UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997 Commission File Number: 0-18805
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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) (Zip Code)
(650) 286-8600
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
(Title of Class)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or an amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 23, 1998.
Common Stock, $.01 par value: $1,366,743,560.88
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of March 24, 1998.
Common Stock , $.01 par value: 52,600,667
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 7, 1997 are incorporated by reference into Part III.
A list of all exhibits to this Form 10-K is located on pages 41 through 44.
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PART I
Item 1: Business.
Electronics for Imaging, Inc., a Delaware corporation (the "Company" or
"EFI") was founded to develop innovative solutions to enable color desktop
publishing in the same manner that laser printers and PostScriptTM software
first enabled black-and-white desktop publishing in the mid-1980s. In pursuit of
this goal, the Company first developed the Fiery(R) line of color servers
("Fiery Color Servers") to enable short-production run color printing in an
office environment, together with application and system software to facilitate
color correction and device-independent color. Fiery Color Servers are
sophisticated computers that enable digital color copier machines to accept,
process, and print digital color images from personal computers and computer
networks.
Historically, the Company primarily focused its efforts on its
stand-alone Fiery Color Servers and substantially all of its revenue to date has
resulted from the sale of these stand-alone products. The Company's efforts are
expanding to include the development of new Fiery products to support printing
on a wide range of devices, including additional digital color copiers, desktop
color laser printers, wide-format color inkjet printers, and digital
black-and-white copiers.
Background
Prior to the mid-1980s, in order to obtain quality black-and-white,
typeset documents, a manuscript was typically sent to a specialized trade shop
where craftspeople labored on typesetting and photo composition machines. This
process was expensive and frequently involved delays and numerous proofing
cycles. As a result, only a limited number of documents were typeset, typically
books or periodicals printed in thousands or millions of copies. However, the
advent of desktop publishing in the mid-1980s enabled users to create the
professional look of typeset documents in an office environment. As a result,
desktop publishing systems offered users without specialized training increased
control over the black-and-white document creation process. It also enabled the
production of documents more quickly without relying on special trade shops and
outside services. A single copy of a letter, a hundred copies of a memo, or a
thousand copies of a newsletter could be produced with a personal computer, a
laser printer and a black-and-white copier. These systems became increasingly
popular with users of low-volume printing, such as small businesses, large
corporations, government agencies, educational institutions, graphic artists and
business professionals.
However, users were still limited in their ability to use desktop
systems to produce color documents for short-run printing at a reasonable cost.
In the late 1970s, color images were typically prepared on an electronic color
pre-press system developed by companies such as Scitex. These pre-press systems
were expensive, ran proprietary software, were not compatible with other
systems, and required highly-trained operators to properly edit and render
color. Users routinely endured a lengthy pre-press process, including the review
of numerous interim proofs before final printing. While suitable for high volume
printing applications such as catalogs or magazines, pre-press equipment and
commercial printing presses were of limited value to users who wished to design
and proof material in-house and to produce a limited number of color copies
quickly and cost-effectively.
The Company believes that consumers generally prefer color as evidenced
by the migration of photographs, motion pictures and television from
black-and-white to color. In the personal computer field, EFI believes this
preference is shown by the almost exclusive use of color monitors with
color-oriented graphical user interfaces, application software and internet
content. In each of these cases, once the enabling technology developed
sufficiently, consumer adoption of color quickly followed. The Company believes
that consumers prefer color in documents created through desktop publishing.
Until recently, however, the technology was not available to do this in a quick
and cost-effective manner. Accurate color reproduction is far more complex than
black-and-white reproduction. In black-and-white printing, the principal
variable is the amount of black ink printed on the page. By contrast, producing
color on a page requires a combination of four inks (cyan, magenta, yellow and
black) applied in differing percentages to create varying colors. In addition,
the human eye is extremely sensitive to variations in color images. Minor
inconsistencies in the way various input, display and
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output devices display color, and even small differences in ambient lighting
conditions, can result in significant variations in the way a color image is
printed and perceived.
The Electronics for Imaging Solution
The Company develops products with a wide range of price and
performance to overcome the obstacles to color printing described above. In
general, the Company's products enable high-quality color printing in short
production runs. For example, Fiery Color Servers do this by permitting users of
digital color copiers to transmit and convert digital data from a computer to a
color copier so that the color copier can print color documents easily, quickly
and cost-effectively. As a result, Fiery Color Servers transform digital color
copiers into fast, high-quality networked color printers. Additionally, the
Company has developed and now manufactures other products that support both
color and black-and-white printing. These include Fiery controllers for
black-and-white digital copiers, Fiery Color Servers for wide-format inkjet
printers and Fiery color controllers, which are embedded solutions to enable
network color printing for color copiers and desktop printers. These products
leverage the Company's Fiery technology for use in new applications; instead of
being sold as a stand-alone product to be connected to copiers, these products
are embedded inside copiers and desktop printers. Printing solutions that
integrate the Fiery Products have been marketed with the "Fiery Driven" logo.
The Company believes the Fiery name and trademark have substantial goodwill and
recognition associated with them.
Strategy
The Company's overall objective is to establish Fiery Products as the
solution of choice to enable short-run digital color printing on a variety of
peripheral printing devices. With respect to its current products, the Company's
primary goal is to provide a broad range of color processing and printing
solutions that address broad sections of the color printing market. The
Company's strategy to accomplish these goals consists of three key elements.
Proliferate and Expand the Fiery Product Line
Traditionally, the Company has sold products that support three to nine
page-per-minute ("ppm") digital color copiers. While the Company believes that
the demand for color laser copiers is still expanding, the Company has also
expanded the uses of its technology. For example, in 1996, the Company expanded
its line of color servers, the Fiery XJ family, to drive a wide range of output
devices including desktop color laser printers and wide-format color inkjet
printers with poster-size output. The Company has also announced plans to
develop products to support black-and-white printing systems and copiers.
In the fourth quarter of 1997, the Company also shipped its first Fiery
Servers based upon its new Fiery LX platform, connecting to the Epson Stylus Pro
5000 and PM 5000C inkjet color printers, and the Sharp AR 5132 black-and-white
digital copier. In 1997, the Company also shipped its first Fiery Products with
PostScript(TM) 3(TM) interpreter software licensed from Adobe Systems
Incorporated ("Adobe"). By utilizing the advantages of the newly developed Fiery
LX platform, the Company intends to continue to develop new Fiery Products that
are scalable and offer a broad range of features and performance when connected
to digital color and black-and-white copiers and printers.
Develop Additional Relationships with Key Industry Participants
The Company has established relationships with such companies as Canon,
Xerox, Kodak, Minolta, Ricoh, Oce, IBM, Digital Equipment Corporation, Konica,
Sharp and Seiko Epson (collectively, "the OEMs") and is seeking relationships
with other digital copier and printer companies for the distribution of Fiery
Products with their copiers and printers. The Company will continue to seek to
develop additional relationships with companies that offer digital copiers
and/or printers.
Leverage Color Expertise
The Company has assembled an experienced team of technical personnel
with backgrounds in color reproduction, electronic pre-press, image processing
and software and hardware engineering. By applying its
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expertise in color imaging the Company expects to continue to expand the scope
and sophistication of its products and gain access to new markets.
Products and Technology
Shipments of the first generation Fiery Color Server began in August
1991. In 1995, the Company introduced its third-generation platform, the Fiery
XJ. During 1996, the Company migrated the majority of its product line to the XJ
platform and later refined these products through migration to a variation of
the XJ platform known as the Fiery XJ+, which included shifting from a 100Mhz to
133Mhz CPU, an improvement in bus speed from 50Mhz to 66Mhz and an improvement
in the application-specific integrated circuit ("ASIC") chip sets incorporated
into the Fiery Color Servers. During 1997, the Company enhanced the Fiery XJ+
family with the introduction of a 200 Mhz CPU in some Fiery Products.
To date, the Company has sold over 100,000 stand-alone Fiery Color
Servers and embedded controllers. The stand-alone Fiery Color Servers enable
color laser copiers to perform as high performance, plain-paper color printers
with the ability to produce full color pages at up to 400 dots-per-inch ("dpi")
resolution for copiers and 600 dpi resolution for printers in continuous tone or
halftone. Stand-alone Fiery Color Servers are capable of connecting color laser
copiers with networked desktop computers such as Windows-based PCs, Apple
Macintosh computers and UNIX workstations. In addition, stand-alone Fiery Color
Servers support the scanning capabilities of certain color laser copiers
providing full color scanning capability to the network. The Fiery Color Server
is designed to provide a solution for short production runs and on-demand color
proofing for the desktop environment. Stand-alone Fiery Color Servers are
currently used with full color copiers supplied by Canon, Xerox, Kodak, Minolta,
Ricoh and Oce. With the exception of Canon, the stand-alone Fiery Color Server
is sold under the Fiery trademark.
In 1997, the Company focused its development efforts on improvements to
its products' performance, features, and ease of use. The first of the Company's
new products to utilize a new hardware platform, the Fiery LX stand-alone Color
Server first shipped in the fourth quarter of, 1997. Also in the fourth quarter
of 1997, the Company shipped the first Fiery LX controller for a black-and-white
digital copier. Shipments of the Fiery LX Color Server and black-and-white
controller did not account for a significant amount of revenue in 1997.
Software features developed and announced by the Company in
1997 include the Company's proprietary ColorWise Color Management System which
allows users to adjust colors to their liking; Fiery WebTools which uses any
standard Java(TM)-enabled browser to provide network administrators with the
ability to access and control a variety of printing functions; and Fiery
FreeForm Variable Data Printing, a printing technology advance that can create
master and variable graphics and text elements independent of platform or
application. The Company also introduced its next generation Command WorkStation
interface in March 1997, enabling users to manage, reorder, and view previews of
any files that are being stored or processed for printing. Additionally, in
October 1997, the Company announced Fiery FreeForm Variable Data Printing, a
printing technology advance that can create master and variable graphics and
text elements independent of platform or application.
In 1997, the Company continued to ship Fiery printer controllers which
are embedded in desktop color laser printers (marketed under the name Fiery XJe)
to Canon, as well as a version of the Fiery XJe which is embedded in the Ricoh
Aficio 2000 series color copier.
During 1997, the Company also continued to ship the Fiery SI (see
"Fiery SI" below) and the Fiery XJ-W (see "Fiery XJ-W" below).
