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, 1999
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.)
303 Velocity Way, Foster City, CA 94404
(Address of principal executive offices, including zip code)
(650) 357 - 3500
(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 June 30, 1999 was
54,614,947.
<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, 1999 and 1998, and
Six Months Ended June 30, 1999 and 1998.....................3
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 ........................4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 ....................5
Notes to Condensed Consolidated Financial Statements ............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........29
PART II - Other Information
Item 1. Legal Proceedings ..................................................31
Item 2. Changes in Securities and Use of Proceeds ..........................31
Item 3. Defaults Upon Senior Securities ....................................31
Item 4. Submission of Matters to a Vote of Security Holders.................31
Item 5. Other Information ..................................................32
Item 6. Exhibits and Reports on Form 8-K ...................................33
Signatures ...................................................................34
<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,
----------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 136,033 $ 96,157 $ 256,049 $ 178,680
Cost of revenue 68,710 54,978 132,431 100,334
------------- ------------- ------------- --------------
67,323 41,179 123,618 78,346
------------- ------------- ------------- --------------
Operating expenses:
Research and development 17,661 14,089 33,955 28,173
Sales and marketing 13,782 13,962 27,581 29,284
General and administrative 4,247 3,868 8,170 7,329
------------- ------------- ------------- --------------
35,690 31,919 69,706 64,786
------------- ------------- ------------- --------------
Income from operations 31,633 9,260 53,912 13,560
Other income, net 3,937 1,589 7,364 3,810
------------- ------------- ------------- --------------
Income before income taxes 35,570 10,849 61,276 17,370
Provision for income taxes 12,094 3,906 20,834 6,254
------------- ------------- ------------- --------------
Net income $ 23,476 $ 6,943 $ 40,442 $ 11,116
============= ============= ============== ==============
Net income per basic common share $ 0.43 $ 0.13 $ 0.75 $ 0.21
============= ============= ============= ==============
Shares used in per share
calculation (basic) 54,212 52,615 54,057 52,591
============= ============= ============= ==============
Net income per diluted common share $ 0.42 $ 0.13 $ 0.72 $ 0.20
============= ============= ============= ==============
Shares used in per share
calculation (diluted) 56,454 55,030 56,085 54,954
============= ============= ============= ==============
<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,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 146,436 $ 53,210
Short-term investments 247,784 269,823
Accounts receivable, net 68,433 57,494
Inventories 8,972 13,726
Other current assets 19,437 21,382
-------------- -------------
Total current assets 491,062 415,635
Property and equipment, net 49,353 46,579
Other assets 9,109 9,818
-------------- -------------
Total assets $ 549,524 $ 472,032
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 44,402 $ 32,707
Accrued and other liabilities 29,902 26,953
Income taxes payable 1,233 9,672
-------------- -------------
Total current liabilities 75,537 69,332
-------------- -------------
Long-term debt 3,625 3,777
-------------- -------------
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; 54,614,947 and 53,499,233 shares
issued and outstanding, respectively 546 535
Additional paid-in capital 182,256 151,270
Retained earnings 287,560 247,118
-------------- -------------
Total stockholders' equity 470,362 398,923
-------------- -------------
Total liabilities and stockholders' equity $ 549,524 $ 472,032
============== =============
<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,
----------------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 40,442 $ 11,116
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,557 5,816
Change in reserve for bad debts (189) 241
Other (76) (146)
Changes in operating assets and liabilities:
Accounts receivable (10,750) (33,067)
Inventories 4,754 2,776
Receivables from subcontract manufacturers 1,142 (760)
Other current assets 803 565
Accounts payable and accrued liabilities 13,810 15,382
Income taxes payable 7,082 1,780
-------------- -------------
Net cash provided by operating activities 63,575 3,703
Cash flows from investing activities:
Net sales and maturities and (purchases)
of short-term investments 22,039 (20,990)
Investment in property and equipment, net (8,841) (6,845)
Purchase of other assets 219 54
-------------- -------------
Net cash provided by (used for)
investing activities 13,417 (27,781)
-------------- --------------
Cash flows from financing activities:
Repayment of bonds payable (152) (140)
Issuance of common stock 16,386 438
-------------- -------------
Net cash provided by financing
activities 16,234 298
-------------- -------------
Increase (decrease) in cash and cash
equivalents 93,226 (23,780)
Cash and cash equivalents at beginning of period 53,210 57,195
-------------- -------------
Cash and cash equivalents at end of period $ 146,436 $ 33,415
============== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
ELECTRONICS FOR IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements of
Electronics for Imaging, Inc., a Delaware corporation (the "Company"),
as of and for the interim periods ended June 30, 1999, have been
prepared on the same basis as the audited consolidated financial
statements as of and for the year ended December 31, 1998, contained in
the Company's Annual Report to Stockholders, and, in the opinion of
management, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial
position of the Company and the results of its operations and cash
flows, in accordance with generally accepted accounting principles. The
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements referred
to above and notes thereto.
The preparation of the interim condensed consolidated financial
statements in conformity with generally accepted accounting principles
for such financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of
the interim condensed consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
The interim results of the Company are subject to fluctuation. As a
result, the Company believes the results of operations for the interim
periods ended June 30, 1999 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 (SFAS 130) "Reporting Comprehensive
Income". This statement requires that all items recognized under
accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This statement
also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. There was no
material difference between comprehensive income and net income for the
periods ending June 30, 1999 and 1998.
6
<PAGE>
3. Accounting for Derivative Instruments and Hedging
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133 (SFAS 133)
"Accounting for Derivative Instruments and Hedging". This statement
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. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 (SFAS 137), "Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective
Date of FASB Statement No. 133". SFAS 133, as amended by SFAS 137, is
effective for fiscal quarters and fiscal years beginning after June 15,
2000. The Company is currently studying the provisions of the SFAS 133
and the potential impact it may have on its financial statements.
