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 2, 1999.
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
eFax.com, Inc.
(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
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 31, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $207,530,859
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 31, 1999, the Registrant had outstanding 12,346,796 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 1999 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission
no later than 120 days after January 2, 1999. (Part III).
This Report on Form 10-K includes 102 pages with the Index to Exhibits
located on pages 52 to 54.
EFAX.COM, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 2, 1999
Page
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PART I
Item 1 Business 3
Item 2 Properties 8
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 7A Quantitative and Qualitative Disclosures About Market Risk 28
Item 8 Financial Statements and Supplementary Data 28
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
PART III
Item 10 Directors and Executive Officers of the Registrant 29
Item 11 Executive Compensation 30
Item 12 Security Ownership of Certain Beneficial Owners
and Management 30
Item 13 Certain Relationships and Related Transactions 30
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 31
Signatures 51
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PART I
ITEM 1. BUSINESS
Overview
eFax.com, Inc. together with its wholly-owned subsidiaries (the
"Company" or "eFax.com") 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. Building from this strong technology base, the Company is now
emphasizing Internet applications for its document transmission and software
expertise.
The majority of the Company's revenues have been generated from sales
of JetFax branded products and consumables through the business equipment
dealer channel. The Company's embedded system technology provides the
intelligence of a MFP and coordinates, controls and optimizes a MFP's
printing, faxing, copying and scanning operations. The Company licenses its
embedded system for a range of MFP solutions sold under the brand names of
its OEM customers. The Company also offers software which can be sold on a
stand-alone basis or bundled with embedded systems to provide a complete,
integrated hardware and software solution. These software products include
JetSuite and PaperMaster.
The Company is utilizing its digital messaging technology for Internet
applications, including HotSend software, introduced in December 1998, and
the M900e MFP, introduced in January 1999. On February 8, 1999 the Company
changed its name from JetFax, Inc. to eFax.com, Inc. and announced its eFax
Service, the first free fax-to-email service. It is the Company's intention
to expand its product offerings to include a variety of Internet-based
electronic and paper document communication solutions.
Products
eFax.com offers the following products and solutions to its OEMs and
other customers:
JetFax Branded Products and Related Consumables. eFax.com develops,
manufactures and markets a high quality MFP under the JetFax brand name,
integrating its embedded system technology with a printing and scanning
engine at its Menlo Park 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 laser printer fax machine in addition to its multifunction print,
copy and scan capabilities. The Series M900 is comprised of five models
which include features such as a two-line capability, which allows
simultaneous receiving and sending of faxes; a high-speed 33.6 Kbps modem
for single-line models, which reduces the transmission time; and fax-to-
email capability independent of a network or special software. The Company
also sells consumables for its products, including toner cartridges, imaging
drums and inkjet cartridges, which represented 19%, 17% and 14% of the
Company's total revenues in the years ended December 31, 1998 and 1997, and
the nine months ended December 31, 1996, respectively.
Embedded System Technology. eFax.com 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 eFax.com 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 Hewlett-Packard LaserJet 3100 and the
Samsung manufactured dex 855, as well as the previously sold Minoltafax
1000, the Xerox 3006, and Xerox WorkCenter 250.
Software. eFax.com offers JetSuite and PaperMaster software for
convenient communication and handling of electronic and paper documents, as
well as Printer Control Language ("PCL") printer drivers.
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JetSuite software 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. Users 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 viewer, while maintaining
all of the document's original formatting, layout, colors and look. The
Company offers JetSuite to OEMs for use with the OEMs' embedded system or
bundled with eFax.com's embedded system technology, as well as an option
with JetFax branded MFPs. PaperMaster began shipping in 1994 as user-
friendly personal document management software. 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 search and retrieval
capabilities and web links to allow users to easily save web-based HTML
documents. The Company withdrew PaperMaster from the retail channel during
the first half of 1998, refocusing on OEM bundles, upgrades, and direct
sales on the Internet. In 1998 Hewlett-Packard began bundling PaperMaster
with its successful CD-Writer Plus storage system, broadening the market for
PaperMaster to the storage arena.
Internet. The Company has begun to utilize its technology for merging
paper-based document transmission via fax with electronic message
transmission via email on the Internet. Late in 1998 the Company introduced
its HotSend software, a free download from the Internet, which allows the
user to send any document as an email attachment. The Company's Series M900
MFP's now have a fax-to-email option. The introduction of the free
Internet-based eFax Service in February 1999 allows a user to obtain a free
phone number that will automatically forward incoming faxes directly to a
specified email address. This service utilizes proprietary, portable
document transmission technology, digital message compression capabilities,
and software developed by the Company. The Company expects to generate
revenue from the eFax Service by selling premium service packages to the
expanding eFax user base and by including paid advertisements with eFaxes.
Technology
Embedded System Technology. eFax.com's third generation embedded
system technology is based on the Company's application specific integrated
circuit (''ASIC'') semiconductor designs integrated with a Motorola
microprocessor. The specialized ASICs perform most of the heavy
computational tasks, allowing the single 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 firmware in the
embedded system is centered on the Company's task-swapping, real-time
operating system. The operating system rotates among the various MFP
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.
Portable Document Technology. Portable document technology
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 database 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. JetSuite also provides a range
of imaging functionality for fast viewing, zooming and panning, as well as
document markup and cleanup functionality. 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 optical character recognition ("OCR") technology, which allows users
to convert scanned text documents to editable text files in a variety of
different word processor and
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spreadsheet formats.
Electronic Document Storage. PaperMaster contains a number of key
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
Business Technology Associates ("BTA"). In the years ended December 31, 1998
and December 31, 1997, and the nine months ended December 31, 1996 revenues
recorded by the Company from dealers associated with IKON represented 16%,
19%, and 18%, respectively, of the Company's total revenues. The Company
also distributes its products through regional distributors. As of December
31, 1998, 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
4%, 3%, and 3% of the Company's total revenues in the years ended December
31, 1998 and December 31, 1997, and the nine months ended December 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. The
Company currently licenses embedded system technology or desktop software to
25 companies and has OEM relationships with Hewlett-Packard, Oki Data, and
Konica.
Hewlett-Packard Company. In 1997, the Company entered into a
development and license agreement with Hewlett-Packard for the inclusion of
the Company's embedded system technology and JetSuite software in Hewlett-
Packard product. The development was completed in early 1998 and the HP
LaserJet 3100 was launched in March 1998. Effective May 1998, a follow-on
development effort was undertaken and was in process at December 31, 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.
eFax Service. The Company offers its proprietary fax-to-email service
to individuals currently utilizing email and believes that the initial
subscriber base will include mobile professionals, small business owners,
and home-office workers. The Company also believes that ease of use, the
ability to retrieve faxes remotely, the confidential nature of receiving
documents to email, enhanced features under development, and the potential
for eliminating costs for standard fax machines and phone lines will make it
attractive to larger corporate clients as well.
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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. The Company hired
a Vice President of Marketing in August 1998 with specific responsibility to
develop and implement marketing plans and partnerships for Internet-based
products. Marketing resources have been refocused to emphasize Internet
activity through reassignment of personnel and utilization of external
consultants.
OEM Relationships. The Company licenses its embedded system
technology and software to OEMs. The Company continues to enhance its
relationships 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 eFax.com as a leading provider to OEMs of MFP solutions through a
combination of public relations and press coverage, exhibits and
presentations at tradeshows, 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
software for bundling with multiple OEM products. In addition, the Company
promotes software upgrades and add-on software products in a number of ways,
including software installation and reminder screens, mailings to registered
users, website advertisements and co-promotions with OEMs.
Internet. The Company established separate websites for its HotSend
software and eFax.com Service in December 1998 and February 1999,
respectively. In addition to an active public relations campaign to gain
press coverage and information sharing by the user community on the
Internet, eFax.com further intends to promote its Internet product offerings
through cooperative advertising with Internet partners, paid banner Internet
advertising, radio advertisements, and assorted other advertising mediums.
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 and
Ireland. International marketing efforts are focused on providing country
specific marketing materials, sales incentive programs for dealers and
participation in trade shows.
Research and Development
eFax.com'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. Primary
activities at those locations include new product development, enhancement
of existing products, product testing and technical documentation.
The Company's research and development efforts focus on ongoing
development of the Company's MFP embedded system technology, desktop
software, and Internet-based document handling services. 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. Software and communications capabilities developed for
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MFP products have provided a solid technological base for creating Internet-
based product offerings, which are now receiving direct research and
development support.
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, patents and
nondisclosure and other contractual restrictions. 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.
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.
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
printed circuit board assembler. Final product assembly at the Company's
headquarters consists of integrating the components on a progressive
assembly line.
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 generally buys components under purchase orders
and does not have long-term agreements with its suppliers. 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.
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 Conexant Systems, Inc. to provide modem
chips. If Oki America, AMI, Motorola, Pixel or Conexant Systems, Inc. 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. 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.
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.
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The Company currently operates its eFax Service through three regional
locations near San Francisco, Chicago, and Boston, and intends to expand to
other sites in the near future. These sites are operated through co-
location agreements with telecommunication companies and/or partners.
