UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-18805
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2855 Campus Drive, San Mateo, CA 94403
(Address of principal executive offices, including zip code)
(650) 286-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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 [ ]
The number of shares of Common Stock outstanding as of November 4, 1998 was
53,158,268.
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
INDEX
<CAPTION>
Page No.
<S> <C>
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1998 and 1997, and
Nine Months Ended September 30, 1998 and 1997.....................................3
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 .........................................4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 ....................................5
Notes to Condensed Consolidated Financial Statements ..................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................................................9
PART II - Other Information
Items 1 - 5. Not Applicable ...........................................................................21
Item 6. Exhibits and Reports on Form 8-K .........................................................21
Signatures .................................................................................................22
</TABLE>
2
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<TABLE>
PART I Financial Information
ITEM 1. Condensed Consolidated Financial Statements
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 125,327 $ 107,323 $ 304,007 $ 298,962
Cost of revenue 71,436 48,295 171,770 134,795
------------- ------------- ------------- --------------
53,891 59,028 132,237 164,167
------------- ------------- ------------- --------------
Operating expenses:
Research and development 14,914 10,753 43,087 28,144
Sales and marketing 13,957 10,520 43,241 30,565
General and administrative 4,120 2,913 11,449 8,627
------------- ------------- ------------- --------------
32,991 24,186 97,777 67,336
------------- ------------- ------------- --------------
Income from operations 20,900 34,842 34,460 96,831
Other income, net 2,419 2,523 6,229 7,779
------------- ------------- ------------- --------------
Income before income taxes 23,319 37,365 40,689 104,610
Provision for income taxes 6,816 13,451 13,070 37,659
------------- ------------- ------------- --------------
Net income $ 16,503 $ 23,914 $ 27,619 $ 66,951
============= ============= ============= ==============
Net income per basic common share $ 0.31 $ 0.46 $ 0.52 $ 1.29
============= ============= ============= ==============
Shares used in per share
calculation (basic) 52,641 52,139 52,608 51,866
============= ============= ============= ==============
Net income per diluted common share $ 0.31 $ 0.43 $ 0.51 $ 1.20
============= ============= ============= ==============
Shares used in per share
calculation (diluted) 53,929 56,216 54,067 55,897
============= ============= ============= ==============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 64,742 $ 57,195
Short-term investments 214,723 185,536
Accounts receivable, net 70,423 30,930
Inventories 16,202 23,790
Other current assets 25,043 32,445
-------------- -------------
Total current assets 391,133 329,896
Property and equipment, net 45,852 46,502
Other assets 8,733 9,600
-------------- -------------
Total assets $ 445,718 $ 385,998
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,253 $ 20,255
Accrued and other liabilities 26,532 19,891
Income taxes payable 11,020 2,923
-------------- -------------
Total current liabilities 74,805 43,069
-------------- -------------
Long-term debt 3,924 4,064
-------------- -------------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, $.01 par value, 150,000,000 shares
authorized; 52,657,312 and 52,558,383 shares issued
and outstanding, respectively 527 524
Additional paid-in capital 137,914 137,264
Cumulative translation adjustment (148) --
Retained earnings 228,696 201,077
-------------- -------------
Total stockholders' equity 366,989 338,865
-------------- -------------
Total liabilities and stockholders' equity $ 445,718 $ 385,998
-------------- -------------
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 27,619 $ 66,951
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,146 4,454
Provision for doubtful accounts
and sales returns 241 (1,269)
Other (148) --
Changes in operating assets and liabilities:
Accounts receivable (39,734) (12,944)
Inventories 7,588 (4,746)
Receivables from subcontract manufacturers 7,808 (4,184)
Other current assets (406) (4,898)
Accounts payable and accrued liabilities 23,639 9,638
Income taxes payable 8,097 12,240
---------- ----------
Net cash provided by operating activities 44,850 65,242
---------- ----------
Cash flows from investing activities:
Purchase of short-term investments (147,927) (141,013)
Sales and maturities of short-term investments 118,740 102,639
Purchase of property and equipment, net (8,679) (30,210)
Increase (decrease) of other assets, net 50 (83)
---------- ----------
Net cash used for investing activities (37,816) (68,667)
---------- ----------
Cash flows from financing activities:
Repayment of bonds payable (140) --
Issuance of common stock related to stock plans 653 8,501
---------- ----------
Net cash provided by financing activities 513 8,501
---------- ----------
Net change in cash and cash equivalents 7,547 5,076
Cash and cash equivalents at beginning of period 57,195 71,946
---------- ----------
Cash and cash equivalents at end of period
$ 64,742 $ 77,022
========== ==========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
5
</TABLE>
<PAGE>
ELECTRONICS FOR IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements of Electronics for Imaging, Inc. (the Company) as of and for
the interim periods ended September 30, 1998, have been prepared on the
same basis as the audited consolidated financial statements as of and
for the year ended December 31, 1997, contained in the Company's Annual
Report to Stockholders. In the opinion of management the condensed
consolidated financial statements include all adjustments (consisting
generally of normal recurring adjustments) necessary to present fairly
the financial position of the Company and the results of its operations
and cash flows, in accordance with generally accepted accounting
principles. The interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto referred to above.