Fiery XJ Technology
In 1997, the Company continued to ship its product line based upon the
Fiery XJ+ architecture. Fiery XJ+ architecture delivers improved performance at
lower costs than earlier models. The Company designed specialized RipChips(TM)
that accompany the MIPS R4600/R4700/R5000 100MHz/133MHz/200MHz
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RISC microprocessors and accelerate color PostScript processing. Through the use
of these ASICs in Fiery embedded controllers, the Company has minimized the chip
count and reduced the key technology of its color server to a single board.
Additional cost reductions result from the Company's introduction in 1997 of its
proprietary STARR Compression technology, which allows for full-resolution
continuous-tone output with half the memory previously required. The Fiery XJ
architecture also incorporates the company's Rip-While-Print(TM) technology,
which enables one page to be printed while subsequent pages are simultaneously
processed, thus eliminating the delay caused by the cycling down of the copier
or printer. As with previous Fiery products, the Fiery XJ+ incorporates
PostScript Level 2 interpreter software from Adobe related system software and
the Company's proprietary software utilities for use on the user's networked
personal computer. The Company has designed the Fiery XJ+ for use with Canon,
Xerox, Kodak, Fuji Xerox, Minolta, and Ricoh.
The Fiery XJ+ for color copiers is currently sold in four
configurations which, except for those sold to Canon, are marketed under the
name Fiery XJ+ and offer a wider range of price/performance capabilities than
the Company's previous products. The four configurations are Fiery XJ+ 170,
Fiery XJ+ 250, Fiery XJ+ 325 and Fiery XJ+ 525. Estimated street prices for
those products are $13,000, $16,000, $20,000 and $40,000, respectively. Actual
street prices are set by the Company's OEMs and may vary by dealer and specific
product configuration.
Fiery XJe Embedded Controllers
In 1997, the Company continued to offer manufacturers of color laser
printers and copiers embedded Fiery XJ technology in the Fiery XJe Controller.
In addition to enabling color copiers, the Fiery XJe Controller enables desktop
color laser printers to print at fast speeds while maintaining superior output
quality. These printers are designed for end-users from a wide range of
environments, including desktop publishing, pre-press and graphic environments.
Speed, output quality, networkability, and remote management software make color
printing with Fiery Driven printers both affordable and easy. Many jobs that
once required a service bureau can now be done in-house, saving time and money
for end-users.
Fiery XJe Controllers are based on the proven technology and scalable
architecture developed for the Company's Fiery XJ+ Color Servers. The
single-board design of the Fiery XJ and Fiery XJ+ allow the Fiery XJe to be
installed inside a color laser printer or color copier. The Fiery XJe employs
both a RISC-based CPU and ASICs for the industry's fastest raster image
processing (RIP). These specially-designed Fiery XJ Rip Chips speed up the
output of color documents by off loading all data movement functions from the
controller's main CPU, which is then available for PostScript processing. The
Company's Rip-While-Print technology further speeds printing by enabling one
page to be printed while subsequent pages are concurrently processed. With
Continuous Print, Fiery XJe Controllers eliminate the delay caused when printers
"cycle down" between printing pages or jobs. Fiery XJe Controllers also provide
enhanced print quality, generating near photographic-quality, 600 dpi,
continuous-tone output on all prints. Fiery Driven printers deliver consistently
high output quality even when printing large and complex color documents.
With a built-in ethernet interface and support for simultaneous Novell
IPX, TCP/IP and EtherTalk network protocols, Fiery Driven printers are designed
to be compatible with leading network environments. Fiery Driven printers come
with a suite of software tools that offer complete remote management of print
output from a PC, Macintosh or UNIX desktop. The tools provide users with
complete control over print queue operations, print options and print order.
Fiery Driven printers also include a print calibrator, enabling accurate
calibration of color output.
In 1997, the Company continued to ship Fiery XJe Controllers to Canon,
IBM and Digital for desktop color printers, as well as to Ricoh for the Aficio
2000 series digital color copier. The Fiery XJe for the Ricoh Aficio 2000 was
the Company's first embedded controller for a color laser copier.
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Fiery XJ-W
Based on the Fiery XJ architecture, the Fiery XJ-W drives wide-format
color inkjet printers at their maximum-rated speed for most software
applications. In 1997, the Company continued shipping the Fiery XJ-W for the
ENCAD NovaJet Pro, and in January 1997 the Company began shipping the Fiery XJ-W
for the Hewlett Packard DesignJet 750C printer. The Company also enhanced the
Fiery XJ-W in 1997 with the introduction of Version 2.5, designed to support the
Hewlett Packard DesignJet 2000CP and the Encad NovaJet PROe Series. The Company
is currently selling the Fiery XJ-W through distributors and wide-format color
inkjet printer dealers. The Fiery XJ-W has a list price of approximately $4,995.
The Company's Fiery XJ-W product faces competition from wide-format
printer manufacturers that develop their own controllers and other companies
that develop controllers for wide-format printers. These companies include
Lasermaster, Onyx, Visual Edge, Cactus, Pisa Systems and Hewlett-Packard. Future
versions of these and other companies' controllers for wide-format printers
developed by these companies and new companies who develop products for this
market may compete with the Fiery XJ-W Controllers.
Fiery SI
In 1997, the Company continued to ship the Fiery SI, which was first
released in December 1996. The Fiery SI is a stand-alone, entry-level color
server that is optimized for fast, high-quality performance on common business
graphics applications, and is also capable of producing photographic quality
output for more demanding graphic arts applications. The Fiery SI currently
supports color copiers and printers distributed by Canon, Xerox, Minolta, Fuji
Xerox, Oce, and Agfa, and has a list price of approximately $10,000.
Fiery For High Speed Black-and-White Printers
In September 1996, the Company announced that it had entered into an
agreement with Oce Printing Systems for the Company to develop a Fiery Server
designed to drive Oce's high speed black-and-white printers. The Company
continues to work with Oce to develop the Fiery Server.
Fiery LX Technology
In 1997, the Company focussed its development efforts on its next
generation architecture designed to replace the Fiery XJ architecture, including
the Fiery LX. The streamlined design of the Fiery LX is a key component in
increasing speed and reducing the cost of Fiery Color Servers, Fiery
black-and-white controllers, and Fiery embedded controllers, thereby making this
technology available to a wider range of copier and printer devices. The Fiery
LX utilizes new proprietary ASICs for the fastest document processing time
available in the short-run color printing industry. The Fiery LX ships with the
100BaseT ethernet network board as standard, and is the first Fiery Product to
support Adobe PostScript 3. The Fiery LX Color Server and black-and-white
controller is a newly designed chassis, while the Fiery LX embedded controller
has a smaller footprint than the Fiery XJe which will enhance the ability to
embed the controller in multiple digital copiers and printers.
The Fiery LX utilizes enhanced, as well as new, software features
developed by the Company during 1997. These software features include the
Company's proprietary ColorWise Color Management System which contains extensive
color rendering dictionaries, allowing users to adjust colors at their own
comfort level. Also, the Fiery LX includes Fiery WebTools which uses any
standard Java(TM)-enabled browser to provide network administrators with the
ability to access and control a variety of printing functions such as job
tracking, job reprinting, job print order, and even deleting jobs. Fiery
WebTools also provides remote access to the print queue so the administrator can
obtain instant updates on job status and error messages, allowing for timely
response to problems, and provides job accounting and job security capabilities
which are essential in network printing environments.
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In 1997, the Company shipped its first Fiery LX products, including a
Fiery LX Color Server which is connected to the Epson Stylus Pro 5000 and EM
5000C. Also in 1997, the Company shipped the Fiery LX Controller for the Sharp
AR-5132, the Company's first controller for a black-and-white digital copier.
Significant Relationships
The Company has established, and continues to try to build and expand
relationships with a number of leading copier and printer companies ("OEMs") in
order to benefit from the OEMs' products, distribution channels and marketing
resources. These OEMs include domestic and international manufacturers of
digital copiers (both black-and-white and color) and wide-format printers, and
more recently, sellers of color-laser printers. The Company works closely with
its OEM customers with the aim of developing solutions that incorporate leading
technology and which are optimally suited to work in conjunction with its OEMs'
products. OEMs that the Company sold products to in 1997 include: Canon, Danka,
DEC, Hitachi, IBM, Kodak, Konica, Minolta, Oce, Ricoh, Seiko Epson, Sharp, and
Xerox and its worldwide subsidiaries and affiliates. Together, sales to Canon,
Xerox, and Ricoh accounted for 80% of the Company's 1997 revenue, with sales to
each of these customers accounting for more than 10% of the Company's revenue.
The Company customarily enters into development and distribution
agreements with its OEM customers. These agreements can be terminated under a
range of circumstances, and often upon relatively short notice. The
circumstances under which an agreement can be terminated vary from agreement to
agreement and there can be no assurance that OEM customers will continue to
purchase products from the Company in the future, despite such agreements. The
Company recognizes the importance of its relationships and works hard to
maintain good relations with its customers. However, the Company's relationships
with its customers can be affected by a number of factors including: competition
from other suppliers, competition from internal development efforts by the
customers themselves, and changes in competitive conditions (such as changes in
demand for the company's products). There can be no assurance that the Company
will continue to maintain or build the relationships it has developed to date.
In addition to its development and sales relationships with OEMs, to
increase the distribution and presence of Fiery Color Servers connected to both
color copiers and wide format printing devices, the Company has developed
strategic relationships with two well-known print-for-pay companies, Kinko's and
AlphaGraphics.
In October of 1997, the Company acquired Pipeline Associates, Inc. and
Pipeline Asia, Inc. (the "Pipeline Acquisition"), a leading software developer
specializing in PostScript, HTML and PCL interpreter technologies.
The Company also has a continuing relationship with Adobe and licenses
PostScript software from Adobe for use in many Fiery products. This relationship
is important because each Fiery Color Server requires page description language
software in order to operate. Adobe's PostScript software is widely used to
manage the geometry, shape and topography of hard copy documents and Adobe is a
recognized leader in providing page description software.
Distribution and Marketing
The Company's primary distribution method for its Fiery Color Servers
(other than for wide format products) has been to sell the Fiery Color Servers
to its OEMs. The Company's OEMs in turn sell these products to end-users for use
with the OEMs' copiers as part of an integrated printing system. For Fiery
Controllers, the Company's primary distribution method has been to sell the
products to the companies that embed the products into their copiers and
printers. There is no assurance that the risks of distributing the Company's
Fiery Products primarily through its OEM customers will not negatively impact
the Company in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Factors That Could Adversely
Affect Performance--Reliance on OEM Resellers; Risks Associated With Significant
Group Concentration". The
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Company continues to sell and distribute wide-format Fiery Color Servers through
distributors and wide-format color inkjet printer dealers. There is no assurance
that future sales of these products will be successful, nor that the risks of
selling the Fiery XJ-W through distributors and printer dealers will not
negatively impact the Company in the future.
