenant for which the Company
received a waiver to March 31, 1998.
Cash and short term investments increased to $7.2 million at December 31, 1997
from $413,000 at December 31, 1996. Inventories increased $1.6 million to $4.0
million at December 31, 1997 from $2.4 million at December 31, 1996, due
primarily to: (i) an increase in finished goods inventory of the JetFax M910 due
to softer sales than originally anticipated and (ii) stocking higher levels of
consumables and product upgrades. Accounts receivable increased $2.3 million to
$4.8 million at December 31, 1997 from $2.5 million at December 31, 1996,
principally due to the increase in product sales and higher receivables related
to development contracts. Accounts payable decreased $819,000 to $1.7 million
at December 31, 1997 from $2.5 million at December 31, 1996 related to a $1.0
million payment associated with the acquisition of the Crandell Group and a
reduction in the DocuMagix payables; the reductions were partially offset by
payables related to the higher inventory levels.
Investing activities for the year ended December 31, 1997 used cash of
approximately $4.5 million for $0.7 million of property purchases, $3.0 million
purchases of short-term investments and $0.8 million of other assets. Financing
activities for the year ended December 31, 1997 provided cash of $16.5 million
resulting from $20.7 million of net proceeds from the sale of common stock
partially offset by $1.4 million of debt and equipment loan repayments and the
$2.8 million redemption of Series P Preferred Stock.
The Company currently believes that the net proceeds of the initial public
offering, 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.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FACTORS THAT MAY AFFECT OPERATING RESULTS
The statements contained in this Report on Form 10-K 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-K.
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 audited Consolidated
Financial Statements and Notes thereto included in Part IV -- Item 14 of this
Annual Report on Form 10-K and the audited Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1996, contained in the
Company's Registration Statement on Form S-1, as amended (No. 333-23763), which
was declared effective on June 10, 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 $27.7
million as of December 31, 1997. 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
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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,
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 with independent
contractors, changing market or competitive product requirements and
unanticipated engineering complexity. The Company has experienced delays in one
of its current development projects in the past which have 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.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth on pages 38 through 56, which
follow Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company is included in the
Company's Proxy Statement to be filed in connection with the Company's 1998
annual meeting of stockholders under the caption "Election of Directors" and is
incorporated herein by reference. The information concerning the executive
officers of the Company required by this item is as follows:
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rudy Prince....................................... 40 President, Chief Executive Officer and
Chairman of the Board
Michael Crandell.................................. 41 Vice President of Software
John H. Harris.................................... 42 Vice President of International Operations
Hansgregory C. Hartmann........................... 40 Vice President of Manufacturing
Allen K. Jones.................................... 50 Vice President of Finance, Chief Financial
Officer and Secretary
Gary P. Kapner.................................... 36 Vice President of North American Sales and
Service
Lon B. Radin...................................... 47 Vice President of Engineering and Director
</TABLE>
RUDY PRINCE co-founded the Company and has served as its President and Chief
Executive Officer and a member of the Board of Directors since August 1988. Mr.
Prince was appointed as the Chairman of the Board of Directors in October 1996.
From June 1985 to February 1988, Mr. Prince was the Vice President of Sales and
Marketing at Entropic Speech, Inc., a manufacturer of telecommunications
products. Prior to that, Mr. Prince served as Sales Manager with Digicon, Inc.,
a geophysical contractor (''Digicon''), from March 1980 to June 1985. From
August 1978 to March 1980, Mr. Prince served as a marketing representative with
the Data Processing Division of International Business Machines Corporation. Mr.
Prince holds a B.S. in Mechanical Engineering from the University of Texas at
Austin. Mr. Prince is the son of Edward R. Prince, Jr., a director of the
Company.
MICHAEL CRANDELL joined the Company in July 1996 as the Vice President of
Software. From January 1993 to July 1996, Mr. Crandell served as the President
of the Crandell Group, the assets of which were purchased by the Company in July
1996. Prior to that, Mr. Crandell served as the President of Crandell
Development Corporation, a software development company from November 1984 to
December 1992. From 1981 to November 1984, Mr. Crandell worked as a Software
Engineer with Compucorp, Inc. Mr. Crandell holds a B.A. in Religious Studies
from Stanford University.
JOHN H. HARRIS joined the Company in March 1990 as the Vice President of
International Operations. From July 1987 to February 1990, Mr. Harris served in
various sales management positions with Landmark Graphics Corporation, a
supplier of graphics workstations for the oil industry, most recently as the
Regional Sales Director. From May 1981 to June 1987, Mr. Harris served as the
North American Sales Manager and Far East Sales manager for Digicon. Mr. Harris
holds a B.A. in Marketing from the University of Houston.
HANSGREGORY C. HARTMANN joined the Company in August 1995 as the Vice
President of Manufacturing. From June 1980 to August 1995, Mr. Hartmann held
various positions with Hewlett-Packard. From November 1992 to August 1995, he
was the Manager of the Channel Development and Information Services for U.S.
Channel Marketing in the Computer Products Organization of Hewlett-
30
<PAGE>
Packard and, from September 1991 to November 1992, he was the Business
Development Manager for the North American Distribution Operation of Hewlett-
Packard. From July 1985 to September 1991, Mr. Hartmann served as the
Engineering Manager for the Personal Computer Distribution Operation of Hewlett-
Packard. Mr. Hartmann holds a B.S. in Electrical Engineering from the New Jersey
Institute of Technology and a M.S. in Manufacturing Systems Engineering from
Stanford University.
ALLEN K. JONES joined the Company in May 1996 as the Vice President of
Finance, Chief Financial Officer and Secretary. From January 1976 to January
1996, Mr. Jones served in various positions with Varian Associates, Inc., a
diversified electronics company, most recently as the Vice President and
Controller from January 1995 to January 1996 and prior to that as the Vice
President and Treasurer from May 1990 to December 1994. Mr. Jones holds a B.S.
in Chemical Engineering from Cornell University and a M.B.A. from the Wharton
School of Finance at the University of Pennsylvania.
GARY P. KAPNER joined the Company in September 1990 as the Technical Services
Manager. Since 1994, Mr. Kapner has been responsible for the JetFax products
sales in North America. From June 1988 to September 1990, Mr. Kapner served as
National Technical Services Manager for Payfax, Inc. From May 1987 to 1988, Mr.
Kapner worked in the Product Diagnostic Center for NEC's Western Region Fax
Division.
LON B. RADIN co-founded the Company and serves as the Vice President of
Engineering and a member of the Board of Directors of the Company. Dr. Radin
also served as the Chairman of the Board of Directors from August 1988 to
October 1996. From 1986 to 1988, Dr. Radin was the sole proprietor of L-Tel
Laboratories, a developer of digital fax telephone devices. From 1981 to 1986,
Dr. Radin served in various positions, most recently as the Director of Software
and Manager of Research with Time & Space Processing, Inc., a software developer
of telecommunications products for the defense industry. Prior to that Dr. Radin
served as a software services consultant for The Systems Group, an engineering
consulting firm from 1976 to 1981. Dr. Radin holds a B.S. in Physics and
Mathematics from the University of Michigan and a Ph.D. and an M.A. in
Mathematics from the University of California at Berkeley.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive
Compensation" and "Stock Option Grants and Exercise" in the Company's Proxy
Statement to be filed in connection with the Company's 1998 annual meeting of
stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with the Company's 1998 annual meeting of
stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Transactions" in the Company's Proxy Statement to be filed in connection with
the Company's 1998 annual meeting of stockholders and is incorporated herein by
reference.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements.
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report -- Deloitte & Touche LLP..................................... 38
Report of Independent Accountants -- Price Waterhouse LLP................................. 39
Consolidated Balance Sheets as of December 31, 1997 and 1996.............................. 40
Consolidated Statements of Operations for the Year ended December 31, 1997, the Nine
Months Ended December 31, 1996 and the Fiscal Year Ended March 31, 1996.................. 41
Consolidated Statements of Stockholders' Equity (Deficit) for Year ended December 31,
1997, the Nine Months Ended December 31, 1996 and the Fiscal Year Ended March 31, 1996... 42
Consolidated Statements of Cash flows for the Year ended December 31, 1997, the Nine
Months Ended December 31, 1996 and the Fiscal Year Ended March 31, 1996.................. 43
Notes to Consolidated Financial Statements................................................ 44
</TABLE>
2. Financial Statement Schedules.
-------------------------------
Schedule II -- Valuation and Qualifying Accounts (see page 57)
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3. Exhibits.
---------
<TABLE>
<C> <S>
3.1** Certificate of Incorporation of Registrant filed on August 3, 1988, as currently in effect.
3.2** Certificate of Amendment of Certificate of Incorporation, as filed on October 31, 1990.
3.3** Certificate of Amendment of Certificate of Incorporation, as filed on August 13, 1991.
3.4** Certificate of Amendment of Certificate of Incorporation, filed on February 12, 1996.
3.5** Certificate of Amendment of Certificate of Incorporation filed on February 12, 1996.
3.6** Certificate of Amendment of Certificate of Incorporation filed on November 4, 1996.
3.7** Amended Certificate of Designation of Series A Preferred Stock, as currently in effect.
3.8** Certificate of Designation of Series B Preferred Stock, as currently in effect.
3.9** Certificate of Designation of Series C Preferred Stock, as currently in effect.
3.10** Certificate of Designation of Series D Preferred Stock, as currently in effect.
3.11** Certificate of Designation of Series E Preferred Stock, as currently in effect.
3.12** Amended Certificate of Designation of Series E Preferred Stock, as currently in effect.
3.13** Certificate of Designation of Series P Preferred Stock, as currently in effect.
3.14** Certificate of Designation of Series F Preferred Stock, as currently in effect.
3.15** Form of Restated Certificate of Incorporation of Registrant to be filed upon the closing of
the Offering made under this Registration Statement.
3.16** Amended and Restated Bylaws of Registrant, as currently in effect.
3.17** Form of Amended and Restated Bylaws to be adopted effective as of the closing of the
Offering made under this Registration Statement.
4.1** Specimen Common Stock Certificate.
10.1** Form of Indemnification Agreement between Registrant and each of its directors and officers.
10.2** 1989 Stock Option Plan, as amended and restated, and forms of Stock Option Agreements
thereunder.
10.3** 1995 Stock Plan, as amended and restated, and form of Stock Option Agreement thereunder.
10.4** 1997 Director Stock Option Plan and form of Stock Option Agreement thereunder.
10.5** 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
</TABLE>
32
<PAGE>
<TABLE>
<C> <S>
10.6** Lease Agreement dated December 1, 1992 between Registrant and Lincoln Menlo Phase I
Associates Limited for Menlo Park, California office.
10.7** Lease dated December 18, 1991 between Crandell Development Corporation and Robert S. Grant
for Santa Barbara, California office.
10.8** Registration Rights Agreement dated March 5, 1997 by and among the Registrant and Rudy
Prince, Lon B. Radin and Virginia Snyder.
10.9** Stock and Warrant Purchase Agreement dated as of August 31, 1988 by and among Registrant
and Purchasers of 299,995 shares of Series A Preferred, as amended February 1994.
10.10** Preferred Stock Purchase Agreement dated as of December 16, 1988 by and among Registrant
and purchasers of 336,000 shares of Series A Preferred, as amended February 1994.
10.11** Preferred Stock Purchase Agreement dated as of June 22, 1989 by and between Registrant and
David A. Brewer.
10.12** Form of Subscription and Stock Purchase Agreement dated January 1991 by and between
Registrant and certain purchasers of Series A Preferred Stock.
10.13** Form of Subscription and Stock Purchase Agreement dated July 1989 by and between Registrant
and certain purchasers of shares of Series B Preferred Stock.
10.14** Form of Subscription and Stock Purchase Agreement dated December 1989 by and between
Registrant and certain purchasers of shares of Series B Preferred Stock.
10.15** Form of Subscription and Stock Purchase Agreement dated August/September 1990 by and
between Registrant and certain purchasers of shares of Series C Preferred Stock.
10.16** Subscription and Stock Purchase Agreement for the purchase of shares of Series C Preferred
Stock dated September 6, 1990 by and between Registrant and Draper Associates Polaris Fund.
10.17** Subscription and Stock Purchase Agreement dated September 7, 1990 by and between Registrant
and Adlar Turnkey Manufacturing Corporation.
10.18** Form of Subscription and Stock Purchase Agreement for shares of Series D and Series E
Preferred Stock and Warrants dated July 1991 by and between Registrant and certain
purchasers of shares of Series D and Series E Preferred Stock.
10.19** Series E Preferred Stock Purchase Agreement dated August 18, 1991, as amended as of January
30, 1996, by and between Registrant and Ailicec California Corporation.
10.20** Series F Preferred Stock Purchase Agreement dated as of March 5, 1996 by and between
Registrant and purchasers of Series F Preferred Stock.
10.21** Purchase and Debt Restructuring Agreement dated as of August 3, 1994 by and between
Registrant and Ailicec International Enterprises Limited.
10.22** Note Purchase Agreement dated August 3, 1994 by and between Registrant and certain
purchasers of notes and warrants for the purchase of Common Stock.
10.23** Warrant to Purchase Stock dated December 31, 1994 by and between Registrant and Ailicec
International Enterprises Limited.
10.24** Common Stock Purchase Warrant dated December 16, 1996, and an amendment thereto dated
February 13, 1997, by and between Registrant and Michael Crandell.
10.25** Common Stock Purchase Warrant dated December 16, 1996, and an amendment thereto dated
February 13, 1997, by and between Registrant and Larry Crandell.
10.26** Asset Purchase Agreement dated July 31, 1996, as amended December 16, 1996, by and between
Registrant and the Crandell Group, Inc.
10.27+** Development Agreement dated September 25, 1991 and amended as of February 12, 1997 by and
between Registrant and Ailicec International Enterprises Limited.
10.28** Common Stock Purchase Option dated as of March 29, 1996 by and between Registrant and
Steven J. Carnevale.
10.29** Common Stock Purchase Option dated as of March 29, 1996 by and between Registrant and
Thomas B. Aikin.
10.30** Promissory Note to Lon B. Radin dated March 1, 1992 from Registrant.
10.31+** Development and Supply Agreement dated June 30, 1995 by and between Registrant and Samsung
Electronics Corporation.
10.32+** Software License Agreement dated September 30, 1996 by and between Registrant and Oki Data
Corporation.
10.33+** Supply and License Agreement dated November 1, 1996 by and between Registrant and Pixel
Magic, Inc.
10.34+** Facsimile Product Development Agreement dated June 9, 1994 by and between Registrant and
Xerox Corporation.
10.35+** Facsimile Product Development Agreement dated November 23, 1994 by and between Registrant
and Xerox Corporation.
</TABLE>
33
<PAGE>
<TABLE>
<C> <S>
10.36+** Master Development, Purchase and Distribution License Agreement dated effective as of
January 31, 1997 by and between Registrant and Hewlett-Packard Company.
10.37** Employment Agreement dated July 31, 1996 between Registrant and Michael Crandell.
10.38** Security Agreement dated July 31, 1996 by and between Registrant and the Crandell Group,
Inc.
10.39+** OEM Purchase Agreement dated February 22, 1995, as amended February 21, 1997, by and
Between Registrant and Oki America, Inc.
10.40** Loan and Security Agreement dated August 23, 1996 by and between Registrant and Cupertino
National Bank & Trust and the amendment thereto dated March 11, 1997 and the amendment
Thereto dated March 31, 1997.
10.41** Form of Dealer Agreement.
10.42+** Agreement dated November 30, 1994 by and between the Crandell Group, Inc. and Intel
Corporation as amended May 11, 1995, assigned and delegated to Registrant as of July 30,
1996 and as further amended December 23, 1996.
10.43 First Amendment dated September 15, 1997 to Lease Agreement dated April 4, 1997 between
Registrant and Lincoln Menlo Phase I Associates Limited for Menlo Park, California office.
10.44 Second Amendment dated December 2, 1997 to Lease Agreement dated April 4, 1997 between
Registrant and Lincoln Menlo Phase I Associates Limited for Menlo Park, California office,
as amended September 15, 1997.
10.45 Sublease dated August 1, 1997 between Registrant and Systems & Software Consortium, Inc.
Santa Barbara, California office.
10.46 Lease Agreement between Registrant and Landlord, K. Dalbey and M Tachouet dated March 28,
1997 for Beaverton, Oregon office.
10.47 Lease Agreement between DocuMagix and Metropolitan Life Insurance Company dated November 1,
1995 for San Jose, California office.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent and Report on Schedule -- Deloitte & Touche LLP (see page 87).
23.2 Consent of Independent Accountants -- Price Waterhouse LLP
24.1 Power of Attorney (see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- -------------
** Incorporated by reference to the identically numbered exhibits filed in
response to Item 16(a), "Exhibits", of the Company's Registration Statement
on Form S-1, as amended, (File No. 333-23763), which was declared effective
on June 10, 1997.
+ Portions of the exhibit have been omitted pursuant to a request for
confidential treatment and the omitted portions have been separately filed
with the Commission.
(b) Reports on Form 8-K. On December 22, 1997 the Company filed Report on
-------------------
Form 8-K in connection with its acquisition of DocuMagix, Inc which
contained disclosures under Item 2. Acquisition or Disposition of Assets
and Item 7. Financial Statements and Exhibits.