4. Earnings Per Share
<TABLE>
The following table represents unaudited disclosures of basic and
diluted earnings per share for the periods presented below:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Net income available to
common shareholders $ 23,476 $ 6,943 $ 40,442 $ 11,116
Shares
Basic shares 54,212 52,615 54,057 52,591
Effect of Dilutive Securities 2,242 2,415 2,028 2,363
------------- ------------- ------------- --------------
Diluted shares 56,454 55,030 56,085 54,954
============= ============= ============= ==============
Earnings per common share
Basic EPS $ 0.43 $ 0.13 $ 0.75 $ 0.21
Diluted EPS $ 0.42 $ 0.13 $ 0.72 $ 0.20
</TABLE>
7
<PAGE>
<TABLE>
5. Balance Sheet Components (in thousands)
<CAPTION>
June 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 69,698 $ 58,948
Less reserves and allowances (1,265) (1,454)
-------------- -------------
$ 68,433 $ 57,494
============== =============
Inventories:
Raw materials $ 8,069 $ 13,261
Work-in-process 20 17
Finished goods 883 448
-------------- -------------
$ 8,972 $ 13,726
============== =============
Other current assets:
Receivable from subcontract manufacturers $ 3,193 $ 4,335
Other 16,244 17,047
-------------- -------------
$ 19,437 $ 21,382
============== =============
Property and equipment:
Land $ 27,923 $ 27,706
Equipment and purchased software 48,870 44,348
Furniture and leasehold improvements 11,475 7,565
-------------- -------------
88,268 79,619
Less accumulated depreciation and amortization (38,915) (33,040)
-------------- -------------
$ 49,353 $ 46,579
============== =============
Accrued and other liabilities:
Accrued product-related obligations $ 6,372 $ 4,650
Accrued royalty payments 8,465 8,232
Accrued compensation and benefits 7,115 6,383
Other accrued liabilities 7,950 7,688
-------------- -------------
$ 29,902 $ 26,953
============== =============
</TABLE>
8
<PAGE>
6. Legal Proceedings
The Company and certain principal officers and directors were named as
defendants in putative 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.
7. Subsequent Event
On July 14, 1999 the Company announced its agreement to acquire
Management Graphics, Inc. ("MGI"), a Minnesota-based corporation that
develops digital print on demand products and other digital imaging
products. The acquisition is intended to be accounted for as a tax
free, pooling of interests transaction. The purchase price for MGI will
be determined at closing and is expected to be approximately $30.0
million. The closing of the acquisition of MGI is subject to the
satisfaction of certain conditions, including, among others, the
approval of certain U.S. regulatory authorities and the approval of the
stockholders of MGI.
9
<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., a Delaware corporation, (the
"Company") and related notes thereto contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998. Results for the three and
six month periods ended June 30, 1999 are not necessarily indicative of the
results expected for the entire fiscal year ended December 31, 1999. 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 1998 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999
AND JUNE 30, 1998
Revenue
Revenue increased 41% to $136.0 million in the three month period ended June 30,
1999 compared to $96.2 million in the three month period ended June 30, 1998,
whereas the corresponding unit volume increased by 103%. Revenue increased 43%
to $256.0 million in the six month period ended June 30, 1999 compared to $178.7
million in the six month period ended June 30, 1998, whereas the corresponding
unit volume increased by 146%. The increase in revenue was primarily due to
significant increases in unit volumes shipped as a result of positive market
acceptance of new product introductions and the impact of new customers, and was
partially offset by price reductions on older product lines.
The Company's revenue is principally derived from three major categories. The
first category is made up of stand-alone servers which connect digital color
copiers with computer networks. This category includes the Fiery XJ+, X2 and ZX
products and accounted for a majority of the Company's revenue prior to 1998.
The second category is made up of embedded / desktop controllers, bundled color
solutions and chipset solutions primarily for the office market. The third
category is made up of controllers for digital black and white products.
10
<PAGE>
<TABLE>
The following is a break-down of categories by revenue, both in terms of
absolute dollars and as a percentage (%) of total. Also shown is volume as a
percentage (%) of total units shipped.
<CAPTION>
Three Months Three Months
Ended Ended Increase /
Revenue June 30, 1999 June 30, 1998 (Decrease)
(in thousands) Revenue Revenue %
------- ------- -------
<S> <C> <C> <C> <C> <C>
Stand-alone Servers Connecting
to Digital Color Copiers $ 54,830 40% $ 60,882 63% (10)%
Embedded / Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 36,913 27% 18,717 20% 97%
Controllers for Digital
Black and White Solutions 35,176 26% 7,710 8% 356%
Spares, Licensing
& Other misc. sources 9,114 7% 8,848 9% 3%
-------- ---- -------- ---- ----
Total Revenue $136,033 100% $ 96,157 100% 41%
======== ==== ======== ==== ====
Three Months Three Months
Ended Ended
Volume June 30, 1999 June 30, 1998
Volume Volume
------ ------
Stand-alone Servers Connecting
to Digital Color Copiers 11% 26%
Embedded / Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 47% 54%
Controllers for Digital
Black and White Solutions 42% 20%
Spares, Licensing
& Other misc. sources -- --
---- ----
Total Revenue 100% 100%
==== ====
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended Increase /
Revenue June 30, 1999 June 30, 1998 (Decrease)
(in thousands) Revenue Revenue %
------- ------- --------
<S> <C> <C> <C> <C> <C>
Stand-alone Servers Connecting
to Digital Color Copiers $114,159 45% $125,011 70% (9)%
Embedded / Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 68,577 27% 28,626 16% 140%
Controllers for Digital
Black and White Solutions 51,970 20% 8,838 5% 488%
Spares, Licensing
& Other misc. sources 21,343 8% 16,205 9% 32%
-------- ---- -------- ---- ----
Total Revenue $256,049 100% $178,680 100% 43%
======== ==== ======== ==== ====
Six Months Six Months
Ended Ended
Volume June 30, 1999 June 30, 1998
Volume Volume
------ ------
Stand-alone Servers Connecting
to Digital Color Copiers 13% 37%
Embedded / Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 52% 48%
Controllers for Digital
Black and White Solutions 35% 15%
Spares, Licensing
& Other misc. sources -- --
---- ----
Total Revenue 100% 100%
==== ====
</TABLE>
Growth in the three and six month periods ended June 30, 1999 primarily took
place in the two newer categories: controllers for digital black and white
solutions and embedded / desktop controllers, bundled color solutions and
chipset solutions. The Company's traditional business of stand-alone servers
connecting to digital color copiers decreased further, which is consistent with
a trend since early 1998 of the market moving away from servers to desktop /
embedded products.
12
<PAGE>
Overall revenues for color products, combining stand-alone color servers and the
desktop / embedded / bundled segments, has increased by 15% and 19% for the
three and six month periods ended June 30, 1999 as compared to the respective
periods ending June 30, 1998. This compares to revenue growth in the black &
white segment of 356% and 488% for the three and six month periods ended June
30, 1999 as compared to the respective periods ended June 30, 1998. In absolute
dollars the black & white segment contributed 68% and 56% of the revenue growth
for the three and six month periods ended June 30, 1999 as compared to the
respective periods ended June 30, 1998. The majority of the revenue growth in
the black & white segment is concentrated in new products with one customer. The
growth of revenue in these particular products may not be sustainable and may in
fact decline; for instance if the orders to date are the result of "channel
fill" rather than ongoing demand.
