UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 March 31, 1999 was
53,809,636.
An Exhibit Index can be found on Page 27.
<PAGE>
ELECTRONICS FOR IMAGING, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998....................3
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 .........................4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 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 ...................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............24
PART II - Other Information
Items 1 - 5. Not Applicable .......................................................25
Item 6. Exhibits and Reports on Form 8-K .....................................25
Signatures .............................................................................26
</TABLE>
<PAGE>
PART I Financial Information
ITEM 1. Condensed Consolidated Financial Statements
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------------------
March 31, March 31,
1999 1998
-------------- -------------
<S> <C> <C>
Revenue $ 120,016 $ 82,523
Cost of revenue 63,721 45,356
-------------- -------------
56,295 37,167
-------------- -------------
Operating expenses:
Research and development 16,294 14,084
Sales and marketing 13,799 15,322
General and administrative 3,923 3,461
-------------- -------------
34,016 32,867
-------------- -------------
Income from operations 22,279 4,300
Other income, net 3,427 2,221
-------------- -------------
Income before income taxes 25,706 6,521
Provision for income taxes 8,740 2,348
-------------- -------------
Net income $ 16,966 $ 4,173
============== =============
Net income per basic common share $ 0.32 $ 0.08
============== =============
Shares used in per share calculation (basic) 53,654 52,582
============== =============
Net income per diluted common share $ 0.31 $ 0.08
============== =============
Shares used in per share calculation (diluted) 55,526 54,891
============== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
<CAPTION>
March 31, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 94,671 $ 53,210
Short-term investments 261,180 269,823
Accounts receivable, net 65,596 57,494
Inventories 10,319 13,726
Other current assets 20,255 21,382
-------------- -------------
Total current assets 452,021 415,635
Property and equipment, net 46,289 46,579
Other assets 9,562 9,818
-------------- -------------
Total assets $ 507,872 472,032
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 39,920 $ 32,707
Accrued and other liabilities 25,584 26,953
Income taxes payable 13,791 9,672
-------------- -------------
Total current liabilities 79,295 69,332
-------------- -------------
Long-term debt, less current portion 3,777 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;
53,809,636 and 53,499,233 shares issued and outstanding,
respectively 538 535
Additional paid-in capital 160,178 151,270
Retained earnings 264,084 247,118
-------------- -------------
Total stockholders' equity 424,800 398,923
-------------- -------------
Total liabilities and stockholders' equity $ 507,872 $ 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>
Three Months Ended March 31,
----------------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,966 $ 4,173
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,384 2,823
Change in reserve for bad debts (18) --
Other (32) --
Changes in operating assets and liabilities:
Accounts receivable (8,084) (7,139)
Inventories 3,407 485
Receivable from subcontract manufacturers 702 (4,749)
Other current assets 425 (769)
Accounts payable and accrued liabilities 5,634 9,228
Income taxes payable 8,310 1,030
-------------- -------------
Net cash provided by operating activities 30,694 5,082
-------------- -------------
Cash flows from investing activities:
Purchases, sales & maturities of
short-term investments, net 8,643 279
Investment in property and equipment, net (2,849) (3,887)
Decrease of other assets, net 11 29
-------------- -------------
Net cash provided by (used for)
investing activities 5,805 (3,579)
-------------- -------------
Cash flows from financing activities:
Issuance of common stock 4,962 290
-------------- -------------
Net cash provided by financing activities 4,962 290
-------------- -------------
Net change in cash and cash equivalents 41,461 1,793
Cash and cash equivalents at beginning of period 53,210 57,195
-------------- -------------
Cash and cash equivalents at end of period $ 94,671 $ 58,988
============== =============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
ELECTRONICS FOR IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements of
Electronics for Imaging, Inc. (the "Company") as of and for the interim
period ended March 31, 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 and notes thereto referred to above.
The preparation of the interim condensed consolidated financial
statements in conformity with generally accepted accounting principles
for such financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of
the interim condensed consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
The interim results of the Company are subject to fluctuation. As a
result, the Company believes the results of operations for the interim
period ended March 31, 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
quarter ending March 31, 1999.
6
<PAGE>
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". 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. 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.