(c) Exhibits Pursuant to Item 601 of Regulation S-K. The exhibits required
-----------------------------------------------
by this Item are listed under 14(a)(3) above.
(d) Financial Statement Schedules. The financial statement schedule
-----------------------------
required by this Item is listed under Item 14(a)(2) above.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
JetFax, Inc.:
We have audited the accompanying consolidated balance sheets of JetFax, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
year ended December 31, 1997, the nine-month period ended December 31, 1996 and
the year ended March 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The consolidated financial
statements give retroactive effect to the 1997 merger of JetFax, Inc. with
DocuMagix, Inc., which has been accounted for as a pooling-of-interests as
described in Note 2 to the consolidated financial statements. We did not audit
the consolidated statements of operations, stockholder's equity (deficit), and
cash flows of DocuMagix, Inc. for the year ended June 30, 1996, which are
combined with JetFax , Inc.'s statements for the year ended March 31, 1996, and
reflect net revenues of $2,709,000 and net loss of $2,495,000. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for DocuMagix, Inc. for
the fiscal year ended March 31, 1996, is based solely on the report of such
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of such other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and on the report of the other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of JetFax, Inc. and subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for the year
ended December 31, 1997, the nine-month period ended December 31, 1996 and the
year ended March 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 30, 1998
(February 23, 1998 as to the last
sentence of Note 6)
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DocuMagix, Inc.:
In our opinion, the accompanying balance sheet and related statements of
operations and redeemable preferred stock and shareholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of DocuMagix, Inc. at June 30, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
October 25, 1996
36
<PAGE>
JETFAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 4,200 $ 413
Short-term investments.............................................. 3,024 --
Trade receivables, net of allowances of: $656 in 1997 and
$559 in 1996....................................................... 4,820 2,542
Inventories......................................................... 4,029 2,454
Prepaid expenses.................................................... 277 162
------- -------
Total current assets............................................ 16,350 5,571
Property--net........................................................ 1,160 715
Other assets......................................................... 1,346 806
------- -------
Total assets......................................................... $18,856 $7,092
======= ======
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $1,672 $2,491
Accrued liabilities................................................. 1,864 1,286
Short-term borrowings............................................... -- 950
Current portion of long-term note payable........................... -- 302
------- -------
Total current liabilities....................................... 3,536 5,029
------- -------
Long-term note payable less current portion.......................... -- 198
Deferred revenue..................................................... 49 --
Redeemable preferred stock, $0.01 par value; none authorized and
outstanding in 1997 and 344,350 shares outstanding in 1996.......... -- 2,726
Commitments (Note 7)................................................
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value; 5,000,000 shares
authorized, shares outstanding: none in 1997 and 6,293,978
in 1996........................................................... -- 63
Common stock, $0.01 par value; 35,000,000 shares authorized,
shares outstanding: 11,741,383 in 1997 and 1,789,086 in 1996...... 117 18
Additional paid-in capital......................................... 42,881 21,317
Accumulated deficit................................................ (27,727) (22,259)
------- -------
Total stockholders' equity (deficit)............................ 15,271 (861)
------- -------
Total liabilities, redeemable preferred stock and stockholders'
equity (deficit)................................................. $18,856 $ 7,092
======= =======
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
JETFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS FISCAL
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ----------- ----------
<S> <C> <C> <C>
Revenues:
Product....................................... $16,281 $10,205 $11,143
Software and technology license fees.......... 4,493 3,200 3,413
Development fees.............................. 2,246 1,468 720
------- ------- -------
Total revenues............................ 23,020 14,873 15,276
------- ------- -------
Costs and expenses:
Cost of product revenues...................... 11,886 8,441 11,102
Cost of software and license revenues......... 770 517 587
Research and development...................... 5,355 2,554 2,318
Selling and marketing......................... 6,046 5,212 5,216
General and administrative.................... 3,031 1,726 1,652
Acquisition and related expenses.............. 2,106 -- --
------- ------- -------
Total costs and expenses.................. 29,194 18,450 20,875
------- ------- -------
Loss from operations........................... (6,174) (3,577) (5,599)
------- ------- -------
Other income (expense):
Interest income............................... 310 40 29
Interest expense.............................. (120) (26) (290)
Other income (expense)........................ (79) (14) 2
------- ------- -------
Total other income (expense).............. 111 -- (259)
------- ------- -------
Loss before income taxes....................... (6,063) (3,577) (5,858)
Provision for income taxes..................... 96 107 35
------- ------- -------
Net loss....................................... (6,159) (3,684) $(5,893)
=======
Series P Redeemable Preferred Stock dividends.. (68) (116)
------- -------
Net loss applicable to common stockholders..... $(6,227) $(3,800)
======= =======
Net loss per share:
Basic......................................... $(0.61) $(0.46)
======= =======
Diluted....................................... $(0.61) $(0.46)
======= =======
Shares used in computation:
Basic......................................... 10,170 8,203
======= =======
Diluted....................................... 10,170 8,203
======= =======
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
JETFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1995.................. 2,848,288 $ 29 1,166,348 $ 12 $ 6,242 $(11,757) $(5,474)
Exercise of Common Stock options......... -- -- 55,760 -- 5 -- 5
Repurchase of DocuMagix Common
Stock................................... -- -- (2,743) -- (3) -- (3)
Sale of DocuMagix Common and
Preferred Stock exchanged for
Common Stock in merger.................. -- -- 506,185 5 4,896 -- 4,901
Issuance of Series F Convertible
Preferred Stock for cash of $7,547
and conversion of debt of $1,929,
net of issuance costs of $675........... 3,445,690 34 -- -- 8,766 -- 8,800
Additional paid in capital from
Conversion of debt into Series P
Redeemable Preferred Stock, net
of issuance costs of $13................ -- -- -- -- 379 -- 379
Cumulative dividends on Series F
Convertible ($70) and Series P
Redeemable ($27) Preferred Stock........ -- -- -- -- 70 (97) (27)
Net loss................................. -- -- -- -- -- (5,893) (5,893)
----------- --------- --------- -------- --------- --------- -------
Balances, March 31, 1996................. 6,293,978 63 1,725,550 17 20,355 (17,747) 2,688
Exercise of Common Stock options......... -- -- 41,125 1 7 -- 8
Sale of DocuMagix Common and
Preferred Stock exchanged for
Common Stock in merger.................. -- -- 22,411 -- 236 -- 236
Sale of DocuMagix warrants............... -- -- -- -- 6 -- 6
Cumulative dividends on Series F
Convertible ($713) and Series P
Redeemable ($116) Preferred
Stock................................... -- -- -- -- 713 (829) (116)
Net loss................................. -- -- -- -- -- (3,683) (3,683)
----------- --------- --------- -------- --------- --------- --------
Balances, December 31, 1996.............. 6,293,978 63 1,789,086 18 21,317 (22,259) (861)
Employee Stock Transactions.............. -- -- 16,948 -- 77 -- 77
Exercise of Common Stock Options......... -- -- 105,374 1 27 -- 28
Exercise of Common Stock Warrants........ -- -- 516,782 5 269 -- 274
Cumulative dividends on Series F
Convertible ($240) and Series P
Redeemable ($68) Preferred Stock........ -- -- -- -- 240 (308) (68)
Warrant compensation expense (Note 2).... -- -- -- -- 625 -- 625
Issuance of Common Stock in
connection with Initial Public Offering. -- -- 2,750,000 27 19,329 -- 19,356
Conversion of Convertible Preferred
Stock to Common Stock at IPO............ (6,293,978) (63) 6,293,978 63 -- -- --
Conversion of Series F Cumulative
Dividends............................... -- -- 162,703 2 (2) -- --
Issuance of Common Stock for
DocuMagix warrants...................... -- -- 2,190 -- -- -- --
Issuance of Common Stock in exchange
For DocuMagix convertible note.......... -- -- 103,853 1 999 -- 1,000
Adjustment to conform fiscal year of
DocuMagix............................... -- -- 469 -- -- 999 999
Net loss................................. -- -- -- -- -- (6,159) (6,159)
----------- --------- --------- -------- --------- --------- --------
Balances, December 31, 1997.............. -- $ -- $11,741,383 $ 117 $42,881 $(27,727) $ 15,271
=========== ========= ========== ======== ========= ========= =======
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
JETFAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS FISCAL
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,159) $(3,684) $(5,893)
Adjustments to reconcile net loss to net cash used for operating activities:
DocuMagix net loss for the quarter ended March 31, 1997 999 -- --
Depreciation and amortization..................................................... 539 208 313
Warrant compensation expense...................................................... 625 -- --
Provision for (reversal of) inventory reserves and purchase commitment............ 292 (339) 977
Changes in assets and liabilities:
Trade receivables................................................................ (2,375) (255) (748)
Inventories...................................................................... (1,769) 997 (2,020)
Prepaid expenses................................................................. (115) (29) (64)
Accounts payable................................................................. (819) (2,251) 2,225
Deferred revenue................................................................. 49 -- --
Accrued liabilities.............................................................. 578 (344) 429
------- ------- -------
Net cash used for operating activities........................................ (8,155) (5,697) (4,781)
------- ------- -------
Cash flows from investing activities:
Purchase of property............................................................... (742) (541) (265)
Purchase of short-term investments................................................. (3,024) -- --
Increase in other assets........................................................... (783) (80) (21)
Acquisition of Crandell Group...................................................... -- (305) --
------- ------- -------
Net cash used for investing activities........................................ (4,549) (926) (286)
------- ------- -------
Cash flows from financing activities:
Proceeds from sale of Common Stock................................................. 19,735 18 8
Repayment of related party notes payable........................................... -- (61) (70)
Line of credit borrowings, net..................................................... -- 450 --
Equipment term note borrowings..................................................... -- 250 --
Proceeds from issuance of notes payable............................................ 500 500 1,010
Repayment of notes payable......................................................... (950) -- (1,362)
Redemption of Preferred Stock--Series P, net....................................... (2,794) -- --
Proceeds from Series F Convertible Preferred Stock--net............................ -- 650 6,222
Proceeds from DocuMagix Preferred Stock--net....................................... -- -- 4,125
Restricted investments............................................................. -- -- 100
------- ------- -------
Net cash provided by financing activities..................................... 16,491 1,807 10,033
------- ------- -------
Increase (decrease) in cash and cash equivalents.................................... 3,787 (4,816) 4,966
Cash and cash equivalents, beginning of year........................................ 413 5,229 263
------- ------- -------
Cash and cash equivalents, end of year.............................................. $ 4,200 $ 413 $ 5,229
======= ======= =======
Supplemental cash flow information:
Interest paid...................................................................... $ 120 $ 9 $ 211
======= ======= =======
Taxes paid--foreign withholding.................................................... $ 96 $ 105 $ 35
======= ======= =======
Supplemental noncash investing and financial information:
Accounts receivable--stockholder, offset against accounts payable--stockholder..... $ 75
=======
Conversion of note payable to stockholder, to Series P Redeemable Preferred Stock
issuable.......................................................................... $ 2,287
=======
Conversion of convertible notes payable into Series D and F Redeemable Convertible
Preferred Stock................................................................... $ 1,929
=======
Receivable--Series F Redeemable Convertible Preferred Stock........................ $ 650
=======
Conversion of Convertible Preferred Stock to Common Stock at Initial Public
Offering.......................................................................... $ 63
=======
Issuance of Series G Convertible Preferred Stock for technology.................... $ 225
=======
Cumulative dividends on Series F Convertible and Series P Redeemable Preferred
Stock............................................................................. $ 308 $ 829 $ 97
======= ======= ========
Acquisition of Crandell Group (Note 3):
Fair value of assets acquired (includes intangibles of $540 and property of $15).. $ 555
=======
Cash paid......................................................................... (305)
=======
Note payable to seller............................................................ $ 250
========
Issuance of Common Stock in exchange for DocuMagix outstanding Common and
Preferred Stock................................................................... $ 236 $ 4,896
======== =========
Issuance of Common Stock in exchange for DocuMagix convertible note................ $ 1,000
=======
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
JetFax, Inc. 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) and entered into agreements with a number of
manufacturers (OEMs) of MFPs for the customization and integration of the
Company's embedded system technology and desktop software in several OEM
products.
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.
FISCAL PERIOD END
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 after
December 31. The 40-week period from April 1, 1996 to January 4, 1997 is
referred to herein as the nine months ended December 31, 1996. Fiscal year 1997
includes 52 weeks. For presentation purposes, the Company refers to its
reporting years ended January 3, 1998 and January 4, 1997 as ending on December
31, 1997 and 1996, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of JetFax, Inc. and
its wholly owned subsidiaries (collectively, the Company). All significant
intercompany balances and transactions have been eliminated.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates include the level of
the allowance for potentially uncollectible accounts receivable, reserves for
inventories, accrued losses on purchase commitments, accrued OEM licensing
revenues, product development revenues recognized on the percentage-of-
completion basis, accrued warranty costs, and a valuation allowance for net
deferred tax assets.
The Company sells and licenses its products and technology primarily to end
users (through independent distributors and dealers) and OEMs in the United
States, Canada, Asia and Europe. In addition, the Company performs development
services for certain of its OEMs. The Company performs ongoing credit
evaluations of its customers' financial condition and limits its exposure to
losses from bad debts by limiting the amount of credit extended whenever deemed
necessary and generally does not require collateral.
Certain components used in the Company's products are available only from one
source. In particular, the Company currently purchases its printer engine and
certain semiconductor devices from separate single sources of supply. 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.
41
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
The Company operates in a very dynamic industry. The Company believes that
changes in any of the following areas could have a negative impact on the
Company's future financial position and results of operation: difficulties in
successfully combining the businesses of the Company and DocuMagix; the fact
that the Company's markets are characterized by rapidly changing technology,
evolving industry standards and frequent introductions of new products and
enhancements, and the Company's ability to respond to such changes;
difficulties which the Company may experience in completing the development of
turnkey designs for OEM customers, its color technology or other products; the
fact that the multifunction and color markets targeted by the Company are at an
early stage of development; the highly competitive nature of the markets for
the Company's products; the phase-out or early termination of the Company's
branded products or OEM products incorporating the Company's technology; the
Company's ability to attract and retain skilled personnel; the Company's
reliance on third party suppliers for components used in the Company's products;
the quarterly variability in the Company's bookings and design wins; and the
Company's reliance on a relatively small number of OEM customers for a large
percentage of its revenue.
FOREIGN CURRENCY TRANSLATION AND HEDGING
The Company's foreign subsidiary in Germany uses the U.S. dollar as the
functional currency. Accordingly, assets and liabilities are translated using
period-end exchange rates, except for inventories and property, plant and
equipment, which are translated using historical rates. Revenues and costs are
translated using historical rates. The resulting translation gains and losses
are included in income as they are incurred. Foreign currency transaction gains
and losses resulting from transactions denominated in other than the U.S. dollar
are included in income as incurred. The Company's foreign losses were $58,000
for the year ended December 31, 1997 and were insignificant in the periods ended
December 31, 1996 and March 31, 1996.
On occasion, the Company enters into firm purchase contracts with suppliers
that are denominated in a foreign currency. The Company has occasionally
purchased foreign currencies and held them during the contract term as a
designated hedge of the purchase commitment. The foreign currency gains and
losses from the foreign currency deposit are deferred and recognized as an
offset to the foreign currency gains and losses from the firm purchase
commitment. At December 31, 1997, the Company had Yen deposits of 115,000,000
which were designated as a hedge against Yen denominated firm purchase
commitments of 213,000,000 for which deliveries are anticipated over the next
five months.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash equivalents, short-term investments and accounts
receivable. Credit risk with respect to trade receivables is spread over a
number of geographically diverse customers, who make up the Company's customer
base. At December 31, 1997 and 1996, the same customer accounted for 35% and 9%
of total accounts receivable, respectively.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are highly liquid debt instruments acquired with an original
maturity of three months or less. The recorded carrying amounts of the Company's
cash and cash equivalents approximate their fair market value. Short-term
investments are high quality financial instruments with a maturity of from three
to fifteen months. The short-term investments are carried at cost, which
approximates fair value.
ACCOUNTS RECEIVABLE
Accounts receivable include unbilled amounts of $1,469,723 and $364,000
relating to development revenues at December 31, 1997 and 1996, respectively
(see "Revenue Recognition" below).
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
The Company's products
42
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
typically experience short life cycles, and the Company estimates the market
value of its inventory based on the anticipated selling prices adjusted for
completion and selling costs. Should the Company experience a substantial
unanticipated decline in the selling price of its products and/or demand
thereof, a valuation adjustment and corresponding charge to operations could
result. In addition, the Company uses subcontractors for the manufacture of
certain of its products and/or components and occasionally enters into purchase
commitments for such purchases. Consequently, the Company evaluates its exposure
relative to such contracts and the estimated selling prices of the related
products, adjusted for completion and selling costs, and accrues for losses, if
anticipated.
PROPERTY
Property is stated at cost or, for items under capital lease, at the present
value of future minimum lease payments at the lease inception. Depreciation and
amortization are computed using the straight-line method over estimated useful
lives of one to five years or the lease term, whichever is appropriate.