The products in the two growth segments, except for chipset solutions, 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. The chipset solutions can be characterized
by lower unit prices and higher per unit margins compared to the traditional
stand-alone server line of products. The Company anticipates further growth in
these two categories as a percentage of total revenue. To the extent these
categories do not grow over time in absolute terms, or if the Company is not
able to meet demand for higher unit volumes, it could have a material adverse
effect on the Company's results. The Company believes that stand-alone server
products have not experienced revenue growth for the three and six month periods
ended June 30, 1999 compared to the three and six month periods ended June 30,
1998, due to a number of factors. Since early 1998, low-end products that
previously shipped as stand-alone products have begun to ship as embedded
products. In addition, desktop products are replacing stand-alone servers as the
price / performance relationship on the newer color desktop printers continues
to improve. Further, many of the Company's OEM partners are scheduled to release
new copier products in the coming year. It is possible that customers are
holding off purchases until these products are released, thus delaying purchases
of the Company's products as well. Finally, prices have been reduced on older
product lines as new products have begun to ship in volume. There can be no
assurance that the new products for the remainder of 1999 will be accepted on a
timely basis by any of the Company's OEM partners, or that they will
successfully compete, or be accepted by the market, or otherwise be able to
effectively replace the volume of revenue and / or income from the older
products.
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.
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 the first half of
1999 (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.
13
<PAGE>
<TABLE>
Shipments by geographic area for the three and six month periods ended June 30,
1999 and June 30, 1998 were as follows:
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998 % Change
------------- -------------
<S> <C> <C> <C> <C> <C>
(in thousands)
North America $ 62,433 46% $45,319 47% 38%
Europe 46,164 34% 34,247 36% 35%
Japan 22,832 17% 13,071 13% 75%
Rest of World 4,604 3% 3,520 4% 31%
-------- ---- ------- ---- ----
$136,033 100% $96,157 100% 41%
======== ==== ======= ==== ===
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998 % Change
------------- -------------
(in thousands)
North America $116,181 45% $83,080 47% 40%
Europe 87,805 34% 63,909 36% 37%
Japan 45,007 18% 25,840 14% 74%
Rest of World 7,056 3% 5,851 3% 21%
-------- ---- -------- ---- ---
$256,049 100% $178,680 100% 43%
======== ==== ======== ==== ===
</TABLE>
All geographic locations showed an increase in shipments of at least 30% for the
three month period ended June 30, 1999 compared to the three month period ended
June 30, 1998, with Japan yielding the most significant increase of 75%.
Shipments to North America, Europe and Japan increased over 30% for the six
month period ended June 30, 1999 compared to the same period in 1998, whereas
the Rest of World region experienced growth of 21% during the same time periods.
The Rest of World is predominantly represented by the Southeast Asian region.
The moderate increase in sales to the Rest of World region in the six month
period ended June 30, 1999 compared to the six month period ended June 30, 1998
is the result of the fact that export sales in the first quarter of 1999
compared to the first quarter of 1998 showed a modest growth of 5% - a
reflection of the challenging economic situation in that region at the beginning
of 1999. Such conditions are difficult to predict and the Company does not know
if the improvement in the economic conditions in Southeast Asia will be
sustained during the remainder of 1999. Limited demand from Southeast Asia may
have an adverse impact on the Company's results of operations.
14
<PAGE>
As shipments to some of the Company's OEM partners are made to centralized
purchasing and manufacturing locations which in turn sell through to other
locations, the Company believes that export sales of its products into each
region may differ from what is reported. The Company expects that export sales
will continue to represent a significant portion of its total revenue.
Substantially all of the revenue for the last three years has been attributable
to sales of products through the Company's OEM channels with such partners as
Canon, Epson, Fuji-Xerox, IBM, Hewlett-Packard, Kodak/Danka Business Systems,
Konica, Lanier, Minolta, Oce, Ricoh, Sharp, Xerox and others. During 1999, the
Company has continued to work on both increasing the number of OEM partners, and
expanding the size of existing relationships with its OEM partners. The Company
relied on three OEM customers, Canon, Xerox and Ricoh in aggregate for 74% and
66% of its revenue for the three month periods ended June 30, 1999 and June 30,
1998, respectively. The Company relied on three OEM customers, Canon, Xerox and
Minolta in aggregate for 71% of its revenue for the six month period ended June
30, 1999 and the Company relied on three OEM customers, Canon, Xerox and Ricoh
in aggregate for 71% of its revenue for the six month period ended June 30,
1998. 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.
The Company continues to work on the development of products utilizing both the
Fiery architecture and other products and intends to continue to introduce new
generations of Fiery products and other new product lines during the remainder
of 1999 and beyond. No assurance can be given that the introduction or market
acceptance of new, current or future products will be successful.
It is also possible that revenues in the future may be adversely 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 and / or Euro currency conversion
projects. In addition, companies that successfully performed Year 2000
compliancy testing might not be willing to buy new products and connect them to
their existing networks that have met year 2000 compliance standards, until
after January 2000 in order to avoid any risks associated with the new products.
At this time, the Company cannot determine how much impact, if any, these
factors may have on the Company's revenue, financial condition or results of
operations.
Cost of Revenue
Third-party manufacturers purchase most of the necessary components and
manufacture Fiery color servers as well as embedded / desktop controllers and
digital black and white products. The Company directly sources processors,
memory, certain ASICs, and software licensed from various sources, including
PostScript(TM) interpreter software, which the Company licenses from Adobe
Systems Incorporated.
Included in cost of revenue as well as operating expenses for the six month
period ended June 30, 1999, are one-time costs of moving to the Company's new
corporate headquarters in Foster City, California. Total moving costs for the
six month period ended June 30, 1999 amounted to $1.8 million of which
approximately $0.2 million related to cost of revenue. All moving related costs
were incurred in the first quarter of 1999.
15
<PAGE>
Gross Margins
The Company's gross margin was 49% and 43% for the three month periods ended
June 30, 1999 and June 30, 1998, respectively and 48% and 44% for the six month
periods ended June 30, 1999 and June 30, 1998, respectively. The increase in
gross margin was due to a combination of factors, including the product mix and
the mix of OEM partners during the two years. Further, the increased volume and
resulting production shift to larger subcontractor manufacturers resulted in
efficiencies in purchasing and manufacturing in the three and six month periods
ended June 30, 1999 as compared to the same time periods one year ago. In
addition, certain manufacturing efficiencies were slightly offset by price
reductions on older product lines.
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 servers and
embedded controllers for black-and-white copiers.
If such sales increase as a percentage of the Company's revenue, gross margins
may decline, unless the Company is able to obtain additional efficiencies in
purchasing and manufacturing.
The Company's ability to maintain current gross margins may not continue. 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 decline as a percentage of revenues.
In general, the Company believes that gross margins will continue to be impacted
by a variety of factors. These factors include the market prices that can be
achieved on the Company's current and future products, the availability and
pricing of key components (including DRAM and PostScript(TM) 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 period to period.
