-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DXUXD/h3gxddM6wN0oPofGsquFoulOhHrFc9vJblzb6SBetpktWfLTe14bd7bX+n QoCWEJsE+Io5+0kudBrqdg== 0001056359-98-000014.txt : 19980518 0001056359-98-000014.hdr.sgml : 19980518 ACCESSION NUMBER: 0001056359-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980404 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JETFAX INC CENTRAL INDEX KEY: 0000872901 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770182451 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22561 FILM NUMBER: 98625972 BUSINESS ADDRESS: STREET 1: 1378 WILLOW RD CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6503240600 MAIL ADDRESS: STREET 1: 1378 WILLOW RD CITY: MENLO PARK STATE: CA ZIP: 94025 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 4, 1998. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to_____________. Commission File Number 0-22561 J E T F A X, I N C. (Exact name of Registrant as specified in its charter) Delaware 77-0182451 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1378 Willow Road, Menlo Park, California 94025 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 324-0600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 11, 1998 there were 11,753,405 shares of common stock, $.01 par value, outstanding. This Report on Form 10-Q includes 22 pages with the Index to Exhibits located on page 20. JETFAX, INC. INDEX TO REPORT ON FORM 10-Q FOR QUARTER ENDED APRIL 4, 1998

2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements

See notes to condensed consolidated financial statements. 3 JETFAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)

See notes to condensed consolidated financial statements. 4 JETFAX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)

See notes to condensed consolidated financial statements 5 JETFAX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Interim Financial Information The accompanying condensed consolidated financial statements of JetFax, Inc. and its wholly-owned subsidiaries ("JetFax" or the "Company") as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 are unaudited. In the opinion of management, the condensed financial statements include all adjustments (consisting of normal recurring accruals) that management considers necessary for a fair presentation of its financial position, operating results and cash flows for the interim periods presented. Operating results and cash flows for interim periods are not necessarily indicative of results for the entire year. The Company acquired DocuMagix, Inc. on December 5, 1997 in a transaction accounted for as a pooling-of-interests. All financial data of the Company has been restated to include the historical information of DocuMagix, Inc. This financial data should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Fiscal Period End The Company uses a 52-53 week fiscal year ending on the first Saturday on or after December 31. For presentation purposes, the Company refers herein to the 13-week periods ended April 4, 1998 and April 5, 1997 as the quarters ended March 31, 1998 and 1997. Basic and Diluted Net Loss Per Share Basic and diluted net loss per share has been computed using the weighted average of common shares outstanding. The Company completed its initial public offering of its common stock in June 1997. Basic and diluted per share amounts presented for periods prior to the IPO represent the pro forma computation including the common equivalent shares from convertible preferred stock which converted in connection with the IPO. Common stock equivalents from options, warrants and redeemable preferred stock have been excluded from the computation during all periods presented as their effect is antidilutive due to the Company's net losses. Such options and warrants will be included, using the treasury stock method, in periods where the Company reports net income and the average fair market value of the Company's common stock exceeds the exercise price. The net loss applicable to common stockholders and the shares, used for the computation of both basic and diluted loss per share, are the same. 2. Inventories

6 Accrued liabilities consist of (in thousands): March 31, December 31, 1998 1997 ---------- ----------- Compensation and related benefits $ 741 $ 509 Royalties 227 215 Acquisition related accruals 105 375 Product warranty 100 94 Other 867 671 -------- -------- Total $ 2,040 $ 1,864 ======== ======== 4. EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. For the quarters ended March 31, 1998 and 1997, there were no differences between the Company's comprehensive income and net income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of this statement will not impact the Company's consolidated financial position, results of operations or cash flows. The Company will adopt this statement in its financial statements for the year ending December 31, 1998. 7 Three Months Ended March 31, -------------------- 1998 1997 -------- -------- Revenues: Product $ 6,024 $ 4,250 Software and technology license fees 1,342 633 Development fees 332 772 -------- -------- Total revenues 7,698 5,655 -------- -------- Costs and expenses: Cost of product revenues 4,286 2,949 Cost of software and license revenues 301 150 Research and development 1,451 1,265 Selling and marketing 2,230 1,611 General and administrative 755 677 Acquisition and related expenses -- 551 -------- -------- Total costs and expenses 9,023 7,203 -------- -------- Loss from operations (1,325) (1,548) Other income (expense), net 53 (41) -------- -------- Loss before income taxes (1,272) (1,589) Provision for income taxes 17 47 -------- -------- Net loss $ (1,289) $ (1,636) ======== ======== The following table sets forth, as a percentage of total revenues, certain items in the Company's statements of operations for the periods indicated.
