UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-18805
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2855 Campus Drive, San Mateo, CA 94403
(Address of principal executive offices, including zip code)
(650) 286-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
The number of shares of Common Stock outstanding as of August 3, 1998 was
52,624,364.
An Exhibit Index can be found on Page 21.
<PAGE>
ELECTRONICS FOR IMAGING, INC.
INDEX
Page No.
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
Three Months Ended June 30, 1998 and 1997, and
Six Months Ended June 30, 1998 and 1997...............3
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 ..................4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 ..............5
Notes to Condensed Consolidated Financial Statements ......6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................9
PART II - Other Information
Items 1 - 3. Not Applicable ...............................................20
Item 4. Submission of Matters to a Vote of Security Holders...........20
Item 5. Other Information ............................................20
Item 6. Exhibits and Reports on Form 8-K .............................22
Signatures .................................................................23
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 96,157 $ 100,633 $ 178,680 $ 191,639
Cost of revenue 54,978 45,407 100,334 86,500
------------- ------------- ------------- --------------
41,179 55,226 78,346 105,139
------------- ------------- ------------- --------------
Operating expenses:
Research and development 14,089 9,265 28,173 17,391
Sales and marketing 13,962 10,487 29,284 20,045
General and administrative 3,868 2,841 7,329 5,714
------------- ------------- ------------- --------------
31,919 22,593 64,786 43,150
------------- ------------- ------------- --------------
Income from operations 9,260 32,633 13,560 61,989
Other income, net 1,589 2,693 3,810 5,256
------------- ------------- ------------- --------------
Income before income taxes 10,849 35,326 17,370 67,245
Provision for income taxes 3,906 12,717 6,254 24,208
------------- ------------- ------------- --------------
Net income $ 6,943 $ 22,609 $ 11,116 $ 43,037
============= ============= ============= ==============
Net income per basic common share $ 0.13 $ 0.44 $ 0.21 $ 0.83
============= ============= ============= ==============
Shares used in per share
calculation (basic) 52,615 51,818 52,591 51,729
============= ============= ============= ==============
Net income per diluted common share $ 0.13 $ 0.41 $ 0.20 $ 0.77
============= ============= ============= ==============
Shares used in per share
calculation (diluted) 55,030 55,734 54,954 55,737
============= ============= ============= ==============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,415 $ 57,195
Short-term investments 206,526 185,536
Accounts receivable, net 63,756 30,930
Inventories 21,014 23,790
Other current assets 32,640 32,445
-------------- -------------
Total current assets 357,351 329,896
Property and equipment, net 48,103 46,502
Other assets 8,974 9,600
-------------- -------------
Total assets $ 414,428 $ 385,998
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,824 $ 20,255
Accrued and other liabilities 21,704 19,891
Income taxes payable 4,703 2,923
-------------- -------------
Total current liabilities 60,231 43,069
-------------- -------------
Long-term debt 3,924 4,064
-------------- -------------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, $.01 par value, 150,000,000 shares
authorized; 52,624,364 and 52,558,383 shares issued
and outstanding, respectively 526 524
Additional paid-in capital 137,700 137,264
Cumulative translation adjustment (146)
Retained earnings 212,193 201,077
-------------- -------------
Total stockholders' equity 350,273 338,865
-------------- -------------
Total liabilities and stockholders' equity $ 414,428 $ 385,998
============== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended June 30,
---------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,116 $ 43,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,816 2,798
Provision for doubtful accounts
and sales returns 241 (454)
Other (146) -
Changes in operating assets and liabilities:
Accounts receivable (33,067) (14,916)
Inventories 2,776 (3,578)
Receivables from subcontract manufacturers (760) (7,365)
Other current assets 565 (3,816)
Accounts payable and accrued liabilities 15,382 16,925
Income taxes payable 1,780 3,807
-------------- -------------
Net cash provided by operating activities 3,703 36,438
-------------- -------------
Cash flows from investing activities:
Purchase of short-term investments (86,001) (85,797)
Sales and maturities of short-term investments 65,011 74,403
Purchase of property and equipment, net (6,845) (5,616)
Increase (decrease) of other assets, net 54 (96)
-------------- --------------
Net cash used for investing activities (27,781) (17,106)
-------------- -------------
Cash flows from financing activities:
Repayment of bonds payable (140) -
Issuance of common stock related to stock plans 438 2,429
-------------- -------------
Net cash provided by financing activities 298 2,429
-------------- -------------
Net change in cash and cash equivalents (23,780) 21,761
Cash and cash equivalents at beginning of period 57,195 71,946
-------------- -------------
Cash and cash equivalents at end of period $ 33,415 $ 93,707
============== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
ELECTRONICS FOR IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements of Electronics for Imaging, Inc. (the Company) as of and for
the interim periods ended June 30, 1998, have been prepared on the same
basis as the audited consolidated financial statements as of and for
the year ended December 31, 1997, contained in the Company's Annual
Report to Stockholders. In the opinion of management the condensed
consolidated financial statements include all adjustments (consisting
generally of normal recurring adjustments) necessary to present fairly
the financial position of the Company and the results of its operations
and cash flows, in accordance with generally accepted accounting
principles. The interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto referred to above.