The preparation of the interim condensed consolidated 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 as of the date of the interim condensed
consolidated financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from these estimates.
The interim results of the Company are subject to fluctuation. As a
result, the Company believes the results of operations for the interim
periods ended September 30, 1998 are not necessarily indicative of the
results to be expected for any other interim period or the full year.
2. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
Statement requires that all items recognized under accounting standards
as components of comprehensive earnings be reported in an annual
financial statement that is displayed with the same prominence as other
annual financial statements. This Statement also requires that an
entity classify items of other comprehensive earnings by their nature
in an annual financial statement. There was no material difference
between Comprehensive income and Net income for the three and nine
months ended September 30, 1998.
3. Accounting for Derivative Instruments and Hedging
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133) Accounting for
Derivative Instruments and Hedging. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
133 is effective for fiscal quarters and fiscal years beginning after
June 15, 1999. The Company is currently studying the provisions of the
SFAS 133 and the potential impact it may have on its financial
statements.
6
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<TABLE>
4. Earnings Per Share
In February 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards SFAS No. 128, "Earnings per
Share" (SFAS No. 128). The Statement redefines earnings per share (EPS)
under generally accepted accounting principles. Under the new standard,
primary EPS is replaced by basic EPS and fully diluted EPS is replaced
by diluted EPS. It also requires dual presentation of basic and diluted
EPS on the face of the financial statements. SFAS No. 128 was adopted
in the fourth quarter of 1997 and the EPS for all periods presented
have been restated to conform with the provisions of SFAS No. 128. The
following table represents unaudited disclosures of basic and diluted
EPS in accordance with SFAS No. 128 for the periods presented below:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income available to
common shareholders $16,503 $23,914 $27,619 $66,951
Shares
Basic shares 52,641 52,139 52,608 51,866
Effect of Dilutive Securities 1,288 4,077 1,459 4,031
------- ------- ------- -------
Diluted shares 53,929 56,216 54,067 55,897
======= ======= ======= =======
Earnings per common share
Basic EPS $ 0.31 $ 0.46 $ 0.52 $ 1.29
Diluted EPS $ 0.31 $ 0.43 $ 0.51 $ 1.20
</TABLE>
Antidilutive Options. Options to purchase 2,890,000 and 50,000 shares
of common stock outstanding as of September 30, 1998 and 1997,
respectively, were not included in the computations of diluted EPS for
the three-month periods then ended because the options' exercise prices
were greater than the average market price of the common shares for the
three month periods then ended. Options to purchase 2,849,000 and
345,000 shares of common stock outstanding as of September 30, 1998 and
1997, respectively, were not included in the computations of diluted
EPS for the nine-month periods then ended because the options' exercise
prices were greater than the average market price of the common shares
for the nine month periods then ended.
7
<PAGE>
6. Balance Sheet Components (in thousands)
September 30, December 31,
1998 1997
-------- --------
Accounts receivable:
Accounts receivable $ 72,049 $ 32,315
Less Allowance for doubtful accounts
and sales returns (1,626) (1,385)
-------- --------
$ 70,423 $ 30,930
======== ========
Inventories:
Raw materials $ 13,895 $ 19,216
Work-in-process 1,393 3,183
Finished goods 914 1,391
-------- --------
$ 16,202 $ 23,790
======== ========
Other current assets:
Receivable from subcontract manufacturers $ 9,834 $ 17,642
Other 15,209 14,803
-------- --------
$ 25,043 $ 32,445
======== ========
Property and equipment:
Land $ 27,461 $ 27,351
Equipment and purchased software 41,575 34,201
Furniture and leasehold improvements 7,717 7,494
-------- --------
76,753 69,046
Less accumulated depreciation and amortization (30,901) (22,544)
-------- --------
$ 45,852 $ 46,502
======== ========
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the audited consolidated financial statements of Electronics for
Imaging, Inc. (the Company) and related notes thereto contained in the Company's
1997 Annual Report to Stockholders. Results for the three and nine month periods
ended September 30, 1998 are not necessarily indicative of the results expected
for the entire fiscal year ending December 31, 1998. All assumptions,
anticipations, expectations and forecasts contained herein are forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed here. For a more complete
discussion of factors which might impact the Company's results, please see the
section entitled "Factors that Could Adversely Affect Performance" below and in
the Company's 1997 Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission. The Company periodically reviews such factors to ensure
their appropriateness.
Results of Operations for the Three and Nine Month Periods Ended September 30,
1997 and 1998
Revenue
Revenue increased 16.8% to $125.3 million in the third quarter of 1998, compared
to $107.3 million in the third quarter of 1997, and the corresponding unit
volume increased approximately 161.4%. Revenue increased 1.7% to $304.0 million
in the nine month period ended September 30, 1998, compared to $299.0 million in
the same period of 1997, and the corresponding unit volume increased
approximately 91.9%. The increase in revenue is primarily due to significant
increases in unit volumes and positive market acceptance of new product
introductions, partially offset by price reductions on older product lines in
anticipation of new product introductions.