OTHER ASSETS
Other assets as of December 31, 1997 and 1996 include intangible assets
(acquired software, licensing contracts and covenants not to compete) of
$1,346,020 and $806,131, net of accumulated amortization of $205,071 and
$54,302, respectively. Amortization is computed using the straight line method
over the estimated useful life of five years.
INCOME TAXES
The Company accounts for income taxes under an asset and liability approach.
Deferred tax liabilities are recognized for future taxable amounts and deferred
tax assets are recognized for future deductions net of a valuation allowance to
reduce deferred tax assets to amounts that are more likely than not to be
realized.
REVENUE RECOGNITION
Revenues from product sales to resellers, international distributors, OEMs and
end users are recognized upon shipment. OEMs, end users, and international
distributors have no rights of return while resellers have limited return
rights. Allowances for potential returns and exchanges from resellers are
provided at the time of sale based on historical returns and exchange
experience. The Company defers revenue on sales to domestic distributors and
recognizes the revenue when the distributor sells the product to resellers.
The Company provides a ninety day warranty for parts and service on its hardware
products as well as ongoing technical support to the dealer network. The Company
provides a limited amount of telephone technical support to its software
customers. Estimated cost of warranty work and post contract software customer
support obligations are accrued when the revenue is recognized.
The Company enters into development agreements with OEM customers for which it
receives development fees with certain payments contingent upon attaining
contract milestones. Development fee revenues are derived from customizing the
Company's embedded system technology and software for inclusion in specific
applications for its OEMs' products. The Company's development contracts with
certain OEM customers have enabled JetFax to accelerate its product development
efforts. The Company classifies all development costs related to such contracts
as research and development expenses because such development fees have only
partially funded the Company's product development activities, and the Company
generally retains ownership of the technology developed under these agreements.
The agreements typically provide for license and royalty payments to the Company
based on the OEM customers' subsequent use of the technology in their products.
Revenues from product development agreements are recognized using the percentage
of completion method. Estimates are reviewed and revised periodically throughout
the lives of the contracts. Any revisions are recorded in the accounting period
in which the revisions are made. Royalties are recognized as earned, and include
OEM product licensing revenues which are primarily determined based on the
number of OEM units sold. Such revenues are initially recorded based on an
estimate of such number of units and are adjusted upon the receipt of actual
unit sales data from
43
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
OEMs in the accounting period in which the information is received.
RESEARCH AND DEVELOPMENT
Research and development costs include costs and expenses associated with the
design and development of new products. To the extent that such costs include
the development of computer software, the Company follows the working model
approach to determine technological feasibility of the software product. Costs
incurred subsequent to establishing technological feasibility have been
immaterial and, accordingly, all software development costs have been included
in research and development expenses for the periods presented herein.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees".
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 intial 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. Accordingly, options and warrants to purchase
approximately 2,600,000 common shares at a weighted average exercise price of
$1.52 per share and redeemable preferred stock convertible into 344,350 shares
of common stock were outstanding at December 31, 1996 and excluded from the
calculation of net loss per basic and diluted share; and options and warrants to
purchase approximately 2,850,000 common shares at a weighted average exercise
price of $3.63 per share were outstanding at December 31, 1997 and excluded from
the calculation of net loss per basic and diluted share. 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 basic and diluted loss
per share are the same.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and 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 these statements will not
impact the Company's consolidated financial position, results of operations or
cash flows. Both statements are effective for the Company in 1998.
2. BUSINESS COMBINATION
On December 5, 1997, the Company acquired DocuMagix, Inc. (DocuMagix) in a
merger transaction pursuant to an Agreement and Plan of Reorganization
(Agreement) entered into with DocuMagix on November 11, 1997. Under the
Agreement, the Company issued 793,957 shares of its common stock in exchange for
all outstanding common and preferred shares of DocuMagix, and all rights with
respect to DocuMagix common stock under outstanding employee options were
converted into rights with respect to
44
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
the Company's common stock using the common stock exchange ratio of 0.004572.
In addition, the Company issued 2,190 shares of its common stock to certain
holders of DocuMagix warrants in exchange for such warrants and 103,853 shares
of the Company's common stock were exchanged for $1.0 million of outstanding
convertible notes payable by DocuMagix . The merger has been accounted for as a
pooling of interests and, accordingly, the consolidated financial statements for
all periods have been restated to reflect the combined operations of the two
companies. The Company's fiscal year end is December (since it changed its
fiscal year end from March to December beginning with the nine-month period
ended December 31, 1996) while DocuMagix has used a June fiscal year.
Accordingly, the consolidated statements of operations combine the Company's
consolidated statements of operations for the year ended December 31, 1997, the
nine months ended December 31, 1996 and the year ended March 31, 1996 with
DocuMagix's statements of operations for the year ended December 31, 1997, the
nine months ended March 31, 1997 and the year ended June 30, 1996, respectively.
As a result, DocuMagix's results for the quarter ended March 31, 1997 have been
included in both the nine month period ended December 31, 1996 and the year
ended December 31, 1997. DocuMagix's unaudited revenues and net loss for this
period are $438,000 and $999,000, respectively. The table below shows the
composition of combined net revenues and net loss for each of the periods
indicated (in thousands). For DocuMagix the periods indicated represent the
Company's reporting period into which the DocuMagix financial information was
combined.
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------------- --------------------- ----------------
<S> <C> <C> <C>
REVENUES:
- ---------
JetFax $20,808 $12,862 $13,187
DocuMagix 2,212 2,011 2,089
------- ------- -------
Combined $23,020 $14,873 $15,276
======= ======= =======
NET LOSS:
- ---------
JetFax $(3,012) $(1,042) $(2,929)
DocuMagix (3,147) (2,642) (2,964)
------- ------- -------
Combined $(6,159) $(3,684) $(5,893)
======= ======= =======
</TABLE>
The consolidated balance sheets at December 31, 1997 and December 31, 1996
combine the accounts of the Company as of those dates with the accounts of
DocuMagix as of December 31, 1997 and March 31, 1997, respectively. In
connection with the restatement of the consolidated financial statements to give
effect to the pooling of interests transaction with DocuMagix, Inc., the Company
adjusted DocuMagix, Inc.'s financial statements to conform its revenue
recognition policies to those of JetFax (the adjustment deferred revenue
recognition on sales to distributors). The effect of the adjustment was to
reduce revenue and increase net loss for the year ended December 31, 1997 and
the year ended March 31, 1996 by $15,000 and $12,000 and $620,000 and $469,000,
respectively, and to increase revenue and decrease net loss by $438,000 and
$351,000, respectively, for the nine months ended December 31, 1996.
In July 1996, the Company acquired the assets of the Crandell Group, Inc. (the
Crandell Group), a company in the business of developing and marketing software
products, including certain products used in fax applications, some of which
have previously been licensed by and used in JetFax products. The two principals
of the Crandell Group (the Principals) entered into two-year employment
agreements with JetFax. The Company paid $250,000 upon the closing and $250,000
in July 1997, and incurred $55,000 of acquisition costs for a total purchase
price of $555,000. The purchase price was allocated $540,000 to proprietary
software, licensing contracts and covenants not-to-compete (included in Other
Assets, see Note
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
1) and $15,000 to property and equipment. The Company was obligated to make
royalty payments to the shareholder/employees contingent upon continued
employment and recorded acquisition expense of $ 1,056,000 and $228,000 for such
payments for the years ended December 31, 1997 and 1996, respectively. as
compensation within research and development expense. The Company's obligation
to make these payments terminated upon the closing of the Company's initial
public offering (IPO) in June 1997 in consideration of a one-time acquisition
expense of $1.0 million. In connection with a 1996 amendment to the above
agreements, the Company issued a warrant to the Principals to acquire 100,000
shares of common stock at an exercise price of $1.75 per share. Because the
terms of the warrant were not fixed until the Company's IPO, the Company treated
the warrant as variable and recorded $625,000 of compensation expense during
1997 included in acquisition expenses. The results of operations for the
Crandell Group prior to its acquisition by the Company are not material and,
accordingly, pro forma information is not disclosed.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Materials and supplies.................................................. $1,776 $1,153
Work-in-process......................................................... 143 235
Finished goods.......................................................... 2,110 1,066
----- -----
Total................................................................... $4,029 $2,454
====== ======
</TABLE>
4. PROPERTY
Property consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Furniture and fixtures.................................................. $1,472 $1,011
Software................................................................ 467 364
Leasehold improvements.................................................. 234 56
----- -----
Total................................................................... 2,173 1,431
Accumulated depreciation and amortization............................... (1,013) (716)
----- -----
Property-net............................................................ $1,160 $715
====== ====
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Compensation and related benefits....................................... $ 509 $446
Acquisition related accruals............................................ 375 --
Royalties............................................................... 215 152
Product warranty........................................................ 94 140
Other................................................................... 671 548
------ ------
Total................................................................... $1,864 $1,286
====== ======
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
6. LINE OF CREDIT AND NOTES PAYABLE
Line of credit and notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Short-term borrowings:
Convertible notes payable................................................ $ -- $ 500
Line of credit........................................................... -- 450
----- -----
Total short-term borrowings $ -- $ 950
===== =====
Equipment term loan...................................................... $ -- $ 250
Note payable............................................................. -- 250
----- -----
Total notes payable................................................... 500
Current portion.......................................................... (--) (302)
----- -----
Long-term portion........................................................ $ -- $ 198
===== =====
</TABLE>
The Company has a line of credit agreement under which it may borrow up to
$1.5 million at the bank's prime rate (8.5% at January 3, 1998) plus 1%.
Borrowings are limited to 80% on eligible domestic receivables, are secured by
all assets of the Company and are subordinate to stockholder notes and lien
positions. The line expires in August 23, 1998. No borrowings were outstanding
under the line of credit at December 31, 1997.
The line of credit contains certain covenants which, among other things,
require the Company to maintain tangible net worth (as defined) of $3.0 million,
quarterly net income, a quick ratio of 1.0 to 1.0, a maximum debt to net worth
ratio (as defined) of 1.5 to 1.0 after December 31, 1996 and certain minimum
liquidity and debt service coverage. In addition, the agreement prohibits the
payment of cash dividends. At December 31, 1997, the Company was not in
compliance with the quarterly net income covenant and, on February 23, 1998,
received a waiver of this covenant through March 31, 1998 from the lender.
In February 1997, DocuMagix issued $500,000 of convertible notes (the
Convertible Notes) with an expiration date of the earliest (a) December 31,
1997; (b) upon the closing of an underwritten public offering of shares of
common stock of DocuMagix; or (c) immediately prior to the closing of an
acquisition of DocuMagix by merger or otherwise. An additional $500,000 of
convertible notes were issued in 1997 and the outstanding balance of $1,000,000
was canceled in exchange for 103,853 shares of JetFax common stock in connection
with the merger with JetFax in December 1997 (see Note 2).
7. LEASE COMMITMENTS
The Company leases its primary facility under an operating lease expiring
through January 2003. Rent expense is recognized on a straight-line basis over
the term of the lease. The lease agreement requires the Company to pay property
taxes and maintenance costs. For the year ended December 31, 1997, the nine
months ended December 31, 1996 and the fiscal year ended March 31, 1996, rent
expense was $522,724, $246,166 and $249,858, respectively. Future minimum annual
rental payments for facilities leases are: 1998, $780,970, 1999, $754,926, 2000,
$563,174, 2001, $550,988 and $ 596,903 thereafter.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
8. STOCKHOLDERS' EQUITY
In June 1997, the Company completed an initial public offering of 2,750,000
shares of its common stock (selling shareholders sold an additional 750,000
shares in the offering) at a price of $8.00 per share. Concurrent with the
offering, each of the 6,293,978 shares of convertible preferred stock then
outstanding were converted into the same number of common shares and the 344,350
shares of Series P Redeemable Preferred Stock were redeemed for $2.8 million
from the proceeds of the offering. In addition, 389,512 shares of common stock
were issued upon the net exercise of warrants and 162,703 shares of common stock
were issued upon conversion of cumulative unpaid dividends on Series F preferred
stock.
PREFERRED STOCK
The number of shares of preferred stock authorized to be issued is 5,000,000.
The Board of Directors is authorized to issue the preferred stock from time to
time in one or more series and to fix the rights, privileges and restrictions of
the shares of such series. As of December 31, 1997, no shares of preferred
stock were outstanding.
STOCK OPTION AND PURCHASE PLANS
The Company has an employee stock option plan and a nonemployee director
option plan under which the Company may grant options to purchase up to
3,400,000 and 270,000 shares of common stock, respectively. At December 31,
1997, 1,519,534 and 150,000 shares, respectively, remain available for future
grant under these plans. The terms for exercising options are determined by the
Board of Directors and options expire at the earlier of ten years and one month
or such shorter terms as may be provided in each stock option agreement. In
connection with the merger of DocuMagix (see Note 2), the Company assumed
outstanding DocuMagix options using the common stock exchange ratio. At
December 31, 1997, options to purchase 5,330 shares of the Company's common
stock at a weighted average exercise price of $33.27 were outstanding pursuant
to the DocuMagix options.
The Company has reserved 500,000 shares of common stock for issuance pursuant
to the 1997 Employee Stock Purchase Plan. The plan permits employees to
purchase shares at 85% of the lower of the fair market value of the common stock
at the beginning or end of each six-month offering period. At December 31,
1997, 16,948 shares have been issued under the plan.
48
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
Stock option activity and balances, excluding DocuMagix option activity which
is immaterial, are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
OF SHARES PER SHARE
---------- ----------
<S> <C> <C>
Balance, April 1, 1995........................................................... 181,910 $0.160
Granted (weighted average fair market value $0.20)............................... 31,000 0.200
Canceled......................................................................... (27,500) 0.200
Exercised........................................................................ (55,760) 0.100
--------- ------
Balance, March 31, 1996.......................................................... 129,650 $0.190
Granted (weighted average fair market value $0.57)............................... 1,009,000 0.550
Canceled......................................................................... (62,740) 0.270
Exercised........................................................................ (41,125) 0.200
--------- ------
Balance, December 31, 1996....................................................... 1,034,785 $0.540
Granted (weighted average fair market value $7.38)............................... 1,107,100 7.416
Canceled......................................................................... (73,509) 4.349
Exercised........................................................................ (105,374) 0.272
--------- ------
Balance, December 31,1997........................................................ 1,963,002 $4.288
========= ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- -------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 LIFE (YEARS) PRICE 1997 PRICE
- ------------------ ---------------- ---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.20 - $0.30 501,785 8.05 $0.29 183,358 $0.29
0.50 - 1.75 399,667 8.80 0.92 139,335 0.83
4.00 - 5.88 207,050 9.72 5.58 3,193 4.31
7.00 - 7.13 92,500 9.26 7.03 -- --
8.00 - 9.88 762,000 9.76 8.00 -- --
- ------------- --------- ---- ---- ------- -----
$0.20 - $9.88 1,963,002 9.10 $4.29 325,886 $0.56
============= ========= ==== ===== ======= =====
</TABLE>
As discussed in Note 1, the Company uses the intrinsic value method specified
by Accounting Principles Board Opinion No. 25 to calculate compensation expense
associated with issuing stock options and, accordingly, has recorded no such
expense in the consolidated financial statements, as such issuances have been at
the fair value of the Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended March 31, 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of the minimum
value method for all periods prior to the initial public offering, and
subsequently through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's stock option calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 12 months following vesting; stock
volatility, 65% subsequent to the initial public filing in June 1997; risk-free
interest rates, 5.76% for options granted during the year ended December 31,
1997, 6.29% for options granted during the nine months ended December 31, 1996
and 6.02% for options granted during the
49
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
year ended March 31, 1996; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
stock-based awards (including awards under the Purchase Plan) had been amortized
to expense over the vesting period of the awards, pro forma net loss available
to common stockholders would have been $6,706,000 ($0.66 per share) for the year
ended December 31, 1997, $3,813,000 ($0.46 per share) for the nine months ended
December 31, 1996 and would not change for the year ended March 31, 1996.
However, because options vest over several years and grants prior to April 1,
1995 have been excluded from these calculations, the pro forma adjustments for
the year ended December 31, 1997, the nine months ended December 31, 1996 and
for the year ended March 31, 1996 are not indicative of future period pro forma
adjustments, assuming grants are made in those years, when the calculation will
apply to all applicable stock options.