The preparation of the interim condensed consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the interim condensed
consolidated financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from these estimates.
The interim results of the Company are subject to fluctuation. As a
result, the Company believes the results of operations for the interim
periods ended June 30, 1998 are not necessarily indicative of the
results to be expected for any other interim period or the full year.
2. Comprehensive Income
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
Statement requires that all items recognized under accounting standards
as components of comprehensive earnings be reported in an annual
financial statement that is displayed with the same prominence as other
annual financial statements. This Statement also requires that an
entity classify items of other comprehensive earnings by their nature
in an annual financial statement. Comprehensive income for the three
months ended June 30, 1998 was $ 6,942,000. The difference between the
Company's net income and comprehensive income was caused by translation
adjustments, which were immaterial.
3. Accounting for Derivative Instruments and Hedging
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133) Accounting for
Derivative Instruments and Hedging. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
133 is effective for fiscal quarters and fiscal years beginning after
June 15, 1999. The Company is currently studying the provisions of the
SFAS 133 and the potential impact it may have on its financial
statements.
6
<PAGE>
4. Earnings Per Share
<TABLE>
In February 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards SFAS No. 128, "Earnings per
Share" (SFAS No. 128). The Statement redefines earnings per share (EPS)
under generally accepted accounting principles. Under the new standard,
primary (EPS) is replaced by basic EPS and fully diluted EPS is
replaced by diluted EPS. It also requires dual presentation of basic
and diluted EPS on the face of the financial statements. SFAS No. 128
was adopted in the fourth quarter of 1997 and the EPS for all periods
presented have been restated to conform with the provisions of SFAS No.
128. The following table represents unaudited disclosures of basic and
diluted EPS in accordance with SFAS No. 128 for the periods presented
below:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Net income available to
common shareholders $ 6,943 $ 22,609 $ 11,116 $ 43,037
Shares
Basic shares 52,615 51,818 52,591 51,729
Effect of Dilutive Securities 2,415 3,916 2,363 4,008
------ ------ ------ ------
Diluted shares 55,030 55,734 54,954 55,737
====== ====== ====== ======
Earnings per common share
Basic EPS $ 0.13 $ 0.44 $ 0.21 $ 0.83
Diluted EPS $ 0.13 $ 0.41 $ 0.20 $ 0.77
</TABLE>
Antidilutive Options. Options to purchase 2,774,000 and 63,000 shares
of common stock outstanding as of June 30, 1998 and 1997, respectively,
were not included in the computations of diluted EPS because the
options' exercise prices were greater than the average market price of
the common shares for the three month periods then ended. Options to
purchase 2,832,000 and 47,000 shares of common stock outstanding as of
June 30, 1998 and 1997, respectively, were not included in the
computations of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares for the six
month periods then ended.
7
<PAGE>
6. Balance Sheet Components (in thousands)
June 30, December 31,
1998 1997
-------- --------
Accounts receivable:
Accounts receivable $ 65,382 $ 32,315
Less Allowance for doubtful accounts
and sales returns (1,626) (1,385)
-------- --------
$ 63,756 $ 30,930
======== ========
Inventories:
Raw materials $ 16,852 $ 19,216
Work-in-process 3,735 3,183
Finished goods 427 1,391
-------- --------
$ 21,014 $ 23,790
======== ========
Other current assets:
Receivable from subcontract manufacturers $ 18,402 $ 17,642
Other 14,238 14,803
-------- --------
$ 32,640 $ 32,445
======== ========
Property and equipment:
Land $ 27,384 $ 27,351
Equipment and purchased software 40,269 34,201
Furniture and leasehold improvements 8,369 7,494
-------- --------
76,022 69,046
Less accumulated depreciation and amortization (27,919) (22,544)
-------- --------
$ 48,103 $ 46,502
======== ========
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis and the audited consolidated financial
statements of Electronics for Imaging, Inc. (the Company) and related notes
thereto contained in the Company's 1997 Annual Report to Stockholders. Results
for the three and six month periods ended June 30, 1998 are not necessarily
indicative of the results expected for the entire fiscal year ending December
31, 1998. All assumptions, anticipations, expectations and forecasts contained
herein are forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here. For
a more complete discussion of factors which might impact the Company's results,
please see the section entitled "Factors that Could Adversely Affect
Performance" below and in the Company's 1997 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission. The Company periodically
reviews such factors to ensure their appropriateness.