The Company's revenue for 1998 is principally derived from three major
categories. The first category is made up of stand-alone servers which connect
digital color copiers into computer networks. This category includes Fiery XJ
and XJ+, which accounted for a vast majority of the Company's revenue prior to
1998. The second category is made up of embedded, desktop and bundled color
solutions primarily for the office market. The third category is made up of
controllers for digital black & white products.
9
<PAGE>
<TABLE>
The following is a break-down of categories of Revenue both in terms of volume,
as a percentage (%) of total units shipped, and absolute revenue dollars.
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------------------- ------------------------------
(dollars in thousands) Volume Revenue Volume Revenue
--------- --------------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Stand-alone Servers Connecting
to Digital Color Copiers 27.8% $ 83,865 66.9% 83.6% $ 92,852 86.5%
Embedded, Desktop Controllers
& Bundled Color Solutions 54.1% 26,067 20.8% 16.4% 5,747 5.4%
Controllers for Digital
Black & White Solutions 18.1% 4,674 3.7% 0.0% 0 0.0%
Spares, licensing
& other misc. sources N/A 10,721 8.6% N/A 8,724 8.1%
--------- ---------- ---------- ---------- ---------- --------
Total revenues 100.0% $ 125,327 100.0% 100.0% $ 107,323 100.0%
========= ========== ========== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
-------------------------------- ------------------------------
(dollars in thousands) Volume Revenue Volume Revenue
---------- --------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Stand-alone Servers Connecting
to Digital Color Copiers 33.0% $ 208,876 68.7% 72.4% $ 239,719 80.2%
Embedded, Desktop Controllers
& Bundled Color Solutions 50.9% 54,693 18.0% 27.6% 30,207 10.1%
Controllers for Digital
Black & White Solutions 16.1% 13,512 4.4% 0.0% 0 0.0%
Spares, licensing
& other misc. sources N/A 26,926 8.9% N/A 29,036 9.7%
---------- ---------- ---------- ---------- ---------- --------
Total revenues 100.0% $ 304,007 100.0% 100.0% $ 298,962 100.0%
========== ========== ========== ========== ========== ========
</TABLE>
10
<PAGE>
As noted above growth took place in the three and nine months ended September
30, 1998 in the two newer product categories - the Embedded Desktop Controllers
& Bundled Color Solutions and the Controllers for Digital Black and White
Solutions. These products are generally characterized by much higher unit
volumes but lower unit prices and associated margins than the Company has
experienced in its more traditional Stand-alone Server line of products. Over
time the Company anticipates further growth in these newer categories as a
percentage of total revenue. To the extent these categories do not grow over
time in absolute terms or the Company is not able to meet demand for higher unit
volumes, it could have a material adverse affect on the Company. The Company
believes that Stand-alone server products have not experienced year over year
revenue growth in 1998 due largely to price reductions on the Company's older
generations of product that the Company believes are, and will be effectively
replaced by newer product as the different OEM customers qualify that new
product and begin to order in increasing volumes. In addition, low end products
which previously shipped as servers have in 1998 begun to ship as embedded
products. There can be no assurance that the new products will be qualified by
all the OEM's or successfully compete or be accepted by the market or otherwise
not be able to effectively replace the volume of revenue and, or income from the
older products.
<TABLE>
Sales by geographic market for the three and nine months ended September 30,
1997 and 1998 were as follows:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------------- -------------- ----------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
North America $ 64,098 $ 45,041 42.3% $ 147,178 $ 138,690 ** 6.1% **
Europe 38,920 36,331 7.1% 102,829 90,617 ** 13.5% **
Japan 18,857 20,315 (7.2%) 44,697 57,868 (22.8%)
Rest of World 3,452 5,636 (38.8%) 9,303 11,787 (21.1%)
-------------- -------------- ----------- ------------ ---------------- -------------
$ 125,327 $ 107,323 16.8% $ 304,007 $ 298,962 1.7%
============== ============== =========== ============ ================ =============
</TABLE>
** In the middle of the second quarter of 1997, one of the Company's major
customers began having its products for the European market shipped directly to
Europe rather than through the United States. The Company does not know the
dollar amount of the corresponding shipments to Europe for the period from the
beginning of the year to the middle of the second quarter of 1997. Therefore
shipments to North America in 1997 are slightly overstated and shipments to
Europe slightly understated for the nine month ended September 30, 1997. The
Company estimates that the actual increase for North America and Europe from the
nine month period ended September 30, 1998 as compared to the nine month period
ended September 30, 1997 amounted to approximately 13% and 2%, respectively.
Consequently the above indicated increase and decrease percentage for the nine
month periods ended September 30, 1998 compared to the nine month period ended
1997 should be read with caution.
Shipments to some of the Company's OEM partners are made to centralized
purchasing and manufacturing locations which in turn sell through to foreign
locations. As a result of these factors, the Company believes that sales of its
products into Europe and Japan may actually be higher, though accurate data is
difficult to obtain. The Company expects that international revenue will
continue to represent a significant portion of its total revenue.