Operating Expenses
Operating expenses increased by 12% to $35.7 million for the three month period
ended June 30, 1999 compared to $31.9 million for the three month period ended
June 30, 1998. Operating expenses as a percentage of revenue amounted to 26% for
the three month period ended June 30, 1999 and 33% for the three month period
ended June 30, 1998. Operating expenses increased by 8% to $69.7 million for the
six month period ended June 30, 1999 compared to $64.8 million for the six month
period ended June 30, 1998. Operating expenses as a percentage of revenue
amounted to 27% for the six month period ended June 30, 1999 and 36% for the six
month period ended June 30, 1998. Excluding the one time moving expenses of
approximately $1.6 million allocated to operating expenses in the first quarter
of 1999, operating expenses increased by 5% for the six month period ended June
30, 1999 compared to the same period in 1998. The increase in absolute dollars
of operating expenses is the result of the support needed for the expanding
business and the increased research and development activity necessary to
develop additional new products. The decrease in operating expenses as a
percentage of revenues is the result of the Company's successful spending
control during early 1999, and the shift toward more embedded / desktop and
black and white business which requires less sales and marketing expenditure by
the Company than the Company's Stand-alone server products. The Company
anticipates that operating expenses will continue to grow and may increase both
in absolute dollars and as a percentage of revenue.
16
<PAGE>
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, depreciation and costs of prototype
materials. Research and development expenses amounted to $17.7 million or 13% of
revenue for the three month period ended June 30, 1999 compared to $14.1 million
or 15% of revenue for the three month period ended June 30, 1998. Research and
development expenses amounted to $34.0 million or 13% of revenue for the six
month period ended June 30, 1999 compared to $28.2 million or 16% of revenue for
the six month period ended June 30, 1998. The majority of the 25% and 21%
increase (17% increase excluding the one time moving expenses of $0.9 million
allocated to research and development during the first quarter of 1999) related
to the three and six month periods ended June 30, 1999 compared to the same
periods in 1998, was due to an increase in research and development projects.
This in turn resulted in increased headcount related costs (increase of
headcount by 42 employees or 15% from 328 employees as of June 30, 1999 compared
to 286 employees as of June 30, 1998). 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.
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 in
the United States, Europe, Japan, Southeast Asia and South America. Sales and
marketing expenses amounted to $13.8 million or 10% of revenue for the three
month period ended June 30, 1999 compared to $14.0 million or 15% of revenue for
the three month period ended June 30, 1998. Sales and marketing expenses
amounted to $27.6 million or 11% of revenue for the six month period ended June
30, 1999 compared to $29.3 million or 16% of revenue for the six month period
ended June 30, 1998. Sales and marketing expenses decreased by 1% and 6% (or 7%
excluding the one-time moving expenses of $0.4 million allocated to sales and
marketing during the first quarter of 1999) in the three and six month periods
ended June 30, 1999 over the respective periods ended June 30, 1998. The
decrease is the result of the lower relative promotional expenses required to
support the growing two newer business segments compared to the traditional
segment of stand-alone servers connecting to digital color copiers. The decrease
in expenses was partially offset by an increase in headcount of 11 employees or
6% from 186 employees as of June 30, 1999 compared to 175 employees as of June
30, 1998.
The Company expects that its sales and marketing expenses may increase in
absolute dollars and possibly also as a percentage of revenue as it continues to
actively promote its products, launch new products and continue to build its
sales and marketing organization, particularly in Europe and Asia Pacific,
including Japan. This increase might not proportionally increase with increases
in volume if the Company's sales continue to gravitate toward embedded desktop
controllers, bundled color solutions and chipset solutions as well as
controllers for digital black and white solutions, which require less relative
promotional support from the Company because the OEM partners contribute more
significantly to the sales and marketing efforts for these products.
17
<PAGE>
General and Administrative
General and administrative expenses consist primarily of personnel expenses and,
to a lesser extent, depreciation and facility costs, professional fees and other
costs associated with public companies. General and administrative expenses
amounted to $4.2 million or 3% of revenue for the three month period ended June
30, 1999, compared to $3.9 million or 4% of revenue for the three month period
ended June 30, 1998. General and administrative expenses amounted to $8.2
million or 3% of revenue for the six month period ended June 30, 1999, compared
to $7.3 million or 4% of revenue for the six month period ended June 30, 1998.
General and administrative expenses increased by 10% and 12% (or by 8% excluding
the one-time moving expenses incurred in the first quarter of 1999 of
approximately $0.3 million) in the three and six month periods ended June 30,
1999 over the corresponding periods ended June 30, 1998. While general and
administrative expenses have slightly decreased as a percentage of total revenue
during the two periods, these expenses have slightly increased in absolute
dollars. The increases were primarily due to the increase in headcount and the
use of outside consultants in order to support the needs of the Company's
growing operations. Headcount increased by 18 employees or 31% from 76 employees
as of June 30, 1999 compared to 58 employees as of June 30, 1998. The Company
expects that its general and administrative expenses may continue to increase in
absolute dollars and possibly also as a percentage of revenue in order to
support the Company's efforts to grow its business.
Other Income
Other income relates mainly to interest income and expense, and gains and losses
on foreign currency transactions. Other income amounted to $3.9 million for the
three month period ended June 30, 1999 compared to $1.6 million for the three
month period ended June 30, 1998. Other income amounted to $7.4 million for the
six month period ended June 30, 1999 compared to $3.8 million for the six month
period ended June 30, 1998. Other income increased by 148% and 93% for the three
and six month periods ended June 30, 1999 compared to the respective periods
ended June 30, 1998. The increase in other income is due i) to the interest
earned on the higher average cash and short-term investment balances for the
respective periods and ii) approximately $0.8 million in losses suffered on
Asian currency denominated transactions for the six month period ended June 30,
1998. Although the Company's exposure to currency fluctuations has historically
been relatively minor, the Company began to implement a hedging program in June
1998 in response to currency fluctuations in Asia.
Income Taxes
The Company's effective tax rate was 34% for the three and six month period
ended June 30, 1999 compared to 36% for the three and six month periods ended
June 30, 1998. The effective tax rate for the three and six month periods ended
June 30, 1998 was retroactively adjusted to 32% in the third quarter of 1998.
The increase in the effective tax rate for the three and six month period ended
June 30, 1999 compared to the adjusted effective tax rate for the three and six
month period ended June 30, 1998 was primarily due to the fact that the research
and development credit has expired mid-year of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased by $71.2 million to
$394.2 million as of June 30, 1999 from $323.0 million as of December 31, 1998.
Working capital increased by $69.2 million to $415.5 million as of June 30, 1999
up from $346.3 million as of December 31, 1998. These increases were primarily
the result of net income, changes of balance sheet components and the exercise
of employee stock options.