4. Earnings Per Share
The following table represents unaudited disclosures of basic and
diluted earnings per share for the periods presented below:
Three Months Three Months
Ended Ended
(in thousands, except per share amounts) March 31, 1999 March 31, 1998
-------------- --------------
Net income available to common shareholders $16,966 $ 4,173
======= =======
Shares
Basic shares 53,654 52,582
Effect of Dilutive Securities 1,872 2,309
------- -------
Diluted shares 55,526 54,891
======= =======
Earnings per common share
Basic EPS $ 0.32 $ 0.08
Diluted EPS $ 0.31 $ 0.08
Antidilutive Options. Options to purchase 1,304,851 and 1,852,799
shares of common stock outstanding as of March 31, 1999 and March 31,
1998 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.
7
<PAGE>
<TABLE>
5. Balance Sheet Components (in thousands)
<CAPTION>
March 31, December 31,
1999 1998
-------- -------
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 67,032 $ 58,948
Less reserves and allowances (1,436) (1,454)
-------- --------
$ 65,596 $ 57,494
======== ========
Inventories:
Raw materials $ 9,538 $ 13,261
Work-in-process 232 17
Finished goods 549 448
-------- --------
$ 10,319 $ 13,726
======== ========
Other current assets:
Receivable from subcontract manufacturers $ 4,664 $ 5,366
Other 15,591 16,016
-------- --------
$ 20,255 $ 21,382
======== ========
Property and equipment:
Land $ 27,767 $ 27,706
Equipment and purchased software 46,219 44,348
Furniture and leasehold improvements 8,279 7,565
-------- --------
82,265 79,619
Less accumulated depreciation and amortization (35,976) (33,040)
-------- --------
$ 46,289 $ 46,579
======== ========
Accrued and other liabilities:
Accrued product-related obligations $ 5,685 $ 4,650
Accrued royalty payments 7,829 8,232
Accrued compensation and benefits 5,001 6,383
Other accrued liabilities 7,069 7,688
-------- --------
$ 25,584 $ 26,953
======== ========
</TABLE>
8
<PAGE>
6. Legal Proceedings
The Company and certain principal officers and directors were named as
defendants in class action complaints filed in both the California
Superior Court of the County of San Mateo on December 16,1997, and the
United States District Court for the Northern District of California on
January 2, 1998 on behalf of purchasers of the common stock of the
Company during the class period from April 10, 1997, through December
11, 1997. The complaints allege violations of securities laws during
the class period. Management believes the lawsuits are without merit
and that the outcome will not have a material adverse effect on the
financial position or overall trends in the results of operations of
the Company. However, due to the inherent uncertainties of litigation,
the Company cannot accurately predict the ultimate outcome of the
litigation. Any unfavorable outcome of the litigation could have an
adverse impact on the Company's financial condition and results of
operations.
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 Annual Report on Form 10-K for the year ended
December 31, 1998. Results for the three months ended March 31, 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 MONTH PERIODS ENDED MARCH 31, 1999 AND MARCH
31, 1998
Revenue
Revenue increased 45% to $120.0 million in the three month period ended March
31,1999 compared to $82.5 million in the three month period ended March 31,
1998. The increase in revenue was primarily due to significant increases in unit
volumes shipped, positive market acceptance of new product introductions and the
impact of new customers, 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.
9
<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 March 31, 1999 March 31, 1998 (Decrease)
(in thousands) Revenue Revenue %
------- ------- --------
<S> <C> <C> <C> <C> <C>
Stand-alone Servers Connecting
to Digital Color Copiers $ 59,329 49% $ 64,129 78% (7)%
Embedded / Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 31,664 27% 9,909 12% 220%
Controllers for Digital
Black and White Solutions 16,794 14% 1,128 1% 1,389%
Spares, Licensing
& Other misc. sources 12,229 10% 7,357 9% 66%
-------- ---- -------- ---- --------
Total Revenue $120,016 100% $ 82,523 100% 45%
======== ==== ======== ==== ========
</TABLE>
Three Months Three Months
Ended Ended
Volume March 31, 1999 March 31, 1998
Volume Volume
------ ------
Stand-alone Servers Connecting
to Digital Color Copiers 15% 60%
Embedded / Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 59% 37%
Controllers for Digital
Black and White Solutions 26% 3%
Spares, Licensing
& Other misc. sources -- --
---- ----
Total Revenue 100% 100%
==== ====
10
<PAGE>
Growth in 1999 primarily took place in the two newer categories: controllers for
digital black & 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 the trend since early 1998. The Company is seeing a trend of
the market moving away from mid-range servers to high-end servers and desktop /
embedded products.