The Company promotes all of its products through public relations,
direct mail, advertising, promotional material, trade shows and ongoing customer
communication programs.
Research and Development
Research and development costs for 1997, 1996, and 1995 were $40.3
million, $22.4 million, and $12.9 million, respectively. As of December 31,
1997, 285 of the Company's 538 full-time employees were involved in research and
development. The Company believes that development of new products and
enhancement of existing products are essential to its continued success, and
management intends to continue to devote substantial resources to research and
new product development. The Company expects to make significant expenditures to
support its research and development programs.
The Company is developing Fiery products to support additional color
and black-and-white printing devices including desktop printers, high-end color
copiers, black-and-white copiers and multi-function devices. The ongoing
development work includes a multiprocessor architecture for high-end systems and
lower-cost designs for desktop color laser printers. Substantial additional work
will be required to complete the development of these projects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Factors That Could Adversely Affect Performance--Product
Transitions".
Manufacturing
The Company subcontracts with other companies to manufacture its
products. These companies are closely supervised by the Company and work closely
with the Company to assure low costs and good quality in the manufacture of the
Company's products. Subcontractors purchase components needed for the Company's
products. The Company is totally reliant on the ability of its subcontractors to
produce products sold by the Company, and although the Company supervises its
subcontractors, there can be no assurance that the subcontractors will continue
to perform for the Company as well as they have in the past. There can also be
no assurance that any difficulties experienced by the Company's subcontractors
(such as interruptions in a subcontractor's ability to make goods or quality
assurance problems) would not adversely affect the Company's operations.
Human Resources
As of December 31, 1997, the Company employed 538 employees, with
approximately 409 full time employees located primarily in its Northern
California offices. Of the 538 total employees, approximately 161 were in sales
in marketing, 56 were in management and administration, 30 were in
manufacturing, and 285 were in research and development. Of the total number of
employees, the Company had 50 employees located in Canadian and U.S. offices
outside of Northern California, and 79 employees located in international
offices including employees based in Great Britain, The Netherlands, Germany,
Japan, France, Italy, Finland, Spain, Australia, and Hong Kong. The Company's
employees are not represented by any collective bargaining organization and the
Company has never experienced a work stoppage.
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Risk Factors
In addition to the above information, a discussion of factors that may
adversely affect the Company's future performance and financial results can be
found in Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operation.
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Item 2: Properties.
The Company's principal offices are located in San Mateo, California.
The company has also leased additional facilities in San Mateo and in Foster
City, California for research and development, quality assurance, sales,
marketing, administration, and other support operations. These offices in
Northern California collectively include approximately 144,000 square feet of
space. In addition, the Company leases space for its international offices.
Employees formerly with Pipeline Associates, Inc. are based in an office in
Parsippany, New Jersey.
In September 1996, the Company's entered into a master operating lease
for land and a building to be constructed in Foster City, California. The
facility is to be used as a corporate headquarters for the Company, and
construction began in 1997. Construction of this facility is scheduled to be
completed in December, 1998. The Company expects to vacate its existing rental
facilities in San Mateo and Foster City upon completion of the new corporate
headquarters.
In addition to its principal offices in San Mateo, the Company also
leases a number of domestic and international sales offices.
Item 3: Legal Proceedings.
On December 15, 1997, a shareholder class action lawsuit, entitled
Steele, et al. v. Electronics for Imaging, Inc., et al., No. CV 403099, was
filed against the Company and certain of its officers and directors in the
California Superior Court, San Mateo County. Five virtually identical class
action complaints were subsequently filed in the San Mateo Superior Court. On
December 31, 1997, a putative shareholder class action entitled Smith v.
Electronics for Imaging, Inc., et al., No. C97-4739 was filed against the
Company and certain of its officers and directors in the United States District
Court for the Northern District of California. The state-court class actions
allege that the Company made false and misleading statements concerning its
business during a putative class period of April 10, 1997 through December 11,
1997 and allege violations of California Corporations Code Sections 25400 and
25500 and Civil Code Sections 1709 and 1710. The federal class action complaint
makes the same factual allegations, but alleges violations of the federal
securities laws. The complaints do not specify the damages sought. The Company
believes that these lawsuits are without merit and
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intends to contest them vigorously, but there can be no assurance that if
damages are ultimately awarded against the Company, the litigation will not
adversely affect the Company's results of operations.
In addition, the Company is involved from time to time in litigation
relating to claims arising in the normal course of business. Management is of
the opinion that the ultimate resolution of such claims will not materially
affect the Company's business or financial position. See "Risk Factors -
Infringement and Potential Litigation."
Item 4: Submission of Matters to a Vote of Security Holders.
No matters were submitted to shareholders for vote during the fourth
quarter of 1997.
PART II
<TABLE>
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock was first traded on the NASDAQ National
Market under the symbol EFII on October 2, 1992. The table below lists the high
and low closing quotation during each quarter the stock was traded in 1997 and
1996 and reflects the Company's February 1997 two-for-for one stock split. As of
December 31, 1997, there were approximately 385 stockholders of record. The
Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for business, and
does not anticipate paying any cash dividends in the foreseeable future.
<CAPTION>
1997 1996
----------------------------------------- -----------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 49.00 $ 50.00 $ 56.00 $ 54.62 $ 22.88 $ 42.69 $ 38.50 $ 42.75
Low 38.00 35.62 47.25 13.62 15.38 22.25 25.63 33.75
</TABLE>
11
<PAGE>
<TABLE>
Item 6: Selected Financial Data.
The following tables summarize selected consolidated financial data as
of and for the five years ended December 31, 1997. This information should be
read in conjunction with the audited consolidated financial statements and
related notes thereto.
<CAPTION>
(In thousands, except per share amounts)
As of and for the years ended December 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Revenue $360,631 $298,013 $190,451 $130,381 $ 89,526
Gross profit 196,676 152,614 95,000 66,048 49,603
Income before income taxes 101,377 97,164 58,593 33,301 20,551
Net income 64,882 62,184 37,500 21,306 12,751
Net income per basic common share 1 1.24 1.23 0.76 0.46 0.29
Net income per diluted common share 1 $ 1.15 $ 1.13 $ 0.71 $ 0.43 $ 0.26
Shares used in computing net income
per basic common share 1 52,359 50,672 49,210 47,208 44,420
Shares used in computing net income per
diluted common share 1 56,198 54,828 53,100 49,836 49,156
Financial Position
Cash and short-term investments $242,731 $212,100 $144,018 $106,974 $ 79,491
Working capital 286,827 237,366 157,059 108,071 82,745
Long Term Debt 4,064 -- -- -- --
Total assets 385,998 298,953 194,469 135,461 104,044
Stockholders' equity 338,865 249,370 163,940 113,529 88,307
Ratios and Benchmarks
Current ratio 7.7 5.8 6.1 5.9 6.3
Inventory turns 9.4 15.5 11.8 9.9 9.1
Full-time employees 538 354 222 192 173
<FN>
1 See Note 7 of Notes to Consolidated Financial Statements as well as the Company's adoption of Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 128 - "Earnings per share".
</FN>
</TABLE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction
with the audited consolidated financial statements and related notes thereto.
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 complete
discussion of the factors that could impact the Company's results, readers are
referred to the section below entitled "Factors that Could Adversely Affect
Performance".
Results of Operations
The following tables set forth items in the Company's consolidated
statements of income as a percentage of total revenue for 1997, 1996, and 1995,
and the year-to-year percentage change for certain items in 1997 and 1996. These
operating results are not necessarily indicative of results for any future
period.
12
<PAGE>
Years ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
Revenue 100% 100% 100%
----- ----- -----
Gross profit 54.5% 51.2% 49.9%
Research and development 11.2% 7.5% 6.8%
Sales and marketing 12.0% 10.1% 11.5%
General and administrative 3.4% 3.4% 3.7%
In-process research and development 2.6% 0.0% 0.0%
----- ----- -----
Income from operations 25.3% 30.2% 27.9%
Other income, net 2.8% 2.5% 2.9%
----- ----- -----
Income before income taxes 28.1% 32.7% 30.8%
Provision for income taxes 10.1% 11.8% 11.1%
----- ----- -----
Net income 18.0% 20.9% 19.7%
===== ===== =====
Years ended December 31,
-------------------------------------------------------
1997 Change 1996 Change 1995
-------------------------------------------------------
Revenue $360,631 21% $298,013 56% $190,451
Gross profit 196,676 29% 152,614 61% 95,000
Operating expenses 105,480 68% 62,768 50% 41,883
Net income 64,882 4.3% 62,184 66% 37,500
Net income per
diluted common share $ 1.15 2% $ 1.13 59% $ 0.71
Revenue
Revenue increased to $360.6 million in 1997, compared to $298.0 million in
1996 and $190.5 million in 1995. Substantially all of the revenue for these
three 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 and others.
The Company believes that its revenue growth in 1997 has been enabled by a
number of factors which include: increased demand for color printing; increased
use in the graphic arts and office environments of software applications which
are enhanced by color printing; the increased percentage of digital color
copiers which are connected to a network environment; and successful sales of
entry-level Fiery products with pricing and performance that are attractive to
the corporate environment. The Company also believes that revenue growth in 1997
is partly attributable to increased sales of the Company's current family of
products to print-for-pay end-users such as Kinko's and Alphagraphics. In
addition, in 1997 the Company made available to its customers improvements to
the Company's current family of products, including new software features.
The Company's growth rate in revenue in 1997 was 21%, compared to 56% in
1996. Through the third quarter of 1997, revenues were 44% greater than for the
same period in 1996. During the fourth quarter of 1997, the Company experienced
substantial decreases in the purchase of its products. The Company believes that
these decreases were associated with product transitions, substantial reductions
of inventory by the Company's customers and distress in Asian economies. As a
result, the Company experienced a decline in revenues during the fourth quarter.
The Company's revenues were 32% less in the fourth quarter of 1997 than in the
corresponding period for 1996, which resulted in a growth rate for fiscal 1997
of 21%.
13
<PAGE>
International revenue increased slightly from 51% of total revenue in 1996
to 52% in 1997. Direct sales to Europe increased $33.4 million to $108.6 million
in 1997, and accounted for approximately 30% of total revenue, compared with 25%
in 1996 and 27% in 1995. The Company believes that increased European revenue
was due in part to one of the Company's OEM partners requesting direct shipments
to their European operations instead of continuing to handle reshipments itself.