The Company has reserved or otherwise committed to issue shares of Common
Stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
Exercise of warrants....................................................... $890,499
========
</TABLE>
9. INCOME TAXES
No federal and state income taxes were provided for the years ended December
31, 1997, the nine months ended December 31, 1996 and the year ended March 31,
1996 due to the Company's net losses. Foreign withholding taxes of approximately
$96,000, $105,000 and $35,000 were paid during the year ended December 31, 1997,
the nine months ended December 31, 1996 and the year ended March 31, 1996,
respectively. The Company's effective tax rate differs from the federal
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR NINE MONTHS FISCAL
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ -------------- ------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate of 35%.......... $(2,156) $(1,289) $(2,063)
Change in valuation allowance............................ 2,156 1,289 2,063
Foreign withholding taxes................................ 96 105 35
Other.................................................... -- 2 --
------- ------- -------
Total provision.......................................... $ 96 $ 107 $ 35
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. Significant components of the Company's net
deferred income tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards.................................... $7,031 $6,326
Tax credit carryforwards............................................ 291 413
Accounts receivable allowances...................................... 124 142
Depreciation........................................................ 101 91
Inventory valuation................................................. 91 78
</TABLE>
50
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Nondeducted expense accrual......................................... 256 74
Warranty reserve.................................................... 38 40
Capitalized research and development................................ 230 41
Vacation accrual.................................................... 86 37
Other............................................................... 291 106
------- -------
Total deferred tax assets.............................................. 8,539 7,348
Valuation allowance.................................................... (8,539) (7,348)
------- -------
$ $
======= =======
</TABLE>
As a result of the Company's history of operating losses, management believes
that the recognition of the deferred tax asset is considered less likely than
not. Accordingly, the Company has fully reserved its net deferred tax assets as
of December 31, 1997 and 1996.
At December 31, 1997, net operating loss carryforwards attributable to JetFax,
Inc. of approximately $13.9 million and $4.2 million (not including amounts
related to the Company's DocuMagix subsidiary) were available to offset future
Federal and state taxable income, respectively, and research and development tax
credits of $170,000 and $121,000 were available to offset future Federal and
state income taxes, respectively. Current Federal and California tax law
includes certain provisions limiting the annual use of net operating loss
carryforwards in the event of certain defined changes in stock ownership, as
defined. The Company's ability to utilize its net operating loss and tax credit
carryforwards could be limited according to these provisions. Management
believes such limitation could result in the loss of carryforward benefits which
expire from 2004 through 2012. The use of the above loss carryforwards is
dependent upon the Company's ability to achieve profitability. The Company's net
operating loss carryforwards attributable to it's DocuMagix subsidiary are
limited according to these provisions to approximately $380,000 per year or
approximately $5.7 million and $1.9 million in total through the applicable
federal and California carryforward periods, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax deferred savings plan for all eligible employees.
Participants may contribute a percentage of their compensation, which may be
limited by the plan administrator or applicable tax laws. The Company may make
discretionary matching contributions. Such matching contributions were
immaterial for the year ended December 31, 1997, the nine months ended December
31, 1996 and the fiscal year ended March 31, 1996.
11. CUSTOMER AND GEOGRAPHIC INFORMATION
Two customers accounted for 19% and 13%,respectively, of total revenues for
the year ended December 31, 1997. Two customers accounted for 18% and 9%,
respectively, of total revenues for the nine months ended December 31, 1996. One
customer accounted for 11% of total revenues for the year ended March 31, 1996.
The following is a summary of revenues by geographic region (in thousands):
<TABLE>
<CAPTION>
YEAR NINE MONTHS FISCAL
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
United States.................................................. $16,386 $10,905 $9,556
Europe......................................................... 4,545 2,369 4,444
</TABLE>
51
<PAGE>
JETFAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED
MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Asia........................................................... 1,098 1,322 844
Other.......................................................... 991 277 432
------- ------- -------
Total.......................................................... $23,020 $14,873 $15,276
======= ======= =======
</TABLE>
12. RELATED PARTY TRANSACTIONS
Related party transactions and balances not otherwise disclosed herein were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
Sales to related party.............................................. $167 $63
Purchases from related party........................................ 12 --
</TABLE>
The Company has also granted a stockholder a nonexclusive royalty-free license
to utilize certain of its intellectual property.
52
<PAGE>
13. QUARTERLY RESULTS -- UNAUDITED
<TABLE>
<CAPTION>
(in thousands, except per share amounts) THREE MONTHS ENDED
-----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues................................. $ 5,655 $ 5,374 $ 6,295 $ 5,696
Loss from operations........................... $(1,547) $(1,900) $ (289) $(2,438)
Net loss applicable to common stockholders..... $(1,672) $(1,957) $ (234) $(2,364)
Net loss per share:
Basic......................................... $ (0.20) $ (0.21) $ (0.02) $ (0.20)
Diluted....................................... $ (0.20) $ (0.21) $ (0.02) $ (0.20)
Shares used in computing per share amounts:
Basic......................................... 8,233 9,196 11,599 11,649
Diluted....................................... 8,233 9,196 11,599 11,649
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
Total revenues..................................................... $ 4,714 $ 4,726 $ 5,433
Loss from operations............................................... $(1,391) $(1,216) $ (970)
Net loss applicable to common stockholders......................... $(1,407) $(1,322) $(1,071)
Net loss per share:
Basic............................................................. $ (0.18) $ (0.16) $ (0.13)
Diluted........................................................... $ (0.18) $ (0.16) $ (0.13)
Shares used in computing per share amounts:
Basic............................................................. 8,000 8,197 8,217
Diluted........................................................... 8,000 8,197 8,217
</TABLE>
53
<PAGE>
SCHEDULE II
JETFAX, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND DEDUCTION/ END OF
PERIOD EXPENSES WRITE-OFF PERIOD
------------ ---------- ---------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Accounts receivable allowance........................... $559 $ 133 $ (36) $656
==== ===== ===== ====
NINE MONTHS ENDED DECEMBER 31, 1996:
Accounts receivable allowance........................... $426 $ 153 $ (20) $559
==== ===== ===== ====
Accrued loss on inventory purchase commitment........... $649 $(280) $(369) --
==== ===== ===== ====
YEAR ENDED MARCH 31, 1996:
Accounts receivable allowance........................... $143 $ 285 $ (2) $426
==== ===== ===== ====
Accrued loss on inventory purchase commitment........... -- $ 760 $ (111) $649
==== ===== ====== ====
</TABLE>
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Menlo Park, State of California on the 3rd day of April, 1998.
JETFAX, INC
By /s/ Edward R. Prince, III
----------------------------------------
EDWARD R. PRINCE, III,
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Edward R. Prince, III and Allen K. Jones,
and each of them, his attorneys-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Edward R. Prince, III President, Chief Executive Officer April 3, 1998
- -------------------------------- and Chairman of the Board
(EDWARD R. PRINCE, III ) (Principal Executive Officer)
/s/ Allen K. Jones Vice President of Finance, Chief April 3, 1998
- -------------------------------- Financial Officer, and Secretary
(ALLEN K. JONES ) (Principal Financial and
Accounting Officer )
/s/ Thomas B. Akin Director April 3, 1998
- --------------------------------
(THOMAS B. AKIN )
/s/ Douglas Y. Bech Director April 3, 1998
- --------------------------------
(DOUGLAS Y. BECH )
/s/ Steven J. Carnevale Director April 3, 1998
- --------------------------------
(STEVEN J. CARNEVALE )
/s/ Chung Chiu Director April 3, 1998
- --------------------------------
(CHUNG CHIU )
/s/ Edward R. Prince, Jr. Director April 3, 1998
- --------------------------------
(EDWARD R. PRINCE, JR. )
/s/ Lon B. Radin Director April 3, 1998
- --------------------------------
(LON B. RADIN )
/s/ Albert E. Sisto Director April 3, 1998
- --------------------------------
(ALBERT E. SISTO)
</TABLE>
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1** Certificate of Incorporation of Registrant filed on August 3, 1988, as currently in effect.
3.2** Certificate of Amendment of Certificate of Incorporation, as filed on October 31, 1990.
3.3** Certificate of Amendment of Certificate of Incorporation, as filed on August 13, 1991.
3.4** Certificate of Amendment of Certificate of Incorporation, filed on February 12, 1996.
3.5** Certificate of Amendment of Certificate of Incorporation filed on February 12, 1996.
3.6** Certificate of Amendment of Certificate of Incorporation filed on November 4, 1996.
3.7** Amended Certificate of Designation of Series A Preferred Stock, as currently in effect.
3.8** Certificate of Designation of Series B Preferred Stock, as currently in effect.
3.9** Certificate of Designation of Series C Preferred Stock, as currently in effect.
3.10** Certificate of Designation of Series D Preferred Stock, as currently in effect.
3.11** Certificate of Designation of Series E Preferred Stock, as currently in effect.
3.12** Amended Certificate of Designation of Series E Preferred Stock, as currently in effect.
3.13** Certificate of Designation of Series P Preferred Stock, as currently in effect.
3.14** Certificate of Designation of Series F Preferred Stock, as currently in effect.
3.15** Form of Restated Certificate of Incorporation of Registrant to be filed upon the closing of
the Offering made under this Registration Statement.
3.16** Amended and Restated Bylaws of Registrant, as currently in effect.
3.17** Form of Amended and Restated Bylaws to be adopted effective as of the closing of the
Offering made under this Registration Statement.
4.1** Specimen Common Stock Certificate.
10.1** Form of Indemnification Agreement between Registrant and each of its directors and officers.
10.2** 1989 Stock Option Plan, as amended and restated, and forms of Stock Option Agreements
thereunder.
10.3** 1995 Stock Plan, as amended and restated, and form of Stock Option Agreement thereunder.
10.4** 1997 Director Stock Option Plan and form of Stock Option Agreement thereunder.
10.5** 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
10.6** Lease Agreement dated December 1, 1992 between Registrant and Lincoln Menlo Phase I
Associates Limited for Menlo Park, California office.
10.7** Lease dated December 18, 1991 between Crandell Development Corporation and Robert S. Grant
for Santa Barbara, California office.
10.8** Registration Rights Agreement dated March 5, 1997 by and among the Registrant and Rudy
Prince, Lon B. Radin and Virginia Snyder.
10.9** Stock and Warrant Purchase Agreement dated as of August 31, 1988 by and among Registrant
and Purchasers of 299,995 shares of Series A Preferred, as amended February 1994.
10.10** Preferred Stock Purchase Agreement dated as of December 16, 1988 by and among Registrant
and purchasers of 336,000 shares of Series A Preferred, as amended February 1994.
10.11** Preferred Stock Purchase Agreement dated as of June 22, 1989 by and between Registrant and
David A. Brewer.
10.12** Form of Subscription and Stock Purchase Agreement dated January 1991 by and between
Registrant and certain purchasers of Series A Preferred Stock.
10.13** Form of Subscription and Stock Purchase Agreement dated July 1989 by and between Registrant
and certain purchasers of shares of Series B Preferred Stock.
10.14** Form of Subscription and Stock Purchase Agreement dated December 1989 by and between
Registrant and certain purchasers of shares of Series B Preferred Stock.
10.15** Form of Subscription and Stock Purchase Agreement dated August/September 1990 by and
between Registrant and certain purchasers of shares of Series C Preferred Stock.
10.16** Subscription and Stock Purchase Agreement for the purchase of shares of Series C Preferred
Stock dated September 6, 1990 by and between Registrant and Draper Associates Polaris Fund.
10.17** Subscription and Stock Purchase Agreement dated September 7, 1990 by and between Registrant
and Adlar Turnkey Manufacturing Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.18** Form of Subscription and Stock Purchase Agreement for shares of Series D and Series E
Preferred Stock and Warrants dated July 1991 by and between Registrant and certain
purchasers of shares of Series D and Series E Preferred Stock.
10.19** Series E Preferred Stock Purchase Agreement dated August 18, 1991, as amended as of January
30, 1996, by and between Registrant and Ailicec California Corporation.
10.20** Series F Preferred Stock Purchase Agreement dated as of March 5, 1996 by and between
Registrant and purchasers of Series F Preferred Stock.
10.21** Purchase and Debt Restructuring Agreement dated as of August 3, 1994 by and between
Registrant and Ailicec International Enterprises Limited.
10.22** Note Purchase Agreement dated August 3, 1994 by and between Registrant and certain
purchasers of notes and warrants for the purchase of Common Stock.
10.23** Warrant to Purchase Stock dated December 31, 1994 by and between Registrant and Ailicec
International Enterprises Limited.
10.24** Common Stock Purchase Warrant dated December 16, 1996, and an amendment thereto dated
February 13, 1997, by and between Registrant and Michael Crandell.
10.25** Common Stock Purchase Warrant dated December 16, 1996, and an amendment thereto dated
February 13, 1997, by and between Registrant and Larry Crandell.
10.26** Asset Purchase Agreement dated July 31, 1996, as amended December 16, 1996, by and between
Registrant and the Crandell Group, Inc.
10.27+** Development Agreement dated September 25, 1991 and amended as of February 12, 1997 by and
between Registrant and Ailicec International Enterprises Limited.
10.28** Common Stock Purchase Option dated as of March 29, 1996 by and between Registrant and
Steven J. Carnevale.
10.29** Common Stock Purchase Option dated as of March 29, 1996 by and between Registrant and
Thomas B. Aikin.
10.30** Promissory Note to Lon B. Radin dated March 1, 1992 from Registrant.
10.31+** Development and Supply Agreement dated June 30, 1995 by and between Registrant and Samsung
Electronics Corporation.
10.32+** Software License Agreement dated September 30, 1996 by and between Registrant and Oki Data
Corporation.
10.33+** Supply and License Agreement dated November 1, 1996 by and between Registrant and Pixel
Magic, Inc.
10.34+** Facsimile Product Development Agreement dated June 9, 1994 by and between Registrant and
Xerox Corporation.
10.35+** Facsimile Product Development Agreement dated November 23, 1994 by and between Registrant
and Xerox Corporation.
10.36+** Master Development, Purchase and Distribution License Agreement dated effective as of
January 31, 1997 by and between Registrant and Hewlett-Packard Company.
10.37** Employment Agreement dated July 31, 1996 between Registrant and Michael Crandell.
10.38** Security Agreement dated July 31, 1996 by and between Registrant and the Crandell Group,
Inc.
10.39+** OEM Purchase Agreement dated February 22, 1995, as amended February 21, 1997, by and
Between Registrant and Oki America, Inc.
10.40** Loan and Security Agreement dated August 23, 1996 by and between Registrant and Cupertino
National Bank & Trust and the amendment thereto dated March 11, 1997 and the amendment
Thereto dated March 31, 1997.
10.41** Form of Dealer Agreement.
10.42+** Agreement dated November 30, 1994 by and between the Crandell Group, Inc. and Intel
Corporation as amended May 11, 1995, assigned and delegated to Registrant as of July 30,
1996 and as further amended December 23, 1996.
10.43 First Amendment dated September 15, 1997 to Lease Agreement dated April 4, 1997 between
Registrant and Lincoln Menlo Phase I Associates Limited for Menlo Park, California office.
10.44 Second Amendment dated December 2, 1997 to Lease Agreement dated April 4, 1997 between
Registrant and Lincoln Menlo Phase I Associates Limited for Menlo Park, California office,
as amended September 15, 1997.
10.45 Sublease dated August 1, 1997 between Registrant and Systems & Software Consortium, Inc.
Santa Barbara, California office.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.46 Lease Agreement between Registrant and Landlord, K. Dalbey and M Tachouet dated March 28,
1997 for Beaverton, Oregon office.
10.47 Lease Agreement between DocuMagix and Metropolitan Life Insurance Company dated November 1,
1995 for San Jose, California office.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent and Report on Schedule -- Deloitte & Touche LLP (see page 87).
23.2 Consent of Independent Accountants -- Price Waterhouse LLP
24.1 Power of Attorney (see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- -------------
** Incorporated by reference to the identically numbered exhibits filed in
response to Item 16(a), "Exhibits", of the Company's Registration Statement
on Form S-1, as amended, (File No. 333-23763), which was declared effective
on June 10, 1997.
+ Portions of the exhibit have been omitted pursuant to a request for
confidential treatment and the omitted portions have been separately filed
with the Commission.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
<PAGE>
EXHIBIT 10.43
FIRST AMENDMENT TO LEASE AGREEMENT
CHANGE OF COMMNCEMENT DATE
This First Amendment to Lease Agreement (the "Amendment") is made and entered
into to be effective as of September 15, 1997, by and between LINCOLN MENLO
PHASE I ASSOCIATES LIMITED, a California limited partnership ("Landlord"), and
Jet Fax, Inc., a Delaware corporation ("Tenant"), with reference to the
following facts:
RECITALS
A. Landlord and Tenant have entered into that certain Lease Agreement dated
April 4, 1997 (the "Lease"), for the leasing of certain premises containing
approximately 4,790 rentable square feet of space located at 1378 Willow
Road, Menlo Park, California (the "Premises") as such Premises are more fully
described in the Lease.
B. Landlord and Tenant wish to amend the Commencement Date of the Lease.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true
--------
and correct.
2. Commencement: The Commencement Date of the Lease shall be July 1, 1997.
-------------
3. The last day of the Term of the Lease (the "Expiration Date") shall be
January 31, 2003.
4. The dates on which the Base Rent will be adjusted are:
for the period July 1, 1997 to June 30, 1998 the monthly Base Rent shall
be $6,186.94;
for the period July 1, 1998 to June 30, 1999 the monthly Base Rent shall
be $6,378.54;
and for the period July 1, 1999 to January 31, 2003 the monthly Base Rent
shall be $6,570.14.
5. Effect of Amendment: Except as modified herein, the terms and conditions
--------------------
of the Lease shall remain unmodified and continue in full force and
effect. In the event of any conflict between the terms and conditions of
the Lease and this Amendment, the terms and conditions of this Amendment
shall prevail.