The segment of controllers for digital black & white solutions accounted for 14%
of total revenue and 26% of total units for the three month period ended March
31, 1999, compared to 1% of total revenue and 3% of total units shipped for the
same period in 1998. The segment of embedded desktop controllers, bundled color
solutions and chipset solutions accounted for 27% for total revenue and 59% of
total units for the three month period ended March 31, 1999, compared to 12% of
total revenue and 37% of total units for the same period in 1998.
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-month period ended
March 31, 1999 compared to the three-month period ended March 31, 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. 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 qualified by all the OEMs, 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 quarter 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.
11
<PAGE>
Shipments by geographic area for the three-month periods ended March 31, 1999
and March 31, 1998 were as follows:
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998 % Change
-------------- --------------
(in thousands)
North America $53,748 45% $37,761 46% 42 %
Europe 41,641 35% 29,662 36% 40 %
Japan 22,175 18% 12,769 15% 74 %
Rest of World 2,452 2% 2,331 3% 5 %
-------- ---- ------- ---- ----
$120,016 100% $82,523 100% 45%
======== ==== ======= ==== ====
Whereas shipments to North America, Europe and Japan increased significantly for
the three-month period ended March 31, 1999 compared to the same period in 1998,
the Rest of World region experienced modest growth of 5% during the same time
periods. The Rest of World is predominantly represented by the Southeast Asian
region, and the modest increase in export sales in the three month period ended
March 31, 1999 compared to the three month period ended March 31, 1998 is a
reflection of the challenging economic situation in that region. Although such
conditions are difficult to predict, the Company does not assume that there will
be a significant improvement in the economic conditions in Asia in the remainder
of 1999, and limited demand from Asia may have an adverse impact on the
Company's results of operations.
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 was 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 OEM partners. The Company
relied on three OEM customers, Canon, Xerox and Minolta in aggregate for 68% of
its revenue for the three-month period ended March 31, 1999. The Company relied
on three OEM customers, Canon, Xerox and Ricoh in aggregate for 76% of its
revenue for the three-month period ended March 31, 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.
12
<PAGE>
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 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 performed successfully Year 2000 compliant testing might not be
willing to buy external products until year 2000 in order to avoid any risks
associated with external products. At this time, the Company cannot determine
how much impact, if any, these factors may have.
Cost of Revenue
Third-party manufacturers who purchase most of the necessary components
manufacture Fiery color servers as well as embedded / desktop controllers and
digital black and white products. The Company sources directly processors,
memory, certain ASICs, and software licensed from various sources, including
PostScript interpreter software, which the Company licenses from Adobe Systems,
Inc.
Included in cost of revenue as well as operating expenses for the three-month
period ended March 31, 1999, are one-time costs of moving to the Company's new
corporate headquarters in Foster City, California. Total moving costs for the
three month period ended March 31, 1999 amounted to $1.8 million of which
approximately $0.2 million related to cost of revenue.
Gross Margins
The Company's gross margin was 47% and 45% for the three-month periods ended
March 31, 1999 and March 31, 1998, respectively. The slight increase in gross
margin was due to a combination of factors, including the product mix and the
mix of OEM partners during the two time periods. Slightly offsetting these
manufacturing efficiencies, were price reductions on older product lines. In
addition, the increased volume and resulting production shift to larger
subcontractor manufacturers resulted in efficiencies in purchasing and
manufacturing in the three-month period ended March 31, 1999 as compared to the
same time period one year ago.
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 be lower.
13
<PAGE>
In general, the Company believes that gross margin 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 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 3% to $34.0 million for the three months period
ended March 31, 1999 compared to $32.9 million for the three months period ended
March 31, 1998. Operating expenses as a percentage of revenue amounted to 28%
for the three months period ended March 31, 1999 and 40% for the three months
period ended March 31, 1998. Excluding the one time moving expenses allocated to
operating expenses of approximately $1.6 million, operating expenses decreased
by 1% for the three month period ended March 31, 1999 compared to the same
period in 1998. The relatively flat operating expenses are 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 support on the Company's part.
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, depreciation and costs of prototype
materials. Research and development expenses amounted to $16.3 million or 14% of
revenue for the three months period ended March 31, 1999 compared to $14.1
million or 17% of revenue for the three months period ended March 31, 1998.