18
<PAGE>
Net cash provided by operating activities was $63.6 million and $3.7 million for
the six month periods ended June 30, 1999 and June 30, 1998, respectively. Cash
provided by operating activities increased by $59.9 million, primarily due to a
significant increase in net income, accounts payable, taxes payables as well as
reductions in inventory, offset in part by an increase in accounts receivable.
During the first half of 1999, the Company continued to invest cash in
short-term investments, mainly municipal securities. Due to capital market
situations during the first six months of 1999, the Company invested relatively
more cash in securities with a maturity at the date of purchase of less than 90
days. This resulted in an increase of cash and cash equivalents of $93.2 million
and a decrease of short-term investments of $22.0 million as of June 30, 1999
compared to December 31, 1998.
The Company's capital expenditures generally consist of investments in computers
and related peripheral equipment and office furniture for use in the Company's
operations. The Company purchased approximately $8.8 million and $6.8 million of
such equipment and furniture during the six month periods ended June 30, 1999
and June 30, 1998, respectively.
In 1997, the Company entered into an agreement to lease a ten-story 295,000
square foot building to be constructed in 1998 and 1999 on 35 acres, which the
Company owns in Foster City, California. The lessor of the building funded the
costs of the building construction directed by the Company. The building
construction was completed on July 15, 1999 and the final balance on the
commitment amounted to $56.8 million. Rent payments for the building commenced
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. The move to the new corporate
headquarters was completed in the first quarter of 1999 and the Company incurred
one time moving expenses of approximately $1.8 million during the first quarter
of 1999. 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
tangible net worth. In addition, the Company has pledged certain marketable
securities ($59.2 million at June 30, 1999) 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 financial covenant restrictions.
Cash provided by the exercise of stock options amounted to $16.4 million for the
six month period ended June 30, 1999, a $15.9 million increase over the
corresponding period in 1998. The increase was due to a higher volume of stock
option exercises during the six month period ended June 30, 1999 compared to the
six month period ended June 30, 1998.
The Company believes that its existing capital resources, together with cash
generated from continuing operations will be sufficient to fund its operations
and meet capital requirements for at least the next twelve-month period.
19
<PAGE>
Year 2000 Status
The Company has updated substantially all of its internal computer system
infrastructure over the last few years, and the Company believes that virtually
all critical pieces of hardware and software have been represented to be Year
2000 compliant by their manufacturers. As of the end of June 1999 all major
internal systems had been upgraded to versions represented by the manufacturer
as Year 2000 compliant and tested on a limited basis by the Company with the
exception of one system having to do with call tracking and post sale support.
This particular system is currently in the process of being upgraded and tested
and this process is expected to be completed by the end of November 1999.
Although the Company continues to review and assess its internal systems, based
on its investigation to date, the Company currently believes that Year 2000
issues will not materially affect its internal Management Information Systems.
However, there can be no assurance that the Company will have identified or
procured all of the resources necessary to address all critical Year 2000
deficient hardware and software systems on a timely basis and the Company may
need to expend additional resources to identify, modify or repair internal
systems.
During the first six months of 1999, the Company spent approximately $0.5
million of $1.2 million the Company has allotted to spend in fiscal 1999 on
addressing and preparing for potential Year 2000 problems and related issues.
Although the Company generally does not sell products to end-users, the Company
has been working with certain of its OEM partners to test the Company's products
in conjunction with the OEM's products to determine if our combined products
will successfully rollover from the years 1999 to 2000 and 2000 to 2001, and if
such products will correctly recognize the date February 29, 2000. The Company's
products recently developed and currently under development are designed to
address the Year 2000 issue. However, while the Company has tested its products,
the Company does not certify that any of its products will perform as tested
when used with other companies' products (including hardware and software) or
when used in circumstances which are not reflected in the testing the Company
has performed. Given that the Company does not and cannot control other
companies' products, including other companies' software, the Company is unable
to provide assurances that any other companies' products or software will not
suffer any errors or malfunctions related to the Year 2000. In addition,
although certain Year 2000 sensitive materials and components in the Company's
internal systems may have passed internal Year 2000 Compliance testing by the
manufacturers of such materials or by our suppliers or vendors, the Company
cannot be certain that such materials or components will perform as tested when
used in circumstances not reflected by such testing.
To date the Company has reviewed the majority of Year 2000 plans and
preparations of its significant manufacturers, suppliers, customers and other
critical third parties with whom it does business. The Company is currently in
the process of completing discussions with these third parties as part of
developing contingency plans. The Company has also begun to work on contingency
plans and currently believes that internal problems encountered could be
successfully circumvented by processing certain transactions manually for a
short period of time. The contingency plans will be more fully developed in the
third quarter of 1999. The Company continues to assess the effects and costs
associated with possible Year 2000 problems, however, the total effects and
costs are unknown to the Company at this time. There can be no assurance that
such effects and costs will not have a materially adverse effect on the Company,
its financial condition, or results of operations.
20
<PAGE>
Euro Assessment
Eleven of the fifteen member countries of the European Union have established
fixed conversion rates between their existing sovereign currencies and the Euro
and have adopted the Euro as a common currency as of January 1, 1999. The Euro
is trading on currency exchanges and is available for non-cash transactions. The
conversion to the Euro is not expected to have a material adverse effect on the
operating results of the Company as the Company predominantly invoices in U.S.
Dollars. The Company is currently in the process of evaluating the reporting
requirements in the respective countries and the related system, legal and
taxation requirements. The Company expects that required modifications will be
made on a timely basis and that such modifications will not have a material
adverse impact on the Company's operating results. There can be no assurance,
however, that the Company will be able to complete such modifications to comply
with Euro currency conversion requirements, which could have a material adverse
effect on the Company's operating results and financial condition.
21
<PAGE>
Factors That Could Adversely Affect Performance
Our performance may be adversely affected by the following factors:
We rely on sales to a relatively small number of OEM partners, and the loss of
any of these customers could substantially decrease our revenues
Because we sell our products primarily to our OEM partners, we rely on high
sales volumes to a relatively small number of customers. We expect that we will
continue to depend on these OEM partners for a significant portion of our
revenues. If we lose an important OEM or we are unable to recruit additional
OEMs, our revenues may be materially and adversely affected. We cannot assure
you that our major customers will continue to purchase our products at current
levels or that they will continue to purchase our products at all. In addition,
our results of operations could be adversely affected by a decline in demand for
copiers or laser printers, other factors affecting our major customers, in
particular, or the computer industry in general.