Software integration was developed with a partner at the Chicago location.
To operate the service the Company requires a large amount of Direct Inward
Dial lines ("DIDs"), that act as individual phone numbers, and inbound T-1
lines at each site. Additional Internet connectivity is used for outgoing
communications.
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 brand 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 the Company's OEM customers,
who have the substantial resources necessary to enhance existing products
and to develop future products. 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.
The Company anticipates increasing competition for its MFPs,
technologies and software under development. The Company expects
competition against its new Internet product offerings and is working
aggressively to build a large user base quickly.
Backlog
The Company had essentially no backlog at December 31, 1998 and 1997,
respectively, which is in line with the normal practice in the markets in
which the Company 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, 1998, the Company had 116 employees and one full-
time equivalent contractor. 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.
ITEM 2. PROPERTIES
The Company's headquarters and principal operations are in leased
facilities totaling approximately 42,000 square feet in Menlo Park,
California, and the lease for this facility expires in January 2003.
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Additionally, the Company leases approximately 2,400 square feet in Santa
Barbara, California for its software application organization and the one-
year extension on the lease is set to expire June 30, 1999, with an option
at the discretion of the Company to extend the lease an additional 8 (eight)
months. The Company leases approximately 2,600 square feet in Beaverton,
Oregon for additional software application personnel, and this lease expires
April 2000.
The Company subleases office space of approximately 10,000 square feet
in San Jose, California under agreements originally entered into by
DocuMagix, Inc. ("DocuMagix"), prior to the Company's acquisition of
DocuMagix. Approximately 4,000 of the 10,000 square feet of office space are
subleased to Lara Technology, Inc. ("Lara") under an agreement dated June
25, 1997 between DocuMagix and Lara. This sublease expires November 18,
1999. On April 1, 1998, the Company entered into an agreement to
sublease approximately 6,000 of the 10,000 square feet of office space to
Silicon Valley Group, Inc. This sublease expires November 18, 1999.
ITEM 3. LEGAL PROCEEDINGS
In early March 1999, E-Fax Communications, Inc. ("E-Fax
Communications"), a California corporation, filed a complaint against
eFax.com Inc., a Delaware corporation, in the United States District Court,
Northern District of California. The Complaint alleged that the Company had
engaged in trademark and service mark infringement and unfair competition in
connection with the Company's use of the name "eFax.com." On April 9, 1999,
the Company and E-Fax Communications signed a settlement agreement in which
E-Fax Communications will dismiss all charges against the Company, transfer
all rights to the mark "E-FAX" to the Company, stop all use of the "E-FAX"
trademark, and change its corporate name. The Company has agreed to pay E-
Fax Communications a combination of cash and Common Stock in an amount not
exceeding $2.5 million based on the average share price of the Common Stock
just prior to the stock registration becoming effective in the near term.
The purchased trademark rights will become an asset of the Company and be
amortized over the period of benefit, estimated to be seven to ten years.
The parties consider the settlement a compromise of disputed claims and
preferable to a possible extended legal proceeding with uncertain outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote
of security holders.
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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 "EFAX". Prior to
February 8, 1999, the symbol for the Company's Common Stock as reported on
the Nasdaq National Market was "JTFX". Effective with the close of business
on February 8, 1999, the Company name was officially changed from "JetFax,
Inc." to "eFax.com, Inc." pursuant to a Certificate of Ownership and Merger,
which provided for the merger of JetFax, Inc. with eFax.com, Inc., a
Delaware corporation and wholly-owned subsidiary of JetFax, Inc., filed with
the Delaware Department of Corporations and declared effective on February
8, 1999.
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 December 31, 1998 was:
Year Ended December 31, 1998: High Low
Fourth quarter $ 2.750 $ 1.531
Third quarter $ 4.500 $ 2.500
Second quarter $ 7.188 $ 4.438
First quarter $ 7.125 $ 3.625
Year Ended December 31, 1997: High Low
Fourth quarter $ 9.375 $ 5.188
Third quarter $ 11.000 $ 8.000
Second quarter (from June 11, 1997) $ 8.125 $ 6.875
The reported last sale price of the Company's Common Stock on the
Nasdaq National Market on April 9, 1999 was $30.13. The approximate number
of holders of record of the shares of the Company's Common Stock was 236 as
of March 19, 1999. 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. Based on the number of
annual reports requested by brokers, the Company estimates that it has
approximately 28,000 beneficial owners of its Common Stock.
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
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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, 1998, the Company did not sell any
equity securities that were not registered under the Securities Act of 1933,
as amended.
(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,
$0.01 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.
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, 1998, the Company used such
net offering proceeds, in direct or indirect payments to others, as follows:
Purchase and installment of machinery and equipment: $ 1,072,154
Acquisition of other businesses 1,250,000
Working capital 12,115,838
Investment in short-term, interest-bearing obligations: -
Repayment of indebtedness 1,705,342
Redemption of Series P Preferred 2,794,000
Investment in Minority Interest 725,000
-----------
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.
11
11
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data set forth below for the
years ended December 31, 1998 and 1997, and the nine months ended December
31, 1996, and the consolidated balance sheet data at December 31, 1998 and
1997 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, and 1995 and the consolidated
balance sheet data at March 31, 1996 and 1995, 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.
Nine Months
Year Ended Year Ended Ended Fiscal Year Ended
December 31, December 31, December 31, March 31,
-------------------
1998 1997 1996(1) 1996 1995
------ ------ --------- ------ ------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
Product...................................... $ 23,385 $ 16,281 $ 10,205 $ 11,143 $ 6,413
Software and technology license fees......... 5,069 4,493 3,200 3,413 484
Development fees............................. 1,779 2,246 1,468 720 1,200
-------- -------- -------- -------- --------
Total revenues............................. 30,233 23,020 14,873 15,276 8,097
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product revenues..................... 16,005 11,886 8,441 11,102 5,249
Cost of software and license fees............ 710 770 517 587 124
Research and development..................... 5,445 5,355 2,554 2,318 1,794
Selling and marketing........................ 7,267 6,046 5,212 5,216 1,928
General and administrative................... 2,592 3,031 1,726 1,652 1,632
Acquisition and related expenses............. - 2,106 - - -
-------- -------- -------- -------- --------
Total costs and expenses................... 32,019 29,194 18,450 20,875 10,727
-------- -------- -------- -------- --------
Loss from operations........................... (1,786) (6,174) (3,577) (5,599) (2,630)
-------- -------- -------- -------- --------
Interest and other income (expense), net....... 365 111 - (259) (119)
-------- -------- -------- -------- --------
Loss before extraordinary item and income taxes (1,421) (6,063) (3,577) (5,858) (2,749)
Provision for income taxes...................... 80 96 107 35 -
-------- -------- -------- -------- --------
Loss before extraordinary item.................. (1,501) (6,159) (3,684) (5,893) (2,749)
Extraordinary item (2).......................... - - - - 349
-------- -------- -------- -------- --------
Net loss........................................ (1,501) (6,159) (3,684) (5,893) (2,400)
Series P Redeemable Preferred Stock dividends... - (68) (116) - -
-------- -------- -------- -------- --------
Net loss applicable to common stockholders...... $ (1,501) $ (6,227) $ (3,800) $ (5,893) $ (2,400)
======== ======== ======== ======== ========
Net loss per share (3):
Basic......................................... $ (0.13) $ (0.84) $ (2.13) $ (3.86) $ (2.31)
======== ======== ======== ======== ========
Diluted....................................... $ (0.13) $ (0.84) $ (2.13) $ (3.86) $ (2.31)
======== ======== ======== ======== ========
Shares used in computing per share amounts:
Basic......................................... 11,784 7,389 1,784 1,526 1,039
======== ======== ======== ======== ========
Diluted....................................... 11,784 7,389 1,784 1,526 1,039
======== ======== ======== ======== ========
December 31, March 31,
------------------------------------ -------------------
1998 1997 1996 (1) 1996 1995
------ ------ --------- ------ ------
(in thousands)
Consolidated Balance Sheet Data:
Working capital................................. $ 10,928 $ 12,814 $ 542 $ 4,978 $ (2,772)
Total assets.................................... 16,215 18,856 7,092 12,031 3,849
Long-term note payable, less current portion.... - - 198 - 2,372
Redeemable preferred stock...................... - - 2,726 2,610 -
Total stockholders' equity (deficit)............ 13,837 15,271 (861) 2,708 (4,779)
- ---------
(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 2, 1999 as ending on December 31, 1998,
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) Reflects retroactive application, in 1998, of the requirements of the
SEC Staff Accounting Bulletin No. 98. For the determination of the
number of shares used in computing net loss per share for periods prior
to 1998, see Note 1 of Notes to Consolidated Financial Statements.
12
12
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.
Pursuant to a Certificate of Ownership and Merger, which provided for
the merger of JetFax, Inc. with eFax.com, Inc., a Delaware corporation and
wholly owned subsidiary of JetFax, Inc., filed with the Delaware Department
of Corporations and declared effective on February 8, 1999, the corporate
name of JetFax, Inc., a Delaware Corporation has been changed to "eFax.com,
Inc." All filings and reports made after February 8, 1999 bear the name
"eFax.com, Inc."
eFax.com, 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. 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. Building from this
strong technology base, the Company is now emphasizing Internet applications
for its document transmission and software expertise.