6. Definitions: Unless otherwise defined in this Amendment, all terms not
-----------
defined in this Amendment shall have the meaning set forth in the Lease.
7. Authority: Subject to the provisions of the Lease, this Amendment shall be
----------
binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Each
party hereto and the persons signing below warrant that the person signing
below on
<PAGE>
such party's behalf is authorized to do so and to bind such party to the
terms of this Amendment.
8. The terms and provisions of the Lease are hereby incorporated in this
Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT:
Jet Fax, Inc.,
a Delaware corporation
By:
-----------------------------
Its VP Manufacturing
-----------------------------
Date: 9/17/97
-----------------------------
LANDLORD:
LINCOLN MENLO PHASE I ASSOCIATES LIMITED,
a California limited partnership
By: Lincoln Property Company Management Services, Inc.,
As Manager and Agent for Landlord
By:
-----------------------------
Vice President
Date:
-----------------------------
<PAGE>
EXHIBIT 10.44
SECOND AMENDMENT TO LEASE AGREEMENT
LEASE EXPANSION
This Second Amendment to Lease Agreement (the "Amendment") is made and entered
into as of December 2, 1997, by and between LINCOLN MENLO PHASE I
ASSOCIATES LIMITED, a California limited partnership "Landlord"), and JET
FAX, INC., a Delaware corporation ("Tenant"), with reference to the following
facts.
RECITALS
A . Landlord and Tenant have entered into that certain Lease Agreement dated as
of April 4, 1997 and that certain First Amendment dated as of September 15,
1997, (hereinafter, collectively the "Lease") for the leasing of certain
premises consisting of approximately 4,790 rentable square feet located at 1378
Willow Road, Menlo Park, California (the "Original Premises") as such Original
Premises are more fully described in the Lease,
B. Landlord and Tenant now wish to amend the Lease to provide for, among other
things, the addition of certain space to the Original Premises, all upon and
subject to each of the terms, conditions, and provisions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true
---------
and correct and are hereby incorporated herein as though set forth in
full.
2. Premises:
---------
2.1 Commencing on January 17 1998 (the "AP Commencement Date")
there shall be added to the Original Premises those certain premises
consisting of approximately 12,214 rentable square feet located at 1370
Willow Road, Suite 200 (the "Additional Premises"), which Additional
Premises are depicted on the site plan (building plan, etc.) attached
hereto and made a part hereof as Exhibit A. Tenant hereby acknowledges
that the Additional Premises are presently being occupied by Four 11
Corporation (the "Existing Tenant"). Landlord's delivery to Tenant of
possession of the Additional Premises by January 17, 1998 is contingent
upon the Existing Tenant vacating the Additional Premises and
surrendering possession thereof to Landlord by January 9, 1998. If
Landlord cannot deliver to Tenant possession of the Additional Premises
broom clean but without any tenant improvements of any kind or nature
on January 17, 1998, Landlord shall neither be subject to any liability
nor shall the validity of the Lease be affected; provided, the Lease
Term applicable to the Additional Premises shall commence on the date
possession is tendered and in no event shall the Expiration Date be
extended. Accordingly, the date Landlord is to deliver the Additional
Premises, namely
Please Initial
<PAGE>
January 17, 1998, shall only be extended to a date later than January
17, 1998 if Landlord fails to tender to Tenant possession of the
Additional Premises broom clean but without any tenant improvements of
any kind or nature being made thereto solely due to the Existing Tenant
failing to vacate and surrender possession of the Additional Premises
to Landlord prior to January 9, 1997. Upon Landlord's delivery to
Tenant of possession of the Additional Premises broom clean but without
any tenant improvements being made there to of any kind or nature,
Tenant shall promptly deliver written notice to Landlord confirming
same (however, any failure by Tenant to deliver to Landlord such
written notice shall not affect the effectiveness of the Lease). By
taking possession of the Additional Premises broom clean without any
tenant improvements of any kind or nature being made thereto, Tenant
shall be deemed to have accepted the Additional Premises in good
condition and state of repair.
2.2 For purposes of the Lease, from and after the AP
Commencement Date, the "Premises" as defined in Section I of the Lease
shall mean and refer to the aggregate of the Original Premises and the
Additional Premises consisting of a combined total of approximately
17,004 rentable square feet located at 1370 Willow Road, Suite 200 and
1378 Willow Road. Accordingly, from and after the AP Commencement
Date, all references in this Amendment and in the Lease to the term
"Premises" shall mean and refer to the Original Premises and the
Additional Premises. Landlord and Tenant hereby agree that for
purposes of the Lease, from and after the AP Commencement Date, the
rentable square footage area of the Premises shall be conclusively
deemed to be 17,004 rentable square feet. In addition to the
foregoing, it is the parties express intention that the balance of the
Term of the Lease for the Original Premises and the Additional Premises
be coterminous with the Expiration Date of the initial Term as
specified in the Lease and that any option or renewal term described in
the Lease shall be applicable to both the Premises and the Additional
Premises.
2.3 Notwithstanding anything to the contrary contained herein or
in the Lease, Landlord shall neither be subject to any liability, nor
shall the validity of the Lease be affected if Landlord is not able to
deliver to Tenant possession of the Additional Premises by the AP
Commencement Date. Provided, however, Tenant's obligation to pay Rent
on the Additional Premises shall commence on the date possession is
tendered.
3. Base Rent: The Basic Lease Information and Section 3 of the Lease are
----------
hereby modified to provide that during the Term of the Lease the
monthly Base Rent payable by Tenant to Landlord, in accordance with the
provisions of Section 3 of the Lease shall be as follows:
<TABLE>
<CAPTION>
Original Premises Additional Premises Aggregate Amount of
Period Monthly Base Rent Monthly Base Rent Monthly Base Rent
<S> <C> <C> <C>
01/17/98-04/30/98 $6,186.94 $15,756.06 $21,943.00
05/01/98-04/30/99 $6,378.54 $16,244.62 $22,623.16
05/01/99-04/30/2000 $6,570.14 $16,733.18 $23,303.32
05/01/2000-01/31/03 $6,570.14 $17,402.50 $23,972.64
</TABLE>
4. Condition of the Additional Premises: Subject to the provisions of
-------------------------------------
Section 2 above, on the AP
Please Initial
<PAGE>
Commencement Date Landlord shall deliver to Tenant possession of the
Additional Premises in its then existing condition and state of repair,
"AS IS", without any obligation of Landlord to remodel, improve or
alter the Additional Premises, to perform any other construction or
work of improvement upon the Additional Premises, or to provide Tenant
with any construction or refurbishing allowance. Tenant acknowledges
that no representations or warranties of any kind, express or implied,
respecting the condition of the Additional Premises, Building, or Park
or have been made by Landlord or any agent of Landlord to Tenant,
except as expressly set forth herein. Tenant further acknowledges that
neither Landlord nor any of Landlord's agents, representatives or
employees have made any representations as to the suitability or
fitness of the Additional Premises for the conduct of Tenant's
business, including without limitation, any storage incidental thereto,
or for any other purpose. Any exception to the foregoing provisions
must be made by express written agreement signed by both parties.
5. Security Deposit: Concurrent with its execution of this Amendment,
-----------------
Tenant shall deliver to Landlord the sum of $17,403.00 (the "AP
Security Deposit"). The AP Security Deposit shall be added to the
Security Deposit presently being held by Landlord under the Lease in
the amount of $6,570.00 (the "Original Security Deposit"). The
aggregate amount of the AP Security Deposit and the Original Security
Deposit is $23,973.00. From and after the AP Commencement Date, the
term "Security Deposit' shall mean and refer to the aggregate of the AP
Security Deposit and the Original Security Deposit in the amount of
$23,973.00. The AP Security Deposit shall be subject to, and the use
and application thereof governed by, Section 4 of the Lease.
6. Tenant's Share of Operating Expenses: As of the AP Commencement Date,
-------------------------------------
the Lease shall be modified to provide that Tenant's Share of Operating
Expenses (as defined in the Basic Lease Information and Section 6 of
the Lease) shall be increased to 10.70% (percentage of Phase I; 158,934
sf).
7. Tenant's Share of Tax Expenses: As of the AP Commencement Date, the
-------------------------------
Lease shall be modified to provide that Tenant's Share of Tax Expenses
(as defined in the Basic Lease Information and Section 6 of the Lease)
shall be increased to 62.37% (percentage of Building R; 27,265 sf).
8. Tenants' Share of Utility Expenses: As of the AP Commencement Date, the
-----------------------------------
Lease shall be modified to provide that Tenant's Share of Utility
Expenses (as defined in the Basic Lease Information and Sections 6 and
7 of the Lease) shall be increased to 62.37% (percentage of Building R;
27,265 sf.
9. Tenant's Share of Common Area Utility Costs: As of the AP Commencement
--------------------------------------------
Date, the Lease shall be modified to provide that Tenant's Share of
Common Area Utility Costs (as defined in the Basic Lease Information
and Sections 6 and 7 of the Lease) shall be increased to 10.70%
(percentage of Phase I; 158,934 sf.
10. Unreserved Parking Spaces: As of the AP Commencement Date, the Lease
--------------------------
shall be modified to provide that Tenant's Unreserved Parking Spaces
(as defined in the Basic Lease Information) shall be increased to
Fifty-seven (57).
11. Insurance: Tenant shall deliver to Landlord, upon execution of this
----------
Amendment, a certificate of insurance evidencing that the Additional
Premises are included within and covered by Tenant's insurance policies
required to be carried by Tenant pursuant to the Lease.
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12. Brokers: Tenant warrants that it has had no dealings with any real
--------
estate broker or agent in connection with the negotiation of this
Amendment. If Tenant has dealt with my person, real estate broker or
agent with respect to this Amendment, Tenant shall be solely
responsible for the payment of any fee due to said person or firm, and
Tenant shall indemnify, defend and hold Landlord free and harmless
against any claims, judgments, damages, costs, expenses, and
liabilities with respect thereto, including attorneys' fees and costs.
13. Effect of Amendment: Except as modified herein, the terms and
-------------------
conditions of the Lease shall remain unmodified and continue in full
force and effect. In the event of any conflict between the terms and
conditions of the Lease and this Amendment, the terms and conditions
of this Amendment shall prevail.
14. Definitions: Unless otherwise defined in this Amendment, all terms not
------------
defined in this Amendment shall have the meanings assigned to such
terms in the Lease.
15. Authority: Subject to the assignment and subletting provisions of the
----------
Lease, this Amendment shall be binding upon and inure to the benefit
of the parties hereto, their respective heirs, legal representatives,
successors and assigns. Each party hereto and the persons signing
below warrant that the person signing below on such party's behalf is
authorized to do so and to bind such party to the terms of this
Amendment.
16. Incorporation: The terms and provisions of the Lease are hereby
-------------
incorporated in this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT:
JET FAX, INC.,
a Delaware corporation
By:
-----------------------------
Its:
-----------------------------
Date: December 8, 1997
-----------------------------
LANDLORD:
LINCOLN MENLO PHASE I ASSOCIATES LIMITED,
a California limited partnership
By:
Senior Vice President
-----------------------------
Date:
-----------------------------
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EXHIBIT 10.45
SUBLEASE
THIS SUBLEASE (this "Sublease") is made and entered into, effective on the date
set forth below, by and between SYSTEMS & SOFTWARE CONSORTIUM, INC., a
California nonprofit mutual benefit corporation ("SySCI"), and JETFAX, INC., a
DELAWARE CORPORATION (the "Subtenant"), with reference to the following facts:
RECITALS:
A. SySCI is the Lessee under that certain Net, Net, Net Lease dated for
reference purposes as of December 1, 1996 with Patterson Associates, LLC, a
California limited liability company (the "Landlord"), a copy of which Lease is
attached to this Sublease as Exhibit A (the "Master Lease").
B. Under the Master Lease, SySCI has leased those portions of the building
(the "Building") located at 5385 Hollister Avenue in the unincorporated area of
Santa Barbara County, California known as Goleta and further described in the
Master Lease.
C. Subtenant desires to sublease from SySCI, on the terms and conditions set
forth in this Sublease, that portion of the premises leased by SySCI under the
Master Lease depicted by crosshatch markings on the attached Exhibit B, which
space consists of approximately 4856 square feet (the "Premises"). Subtenant
retains the right of first refusal on the adjoining Annex of approximately 1280
square feet, the S-4 SCIF of approximately 1520 square feet, and the S-4
Computer Room of approximately 850 square feet.
AGREEMENTS:
NOW, THEREFORE, in light of the foregoing and in consideration of the mutual
covenants set forth below, SySCI and Subtenant, intending to be legally bound,
agree as follows:
1 . SUBLEASE OF PREMISES
1.1 Sublease. SySCI hereby subleases to Subtenant the Premises and the
nonexclusive right to use the Common Areas in and about the Building and the
parking facilities adjoining the Building. (Common Areas shall include a
reception area, auditorium, presentation room, locker rooms, lunch area, and
business services room, all located within the portion of the building leased to
SySCI.) Subtenant's non-exclusive right to use the Common Areas and the parking
facilities shall be determined reasonably on an equitable basis by SySCI from
time to time, based generally on the ratio that the square footage of the
Premises bears to the square footage of the building covered by the Master
Lease, other than the Common Area and the parking facilities. The Premises are
subleased in their existing configuration and in their "AS-IS" condition. SySCI
makes no representation or warranty whatsoever concerning the condition of the
Premises or their fitness for any particular use. Notwithstanding the
foregoing, on the Commencement Date, the heating, ventilating and air
conditioning ("HVAC") system, and the electrical, plumbing, sewer, life safety
and, if applicable, security systems (collectively, "Building Systems") serving
the Premises shall be in good working order and repair. If, during the first
thirty (30) days of the Term, any Building System is not in the condition
required by the foregoing sentence, Sublessee shall notify SySCI of the need or
repair and the repair shall be completed at no cost to Sublessee.
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1.2 Terms. This Sublease is subject to all of the terms and conditions of the
Master Lease. Subtenant shall assume and perform the obligations of SySCI under
the Master Lease to the extent that such terms and conditions are applicable to
the Premises subleased pursuant to this Sublease. When the context requires,
each reference in the Master Lease to "Lessor" shall be deemed to refer to
SySCI, and each reference therein to "Lessee" shall be deemed to refer to
Subtenant. As between SySCI and Subtenant, any inconsistency between the terms
of the Master Lease and the terms of this Sublease shall be governed by the
terms of this Sublease. Subtenant shall not commit or permit to be committed on
the Premises any act or omission that would violate any term or condition of the
Master Lease.
1.3 Exceptions. All of the terms and conditions contained in the Master Lease
are incorporated in this Sublease as if fully set forth herein, except for the
provisions of Sections Basic Lease Provision 1 ("Premises", but the remaining
sections of Paragraph 1 are incorporated in this Sublease),
2,3,4,5,6,7,7,8,10,11 and 12; the second sentence and the second full paragraph
of Section 1; Section 2.1 (a) and (b); Section 2.3, Sections 3.1, 3.2, and 3.4;
the second full paragraph of 3.6 (a), 3.6 (b) and 3.7; Section 4, the second-to-
last full paragraph of Section 5.4; the last sentence of Section 6.1; Section
7.7; Section 12.1; Section 12.4: Section 14; Section 15.1; Section 15.2 (a);
Section 18 and Exhibit A. In addition Sublessee shall not be responsible for
complying with any law, requirement, ordinance, statute, or regulation requiring
alteration, maintenance or restoration of the Premises except to the extent
arising solely out of Sublessee's particular use of the Premises.
2. TERM OF SUBLEASE
The term of this Sublease shall commence on AUGUST 1, 1997 and shall end at
midnight, California Time, on JULY 31, 1998. Subtenant shall have the option to
extend the term of this sublease for a one-year period. Commencing at the end
of the one (1) year extension, Subtenant shall have the option to extend the
term of this sublease for an additional 8 month period. Subtenant retains the
option to extend this sublease for an additional year commencing at the end of
the eight (8) month extension, contingent upon the extension of the SySCI Master
Lease by Patterson Associates. With respect to the Master Lease termination
right exercisable by the Landlord as set forth in Section 2.4 of the Master
Lease, so long as Sublessee is not in default under this Sublease beyond
applicable cure periods, SySCI shall use its best efforts to have the Premises
excluded from the nine thousand (9,000) contiguous square feet designated for
termination by Landlord. In addition, notwithstanding anything to the contrary
contained in the Sublease, Sublessee shall have the right to enter the Premises
for a period fourteen (14) days prior to the commencement of the term of this
Sublease, without any obligation to pay Monthly Rent under this Sublease, for
the purpose of installing its equipment, data, telecommunication and cabling
systems, furniture and trade fixtures.