Excluding the one time moving expenses allocated to research and development
expenses of approximately $0.9 million, research and development expenses
amounted to $15.4 million or 13% of total revenue for the three months period
ended March 31, 1999. The majority of the 16% increase (or 9% increase excluding
the one time moving expenses) of research and development expenses in the first
quarter of 1999 compared to the same quarter in 1998 was due to an increase in
research and development projects. This resulted in increased headcount related
costs (increase of headcount by 21 employees as of March 31, 1999 compared to
March 31, 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.
14
<PAGE>
Sales and Marketing
Sales and marketing expenses include personnel expenses, costs for trade shows,
marketing programs and promotional materials, sales commissions, travel and
entertainment expenses, depreciation, and costs associated with sales offices in
the United States, Europe, Japan and other locations around the world. Sales and
marketing expenses amounted to $13.8 million or 12% of revenue for the
three-month period ended March 31, 1999 compared to $15.3 million or 19% of
revenue for the three-month period ended March 31, 1998. Excluding the one time
moving expenses related to sales and marketing costs of $0.4 million, sales and
marketing expenses amounted to $13.4 million for the three-month period ended
March 31, 1999. Sales and marketing expenses decreased by 10% (or 12% excluding
the one-time moving expenses) in the three-month period ended March 31, 1999
over the three-month period ended March 31, 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 by 7 employees as of March 31, 1999
compared to March 31, 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 support
from the Company as the OEM partners take over this role.
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 $3.9 million or 3% of revenue for the three-months period ended
March 31, 1999, compared to $3.5 million or 4% of revenue for the three-month
period ended March 31, 1998. General and administrative expenses increased by
11% (or by 3 % excluding the one-time moving expenses of approximately $0.3
million) in the three-months period ended March 31, 1999 over the three-months
period ended March 31, 1998. While general and administrative expenses have
remained relatively constant 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 in order to support
the needs of the growing Company's operations, including the use of outside
consultants. Headcount increased by 15 employees as of March 31, 1999 compared
to March 31, 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 $3.4 million in the
first quarter of 1999 compared to $2.2 million in the first quarter of 1998. The
55% increase in other income is due to the interest earned on the higher average
cash and short-term investment balances for the three-month period ended March
31, 1999 as compared to the three-month period ended March 31, 1998. Included in
other income for the three-month period ended March 31, 1998 are approximately
$0.3 million in losses suffered on Asian currency denominated transactions.
Although the Company's exposure to currency fluctuations has been relatively
minor, in response to currency fluctuations in Asia, the, Company began to
implement a hedging program in June 1998.
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Income Taxes
The Company's effective tax rate was 34% for the first quarter ended March 31,
1999 compared to 36% for the first quarter ended March 31, 1998. The effective
tax rate for the three-month period ended March 31, 1998 was retroactively
adjusted to 32% in the third quarter of 1998. The increase in the effective tax
rate for the three-month period ended March 31, 1999 compared to the adjusted
effective tax rate for the three-month period ended March 31, 1998 was primarily
due to the fact that the research and development credit is scheduled to expire
mid-year of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased by $32.9 million to
$355.9 million as of March 31, 1999, from $323.0 million as of December 31,
1998. Working capital increased by $26.4 million to $372.7 million as of March
31, 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.
Net cash provided by operating activities was $30.7 million and $5.1 million for
the three-month periods ended March 31, 1999 and March 31, 1998, respectively.
Cash provided by operating activities increased by $25.6 million, primarily due
to a significant increase in net income, a reduction in inventory levels, a
reduction of receivables from subcontractors and an increase in taxes payable.
During the first quarter of 1999, the Company continued to invest cash in
short-term investments, mainly municipal securities. Due to capital market
situations during the first three months of 1999, the Company invested
relatively more cash in securities with a maturity at the date of purchase of
less than 90 days, which resulted in an increase of cash and cash equivalents of
$41.5 million and a decrease of short-term investments of $8.6 million from
December 31, 1998 compared to March 31, 1999.
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 $2.8 million and $3.9 million of
such equipment and furniture during the three month periods ended March 31, 1999
and March 31, 1998, respectively.