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 2, 1999 as ending on December 31, 1998, 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 year ended
December 31, 1998 compared to the year ended December 31, 1997.
Revenues increased to $30.2 million for the year ended December 31,
1998 from $23.0 million for the year ended December 31, 1997 and $20.4
million for the year ended December 31, 1996. 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 year ended December 31, 1998, product
revenues, development fees, and software and technology license fees, as a
percentage of total revenues, were 77%, 6% and 17%, respectively. 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.
13
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 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 eFax.com 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 product sales are to
dealers in the IKON network. These IKON dealers accounted for 16% of the
Company's total revenues for the year ended December 31, 1998. The
Company's current OEM customers for engineering development and technology
licenses are Hewlett-Packard, Oki Data, and FaxBack; Hewlett-Packard
accounted for 18% and 13% of the Company's total revenues for the years
ended December 31, 1998 and 1997, respectively. 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 ''Factors That May
Affect Operating Results - Dependence on Dealers and Distributors and
Dependence on OEMs.''
International revenues accounted for 18% and 29% of total revenues for
the years ended December 31, 1998 and December 31, 1997, 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 '' Factors That May Affect Operating Results -
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 eFax.com competes. The Company believes that
sales of its 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
14
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 year ended December 31, 1996 (due to its change in fiscal year - see
Note 1 of Notes to Consolidated Financial Statements).
Year Ended
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(unaudited)
Revenues:
Product $ 23,385 $ 16,281 $ 14,012
Software and technology license fees 5,069 4,493 4,623
Development fees 1,779 2,246 1,722
-------- -------- --------
Total revenues 30,233 23,020 20,357
-------- -------- --------
Costs and expenses:
Cost of product revenues 16,005 11,886 11,750
Cost of software and license revenues 710 770 716
Research and development 5,445 5,355 3,211
Selling and marketing 7,267 6,046 7,115
General and administrative 2,592 3,031 2,284
Acquisition and related expenses - 2,106 -
-------- -------- --------
Total costs and expenses 32,019 29,194 25,076
-------- -------- --------
Loss from operations (1,786) (6,174) (4,719)
Other income (expense), net 365 111 (76)
-------- -------- --------
Loss before income taxes (1,421) (6,063) (4,795)
Provision for income taxes 80 96 107
-------- -------- --------
Net loss $ (1,501) $ (6,159) $ (4,902)
======== ======== ========
The following table sets forth, as a percentage of total revenues,
certain items in the Company's statements of operations for the periods
indicated.
Year Ended
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
(unaudited)
Revenues:
Product 77% 71% 69%
Software and technology license fees 17 19 23
Development fees 6 10 8
-------- -------- --------
Total revenues 100 100 100
-------- -------- --------
15
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Costs and expenses:
Cost of product revenues 53 52 58
Cost of software and license revenues 2 3 3
Research and development 18 24 16
Selling and marketing 24 27 35
General and administrative 9 13 11
Acquisition and related expenses - 9 -
-------- -------- --------
Total costs and expenses 106 127 123
-------- -------- --------
Loss from operations (6) (27) (23)
Other income (expense), net 1 - -
-------- -------- --------
Loss before income taxes (5) (27) (23)
Provision for income taxes - - 1
-------- -------- --------
Net loss (5)% (27)% (24)%
======== ======== ========
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.)
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased 31% to $30.2 million for the year
ended December 31, 1998 from $23.0 million for the year ended December 31,
1997. Product revenue from the sale of the Company's MFPs and related
consumables and accessories was $23.4 million in 1998, a 44% increase from
$16.3 million during the year ended December 31, 1997. All product
categories rose significantly year over year, as MFP's, consumables and
accessories advanced 45%, 42% and 37%, respectively, for the year ended
December 31, 1998 from the same period ended December 31, 1997. MFP unit
sales increased 61% for the year ended December 31, 1998 from the same
period ended December 31, 1997. This increase in demand was partially
offset by average selling price declines driven by competitive pricing in
the market. The number of units sold each quarter was relatively flat
during the first nine months of 1998, dropping by 18% in the final three
month period ended December 31, 1998. The decline in unit shipments in the
last quarter was due primarily to inventory level adjustments at one of the
Company's marketing channel partners, IKON, that began in September 1998 and
continued through year-end.
Development revenue decreased 21% to $1.8 million for the year ended
December 31, 1998 from $2.2 million for the year ended December 31, 1997.
Major development milestones on the original Hewlett-Packard contract were
completed in 1997 and the revenue stream from development fees was converted
to per unit royalties in the first part of 1998. The follow-on development
efforts did not commence until May 1998, which resulted in the decrease.
Software and technology licensing fees rose 13% to $5.1 million for the
year ended December 31, 1998 from $4.5 million for the year ended December
31, 1997. The year ended December 31, 1998 included per unit royalties for
1) the H-P SureStore CD-Writer, which began shipping in February 1998 and 2)
H-P LaserJet 3100, which began shipping in March 1998. Partially offsetting
these increases in per unit royalties, revenue from acquired DocuMagix
software products for the year ended December 31, 1998 fell 79% to $.5
million from $2.1 million for the same period ended December 31, 1997, the
result of withdrawal of products from the retail distribution channel.
International revenues declined to 18% of total revenues from 29% for
the year ended December 31, 1998 and 1997, respectively. Product revenue
increases in 1998 were more heavily concentrated in the US as opposed to
Europe, resulting in the proportionate decline. The Company does not sell
its products in any Asian countries, though products are sold in New Zealand
and Australia. Two customers, Hewlett-Packard and IKON Office Solutions,
accounted for $5.3 million (18%) and $4.8 million (16%), respectively, of
total revenues for the year ended December 31, 1998. The same two customers
accounted for $3.1 million (13%)
16
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
and $4.4 million (19%), respectively, of total revenues for the year ended
December 31, 1997.
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 35% to $16.0 million from $11.9
million for the years ended December 31, 1998 and 1997, respectively. In
1998 the year end review of inventory resulted in an increase in reserves of
$350,000. Approximately half of this charge related to reduced MFP demand
and half to previously inventoried marketing materials. Despite this
adjustment, product gross margins expanded to 31.6% from 27.0% for the years
ended December 31, 1998 and 1997, respectively. The improvements in gross
margin for JetFax branded products and consumables were due to manufacturing
efficiencies, higher volumes, and a shift in mix to the newer Series M900
product lines, the aggregate of which more than offset a decline in average
selling price of MFPs and the inventory reserve adjustment.
The Company purchases print engines for its Series M900 product line in
Yen from Oki Data Corporation and includes exchange gains and losses related
to Yen-based purchases and hedging activity in cost of goods sold. In order
to reduce the potential volatility related to the ongoing Yen liability, the
Company entered into a Yen hedge in August 1997. As the Yen weakened during
the year ended December 31, 1998, the average exchange rate for purchases
improved to 133 from 122 Yen to the dollar for the year ended December 31,
1997. As a result of this rate improvement, cost of goods sold was lowered
by over $300,000. Hedging activity generated a loss of $12,000 for the
year ended December 31, 1998. Given the considerable expense associated
with maintaining the Yen hedge, coupled with the recent strengthening of the
Yen in relation to the dollar, the Company decided to terminate its Yen
hedge in September 1998.
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 decreased 8% to
$710,000 from $770,000. The increase in per unit royalty revenues generated
a corresponding increase in per unit royalties payable for certain
technology licensed from others for the year ended December 31, 1998. This
was in turn offset by reduced expenses related to retail software sales as
the Company withdrew from the retail channel distribution market.
Research and Development. Research and development expenses were
essentially flat at $5.4 million for the years ended December 31, 1998 and
1997, respectively. Average engineering headcount increased to 45 from 39
for the years ended December 31, 1998 and 1997, respectively. The related
increase in engineering compensation expense was effectively offset by (1)
reduced prototype, materials and external consultant charges and (2) the
non-recurrence of acquisition-related DocuMagix retention bonuses of
$150,000 from December 1997. As a percent of revenue, research and
development expense declined to 18%, a result of the increase in revenue.
Selling and Marketing. Selling and marketing expenses consist
primarily of personnel related costs and commissions, travel and
entertainment expenses, advertising and promotional expenses, marketing
communications, customer support, and service and facilities expenses.
Selling and marketing expenses increased 20% to $7.3 million from $6.0
million for the year ended December 31, 1998 and 1997, respectively. An
additional $1.3 million in promotional efforts including dealer incentives,
advertising, and public relations in support of the Series M900 product
accounted for the period increase. This was offset to a minor degree by the
non-recurrence of acquisition-related DocuMagix retention bonuses of $77,000
from December 1997. As a percentage of revenues, selling and marketing
expenses declined slightly to 24%
17
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
from 27% for the year ended December 31, 1998 from the year ended December
31, 1997, as the rise in revenue outpaced the increase in marketing charges.