Results of Operations for the Three and Six Month Periods Ended June 30, 1997
and 1998
Revenue
Revenue decreased 4.4% to $ 96.2 million in the second quarter of 1998, compared
to $100.6 million in the second quarter of 1997, however the corresponding unit
volume increased approximately 112%. Revenue decreased 6.8 % to $ 178.7 million
in the six month period ended June 30, 1998, compared to $191.6 million in the
same period of 1997, however the corresponding unit volume increased
approximately 56%. The decrease in revenue is primarily due to price reductions
on existing product lines in anticipation of new product introductions as well
as continued weak sales from Asia, particularly in Japan, due to the ongoing
weakness in those economies.
The Company's revenue for 1998 is principally derived from three major
categories. The first category is made up of stand-alone servers which connect
digital color copiers. This category includes Fiery XJ and XJ+, which accounted
for a vast majority of the Company's revenue prior to 1998. The second category
is made up of embedded, desktop and bundled color solutions primarily for the
office market. The third category is made up of controllers for digital black &
white products.
9
<PAGE>
<TABLE>
The following is a break-down of categories of Revenue both in terms of volume,
as a percentage (%) of total units shipped, and absolute revenue dollars.
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------------------------------- -------------------------------------
(dollars in thousands) Volume Revenue Volume Revenue
------ ------------------------ ------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Stand-alone Servers Connecting
to Digital Color Copiers 26.5% $ 60,882 63.3% 71.2% $ 83,014 82.5%
Embedded, Desktop Controllers
& Bundled Color Solutions 53.6% 18,717 19.5% 28.8% 10,326 10.3%
Controllers for Digital
Black & White Solutions 19.9% 7,710 8.0% 0.0% 0 0.0%
Spares, licensing
& other misc. sources 0.0% 8,848 9.2% 0.0% 7,293 7.2%
----- -------- ----- ----- -------- -----
Total revenues 100.0% $ 96,157 100.0% 100.0% $100,633 100.0%
===== ======== ===== ===== ======== =====
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------------------------------- -------------------------------------
(dollars in thousands) Volume Revenue Volume Revenue
------ ------------------------ ------ ------------------------
Stand-alone Servers Connecting
to Digital Color Copiers 37.3% $125,011 70.0% 67.5% $147,844 77.1%
Embedded, Desktop Controllers
& Bundled Color Solutions 48.2% 28,626 16.0% 32.5% 23,483 12.3%
Controllers for Digital
Black & White Solutions 14.5% 8,838 4.9% 0.0% 0 0.0%
Spares, licensing
& other misc. sources 0.0% 16,205 9.1% 0.0% 20,312 10.6%
----- -------- ----- ----- -------- -----
Total revenues 100.0% $178,680 100.0% 100.0% $191,639 100.0%
===== ======== ===== ===== ======== =====
</TABLE>
As noted above growth took place in the three and six months ended June
30, 1998 in the two newer product categories - the Embedded Desktop Controllers
& Bundled Color Solutions and the Controllers for Digital Black and White
Solutions. These products are generally characterized by much higher unit
volumes but lower unit prices and associated margins than the Company has
experienced in its more traditional Stand-alone Server line of products. Over
time the Company anticipates further growth in these newer categories as a
percentage of total revenue. To the extent these categories do not grow over
time in absolute terms or the Company is not able to meet demand for higher unit
volumes, it could have a material adverse affect on the Company. The Company
believes that Stand-alone server products have not experienced year over year
revenue growth in 1998 not because of a significant change in unit volume, but
rather due largely to price reductions on the Company's older generations of
product that will effectively be replaced by a newer generation of product
throughout 1998 as the different OEM customers qualify the new product and begin
to order in increasing volumes.
10
<PAGE>
<TABLE>
Sales by Geographic Market for the three and six months ended June 30, 1998 were
as follows:
<CAPTION>
Three Months Ended Six Months Ended
(in thousands) June 30, 1998 June 30, 1998
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
North America $ 45,319 47.1% $ 83,080 46.5%
Europe 34,247 35.6% 63,909 35.8%
Japan 13,071 13.6% 25,840 14.5%
Rest of World 3,520 3.7% 5,851 3.3%
--------------- ------------ ------------- ------------
$ 96,157 100.0% $ 178,680 100.0%
=============== ============ ============= ============
</TABLE>
As discussed below, shipments to some of the Company's OEM partners are made to
centralized purchasing and manufacturing locations which in turn sell through to
foreign locations. As a result of these factors, the Company believes that sales
of its products into Europe and Japan may actually be higher, though accurate
data is difficult to obtain. The Company expects that international revenue will
continue to represent a significant portion of its total revenue.
In the middle of the second quarter of 1997, one of the Company's major
customers began having its products for the European market shipped directly to
Europe rather than through the United States. In order to have a more consistent
comparison between the three and six months ended June 30, 1998 as compared to
the same periods in 1997 we have restated 1998 and 1997 figures on a pro-forma
basis as if this particular major customer was still shipping products for the
European market through its United States operations. This has the affect of
slightly overstating sales in the United States market and understating sales
ultimately bound for the European market, however it does provide for a
consistent comparison between the two years.