Shipments to some of the Company's OEM partners continue to be made to
centralized purchasing and manufacturing locations in the United States, which
in turn sell through to other international locations. As a result of these
factors, the Company believes that international sales of its products may
actually be higher than is reflected in the percentages above, though accurate
data is difficult to obtain. The Company believes that the increase in sales to
Europe was also due in part to the continued development of distribution
channels and the Company's continued investment in its European sales
organizations.
Direct sales to Japan decreased $0.3 million to $63.4 million and accounted
for approximately 18% of total revenue in 1997, compared with 21% and 14% in
1996 and 1995, respectively. The Company believes that the decrease in sales to
Japan in 1997 reflects delays in purchases associated with product transitions,
aggressive reductions of inventory by the Company's Japanese customers, and
distress in Asian economies. Although such conditions are difficult to predict,
the Company does not assume that there will be a significant improvement in
economic conditions in Asia in 1998, and limited demand from Asia may have an
adverse impact on the Company's results of operation. The Company expects that
international revenue will continue to represent a significant portion of its
total revenue.
In 1997, the Company relied on three OEM customers, Canon, Xerox, and
Ricoh, for approximately 85% of its revenue, with each of these customers
accounting for more than 10% of the Company's total revenue. As a result of this
concentration, delays in purchases by one or several key OEM customers, as
occurred in the fourth quarter of 1997, can severely impact the Company's
revenues. The Company anticipates that decreases in revenue related to delays in
the introduction of next generation Fiery products may continue until the next
generation of products is fully tested and accepted by the Company's OEM
customers and is shipping in volume. Although the Company is continuing
development of new products and expects to announce the introduction of new
products in 1998, there can be no assurance that such introductions will not be
further delayed, or that once the products have been introduced, the Company's
customers will purchase them. If the Company experiences further delays in the
launch or availability of its products, such delays may have an additional
adverse impact on the Company's financial results.
In 1997, as in 1996 and 1995, the Company's revenues were substantially
based on sales of stand-alone Fiery Color Servers for digital color copiers.
These products accounted for more than 80% of the Company's revenue in 1997.
However, in addition to further developing and distributing its stand-alone
Fiery Color Servers, the Company continues to market embedded Fiery technology
under the name "Fiery Driven" for use in desktop color printers. Although sales
of this type of product did not account for a significant part of the Company's
revenue in 1997, the Company believes that the demand for desktop color printers
may increase, although there can be no assurance that such demand will in fact
increase or that the Company can successfully develop and sell embedded
controllers for desktop color printers. Accordingly, the Company continues to
dedicate resources to developing embedded controllers for desktop color
printers. The Company believes a higher level of competition and different
distribution and marketing practices exist for desktop color printers than for
digital color copiers. This has led the Company to accept lower unit prices and
lower margins for its embedded products for desktop color printers than the
Company obtained in 1997 for its stand-alone color copier products. Accordingly,
if the Company does not sell printer products in sufficient volume to offset the
products' lower margins, the Company's results of operations may be adversely
affected.
14
<PAGE>
The Company has also begun efforts to develop and sell both embedded and
stand-alone controllers for digital black-and-white copiers. Products for
digital black-and-white copiers began shipping in low volumes in the fourth
quarter of 1997 and were an insignificant source of revenue for 1997. The
Company believes that its development of Fiery products for digital
black-and-white copiers may further allow the Company to leverage its controller
technology into additional sources of revenue, although there can be no
assurance that the Company will successfully develop and sell Fiery products for
black-and-white copiers or that there will be significant demand for these
products. There can be no assurance that the Company will ever experience
significant revenue from sales of the Company's products for digital
black-and-white copiers.
The Company also believes that in addition to the factors described above,
price reductions for all of its products may affect revenues in the future. The
Company has made and may in the future make price reductions for its products,
including reductions on its stand-alone Fiery Color Servers. Depending upon the
price-elasticity of demand for the Company's products, the pricing and quality
of competitive products, and other economic and competitive conditions, such
price reductions may have an adverse impact on the Company's revenues and
profits. If the Company is not able to compensate for lower gross margins that
may result from price reductions with an increased volume of sales, its results
of operations could be adversely affected. In addition, if the Company's revenue
in the future depends more upon sales of products with relatively lower gross
margins than the Company obtained in 1997 (such as embedded controllers for
printers, embedded controllers for color and black-and-white copiers, and
stand-alone controllers for black-and-white copiers), results of operations may
be adversely affected.
It is also possible that revenues in the future may be affected if
individuals with responsibility for purchasing the Company's Fiery products,
such as information technology professionals, choose to devote available
discretionary resources to other perceived needs, such as technology expenses
associated with Year 2000 preparation. At this time, the Company cannot
determine how much impact, if any, this factor may have.
Cost of Revenue
The substantial majority of the Company's cost of revenue to date has
been attributable to the sale of Fiery Color Servers. Third-party manufacturers
who purchase most of the necessary components manufacture these products. The
Company directly purchases proprietary memory, certain ASIC components, as well
as software licensed from various sources, including PostScript interpreter
licensed from Adobe Systems Incorporated.
The Company's gross margin was 54.5%, 51.2% and 49.9% of revenue in
1997, 1996, and 1995, respectively. Overall gross margins in 1997 benefited from
lower component prices used in the Company's products in addition to lower
manufacturing costs due to economies of scale. Gross margins in 1996 were better
than in 1995 in part because of a reduction of DRAM and other component prices.
However, prices for these components generally only began to decrease in the
second quarter of 1996. In addition, the Company introduced certain color
servers at the end of 1996 which had higher margins than the embedded products
that the Company introduced in 1995.
The Company's gross margin depends in part on the market prices that
can be achieved on its current and future products. The lower manufacturing
costs of the Company's currently shipping color servers have given the Company
flexibility to offer products with a broad range of prices. However, no
assurance can be given that either component prices or overall manufacturing
costs will not increase in future periods.
15
<PAGE>
In the first half of 1997, the Company was able to offer its customers
significant price reductions across its line of products and saw substantial
increases in volumes while still maintaining its gross margins. The Company was
able to do so because of lower market prices for DRAM components. However, the
Company's ability to maintain similar gross margins may not continue, and there
can be no assurance that the Company will increase or maintain current margins.
In addition to the factors affecting revenue described above, the Company
expects to be subject to pressures to reduce prices, and as a result, gross
margins for all of its products may be lower. The Company also expects that
sales of products with relatively lower margins may 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 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.
Operating Expenses
Operating expenses for 1997 increased by $42.7 million or 68 % from 1996.
Operating expenses in 1997 also constituted a higher percentage of revenues than
in 1996 or 1995 - 29% versus 21% and 22% respectively. One element of this
increase was a $9.4 million charge for in process technology that was expensed
in 1997 as part of the acquisition of Pipeline Associates, Inc. and Pipeline
Asia, Inc. (the "Pipeline Acquisition"), a leading software developer
specializing in PostScript, HTML and PCL interpreter technologies. Increases in
operating expenses in the last two years also were caused by the hiring of
additional full time employees, with a net increase of 184 people or 52% in 1997
and a net increase of 132 people or 59% in 1996. The Company hired additional
employees to support product development as well as to support the Company's
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 $40.3 million or 11.2% of
revenue in 1997, compared to $22.4 million (7.5% of revenue) and $12.9
million (6.8% of revenue) in 1996 and 1995, respectively. Research and
development expenses have increased over the years primarily due to an
increase in research and development projects resulting in an 80%
growth in engineering headcount in 1997 and 1996. The increase in
efforts to develop new Fiery products has also increased prototype
costs, nonrecurring engineering expenses, and depreciation charges. The
Company believes that the development of new products and the
enhancement of existing products are essential to its continued
success, and intends to continue to devote substantial resources to
research and new product development efforts. Accordingly, the Company
expects that its research and development expenses may continue to
increase in absolute dollars and also as a percentage of revenue.
16
<PAGE>
Sales and Marketing
Sales and marketing expenses include personnel expenses, costs for
trade shows, marketing programs and promotional materials, sales
commissions, travel and entertainment expenses, depreciation, and costs
associated with sales offices primarily in the United States, Europe,
Japan and other locations around the world. Sales and marketing
expenses for 1997 were $43.4 million or 12.0% of revenue, compared to
$30.2 million (10.1% of revenue) and $21.9 million (11.5% of revenue)
in 1996 and 1995, respectively. While sales and marketing expenses
decreased as a percentage of total revenue in 1996 from 1995, over the
past three years these expenses have increased steadily in absolute
dollars. Contributing to this increase is a 29% and 40% increase in
headcount, in 1997 and 1996, respectively, primarily in the United
States. 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 have also
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
products, and continue to build its sales and marketing organization,
particularly in Europe and Asia Pacific, including Japan.
General and Administrative
General and administrative expenses consist primarily of personnel
expenses and, to a lesser extent, depreciation and facility costs,
professional fees and certain costs associated with public companies.
General and administrative expenses were $12.3 million or 3.4% of
revenue in 1997, compared to $10.1 million (3.4% of revenue) and $7.0
million (3.7% of revenue) in 1996 and 1995, respectively. While general
and administrative expenses have remained constant or have decreased as
a percentage of total revenue in 1997 and 1996, these expenses have
increased in absolute dollars. The increases in 1997 and 1996 were
primarily due to the increase in headcount to support the Company's
operations. The Company expects that its general and administrative
expenses may continue to increase in absolute dollars and also as a
percentage of revenue.
17
<PAGE>
Acquisition
In October of 1997, the Company acquired Pipeline Associates, Inc. and
Pipeline Asia, Inc. in the Pipeline Acquisition for $12.6 million, net
of cash received. The acquisition is intended to expand the Company's
core technologies and thereby decrease its dependence on software
licensed from outside sources.
Income Taxes
The Company's effective tax rate was 36.0% in 1997, 1996 and 1995. In
each of these years, the Company benefited from increased tax-exempt
interest income, increases in foreign sales and the utilization of
research and development credits in achieving a consolidated effective
tax rate lower than that prescribed by the respective Federal and State
taxing authorities. The Company anticipates that these benefits will
continue to have a favorable impact on its consolidated effective tax
rate.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased to $242.7
million as of December 31, 1997, from $212.1 million as of December 31, 1996.
Working capital increased to $286.8 million as of December 31, 1997, up from
$237.4 million as of December 31, 1996. These increases are primarily the result
of cash generated from operations and the exercise of employee common stock
options.