11
<PAGE>
The unit volume for the entire Company has increased by 161.4% quarter over
quarter and 91.9% nine month period over nine month period. The corresponding
revenue increase has been tempered by the effect of price reductions on the
Company's older product lines in 1998, as well as a shift in product mix to less
expensive desktop units. The Company expects the shift in product mix to
continue; however, this may be tempered somewhat as the new Fiery ZX stand alone
server line begins to ship in larger volumes after its introduction in the third
quarter of 1998.
Substantially all of the revenue of both periods was attributable to sales of
products through the Company's OEM channels with such partners as Canon, Xerox,
Ricoh, Minolta, Fuji Xerox, Konica, Oce, Epson, Sharp and others. During 1998,
the Company has continued work on both increasing the number and expanding the
size of existing relationships with OEM partners. For the three and nine month
periods ended September 30, 1998, the Company continued to rely on three OEM
customers, Canon, Xerox and Ricoh for 69.2 % and 70.2% of it's revenue for the
respective periods, as compared to 85.3% and 85.5%, reported for the same
periods of 1997. In the event that any of these OEM relationships are scaled
back or discontinued, the Company may experience a significant negative impact
on its consolidated financial position and results of operations. In addition,
no assurance can be given that the Company's relationships with these OEM
partners will continue. Further, the Company's historical results have followed
a seasonal pattern reflecting the buying patterns of these large OEM customers.
That historical pattern has indicated the Company's fiscal fourth quarter
results may be adversely affected by a desire on the part of some or all of its'
OEM customers to slow down, or otherwise delay fourth quarter orders in order to
minimize their respective inventory investments at the end of their fiscal
years.
On October 28, 1998 the Company announced that it has provided Hewlett Packard
Company with embedded Fiery X2e technology for the new HP Color Laserjet 8500
Printer which is HP's first A3 Tabloid Color Laser Printer for the Department
Market. Hewlett Packard is the market leader among computer printer
manufacturers for the Desktop market. The 8500 project basically calls for the
Company to provide chipsets and software to HP which, as the products begin to
ship in volume, will have a lower per unit revenue impact but a much higher per
unit margin impact as a percentage of revenues than the Company's traditional
products have had on the Company's results from operations. The Company
continues to work on the development of products utilizing the Fiery
architecture and other products and intends to continue to introduce new
generations of Fiery products and other new product lines in the remainder of
1998 and beyond. No assurance can be given that the introduction or market
acceptance of new, current or future products will be successful.
Cost of Revenue
Historically, a majority of the Company's cost of revenue has been attributable
to the sale of Fiery Color Servers. Fiery Color Servers as well as embedded
desktop controllers and digital black and white products are manufactured by
third-party manufacturers who purchase most of the necessary components. The
Company sources directly processors, memory, certain ASICs, and software
licensed from various sources, including PostScript interpreter software, which
the Company licenses from Adobe Systems, Inc. The Company's gross margin was
43.0% and 43.5% for the three and nine month periods ended September 30, 1998,
down from 55.0% and 54.9%, respectively, of the corresponding periods of 1997.
This was due to a combination of factors, including a higher mix of low end
products with relatively lower margins, including new embedded products and
black and white products, and a different mix of OEM partners purchasing a
different mix of products during the three and nine month periods. The Company
also initiated price reductions on older products as of January 1, 1998 in light
of pending introductions of newer generations of products. The Company expects
that sales of products with relatively lower margins may further increase as a
percentage of revenue. Such products include older products for which prices are
reduced during product transitions, embedded products for both desktop printers
and copiers, and stand-alone and embedded controllers for black-and-white
copiers. If such sales increase as a percentage of the Company's revenue, gross
margins may further decline.
12
<PAGE>
In general, the Company believes that gross margin will continue to be impacted
by a variety of factors. These factors include the availability and pricing of
key components (including DRAM and Postscript interpreter software), third party
manufacturing costs, product, channel and geographic mix, the success of the
Company's product transitions and new products, competition, and general
economic conditions in the United States and abroad. Consequently, the Company
anticipates gross margins will fluctuate from quarter to quarter.
Operating Expenses
Operating expenses for the three and nine month periods ended September 30, 1998
increased $8.8 million and $30.4 million or 36.4% and 45.2%, respectively, from
the corresponding periods in 1997. Operating expenses in 1998 also constituted a
higher percentage of revenues than in 1997, 26.3% versus 22.5% for the three
month periods ended September 30 and 32.2% versus 22.5% for the nine month
periods ended September 30. Increases in operating expenses in absolute dollars
were primarily caused by costs associated with the development and introduction
of new products during 1998 and the hiring of additional full time employees - a
net increase of 72 people or 14.5% from September 30, 1997 to September 30,
1998. The Company has hired additional employees to support product development
as well as to support expanded operations. The increase in operating expenses as
a percentage of revenues resulted from increases in absolute costs. The Company
anticipates that operating expenses will continue to grow and may increase both
in absolute dollars and as a percentage of revenue. The components of operating
expenses are detailed below.
Research and Development. Expenses for research and development consist
primarily of personnel expenses and, to a lesser extent, consulting and
nonrecurring engineering expenses, depreciation, and costs of prototype
materials. Research and development expenses were $14.9 million and $43.1
million or 11.9% and 14.2% of revenues, respectively, for the three and nine
month periods ended September 30, 1998, compared to $10.8 million and $28.1
million or 10.0% and 9.4% of revenue in the corresponding periods of 1997.