General and Administrative. General and administrative expenses
include personnel related costs for administrative, finance, and executive
personnel, outside professional fees, and facilities expenses. General and
administrative expenses decreased 15% to $2.6 million from $3.0 million for
the years ending December 31, 1998 and 1997, respectively. Elimination of
redundant costs related to facilities, business insurance, and legal and
accounting services, effective with the acquisition of DocuMagix accounted
for the drop in expense. Expenses related to public company disclosures,
e.g., reporting to shareholders and SEC filings, more than offset the non-
recurrence of DocuMagix retention bonuses of $169,000. As a percentage of
revenues, general and administrative expenses declined to 9% from 13% for
the year ended December 31, 1998 from the year ended December 31, 1997.
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
no acquisition related charges for the year ended December 31, 1998; there
were a total of $2.1 million in acquisition charges for the year ended
December 31, 1997. The Crandell Group's $1.7 million portion of the 1997
acquisition charges was comprised of: a $1.0 million compensation payment in
July 1997, 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, net
increased to $365,000 from $111,000 for the year ended December 31, 1998 and
1997, respectively. Interest income from investments was essentially flat
at $300,000, while interest expense declined to zero from $119,000. Foreign
exchange gains (losses) increased to $19,000 from ($58,000) for the years
ended December 31, 1998 and 1997, respectively.
Provision for Income Taxes. Due to the Company's net losses, there
were no provisions for federal or state income taxes for the year ended
December 31, 1998 or the year ended December 31, 1997. Income tax
provisions of $80,000 and $96,000 for the year ended December 31, 1998 and
1997, respectively, relate primarily to foreign withholding taxes on certain
royalty fees, but also include minimum state and franchise taxes.
Net Loss. The net loss for the year ended December 31, 1998 was $1.5
million or $0.13 per share. The net loss for the year ended December 31,
1997 was $6.2 million or $0.84 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 bonus ($396,000) associated with the retention of
DocuMagix employees prior to the acquisition, the pro forma net loss for the
year ended December 31, 1997 was $3.7 million or $0.50 per share.
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 operations for
the Company 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
18
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 the Company's historical operations grew 24% to $2.4
million in 1997 from $1.9 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 The Company 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
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 expenses increased to
23.3% for 1997 from 15.8% for 1996. The year to year research and
development increase for the Company's historical 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 the Company's historical 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 Company's historical
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
Company's historical 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
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 Company's historical 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 foreign withholding taxes on certain development fees.
Net income (loss). The net loss for 1997 was $6.2 million or
$0.84 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 $0.50 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 Company's historical operations and $2.8 million was attributable
to the operations of DocuMagix.
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 its 1997 initial public offering of common stock. The total amount of
equity raised through December 31, 1998 was $42.6 million through a series
of private financing rounds and the Company's June 1997 initial public
offering.
At December 31, 1998, the Company had $1.5 million available under its
bank credit facility under which there were no borrowings at December 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 2, 1998, terminates on August 23, 1999, 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 $5.0 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, 1998, except the
quarterly net income covenant for which the Company received a waiver dated
March 10, 1999.
Cash and short term investments decreased to $4.1 million at December
31, 1998 from $7.2 million at December 31, 1997. Significant cash outlays
included a $400,000 minority investment in Oasis Semiconductor and a
$200,000 warehouse dock leasehold improvement. Inventories increased to
$4.5 million from $4.0 million at December 31, 1998 and 1997, respectively,
a result of higher stocking levels to support the growth in consumables
revenue. Accounts receivable decreased to $4.4 million from $4.8 million
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
at December 31, 1998 and 1997, respectively, which was principally the
result of the withdrawal of PaperMaster from the retail distribution
channel, partially offset by increased product revenues and their related
receivables. Accounts payable decreased $895,000 to $777,000 at December
31, 1998 from $1.7 million at December 31, 1997. Further reduction of
payables assumed through the DocuMagix acquisition and a slowdown in
inventory related purchases accounted for the drop.
Investing activities for the year ended December 31, 1998 used cash of
approximately $0.6 million for: $0.6 million of property purchases, and $0.2
million for other asset purchases, partially offset by $0.2 million net
proceeds of short-term investments. There were no borrowing activities for
the twelve months ended December 31, 1998.
The Company currently believes that its cash equivalents and short-term
investments, 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 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 that 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.
Risks Associated with Internet-related Revenues. The market for
Internet-related document communications is very new and is evolving
rapidly. The Company expects that a significant portion of its revenues in
the future will be generated through its eFax Service and ancillary
products. There can be no assurance, however, that the Company's subscriber
base will continue to expand rapidly, that users will be willing to pay fees
for premium services, or that the subscriber base will grow large enough to
be capable of generating advertising revenue.
Dependence on Intellectual Property Rights; Risk of Infringement. The
Company's success is heavily dependent upon its intellectual property. To
protect its proprietary rights, the Company relies on a combination of
copyright, trade secret and trademark laws, patents, nondisclosure
agreements and other contractual restrictions. 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. 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, the Company's
intellectual property increasingly may become the subject of infringement
claims. The Company has in the past received communications asserting that
the Company's trademarks or products infringe the proprietary rights of
other 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 revenue delays or require the
Company to enter into royalty or licensing agreements that may not be
available, or available on terms acceptable to the Company. The failure of
the Company to develop, or license on acceptable terms, a substitute
technology could have a material adverse effect on the
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Company's business, financial condition and results of operations.
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. These factors include: 1) acceptance and timing of new products
integrating fax technology with the Internet; 2) the size and timing of
development or software licensing agreements; 2) the timing of new
introductions or phase-out of the Company's branded products, 3)
fluctuations in end user demand for the Company's branded and OEM products;
and 4) seasonal trends, competition and pricing. The Company expects that
its operating results will continue to fluctuate as a result of these and
other factors.
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.
Possible Volatility of Stock Price. The trading price of the Common
Stock is likely to be highly volatile and could be subject to wide
fluctuations in response to factors such as actual or anticipated variations
in the Company's quarterly operating results, announcements of technological
innovations or new services by the Company or its competitors, announcements
of significant acquisitions or strategic partnerships by the Company or its
competitors, changes in financial estimates and recommendations by
securities analysts, and news reports relating to trends in its markets.
Further, the stock market in general, and the market prices for Internet-
related companies in particular, have experienced extreme volatility that
often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price
of the Company's Common Stock, regardless of its operating performance.
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 expansion of Internet-
based document services and further licensing of the Company's embedded
system technology and software products. However, there can be no assurance
that the Company will realize growth in revenues from such sales. 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, it could
have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Continued Growth of Electronic Commerce. The Company
intends to derive a significant portion of its revenues from its eFax
Service and ancillary products. Rapid growth in the use of and interest in
the Internet and online services is a recent phenomenon. As a result, a
sufficiently broad base
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of consumers may not adopt and continue to use the Internet and other online
services as a medium of commerce. Web-based advertising and selling premium
services are relatively new and it is difficult to predict the extent of
further growth, if any. In addition, the Internet may not prove to be a
viable commercial marketplace for reasons such as potentially inadequate
development of network infrastructure or enabling technologies and
performance improvements to support increased levels of Internet activity.
If the use of the Internet and other online services does not continue to
increase or increases more slowly than expected, if the infrastructure for
the Internet and online services proves to be inadequate to effectively
support expansion, or the Internet does not become a viable commercial
marketplace, it could have a material adverse effect on the Company's
business, financial condition and results of operation.
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, Oki Data Corporation, and Konica
Business Systems. 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 dependent upon, among other things, the ability and
willingness of OEMs to 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, which include the Company's ability to
complete timely development of turnkey designs for them. 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. 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.
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, a national group of office equipment dealers and A.
Messerli AG, 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. 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.
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 $29.2 million as of December 31, 1998. There can be no
assurance that the Company will achieve profitability on a quarterly or
annual basis in the future.
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. As the market for Internet-based document communication and
handling grows, it will begin to exert more pressure for advanced features
at economical pricing. The MFP market already expects development and
release of new products 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 increases 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 product offerings and the ability
of the Company and its OEM customers to respond to industry changes and
market demands. Any failure to anticipate or respond adequately to the
rapidly changing technology and evolving industry standards
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
Highly Competitive Industry. The market for Internet-related
document communication and handling is a newly emerging one and competitors
are just beginning to appear. The Company anticipates that it will need to
provide good service and scale the business rapidly to meet demand, to
create name recognition for the Company in advance of those competitors, to
build its subscriber base prior to any significant entry by the competition,
and to continue to expand and improve on its eFax Service offerings.
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 develop competing multifunction
technologies and software that may be implemented into their products. 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. In the newly evolving market for fax-to-
e-mail services, competitors include JFAX, an existing business, and
CallWave, a start-up that is just introducing its product.
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 anticipates increasing competition for its MFPs,
technologies, software under development, and Internet services. 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 cost of its eFax Service offerings, 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. Such competitive pressures would have a
material adverse effect 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 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.
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
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 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. The Company 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. 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 Conexant Systems, Inc (''Conexant'') to provide modem chips.