We rely upon our OEM partners to develop new products, applications and product
enhancements in a timely and cost-effective manner. Our continued success
depends upon the ability of these OEMs to meet changing customer needs and
respond to emerging industry standards and other technological changes. However,
we cannot assure you that our OEMs will effectively meet these technological
challenges. These OEMs, who are not within our control, may incorporate into
their products the technologies of other companies in addition to, or instead of
our products. These OEMs may introduce and support products that are not
compatible with our products. We rely on these OEMs to market our products with
their products, and if these OEMs do not effectively market our products our
sales revenue may be materially and adversely affected. With the exception of
certain minimum purchase obligations, these OEMs are not obligated to purchase
products from us. We cannot assure you that our OEMs will continue to carry our
products.
We are pursuing, and will continue to pursue, the business of additional copier
and printer OEMs. However, because there are a limited number of OEMs producing
copiers and printers in sufficient volume to be attractive customers for us, we
expect that customer concentration will continue to be a risk.
If we are not be able to successfully manage product launches and product
transitions, customers may delay or cancel orders of our existing products at a
time when our new products are not being sold
Any delays in the launch or availability of new products we are planning could
have an adverse effect on our financial results. During transitions from
existing products to new products, customers may delay or cancel orders for
existing products. Our results of operations may be adversely affected if we
cannot successfully manage product transitions or guarantee the availability of
products after they have been introduced.
22
<PAGE>
We license software used in most of our products from on Adobe Systems
Incorporated, and the loss of this license would prevent us from shipping these
products
Under our license agreements with Adobe, a separate license must be granted from
Adobe to us for each type of copier or printer used with a Fiery Server or
Controller. If Adobe does not grant us such licenses or approvals, if the Adobe
license agreements are terminated, or if our relationship with Adobe is
otherwise impaired, our financial condition and results of operations may be
materially adversely affected. To date, we have successfully obtained licenses
to use Adobe's PostScript(TM) software for our products, where required.
However, we cannot assure you that Adobe will continue to grant future licenses
to Adobe PostScript(TM) software on reasonable terms, in a timely manner, or at
all. In addition, we cannot assure you that Adobe will continue to give us the
quality assurance approvals we are required to obtain from Adobe for the Adobe
licenses.
If we are not able to successfully coordinate product development with our OEM
partners, they may reduce their purchases from us
In the past our OEM partners have requested a broader range of products with
different and unique features, and we believe that this trend may continue. Our
sales revenue and results of operations may be adversely affected if we cannot
timely meet their product needs and successfully manage the additional
engineering and support effort and other risks associated with a broader range
of products.
Our OEMs work closely with us to develop products that are specific to each
OEM's copiers and printers. For many of the products we are developing we need
to coordinate development, quality testing, marketing and other tasks with our
OEMs. We cannot control our OEMs' development efforts and coordinating with our
OEMs may cause delays that we cannot manage by ourselves. Our results of
operations may be adversely affected if we cannot successfully coordinate
product development with our OEMs.
If the demand for products that enable color printing of digital data decreases,
our sales revenue may decrease
Although we have expanded our product line in recent years, and continue to
explore opportunities to further diversify our business, we have been focused
heavily on sales of products that enable the color printing of digital data. If
demand for this service declines, our sales revenue may be adversely affected.
We believe that demand for our products may be affected by a variety of economic
conditions and considerations, and we cannot assure you that demand for our
products will continue at current levels. For example, although such conditions
are difficult to predict, we do not expect a significant improvement in economic
conditions in Asia, including Japan, during the remainder of 1999. We believe
that continued economic distress in Japan and elsewhere in Asia might limit
demand in these regions for our products. Economic distress in other parts of
the world such as Brazil may also limit demand for our products. The move to a
single European currency, the Euro, and the resulting central bank management of
interest rates to maintain fixed currency exchange rates among the member
nations may lead to economic conditions which adversely impact sales of our
products. In addition, individuals with responsibility for purchasing our
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. Finally, companies that successfully performed Year 2000 compliancy
testing might not be willing to buy new products and connect them to their
existing networks that have met year 2000 compliance standards, until after
January 2000 in order to avoid any risks associated with the new products. At
this time, we cannot determine how much of an impact these factors may have.
23
<PAGE>
If we are not able to successfully develop and market our new products, our
investments in these products will not produce a return for us
We continue to explore opportunities to develop product lines different from our
Fiery servers and embedded controllers. We may need to invest funds for the
development of new distribution and marketing channels for these new products.
We do not know if we would be successful in developing these channels or whether
any new products would be accepted by the market. Our results of operations may
be adversely affected if we cannot successfully introduce new products. In
addition, if we are able to introduce new products, our new products (including
more powerful products sold at a lower price) may adversely impact gross margins
or sales of existing products.
We face competition from our own customers who develop similar products, and if
we are not able to compete successfully then our business may be adversely
impacted
Our OEM partners may themselves internally develop and supply products similar
to our current products. These OEMs may be able to develop similar products that
are compatible with their own products more quickly than we can. These OEMs may
choose to market their own products, even if these products are technologically
inferior, have lower performance or cost more. We cannot assure you that we will
be able to continue to successfully compete against similar products developed
internally by our OEMs or against their financial and other resources. If we
cannot compete successfully against our OEMs' internally developed products, our
business may be adversely impacted.
If we are not able to hire and retain skilled employees, we may not be able to
develop products or meet demand for our products in a timely fashion
We depend upon skilled employees, such as software and hardware engineers,
quality assurance engineers and other technical professionals. We are located in
the Silicon Valley where competition among companies to hire engineering and
technical professionals is intense. It is difficult for us to locate and hire
qualified engineers and technical professionals and for us to retain these
people. There are many technology companies located nearby that may try to hire
our employees. If we do not offer competitive compensation, we may not be able
to recruit or retain employees. If we cannot successfully hire and retain
employees, we may not be able to timely develop products or to meet demand for
our products in a timely fashion and our results of operations may be adversely
impacted.
If we are not able to accurately project growth of demand for our products, our
business may be adversely impacted
In the first half of 1999, we have experienced growth in our number of employees
and unit volumes. We attempt to hire additional employees to match growth in
projected demand for our products. If we project a higher demand than
materializes, we will hire too many employees and incur expenses that we need
not have incurred and our margins may be lower. If we project a lower demand
than materializes we will hire too few employees we may not be able to meet
demand for our products and our sales revenue may be lower. If we cannot
successfully manage our growth, our results of operations may be adversely
affected.