Three Months Ended March 31, -------------------- 1998 1997 -------- ------- Revenues: Product 78.3% 75.2% Software and technology license fees 17.4 11.2 Development fees 4.3 13.6 -------- -------- Total revenues 100.0% 100.0% -------- -------- Costs and expenses: Cost of product revenues 55.7 52.1 Cost of software and license revenues 3.9 2.7 Research and development 18.8 22.4 Selling and marketing 29.0 28.5 General and administrative 9.8 12.0 Acquisition and related expenses -- 9.7 -------- -------- Total costs and expenses 117.2 127.4 -------- -------- Loss from operations (17.2) (27.4) Other income (expense), net 0.7 (0.7) -------- -------- Loss before income taxes (16.5) (28.1) Provision for income taxes 0.2 0.8 -------- -------- Net loss (16.7)% (28.9)% ======== ========
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) At March 31, 1998, the Company had $1.5 million available under its bank credit facility under which there were no borrowings at March 31, 1998. This lending facility is collateralized by substantially all of the Company's assets. The maximum amount available under the line of credit is the lesser of $1.5 million or 80% of the Company's eligible outstanding domestic accounts receivable. The revolving line of credit was renegotiated on September 17, 1997, terminates on August 23, 1998, and is subject to renegotiation at that time. The line of credit contains certain covenants which include the requirements that the Company maintain tangible net worth (as defined) of $3.0 million, quarterly net income, a quick ratio of at least 1.0 to 1.0, a maximum debt to net worth ratio (as defined) of 1.5 to 1.0, and certain minimum liquidity and debt service coverage. In addition, the agreement prohibits the payment of cash dividends. The Company was in compliance with all such covenants at March 31, 1998, except the quarterly net income covenant for which the Company received a waiver through March 31, 1998 and is currently in the process of obtaining a further waiver to June 30, 1998. The Company's working capital decreased by $1.4 million to $11.4 million as of March 31, 1998 from $12.8 million as of December 31, 1997. Cash and short term investments decreased modestly to $6.9 million at March 31, 1998 from $7.2 million at December 31, 1997. Inventories of $3.4 million at March 31, 1998 decreased from $4.0 million at December 31, 1997, resulting primarily from a sharp reduction of finished goods inventory. Collection of development fees and prepaid royalties caused a reduction of accounts receivable to $4.3 million at March 31, 1998 from $4.8 million at December 31, 1997. Accounts payable decreased to $1.4 million at March 31, 1998 from $1.7 million at December 31, 1997, primarily resulting from a reduction in the DocuMagix payables and lower payables related to the reduced inventory levels. Investing activities for the three months ended March 31, 1998 used $289,000 of cash: $206,000 for property purchases, and $83,000 for investment in other assets. The Company currently believes that the its cash and equivalents, together with available borrowings under its line of credit, and funds from current and anticipated operations, will be sufficient to meet the Company's working capital and capital expenditure requirements for the next twelve months. If the Company acquires one or more businesses or products, the Company's capital requirements could increase substantially. In the event of such an acquisition or should any unanticipated circumstances arise which significantly increase the Company's capital requirements, there can be no assurance that necessary additional capital will be available on terms acceptable to the Company, if at all. Factors That May Affect Operating Results The statements contained in this Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the ''Securities Act'') and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. When used herein, the words ''may,'' ''will,'' ''expect,'' ''anticipate,'' ''continue,'' ''estimate,'' ''project,'' ''intend'' and similar expressions are intended to identify forward-looking statements within the meaning of the Securities Act and the Exchange Act. Forward-looking statements include: statements regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial position. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward- looking statements. Investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995. Factors that could cause or contribute to such differences include, but are not limited to, those described below, under the heading "Factors That May Affect Operating Results" and elsewhere in this Report on Form 10- Q. The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of those risks and uncertainties which may have a material adverse effect on the Company's business, financial condition or results of operations. This section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto included in Part I - 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Item 1 of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1997, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. History of Operating Losses; Accumulated Deficit. The Company had annual net losses since inception. The Company's historical losses and certain preferred stock dividends have resulted in an accumulated deficit of approximately $29.0 million as of March 31, 1998. There can be no assurance that the Company will achieve profitability on a quarterly or annual basis in the future. Potential Fluctuations in Quarterly Results. The Company in the past has experienced, and in the future may experience, significant fluctuations in quarterly operating results that have been or may be caused by many factors including: the timing of introductions of new products or product enhancements by the Company, its OEMs and their competitors; initiation or termination of arrangements between the Company and its existing and potential significant OEM customers or dealers and distributors; the size and timing of and fluctuations in end user demand for the Company's