Net cash provided by operating activities was $72.5 million, $71.3
million and $36.0 million in 1997, 1996 and 1995, respectively. Cash provided by
operating activities increased in 1997 primarily due to a reduction in accounts
receivable balances at the end of the fourth quarter, partially offset by the
increased investment in inventory and receivable from subcontract manufacturers.
The Company has continued to invest additional cash in short-term
investments, mainly municipal securities. Purchases in excess of sales of
short-term investments were $45.3 million, $42.1 million, and $21.2 million in
1997, 1996, and 1995, respectively. In October 1997, the Company invested $12.6
million, net of cash received, in the Pipeline Acquisition. Prior to 1997, the
Company's capital expenditures have generally consisted of investments in
computers and related peripheral equipment and office furniture for use in the
Company's operations. The Company purchased approximately $11.2 million, $10.7
million and $4.5 million of such equipment and furniture during 1997, 1996 and
1995, respectively.
In 1997, the Company began development of a corporate campus on a
35-acre parcel of land in Foster City, California. During 1997, the Company
spent approximately $27.0 million on this land and associated improvement costs.
In addition to purchasing the land, the Company entered into an agreement to
lease a ten-story 295,000 square foot building to be constructed in 1998. The
lessor of the building has committed to fund up to a maximum of $65 million for
the construction to be directed by the Company. Rent payments for the building
will commence upon completion of construction and bear a direct relationship to
the carrying cost of the amount drawn on the commitment. The initial term of the
lease is 7 years with options to purchase at any time. Also in conjunction with
the lease, the Company has entered into a separate ground lease with the lessor
of the building for approximately 35 years. The Company has guaranteed a
residual value associated with the building to the lessor of approximately 82%
of the lessor's funding. If the Company defaults on the lease, does not renew
the lease, does not purchase the building or does not arrange for a third party
purchase of the building at the end of the lease term, it may be liable to the
lessor for the amount of the residual guarantee. As part of the lease agreement
the Company must maintain a minimum net worth. In addition, the company has
pledged certain marketable securities ($ 7.6 million at December 31, 1997) to be
held in proportion to the amount drawn in order to secure a more favorable lease
rate and avoid other covenant restrictions. The Company may use these funds at
any time, but their conversion would also result in an increase to the lease
rate and the imposition of additional covenant restrictions.
18
<PAGE>
Net cash provided by financing activities of $9.9 million, $7.7 million
and $5.5 million in 1997, 1996 and 1995, respectively, were primarily the result
of exercises of common stock options. Net cash provided by financing activities
in 1997 includes approximately $ 132,000 of repayment of bonds assumed as part
of the Foster City, California land acquisition.
The Company's inventory consists primarily of memory subsystems which
are consigned to third-party contract manufacturers responsible for
manufacturing substantially all of the Company's products. Should the Company
decide to purchase components and do its own manufacturing, or should it become
necessary for the Company to purchase and consign components other than the ASIC
or memory subsystems for its contract manufacturers, inventory balances would
increase significantly, thereby reducing the Company's available cash resources.
Further, these contract manufacturers produce substantially all of the Company's
products. The Company believes that, should the services of any of these
contract manufacturers become unavailable, a significant negative impact on the
Company's consolidated financial position and results of operations could
result. The Company is also reliant on several sole-source suppliers for certain
key components and could experience a further significant negative impact on its
consolidated financial position and results of operations if such supply were
reduced or not available.
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 its internal MIS systems will not be materially
affected by Year 2000 issues. Also, the Company has tested its products to
determine if the products will successfully roll-over 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, along with its directors and certain officers and
employees, has been named in class action lawsuits filed in both the San Mateo
County Superior Court and the United States District Court for the Northern
District of California. The lawsuits are all related to the drop in the trading
price of the Company's stock that occurred in December, 1997. The Company
believes the lawsuits are without merit and intends to contest them vigorously,
but there can be no assurance that if damages are ultimately awarded against the
Company, the litigation will not adversely affect the Company's 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 1998.
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.
19
<PAGE>
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 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
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
20
<PAGE>
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
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
21
<PAGE>
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 52% of the Company's product revenue for 1997 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.
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 software for products that it
offers. However, there can be no assurance that Adobe will continue to grant
future licenses to Adobe PostScript 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.
22
<PAGE>
<TABLE>
Electronics for Imaging, Inc.
Consolidated Balance Sheets
<CAPTION>
December 31,
--------------------------------
(In thousands, except share and per share amounts) 1997 1996
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 57,195 $ 71,946
Short-term investments 185,536 140,154
Accounts receivable 30,930 40,875
Inventories 23,790 11,004
Other current assets 32,445 22,970
------------- --------------
Total current assets 329,896 286,949
Property and equipment, net 46,502 10,640
Other assets 9,600 1,364
------------- --------------
Total assets $ 385,998 $ 298,953
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 20,255 $ 16,355
Accrued and other liabilities 19,891 25,980
Income taxes payable 2,923 7,248
------------- --------------
Total current liabilities 43,069 49,583
------------- --------------
Long - term debt 4,064 -
------------- --------------
Commitments and Contingencies (Note 5)
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;
52,558,383 and 51,503,314 shares issued and outstanding,
respectively 524 515
Additional paid-in capital 137,264 112,660
Retained earnings 201,077 136,195
------------- --------------
Total stockholders' equity 338,865 249,370
------------- --------------
Total liabilities and stockholders' equity $ 385,998 $ 298,953
============= ==============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
Electronics for Imaging, Inc.
Consolidated Statements of Income
<CAPTION>
Years ended December 31,
--------------------------------------------------
(In thousands, except per share amounts) 1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Revenue $ 360,631 $ 298,013 $ 190,451
Cost of revenue 163,955 145,399 95,451
-------------- ------------- --------------
Gross profit 196,676 152,614 95,000
Operating expenses:
Research and development 40,318 22,440 12,922
Sales and marketing 43,414 30,221 21,938
General and administrative 12,348 10,107 7,023
In - process research and development 9,400 -- --
-------------- ------------- ------------
105,480 62,768 41,883
-------------- ------------- --------------
Income from operations 91,196 89,846 53,117
Other income, net 10,181 7,318 5,476
-------------- ------------- --------------
Income before income taxes 101,377 97,164 58,593
Provision for income taxes (36,495) (34,980) (21,093)
--------------- ------------- --------------
Net income $ 64,882 $ 62,184 $ 37,500
============== ============= ==============
Net income per basic common share $ 1.24 $ 1.23 $ 0.76
============== ============= ==============
Shares used in per-share calculation $ 52,359 $ 50,672 49,210
============== ============= ==============
Net income per diluted common share $ 1.15 $ 1.13 $ 0.71
============== ============= ==============
Shares used in per-share calculation $ 56,198 $ 54,828 53,100
============== ============= ==============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
Electronics for Imaging, Inc.
Consolidated Statements of Stockholders' Equity
<CAPTION>
Common Stock Additional Total
----------------------- Paid-in Retained Stockholder's
(In thousands) Shares Amount Capital Earnings Equity
------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1994 11,989 $ 120 $ 76,898 $ 36,511 $ 113,529
Exercise of common stock options 993 10 5,465 -- 5,475
Tax benefit related to stock plans -- -- 7,436 -- 7,436
Effect of two-for-one stock split 11,989 120 (120) -- --
Net income for the year ended
December 31, 1995 -- -- -- 37,500 37,500
------ --------- --------- --------- ---------
Balances as of December 31, 1995 24,971 250 89,679 74,011 163,940
Exercise of common stock options 780 8 7,691 -- 7,699
Tax benefit related to stock plans -- -- 15,547 -- 15,547
Effect of two-for-one stock split 25,752 257 (257) -- --
Net income for the year ended
December 31, 1996 -- -- -- 62,184 62,184
------ --------- --------- --------- ---------
Balances as of December 31, 1996 51,503 515 112,660 136,195 249,370
Exercise of common stock options 1,055 9 10,059 -- 10,068
Tax benefit related to stock plans -- -- 14,545 -- 14,545
Net income for the year ended
December 31, 1997 -- -- -- 64,882 64,882
------ --------- --------- --------- ---------
Balances as of December 31, 1997 52,558 $ 524 $ 137,264 $ 201,077 $ 338,865
====== ========= ========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
25
<PAGE>
<TABLE>
Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
-------------------------------------------------
(In thousands) 1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 64,882 $ 62,184 $ 37,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,376 5,484 3,414
Deferred taxes (4,144) (4,135) (1,313)
In-process research and development 9,400 -- --
Changes in operating assets and liabilities:
Accounts receivable 10,378 (13,287) (18,849)
Inventories (12,786) (3,195) 614
Receivable from Subcontract Manufacturers (5,854) (9,600) (1,788)
Other current assets (4,107) (778) 426
Accounts payable and accrued liabilities (2,870) 19,682 6,549
Income taxes payable 10,220 14,919 9,484
-------------- ------------- --------------
Net cash provided by operating activities 72,495 71,274 36,037
-------------- ------------- --------------
Cash flows from investing activities:
Purchases of short-term investments (195,669) (213,919) (168,556)
Sales/maturities of short-term investments 150,287 171,777 147,299
Investment in property and equipment, net (38,530) (10,655) (4,528)
Business acquired, net of cash received (12,626) -- --
Purchase of other assets (644) (236) 60
--------------- -------------- --------------
Net cash used for investing activities (97,182) (53,033) (25,725)
--------------- ------------- --------------
Cash flows from financing activities:
Repayment of bonds payable (132) -- --
Issuance of common stock 10,068 7,699 5,475
-------------- ------------- --------------
Net cash provided by financing activities 9,936 7,699 5,475
-------------- ------------- --------------
Increase (decrease) in cash and cash equivalents (14,751) 25,940 15,787
Cash and cash equivalents at beginning of year 71,946 46,006 30,219
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 57,195 $ 71,946 $ 46,006
============== ============= ==============
Supplemental disclosures of Cash Flow Information:
Cash paid for interest $ 154 $ -- $ --
Cash paid for income taxes 30,225 23,715 12,463
Assumption of debt in conjunction with land acquisition 4,467 -- --
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
26
<PAGE>
Electronics for Imaging, Inc.
Notes to Consolidated Financial Statements
Note 1: The Company and Its Significant Accounting Policies
The Company and Its Business
Electronics for Imaging, Inc. (the "Company"), a Delaware corporation,
designs and markets products that enable high-quality color printing in short
production runs. Its Fiery products incorporate hardware and software
technologies that transform digital color copiers from all leading copier
manufacturers into fast, high-quality networked color printers. Fiery XJe
Controllers leverage these technologies to increase the output speed and improve
the print quality of desktop color laser printers. The Company operates in one
industry and sells its products primarily to original equipment manufacturers in
North America, Europe and Japan. Substantially all of the Company's revenue to
date has resulted from the sale of Fiery products.
Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The preparation of 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
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Revenue Recognition. Revenue is recognized when the product is shipped,
provided no significant obligations remain and collectibility is probable.
Provisions for estimated warranty costs and potential sales returns are recorded
when revenue is recognized.
Cash, Cash Equivalents and Short-Term Investments. The Company generally
invests its excess cash in deposits with major banks, money market securities,
and municipal and U.S. government securities. The Company is exposed to credit
risk in the event of default by the financial institutions or issuers of these
investments to the extent of amounts recorded on the consolidated balance sheet.
The Company has classified its investment portfolio as available-for-sale.
Available-for-sale securities are stated at fair value with unrealized gains and
losses reported as a separate component of stockholders' equity. Such unrealized
gains and losses have historically not been material.
Cash equivalents consist of short-term, highly liquid investments with
original maturities of three months or less. As of December 31, 1997, the
Company had approximately $187.0 million of available-for-sale securities, of
which approximately $1.4 million were classified as cash equivalents.
Approximately $45.7 million had stated maturities greater than one year and less
than two years. Approximately $39.3 million had stated maturities greater than
two years. As of December 31, 1996, the Company had approximately $150.2 million
of available-for-sale securities, of which approximately $10.1 million were
classified as cash equivalents and approximately $68.7 million had stated
maturities greater than one year. None of the Company's available-for-sale
securities had maturities greater than two years as of December 31, 1996.
Concentration of Credit Risk. The Company is exposed to credit risk in the
event of default by any of its customers to the extent of amounts recorded on
the consolidated balance sheet. The Company performs ongoing credit evaluations
of its customers' financial condition and maintains reserves for estimated
credit losses; such actual losses have been within management's expectations.
Fair value of financial Instruments. The carrying amount of cash, cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities and bonds payable as presented in the financial statements,
approximates fair value based on the nature of these instruments and prevailing
interest rates.
27
<PAGE>
Inventories. Inventories are stated at standard costs which approximate the
lower of actual cost using a first-in, first-out method, or market. The Company
periodically reviews its inventories for potential slow-moving or obsolete items
and writes down specific items to net realizable value as appropriate.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the lease term, if shorter.
Income Taxes. The Company uses the asset and liability method to calculate
deferred income taxes. The realization of deferred tax assets is based on
historical tax positions and expectations about future taxable income. No
provision for U.S. income tax is made for the undistributed earnings of the
Company's foreign subsidiaries, to the extent it is the Company's intention to
indefinitely reinvest these earnings in the respective subsidiaries.
Foreign Currency Translation. Subsidiaries with accounts denominated in
foreign currencies have been translated in accordance with SFAS 52 - "Foreign
Currency Translation", using the U.S. dollar as the functional currency. Foreign
currency translation and transaction gains and losses have not been significant
in any period.
Stock Based Compensation. Compensation associated with stock options is
recognized using the intrinsic value method, whereby compensation is only
recorded if the exercise price of the stock option is less than the market price
of the underlying stock on the date of grant. Additional pro forma disclosures
are provided in Note 8 as if the fair value method had been applied. Current
compensation under the fair value method incorporates an additional component
for the potential future value of the option.
Computation of Net Income per Common Share. Net income per basic common
share is computed using the weighted average number of common shares outstanding
during the period. Net income per diluted common share is computed using the
weighted average number of common shares and potential common shares outstanding
during the period. Potential common shares result from the assumed exercise,
using the treasury stock method, of outstanding common stock options having a
dilutive effect.
Comprehensive Income. In June 1997 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 130 (SFAS) - "Reporting
Comprehensive Income". SFAS 130 establishes the standards for reporting
comprehensive income and its components in a financial statement. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income include foreign currency translation
adjustment and unrealized gain/loss on available for sale securities. The
disclosure prescribed by the Statement must be made beginning with the first
quarter of fiscal 1998.
Segment Reporting. In June 1997, the Financial Accounting Standards Board
issued SFAS 131 - "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
SFAS 131 are effective in fiscal 1998.
Reclassifications. Certain prior year amounts have been reclassified to
conform with fiscal 1997 presentation. These changes had no impact on previously
reported results of operations or shareholders' equity.
28
<PAGE>
Note 2: Acquisitions
In October of 1997, the Company acquired Pipeline Associates, Inc. and
Pipeline Asia, Inc. (collectively, "Pipeline") - a leading software developer of
PostScript, HTML and PCL interpreter technologies . The acquisition cost, net of
cash received was $12.6 million and was accounted for as a purchase. The excess
of the acquisition cost over the fair market value of net tangible assets
acquired was $ 12.5 million, of which $ 9.4 million was allocated to in-process
research and development and expensed immediately. The allocation to in -
process research and development was based on an independent appraiser's
valuation report which included the value of products in the development stage
not considered to have reached technological feasibility. The balance of the
excess acquisition cost was allocated to Acquired Technology and Trademarks - $
2.8 million, and goodwill - $0.3 million which are being amortized over 3 and 5
years respectively. The Pipeline acquisition was not deemed material to the
Company's financial condition or results of operations, accordingly, pro forma
disclosures associated with purchase accounting have not been provided.
29
<PAGE>
Note 3: Balance Sheet Components
December 31,
------------------------
(In thousands) 1997 1996
------------------------
Short-term investments:
Municipal securities $ 183,859 $ 137,315
U.S. government securities 1,677 2,839
--------- ---------
$ 185,536 $ 140,154
========= =========
Accounts receivable:
Accounts receivable $ 32,315 $ 42,787
Less reserves and allowances (1,385) (1,912)
--------- ---------
$ 30,930 $ 40,875
========= =========
Inventories:
Raw materials $ 19,216 $ 6,696
Work in process 3,183 3,374
Finished goods 1,391 934
--------- ---------
$ 23,790 $ 11,004
========= =========
Other Current Assets:
Receivable from subcontract manufacturers $ 17,642 $ 11,788
Other 14,803 11,182
--------- ---------
$ 32,445 $ 22,970
========= =========
Property and equipment:
Land $ 27,351 $ --
Equipment and purchased software 34,201 21,901
Furniture and leasehold improvements 7,494 3,907
--------- ---------
69,046 25,808
Less accumulated depreciation and amortization (22,544) (15,168)
--------- ---------
$ 46,502 $ 10,640
========= =========
Accrued and other liabilities:
Accrued product-related obligations $ 14,618 $ 13,588
Accrued compensation and benefits 2,716 2,261
Other accrued liabilities 2,557 10,131
--------- ---------
$ 19,891 $ 25,980
========= =========
30
<PAGE>
Note 4: Long -Term Debt
Long Term Debt consists of amounts due to the City of Foster City for
certain bonds assumed by the Company during the purchase of land (see Note 5).
Principal amounts owing under the bonds are as follows:
(In thousands)
Total principal $ 4,335
Less: current portion (271)
-------
$ 4,064
=======
The bonds are secured by the land and bear an annual interest rate of
approximately 7%. Interest and principal payments are due semi-annually with the
last payment occurring in June 2009. Principal payments under the bonds payable
are as follows:
(In thousands)
Year ending
December 31,
- ------------
1998 $ 271
1999 287
2000 304
2001 323
2002 342
Thereafter 2,808
------
$4,335
======
Note 5: Commitments and Contingencies
Leases
The Company currently leases its principal operating facilities under four
non-cancelable operating leases expiring between March 31, 1999 and June 30,
2000. Future minimum lease commitments under noncancelable operating leases for
facilities as of December 31, 1997 are approximately $3.1 million, $2.5 million,
and $0.8 million in 1998, 1999 and 2000, respectively. Rent expense was
approximately $3.3 million, $2.1 million, and $1.9 million in 1997, 1996 and
1995, respectively.
On July 18, 1997, the Company entered into an agreement to lease a
ten-story 295,000 square foot building to be constructed on 35 acres, which the
Company owns in Foster City, California. The lessor of the building has
committed to fund up to a maximum of $65 million for the construction of the
building, with the portion of the committed amount actually used for
construction to be determined by the Company. Rent obligations for the building
will bear a direct relationship to the carrying cost of the commitment actually
drawn down. The amount of this rent obligation is contingent upon future events
and is not included in the above future minimum lease commitments under
non-cancelable operating leases. Currently, carrying costs of funds drawn also
accrue as part of the construction cost being drawn from the commitment. The
Company currently anticipates that construction will be completed in December of
1998. The Company has the contractual right to sub-lease its current facilities.
31
<PAGE>
The lease associated with the Foster City building has a term of seven
years with an option to renew the lease for an additional 3 to 5 years subject
to certain conditions. In connection with the lease, the Company entered into a
lease of its land in Foster City to the lessor of the building at a nominal rate
and for a term of 34 years and 11 months. If the Company terminates or does not
negotiate an extension of its lease of the building, the ground lease to the
lessor converts to a market rate. The Company, at its option, may purchase the
building during or at the end of the terms of the lease at approximately the
amount expended by the lessor to construct the building. The Company has
guaranteed a residual value associated with the building to the lessor of
approximately 82% of the lessor's funding. If the Company defaults on its lease,
does not renew its lease, does not purchase the building or arrange for a third
party purchase of the building at the end of the lease term, it may be liable to
the lessor for the amount of the residual guarantee.
As part of this agreement, the Company must maintain a minimum net worth.
In addition, in order to obtain a favorable lease rate, the Company has pledged
certain securities ($ 7.6 million at December 31, 1997) in proportion to the
amount drawn against the commitment to be held in a custodial account as
collateral to ensure fulfillment of the obligations to the lessor under the
lease agreement. The Company may invest these funds in certain securities and
receive the full benefit of the investment. However, if the Company uses or
transfers these funds, the rent on the building would increase and the Company
would be required to comply with certain additional financial covenants.
Legal Proceedings
The Company and certain principal officers and directors were named as
defendants in class action complaints filed in both the California Superior
Court of the County of San Mateo on December 16,1997, and the United States
District Court for the Northern District of California on January 2, 1998 on
behalf of purchasers of the common stock of the Company during the class period
from April 10, 1997, through December 11, 1997. The complaints allege violations
of securities laws during the class period. Management believes the lawsuits are
without merit and that the outcome will not have a material adverse effect on
the financial position or overall trends in the results of operations of the
Company. However, due to the inherent uncertainties of litigation, the Company
cannot accurately predict the ultimate outcome of the litigation. Any
unfavorable outcome of the litigation could have an adverse impact on the
Company's financial condition and results of operations.
