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 March 31, 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)
(415) 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 March 31, 1998 was
52,605,237.
An Exhibit Index can be found on Page 15.
<PAGE>
ELECTRONICS FOR IMAGING, INC.
INDEX
Page No.
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997
..........................................................3
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 .....................4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 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 ...............................8
PART II - Other Information
Items 1-5. Not Applicable ...................................................15
Item 6. Exhibits and Reports on Form 8-K .................................16
Signatures ...................................................................17
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------------------
March 31, March 31,
1998 1997
-------------- -------------
<S> <C> <C>
Revenue $ 82,523 $ 91,006
Cost of revenue 45,356 41,093
-------------- -------------
37,167 49,913
-------------- -------------
Operating expenses:
Research, development and contract costs 14,084 8,126
Sales and marketing 15,322 9,558
General and administrative 3,461 2,873
-------------- -------------
32,867 20,557
-------------- -------------
Income from operations 4,300 29,356
Other income, net 2,221 2,563
-------------- -------------
Income before income taxes 6,521 31,919
Provision for income taxes 2,348 11,491
-------------- -------------
Net income $ 4,173 $ 20,428
============== =============
Net income per basic common share $ 0.08 $ 0.40
============== =============
Shares used in per share calculation (basic) 52,582 51,640
============== =============
Net income per diluted common share $ 0.08 $ 0.37
============== =============
Shares used in per share calculation (diluted) 54,891 55,740
============== =============
<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>
March 31, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 58,988 $ 57,195
Short-term investments 185,257 185,536
Accounts receivable, net 38,069 30,930
Inventories 23,305 23,790
Other current assets 37,963 32,445
-------------- -------------
Total current assets 343,582 329,896
Property and equipment, net 47,894 46,502
Other assets 9,243 9,600
-------------- -------------
Total assets $ 400,719 $ 385,998
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,651 $ 20,255
Accrued and other liabilities 22,723 19,891
Income taxes payable 3,953 2,923
-------------- -------------
Total current liabilities 53,327 43,069
-------------- -------------
Long-term debt 4,064 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; 52,605,237 and 52,558,383 shares issued and
outstanding, respectively 526 524
Additional paid-in capital 137,552 137,264
Retained earnings 205,250 201,077
-------------- -------------
Total stockholders' equity 343,328 338,865
-------------- -------------
Total liabilities and stockholders' equity $ 400,719 $ 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>
Three Months Ended March 31,
----------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,173 $ 20,428
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,823 1,441
Changes in operating assets and liabilities:
Accounts receivable (7,139) (7,062)
Inventories 485 (1,951)
Receivable from subcontract manufacturers (4,749) (7,118)
Other current assets (769) (2,484)
Accounts payable and accrued liabilities 9,228 11,364
Income taxes payable 1,030 9,034
-------------- -------------
Net cash provided by operating activities 5,082 23,652
-------------- -------------
Cash flows from investing activities:
Purchase of short-term investments (28,653) (36,097)
Sales and maturities of short-term investments 28,932 34,136
Purchases of property and equipment, net (3,887) (1,544)
Purchase of other assets 29 7
-------------- -------------
Net cash used for investing activities (3,579) (3,498)
-------------- -------------
Cash flows from financing activities:
Issuance of common stock related to stock plans 290 1,706
-------------- -------------
Net cash provided by financing activities 290 1,706
-------------- -------------
Net change in cash and cash equivalents (1,793) 21,860
Cash and cash equivalents at beginning of period 57,195 71,946
-------------- -------------
Cash and cash equivalents at end of period $ 58,988 $ 93,806
============== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
ELECTRONICS FOR IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements of
Electronics for Imaging, Inc. (the Company) as of and for the interim
period ended March 31, 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, and, in the opinion of management, include all
adjustments (consisting only 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
for such financial statements 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
period ended March 31, 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. For the quarters ending March 31,
1998 and 1997, the differences between the Company's net income and
comprehensive income were immaterial.
6
<PAGE>
3. Earnings Per Share
<TABLE>
In February 1997, The Financial Accounting Standards Board
issued SFAS No. 128, Earnings per Share. 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 assuming the standard was applied during all periods presented
below:
<CAPTION>
March 31, March, 31,
1998 1997
----------- ----------
<S> <C> <C> <C>
(in thousands, except per share amounts)
Net income available to common shareholders $ 4,173 $ 20,428
Shares
Basic shares 52,582 51,640
Effect of Dilutive Securities 2,309 4,100
----------- ----------
Diluted shares 54,891 55,740
=========== ==========
Earnings per common share
Basic EPS $ 0.08 $ 0.40
Diluted EPS $ 0.08 $ 0.37
</TABLE>
<TABLE>
Antidilutive Options. Options to purchase 1,852,799 and 32,492 shares
of common stock outstanding as of March 31, 1998 and 1997,
respectively, were not included in the computations of diluted EPS
because the options' exercise prices were greater than the average
market price of the common shares for the quarters then ended.