branded products and OEM products incorporating the Company's technology; inventories of the Company's branded products or products incorporating the Company's technology carried by the Company, its distributors or dealers, its OEMs or the OEMs' distributors that exceed current or projected end user demand; the phase-out or early termination of the Company's branded products or OEM products incorporating the Company's technology; the amount and timing of development agreements, one-time software licensing transactions and recurring licensing fees; non-performance by the Company, its suppliers or its OEM or other customers pursuant to their plans and agreements; seasonal trends; competition and pricing; customer order deferrals and cancellations in anticipation of new products or product enhancements; industry and technology developments; changes in the Company's operating expenses; software and hardware defects; product delays or product quality problems; currency fluctuations; and general economic conditions. The Company expects that its operating results will continue to fluctuate significantly as a result of these and other factors. A substantial portion of the Company's operating expenses is related to personnel, development of new products, marketing programs and facilities. The level of spending for such expenses cannot be adjusted quickly and is based, in significant part, on the Company's expectations of future revenues and anticipated OEM commitments. If such commitments do not result in revenues or operating expenses are significantly higher, the Company's business, financial condition and results of operations will be adversely affected, which could have a material adverse effect on the price of the Company's Common Stock. Furthermore, the Company has often recognized a substantial portion of its revenues in the last month of a quarter, with such revenues frequently concentrated in the last weeks or days of a quarter. The Company's branded products are primarily sold through dealers, and such dealers often place orders for products at or near the end of a quarter. As a result, because one or more key orders that are scheduled to be booked and shipped at the end of a quarter may be delayed until the beginning of the next quarter or cancelled, revenues for future quarters are not predictable with any significant degree of accuracy. For these and other reasons, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. It is likely that in future quarters, the Company's operating results, from time to time, will be below the expectations of public market analysts and investors, which could have a material adverse effect on the price of the Company's Common Stock. The accuracy of quarterly license revenues from OEMs reported by the Company has been, and the Company believes will continue to be, dependent on the timing and accuracy of product sales reports received from the Company's OEMs. These reports are provided only on a quarterly basis (which may not coincide with the Company's quarter) and are subject to delay and potential revision by the Company's OEMs. Therefore, the Company is required to estimate all of the recurring license revenues from OEMs for each quarter. As a result, the Company will record an estimate of such revenues prior to public announcement of the Company's quarterly results. In the event the product sales reports received from the Company's OEMs are delayed or subsequently revised, the Company may be required to restate its recognized revenues or adjust revenues for subsequent periods, which could have a material adverse effect on the Company's business, financial condition and results of operations and the price of the Company's Common Stock. Dependence on the MFP Market. The market for MFPs is relatively new and rapidly evolving. The Company's future success is dependent to a significant degree upon broad market acceptance of the type of MFPs on which the Company is focusing its development efforts. This success will be dependent in part on the ability of the Company and its 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OEM customers to develop MFPs that provide the functionality, performance, speed and connectivity demanded by the market at acceptable price points and to convince end users to broadly adopt MFPs for office and home office use. There can be no assurance that the market for MFPs will continue to develop, that the Company and its OEM customers will be successful in developing MFPs that gain broad market acceptance, that the Company will be able to offer in a timely manner its embedded system technology, branded products or desktop software or that the Company's OEM customers will choose the Company's technology for use in their MFPs. The failure of any of these events to occur would have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Change in Focus of the Company's Business. The Company has historically focused primarily on the development, manufacture and sale of its branded MFPs and currently derives a substantial portion of its revenues from the sale of its branded MFPs. The Company expects that its revenue growth will be dependent, in part, on increased licensing of the Company's embedded system technology and desktop software products. However, there can be no assurance that the Company will realize growth in revenues from sales and licensing of its embedded system technology or desktop software. If such growth in revenues does not occur and if revenues from the sale of the Company's branded MFPs were not to continue at past growth rates, due either to a change in the Company's deployment of resources or otherwise, it could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Increased Focus on PC Software Business. The Company expects that its business, financial condition and results of operations will be more dependent on sales of its PC software for JetSuite MFP desktop and PaperMaster personal document handling, which will be sold both separately and bundled with the Company's branded products and embedded system