<TABLE>
Pro-forma - as if goods for one major customer's European market were still
shipped through the United States
<CAPTION>
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------------- -------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
North America $ 51,127 $ 49,242 3.8% $ 96,571 $ 96,556 0.0%
Europe 28,439 28,874 (1.5%) 50,418 51,379 (1.9%)
Japan 13,071 19,010 (31.2%) 25,840 37,553 (31.2%)
Rest of World 3,520 3,507 0.4% 5,851 6,151 (4.9%)
-------------- -------------- ----------- ---------- ------------ -------------
$ 96,157 $ 100,633 (4.4%) $ 178,680 $ 191,639 (6.8%)
============== ============== =========== ============ ============ =============
</TABLE>
11
<PAGE>
Although revenues for all markets, except Japan, are essentially flat, as noted
previously, the unit volume for the entire company has increased by 112% quarter
over quarter and 56% six months over six months. The increase in volume has
essentially been offset by the effect of price reductions on the Company's older
product lines, effective January of fiscal 1998, as well as a shift in product
mix to less expensive desktop units. The Company expects the shift in product
mix to continue however this may be tempered somewhat as the new Fiery ZX stand
alone server line begins to ship in larger volumes in the latter half of 1998.
The decline in sales to Japan is primarily due to a continued weakness in the
Japanese and other Asian economies.
Substantially all of the revenue of both periods was attributable to sales of
products through the Company's OEM channels with such partners as Canon, Xerox,
Ricoh, Minolta, Fuji Xerox, Oce, Epson, Sharp and others. During 1998, the
Company has continued work on both increasing the number, and expanding the size
of existing relationships with OEM partners. For the three and six month periods
ended June 30, 1998, the Company continued to rely on three OEM customers,
Canon, Xerox and Ricoh for 66.3% and 70.9% of it's revenue for the respective
periods as, compared to 85.0% and 85.6%, reported for the same periods of 1997.
In the event that any of these OEM relationships are scaled back or
discontinued, the Company may experience a significant negative impact on its
consolidated financial position and results of operations. In addition, no
assurance can be given that the Company's relationships with these OEM partners
will continue. In addition, the Company's historical results have followed a
seasonal pattern reflecting the buying patterns of these large OEM customers.
That historical pattern has indicated the Company's fiscal fourth quarter
results may be adversely affected by a desire on the part of some or all its'
OEM customers to slow down, or otherwise delay fourth quarter orders in order to
minimize their respective inventory investments at the end of their fiscal year.
The Company continues to work on the development of products utilizing the Fiery
architecture and other products and intends to continue to introduce new
generations of Fiery products and other new product lines in the remainder of
1998 and beyond. No assurance can be given that the introduction or market
acceptance of new, current or future products will be successful.
Cost of Revenue
Historically, a majority of the Company's cost of revenue has been attributable
to the sale of Fiery Color Servers. Fiery Color Servers as well as embedded
desktop controllers and digital black and white products are manufactured by
third-party manufacturers who purchase most of the necessary components. The
Company sources directly proprietary memory, certain ASICs, and software
licensed from various sources, including PostScript interpreter software, which
the Company licenses from Adobe Systems, Inc. The Company's gross margin was
42.8% and 43.8% for the three and six month periods ended June 30, 1998, down
from 54.9% for both of the corresponding periods of 1997. This was due to a
combination of factors including a higher mix of low end products with
relatively lower margins including new embedded products and black and white
products that the Company introduced during 1998. The Company also initiated
price reductions on older products as of January 1, 1998 in light of pending
introductions of newer generations of product. The Company expects that sales of
products with relatively lower margins may further increase as a percentage of
revenue. Such products include older products for which prices are reduced
during product transitions, embedded products for both desktop printers and
copiers, and stand-alone and embedded controllers for black-and-white copiers.
If such sales increase as a percentage of the Company's revenue, gross margins
may further decline.
12
<PAGE>
In general, the Company believes that gross margin will continue to be impacted
by a variety of factors. These factors include the availability and pricing of
key components (including DRAM and Postscript interpreter software), third party
manufacturing costs, product, channel and geographic mix, the success of the
Company's product transitions and new products, competition, and general
economic conditions in the United States and abroad. Consequently, the Company
anticipates gross margins will fluctuate from quarter to quarter.
Operating Expenses
Operating expenses for the three and six month periods ended June 30, 1998
increased $9.3 million and $21.6 million or 41.3% and 50.1%, respectively, from
the corresponding periods in 1997. Operating expenses in 1998 also constituted a
higher percentage of revenues than in 1997, 33.2% versus 22.5% for the three
month periods ended June 30 and 36.3% and 22.5% for the six month periods ended
June 30, respectively. Increases in operating expenses in absolute dollars were
primarily caused by the hiring of additional full time employees - a net
increase of 125 people or 29.0% from June 30, 1997 to June 30, 1998. The Company
has hired additional employees to support product development as well as to
support expanded operations. The increase in operating expenses as a percentage
of revenues resulted from both increases in absolute costs as previously
discussed and a decrease in revenues in 1998 compared to the corresponding
periods in 1997. The Company anticipates that operating expenses will continue
to grow and may increase both in absolute dollars and as a percentage of
revenue. The components of operating expenses are detailed below.