If Oki America, AMI, Motorola, Pixel or Conexant 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. 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.
International Activities. Revenues from sales to the Company's
customers outside the United States account for a significant portion of the
Company's total revenues. The international market for the Company's
branded products and products incorporating the Company's technology and
software is highly competitive. 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, longer accounts receivable cycles, the imposition of
government controls, risks of localizing and
26
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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, the Company purchases
certain key components pursuant to purchase contracts denominated in foreign
currency.
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, 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.
Readiness for Year 2000. Readiness for year 2000 refers to the
issue surrounding computer programs that use two digits rather than four to
define a given year. These programs might read a date using "00" as the
year 1900 rather than the year 2000 and which therefore could cause a system
failure or miscalculation.
The Company's manufacturing facilities date from October 1996 and are
not believed to be vulnerable in any significant way to Year 2000 non-
information technology system failures. In August 1998 the Company
renovated its existing telephone system at a cost of approximately $40,000,
also bringing it into Year 2000 compliance. The Company has invested
approximately $367,000 and will continue to make certain investments
estimated not to exceed $50,000 in its software systems and applications
to ensure the Company's information systems are Year 2000 compliant. The
necessary funds to support these renovations have come from the Company's
operating budget and future funding is not anticipated to require special
funding outside of historical levels for this item. 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. For example, during 1997 and 1998, the
Company purchased and implemented new manufacturing and accounting
information systems with a total capitalized cost of $338,000. The Company
has obtained written assurances from the vendor, QAD Inc., that the systems
are Year 2000 compliant, but has not conducted internal testing of the
system readiness.
The Company believes that its current products are Year 2000 compliant.
Certain of the Company's older products, which may not be Year 2000
compliant are no longer under warranty and the Company believes it has no
obligation related to these products. If the Company is mistaken in this
assessment, the Company could incur expenses in defending legal actions for
breach of contract or causes of action. There can be no assurances that
such expenses will not be material to the Company's financial position or
results of operations.
As discussed above, the Company has recently implemented new
information systems and accordingly does not anticipate any internal Year
2000 issues from those information systems, databases or programs. However,
the Company could be adversely impacted by Year 2000 issues faced by major
distributors, suppliers, customers and financial service organizations with
which the Company interacts. The Company expects to complete its assessment
of the potential impact of these ancillary issues by May 1, 1999. 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, but the Company is unable at this time
to assess what might be the extent of such effect. The Company intends to
complete a contingency plan by July 1, 1999, detailing actions that would be
taken in the event that such a failure occurs.
27
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following disclosures about the Company's market risk involve
forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company faces
exposure to market risk from adverse movements in interest rates and foreign
currency exchange rates, which could impact its results of operations and
financial condition. The Company does not use derivative financial
instruments for speculative purposes.
Short-term Investments. At December 31, 1998, the Company held $2.8
million in short-term investments consisting of high quality financial
instruments with an original maturity of from three to fifteen months. These
available-for-sale securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10 percent from levels at
December 31, 1998, the fair market value of the short-term investments would
decline by an immaterial amount. The Company generally expects to have the
ability to hold its fixed income investments until maturity and therefore
would not expect operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates
on short-term investments.
Foreign Currency Exchange Rate. Historically, the Company's primary
exposure has related to significant purchases of materials for manufacture
of its Series M900 product line which were denominated in Yen. In order to
reduce the potential volatility related to its ongoing Yen liability, the
Company has occasionally purchased foreign currencies and held them during
the contract term. At December 31, 1998 the Company did not hold a hedge
position against a foreign currency exposure.
During the year ended December 31, 1998, the average exchange rate for
purchases denominated in Yen improved to 133 Yen to the dollar from 122 Yen
to the dollar for the year ended December 31, 1997, generating a reduction
in cost of goods sold of over $300,000. Assuming a similar volume of
purchases denominated in Yen, and that the Company does not enter into a
hedge in order to minimize volatility of its Yen liability for that period,
a return to 1997 average exchange rates for purchases of 122 Yen to the
dollar or lower could increase cost of goods sold by $300,000 or more. At
December 31, 1998 the Company had purchase commitments denominated in Yen of
47,871,000; should there be a 10% change in average exchange rates to 120
from the 1998 average of 133 Yen to the dollar, the cost of those purchases
would increase approximately $40,000. There can be no assurance that the
exchange rate will not fall below 120 Yen to the dollar and thus that the
Company will not experience an even higher increase in the cost of goods
sold if it has not elected to hedge prior to that time.
The Company does maintain cash balances denominated in British Pound
Sterling, Irish Punt, French Francs, and German Deutschemarks. If foreign
exchanges rates were to weaken against the dollar immediately and uniformly
by 10 percent from the exchange rate at December 31, 1998, the fair value of
these foreign currency amounts would decline by an immaterial amount.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth in Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
28
28
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
1999 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, 1998, are as follows:
Name Age Position
- ------------------------------- --- ------------------------------------
Rudy Prince.................... 41 Chief Executive Officer and Chairman
of the Board
Robert A. Pollock.............. 46 President and Chief Operating Officer
Ronald P. Brown................ 45 Vice President of Marketing
Michael Crandell............... 43 Vice President of Software
John L. Jacobson............... 31 Vice President of Manufacturing and
Hardware Development
Allen K. Jones................. 51 Vice President of Finance, Chief
Financial Officer and Secretary
Gary P. Kapner................. 37 Vice President of US Sales
Lon B. Radin................... 48 Vice President of Engineering
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.
Robert Pollock joined the Company in March 1999 as President and Chief
--------------
Operating Officer. From January 1998 to February 1999 Mr. Pollock was a
consultant serving in interim management positions for a variety of
technology companies, including Chief Executive Officer for NameSecure.com,
an Internet domain name service provider, and Vice President of Sales and
Marketing for E-Traffic, an enterprise software company providing
interactive commerce technology and marketing services. Mr. Pollock was
founder and Chief Executive Officer of Pacific Micro Marketing, Inc. from
April 1983 to December 1997, a high technology sales and marketing firm
whose client list includes Apple Computer, Eastman Kodak and NV Philips.
Mr. Pollock holds a B.S. degree in Business Administration from San Jose
State University and an M.B.A. from St. Mary's College.
Ron Brown joined the Company in August 1998 as the Vice President of
---------
Marketing. Mr. Brown was a founding partner in the Internet start-up,
Musicvine from February 1997 to August 1998, concentrating on Web-casting
sponsorships for large companies. From February 1994 to February 1997, Mr.
Brown was vice president of worldwide corporate marketing for SyQuest
Technology, a manufacturer of removable storage devices for personal
computers. From April 1993, until it was acquired by Artisoft, Inc. in
February 1994, Mr. Brown was vice president of marketing for Eagle
Technology, a manufacturer of networking products. Mr. Brown holds a B.A.
degree in Advertising and an M.B.A. from San Jose State University.
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 L. Jacobson joined the Company in November 1995, and most recently
----------------
held the position of Manufacturing Manager. Mr. Jacobson was appointed Vice
President of Manufacturing and Hardware in November 1998. Prior to joining
the Company, Mr. Jacobson spent eight years with the Electronics Division
29
29
of Ford Motor Company, where he held various positions in manufacturing and
product engineering. Mr. Jacobson holds a B.S. in Electrical Engineering
from Marquette University, 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. Mr. Kapner was appointed Vice President of
U.S. Sales in November 1997. Mr. Kapner's role was also expanded in 1998 to
include international responsibilities as well. 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" in the Company's Proxy Statement to be filed in
connection with the Company's 1999 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 1999
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 with Management" in the Company's Proxy Statement to
be filed in connection with the Company's 1999 annual meeting of
stockholders and is incorporated herein by reference.
30
30
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.
---------------------
Page
----
Independent Auditors' Report................................... 32
Consolidated Balance Sheets as of December 31, 1998 and 1997... 33
Consolidated Statements of Operations for the Year Ended
December 31, 1998, the Year Ended December 31, 1997, and the
Nine Months Ended December 31, 1996.......................... 34
Consolidated Statements of Stockholders' Equity (Deficit) the
Year Ended December 31, 1998, the Year Ended December 31, 1997,
and the Nine Months Ended December 31, 1996.................. 35
Consolidated Statements of Cash flows for the Year Ended
December 31, 1998, the Year Ended December 31, 1997,
and the Nine Months Ended December 31, 1996.................. 36
Notes to Consolidated Financial Statements..................... 37
2. Financial Statement Schedules.
------------------------------
Schedule II - Valuation and Qualifying Accounts (see page 51)
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.
---------
Set forth below is a list of management contracts and compensatory
plans and arrangements required to be filed as Exhibits by Item 14(a)(3).
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.
10.28** 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. Akin.
- -------------
** 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.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed by the
Registrant during the fourth quarter of 1998.
(c) Exhibits Pursuant to Item 601 of Regulation S-K. The exhibits
required by this Item are listed in the Exhibit Index attached hereto, which
is incorporated by reference.
(d) Financial Statement Schedules. The financial statement
schedule required by this Item is listed under Item 14(a)(2) above.