technology. The Company's on-going ability to develop its MFP desktop software products business will depend upon several factors, including, but not limited to, the commercial acceptance of the Company's MFP desktop software products, upgrades and add-on software products, the ability of the Company's personnel and distribution channels to sell and support MFP desktop software products and the Company's ability to continue to integrate the recent acquisition of DocuMagix, Inc. into the Company. Because the market for MFP desktop software products is new and emerging, there can be no assurance that a significant market, if any, will develop for sales of the Company's MFP desktop software products, or for sales of upgrades and add-on software products, and such a failure would likely have a material adverse effect on the Company's MFP desktop software products business. There can be no assurance that the Company's PC software products business will be successful. Any failure by the Company to develop a successful PC software products business would have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Dealers and Distributors. The Company has derived a substantial portion of its revenues from sales of its branded MFPs through dealers and distributors. The Company expects that sales of these products through its dealers and distributors will continue to account for a substantial portion of its revenues for the foreseeable future. The Company currently maintains distribution relationships with dealers associated with IKON Office Solutions (formerly Alco Standard), a national group of office equipment dealers (''IKON''). The Company has also derived substantial sales to A. Messerli AG (''Messerli''), one of the Company's office equipment dealers located in Switzerland. Each of the Company's dealers and distributors can cease marketing the Company's products with limited notice and with little or no penalty. There can be no assurance that the Company's dealers and distributors will continue to offer the Company's products or that the Company will be able to recruit additional or replacement dealers and distributors. The loss of one or more of the Company's major dealers and distributors could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's dealers and distributors also offer competitive products manufactured by third parties. There can be no assurance that the Company's dealers and distributors will give priority to the marketing of the Company's products as compared to its competitors' products. Any reduction or delay in sales of the Company's products by its dealers and distributors could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on OEMs. The Company has derived a significant portion of its revenues from licensing of its embedded system technology and software and from development services to OEMs. The Company currently has OEM relationships with Hewlett-Packard Company (''Hewlett-Packard''), Oki Data Corporation (''Oki Data''), and Samsung Electronics Corporation (''Samsung''). The Company anticipates that a significant portion of its revenues will be derived from OEMs in the future and that the Company's revenues will be increasingly dependent upon, among other things, the ability and willingness of OEMs to timely develop and promote MFPs that incorporate the Company's technology. The 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ability and willingness of these OEMs to do so is based upon a number of factors, such as the timely development by the Company and the OEMs of new products with additional functionality, increased speed and enhanced performance at acceptable prices to end users; development costs of the OEMs; licensing and development fees of the Company; compatibility with emerging industry standards; technological advances; intellectual property issues; general industry competition; and overall economic conditions. Many of these factors are beyond the control of the Company and its OEMs. Many OEMs, including some of the Company's OEM customers, are concurrently developing and promoting MFPs that do not incorporate the Company's technology. In such cases, the OEMs may have profitability or other incentives to promote internal solutions or competing products in lieu of products incorporating the Company's technology. No assurance can be given as to the ability or willingness of the Company's OEMs to continue developing, marketing and selling products incorporating the Company's technology. For example, the Company no longer receives royalties from the Xerox WorkCenter 250 MFP, which incorporated the Company's embedded system technology, as Xerox has ceased production of that model due to the product reaching the end of its life cycle and pricing pressures from competitors' products. The loss of any of the Company's significant OEMs could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Technological Change. The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards and needs, and frequent new product introductions. The Company currently derives all of its revenues from the sale of its branded MFPs and related consumables, the licensing of its technology and software, and the provision of related development services. The Company anticipates that these sources of revenues will continue to account for substantially all of its revenues for the foreseeable future. The market expects the Company and its OEMs to develop and release, in a regular and timely manner, new MFPs with better performance and improved features at competitive price points. As the complexity of product development increases and the expected time-to-market continues to decrease, the risk and difficulty in meeting such schedules increase as well as the costs to the Company and its OEMs. In addition, the Company, its OEMs and their competitors, from time to time, may announce new products, capabilities or technologies that may replace or shorten the life cycles of the Company's branded products and software and the OEM products incorporating the Company's technology. The Company's