Research and development expenses have increased primarily due to an increase in
research and development projects, which has led to an increase in engineering
headcount of 84.8% from September 30, 1997 to September 30, 1998. In addition,
due to all of the new product development, the Company has experienced an
increase in non-recurring engineering expenses for prototype development. The
Company believes that the development of new products and enhancement of
existing products is essential to its continued success, and management intends
to continue to devote substantial resources to research and new product
development. Accordingly, the Company expects that its research and development
expenses may increase in absolute dollars and possibly also as a percentage of
revenue.
Sales and Marketing. Such expenses include personnel expenses, costs for
tradeshows, marketing programs and other promotional material, sales
commissions, travel and entertainment expense, depreciation, and costs
associated with sales offices in the United States, Europe and Japan and other
locations around the world. Sales and marketing expenses were $14.0 million or
11.1% of revenue in the third quarter of 1998, compared to $10.5 million or 9.8%
of revenue in the corresponding quarter of 1997. Sales and marketing expenses
were $43.2 million or 14.2% of revenue for the nine month period ended 1998,
compared to $30.6 million or 10.2% of revenue in the corresponding period of
1997. Sales and marketing expenses increased in absolute dollars and as a
percentage of total revenue due primarily to a 42.4% increase in employee
headcount since September 30, 1997. In addition, costs required for the
introduction, promotion and support of a broader range of current products with
both existing and new OEM relationships as well as technology alliance partners
has increased. The Company expects that its sales and marketing expenses may
increase in absolute dollars and possibly also as a percentage of revenue as it
continues to actively promote its products, launch new Fiery models and other
products, and continue to build its worldwide sales and marketing organization.
13
<PAGE>
General and Administrative. Such expenses consist primarily of personnel
expenses and, to a lesser extent, professional fees, expenses required of a
public company, and depreciation and facility costs. General and administrative
expenses were $4.1 million or 3.3% of revenue for the three month period ended
September 30, 1998, compared to $2.9 million or 2.7% of revenue in the
corresponding period of 1997. General and administrative expenses were $11.5
million or 3.8% of revenue for the nine month period ended September 30, 1998,
compared to $8.6 million or 2.9% of revenue in the corresponding period of 1997.
The increases were primarily due to increased headcount as well as other
operating expenses, including the use of outside consultants for legal and other
matters. The Company expects that its general and administrative expenses may
increase in absolute dollars and possibly also as a percentage of revenue in
order to support the Company's efforts to grow its business. In addition, the
Company anticipates certain non recurring general and administrative expenses
beginning in the fourth fiscal quarter, and possibly for one to two quarters
thereafter, related to the Company's pending move to a new central facility in
Foster City, California.
Other income
Other income relates mainly to interest income and expense and gains and losses
on foreign currency transactions. Other income decreased by $0.1 million or 4.1%
to $2.4 million and by $1.6 million or 19.9% to $6.2 million, in the three and
nine month periods ended September 30, 1998, compared to $2.5 million and $7.8
million in the corresponding periods ended September 30, 1997. The decrease for
the nine month period was due in part to $1.3 million in losses suffered on
Asian currency denominated transactions. Although to date the Company's exposure
to currency fluctuations has been relatively minor, in response to recent
currency fluctuations in Asia the Company began to implement a hedging program
in June 1998. In addition, the Company has been earning less on interest in 1998
compared to 1997 due to a decline in market interest rates.
Income Taxes
The Company's effective tax rate was 32.1% for the nine month period ended
September 30, 1998 compared to 36.0% for the corresponding period in 1997. The
decrease in the effective tax rate was primarily the result of lower expected
taxable income in fiscal 1998 as compared to fiscal 1997, primarily the result
of lower expected taxable income in fiscal 1998 relative to non taxable income
and tax credits as compared to the mix of taxable income and non-taxable income
and credits in 1997. The effective tax rate of 32.1% for fiscal 1998 also
assumed that the R&D tax credit would only be available for the first 6 months
of the year. In the fourth quarter of fiscal 1998 the US Congress announced that
the credit would be extended for all of fiscal 1998. Accordingly the Company may
adjust the fourth quarter effective tax rate to reflect this change.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $36.8 million to
$279.5 million as of September 30, 1998 compared to $242.7 million as of
December 31, 1997. The Company has an investment portfolio of short-term
investments comprised of fixed income securities that are classified as "held to
maturity securities". These securities, like all fixed income instruments, are
subject to interest rate risk and will fall in value if market interest rates
increase. The Company attempts to limit this exposure by investing primarily in
short-term securities.