31
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
eFax.com, Inc.:
We have audited the accompanying consolidated balance sheets of
eFax.com, Inc. (formerly JetFax, Inc.) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December
31, 1998 and 1997, and the nine-month period ended December 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.
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 provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of eFax.com, Inc. and
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998 and
1997, and the nine-month period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 1, in 1998, the Company has adopted Staff
Accounting Bulletin No. 98 in the computation of earnings per share for all
periods presented.
DELOITTE & TOUCHE LLP
San Jose, California
February 8, 1999
(April 9, 1999 as to Note 14)
32
32
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, December 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 1,305 $ 4,200
Short-term investments........................ 2,808 3,024
Trade receivables, net of allowances of: $277
in 1998 and $656 in 1997.................... 4,402 4,820
Inventories................................... 4,519 4,029
Prepaid expenses.............................. 247 277
-------- --------
Total current assets..................... 13,281 16,350
Property, net................................... 1,339 1,160
Other assets.................................... 1,595 1,346
-------- --------
Total assets.................................... $ 16,215 $ 18,856
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 777 $ 1,672
Accrued liabilities........................... 1,576 1,864
-------- --------
Total current liabilities................ 2,353 3,536
-------- --------
Deferred revenue................................ 25 49
Commitments and contingencies (Note 7 and 14)...
Stockholders' equity:
Convertible preferred stock, $0.01 par
value; 5,000,000 shares authorized, shares
outstanding: none in 1998 and 1997.......... -- --
Common stock, $0.01 par value; 35,000,000
shares authorized, shares outstanding:
11,873,711 in 1998 and 11,741,383 in 1997... 119 117
Additional paid-in capital.................... 42,946 42,881
Accumulated deficit........................... (29,228) (27,727)
-------- --------
Total stockholders' equity............... 13,837 15,271
-------- --------
Total liabilities and stockholders' equity...... $ 16,215 $ 18,856
======== ========
See notes to consolidated financial statements.
33
33
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Nine
Year Ended Year Ended Months Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Revenues:
Product......................... $ 23,385 $ 16,281 $ 10,205
Software and technology
license fees................... 5,069 4,493 3,200
Development fees................ 1,779 2,246 1,468
-------- -------- --------
Total revenues................ 30,233 23,020 14,873
-------- -------- --------
Costs and expenses:
Cost of product revenues........ 16,005 11,886 8,441
Cost of software and license
revenues...................... 710 770 517
Research and development........ 5,445 5,355 2,554
Selling and marketing........... 7,267 6,046 5,212
General and administrative...... 2,592 3,031 1,726
Acquisition and related expenses - 2,106 -
-------- -------- --------
Total costs and expenses...... 32,019 29,194 18,450
-------- -------- --------
Loss from operations.............. (1,786) (6,174) (3,577)
-------- -------- --------
Other income (expense), net:
Interest income................. 320 310 40
Interest expense................ (1) (120) (26)
Other income (expense).......... 46 (79) (14)
-------- -------- --------
Total other income, net....... 365 111 -
-------- -------- --------
Loss before income taxes.......... (1,421) (6,063) (3,577)
Provision for income taxes........ 80 96 107
-------- -------- --------
Net loss.......................... (1,501) (6,159) (3,684)
Series P Redeemable Preferred
Stock dividends................. - (68) (116)
-------- -------- --------
Net loss applicable to common
stockholders.................... $ (1,501) $ (6,227) $ (3,800)
======== ======== ========
Net loss per share (Note 1):
Basic........................... $ (0.13) $ (0.84) $ (2.13)
======== ======== ========
Diluted......................... $ (0.13) $ (0.84) $ (2.13)
======== ======== ========
Shares used in computation:
Basic........................... 11,784 7,389 1,784
======== ======== ========
Diluted......................... 11,784 7,389 1,784
======== ======== ========
See notes to consolidated financial statements.
34
34
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
Convertible Additional
Preferred Stock Common Stock Paid-in Accumulated
------------------ -----------------
Shares Amount Shares Amount Capital Deficit Total
--------- -------- --------- ------ ----------- ------------ --------
Balances, April 1, 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 Purchase Plan...... - - 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
Employee Stock Purchase Plan...... - - 51,492 - 157 - 157
Exercise of Common Stock Options.. - - 53,245 1 21 - 22
Exercise of Common Stock Warrants. - - 67,591 1 (1) - -
Repurchase of Common Stock........ - - (40,000) - (112) - (112)
Net loss.......................... - - - - - (1,501) (1,501)
--------- ------ ---------- ------ -------- ---------- --------
Balances, December 31, 1998....... - $ - 11,873,711 $ 119 $ 42,946 $ (29,228) $ 13,837
========= ====== ========== ====== ======== ========== ========
See notes to consolidated financial statements.
35
35
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ----------- ------------
Cash flows from operating activities:
Net loss............................ $ (1,501) $ (6,159) $ (3,684)
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..... 705 539 208
Gain (loss) on disposal of assets. 3 - -
Warrant compensation expense...... - 625 -
Provision for (reversal of)
inventory reserves and purchase
commitment...................... 350 292 (339)
Changes in assets and liabilities:
Trade receivables............... 418 (2,375) (255)
Inventories..................... (840) (1,769) 997
Prepaid expenses................ 30 (115) (29)
Accounts payable................ (895) (819) (2,251)
Deferred revenue................ (24) 49 -
Accrued liabilities............. (288) 578 (344)
-------- -------- --------
Net cash used for operating
activities................... (2,042) (8,155) (5,697)
Cash flows from investing activities:
Purchase of property................ (604) (742) (541)
Purchase of short-term investments.. (10,044) (3,024) -
Proceeds from sale of short-term
investments....................... 10,260 - -
Increase in other assets............ (532) (783) (80)
Acquisition of Crandell Group....... - - (305)
Net cash used for investing activities (920) (4,549) (926)
Cash flows from financing activities:
Proceeds from sale of Common Stock.. 179 19,735 18
Repurchase of Common Stock.......... (112) - -
Repayment of related party notes
payable........................... - - (61)
Line of credit borrowings, net...... - - 450
Equipment term note borrowings...... - - 250
Proceeds from issuance of notes payable - 500 500
Repayment of notes payable.......... - (950) -
Redemption of Preferred Stock -
Series P, net..................... - (2,794) -
Proceeds from Series F Convertible
Preferred Stock-net............... - - 650
-------- -------- --------
Net cash provided by (used for)
financing activities.............. 67 16,491 1,807
-------- -------- --------
Increase (decrease) in cash and cash
equivalents......................... (2,895) 3,787 (4,816)
Cash and cash equivalents, beginning
of year............................. 4,200 413 5,229
-------- -------- --------
Cash and cash equivalents, end of year $ 1,305 $ 4,200 $ 413
======== ======== ========
Supplemental cash flow information:
Interest paid....................... $ - $ 120 $ 9
======== ======== ========
Taxes paid-foreign withholding...... $ 52 $ 96 $ 105
======== ======== ========
Supplemental noncash investing and
financial information:
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
======== ======== ========
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
======== ======== ========
Issuance of Common Stock in exchange
for DocuMagix convertible note... - $ 1,000 -
======== ======== ========
See notes to consolidated financial statements.
36
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
1. Nature of Business and Significant Accounting Policies
Nature of Business
On February 8, 1999 JetFax, Inc. changed its name to eFax.com, Inc.
("eFax.com" or "the Company"). The Company was incorporated in Delaware in
August 1988 and since that time has engaged in the development, manufacture
and sale of its branded multifunction products (MFPs) 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 years 1998 and 1997 include 52 weeks. For presentation purposes, the
Company refers to its reporting years ended January 2, 1999, January 3,
1998, and January 4, 1997 as ending on December 31, 1998, 1997, and 1996,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. 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 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.
37
37
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 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 operations: 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; expansion of its business model to include Internet-based
electronic and paper document communications; 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 gains were $19,000 for the year ended December 31, 1998
and its losses were $58,000 for the year ended December 31, 1997 and were
insignificant in the period ended December 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 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; in September 1998 the Company closed its Yen account.
At December 31, 1998 the Company did not hold a hedge position against a
foreign currency.
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, 1998 and 1997, one
customer accounted for 30% and 35% 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 an
original maturity of three to fifteen months. The short-term investments
are carried at cost, which approximates fair value.
Accounts Receivable
Accounts receivable include unbilled amounts of $526,000, $1,469,723
and $364,000 relating to development revenues at December 31, 1998, 1997 and
1996, respectively (see ''Revenue Recognition'' below).
38
38
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's products 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, 1998 and 1997 include a minority
investment in Oasis Semiconductor of $725,000 and $325,000, respectively,
(accounted for using the cost method) and intangible assets (acquired
software, eFax license, licensing contracts and covenants not to compete) of
$870,000 and $1,021,000, net of accumulated amortization of $488,000 and
$205,000, respectively. Amortization of intangible assets is computed using
the straight line method over the estimated useful life of five years.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," the Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
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 is 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 the Company to
accelerate its product development efforts. The Company
39
39
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
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 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. Potential common shares
issuable upon exercise of options, warrants, convertible preferred stock 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 at December 31, 1998, options and warrants to
purchase approximately 2,530,000 common shares at a weighted average
exercise price of $3.03 per share have been excluded from the computation.