<CAPTION>
4. Balance Sheet Components (in thousands)
March 31, December 31,
1998 1997
----------- ----------
<S> <C> <C> <C>
Inventories:
Raw materials $ 18,404 $ 19,216
Work-in-process 4,283 3,183
Finished goods 618 1,391
----------- ----------
$ 23,305 $ 23,790
=========== ==========
Other Current Assets:
Receivable from subcontract manufacturers $ 22,391 $ 17,642
Other 15,572 14,803
----------- ----------
$ 37,963 $ 32,445
=========== ==========
</TABLE>
7
<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 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 months ended March 31, 1998 are not necessarily indicative of the
results expected for the entire fiscal year ended 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
Revenue
Revenue decreased 9.3% to $ 82.5 million in the first quarter of 1998, as
compared to $91.0 million in the first quarter of 1997. The decrease in revenue
is primarily due to price reductions on existing product lines in anticipation
of new product introductions as well as continued weak sales from Asia
particularly in Japan due to the ongoing weakness in those economies. The
Company's new generation Fiery ZX products, new black and white products, and a
new line of embedded printer products (under the name "Fiery Driven" for use in
desktop color printers) began shipping in limited volume during the first
quarter of 1998. In coordination with the introduction of these new products,
the Company lowered prices on existing product lines. Although sales of these
new products are expected to increase, they accounted for less than 8% of total
revenues in the first quarter of 1998. The majority of revenues continue to be
derived from the Company's stand-alone Fiery XJ and XJ+ color servers for
digital color copiers. As discussed below, the decline in revenue is also
partially due to the continued weakness in Asian economies.
Comparing international revenue in the first quarter of 1998 to the first
quarter of 1997, these sales increased from $43.7 million or 48.0% of total
revenues to $44.8 million or 54.3% of total revenues, respectively. However, the
Company believes the increase in international revenue is due to a change in the
way the Company ships products to one of its major customers. Starting in the
second quarter of 1997, instead of receiving product in the United States and
then shipping the product to its European facilities, one of the Company's major
customers began having its product shipped directly to Europe. In conjunction
with this change, sales revenue that was formerly being recorded as domestic
sales began being recorded as European sales. During the first quarter of 1998
under the new more direct distribution model, sales to Europe totaled $29.7
million or 35.9% of total revenues as compared to $22.5 million or 24.7% of
total revenues in the first quarter of 1997 under the old distribution model -
representing on its face a 32% increase. Reflecting historical shipment methods,
during the first quarter of 1998, proforma sales to Europe showed a 2% decline
from the comparable sales during the first quarter of 1997. Sales to Japan in
the first quarter of 1998 decreased to $12.8 million or 15.5% of total revenues
as compared to $18.5 million or 20.4% of total revenues in the first quarter of
1997. The decline in sales to Japan is primarily due to a continued weakness in
the Japanese and other Asian economies. Foreign sales to areas other than Europe
and Japan for the first quarter of 1998 totaled $2.3 million and comprised 2.8%
of total revenues as compared to $2.6 million and 2.8% of total revenues in the
first quarter of 1997.
8
<PAGE>
Substantially all of the revenue of both periods was attributable to the sale of
Fiery products through the Company's OEM channels with such partners as Canon,
Xerox, Ricoh, Minolta, Fuji Xerox, Epson, Sharp and others. For the first
quarter of 1998 the company continued to rely on three OEM customers, Canon,
Xerox and Ricoh for 77% of it's first quarter revenue as compared to 85%
reported for all of 1997. In the event that any of such 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.
As discussed above, 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.
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
A substantial majority of the Company's cost of revenue to date has been
attributable to the sale of Fiery Color Servers. Fiery Color Servers are
manufactured by third-party manufacturers who purchase most of the necessary
components. The Company sources directly proprietary memory and 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 45.0% in the first quarter of 1998, down from 54.8% in the
corresponding quarter 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 that the Company
introduced in the first quarter of 1998. The company also initiated price
reductions on older products as an inducement for continued older product
purchases in light of pending transitions to newer 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.
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.