success will depend on, among other things, market acceptance of the Company's branded products, software and embedded system technology and the demand for MFPs by the Company's OEM customers; the ability of the Company and its OEM customers to respond to industry changes and market demands in a timely manner; achievement of new design wins by the Company in the Company's development of its branded products as well as the OEMs' development of associated new MFPs; the ability of the Company and its OEM customers to reduce production costs; and the regular and continued introduction of new and enhanced technology, services and products by the Company and its OEMs on a timely and cost-effective basis. There can be no assurance that the products and technology of competitors of the Company or its OEMs will not render the Company's branded products, technology, software or its OEMs' products noncompetitive or obsolete. Any failure by the Company or its OEMs to anticipate or respond adequately to the rapidly changing technology and evolving industry standards and needs, or any significant delay in development or introduction of new and enhanced products and services, could result in a loss of competitiveness or revenues, which could have a material adverse effect on the Company's business, financial condition and results of operations. Reliance on Limited Product Line. The Company has been primarily engaged in the development, manufacture and sale of MFPs and related technology and has derived a substantial portion of its revenues from sales of its branded MFPs and consumables. Dependence on a single product line makes the Company particularly vulnerable to the successful introduction of competitive products. The Company currently derives a substantial portion of its branded product revenues from sales of the Series M900. Sales of the Series M900 began shipping commercially in the third quarter of 1997. A reduction in demand for the Series M900, or the Company's failure to timely introduce its next MFP, would have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Product Development and Introduction; Product Delays. The Company's future success is dependent to a significant degree on its ability to further develop its embedded system technology and software for MFPs in the time frame required by its OEM and other customers and to develop technology with the quality, speed and other specifications required by its OEM and other customers. The Company in the past has experienced delays in product development, and the Company may experience similar delays in the future. Prior delays have resulted from numerous factors such as changing OEM product specifications, delays in receiving necessary components, difficulties in hiring and retaining necessary personnel, difficulties in reallocating engineering resources and other resource limitation difficulties 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) with independent contractors, changing market or competitive product requirements and unanticipated engineering complexity. The Company experienced delays in one of its development projects in the past which resulted in delays in receiving payment. In addition, the Company's software and hardware have in the past, and may in the future, contain undetected errors or failures that become evident upon product introduction or as product production volumes increase. There can be no assurance that errors will not be found; that the Company will not experience problems or delays in meeting the delivery schedules for or in the acceptance of products by the Company's OEMs or other customers; that there will not be problems or delays in shipments of the Company's branded products or OEMs' products; or that the Company's new products and technology will meet performance specifications under all conditions or for all anticipated applications. Given the short product life cycles in the MFP market, any delay or difficulty associated with new product development, introductions or enhancements could have a material adverse effect on the Company's business, financial condition and results of operations. Highly Competitive Industry. The market for MFPs and related technology and software is highly competitive and characterized by continuous pressure to enhance performance, to introduce new features and to accelerate the release of new products. The Company's branded products compete primarily with the dominant vendors in the fax market, all of whom have substantially greater resources than the Company and include, among others, Canon Inc., Panasonic, a division of Matsushita Electrical Industrial Co., Ltd., Pitney Bowes Inc., Ricoh Co. Ltd., Sharp Electronics Corporation and Xerox. The Company also competes on the basis of vendor name and recognition, technology and software expertise, product functionality, development time and price. The Company's technology, development services and software primarily compete with solutions developed internally by OEMs. Virtually all of the Company's OEMs have significant investments in their existing solutions and have the substantial resources necessary to enhance existing products and to develop future products. These OEMs have or may develop competing multifunction technologies and software which may be implemented into their products, thereby replacing the Company's proposed or current technologies, eliminating a need for the Company's services and products to these OEMs. The Company also competes with technologies, software and development services provided in the MFP market by other systems and software suppliers to OEMs. With respect to MFP embedded system technologies, the Company competes with, among others, Peerless Systems Corporation, Personal Computer Products, Inc. and Xionics Document Technologies, Inc. With respect to desktop software, the Company competes with, among others, Caere Corporation, Simplify Development Corporation, Smith Micro Software, Inc., Visioneer Inc., Wordcraft International and Xerox. As the MFP market continues to develop, the Company