Research and Development. Expenses for research and development consist
primarily of personnel expenses and, to a lesser extent, consulting and
nonrecurring engineering expenses, depreciation, and costs of prototype
materials. Research and development expenses were $14.1 million and $28.2
million or 14.7% and 15.8% of revenues, respectively, for the three and six
month periods ended June 30, 1998, compared to $9.3 million and $17.4 million or
9.2% and 9.1% of revenue in the corresponding periods of 1997. Research and
development expenses have increased primarily due to an increase in research and
development projects, which has led to an increase in engineering headcount of
34.9% from June 30, 1997 to June 30, 1998. In addition, due to all of the new
product development, the Company has experienced an increase in non-recurring
engineering expenses for prototype development. The Company believes that the
development of new products and enhancement of existing products is essential to
its continued success, and management intends to continue to devote substantial
resources to research and new product development. Accordingly, the Company
expects that its research and development expenses may increase in absolute
dollars and possibly also as a percentage of revenue.
Sales and Marketing. Such expenses include personnel expenses, costs for
tradeshows, marketing programs and other promotional material, sales
commissions, travel and entertainment expense, depreciation, and costs
associated with sales offices in the United States, Europe and Japan and other
locations around the world. Sales and marketing expenses were $14.0 million or
14.5 % of revenue in the second quarter of 1998, compared to $10.5 million or
10.4 % of revenue in the corresponding quarter of 1997. Sales and marketing
expenses were $29.3 million or 16.4% of revenue for the six month period ended
1998, compared to $20.0 million or 10.5% of revenue in the corresponding period
of 1997. Sales and marketing expenses increased in absolute dollars and as a
percentage of total revenue due primarily to a 23.2% increase in employee
headcount from June 30, 1997 to June 30, 1998. In addition, cost required for
the introduction, promotion and support of a broader range of current products
with both existing and new OEM relationships as well as technology alliance
partners has increased. The Company expects that its sales and marketing
expenses may increase in absolute dollars and possibly also as a percentage of
revenue as it continues to actively promote its products, launch new Fiery
models and other products, and continue to build its worldwide sales and
marketing organization.
13
<PAGE>
General and Administrative. Such expenses consist primarily of personnel
expenses and, to a lesser extent, professional fees, expenses required of a
public company, and depreciation and facility costs. General and administrative
expenses were $3.9 million or 4.0% of revenue for the three month period ended
June 30, 1998, compared to $2.8 million or 2.8% of revenue in the corresponding
period of 1997. General and administrative expenses were $7.3 million or 4.1% of
revenue for the six month period ended June 30, 1998, compared to $5.7 million
or 3.0% of revenue in the corresponding period of 1997. The increases were
primarily due to increased headcount as well as other operating expenses
including the use of outside consultants for legal and other matters. The
Company expects that its general and administrative expenses may increase in
absolute dollars and possibly also as a percentage of revenue in order to
support the Company's efforts to grow its business. In addition, the Company
anticipates certain non recurring general and administrative expenses beginning
in the fourth fiscal quarter, and for one to two quarters thereafter, related to
the Company's pending move to a new central facility in Foster City.
Other income
Other income relates mainly to interest income and expense and gains and losses
on foreign currency transactions. Other income decreased by $1.1 million or
41.0% to $1.6 million and by $1.5 million or 27.5% to $3.8 million, in the three
and six month periods ended June 30, 1998, respectively, compared to $2.7
million and $5.3 million in the corresponding periods ended June 30, 1997. The
decrease was due in part to $0.8 million in losses suffered on Asian currency
denominated transactions. Although to date the Company's exposure to currency
fluctuations has been relatively minor, in response to recent currency
fluctuations in Asia - the Company began to implement a hedging program in June
1998. In addition, the Company has been earning approximately $0.2 million less
per quarter on interest in 1998 compared to 1997 due to a decline in market
interest rates.
Income Taxes
The Company's effective tax rate was 36.0% for the second quarter of 1998 and
1997. In each period the Company benefited from increased tax-exempt interest
income, increases in foreign sales and to a lesser extent the utilization of
research and development credits in achieving a consolidated effective tax rate
lower than the consolidated federal and state statutory income tax rate. The
Company anticipates that these benefits will continue and may increase as a
percentage of income before income taxes resulting in a favorable impact on the
Company's consolidated effective tax rate.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased by $5.3 million to
$239.9 million as of June 30, 1998 compared to $245.3 million as of June 30,
1997. The Company has an investment portfolio of short-term investments
comprised of fixed income securities that are classified as "held to maturity
securities". These securities, like all fixed income instruments, are subject to
interest rate risk and will fall in value if market interest rates increase. The
Company attempts to limit this exposure by investing primarily in short-term
securities.