3 . SECURITY DEPOSIT
Upon execution of this sublease, Subtenant shall deliver to SySCI (a)
prepaid Monthly Rent for the first month of the term of the Sublease, and (b)
the amount of $5341.60 as a security deposit for the performance by Subtenant of
its obligations under this Sublease. The security deposit may be paid in two
installments, one half due upon execution, and one half due upon the first day
of the second month of occupancy. If Subtenant defaults in its performance of
any of its obligations under this Sublease, then SySCI may, but shall not be
obligated to, use the security deposit, or any portion thereof, to cure such
default or to compensate SySCI for any damage, including late charges, sustained
by SySCI resulting from Subtenant's default. Immediately upon demand by SySCI,
Subtenant shall pay to SySCI an amount equal to the portion for the security
deposit so expended
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or applied by SySCI as provided herein in order to maintain the security deposit
in the original amount initially deposited with SySCI. If Subtenant is not in
default at the expiration or termination of this Sublease, SySCI shall return
the unexpended portion of the security deposit to the Subtenant, without
interest. SySCI'S obligations with respect to the security deposit shall be
those of a debtor, and not of a trustee, and SySCI shall be entitled to
commingle the security deposit with the general funds of SySCI.
4. USE
Subtenant may use the Premises for the uses permitted by the Master Lease and
for no other purposes whatsoever without the prior written consent of SySCI,
which shall not be unreasonably with held or delayed, and Landlord.
5. RENT
5.1 Monthly Rent. Commencing on AUGUST 1,1997 (the "Rent Commencement Date")
and continuing during each if the term of this Sublease, Subtenant shall pay to
SySCI on or before the first day of each month of the term of this Sublease
gross rent ("Monthly Rent") in the amount of $5341.60. The amount of the Monthly
Rent shall be adjusted annually on each anniversary of the Rent Commencement
Date in accordance with the provisions of Section 3.5 of the Master Lease.
SySCI and Subtenant acknowledge that the rent contemplated in this Section is a
gross rent and that Subtenant shall not be obligated to pay SySCI its otherwise
proportionate share of any additional rent that SySCI is required to pay under
the terms of the Master Lease. Sublessee shall be entitled to receive from
SySCI any abatement of Monthly Rent received by the SySCI from the Landlord
pursuant to the Master Lease to the extent such abatement of Monthly Rent is
attributable to the Premises.
5.2 Late Payment Charge. Subtenant acknowledges that the late payment by
Subtenant to SySCI of any amounts owing pursuant to the terms of this Sublease
(collectively, "Rent") will cause SySCI to incur costs not contemplated by this
Sublease. The exact amount of such costs are extremely difficult and
impracticable to fix. Such costs include, without limitation, financing,
processing and accounting charges, and late charges that may be imposed by SySCI
by the terms of the Master Lease. Therefore, if any installment of Rent due
from Subtenant is not received by SySCI within 3 days of its due date, Subtenant
shall pay to SySCI an additional sum of five percent (5%) of the overdue Rent as
a late charge for any payment of Rent not so paid. The parties agree that this
late charge represents a fair and reasonable estimate of the cost that SySCI
will incur by reason of a late payment by Subtenant. Acceptance of any late
charge shall not constitute a waiver of Subtenant's default with respect to the
overdue amount, or prevent SySCI from exercising any other rights or remedies
available to SySCI.
5.3 Payment. Subtenant shall pay all Rent hereunder to SySCI not later than
the close of business on the date first due, without prior notice or demand,
without offset or reduction. All rent shall be payable in lawful money of the
United States at such place as SySCI shall designate to Subtenant from time to
time in writing. Rent or increased rent for any partial month shall be prorated
on the basis of a thirty-day month.
6. INSURANCE
Subtenant shall procure and maintain policies of insurance, insuring the
Premises and Subtenant's use of the same with the coverages and amounts equal to
or greater (at Subtenant's election) than those that SySCI is obligated to
procure under the terms of the Master Lease. Such policies shall comply with all
of the terms of the Master Lease. Not later than 30
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days prior to the expiration of any such policy, Subtenant shall present to
SySCI evidence of the renewal of such policies, or the purchase of acceptable
replacement policies, for the ensuing period. All such policies shall name both
SySCI and Landlord as additional insureds and shall provide that such policies
will not be subject to cancellation without thirty days' prior written notice to
SySCI.
7. INDEMNIFICATION
Except to the extent caused by the gross negligence of willful misconduct of
SySCI, its agents, employees, contractors or invitees, Subtenant shall
indemnify, protect, defend with counsel reasonably acceptable to SySCI and hold
SySCI harmless from and against any and all claims, liabilities, judgments,
causes of action, damages, costs and expenses (including, without limitation,
reasonable attorneys' fees) caused by or arising in connection with (a) a breach
of Subtenant's obligations under this Sublease and (b) Subtenant's use and
occupancy of the Premises. Except to the extent caused by gross negligence of
willful misconduct of SySCI, its agents, employees, contractors or invitees,
Subtenant shall indemnify, protect, defend with counsel reasonably acceptable to
Subtenant and hold Subtenant harmless from and against any and all claims,
liabilities, judgments, causes of action, damages, costs and expenses
(including, without limitation, reasonable attorneys' fees) caused by or arising
in connection with (a) a breach of Subtenant's obligations under this Sublease
and (b) a breach of SySCI's obligations under the Master Lease.
8. DEFAULT
8.1 Events of Default. The following events shall constitute an event of
default under this Sublease:
8.1.2 Rent. Subtenant's failure to make timely payment of Rent.
8.1.3 Breach. Subtenant's failure to honor or perform any other covenant,
condition, or obligation imposed upon Subtenant by this Sublease.
8.1.4 Lease. Subtenant's failure to honor or perform any covenant, condition,
or obligation imposed upon SySCI, as Lessee under the terms of the Master Lease
that is assumed hereunder by Subtenant.
8.2 Notice and Cure of Nonmonetary Defaults. SySCI shall provide Subtenant
written notice of any nonmonetary default under this Sublease. If the default
is attributable to Subtenant's acts or omissions, Subtenant shall be entitled to
cure any such default within 30 days of receiving such notice. Subtenant
acknowledges that it will not be entitled to receive any notice of a default in
the payment of any sums owing under this Sublease.
8.3 Remedies. If Subtenant fails to pay any sums owing hereunder within 3
days of the date due, or to cure any nonmonetary default within the applicable
cure period specified in Section 8.2, SySCI may terminate this Sublease upon
delivery of written notice to Subtenant. Upon any such occurrence, in addition
to other remedies available to SySCI under law, SySCI immediately shall be
entitled to (a) reenter and take possession of the Premises and evict Subtenant
therefrom through legal process, and (b) to exercise, as to Subtenant, all of
the rights and remedies available to the Landlord under the Master Lease, as if
all such rights and remedies were set forth verbatim herein.
9. OBLIGATIONS OF SySCI
9.1 Preservation of Master Lease. For so long as Subtenant is not in default
in the performance of its
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obligations under this Sublease, SySCI shall perform all of its obligations
under the Master Lease not expressly agreed to or performed by the Sublessee
hereunder, and shall not engage in action or conduct, the purpose or effect of
which is to cause a default under the Master Lease. SySCI shall provide
Subtenant with copies of all notices that SySCI receives from Landlord alleging
any default by SySCI under the Master Lease, or a termination of the Master
Lease.
9.2 Performance of Lessor's Obligations. For so long as this Sublease remains
in effect, SySCI shall use due diligence in attempting to cause the Landlord
under the Master Lease to perform all of the Landlord's duties and obligations
thereunder. If the Landlord defaults in the performance of any such obligations
and fails or refuses to cure any such default, and such uncured defaults pertain
solely to the Premises, then SySCI may, at its election, in lieu of commencing
legal actions or proceedings against the Landlord, assign to Subtenant any
claims, causes of action or remedies that SySCI may have on account of such
uncured defaults, if such uncured defaults pertain solely to the Premises.
9.3 Estoppel; Nondisturbance. Contemporaneously with the execution hereof,
SySCI and Subtenant shall execute and deliver to Landlord a Nondisturbance,
Subordination and Attornment Agreement in the form attached as Exhibit C.
10. ASSIGNMENT OF SUBRENTS
SySCI has agreed in the Master Lease that the rentals payable to SySCI under
this Sublease shall be paid directly by Subtenant to Landlord upon the
occurrence of a default by SySCI under the Master Lease and SySCI's failure to
cure such default within a period of 60 days. Accordingly, after notice is
given by Landlord to Subtenant that the rentals under the Sublease should be
paid to Landlord, Subtenant shall pay to Landlord, or in accordance with
Landlord's directions, all rentals and other monies due and to become due SySCI
under this Sublease. Subtenant shall have no responsibility to ascertain
whether such demand by Landlord is permitted under the Master Lease. Any such
payment to Landlord shall discharge Subtenant's obligations to make such payment
to SySCI. Such payment of rents to Landlord by Subtenant shall continue until
the first to occur of the following: (a) no further rent is due and payable
under the Sublease; and (b) Landlord gives Subtenant notice that SySCI's default
has been cured and instructs Subtenant that the rents shall thereafter be
payable to SySCI.
11. ATTORNEYS' FEES
If either party engages counsel to enforce that party's rights hereunder, or to
resolve a dispute hereunder, the prevailing party shall be entitled to recover
all costs and expenses including attorneys' fees, whether or not litigation is
commenced.
12. SURRENDER
Notwithstanding anything to the contrary contained in this Sublease or the
Master Lease, upon
the expiration or earlier termination of this Sublease, Sublessee shall not be
obligated to remove
(i) any tenant improvements, alterations, additions, or improvements installed
in the Premises by Sublessee prior to the Commencement Date; or (ii) any
Hazardous Materials not stored, used, disposed of or released on or about the
Premises by Sublessee, its, agents, employees or
contractors.
13. AMENDMENT OR MODIFICATION
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Sublessor and Master Lessor shall not amend or modify the Master Lease in any
way so as to
materially or adversely affect Sublessee or its interest hereunder or materially
restrict Sublessee's rights hereunder, without prior written consent of
Sublessee, which shall not be unreasonably withheld or delayed. For purposes of
this Section, any changes or adjustments in any of the terms or provisions of
the Master Lease as a result of the occurrence of any event contemplated in the
Master Lease shall not be considered an amendment or modification which
materially or adversely affects Subtenant or increases any of this obligations.
14. SySCI'S OBLIGATIONS
In addition to SySCI's obligations pursuant to Paragraph 9.2 of this Sublease,
with respect to work, services, repairs, restoration, the provision of insurance
or the performance of any other obligation of Landlord under the Master Lease,
SySCI shall use good faith reasonable efforts to obtain Landlord's performance
of such obligations on Sublessee's behalf
15. SUBLESSOR'S REPRESENTATIONS AND WARRANTIES
As an inducement to Sublessee to enter this Sublease, SySCI represents and
warrants, to the best of SySCI's knowledge and belief, with respect to the
Premises that:
A. The copy of the Master Lease attached hereto is a true and correct copy
thereof, and the Master Lease is in full force and effect, and there exists
under the Master Lease no default or event of default, nor has there occurred
any event which, with the giving of notice or passage of time or both, could
constitute such a default or event of default.
B. There are no pending or threatened actions, suits or proceedings before
any court or administrative agency against SySCI or against Landlord or third
parties which could, in the aggregate, adversely affect the Premises or any part
thereof or the ability of Landlord to perform its obligations under the Master
Lease of SySCI to perform its obligations under this Sublease, and SySCI is not
aware of any facts which might result in any such actions, suit, or proceedings.
C. SySCI has not received any notice from any insurance company of any
defect or inadequacies in the Premises of the premiums for the insurance
thereof.
16. QUIET ENJOYMENT
Subleasee shall peacefully have, hold and enjoy the Premises, subject to the
terms and conditions of this Sublease, provided that Sublessee pays all Monthly
Rent and performs all Sublessee's covenants and agreements contained herein.
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17. CONDITION PRECEDENT
This Sublease and Sublessee's and SySCI's obligations hereunder are conditioned
upon SySCI's obtaining the written consent of the Landlord. If SySCI fails to
obtain the Landlord's consent within thirty (30) days after execution of this
Sublease by SySCI, then Sublessee or SySCI may terminate this Sublease by giving
the other party written notice, and SySCI shall return to Sublessee all
consideration previously paid by Sublessee to SySCI.
IN WITNESS WHEREOF, the undersigned have executed this Sublease, effective on
the date on which all parties have executed both this Sublease and the
Nondisturbance, Subordination and Attornment Agreement required by Section 9.3.
SYSTEMS & SOFTWARE CONSORTIUM, INC., a California nonprofit mutual benefit
corporation
Date
By
Michael C. Ditmore, Chairman
Address for Notices
5385 Hollister Avenue
Santa Barbara, California 93111
"SUBTENANT"
JetFax, INC.
Date
By
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EXHIBIT 10.46
Standard Form of OFFICE BUILDING LEASE Developed by PORTLAND METROPOLITAN
ASSOCIATION OF BUILDING OWNERS AND MANAGERS
OFFICE LEASE
This lease, made and entered into at Portland, Oregon, this 28 day of March
1997 by and between
LANDLORD: Kurt H. Dalbey & Mary E. Tachouet *
and
TENANT: Jet Fax, Inc. *
Landlord hereby leases to Tenant the following: Approximately
2,585 rentable Sq.Ft. *
(12% load factor) Suite 102 (See Exhibit A) (the Premises)
in the Twin Oaks Executive Center (the Building)
at 1865 NW 169th Avenue, Beaverton, Oregon, for a term
commencing , May 1, 1997
and continuing through April 30, 2000
at a Monthly Base Rental as follows:*
Month 1-18 $3,554.38
Month 19-36 $3,715.94
Rent is payable in advance on the I day of each month
commencing May 1, 1997 *
Landlord and Tenant covenant and agree as
follows: *
1.1 DELIVERY OF Should Landlord be unable to deliver possession of
POSSESSION. the Premises on the SEE EXHIBIT B-1 date fixed for
the commencement of the term, commencement will be
deferred and Tenant shall owe no rent until notice
from Landlord tendering possession to Tenant. If
possession is not so tendered within 90 days
following commencement of the term, then Tenant may
elect to cancel this lease by notice to Landlord
within 10 days following expiration of the 90-day
period. Landlord shall have no liability to Tenant
for delay in delivering possession, nor shall such
delay extend the term of this lease in any manner
2.1 RENT PAYMENT. Tenant shall pay the Base Rent for the Premises and
any additional rent provided herein without
deduction or offset. Rent for any partial month
during the lease term shall be prorated to reflect,
the number of days during the month that Tenant
occupies the Premises, Additional rent means amounts
determined under Section 19 of this lease and any
other sums payable by Tenant to Landlord under this
lease. Rent not paid when due shall bear interest at
the rate of one-and-one-half percent per month until
paid. Landlord may at its option impose a late
charge of $.05 for each $1 of rent for rent payments
made more than 10 days late in lieu of interest for
the first month of delinquency, without waiving any
other remedies available for default. Failure to
impose a late charge shall not be a waiver of
Landlord's rights hereunder.
3.1 LEASE CONSIDERATION. Upon execution of the lease Tenant, has paid the
Base Rent for the first full month of the lease term
for which rent , is payable and in addition has paid
the sum of $3,715.94 as lease consideration.
Landlord may apply the lease consideration to pay
the cost of performing any obligation which Tenant
fails to perform within the time required by this
lease, but such application by Landlord shall not be
the exclusive remedy for tenant's default. If the
lease consideration is applied by Landlord, Tenant
shall on demand pay the sum necessary to replenish
the lease consideration to its original amount. To
the extent not applied by Landlord to cure defaults
by Tenant, the lease
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consideration shall be applied against the rent
payable for the last month of the term if so
applied. The lease consideration shall not be
refundable.
4.1 USE. Tenant shall use the Premises as business for
General Office and all legal related uses and for
no other purpose without Landlord's written
consent. In connection with its use, Tenant shall
at (its expense promptly comply with all
applicable laws, ordinances, rules and regulations
of any public authority and shall not annoy,
obstruct, or interfere with the rights of other
tenants of the Building. Tenant shall create no
nuisance nor allow any objectionable fumes, noise,
or vibrations to be emitted from the Premises.
Tenant shall not conduct any activities that will
increase Landlord's insurance rates for any
portion of the Building or that will in any manner
degrade or damage the reputation of the Building.
4.2 EQUIPMENT Tenant shall install in the Premises only such
office equipment as is customary for general office
use and shall not overload the floors or electrical
circuits of the Premises or Building or alter the
plumbing or wiring of the Premises or Building.
Landlord must approve in advance the location of and
manner of installing any wiring or electrical, heat
generating or communication equipment or
exceptionally heavy articles. All telecommunications
equipment, conduit, cables and wiring and any
additional air conditioning required because of heat
generating equipment or special lighting installed
by Tenant shall be installed and operated at
Tenant's expense.
4.3 SIGNS. No signs, awnings, antennas, or other apparatus
shall be painted on or attached to the Building or
anything placed on any glass or woodwork of the
Premises or positioned so as to be visible from
outside the Premises without Landlord's written
approval as to design, size, location, and color.
All signs installed by Tenant shall comply with
Landlord's standards for signs and all applicable
codes and all signs and sign hardware shall be
removed upon termination of this lease with the sign
location restored to its former state unless
Landlord elects to retain all or any portion
thereof.
5.1 UTILITIES Landlord will furnish water, electricity and
AND elevator service and, during the normal Building
SERVICES hours of 8:00 AM to 6:00 PM Monday through Friday
except holidays, will furnish heat and air-
conditioning (if the Building is air-conditioned).