expects that competition and pricing pressures will increase from OEMs, existing competitors and other companies that may enter the Company's existing or future markets with similar or substitute products or technologies. Software solutions may also be introduced by competitors that are less costly or provide better performance or functionality. The Company anticipates increasing competition for its MFPs, technologies and software under development. Most of the Company's existing competitors, many of its potential competitors and all of the Company's OEMs have substantially greater financial, technical, marketing and sales resources than the Company. In the event that price competition increases, competitive pressures could cause the Company to reduce the price of its branded products, to reduce the amount of royalties received on new licenses and to reduce the fees for its development services in order to maintain existing business and generate additional product sales and license and development revenues, which could reduce profit margins and result in losses and a decrease in market share. No assurances can be given as to the ability of the Company to compete favorably with the internal development capabilities of its current and prospective OEM customers or with other third-party vendors, and the inability to do so would have a material adverse effect on the Company's business, financial condition and results of operations. Effect of Rapid Growth on Existing Resources; Potential Acquisitions. The Company has grown rapidly in recent years. A continuing period of rapid growth could place a significant strain on the Company's management, operations and other resources. The Company's ability to manage its growth will require it to continue to invest in its operational, financial and management information systems, procedures and controls, and to attract, retain, motivate and effectively manage its employees. There can be no assurance that the Company will be able to manage its growth effectively and to successfully utilize the current management information system, and failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company may, from time to time, pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. Acquisitions involve a number of risks that could adversely affect the Company's operating results, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees. JetFax has no present commitments nor is it engaged in any discussions or negotiations with respect to possible acquisitions. No assurance can be given that any acquisition by the Company will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. Dependence on Outside Suppliers; Dependence on Sole Source Suppliers. The Company relies on various suppliers of components for its products. Many of these components are standard and generally available from multiple sources. However, there can be no assurance that alternative sources of such components will be available at acceptable prices or in a timely manner. The Company generally buys components under purchase orders and does not have long-term agreements with its suppliers. Although alternate suppliers may be readily available for some of these components, for other components it could take an undetermined amount of time to qualify a replacement supplier and order and receive replacement components. The Company does not always maintain sufficient inventory to allow it to fill customer orders without interruption during the time that would be required to obtain an adequate supply of single sourced components. Although the Company believes it could develop other sources for single source components, no alternative source currently exists and the process could take several months or longer. Therefore, any interruption in the supply of such components could have a material adverse effect on the Company's business, financial condition and results of operations. Many of the components used in the Company's products are purchased from suppliers located outside the United States. Foreign manufacturing facilities are subject to risk of changes in governmental policies, imposition of tariffs and import restrictions and other factors beyond the Company's control. There can be no assurance that United States or foreign trading policies will not restrict the availability of components or increase their cost. Any significant increase in component prices or decrease in component availability could have a material adverse effect on the Company's business, financial condition and results of operations. Certain components used in the Company's products are available only from one source. The Company is dependent on Oki America, Inc. (''Oki America''), as the supplier of major components, including the printer engine, of the Series M900. Oki America is also a competitor of the Company. The Company is also dependent on American Microsystems, Inc. (''AMI'') to provide unique application specific integrated circuits (''ASICs'') incorporating the Company's imaging and logic circuitry, Motorola, Inc. (''Motorola'') to provide microprocessors, Pixel Magic, Inc., a subsidiary of Oak Technology, Inc. (''Pixel''), to provide a specialized imaging processor and Rockwell Semiconductor Systems (''Rockwell'') to provide modem chips. If Oki America, AMI, Motorola, Pixel or Rockwell were to limit or reduce the sale of such components to the Company, or if such suppliers were to experience financial difficulties or other problems which prevented them from supplying the Company with the necessary components, it could have a material adverse effect on the Company's business, financial condition and results of operations. These sole source providers are subject to quality and performance issues, materials shortages, excess demand, reduction in capacity and/or other factors that may disrupt the flow of goods to the Company or its customers and thereby adversely affect the Company's business and customer relationships. Any shortage or interruption in the supply of any of the components used in the Company's