9
<PAGE>
Operating Expenses
Operating expenses for the quarter ended March 31, 1998 increased $12.3 million
or 59.9% from the same period in 1997. Operating expenses in the first quarter
of 1998 also constituted a higher percentage of revenues than in the first
quarter of 1997, 39.8% versus 22.6%, respectively. Increases in operating
expenses were primarily caused by the hiring of additional full time employees -
a net increase of 183 people or 49% from March 31, 1997 to March 31, 1998. The
Company has hired additional employees to support product development as well as
to support expanded operations. 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 $14.1 million or 17.1% of
revenue in the first quarter of 1998, compared to $8.1 million or 8.9% of
revenue in the corresponding quarter of 1997. Research and development expenses
have increased primarily due to an increase in research and development
projects, which has resulted in an engineering headcount increase of 62.1% from
March 31, 1997 to March 31, 1998. 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 $15.3 million or
18.6% of revenue in the first quarter of 1998, compared to $9.6 million or 10.5%
of revenue in the corresponding quarter of 1997. Sales and marketing expenses
increased as a percentage of total revenue due primarily to a 30.5 % increase in
employee headcount from March 31, 1997 to March 31, 1998. In addition, cost
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. Also, in coordination with its new
product releases, the Company has increased its participation in trade shows
during the first quarter of 1998. 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.
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 $3.5 million or 4.2% of revenue in the first quarter of 1998,
compared to $2.9 million or 3.2% of revenue in the corresponding quarter of
1997. The increases were primarily due to the addition of personnel to support
the Company's operations. 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 any growth in operations.
10
<PAGE>
Income Taxes
The Company's effective tax rate was 36.0% for the first quarter of 1998 and
1997. In each period the Company benefited from increased tax-exempt interest
income, increases in foreign sales and to a lesser extent the utilization of
research and development credits in achieving a consolidated effective tax rate
lower than the consolidated federal and state statutory income tax rate. The
Company anticipates that these benefits will continue to have a favorable impact
on the Company's consolidated effective tax rate.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased to $244.2 million as
of March 31, 1998, up from $235.9 million as of March 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.
Working capital increased to $290.3 million as of March 31, 1998, up from $259.4
million as of March 31, 1997. Net cash provided by operating activities was $5.1
million and $23.7 million for the three-month periods ended March 31, 1998 and
1997, respectively, primarily as a result of profitable operations in both
periods. The Company purchased approximately $3.9 million of capital equipment
and furniture during the three-month period ended March 31, 1998, compared to
purchases of $1.5 million in the corresponding period of 1997.
The Company does not have a comprehensive and formal Year 2000 plan for all of
its operations. The Company has informally reviewed its internal MIS systems and
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. 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 effects and costs associated with
possible Year 2000 issues 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, results of operations.
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.
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.
11
<PAGE>
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.
Reliance on Products That Enable Color Printing of Digital Data and Decrease in
Demand for the Company's Products
12
<PAGE>
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 in 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.
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.
Hiring and Retention of Employees
13
<PAGE>
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. 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 color copiers, digital black-and-white
copiers, and color laser printers will also effect operating results.
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 may 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.
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 54.2% of the Company's product revenue for the first quarter of
1998 was 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.
14
<PAGE>
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
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.
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.
15
<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 18
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the three-month period ended March 31, 1998.
16
<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: May 14, 1998
By /s/ Dan Avida
Dan Avida
President and Chief Executive Officer
and Acting Principal Financial Officer
By /s/ Eric Saltzman
Eric Saltzman
Vice President, Strategic Relations
and Duly Authorized Officer
17
<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 three month
period ended march 31, 1998 and is qualified in its entirety by reference to
such financial statements and notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 58,988
<SECURITIES> 185,257
<RECEIVABLES> 38,657
<ALLOWANCES> 588
<INVENTORY> 23,305
<CURRENT-ASSETS> 343,582
<PP&E> 72,932
<DEPRECIATION> 25,038
<TOTAL-ASSETS> 400,719
<CURRENT-LIABILITIES> 53,327
<BONDS> 4,064
0
0
<COMMON> 526
<OTHER-SE> 342,802
<TOTAL-LIABILITY-AND-EQUITY> 400,719
<SALES> 82,523
<TOTAL-REVENUES> 82,523
<CGS> 45,356
<TOTAL-COSTS> 45,356
<OTHER-EXPENSES> 32,867
<LOSS-PROVISION> 44
<INTEREST-EXPENSE> 2,461
<INCOME-PRETAX> 6,521
<INCOME-TAX> 2,348
<INCOME-CONTINUING> 4,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,173
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