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.
In 1998, the Company adopted the requirements of Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No. 98, issued in
February 1998, and began presenting its net loss per share data on a
historical basis without giving retroactive effect to the conversion of the
outstanding shares of convertible preferred stock that automatically
converted into common shares in connection with the Company's June 1997
initial public offering (IPO) of common stock. The adoption of SAB No. 98
has been reflected in the net loss per share data for all periods prior to
1998.
The pro forma computation set forth below includes in the weighted
average number of shares outstanding the 6,293,978 shares of common stock
issued in connection with the IPO upon the automatic conversion of the
outstanding convertible preferred shares. Because of the significant
increase in outstanding common shares that occurred as a result of the
conversion of convertible preferred stock, management believes that the pro
forma computation of net loss per share provides a useful and more
meaningful comparison of year to year per share data.
40
40
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
Nine
Year Ended Months Ended
December 31, December 31,
1997 1996
------------ ------------
Net loss applicable to common stockholders.. $ (6,227) $ (3,800)
========== =========
Pro Forma net loss per share:
Basic..................................... $ (0.61) $ (0.46)
========== =========
Diluted................................... $ (0.61) $ (0.46)
========== =========
Shares used in pro forma computation:
Basic..................................... 10,170 8,203
========== =========
Diluted................................... 10,170 8,203
========== =========
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from non-owner
sources. For the years ended December 31, 1998 and 1997, and the nine
months ended December 31, 1996. There were no differences between the
Company's comprehensive income and net income.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS 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 does not
impact the Company's consolidated financial position, results of operations
or cash flows. It is the Company's opinion that its business is a single
reportable segment, which addresses the communication and handling of
electronic and paper documents. Organizational structure and internal
management reporting are not segmented, nor are there specific segment
profitability responsibilities within management.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
defines derivatives, requires that all derivatives be carried at fair value,
and provides for hedge accounting when certain conditions are met. At
December 31, 1998 the Company held no derivatives or hedge positions.
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 recognized as an
offset to the foreign currency gains and losses from the firm purchase
commitment.
The Company purchases print engines for its Series M900 product line in
Yen from Oki Data Corporation and includes exchange gains and losses related
to Yen-based purchases and hedging activity in cost of goods sold. In order
to reduce the potential volatility related to the ongoing Yen liability, the
Company entered into a Yen hedge in August 1997. 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. Given the considerable
expense associated with maintaining the Yen hedge, coupled with the recent
strengthening of the Yen in relation to the dollar, the Company decided to
sell its Yen hedge in September 1998. Hedging activity generated a loss of
$12,000 for the year ended December 31, 1998.
41
41
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
2. Business Combinations
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 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,
and the nine months ended December 31, 1996 with DocuMagix's statements of
operations for the year ended December 31, 1997, and the nine months ended
March 31, 1997, 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.
Nine
Year Ended Months Ended
December 31, December 31,
1997 1996
------------- -------------
Revenues:
- ---------
eFax.com (formerly JetFax, Inc.)... $ 20,808 $ 12,862
DocuMagix.......................... 2,212 2,011
--------- ---------
Combined........................... $ 23,020 $ 14,873
========= =========
Net loss:
eFax.com (formerly JetFax, Inc.)... $ (3,012) $ (1,042)
DocuMagix.......................... (3,147) (2,642)
--------- ---------
Combined........................... $ (6,159) $ (3,684)
========= =========
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 eFax.com (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 by $15,000 and $12,000, 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 the
Company's products. The two principals of the Crandell Group (the
Principals) entered into two-year employment agreements with the Company.
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
42
42
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
proprietary software, licensing contracts and covenants not-to-compete
(included in Other Assets, see Note 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 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):
December 31, December 31,
1998 1997
------------ ------------
Materials and supplies.................. $ 1,982 $ 1,776
Work-in-process......................... 93 143
Finished goods.......................... 2,444 2,110
--------- ---------
Total................................... $ 4,519 $ 4,029
4. Property
Property consists of (in thousands):
December 31, December 31,
1998 1997
------------ ------------
Furniture and fixtures.................. $ 1,816 $ 1,472
Software................................ 501 467
Leasehold improvements.................. 440 234
--------- ---------
Total................................... $ 2,757 $ 2,173
Accumulated depreciation and amortization (1,418) (1,013)
--------- ---------
Property-net............................ $ 1,339 $ 1,160
========= =========
5. Accrued Liabilities
Accrued liabilities consist of (in thousands):
December 31, December 31,
1998 1997
------------ ------------
Compensation and related benefits..... $ 632 $ 509
Acquisition related accruals.......... 22 375
Royalties............................. 62 215
Product warranty...................... 78 94
Other................................. 782 671
--------- ---------
Total................................. $ 1,576 $ 1,864
========= =========
43
43
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
6. Line of Credit and Notes Payable
The Company has a line of credit agreement under which it may borrow up
to $1.5 million at the bank's prime rate (7.75% at January 2, 1999) plus
0.5%. 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, 1999. No borrowings
were outstanding under the line of credit at December 31, 1998.
The line of credit contains certain covenants which, among other
things, require the Company to maintain tangible net worth (as defined) of
$5.0 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 and certain minimum
liquidity and debt service coverage. In addition, the agreement prohibits
the payment of cash dividends. At December 31, 1998, the Company was not in
compliance with the quarterly net income covenant. Subsequent to year-end,
the Company received a waiver of this covenant from the lender (See Note
14).
7. Lease Commitments
The Company leases its primary facility under an operating lease
expiring 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, 1998,
December 31, 1997, and the nine months ended December 31, 1996, rent expense
was $572,000, $523,000, and $246,000, respectively. Future minimum annual
rental payments for facilities leases are: 1999, $755,000; 2000, $563,000;
2001, $551,000; 2002, $551,000; 2003, $46,000 and none thereafter.
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, 127,270 shares of common stock were issued upon the exercise of
other warrants and 162,703 shares of common stock were issued upon
conversion of cumulative unpaid dividends on Series F Preferred Stock. In
1998, 67,591 shares of common stock were issued upon the net exercise of
warrants.
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, 1998, 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, 1998, 1,417,048 and 125,000 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
44
44
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
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, 1998, options to purchase 1,664 shares of
the Company's common stock at a weighted average exercise price of $38.12
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.
During 1997 and 1998, 16,948 and 51,492 shares, respectively, have been
issued under the plan. At December 31, 1998, 431,560 shares are reserved
for issuance under the plan.
Stock option activity and balances, excluding DocuMagix option activity
which is immaterial, are summarized as follows:
Weighted
Average
Number Exercise Price
of Shares Per Share
--------- --------------
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
Granted (weighted average fair market
value $3.19)............................... 847,800 3.194
Canceled..................................... (720,408) 5.961
Exercised.................................... (53,245) 0.404
--------- --------
Balance, December 31, 1998................... 2,037,149 $ 3.343
=========
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 1998 Life (Years) Price 1998 Price
- --------------- ---------- ----------- -------- ----------- --------
$ 0.20 - $ 0.30 416,682 7.01 $ 0.29 292,170 $ 0.29
0.50 - 1.75 495,667 6.10 0.71 225,586 0.83
2.75 - 5.88 537,300 9.08 2.91 90,527 2.96
6.00 - 7.00 75,000 8.59 6.67 50,000 7.00
8.00 - 8.00 512,500 8.76 8.00 145,828 8.00
- --------------- --------- ---- ------- ------- -------
$ 0.20 - $ 8.00 2,037,149 7.83 $ 3.34 804,111 $ 2.56
=============== ========= ==== ======= ======= =======
As discussed in Note 1, the Company uses the intrinsic value method
specified by Accounting Principles Board Opinion No. 25 to measure
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
45
45
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
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:
Employee Stock Options
------------------------------------------
Nine Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ -------------
Risk-Free Interest Rate......... 5.36% 5.76% 6.29%
Stock Volatility (*)............ 100% 65% -
Expected Life (in years)........ 1 1 1
Dividends....................... - - -
(*) 1997 : 65% subsequent to public filing; 0% prior to public filing
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 $3,262,000
($0.28 per share) for the year ended December 31, 1998, $6,706,000 ($0.91
per share) for the year ended December 31, 1997, and $3,813,000 ($2.14 per
share) for the nine months ended December 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 years ended
December 31, 1998 and 1997, and the nine months ended December 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.
As of December 31, 1998, the Company has reserved or otherwise
committed to issue 491,999 shares of Common Stock upon exercise of warrants.