14
<PAGE>
Net cash provided by operating activities decreased to $44.9 million for the
nine month period ended September 30, 1998 compared to $65.2 million for the
corresponding period ended September 30, 1997. The $20.3 million decrease was
mainly the result of a $39.3 million decrease in net income offset by changes in
other operating assets and liabilities. The Company purchased approximately $8.6
million of capital equipment and furniture during the nine month period ended
September 30, 1998 compared to purchases of $30.2 million in the corresponding
period of 1997. Capital equipment and furniture spending decreased
significantly, as the Company purchased land for its new corporate campus in
Foster City, California for $20.2 million in cash and the assumption of $4.5
million in bonds payable during the third quarter in 1997. Cash provided by the
exercise of options amounted to $0.7 million for the nine month period ended
September 30, 1998, a $7.9 million decrease over the corresponding period in
1997. The decrease was due to a lower volume of option exercises due to the
lower relative market prices available for the stock in fiscal 1998.
The Company believes that its existing capital resources together with cash
generated from continuing operations will be sufficient to fund its operations
and meet capital requirements through at least 1999.
Year 2000 Status
Although the Company has not completed a formal, comprehensive MIS plan for
potential Year 2000 related problems, Management has taken steps and continues
to assess the possible effects and potential solutions for a Year 2000 problem.
The Company has updated substantially all of it's computer system infrastructure
over the last few years, thus management believes that all critical pieces of
hardware and software have been represented by their manufacturers, and tested
on a limited basis by EFI, to be Year 2000 compliant. In addition, based on the
reviews completed to date, the Company has not spent and does not expect to
spend material amounts on remediation of it's existing systems. Although the
Company continues to review and test, based on informal reviews to date, the
Company currently believes that Year 2000 issues will not materially affect its
internal MIS systems.
Also, the Company has tested its products to determine if the products will
successfully rollover from the years 1999 to 2000 and 2000 to 2001, and if the
products will correctly recognize the date February 29, 2000. Products first
released after November 1, 1997 have passed internal tests for these criteria,
and future products will be required to pass the same internal tests before
shipping. Because the Company cannot control other companies' products used in
conjunction with the Company's products (such as other companies' software), the
Company does not intend to assure its customers that its products will meet the
above-referenced criteria when used in conjunction with any other software or
hardware not manufactured by the Company.
To date, the Company has not reviewed Year 2000 plans and preparations of its
manufacturers, suppliers, customers, and other third parties with whom it does
business. The Company is currently in the process of identifying and contacting
these critical third parties. The Company has begun to work on contingency plans
and currently assumes that internal problems encountered in handling
transactions could be processed manually for a short period of time. These
contingency plans will be more fully developed by the 3rd quarter of 1999.
The Company continues to assess the effects and costs associated with possible
Year 2000 problems; however, the total effects and costs are unknown to the
Company at this time, and there can be no assurance that such effects and costs
will not have a material adverse effect on the Company, its financial condition,
or results of operations.
15
<PAGE>
Factors That Could Adversely Affect Performance
The following factors may adversely impact the Company's future performance and
financial results:
Reliance on OEM Resellers; Risks Associated with Significant OEM Group
Concentration
The Company's strategy of selling principally to OEMs anticipates that the
Company will be relying on high sales volumes to a relatively small number of
customers. Although there can be no assurance that the Company's major customers
will continue to utilize the Company's products at current levels, if at all,
the Company expects to continue to depend upon such customers for a significant
percentage of its revenues. A decline in demand for color copiers or color laser
printers, or other factors affecting the computer industry in general, or major
customers in particular, may adversely affect the Company's results of
operations.
The Company relies upon the ability of its OEMs to develop new products,
applications and product enhancements on a timely and cost-effective basis. The
ability of these OEMs to meet changing customer needs and respond to emerging
industry standards and other technological changes is essential to the Company's
continued success. There is no assurance that the Company's OEMs will
effectively meet these technological challenges. These OEMs, who are not within
the control of the Company, may incorporate into their products the technologies
of other companies in addition to or instead of the Company's products, and with
the exception of certain minimum purchase obligations, are not obligated to
purchase products from the Company. There can be no assurance that any OEM will
continue to carry the Company's products, and the loss of important OEMs, or an
inability to recruit additional OEMs, may have a material adverse effect on the
Company's business, operating results, and financial condition.
The Company's sales have been and will continue to be heavily influenced by
order quantities and timing of delivery to its OEMs. No assurance can be given
that the Company will be able to successfully maintain sales of its products in
any OEM channel. The Company's sales may be adversely affected if an OEM
introduces or supports additional products that compete with the Company's
products, fails to effectively market the Company's products, modifies its color
copiers or printers such that the Company's products are no longer compatible,
introduces new color copiers or printers that are incompatible with the
Company's products, or does not allow the Company's products to support all of
the features available on its new copiers or printers.
Although the Company is pursuing, and will continue to pursue, the business of
additional copier and printer OEMs, customer concentration will continue to be a
risk due to the limited number of OEMs producing copiers and printers in
sufficient volume to be attractive to the Company.
Product Transitions
Although the Company plans to introduce new products, delays in the launch or
availability of these products could have an adverse effect on the Company's
financial results. Product transitions also carry the risk that customers will
delay or cancel orders for existing products. If the Company is not able to
successfully manage product transitions or cannot guarantee the availability of
products once they have been introduced, its results of operations may be
adversely affected.