24
<PAGE>
Our operating results may fluctuate based upon many factors, which could affect
our stock price
Operating results may fluctuate due to factors outside of our control such as:
o demand for our products;
o success and timing of new product introductions;
o price reductions by us and our competitors;
o delay, cancellation or rescheduling of orders;
o product performance;
o availability of key components;
o the seasonal purchasing patterns of our OEM partners;
o the status of our relationships with our OEM partners;
o the performance of third-party manufacturers;
o the status of our relationships with our key suppliers; and
o general economic conditions
We expect our stock price to vary with our operating results and, consequently,
adverse fluctuations could adversely affect our stock price. Our results of
operations have typically followed a seasonal pattern reflecting the buying
patterns of our large OEM customers. In the past, our fiscal fourth quarter
results have been adversely affected because some or all of our OEM customers
wanted to slow down, or otherwise delay fourth quarter orders in an effort to
minimize their inventory investment at the end of their fiscal year. In
addition, the first fiscal quarter traditionally has been a weaker quarter
because our OEM partners focus on training of their sales forces. Moreover, our
ability to develop and market new products, the timing and amount of our sales
and marketing expenditures, the general demand for what are discretionary
purchase items (color copiers, digital black-and-white copiers, and color laser
printers) and general global economic conditions will also affect operating
results.
The value of our investment portfolio will decrease if interest rates increase
We have an investment portfolio of mainly fixed income securities classified as
available-for-sale securities. As a result, our investment portfolio is subject
to interest rate risk and will fall in value if market interest rates increase.
We attempt to limit this exposure to interest rate risk by investing primarily
in short-term securities. We may be unable to successfully limit our risk to
interest rate fluctuations and this may cause our investment portfolio to
decrease in value.
25
<PAGE>
Our expenditures are planned according to anticipated revenues and, therefore,
imprecise forecasts of orders may result in poor operating results
Typically we do not have long-term volume purchase contracts with our customers,
and a substantial portion of our backlog is scheduled for delivery within 90
days or less. Our customers may cancel orders and change volume levels or
delivery times for product they have ordered from us without penalty. Our sales
and operating results depend on the volume and timing of the backlog as well as
bookings received from our customers. In addition, a significant portion of our
operating expenses are fixed in advance, and we plan these expenditures based on
the sales forecasts from our OEM customers and product development programs. If
our sales do not meet our expectations in any period, the adverse impact on our
operating results may be magnified by our inability to adjust our operating
expenses sufficiently or quickly enough to compensate for such a shortfall in
sales. If we were unable to adjust our operating expenses in response to a
shortfall in our sales, there could be a material adverse effect on our
business, financial condition and results of operations.
Our stock price has been and may continue to be volatile
Our common stock, and the stock market generally, have from time to time
experienced significant price and volume fluctuations. The market prices for
securities of technology companies have been especially volatile, and
fluctuations in the stock market are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock. Our common stock price
may also be affected by the factors discussed above in this section as well as:
o Fluctuations in our results of operations, revenues or earnings or
those of our competitors;
o Failure of such results of operations, revenues or earnings to meet the
expectations of stock market analysts and investors;
o Changes in stock market analysts' recommendations regarding us;
o Real or perceived technological advances by our competitors;
o Political or economic instability in regions where our products are
sold or used; and o General market and economic conditions.
We face risks from our international operations and from currency fluctuations
Approximately 55% and 53% of our revenue from the sale of products for the six
month periods ended June 30, 1999 and June 30, 1998, respectively, came from
sales outside North America, primarily to Europe and Japan. We expect that sales
to international destinations will continue to be a significant portion of our
total revenue. You should be aware that we are subject to certain risks because
of our international operations. One of these risks is tariff regulations of
foreign governments which may apply to our products. Another risk is
requirements for export licenses which we may be required to obtain for the
export of certain technologies. The necessary export licenses may be delayed or
difficult to obtain, which could cause a delay in our international sales and an
adverse effect on our product revenue.
26
<PAGE>
Given the significance of our export sales to our total product revenue, we face
a continuing risk from the strengthening of the U.S. dollar versus the Japanese
yen, the Euro and other major European currencies, and numerous Southeast Asian
currencies, which could cause lower unit demand and the necessity that we lower
average selling prices for our products because of the reduced strength of local
currencies. Either of these events could adversely impact our revenues and gross
margin. Although we typically invoice our customers in U.S. dollars, when we do
invoice our customers in local currencies, our cash flows and earnings are
exposed to fluctuations in interest rates and foreign currency exchange rates
between the currency of the invoice and the U.S. dollar. We attempt to limit or
hedge these exposures through operational strategies and financial market
instruments where we consider it appropriate. To date we have mostly used
forward contracts to reduce our risk from interest rate and currency
fluctuations. However, our efforts to reduce the risk from our international
operations and from fluctuations in foreign currencies or interest rates may not
be successful, which could materially adversely affect our financial condition
and operating results.
We may be unable to adequately protect our proprietary information
We rely on a combination of copyright, patent and trade secret protection,
nondisclosure agreements, and licensing and cross-licensing arrangements to
establish and protect our proprietary rights. We cannot be certain that any
patents that may be issued to us, or which we license from third parties, or any
other of our proprietary rights will not be challenged, invalidated or
circumvented. In addition, we cannot be certain that any rights granted to us
under any patents, licenses or other proprietary rights will provide adequate
protection of our proprietary information. Any failure to adequately protect our
proprietary information could materially adversely affect our financial
condition and operating results.
We face risks from third party claims of infringement and potential litigation
Third parties may claim that our products infringe, or may infringe, their
proprietary rights. Such claims could result in lengthy and expensive
litigation. Such claims and any related litigation could result in substantial
costs and diversion of our resources. Although we may seek licenses from third
parties covering intellectual property that we are allegedly infringing, we
cannot guarantee that any such licenses could be obtained on acceptable terms,
if at all.
Our operating results fluctuate from quarter to quarter
Historically, our operating results have fluctuated quarterly due, for example,
to the following factors:
o Economic situations in various geographic locations around the world;
o Acceptance of new products by our OEM partners and their customers;
o Demand for our products from our OEM partners, which fluctuates because
of customer demand and inventory levels (including the reduction in
demand following introductory "channel fill" purchases by our OEM
partners), timing of training and product releases by our OEM partners;
o The fact that our partners have achieved the yearly sales targets and
consequently delayed further purchases into the next fiscal year, and
the fact that we do not know when our partners reach these sales
targets as they generally do not share them with us; and
o Our timing of expenses which could affect one quarter significantly
more than another (for example, expenditures in connection with the
move to the new corporate headquarters during the first quarter of
1999).
27
<PAGE>
As a result of all of these factors (and others described in this section), we
believe that period to period comparisons of our operating results are not
meaningful, and you should not rely on such comparisons to predict our future
performance. We anticipate that future operating results may fluctuate
significantly from quarter to quarter.