Janitorial service will be provided in accordance
with the regular schedule of the Building, which
schedule and service may change from time to time.
Tenant shall comply with all government laws or
regulations regarding the use or reduction of use
of utilities on the Premises. Interruption of
services or utilities shall not be deemed an
eviction or disturbance of Tenant's use and
possession of the Premises, render Landlord liable
to Tenant for damages, or relieve Tenant from
performance of Tenant's obligations under this
lease. Landlord shall take all-reasonable steps to
correct any interruptions in service. Electrical
service furnished will be 110 volts unless
different service already exists in the Premises.
SEE EXHIBIT B-3
5.2 EXTRA USAGE. If Tenant uses excessive amounts of utilities or
services of any kind because of operation outside
of normal Building hours, high demands from office
machinery and equipment, nonstandard lighting, or
any other cause, Landlord may impose a reasonable
charge for supplying such extra utilities or
services, which charge shall by payable monthly by
Tenant in conjunction with rent payments. In case
of dispute over any extra charge under this
paragraph, Landlord shall designate a qualified
independent engineer whose decision shall be
conclusive on both parties. Landlord and Tenant
shall each pay one-half of the cost of such
determination.
6.1 MAINTENANCE Landlord shall have no liability for failure to
AND REPAIR. perform required maintenance and repair unless
written notice of such maintenance and repair is
given by Tenant and Landlord fails to commence
efforts to remedy the problem in a reasonable
time, not to exceed thirty (30) days, and manner.
Landlord shall have the right to erect scaffolding
and other apparatus necessary for the purpose of
making repairs, and Landlord shall have no
liability for interference with Tenant's use
because of repairs and installations. Tenant shall
have no claim against Landlord for any
interruption or reduction of services or
interference with Tenant's occupancy, and no such
interruption or reduction shall be construed as a
constructive or other eviction of Tenant. Repair
of damage caused by negligent or intentional acts
or breach of this lease by Tenant, its employees
or invitees shall be at Tenant's expense.
6.2 ALTERATIONS. Tenant shall not make any alterations, additions, or
improvements to the Premises, change the color of the
interior, or install any wall or floor covering without
Landlord's prior written consent ,SEE EXHIBIT B-4 any such
improvements, alterations, wiring, cables or conduit
installed by Tenant shall at once become part of the
Premises and belong to Landlord except for removable
machinery and unattached movable trade fixtures. Landlord
may at its option require that Tenant remove any
improvements, alterations, wiring, cables or conduit
installed by Tenant and restore the Premises to the original
condition upon termination of this lease. Landlord shall
have the right to approve the contractor used by Tenant for
any work in the Premises, and to post notices of
nonresponsibility in connection with work being performed by
Tenant in the Premises. SEE EXHIBIT B-5
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EXHIBIT B-6 INSERTED
7.1 INDEMNITY. Tenant shall not allow any liens to attach to the Building
or Tenant's interest in the Premises as a result of its
activities.
Tenant shall indemnify and defend Landlord and its managing
agents from any claim, liability, damage, or loss occurring
on the Premises, arising out of any activity by Tenant, its
agents, or invitees or resulting from Tenant's failure to
comply with any term of this lease. Neither Landlord nor its
managing agent shall have any liability to Tenant because of
loss or damage to Tenant's property or for death or bodily
injury caused by the acts or omissions of other Tenants of
the Building, or by third parties (including criminal acts).
7.2 INSURANCE. Tenant shall carry liability insurance with limits of not
less than One Million Dollars ($1,000,000) combined single
limit bodily injury and property damage which insurance
shall have an endorsement naming Landlord and Landlord's
managing agent, if any, as an additional insured and
covering the liability insured under paragraph 7.1 of this
lease.
Tenant shall furnish a certificate evidencing such insurance
which shall state that the coverage shall not be cancelled
or materially changed without 10 days advance notice to
Landlord and Landlord's managing agent, if any. A renewal
certificate shall be furnished at least 10 days prior to
expiration of any policy.
8.1 FIRE OR "Major Damage" means damage by fire or other casualty to the
CASUALTY. Building or the Premises which causes the Premises or any
substantial portion of the Building to be unusable, or which
will cost more than 25 percent of the pre-damage value of
the Building to repair, or which is not covered by
insurance. In case of major damage, Landlord may elect to
terminate this lease by notice in writing to Tenant within
30 days after such date. If this lease is not terminated
following Major Damage, or if damage occurs which is not
Major Damage, Landlord shall promptly restore the Premises
to the condition existing just prior to the damage. Tenant
shall promptly restore all damage to tenant improvements or
alterations installed by Tenant or pay the cost of such
restoration to Landlord if Landlord elects to do the
restoration of such improvements. Rent shall be reduced from
the date of damage until the date restoration work being
performed by Landlord is substantially complete, with
reduction to be in proportion. SEE EXHIBIT B-7,-
8.2 WAIVER OF Tenant shall be responsible for insuring its personal
SUBROGATION property and trade fixtures located on the Premises and any
alterations or tenant improvements it has made to the
Premises. Neither Landlord. its managing agent nor Tenant
shall be liable to the other for any loss or damage caused
by water damage, sprinkler leakage, or any of the risks that
are or could be covered by a standard at risk insurance
policy with an extended coverage endorsement, or for any
business interruption, and there shall be no Subrogated
claim by one party's insurance carrier against the other
party arising out of any such loss or injury
9.1 EMINENT If a condemning authority takes title by eminent domain or
DOMAIN by agreement in lieu thereof to the entire Building or a
portion sufficient to render the Premises unsuitable for
Tenant's use, then either party may elect to terminate this
lease effective on the date that possession is taken by the
condemning authority. Rent shall be reduced for the
remainder of the term in an amount proportionate to the
reduction in area of the Premises caused by the taking. All
condemnation proceeds shall belong to Landlord, and Tenant
shall have no claim against Landlord or the condemnation
award because of the taking.
10.1 ASSIGNMENT This lease shall bind and inure to the benefit of the
AND parties, their respective heirs, successors, and assigns,
SUBLETTING provided that Tenant shall not assign its interest under
this lease or sublet all or any portion of the Premises
without first obtaining Landlord's consent in writing. SEE
EXHIBIT B-8. This provision shall apply to all transfers by
operation of law including but not limited to mergers and
changes in control of Tenant. No assignment shall
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relieve Tenant of its obligation to pay rent or perform
other obligations required by this lease, and no consent to
one assignment or subletting shall be a consent to any
further assignment or subletting. Landlord shall not
unreasonably withhold its consent to any assignment or
subletting provided the effective rental paid by the
subtenant or assignee is not less than the current scheduled
rental rate of the Building for comparable space and the
proposed Tenant is compatible with Landlord's normal
standards for the Building. If Tenant proposes a subletting
or assignment to which Landlord is required to consent under
this paragraph, Landlord shall have the option of
terminating this lease and dealing directly with the
proposed subtenant or assignee, or any third party. If an
assignment or subletting is permitted, any cash profit, or
the net value of any other consideration received by Tenant
as a result of such transaction shall be paid to landlord
promptly following its receipt by Tenant. Tenant shall pay
any reasonable costs incurred by Landlord in connection with
a request for assignment or subletting, including reasonable
attorneys' fees.
11.1 DEFAULT. Any of the following shall constitute a default by Tenant under
this lease:
(a) Tenant's failure to pay rent or any other charge under this
lease within 10 days after it is due, or failure to comply with
any other term or condition within 20 days following written
notice from Landlord specifying the noncompliance. If such
noncompliance cannot be cured within the 20-day period, this
provision shall be satisfied if Tenant commences correction
within such period and thereafter proceeds in good, faith and
with reasonable diligence to effect compliance as soon as
possible. Time is of the essence of this lease.
(b) Tenant's insolvency, business failure or assignment for the
benefit of its creditors. Tenant's commencement of proceedings
under any provision of any bankruptcy or insolvency law or
failure to obtain dismissal of any petition filed against it
under such laws within the time required to answer; or the
appointment of a receiver for Tenant's properties
(c) Assignment or subletting by Tenant in violation of paragraph
10.1
(d) Vacation or abandonment of the Premises without the written
consent of Landlord or failure to occupy the Premises within 20
days after notice tendering possession.
FOR
DEFAULT.
11.2 REMEDIES In case of default as described in paragraph 11.1 Landlord shall
have the right to the following remedies which are intended to
be cumulative and in addition to any other remedies provided
under applicable law
(a) Landlord may at its option terminate the lease by notice to
Tenant. With or without termination, Landlord may retake
possession of the Premises and may use or relet the Premises
without accepting a surrender or waiving the right to damages.
Following such retaking of possession, efforts by Landlord to
relet the Premises shall be sufficient if Landlord follows its
usual procedures for finding tenants for the space at rates not
less than the current rates for other comparable space in the
Building. If Landlord has other vacant space in the Building,
prospective tenants may be placed in such other space without
prejudice to Landlord's claim to damages or loss of rentals from
Tenant
(b) Landlord may recover all damages caused by Tenant's default
which shall include an amount equal to rentals lost because of
the default, lease commissions paid for this lease, and the
unamortized cost of any tenant improvements installed by
Landlord to meet Tenant's special requirements. Landlord may sue
periodically to recover damages as they occur throughout the
lease term, and no action for accrued damages shall bar a later
action for damages subsequently accruing. Landlord may elect in
any one action to recover accrued damages plus damages
attributable to the remaining term of the lease. Such damages
shall be measured by the difference between the rent under this
lease and the reasonable rental value of the Premises for the
remainder of the term, discounted to the time of judgement at
the prevailing interest rate on judgements.
(c) Landlord may make any payment or perform any obligation
which Tenant has failed to perform, in which case Landlord shall
be entitled to recover from Tenant upon demand all amounts so
expended, plus interest from the date of the expenditure at the
rate of one-and-one-half percent per month. Any such
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payment or performance by Landlord shall not waive Tenant's
default.
12.1 SURRENDER. On expiration or early termination of this lease Tenant
shall deliver all keys to Landlord and surrender the
Premises vacuumed, swept, and free of debris and in the
same condition as at the commencement of the term subject
only to reasonable wear from ordinary use. Tenant shall
remove all of its furnishings and trade fixtures that
remain its property and restore all damage resulting from
such removal. Failure to remove shall be an abandonment of
he property, and Landlord may dispose of it in any manner
without liability. If Tenant fails to vacate the Premises
when required, including failure to remove all its
personal property, Landlord may elect either: (I) to treat
Tenant as a tenant from month to month, subject to the
provisions of this lease except that rent shall be one-and-
one-half times the total rent being charged when the lease
term expired: or (II) to eject Tenant from the Premises
and recover damages caused by wrongful holdover.
13.1 REGULATIONS. Landlord shall have the right but shall not be obligated,
to make, revise and enforce regulations or policies
consistent with this lease for the purpose of promoting
safety, health (including regulation or prohibition of
smoking), order, economy, cleanliness, and good service to
all tenants of the Building. All such regulations and
policies shall be complied with as if part of this lease.
14.1 ACCESS During times other than normal Building hours Tenant's
officers and employees or those having business with
Tenant may be required to identify themselves or show
passes in order to gain access to the Building. Landlord
shall have no liability for permitting or refusing to
permit access by anyone SEE EXHIBIT B-9. Landlord shall
have the right to enter upon the Premises at any time by
passkey or otherwise to determine Tenant's compliance with
this lease, to perform necessary services, maintenance and
repairs or alterations to the Building or the Premises, or
to show the Premises to any prospective tenant or
purchasers. Except in case of emergency such entry shall
be at such times and in such manner as to minimize
interference with the reasonable business use of the
Premises by Tenant
14.2 FURNITURE Tenant shall move furniture and bulky articles in and out of
AND BULKY the Building or make independent use of the elevators only
ARTICLES at reasonable times approved by Landlord following at
least 24 hours written notice to Landlord of the intended
move. Landlord will not unreasonably withhold its consent
under this paragraph.
15.1 NOTICES. Notices between the parties relating to this lease shall be
in writing, effective when delivered, or if mailed,
effective on the second day following mailing, postage
prepaid, to the address for the party stated in this lease
or to such other address as either party may specify by
notice to the other. Notice to Tenant may always be
delivered to the Premises. Rent shall be payable to
Landlord at the same address and in the same manner, but
shall be considered paid only when received.
16.1 SUBORDINATION. This lease shall be subject to and subordinate to any
mortgage or deeds of trust, or land sale contracts
(hereafter collectively referred to as encumbrances) now
existing against the Building. At Landlord's option this
lease shall be subject and subordinate to any future
encumbrance hereafter placed against the Building
(including the underlying land) or any modifications of
existing encumbrances, and Tenant shall execute such
documents as may reasonably be requested by Landlord or
the holder of the encumbrance to evidence this
subordination.
16.2 TRANSFER If the Building is sold or otherwise transferred by
OF BUILDING Landlord or any successor, Tenant shall attorn to the
purchaser or transferee and recognize it as the lessor
under this lease, and, provided the purchaser or
transferee assumes all obligations hereunder, the
transferor shall have no further liability hereunder.
16.3 ESTOPPELS Either party will within 10 days after notice from the
other execute, acknowledge and deliver to the other party
a certificate certifying whether or not this lease has
been modified and is in full force and effect; whether
there are any modifications or alleged breaches by the
other party; the dates to which rent has been paid in
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advance, and the amount of any security deposit or prepaid
rent; and any other facts that may reasonably be
requested. Failure to deliver the certificate within the
specified time shall be conclusive upon the party of whom
the certificate was requested that the lease is in full
force and effect and has not been modified except as may
be represented by the party requesting the certificate. If
requested by the holder of any encumbrance, or any ground
lessor, Tenant will agree to give such holder or lessor
notice of and an opportunity to cure any default by
Landlord under this lease.
17.1 ATTORNEYS' In any litigation arising out of this lease, the
FEES. prevailing party shall be entitled to recover reasonable
attorney's fees at trial and on any appeal. If Landlord
incurs attorneys' fees SEE EXHIBIT B-10, because of a
default by Tenant, Tenant shall pay all such fees whether
or not litigation is filed.
18.1 QUIET Landlord warrants that so long as Tenant complies with all
ENJOYMENT. terms of this lease it shall be entitled to peaceable and
undisturbed possession of the Premises free from any
eviction or disturbance by Landlord. SEE EXHIBIT B-11.
Neither Landlord nor its managing agent shall have any
liability to Tenant for loss or damages arising out of the
acts, including criminal acts, of other tenants of the
Building or third parties, nor any liability for any
reason which exceeds the value of its interest in the
Building.
19.1 ADDITIONAL Whenever for any July 1 - June 30 tax year the real
RENT: property taxes levied against the Building and its
TAX underlying Tax Adjustment land exceed those levied for the
ADJUSTMENT 19 7 - 1998 tax year, then the monthly rental for the
next succeedingcalendar year shall be increased by one-
twelfth of such tax increase times Tenant's proportion-ate
share. "Real property taxes" as used herein means all
taxes and assessments of any public authority against the
Building and the land on which it is located, the cost of
contesting any tax and any form of fee or charge imposed
on Landlord as a direct consequence of owning or leasing
the Premises, including but not limited to rent taxes,
gross receipt taxes, leasing taxes, or any fee or charge
wholly or partially in lieu of or in substitution for ad
valorem real property taxes or assessments, whether now
existing or hereafter enacted. If any portion of the
Building is occupied by a tax-exempt tenant so that the
Building has a partial tax exemption under ORS 307.112 or
a similar, statute, then real property taxes shall mean
taxes computed as If such partial exemption did not exist.
If a separate assessment or identifiable tax increase
arises because of improvements to the Premises, then
Tenant shall pay 100 percent of such increase.
19.2 TENANT'S "Tenant's proportionate share" as used herein means the
PROPORTIONATE area of the Premises, divided by the total area of office
SHARE space in the Building, with area determined using one of
the methods of building measurement defined by the
Building Owners and Managers Association (BOMA). Tenant's
proportionate share as of the lease commencement data
shall be 18 percent as predicated on 14,376SF of building
area.
19.3 ADDITIONAL Tenant shall pay as additional rent its proportionate share
RENT: as defined in paragraph 19.2, of the amount by which
OPERATING operating expenses for the Building increase over during
EXPENSE the calendar year 1997 (base year). Effective January 1 of
ADJUSTMENT each year commencing with calendar year 1998, Landlord
shall estimate amount by which operating expenses are
expected to increase, if any, over those incurred in the
base year. Monthly rental for that year shall be increased
by one-twelfth of Tenant's share of the estimated increase.
Following the end of each calendar year, Landlord shall
compute the actual increase in operating expenses and bill
Tenant for any deficiency or credit Tenant with any excess
collected. As used herein 'operating expenses' shall mean
all costs of operating and maintaining the Building as
determined by standard real estate accounting practice,
including, but not limited to: all water and sewer charges;
the cost of natural gas and electricity provided to the
building; Janitorial and cleaning supplies and services;
administration costs and management fees; superintendent
fees; security services, if any; insurance premiums;
licenses; permits for the
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operation and maintenance of the building and all of its
component elements and mechanical systems ;the annual
amortized capital improvement cost (amortized over such a
period as Landlord See may select but not shorter than the
period allowed under the Internal Revenue Code and at a
current market interest rate) for any capital improvements
to the Building required by any governmental authority or
those which have a reasonable probability of improving the
operating efficiency of the Building. SEE EXHIBIT B-12.