Net cash provided by operating activities decreased to $3.7 million for the six
month period ended June 30, 1998 compared to $36.4 million for the corresponding
period ended June 30, 1997. The
14
<PAGE>
$32.7 million six month over six month decrease was a result of a decrease in
net income and to a lesser extent an increase in account receivables. The $33.1
million increase in accounts receivable within fiscal 1998 was mainly due to
timing differences in payments from customers. For example, the Company received
approximately $8.0 million in payments from one customer in the first two
business days following the end of the quarter. To a lesser degree the increase
within fiscal 1998 was also due to the relatively higher volume in revenue for
the quarter ended June 30, 1998 as compared to the quarter ended December 31,
1997. The Company purchased approximately $6.8 million of capital equipment and
furniture during the six month period ended June 30, 1998 compared to purchases
of $5.6 million in the corresponding period of 1997. Cash provided by the
exercise of options amounted to $0.4 million for the six month period ended June
30, 1998, a $2.0 million decrease over the corresponding period in 1997.
The Company does not have a comprehensive and formal Year 2000 plan for all of
its operations. The Company has informally reviewed its internal MIS systems and
believes that Year 2000 issues will not materially affect its internal MIS
systems. Also, the Company has tested its products to determine if the products
will successfully rollover from the years 1999 to 2000 and 2000 to 2001, and if
the products will correctly recognize the date February 29, 2000. Products first
released after November 1, 1997 have passed internal tests for these criteria,
and future products will be required to pass the same internal tests before
shipping. Because the Company cannot control other companies' products used in
conjunction with the Company's products (such as other companies' software), the
Company does not intend to assure its customers that its products will meet the
above-referenced criteria when used in conjunction with any other software or
hardware not manufactured by the Company. To date, the Company has not reviewed
Year 2000 plans and preparations of its manufacturers, suppliers, customers, and
other third parties with whom it does business. The Company continues to assess
the effects and costs associated with possible Year 2000; however, the total
effects and costs are unknown to the Company at this time, and there can be no
assurance that such effects and costs will not have a material adverse effect on
the Company, its financial condition, results of operations.
The Company believes that its existing capital resources together with cash
generated from continuing operations will be sufficient to fund its operations
and meet capital requirements through at least 1999.
Factors That Could Adversely Affect Performance
The following factors may adversely impact the Company's future performance and
financial results:
Reliance on OEM Resellers; Risks Associated with Significant OEM Group
Concentration
The Company's strategy of selling principally to OEMs anticipates that the
Company will be relying on high sales volumes to a relatively small number of
customers. Although there can be no assurance that the Company's major customers
will continue to utilize the Company's products at current levels, if at all,
the Company expects to continue to depend upon such customers for a significant
percentage of its revenues. A decline in demand for color copiers or color laser
printers, or other factors affecting the computer industry in general, or major
customers in particular, may adversely affect the Company's results of
operations.
The Company relies upon the ability of its OEMs to develop new products,
applications and product enhancements on a timely and cost-effective basis. The
ability of these OEMs to meet changing customer needs and respond to emerging
industry standards and other technological changes is essential to the Company's
continued success. There is no assurance that the Company's OEMs will
effectively meet these technological challenges. These OEMs, who are not within
the control of the Company, may incorporate into their products the technologies
of other companies in addition to or instead of the Company's products, and with
the exception of certain minimum purchase obligations, are not obligated to
purchase products from the Company. There can be no assurance that any OEM will
continue to carry the Company's products, and the loss of important OEMs, or an
inability to recruit additional OEMs, may have a material adverse effect on the
Company's business, operating results, and financial condition.
15
<PAGE>
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 Continued Demand for the Company's Products That Enable Color
Printing of Digital Data and the effects of a Potential Decrease
Although the Company has expanded its product line in recent years, and
continues to explore opportunities to further diversify its business, the
Company's business has been focused heavily on sales of products that enable the
color printing of digital data. Should conditions arise that reduce the demand
for this service, the Company's results of operations may be adversely affected.
The Company believes that purchases of the Company's products may be affected by
a variety of economic conditions and considerations, and there can be no
assurance that demand for the Company's products will continue at current
levels. For example, although such conditions are difficult to predict, the
Company is not assuming that there will be significant improvement in economic
conditions in Japan during the remainder of 1998. The Company believes that
continued economic distress in Japan and elsewhere in Asia may limit demand in
these regions for the Company's products. In addition, it is possible that
individuals with responsibility for purchasing the Company's products, such as
information technology professionals, may choose to devote available
discretionary resources to other perceived needs, such as technology expenses
associated with Year 2000 preparation and, or Euro currency conversion projects.