9. Income Taxes
No federal and state income taxes were provided for the years ended
December 31, 1998, December 31, 1997, and the nine months ended December 31,
1996 due to the Company's net losses. Foreign withholding taxes of
approximately $52,000, $96,000 and $105,000 were paid during the years ended
December 31, 1998, December 31, 1997, and the nine months ended December 31,
1996, respectively. The Company's effective tax rate differs from the
federal statutory rate as follows (in thousands):
46
46
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
Year Year Nine Months
Ended Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Taxes computed at federal statutory
rate of 35%........................ $ (554) $ (2,156) $ (1,289)
Effect of losses without tax benefit. 554 2,156 1,289
Foreign withholding taxes............ 52 96 105
Other................................ 28 - 2
-------- -------- --------
Total provision...................... $ 80 $ 96 $ 107
======== ======== ========
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):
December 31, December 31,
1998 1997
------------ -----------
Deferred tax asset:
Net operating loss carryforwards............... $ 7,283 $ 7,031
Tax credit carryforwards....................... 277 291
Accounts receivable allowances................. 110 124
Depreciation................................... 99 101
Inventory valuation............................ 173 91
Nondeducted expense accrual.................... 201 256
Warranty reserve............................... 31 38
Capitalized research and development........... 68 230
Vacation accrual............................... 140 86
Other.......................................... 139 291
-------- --------
Total deferred tax assets........................ 8,521 8,539
Valuation allowance.............................. (8,521) (8,539)
-------- --------
$ - $ -
======== ========
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, 1998 and 1997. At December 31, 1998,
consolidated net operating loss carryforwards of approximately $20 million
and $7 million were available to offset future Federal and state taxable
income, respectively, and research and development tax credits of $119,000
and $158,000 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. 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 2017. 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 its DocuMagix subsidiary before
its acquisition 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
47
47
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
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, 1998, December 31, 1997, and the
nine months ended December 31, 1996.
11. Customer and Geographic Information
Two customers accounted for 18% and 16%, respectively, of total
revenues for the year ended December 31, 1998. The same 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.
The following is a summary of revenues by geographic region (in
thousands):
Year Year Nine Months
Ended Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
United States.................. $ 24,747 $ 16,386 $ 10,905
Europe......................... 4,665 4,545 2,369
Asia........................... 568 1,098 1,322
Other.......................... 253 991 277
-------- -------- --------
Total.......................... $ 30,233 $ 23,020 $ 14,873
======== ======== ========
12. Related Party Transactions
Related party transactions and balances not otherwise disclosed herein
were as follows (in thousands):
December 31, December 31,
1998 1997
------------ ------------
Sales to related party.................. $ 31 $ 167
Purchases from related party............ - 12
The Company has also granted a stockholder a nonexclusive royalty-free
license to utilize certain of its intellectual property.
13. Quarterly Results - Unaudited
(in thousands, except per share amounts)
Three Months Ended
---------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
-------- -------- -------- ---------
Total revenues................... $ 7,698 $ 7,722 $ 7,748 $ 7,064
Income (loss) from operations.... $ (1,325) $ 64 $ (85) $ (441)
Net income (loss) applicable to
common stockholders............ $ (1,289) $ 114 $ 37 $ (365)
Net income (loss) per share:
Basic.......................... $ (0.11) $ 0.01 $ 0.00 $ (0.03)
Diluted........................ $ (0.11) $ 0.01 $ 0.00 $ (0.03)
Shares used in computing per
share amounts:
Basic.......................... 11,741 11,755 11,806 11,834
Diluted........................ 11,741 13,136 12,838 11,834
48
48
EFAX.COM, INC. (FORMERLY JETFAX, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1998, and 1997, and Nine Months
Ended December 31, 1996
Three Months Ended
---------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
-------- -------- -------- ---------
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.......................... $ (0.93) $ (0.43) $ (0.02) $ (0.20)
Diluted........................ $ (0.93) $ (0.43) $ (0.02) $ (0.20)
Shares used in computing per
share amounts:
Basic.......................... 1,795 4,513 11,599 11,649
Diluted........................ 1,795 4,513 11,599 11,649
Pro forma net loss per share:
Basic.......................... $ (0.20) $ (0.21)
Diluted........................ $ (0.20) $ (0.21)
Shares used in computing pro
forma per share amounts:
Basic.......................... 8,233 9,196
Diluted........................ 8,233 9,196
* See "Basic and Diluted Net Loss Per Share" in Note 1 for the
determination of the number of shares used in computing net loss per share
in accordance with the adoption of SEC Staff Accounting Bulletin No.98.
14. Subsequent Events
On March 10, 1999, the Company received a waiver from the lender for
the quarterly net income covenant.
In early March 1999, E-Fax Communications, Inc. ("E-Fax
Communications"), a California corporation, filed a complaint against
eFax.com Inc., a Delaware corporation, in the United States District Court,
Northern District of California. The Complaint alleged that the Company had
engaged in trademark and service mark infringement and unfair competition in
connection with the Company's use of the name "eFax.com." On April 9, 1999,
the Company and E-Fax Communications signed a settlement agreement in which
E-Fax Communications will dismiss all charges against the Company, transfer
all rights to the mark "E-FAX" to the Company, stop all use of the "E-FAX"
trademark, and change its corporate name. The Company has agreed to pay E-
Fax Communications a combination of cash and Common Stock in an amount not
exceeding $2.5 million based on the average share price of the Common Stock
just prior to the stock registration becoming effective in the near term.
The purchased trademark rights will become an asset of the Company and be
amortized over the period of benefit, estimated to be seven to ten years.
The parties consider the settlement a compromise of disputed claims and
preferable to a possible extended legal proceeding with uncertain outcome.
49
49
Schedule II
eFax.com, Inc.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to Balance at
Beginning of Cost and Deduction/ End of
Period Expenses Write-off Period
------ -------- --------- ------
Year Ended December 31, 1998:
Accounts receivable allowance... $ 656 $ - $ (379) $ 277
===== ====== ======= ======
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) -
===== ====== ======= ======
50
50
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 9th day of April, 1999.
EFAX.COM, INC.
By: /s/ EDWARD R. PRINCE, III
-----------------------------
Edward R. Prince, III,
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.
Signatures Title Date
- -------------------------- ----------------------------- ----------------
/s/ EDWARD R. PRINCE, III Chief Executive Officer and April 9, 1999
- -------------------------- Chairman of the Board
(Edward R. Prince, III) (Principal Executive Officer)
/s/ ALLEN K. JONES Vice President of Finance, April 9, 1999
- -------------------------- Chief Financial Officer,
(Allen K. Jones) and Secretary (Principal
Financial and Accounting Officer)
/s/ THOMAS B. AKIN Director April 9, 1999
- --------------------------
(Thomas B. Akin)
/s/ DOUGLAS Y. BECH Director April 9, 1999
- --------------------------
(Douglas Y. Bech)
/s/ STEVEN J. CARNEVALE Director April 9, 1999
- ---------------------------
(Steven J. Carnevale)
/s/ CHUNG CHIU Director April 9, 1999
- ---------------------------
(Chung Chiu )
/s/ EDWARD R. PRINCE, JR. Director April 9, 1999
- ---------------------------
(Edward R. Prince, Jr.)
/s/ LON B. RADIN Director April 9, 1999
- ---------------------------
(Lon B. Radin)
/s/ ALBERT E. SISTO Director April 9, 1999
- ---------------------------
(Albert E. Sisto)
51
51
Exhibit Index
-------------
eFax.com, Inc.
Exhibits Pursuant to Item 601 of Regulation S-K
(a) Exhibits
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.
3.18** Certificate of Ownership and Merger, merging eFax.com, Inc., a
Delaware corporation and wholly owned subsidiary of JetFax,
Inc., with and into JetFax, Inc. as filed on February 8, 1999.
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.
52
52
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. Akin.
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.
10.38** 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.
53
53
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.
10.48 First Amendment to the Sublease Agreement made and entered into
as of June 1, 1998 by and between JetFax, Inc. and Lara
Technology, Inc.
10.49 Sublease made and entered into as of April 1, 1998, by and
between JetFax, Inc., and Silicon Valley Group, Inc., under the
Master Lease dated November 1, 1995 between Spieker Properties,
LP, successor and interest to Metropolitan Life Insurance
Company, and as further modified by the Amendment dated
September 17, 1996.
10.50^^ Amended and Restated Loan and Security Agreement between the
Registrant and Venture Banking Group, a division of Cupertino
National Bank dated September 18, 1998.
10.51# Revision D to Master Development, Purchase and Distribution
License Agreement dated as of December 22, 1998 by and between
Registrant and Hewlett-Packard Company which incorporates by
reference Master Development, Purchase and Distribution License
Agreement dated effective as of January 31, 1997 by and between
Registrant and Hewlett-Packard Company (Exhibit 10.36^**).
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent and Report on Schedule (see page
57).
24.1 Power of Attorney (see Signature Page).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
27.4 Restated Financial Data Schedule.
- -------------
** 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.
^ Confidential treatment has been granted with respect to certain
portions of the exhibit and the omitted portions have been separately
filed with the Commission.
*** Incorporated by reference to the identically numbered exhibits filed
in response pursuant to Item 601 of Regulation S-K of the Company's
filing on Annual Report on Form 10-K for the fiscal year ended January
3, 1998.
^^ Incorporated by reference to Exhibit 10.1 filed November 17, 1998, on
Report on Form 10-Q for the quarter ended October 3, 1998.
# 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.
54
54