products, or the inability of the Company to procure these components from alternate sources on acceptable terms, could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Intellectual Property Rights; Risk of Infringement. The Company's success is heavily dependent upon its proprietary technology. To protect its proprietary rights, the Company relies on a combination of copyright, trade secret and trademark laws and nondisclosure and other contractual restrictions. The Company has no patents or patent applications pending. As part of its confidentiality procedures, the Company generally enters into nondisclosure agreements with its employees, consultants, OEMs and strategic partners and limits access to and distribution of its designs, software and other proprietary information. Despite these efforts, the Company may be unable to effectively protect its proprietary rights and, in any event, enforcement of the Company's proprietary rights may be expensive. The Company's source code also is protected as a trade secret. However, the Company from time to time licenses portions of its source code and designs to OEMs and also places such source code and designs in escrow to be released to OEMs in certain circumstances, which subjects the Company to the risk of unauthorized use or misappropriation despite the contractual terms restricting disclosure. In addition, it may be possible for unauthorized third parties to copy the Company's products 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) or to reverse engineer or obtain and use the Company's proprietary information. Further, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. As the number of patents, copyrights, trademarks and other intellectual property rights in the Company's industry increases, products based on the Company's technology increasingly may become the subject of infringement claims. The Company has in the past received communications from third parties asserting that the Company's trademarks or products infringe the proprietary rights of third parties or seeking indemnification against such infringement. The Company is generally required to agree to indemnify its OEMs from third party claims asserting such infringement. There can be no assurance that third parties will not assert infringement claims against the Company or its OEMs in the future. Any such claims, regardless of merit, could be time consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Litigation to determine the validity of any claims, whether or not such litigation is determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from daily operations. In addition, the Company may lack sufficient resources to initiate a meritorious claim. In the event of an adverse ruling in any litigation regarding intellectual property, the Company may be required to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing or substituted technology. The failure of the Company to develop, or license on acceptable terms, a substitute technology could have a material adverse affect on the Company's business, financial condition and results of operations. Dependence on Key Personnel. The Company is largely dependent upon the skills and efforts of its senior management, particularly Edward R. Prince, III (''Rudy Prince''), its President and Chief Executive Officer, and Lon Radin, its Vice President of Engineering, and other officers and key employees, some of whom only recently have joined the Company. The Company maintains key person life insurance policies on Rudy Prince and Lon Radin. None of the Company's officers or key employees, other than Michael Crandell, Vice President of Software, are covered by an employment agreement with the Company. The Company believes that its future success will depend in large part upon its ability to attract and retain highly skilled engineering, managerial, sales, marketing and operations personnel, many of whom are in great demand. Competition for such personnel, especially engineering, has recently increased significantly. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations. International Activities. Revenues from sales to the Company's customers outside the United States account for a substantial portion of the Company's total revenues. The Company expects that revenues from customers located outside the United States may increase in both absolute dollars and as a percentage of total revenues in the future. The international market for the Company's branded products and products incorporating the Company's technology and software is highly competitive, and the Company expects to face substantial competition in this market from established and emerging companies and technologies developed internally by its OEM customers. Risks inherent in the Company's international business activities also include currency fluctuations and restrictions, the burdens of complying with a wide variety of foreign laws and regulations, including Postal, Telephone and Telegraph (''PTT'') regulations, longer accounts receivable cycles, the imposition of government controls, risks of localizing and internationalizing products to local requirements in foreign countries, trade restrictions, tariffs and other trade barriers, restrictions on the repatriation of earnings and potentially adverse tax consequences, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Substantially all of the Company's international sales are currently denominated in U.S. dollars and, therefore, increases in the value of the U.S. dollar relative to foreign currencies could make the Company's products less competitive in foreign markets. Because of the Company's international activities, it faces certain currency exposure and translation risks. For example, late in 1997 the Company established a subsidiary in Germany which will increase the Company's exposure to foreign exchange risk, and the Company purchases certain key components pursuant to purchase contracts denominated in foreign currency. In connection therewith, the Company has Yen cash deposits designated as a hedge against the firm purchases under supply contract. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Dependence on Single Manufacturing Facility; Risks Related to Potential Disruption. The Company's manufacturing operations are located in its facility in Northern California. In addition, a number of the suppliers of components for the Company's products and providers of outsourced assembly, upon which the Company relies, are located in Northern California. Since the Company does not currently operate multiple facilities in different geographic areas, or have alternative sources for many of its components or outsourced assembly, a disruption of the Company's manufacturing operations, or the operations of its suppliers, resulting from sustained process abnormalities, human error, government intervention or natural disasters such as earthquakes, fires or floods could cause the Company to cease or limit its manufacturing operations and consequently have a material adverse effect on the Company's business, financial condition and results of operations. No Present Intention to Pay Dividends; Restriction on Payment of Dividends. The Company has never declared or paid cash dividends on its Common Stock and intends to retain all available funds for use in the operation and expansion of its business. The Company therefore does not anticipate that any cash dividends will be declared or paid in the foreseeable future. In addition, the Company's credit facility prohibits the payment of cash dividends without the consent of the lender. Readiness for Year 2000. The Company has and will continue to make certain investments in its software systems and applications to ensure the Company's information systems are Year 2000 compliant. The financial impact to the Company of the Company's Year 2000 compliance effort has not been and is not anticipated to be material to its financial position or results of operations in any given year. The Company believes that its current products are Year 2000 compliant. The approach of Year 2000 presents significant issues for many computer systems, since much of the software in use today may not accurately process data beyond 1999. The Company has recently implemented new information systems and accordingly does not anticipate any internal Year 2000 issues from its own information systems, databases or programs. However, the Company could be adversely impacted by Year 2000 issues faced by major distributors, suppliers, customers, vendors and financial service organizations with which the Company interacts. The Company is currently taking steps to address the impact, if any, of the Year 2000 issue on the operations of the Company. There can be no assurances that the Company will be able to detect all potential failures of the Company's and/or third parties' computer systems. A significant failure of the Company's or a third party's computer system could have a material adverse effect on the Company's business, financial condition and results of operations. PART II. OTHER INFORMATION ITEM 5. Other Information Report of offering securities and use of proceeds therefrom: In connection with its initial public offering in 1997, the Company filed a Registration Statement on Form S-1, SEC File No. 333-23763 (the "Registration Statement"), which was declared effective by the Commission on June 10, 1997. The Company registered 4,025,000 shares of its Common Stock, $0.001 par value per share. The offering commenced on June 11, 1997 and 3,500,000 shares were sold. The over-allotment option was not exercised and the Company deregistered 525,000 shares on July 11, 1997. The aggregate offering price of the registered shares was $28,000,000. The managing underwriters of the offering were Prudential Securities Incorporated and Cowen & Company. The Company incurred the following expenses in connection with the offering: Underwriting discounts and commissions $ 1,960,000 Other expenses 800,000 ----------- Total expenses $ 2,760,000 ===========

All of such expenses were direct or indirect payments to others. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The net offering proceeds to the Company after deducting the total expenses above and the proceeds to selling shareholders were approximately $19,662,000. From June 11, 1997 to March 31, 1998, the Company used such net offering proceeds, in direct or indirect payments to others, as follows: Purchase and installment of machinery and equipment $ 674,154 Acquisition of other businesses 1,250,000 Working capital 7,484,209 Investment in short-term, interest-bearing obligations 5,429,629 Repayment of indebtedness 1,705,342 Redemption of Series P Preferred 2,794,000 Investment in Minority Interest 325,000 ------------ Total $ 19,662,334 ============

Each of such amounts is a reasonable estimate of the application of the net offering proceeds. This use of proceeds does not represent a material change in the use of proceeds described in the prospectus of the Registration Statement. ITEM 6. Exhibits And Reports On Form 8-K (a) Exhibits. ---------
Exhibit Number Description ------ --------------------------------------------------- ~~27.1 Financial Data Schedule.~~
(b) Reports on Form 8-K. On February 20, 1998 the Registrant -------------------- filed Form 8-K/A as Amendment Number 1 which amended Item 7. Financial Statements, Pro Forma Financial Information and Exhibits of its Form 8-K Report filed December 22, 1997 in connection with the Registrant's acquisition of DocuMagix, Inc. 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JETFAX, INC. ---------------------- (Registrant) Date: May 15, 1998 By /s/ ALLEN K. JONES ---------------------------- Allen K. Jones Vice President, Finance and Chief Financial Officer (Authorized Officer and Principal Accounting and Financial Officer) 21 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 6,872 0 4,254 0 3,407 14,789 1,268 0 17,486 3,403 0 0 0 117 13,941 17,486 6,024 7,698 4,286 4,587 0 0 0 (1,272) 17 (1,289) 0 0 0 (1,289) (0.11) (0.11)

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