New Product Introductions
The Company continues to explore opportunities to develop product lines distinct
from its Fiery Color Servers. Such new products may require the investment of
capital for the development of new distribution and marketing channels at an
unknown cost to the Company. There can be no guarantee that the Company would be
successful in the development of such channels or that any new products would
16
<PAGE>
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. The Company's results have
followed a seasonal pattern reflecting the buying patterns of its' large OEM
customers. In the past that pattern has indicated the Company's fiscal fourth
quarter results may be adversely affected by a desire on the part of some or all
its' OEM customers to slow down, or otherwise delay fourth quarter orders in
order to minimize their inventory investment at the end of their fiscal year.
Moreover, the Company's ability to develop and market new products, the timing
and amount of sales and marketing expenditures, and the general demand for color
copiers, digital black-and-white copiers, and color laser printers will also
effect operating results.
17
<PAGE>
Interest Rate risk
The Company has an investment portfolio of fixed income securities. These
securities are subject to interest rate risk and will fall in value if market
interest rates increase. The Company attempts to limit these exposures by
investing primarily in short-term securities.
Limited Backlog
The Company typically does not obtain long-term volume purchase contracts from
its customers, and a substantial portion of the Company's backlog is scheduled
for delivery within 90 days or less. Customers may cancel orders and change
volume levels or delivery times without penalty. Sales and operating results
therefore depend on the volume and timing of the backlog as well as bookings
received. Significant portions of the Company's operating expenses are fixed,
and planned expenditures are based primarily on sales forecasts and product
development programs. If sales do not meet the Company's expectations in any
given period, the adverse impact on operating results may be magnified by the
Company's inability to adjust operating expenses sufficiently or quickly enough
to compensate for such a shortfall.
Volatility of Stock Price
Due to various factors, including those noted above, the Company's future
earnings and stock price 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 52.9% and 53.5%, respectively, of the Company's product revenue
for the three and six month periods ended June 30, 1998, were attributable to
international sales, primarily in Europe and Japan. The Company expects that
international sales will continue to represent a significant portion of its
total revenue. The Company is subject to certain risks associated with
international operations, including tariff regulations and requirements for
export licenses, particularly with respect to the export of certain
technologies, which may on occasion be delayed or difficult to obtain. Given the
significance of international sales to the Company, the Company faces a
continuing risk in that the strengthening of the U.S. dollar versus the Japanese
yen and major European currencies could adversely impact the Company's revenues
and gross margin. Although the Company typically invoices in U.S. dollars, these
adverse impacts could occur through lower unit demand and the necessity to lower
average selling prices to compensate for the reduced strength of local
currencies. Where the company does invoice in local currency, the Company's cash
flows and earnings are exposed to fluctuations in interest rates and foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and where appropriate the use of hedge oriented financial
market instruments. To date the Company has primarily utilized forward contracts
to mitigate its exposure in these markets.
18
<PAGE>
Proprietary Information
The Company relies on a combination of copyright, patent and trade secret
protection, nondisclosure agreements, and licensing and cross-licensing
arrangements to establish and protect its proprietary rights. There can be no
assurance that any patents that may be issued to the Company, or which the
Company may license from third parties, or that any other proprietary rights of
the Company will not be challenged, invalidated or circumvented, or that any
rights granted thereunder would provide proprietary protection to the Company.
Infringement and Potential Litigation
The Company may receive in the future communications from third parties
asserting that the Company's products infringe, or may infringe, the proprietary
rights of third parties. There can be no assurance that any of these claims will
not result in protracted and costly litigation. While it may be necessary or
desirable in the future to obtain licenses relating to one or more of its
products or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms, or at all.
Reliance on Adobe Systems, Incorporated
Under the Company's license agreements with Adobe, a separate license must be
granted from Adobe to the Company for each type of copier or printer used with a
Fiery Server or Controller. To date, the Company has successfully obtained
licenses to use Adobe's PostScript(TM) software for products that it offers.
However, there can be no assurance that Adobe will continue to grant future
licenses to Adobe PostScript(TM) software on reasonable terms, in a timely
manner, or at all, or that Adobe will continue to give quality assurance
approvals. Such actions by Adobe may adversely affect the Company's results of
operations. If Adobe does not grant the Company such licenses or approvals, if
the Adobe license agreements are terminated, or if the Company's relationship
with Adobe is otherwise impaired, the Company's operations may be adversely
affected.