32
<PAGE>
Note 6: Income Taxes
The provision for income taxes is summarized as follows:
Years ended December 31,
---------------------------------
(In thousands) 1997 1996 1995
---------------------------------
Current:
U.S. federal $ 34,623 $ 32,309 $ 18,372
State 5,744 6,186 3,673
Foreign 272 620 361
-------- -------- --------
Total current 40,639 39,115 22,406
-------- -------- --------
Deferred:
U.S. federal (3,327) (3,203) (1,079)
State (817) (932) (234)
Foreign -- -- --
Total deferred (4,144) (4,135) (1,313)
-------- -------- --------
Total provision for income taxes $ 36,495 $ 34,980 $ 21,093
======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
assets are as follows:
December 31,
-----------------------
(In thousands) 1997 1996
-----------------------
Depreciation $ 1,007 $ 669
Reserves and accruals 5,795 7,457
State taxes payable 1,140 1,188
Deferred Revenue 1,466 --
Intangibles 3,777 --
Other 550 277
------- -------
Total deferred tax assets $13,735 $ 9,591
======= =======
33
<PAGE>
A reconciliation between the income tax provision computed at the federal
statutory rate and the actual tax provision is as follows:
Years ended December 31,
----------------------------------
(In thousands) 1997 1996 1995
----------------------------------
Tax expense at federal statutory rate $ 35,482 $ 34,007 $ 20,509
State income taxes, net of federal benefit 3,203 3,415 2,235
Tax-exempt interest income (2,245) (2,099) (1,488)
Other 55 (343) (163)
-------- -------- --------
$ 36,495 $ 34,980 $ 21,093
======== ======== ========
Income before income taxes includes $ 1.0 million, $ 0.8 million and $ 0.8
million of income relating to non -U.S. operations for 1997, 1996 and 1995
respectively.
The United States federal tax authority is currently reviewing the Company's
federal income tax returns for 1994, 1995 and 1996. Management believes that the
ultimate outcome of these reviews will not have a material adverse impact on the
Company's financial condition or results of operations.
Note 7: Earnings Per Share
In February 1997, The Financial Accounting Standards Board issued SFAS 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:
Years ended December 31,
---------------------------
(In thousands, except per share amounts) 1997 1996 1995
---------------------------
Net income available to common shareholders $64,882 $62,184 $37,500
Shares
Basic shares 52,359 50,672 49,210
Effect of Dilutive Securities 3,839 4,156 3,890
------- ------- -------
Diluted shares 56,198 54,828 53,100
------- ------- -------
Earnings per common share
Basic EPS $ 1.24 $ 1.23 $ 0.76
Diluted EPS $ 1.15 $ 1.13 $ 0.71
Antidilutive Options. Options to purchase 585,529, 95,625 and 89,332 shares of
common stock outstanding as of December 31, 1997, 1996, and 1995, 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 years then ended.
34
<PAGE>
Note 8: Stock Compensation Plans
As of December 31, 1997, the Company has two stock-based compensation plans,
described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost for
options granted in 1997 and 1996 under the Company's option plans been
determined based on the fair value at the grant dates as prescribed by SFAS No.
123, the Company's net income and pro forma net income per share would have been
as follows:
Years ended December 31,
--------------------------------
(In thousands, except per share amounts) 1997 1996 1995
--------------------------------
Net income As reported $64,882 $62,184 $37,500
Pro forma $52,015 $58,304 $36,057
Earnings per basic As reported $ 1.24 $ 1.23 $ 0.76
common share Pro forma $ 0.99 $ 1.15 $ 0.73
Earnings per diluted As reported $ 1.15 $ 1.13 $ 0.71
common share Pro forma $ .93 $ 1.06 $ 0.68
Under the Company's 1989 and 1990 Stock Plans (the Plans), the Company
may grant options to employees, directors and consultants for up to 19.5 million
shares of common stock. Under the Plans the exercise price of each option equals
the market price of the Company's stock on the date of grant and an option's
maximum term is 10 years. Options are granted periodically throughout the year
and vest ratably over four years. At December 31, 1997, 2.8 million shares were
available for future grants.
<TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model, the attribution method with
respect to graded vesting and the following weighted-average assumptions:
<CAPTION>
Years Ended December 31,
------------------------
Black Scholes Assumptions & Fair Value 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected Volatility 69.0% 48.0% 48.0%
Dividend Yield 0.0% 0.0% 0.0%
Risk Free Interest Rate 5.35% to 5.83% 5.68% to 6.71% 5.68% to 6.71%
Weighted Average Expected Option Term 5.2 years 4.3 years 4.3 years
Weighted Average Fair Value of Options Granted $ 25.22 $ 9.42 $ 4.78
</TABLE>
35
<PAGE>
<TABLE>
A summary of the status of the Company's fixed stock option plan
activity is presented below:
<CAPTION>
(In thousands, except exercise price) Years ended December 31,
1997 1996 1995
---- ---- ----
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Beginning of Year 6,085 $ 13.19 6,338 $ 7.34 7,160 $ 3.76
Granted 1,613 47.14 1,950 25.80 2,401 13.08
Exercised (1,055) 9.51 (1,560) 4.89 (1,986) 2.69
Forfeited (301) 25.70 (643) 13.86 (1,237) 5.31
----- ----- -------
End of Year 6,342 21.84 6,085 13.19 6,338 7.34
----- ----- -------
</TABLE>
<TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
--------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 to $5.00 1,490 5.62 $ 3.61 1,257 $ 3.40
$5.62 to $9.97 577 6.88 6.35 447 5.76
$10.75 to $12.81 1,001 7.51 12.77 341 12.77
$13.25 to $19.13 266 7.98 16.24 80 16.54
$19.38 to $25.63 1,139 8.49 25.14 235 24.96
$27.31 to $47.25 1,492 9.27 42.87 69 33.12
$47.56 to $55.13 377 9.71 52.38 0 0
----- -----
$0.01 to $55.13 6,342 7.75 21.84 2,429 8.51
===== =====
</TABLE>
36
<PAGE>
Note 9: Export Sales and Significant Customers
Export sales by geographic area consisted of the following:
(In thousands)
Years ended December 31,
------------------------------------------------
1997 1996 1995
------------------------------------------------
Europe $109,000 $ 75,000 $ 51,000
Japan 63,000 64,000 26,000
Canada 1,000 7,000 3,000
Other 14,000 5,000 2,000
-------- -------- --------
Total $187,000 $151,000 $ 82,000
======== ======== ========
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.
Three customers accounted for approximately 44%, 27% and 14% of Revenue in
1997. These customers represented 47%, 23% and 12%, and 56%, 23% and 12% of
revenue in 1996 and 1995 respectively. In addition, these customers in
combination with a fourth customer accounted for approximately 77% and 84% of
the accounts receivable balance as of December 31, 1997 and 1996 respectively.
37
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Electronics for Imaging, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Electronics
for Imaging, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 14, 1998,
38
<PAGE>
<TABLE>
Quarterly Consolidated Financial Information
(Unaudited)
(In thousands, except per share data)
The following table presents the Company's operating results for each of the
eight quarters in the two-year period ended December 31, 1997. The information
for each of these quarters is unaudited but has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
Annual Report. In the opinion of management, all necessary adjustments
(consisting only of normal recurring adjustments) have been included to present
fairly the unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto appearing
in this Annual Report. These operating results are not necessarily indicative of
the results for any future period. Per share amounts have been restated to
reflect the effect of the Company's adoption of SFAS 128.
<CAPTION>
1996: Q1 Q2 Q3 Q4
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 63,649 $ 69,046 $ 75,121 $ 90,197
Gross profit 30,406 34,491 38,699 49,018
Income from operations 18,025 20,030 22,564 29,227
Net income 12,597 13,901 15,553 20,133
Net income per basic common share $ 0.25 $ 0.27 $ 0.31 $ 0.40
Net income per diluted common share $ 0.23 $ 0.25 $ 0.28 $ 0.36
1997: Q1 Q2 Q3 Q4
---------------------------------------------------------------
Revenue $ 91,006 $100,633 $107,323 $ 61,669
Gross profit 49,913 55,226 59,028 32,509
Income (loss) from operations 29,356 32,633 34,842 (5,635)
Net income (loss) 20,428 22,609 23,914 (2,069)
Net income (loss) per basic common share $ 0.40 $ 0.44 $ 0.46 $ (0.06)
Net income (loss) per diluted common share $ 0.37 $ 0.41 $ 0.43 $ (0.04)
</TABLE>
39
<PAGE>
PART IV
<TABLE>
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of Form 10-K
<CAPTION>
Page in this
Annual Report
on Form 10-K
------------
<S> <C>
1. Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 45
(All other schedules are omitted because of the absence of conditions under
which they are required or because the necessary information is provided in
the consolidated financial statements or notes thereto.)