20.1 COMPLETE This lease and the attached Exhibits and Schedules if any,
AGREEMENT. constitute the entire agreement of the parties and supersede
all prior written and oral agreements and representations.
Neither Landlord nor Tenant is relying on any
representations other than those expressly set forth herein.
20.2 SPACE Unless otherwise stated in this Lease, the Premises are
LEASED AS leased as is in the condition now existing with no
IS alterations or other work to be performed by Landlord. SEE
ADDENDUM A.
20.3 CAPTIONS The titles to the paragraphs of this lease are descriptive
only and are not intended to change or influence the meaning
of any paragraph or to be part of this lease.
20.4 NONWAIVER. Failure by Landlord to promptly enforce any regulation,
remedy or right of any kind under this lease shall not
constitute a waiver of the same and such right or remedy may
be asserted at any time after Landlord becomes entitled to
the benefit thereof notwithstanding delay in enforcement
20.5 EXHIBITS. The following Exhibits are attached hereto and incorporated
as a part of this lease:
Exhibit A- Space Plan
Addendum A-Other Terms & Conditions
Exhibit B-Inserts
21.1 See Exhibit B-13.
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IN WITNESS WHEREOF, the duly authorized representatives of the parties have
executed this lease as of the day and year first written above.
<TABLE>
<CAPTION>
<S> <C>
LANDLORD:
Kurt Dalbey & Mary Tachouet By: By:
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Address for notices: Title: Title:
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1865 NW 169/th/
Beaverton, OR 97006 By: By:
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Title: Title:
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TENANT: JetFax, Inc. By: By:
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Address for notices: Title: Title:
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1376 Willow Road
Menlo Park, CA 95025 By:
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Attn: Mr. Hans Hartmann Title: Title:
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</TABLE>
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EXHIBIT 10.47
TO THE LEASE AGREEMENT DATED NOVEMBER 1, 1995
BY AND BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY, AS OWNER
AND
DOCUMAGIX, INC., AS LESSEE
2880 ZANKER ROAD, SUITES 204 AND 204A
SAN JOSE, CALIFORNIA 95134
AMENDMENT NO. 1
PAGE 1 OF
This First Amendment to Lease ("First Amendment") is made this 17 day of
September, 1996 by and between Metropolitan Life Insurance Company, a New York
corporation, as Owner (hereinafter called "Lessor") and DocuMagix, Inc.
(hereinafter called "Lessee").
RECITALS
- --------
A. Lessor and Lessee are parties to that certain Lease dated
November 1, 1995 (the "0riginal Lease") for certain demised premises
consisting of approximately 6,068 rentable square feet of space at 2880
Zanker Road, Suites 204 and 204A, San Jose, California (the
"Premises"). Except as otherwise specified below, the capitalized terms
used herein shall have the same meaning and definitions as set forth in
the Lease.
B. Pursuant to the terms of said Lease; the term expires on
November 18, 1996; and
C. Lessor and Lessee now desire to modify and amend the Lease to
reflect among other provisions, the (i) extension of the Term of the
Lease for an additional three (3) years, and (ii) lease to Tenant of
certain additional space consisting of approximately Three Thousand Six
Hundred Fifty Two (3,652) rentable square feet of space commonly known
as Suite 104 on the first floor of the Building shown cross-hatched in
black on the attached Exhibit (the "Expansion Premises"), all in
accordance with the terms and conditions set forth herein. The Premises
and the Expansion Premises (sometimes collectively hereinafter
referred to as the "Premises") consist of approximately Nine Thousand
Seven Hundred Twenty (9,720) square feet of rentable space.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants and conditions set forth herein and of other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
LEASE TERM/EXTENSION PERIOD. The Term shall continue to and including
---------------------------
November 18,1999, and the Expiration Date shall be deemed to refer to November
18, 1999. The period commencing on the "Expansion Premises Commencement Date",
as defined below, and running through November 18, 1999 is sometimes
hereinafter referred to as the "Extension Period".
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BASE ANNUAL RENT. The Base Annual Rent shall be paid in the following
----------------
monthly amounts throughout the Extended Term:
Months I - 18 $16,524.00 ($1.70 per rentable square foot per month)
Months 19 - 36 $17,010.00 ($1.75 per rentable square foot per month)
EXPANSION PREMISES. Lessee shall lease and, effective as of the
-------------------
"Expansion Premises Commencement Date", as defined below, there shall be added
to the Premises the Expansion Premises upon and subject to all the conditions,
terms, covenants and agreements of the Lease, except as expressly provided in
this Amendment.
EXPANSION PREMISES COMMENCEMENT DATE. The Expansion Premises
------------------------------------
Commencement Date shall mean November 19,1996. Lessee shall execute and return
to Lessor an addendum provided by Lessor, confirming the Expansion Premises
Commencement Date and the number of square feet of rentable square feet of
space. In the event that any portion of the Expansion Premises is to be
occupied prior to the Expansion Premises Commencement Date, and if Lessor gives
its prior written approval to such early occupancy, Lessee may take early
occupancy of such Expansion Promises on such date as Lessor and Lessee shall
agree, and notwithstanding any above provisions to the contrary, the Expansion
Premises Commencement Date and Lessee's obligation to pay Rent with respect to
the Expansion Premises shall commence upon occupancy. Lessor and Lessee hereby
agree to execute Exhibit C attached hereto providing confirmation of the
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Premises Commencement Date. In the event the Expansion Premises Commencement
Date occurs on a date other than the first day of a calendar month, then the
initial monthly installment of Rent for the Expansion Premises shall be prorated
for such partial months on the basis of a thirty (30) day month. The last
monthly installment of Rent for both the Promises and the Expansion Premises
shall also be prorated for such partial months on the basis of a thirty (30) day
month.
LESSOR'S MAXIMUM OPERATING EXPENSE LIABILITY. Lessee shall be
---------------------------------------------
responsible for its pro-rata share of any increases in the Operating Costs and
Taxes over and above those expenses and taxes incurred by Lessor during
calendar year 1996.
LESSEE'S SHARE OF OPERATING COSTS AND TAXES. Lessee's proportionate
--------------------------------------------
share of the Building's Operating Costs and Taxes for the Premises and the
Expansion Premises is 16.60%. Lessee's proportionate share of the Park's
Operating Costs and Taxes for the Premises and the Expansion Premises is 3.12%.
SECURITY DEPOSIT. The sum of Nine Thousand Four Hundred Five Dollars, and
----------------
Forty Cents ($9,405.40) already held by Lessor shall be increased to Seventeen
Thousand Ten Dollars and No Cents ($17,010.00).
CONSTRUCTION OF LEASEHOLD IMPROVEMENTS. Lessor has agreed to make
- --------------------------------------
structural improvements and alterations to the Premises and Expansion Premises
as outlined in Exhibit B attached hereto and made a part hereof, and subject to
the following terms and conditions:
Lessor shall perform the work and make the installations in the Premises
and the Expansion Premises substantially as set forth in the Work Letter
(the "Landlord's Work"). Lessor's Work shall be performed by Lessor's
general contractor. Other than Lessor's Work as described in the Work
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Letter, Lessor has no obligation to improve, alter or remodel the Promises
or the Expansion Premises. All such installations (exclusive of Lessee's
furniture, computers and telephone system) shall immediately become and
remain the property of Lessor.
PROHIBITION ON USE OF HAZARDOUS MATERIALS. Lessee shall not use,
-----------------------------------------
generate, manufacture, produce, store, release, discharge, or dispose of, on,
under or about the Premises or any part of the Building, or transport to or
from the Premises or any part of the Building, any Hazardous Materials or allow
its employees, agents, contractors, invitees, or any other person or entity to
do so. The term "Hazardous Materials" shall include without limitation:
(i) Those substances included within to definitions of "hazardous
substances, hazardous materials", "toxic substances", or "solid wastes"
under CERCLA, RCRA, and the Hazardous Materials Transportation Act, 49
U.S.C. sections 1801, et seq., and in the regulations promulgated pursuant
--------
to said laws;
(ii) THOSE SUBSTANCES DEFINED AS "HAZARDOUS WASTES" IN SECTION 25117
OF THE CALIFORNIA HEALTH & SAFETY CODE, OR AS "HAZARDOUS SUBSTANCES" IN
SECTION 25316 OF THE CALIFORNIA HEALTH & SAFETY CODE, AND IN THE
REGULATIONS PROMULGATED PURSUANT TO SAID LAWS;
(iii) Those substances listed in the United States Department of
Transportation Table (49 CFR 172.101 and amendments thereto) or designated
by the Environmental Protection Agency (or any successor agency) as
hazardous substances (see, e.g., 40 CFR Part 302 and amendment thereto);
--------
(iv) Such other substances, materials and wastes which are or
become regulated under applicable local, state or federal law, or the
United States government, or which are or become classified as hazardous or
toxic under federal, state, or local laws or regulations, including without
limitation, California Health & Safety Code, Division 20, and 26 California
Code of Regulations, Division 4, sections 8-337, et seq.; and
------
(v) Any material, waste or substance which is (i) petroleum, (ii)
asbestos, (iii) polychlorinated biphenyls, (iv) designated as a "hazardous
substance" pursuant to section 311 of the Clean Water Act of 1977, 33
U.S.C. sections 1251, et seq. (33 U.S.C. 1321) or listed pursuant to
------
section 307 of the Clean Water Act of 1977 (33 U.S.C. 1317); (v)
flammable explosive, or (vi) radioactive materials.
COMPLIANCE WITH LAW.
--------------------
(a) Lessee acknowledges that the Americans with Disabilities Act of 1990
and the Fair Housing Act of 1968 (collectively, as amended and as supplemented
by further laws from time to time, the "Acts") imposes certain requirements upon
the owners, lessees and operators of commercial facilities and places of public
accommodation, including, without limitation, prohibitions on discrimination
against any individual on the basis of disability (which discrimination
includes certain failures to design and construct facilities for first occupancy
that are readily accessible to and usable by individuals with disabilities and
certain failures, when making alterations affecting the usability of a
facility, to make the same in such a manner that such altered portions are
readily accessible to and usable by individuals with disabilities).
Accordingly, but without limiting the generality of Sections 10 and 11 of the
Lease and in addition to all other
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requirements under and notwithstanding any other provision of the Lease, Lessee
agrees to take all proper and necessary action to cause the Premises to be
maintained, used and occupied in compliance with the Acts and, further, to
otherwise assume all responsibility to ensure the Premises' continued compliance
with all provisions of the Acts throughout the Term.
(b) Without limiting its obligations under Section 10 of the Lease,
Lessee covenants and agrees to comply with all laws, rules, regulations and
guidelines now or hereafter made applicable to the Premises by government or
other public authorities respecting the disposal of waste, trash, garbage and
other matter (liquid or solid), generated by Lessee, its employees, agents,
contractors, invitees, licensees, guests and visitors, the disposal of which is
not otherwise the express obligation of Lessor under this Lease, including, but
not limited to, laws, rules, regulations and guidelines respecting recycling and
other forms of reclamation (all of which are herein collectively referred to as
"Waste Management Requirements"). Lessee covenants and agrees to comply with
all rules and regulations established by Lessor to enable Lessor from time to
time to comply with Waste Management Requirements applicable to Lessor (i) as
owner of the Premises and (ii) in performing Lessors obligations under this
Lease, if any. Upon receipt of written notice informing Lessor of any violation
of such Waste Management Requirements by other tenants or occupants of the
Building, Lessor shall use commercially reasonable efforts to enforce its rules
and regulations against such tenants or occupants of the Building; however,
Lessor shall in no event be obligated to (i) incur costs and expenses or (ii)
to enter into litigation with other tenants or occupants of the Building to
enforce such rules and regulations.
PARKING. During the Extended Term of the Lease, Lessee shall have the
-------
use of thirty one (31) undesignated parking stalls.
PAYMENT OF COMMISSION. Lessee acknowledges and agrees that other than CB
---------------------
Commercial on behalf of Lessee, and on behalf of Lessor, no real estate broker,
agent or finder negotiated or was instrumental in the negotiation or
representation of Lessee in connection with this Amendment. Lessor agrees to pay
a commission or fee owed to CB Commercial pursuant to the terms of a separate
agreement between Lessor and CB Commercial. In addition, in the event of a
claim for brokers fee, finder's fee, commission or other similar compensation in
connection herewith other than to CB Commercial, Lessee hereby agrees to
protect, defend and indemnify Lessor against and hold Lessor harmless from any
and all damages, liabilities, costs, expenses and losses (including, without
limitation, reasonable attorneys' fees and costs) which Lessor may sustain or
incur by reason of such claim, and Lessor, if such claim is based upon any
agreement alleged to have been made by Lessor, hereby agrees to protect and
indemnify Lessee against and hold Lessee harmless from any and all damages,
liabilities, costs, expenses and losses (including, without limitation,
reasonable attorneys' fees and costs) which Lessee may sustain or incur by
reason of such claim. The provisions of this section shall survive the
termination of this Amendment.
AUTHORITY. This First Amendment shall be binding upon and inure to the
---------
benefit of the parties hereto, their respective heirs, legal representatives,
successors and assigns. Each party hereto and the persons signing below warrant
that the person signing below on such party's behalf is authorized to do so and
to bind such party to the terms of this First Amendment.
ATTORNEYS' FEES AND COSTS. In the event that either Lessor or Lessee
--------------------------
fails to perform any of its obligations under this First Amendment or in the
event a dispute arises concerning the meaning or interpretation of any
provision of this First Amendment, the basis of the dispute shall be settled
by judicial proceedings and the defaulting party or the party not prevailing
in such dispute, as the case may be,
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<PAGE>
shall pay any and all costs and expenses incurred by the other party in
enforcing or establishing its rights hereunder, including without limitation,
court costs and attorneys' fees including costs and fees incurred in enforcing
such judgment.
ENTIRE AGREEMENT; NO AMENDMENT. This First Amendment constitutes the
------------------------------
entire agreement and understanding between the parties herein named with respect
to the subject of this First Amendment and shall supersede all prior written and
oral agreements concerning the subject matter contained herein. This First
Amendment may not be altered, amended, modified or otherwise changed in any
respect whatsoever except by a writing duly executed by authorized
representatives of the parties hereto. Each party acknowledges that it has read
this First Amendment, fully understands all of this First Amendment's terms and
conditions, and hereby executes this First Amendment freely, voluntarily and
with full knowledge of its significance. This First Amendment is entered into by
the undersigned parties freely and voluntarily and with and upon advice of
counsel.
SEVERABILITY. If any provision of this First Amendment or the
------------
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this First Amendment and the
application of such provision to other persons or circumstances, other than
those to which it is held invalid, shall not be affected thereby and shall be
enforced to the furthest extent permitted by law, provided that the invalidity
of such provision does not materially affect the benefits accruing to any party
hereto.
CAPTIONS AND HEADINGS. The titles or headings of the various sections
---------------------
and paragraphs hereof are intended solely for convenience of reference and are
not intended and shall not be deemed to or in any way be used to modify, explain
or place any construction upon.
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<PAGE>
IN WITNESS WHEREOF, this First Amendment is executed as of the date
hereinabove written.
LESSOR: METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By:
--------------------------------
Print Name:
-------------------------
Its:
--------------------------------
LESSEE: DOCUMAGIX, INC.
a California corporation
By:
--------------------------------
Print Name:
-------------------------
Its:
--------------------------------
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<PAGE>
EXHIBIT 21.1
JETFAX, INC.
SUBSIDIARIES
(ALL 100% OWNED)
JF ACQUISITION SUB, INC.
(Incorporated in California)
JETFAX DEUTSCHLAND GMBH
(Incorporated in Germany)
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<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
JetFax, Inc.:
We consent to the incorporation by reference in Registration Statement No.
333-39815 on Form S-8 of our report dated January 30, 1998 (February 23, 1998 as
to the last sentence of Note 6), appearing in this Annual Report on Form 10-K of
JetFax, Inc. for the year ended December 31, 1997.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of JetFax,
Inc., listed in Item 14(a). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
March 31, 1998
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<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration Statement on
Form S-8 (No. 333-39815) of JetFax, Inc. of our report dated October 25, 1996,
relating to the financial statements of DocuMagix, Inc. which appears in this
Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 31, 1998
Please Initial
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FIONANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE
PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,200
<SECURITIES> 3,024
<RECEIVABLES> 4,820
<ALLOWANCES> 378
<INVENTORY> 4,029
<CURRENT-ASSETS> 16,350
<PP&E> 1,160
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,856
<CURRENT-LIABILITIES> 3,536
<BONDS> 0
0
0
<COMMON> 345
<OTHER-SE> 14,926
<TOTAL-LIABILITY-AND-EQUITY> 18,856
<SALES> 23,020
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 11,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120
<INCOME-PRETAX> (6,063)
<INCOME-TAX> 96
<INCOME-CONTINUING> (6,159)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,159)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