Year 2000 Issues
The Company does not have a comprehensive and formal Year 2000 plan for all of
its operations. The Company has informally reviewed its internal MIS systems and
believes that Year 2000 issues will not materially affect its internal MIS
systems. Also, the Company has tested its products to determine if the products
will successfully rollover from the years 1999 to 2000 and 2000 to 2001, and if
the products will correctly recognize the date February 29, 2000. Products first
released after November 1, 1997 have passed internal tests for these criteria,
and future products will be required to pass the same internal tests before
shipping. Because the Company cannot control other companies' products used in
conjunction with the Company's products (such as other companies' software), the
Company does not intend to assure its customers that its products will meet the
above-referenced criteria when used in conjunction with any other software or
hardware not manufactured by the Company. To date, the Company has not reviewed
Year 2000 plans and preparations of its manufacturers, suppliers, customers, and
other third parties with whom it does business. . The Company continues to
assess the effects and costs associated with possible Year 2000; however, the
total effects and costs are unknown to the Company at this time, and there can
be no assurance that such effects and costs will not have a material adverse
effect on the Company, its financial condition, results of operations.
19
<PAGE>
PART II OTHER INFORMATION
ITEMS 1 - 3.
There is no applicable information to report under Part II, Items 1 - 3 during
the period covered by this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following items were submitted to the stockholders of the Company at the
Company's Annual Meeting of Stockholders held May 7, 1998.
(a) The election of six directors to serve a one-year term until
their successors are duly elected and qualified. The following
is a summary of the votes cast for and the votes withheld for
each individual.
Votes For Votes Withheld
--------- --------------
Efraim Arazi 47,749,452 193,708
Dan Avida 47,780,249 152,911
Gill Cogan 47,754,121 189,039
Dan Maydan 47,784,831 158,329
Jean-Louis Gassee 47,781,022 162,138
Thomas Unterberg 47,781,807 161,353
(b) The approval of an amendment to the Company's 1990 Stock Plan
to increase the number of shares reserved for issuance
thereunder by an additional 1,000,000 shares. Results of the
voting included 31,336,820 votes for, 16,096,272 votes against
and 510,068 shares abstained or not voted.
(c) The ratification of the appointment of Price Waterhouse LLP as
the independent accountants of the Company for the fiscal year
ended December 31, 1998. Results of the voting included
47,845,061 votes for, 52,880 votes against and 45,219 shares
abstained.
ITEM 5. OTHER INFORMATION
Effective July 15, 1998 the Company accepted the resignation of an Executive
Officer - Jeffrey Lenches, Executive Vice President since October 1994 and an
Officer of the Company since 1991. Certain other changes in the make-up of the
Executive Officers as announced on August 6, 1998 are as follows:
Mr. Fred Rosenzweig, previously Vice President, Manufacturing and Support will
become Executive Vice President of Operations. Mr Rosenzweig will continue in
his capacity as Vice President, Manufacturing and Support until such time as the
Company hires an individual who can assume some or all of his previous
responsibilities.
Mr. Eric Saltzman, previously Vice President, Strategic Relations, General
Counsel and Corporate Secretary will become Chief Financial Officer & General
Counsel.
20
<PAGE>
ITEM 5. OTHER INFORMATION (continued)
Ms. Jan Smith previously Vice President of Human Resources, will become Vice
President of Human Resources and Corporate Communications and an Executive
Officer of the Company.
Mr. Mark Lee previously a Vice President of Sales for the Company will become
the Vice President of Worldwide Sales and an Executive Officer of the Company.
Mr. Lee will continue in his capacity as Vice President of Sales until such time
as the Company hires an individual who can assume some or all of his previous
responsibilities.
Pursuant to recent changes to the proxy rules, unless a stockholder who wishes
to bring a matter before the stockholders at the Company's 1999 annual meeting
of stockholders notifies the Company of such matter prior to February 15, 1999,
management will have discretionary authority to vote all shares for which it has
proxies in opposition to such matter.
Other than the information reported above, there is no additional applicable
information to report under Part II, Item 5 during the period covered by this
report.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.............. Page 23
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the three month period ended June 30, 1998.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRONICS FOR IMAGING, INC.
Date: August 6, 1998
By /s/ Dan Avida
--------------------------------------
Dan Avida
President and Chief Executive Officer
By /s/ Eric Saltzman
--------------------------------------
Eric Saltzman
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed balance sheet, condensed statement of operations and condensed
statement of cash flows included in the Company's form 10-Q for the three
month period ended June 30, 1998 and is qualified in its entirety by
reference to such financial statements and notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 33,415
<SECURITIES> 206,526
<RECEIVABLES> 65,382
<ALLOWANCES> 1,626
<INVENTORY> 21,014
<CURRENT-ASSETS> 357,351
<PP&E> 76,022
<DEPRECIATION> 27,919
<TOTAL-ASSETS> 414,428
<CURRENT-LIABILITIES> 60,231
<BONDS> 3,924
0
0
<COMMON> 526
<OTHER-SE> 349,747
<TOTAL-LIABILITY-AND-EQUITY> 414,428
<SALES> 96,157
<TOTAL-REVENUES> 96,157
<CGS> 54,978
<TOTAL-COSTS> 54,978
<OTHER-EXPENSES> 31,919
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 170
<INCOME-PRETAX> 10,849
<INCOME-TAX> 3,906
<INCOME-CONTINUING> 6,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,943
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