</TABLE>
40
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- --- -----------
3.1 Amended and Restated Certificate of Incorporation. (2)
3.2 Bylaws as amended. (1)
4.1 See Exhibit 3.1
4.2 Specimen Common Stock certificate of the Company.(1)
10.1 Agreement of Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust for the Company's
new executive office in San Mateo, California.(1)
10.2 First Addendum to Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust.(1)
10.3+ License Agreement, dated as of February 9, 1990, between the Company
and the Massachusetts Institute of Technology.(1)
10.4 Amendment to License Agreement dated December 31, 1990, between the
Company and the Massachusetts Institute of Technology.(1)
10.5 Amendment to License Agreement dated May 29, 1991 and March 19, 1991,
by and between the Company and the Massachusetts Institute of
Technology.(1)
10.6+ Third Amendment to License Agreement dated June 1, 1992, by and
between the Company and the Massachusetts Institute of Technology.(1)
10.7+ Research and Development Agreement, dated September 1, 1989, between
the Company and Toyo Ink Mfg. Co., Ltd.(1)
10.8 Cooperation Agreement, dated as of March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.9+ Patent Sublicense Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.10+ Know-How License Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.11+ License Agreement, dated as of January 11, 1991, by and between the
Company and Eastman Kodak Company, as amended March 10, 1992.(1)
10.12+ Authorized VAR Agreement dated as of November 26, 1991, by and
between the Company and Eastman Kodak Company.(1)
10.13+ License Agreement, dated March 1, 1991, by and between the Company
and Adobe Systems Incorporated, as amended May 22, 1991.(1)
10.14+ Custom PostScript Interpreter OEM License Agreement, dated as of
March 1, 1991, by and between the Company and Adobe Systems
Incorporated.(1)
10.15+ Agreement dated September 6, 1991, by and between the Company and
Xerox Corporation.(1)
41
<PAGE>
Exhibit
No. Description
- --- -----------
10.16+ Patent License Agreement dated December 12, 1991, by and between the
Company and Xerox Corporation.(1)
10.17 Formal Agreement for Distribution of Fiery, dated June 27, 1991, by
and between the Company and Toyo Ink Mfg. Co., Ltd.(1)
10.18+ Patent License Agreement dated January 29, 1992, by and between the
Company and Minolta Camera Co., Ltd.(1)
10.19 License Agreement dated December 3, 1991, by and between the Company
and Scitex Corporation Ltd.(1)
10.20+ Development Agreement dated May 28, 1991, by and between the Company
and Canon Inc.(1)
10.21 Fiery Approval Agreement dated May 28, 1991, by and between the
Company and Canon Inc.(1)
10.22 Letter Agreement dated May 28, 1991, by and between the Company and
Canon, Inc.(1)
10.23+ Parts Purchase Agreement dated June 30, 1991, by and between the
Company and Canon Inc.(1)
10.24+ Patent License Agreement dated June 11, 1992, by and between the
Company and Victor Company of Japan.(1)
10.25+ OEM License Agreement dated July 20, 1992, by and between the Company
and QMS, Inc.(1)
10.26+ License Agreement dated May 2, 1991, by and between the Company and
Pantone, Inc.(1)
10.27+ Software Distribution License Agreement dated January 30, 1992, by
and between the Company and Storm Technology, Inc.(1)
10.28+ Agreement for OEM Software Acquisition dated April 7, 1992, by and
between the Company and Cooperative Printing Solutions, Inc.(1)
10.29+ License Agreement dated May 18, 1992, by and between the Company and
Microsoft Corporation.(1)
10.30+ Cooperation and Project Funding Agreement dated August 6, 1992, by
and among the Company, Electronics for Imaging (Israel) Ltd. and the
BIRD Foundation.(1)
10.31 Advisory Agreement, dated May 25, 1989, between the Company and
William F. Schreiber.(1)
10.32 1989 Stock Plan of the Company.(1)
10.33 1990 Stock Plan of the Company.(1)
10.34 Convertible Subordinated Note Purchase Agreement, dated as of June 1,
1990, between the Company and Frederick R. Adler, and related
Convertible Note.(1)
10.35 Convertible Subordinated Note Purchase Agreement, dated June 1, 1990,
between the Company and Hesperus XVI N.V., and related Convertible
Note.(1)
10.36 Convertible Subordinated Note Purchase Agreement, dated as of June 1,
1990, between the Company and Athena Venture Partners L.P., and
related Convertible Note.(1)
42
<PAGE>
Exhibit
No. Description
- --- -----------
10.37 Convertible Subordinated Note Purchase Agreement, dated as of June 1,
1990, between the Company and Thomas I. Unterberg, and related
Convertible Note.(1)
10.38 Convertible Subordinated Note, dated June 1, 1990, for principal
amount of $17,500 transferred from Athena Venture Partners L.P. to
Dan Tolkowsky pursuant to Letter Agreement dated May 31, 1991.(1)
10.39 Convertible Subordinated Note, dated June 1, 1990, for principal
amount of $6,000 transferred from Athena Venture Partners L.P. to
Yadin Kaufman pursuant to Letter Agreement dated May 31, 1991.(1)
10.40 Stock Purchase Agreement, dated as of March 1, 1991, by and between
the Company and Adobe Systems Incorporated.(1)
10.41 Convertible Note Purchase Agreement dated as of March 1, 1992, by and
between the Company, Electronics for Imaging (Ireland) Limited and
European Financial Investors Holdings S.A.(1)
10.42 Series B Preferred Stock Purchase Agreement dated as of March 12,
1992, by and among the Company, funds affiliated with Weiss, Peck &
Greer Venture Partners II, L.P. and other persons and entities.(1)
10.43 Registration Rights Agreement dated as of March 12, 1992, by and
among the Company, funds affiliated with Weiss, Peck & Greer Venture
Partners II., L.P. and other persons and entities.(1)
10.44 First Addendum to Series B Stock Purchase Agreement dated as of
August 5, 1992 (the "Addendum"), by and among the Company, and the
persons listed on Schedule A to the Addendum.(1)
10.45 First Amendment to Registration Rights Agreement dated as of August
5, 1992 (the "First Amendment"), by and among the Company, and the
persons listed on Exhibit A to the First Amendment.(1)
10.46 Form of Indemnification Agreement.(1)
10.47+ Patent License Agreement dated May 28, 1991, by and between the
Company and Canon Inc.(1)
10.48 Software Publishing Agreement dated August 17, 1992, by and between
the Company and Quark, Inc.(1)
10.49 Employment Agreement dated August 1, 1992 by and between Efraim Arazi
and the Company.(1)
10.50+ Supplement to Formal Agreement for Distribution of Fiery dated August
25, 1992, by and between the Company and Toyo Ink Mfg. Co., Ltd.(1)
10.51+ OEM Software License Agreement dated August 14, 1992, by and between
the Company and RSA Data Security, Inc.(1)
10.52 Employment Agreement dated July 13, 1995, by and between Efraim Arazi
and the Company.(3)
10.53 Employment Agreement dated July 17, 1995, by and between Dan Avida
and the Company.(3)
10.54 Employment Agreement dated July 17, 1995, by and between Jeff Lenches
and the Company.(3)
10.55 Employment Agreement dated July 17, 1995, by and between Fred
Rosenzweig and the Company.(3)
43
<PAGE>
10.56 Employment Agreement dated October 15, 1995, by and between Eric
Saltzman and the Company.(3)
10.57 Master Lease and Open End Mortgages dated as of July 18, 1997 by and
between the Company and FBTC Leasing Corp. for the lease financing of
the Company's corporate headquarters building to be built in Foster
City, California.(4)
11.1 Statement regarding computation of the Company's per share earnings.
21.1 List of Subsidiaries. (1)
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney.
- ------------------------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1 (No. 33-50966) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-57382) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 0-18805) and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 0-18805) and
incorporated herein by reference.
+ The Company has received confidential treatment with respect to
portions of these documents.
(b) Reports on Form 8-K
None filed during the quarter ended December 31, 1997.
(c) List of Exhibits
See Item 14 (a) 3.
(d) Consolidated Financial Statement Schedule II for the years ended
December 31, 1995, 1996 and 1997, respectively.
See Page 45 of this Annual Report on Form 10-K.
44
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
Schedule II
Valuation and Qualifying Accounts
<CAPTION>
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Year Ended December 31, 1997
Allowance for doubtful accounts and
sales-related reserves $ 1,912 $ 132 $ -- $ (659) $ 1,385
============= ============= ============= ============= =============
Year Ended December 31, 1996
Allowance for doubtful accounts and
sales-related reserves $ 1,570 $ 1,132 $ -- $ (790) $ 1,912
============= ============= ============= ============= =============
Year Ended December 31, 1995
Allowance for doubtful accounts and
sales-related reserves $ 2,176 $ 479 $ -- $ (1,085) $ 1,570
============= ============= ============= ============= =============
</TABLE>
45
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Electronics for Imaging, Inc.
Our audits of the consolidated financial statement referred to in our report
dated January 14, 1997 appearing in this form 10-K also included an audit of the
Consolidated Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, the Consolidated Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
San Jose, California
January 14, 1998
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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, on the 27th day of
March 1998.
ELECTRONICS FOR IMAGING, INC.
By: /s/ Dan Avida
----------------------------------------------------
Dan Avida
President, Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Dan Avida and Eric Saltzman jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Form 10-K Annual
Report, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and conforming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue thereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 27th day of March 1998.
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Efraim Arazi Chairman of the Board March 27, 1998
- --------------------------------------
Efraim Arazi
President, Chief Executive Officer
/s/ Dan Avida and Director March 27, 1998
- -------------------------------------- (Principal Executive Officer and
Dan Avida Principal Financial and Accounting Officer)
/s/ Gill Cogan Director March 27, 1998
- --------------------------------------
Gill Cogan
/s/ Jean-Louis Gassee Director March 27, 1998
- --------------------------------------
Jean-Louis Gassee
/s/ Dan Maydan Director March 27, 1998
- --------------------------------------
Dan Maydan
/s/ Thomas Unterberg Director March 27, 1998
- --------------------------------------
Thomas Unterberg
</TABLE>
47
<TABLE>
EXHIBIT 11.1
ELECTRONICS FOR IMAGING, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (1) (2)
(In thousands, except per share data)
<CAPTION>
Year Ended
December 31,
-------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income for purposes of computing net income per share $64,882 $62,184 $37,500
------- ------- -------
Weighted average common shares outstanding for
computing basic income per share 52,359 50,672 49,210
Potential common shares from options (2) 3,839 4,156 3,890
------- ------- -------
Weighted average potential common shares and equivalents 56,198 54,828 53,100
======= ======= =======
Net income per basic common share $ 1.24 $ 1.23 $ 0.76
======= ======= =======
Net income per diluted common share $ 1.15 $ 1.13 $ 0.71
======= ======= =======
<FN>
(1) This Exhibit should be read in conjunction with "Summary of Significant
Accounting Policies - Computation of Net Income per Common Share"
contained in Note 1 of Notes to Consolidated Financial Statements.
(2) Computed using the treasury stock method.
</FN>
</TABLE>
48
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 33-56422, 33-80523, 33-93602 and 333-11685) of
Electronics for Imaging, Inc. of our report dated January 14, 1998 appearing in
this Form 10-K. We also consent to the incorporation by reference of our report
on the Consolidated Financial Statement Schedule, which appears in this Annual
Report on Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 27, 1998
49
<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-K for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 57,195
<SECURITIES> 185,536
<RECEIVABLES> 32,315
<ALLOWANCES> 1,385
<INVENTORY> 23,790
<CURRENT-ASSETS> 329,896
<PP&E> 69,046
<DEPRECIATION> 22,544
<TOTAL-ASSETS> 385,998
<CURRENT-LIABILITIES> 43,069
<BONDS> 4,064
0
0
<COMMON> 524
<OTHER-SE> 338,341
<TOTAL-LIABILITY-AND-EQUITY> 385,998
<SALES> 360,631
<TOTAL-REVENUES> 360,631
<CGS> 163,955
<TOTAL-COSTS> 163,955
<OTHER-EXPENSES> 105,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 101,377
<INCOME-TAX> 36,495
<INCOME-CONTINUING> 64,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,882
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.15
</TABLE>