Product Diversification and Coordination of Development with Customers
The Company's customers have requested a broader range of products with
different and unique features, and the Company believes that this trend may
continue. If the Company cannot successfully manage the effort and risks
associated with a broader range of products, its results of operations may be
adversely affected.
The Company's customers work closely with the Company to develop products that
are specific to each customer. Many of the products the Company is developing
require the Company and its customers to coordinate development, quality
testing, marketing and other tasks. The Company cannot control other companies'
efforts, and such coordination may result in delays that the Company cannot
manage by itself. If the Company cannot successfully manage the effort and risks
associated with coordination, its results of operations may be adversely
affected.
16
<PAGE>
Reliance on Continued Demand for the Company's Products That Enable Color
Printing of Digital Data and the effects of a Potential Decrease
Although the Company has expanded its product line in recent years, and
continues to explore opportunities to further diversify its business, the
Company's business has been focused heavily on sales of products that enable the
color printing of digital data. Should conditions arise that reduce the demand
for this service, the Company's results of operations may be adversely affected.
The Company believes that purchases of the Company's products may be affected by
a variety of economic conditions and considerations, and there can be no
assurance that demand for the Company's products will continue at current
levels. For example, although such conditions are difficult to predict, the
Company is not assuming that there will be significant improvement in economic
conditions in Japan during the remainder of 1998. The Company believes that
continued economic distress in Japan and elsewhere in Asia may limit demand in
these regions for the Company's products. In addition, it is possible that
individuals with responsibility for purchasing the Company's products, such as
information technology professionals, may choose to devote available
discretionary resources to other perceived needs, such as technology expenses
associated with Year 2000 preparation and or Euro currency conversion projects.
New Product Introductions
The Company continues to explore opportunities to develop product lines distinct
from its Fiery Color Servers. Such new products may require the investment of
capital for the development of new distribution and marketing channels at an
unknown cost to the Company. There can be no guarantee that the Company would be
successful in the development of such channels or that any new products would
gain market acceptance. If the Company is not able to successfully manage the
introduction of new products, its results of operations may be adversely
affected. In addition to these risks, if the Company is successful in
introducing new products, there can be no assurance that such product
introductions (including more powerful products sold at a lower price) will not
adversely impact gross margins or sales of existing products.
Competition
The Company has seen competition in the market from companies and products that
provide similar functionality to the Company's products and believes that such
competition will continue and may intensify. It is also possible that the
Company's customers may themselves internally develop and supply products
presently sold by the Company. There can be no assurance that the Company will
be able to continue to successfully compete against other companies' product
offerings or their financial and other resources. In addition to competition
among suppliers of the Company's products, the Company believes that competition
among the Company's customers and potential customers, including competition
over price, may increase. Such competition may have an adverse impact on the
Company's results of operations.
Managing Growth
The Company continues to increase its headcount, and is working to build
relationships with OEMs and other customers. As a result, the number and
complexity of relationships the Company must manage, including relationships
with customers, manufacturers, and suppliers, has increased and may increase
further. If the Company cannot successfully manage growth, its results of
operations may be adversely affected.
17
<PAGE>
Hiring and Retention of Employees
The Company depends upon skilled employees, such as software and hardware
engineers, quality assurance engineers, marketing and sales professionals, and
persons in administrative and managerial positions. Demand for such employees in
Northern California, where the Company's main offices are located, is high. To
assure that the Company can adequately support its business, the Company
undertakes a number of efforts to hire and retain qualified employees. If the
Company cannot successfully hire and retain employees, its results of operations
could be adversely affected.
Fluctuations in Operating Results
Operating results may fluctuate due to factors such as demand for the Company's
products, success and timing of the new product introductions, price reductions
by the Company and its competitors, delay, cancellation or rescheduling of
orders, product performance, or availability of key components. Operating
results may also fluctuate due to seasonal purchasing patterns of its OEM
partners or the status of the Company's relationships with its OEM partners as
well as to performance of third-party manufacturers or the status of the
Company's relationships with its key suppliers. The Company's results have
followed a seasonal pattern reflecting the buying patterns of its' large OEM
customers. In the past that pattern has indicated the Company's fiscal fourth
quarter results may be adversely affected by a desire on the part of some or all
its' OEM customers to slow down, or otherwise delay fourth quarter orders in
order to minimize their inventory investment at the end of their fiscal year.
Moreover, the Company's ability to develop and market new products, the timing
and amount of sales and marketing expenditures, and the general demand for what
is a discretionary purchase item - color copiers, digital black-and-white
copiers, and color laser printers and general global economic conditions will
also effect operating results.
Interest Rate risk
The Company has an investment portfolio of fixed income securities. These
securities are subject to interest rate risk and will fall in value if market
interest rates increase. The Company attempts to limit these exposures by
investing primarily in short-term securities.
Limited Backlog
The Company typically does not obtain long-term volume purchase contracts from
its customers, and a substantial portion of the Company's backlog is scheduled
for delivery within 90 days or less. Customers may cancel orders and change
volume levels or delivery times without penalty. Sales and operating results
therefore depend on the volume and timing of the backlog as well as bookings
received. Significant portions of the Company's operating expenses are fixed,
and planned expenditures are based primarily on sales forecasts and product
development programs. If sales do not meet the Company's expectations in any
given period, the adverse impact on operating results may be magnified by the
Company's inability to adjust operating expenses sufficiently or quickly enough
to compensate for such a shortfall.