Our systems or those of third parties may fail in the Year 2000, which would
delay our product development and the sale of our products
Failure of our computer systems could adversely affect our product development
processes and/or our ability to cost-effectively manage our company during the
time required to fix such problems. In addition, computer failures could cause
our customers to postpone or cancel orders for our products. We are currently
assessing the readiness of our computer systems and those of our major customers
to handle dates beyond the year 1999. Unforeseen problems in our own computers
and embedded systems and from customers, suppliers and other organizations with
which we conduct transactions worldwide may arise. These statements constitute
year 2000 disclosures under federal law. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000 Status"
for more information on the status of our preparation relating to this issue.
28
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is exposed to various market risks, including the changes in foreign
currency exchange rates. Market risk is the potential loss arising from adverse
changes in market rates and prices, such as foreign currency exchange and
interest rates. The Company does not purchase derivatives or other financial
instruments for trading or speculative purposes. The Company purchases financial
instruments to manage and attempt to reduce the impact of changes in foreign
currency exchange rates. The counterparties to the financial instruments the
Company is a party to are generally major financial institutions.
Foreign Exchange Contracts
As of mid 1998, the Company started to enter into forward foreign exchange
contracts to hedge the currency fluctuations in transactions denominated in
foreign currencies, thereby limiting the Company's risk that would otherwise
result from changes in exchange rates. During the three and six month periods
ended June 30, 1999, the transactions hedged were intercompany accounts
receivable and payable between the Company and its Japanese subsidiary. The
periods of the forward foreign exchange contracts correspond to the reporting
periods of the hedged transactions. Foreign exchange gains and losses on
intercompany balances and the offsetting losses and gains on forward foreign
exchange contracts are reflected in the income statement.
As of June 30, 1999, the Company had one outstanding forward foreign exchange
contract to sell Japanese Yen equivalent to approximately $4.3 million with an
expiration date of July 30, 1999.
The estimated fair value of the foreign currency contract represents the amount
required to enter into offsetting contracts with similar remaining maturities
based on quoted market prices. As of June 30, 1999, the difference between the
fair value of the outstanding contract and the contract amount was immaterial.
Market risk was estimated as the potential decrease in fair value resulting from
a hypothetical 10% increase in the amount of Japanese Yen necessary to purchase
one U.S. Dollar. A 10% fluctuation in the exchange rate for this currency would
change the fair value of the foreign currency contract by approximately $0.4
million. However, since the contract hedges foreign currency denominated
transactions, any change in the fair value of the contract would be offset by
changes in the underlying value of the transactions being hedged.
Interest Rate Risk
The fair value of the Company's cash and short-term investment portfolio at June
30, 1999, approximated carrying value due to its short-term duration. Market
risk was estimated as the potential decrease in fair value resulting from an
instantaneous hypothetical 100 basis-point increase in interest rates for the
issues contained in the investment portfolio. As of June 30, 1999, the Company's
cash and short-term investment portfolio includes debt securities of $331.6
million, subject to interest rate risk. A 100 basis-point increase in market
interest rates would result in a decrease of fair value of the portfolio of
approximately $2.7 million.
29
<PAGE>
The fair value of the Company's long-term debt, including current maturities was
estimated to be $3.9 million as of June 30, 1999, and equaled the carrying
value. The Company's long-term debt requires interest payments based on a
variable rate and therefore is subject to interest rate risk. A 10% fluctuation
in interest rates would not have a material effect on the fair value of the
outstanding long-term debt of the Company as of June 30, 1999.
30
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following items were submitted to a vote of the stockholders of the Company
at the Company's Annual Meeting of Stockholders held May 6, 1999.
(a) The election of five 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
---------- --------------
Dan Avida 51,296,901 104,968
Gill Cogan 51,340,548 61,321
Jean-Louis Gassee 51,347,668 54,201
Dan Maydan 51,347,011 54,858
Thomas Unterberg 51,344,587 57,282
(b) The approval of the Company's 1999 Equity Incentive Plan. Results of
the voting included 42,435,448 votes for, 8,906,137 votes against /
withheld and 60,284 shares abstained.
(c) The ratification of the appointment of PriceWaterhouseCoopers LLP as
the independent auditors of the Company for the fiscal year ended
December 31, 1999. Results of the voting included 51,333,652 votes
for, 35,179 votes against / withheld and 33,038 shares abstained.
31
<PAGE>
ITEM 5. OTHER INFORMATION
Effective July 14, 1999, Electronics for Imaging, Inc. announced the following
promotions and changes in the Company's Executive Officers:
Mr. Guy Gecht, formerly Vice President and General Manager of the Company's
Server Division has been promoted to President.
Mr. Fred Rosenzweig, formerly Executive Vice President of Operations has been
promoted to Chief Operating Officer. Mr. Gecht and Mr. Rosenzweig will share
responsibility for the Company's day to day operations.
On July 14, 1999 the Company announced its agreement to acquire Management
Graphics, Inc. ("MGI"), a Minnesota-based corporation that develops digital
print on demand products and other digital imaging products. The acquisition is
intended to be accounted for as a tax free, pooling of interests transaction.
The purchase price for MGI will be determined at closing and is expected to be
approximately $30.0 million. The closing of the acquisition of MGI is subject to
the satisfaction of certain conditions, including, among others, the approval of
certain U.S. regulatory authorities and the approval of the stockholders of MGI.
32
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.28 1999 Equity Incentive Plan
(Incorporated by reference to Exhibit 10.28
filed with the Company's Form 10 Q for the
quarter ended March 31, 1999)
Exhibit 27.1 Financial Data Schedule
(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, 1999.
33
<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 11, 1999
By /s/ Dan Avida
----------------------------------
Dan Avida
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
By /s/ Eric Saltzman
----------------------------------
Eric Saltzman
Chief Financial Officer, General
Counsel and Corporate Secretary
(Principal Financial and
Accounting Officer)
34
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.28 1999 Equity Incentive Plan
(Incorporated by reference to Exhibit 10.28 filed with the
Company's Form 10Q for the quarter ended March 31, 1999)
27.1 Financial Data Schedule
35
<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 six month
period ended June 30, 1999 and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 146,436
<SECURITIES> 247,784
<RECEIVABLES> 69,698
<ALLOWANCES> 1,265
<INVENTORY> 8,972
<CURRENT-ASSETS> 491,062
<PP&E> 88,268
<DEPRECIATION> 38,915
<TOTAL-ASSETS> 549,524
<CURRENT-LIABILITIES> 75,537
<BONDS> 3,625
0
0
<COMMON> 546
<OTHER-SE> 182,256
<TOTAL-LIABILITY-AND-EQUITY> 287,560
<SALES> 256,049
<TOTAL-REVENUES> 256,049
<CGS> 132,431
<TOTAL-COSTS> 132,431
<OTHER-EXPENSES> 69,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 61,276
<INCOME-TAX> 20,834
<INCOME-CONTINUING> 40,442
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,442
<EPS-BASIC> 0.75
<EPS-DILUTED> 0.72
</TABLE>