Volatility of Stock Price
Due to various factors, including those noted above, the Company's future
earnings and stock price might be subject to significant volatility. Any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock in any given period. The Company participates in a
highly dynamic industry, which often results in significant volatility for the
Company's common stock price.
18
<PAGE>
Risks Associated With The Company's Ownership of Real Property And Transition To
New Facilities
In late 1998 or early 1999, the Company anticipates moving into new headquarters
on land in Foster City, California that the Company owns. If the Company cannot
successfully manage the transition, disruption to the Company's business and
delays in sales could arise, and results of operations may be adversely
affected.
International Operations and Currency Fluctuations
Approximately 48.9% and 51.6%, respectively, of the Company's product revenue
for the three and nine month periods ended September 30, 1998, were attributable
to international sales, primarily in Europe and Japan. The Company expects that
international sales will continue to represent a significant portion of its
total revenue. The Company is subject to certain risks associated with
international operations, including tariff regulations and requirements for
export licenses, particularly with respect to the export of certain
technologies, which may on occasion be delayed or difficult to obtain. Given the
significance of international sales to the Company, the Company faces a
continuing risk in that the strengthening of the U.S. dollar versus the Japanese
yen and major European currencies could adversely impact the Company's revenues
and gross margin. Although the Company typically invoices in U.S. dollars, these
adverse impacts could occur through lower unit demand and the necessity to lower
average selling prices to compensate for the reduced strength of local
currencies. Where the Company does invoice in local currency, the Company's cash
flows and earnings are exposed to fluctuations in interest rates and foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and where appropriate the use of hedge oriented financial
market instruments. To date the Company has primarily utilized forward contracts
to mitigate its exposure in these markets.
Proprietary Information
The Company relies on a combination of copyright, patent and trade secret
protection, nondisclosure agreements, and licensing and cross-licensing
arrangements to establish and protect its proprietary rights. There can be no
assurance that any patents that may be issued to the Company, or which the
Company may license from third parties, or that any other proprietary rights of
the Company will not be challenged, invalidated or circumvented, or that any
rights granted thereunder would provide proprietary protection to the Company.
Infringement and Potential Litigation
The Company may receive in the future communications from third parties
asserting that the Company's products infringe, or may infringe, the proprietary
rights of third parties. There can be no assurance that any of these claims will
not result in protracted and costly litigation. While it may be necessary or
desirable in the future to obtain licenses relating to one or more of its
products or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms, or at all.
19
<PAGE>
Reliance on Adobe Systems, Incorporated
Under the Company's license agreements with Adobe, a separate license must be
granted from Adobe to the Company for each type of copier or printer used with a
Fiery Server or Controller. To date, the Company has successfully obtained
licenses to use Adobe's PostScript(TM) software for products that it offers.
However, there can be no assurance that Adobe will continue to grant future
licenses to Adobe PostScript(TM) software on reasonable terms, in a timely
manner, or at all, or that Adobe will continue to give quality assurance
approvals. Such actions by Adobe may adversely affect the Company's results of
operations. If Adobe does not grant the Company such licenses or approvals, if
the Adobe license agreements are terminated, or if the Company's relationship
with Adobe is otherwise impaired, the Company's operations may be adversely
affected.
20
<PAGE>
PART II Other Information
ITEMS 1 - 5.
There is no applicable information to report under Part II, Items 1 - 5 during
the period covered by this report.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.............. Page 23
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the three month period ended September 30, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRONICS FOR IMAGING, INC.
Date: November 13, 1998
By /s/ Dan Avida
--------------------------
Dan Avida
President and Chief
Executive Officer
By /s/ Eric Saltzman
--------------------------
Eric Saltzman
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed balance sheet, condensed statement of operations and condensed
statement of cash flows included in the Company's form 10-Q for the nine month
period ended September 30, 1998 and is qualified in its entirety by reference to
such financial statements and notes thereto.
</LEGEND>
<CIK> 0000867374
<NAME> u@g2dxvi
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 64,742
<SECURITIES> 214,723
<RECEIVABLES> 72,049
<ALLOWANCES> 1,626
<INVENTORY> 16,202
<CURRENT-ASSETS> 391,133
<PP&E> 76,752
<DEPRECIATION> 30,901
<TOTAL-ASSETS> 445,718
<CURRENT-LIABILITIES> 74,805
<BONDS> 3,924
0
0
<COMMON> 527
<OTHER-SE> 366,462
<TOTAL-LIABILITY-AND-EQUITY> 445,718
<SALES> 304,007
<TOTAL-REVENUES> 304,007
<CGS> 171,770
<TOTAL-COSTS> 171,770
<OTHER-EXPENSES> 97,777
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 236
<INCOME-PRETAX> 40,689
<INCOME-TAX> 13,070
<INCOME-CONTINUING> 27,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,619
<EPS-PRIMARY> .52
<EPS-DILUTED> .51
</TABLE>