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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 has
committed to fund up to a maximum of $65.0 million for the construction to be
directed by the Company. Rent payments for the building will commence upon
completion of construction and bear a direct relationship to the carrying cost
of the amount drawn on the commitment. The initial term of the lease is 7 years
with options to purchase at any time. As of March 31, 1999, the Company has
drawn $46.0 million on the commitment. The building construction is scheduled to
be completed in the second quarter of 1999. 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 ($55.4 million at March 31, 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 $5.0 million for the
three-months period ended March 31, 1999, a $4.7 million increase over the
corresponding period in 1998. The increase was due to a higher volume of stock
option exercises as a result of the higher relative market prices available for
the stock during the three-month period ended March 31, 1999 compared to the
three-month period ended March 31, 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.
Year 2000 Status
Although the Company has not completed a formal contingency plan for potential
Year 2000 related problems, management has taken steps and continues to assess
the possible effects and potential solutions for a Year 2000 problem. The
Company has updated substantially all of its computer system infrastructure over
the last few years, and management believes that all critical pieces of hardware
and software have been represented to be Year 2000 compliant by their
manufacturers. In some cases compliance is expected to be met by releases of
software updates from the manufacturers that were scheduled to be released by
the end of March 1999 but have now been delayed until the second quarter of
1999. For software that is currently available and represented to be compliant,
the Company is performing limited tests on the manufacturing representations.
Due to the complexities involved in moving into the new building in the first
quarter of 1999, the Company was only able to spend approximately $0.1 million
of the approximately $1.0 million the Company has allotted to spend in fiscal
1999 on addressing and preparing for a potential Year 2000 problem. The Company
anticipates spending at a significantly higher rate during the second quarter
fiscal 1999.
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Although the Company continues to review and test, based on the reviews to date,
the Company currently believes that Year 2000 issues will not materially affect
its internal MIS 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 spend additional amounts to identify, modify or repair
internal systems.
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. The estimated installed base of products released before November 1,
1997 is considered to be relatively small. Although all of these products are
expected to continue to be functional at some level, the Company has notified
each of the OEM customers about the potential problems that may be encountered.
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
significant manufacturers, suppliers, customers and other critical third parties
with whom it does business. The Company is currently in the process of
identifying and contacting these third parties and anticipates completion of
this process by the end of June 1999. The Company has also begun to work on
contingency plans and currently believes that internal problems encountered in
handling transactions could be processed manually for a short period of time.
The contingency plans will be more fully developed by 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, and 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.
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 US
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, the Company will be able to complete such modifications to comply with
Euro requirements, which could have a material adverse effect on the Company's
operating results.
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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 and black and white
copiers or laser printers, or other factors affecting the computer industry in
general, or major customers in particular, may adversely affect the Company's
results of operations.
The Company relies upon the ability of its OEMs to develop new products,
applications and product enhancements on a timely and cost-effective basis. The
ability of these OEMs to meet changing customer needs and respond to emerging
industry standards and other technological changes is essential to the Company's
continued success. There is no assurance that the Company's OEMs will
effectively meet these technological challenges. These OEMs, who are not within
the control of the Company, may incorporate into their products the technologies
of other companies in addition to, or instead of the Company's products, and
with the exception of certain minimum purchase obligations, are not obligated to
purchase products from the Company. There can be no assurance that any OEM will
continue to carry the Company's products; and the loss of important OEMs, or an
inability to recruit additional OEMs, may have a material adverse effect on the
Company's business, operating results, and financial condition.
The Company's sales have been and will continue to be heavily influenced by
order quantities and timing of delivery to its OEMs. No assurance can be given
that the Company will be able to successfully maintain sales of its products in
any OEM channel. The Company's sales may be adversely affected if an OEM
introduces or supports additional products that compete with the Company's
products, fails to effectively market the Company's products, modifies its color
and black and white copiers or printers such that the Company's products are no
longer compatible, introduces new 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.
Delays in Product Launches; 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.
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Product Diversification and Coordination of Development with Customers
The Company's customers have historically 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 Asia, including Japan, during the remainder of 1999. The Company
believes that continued economic distress in Japan and elsewhere in Asia might
limit demand in these regions for the Company's products. Economic distress in
other parts of the world such as Brazil may also limit demand for the Company's
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 the sale of 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. In addition, Companies that performed successfully Year 2000 compliant
testing might not be willing to buy external products until year 2000 in order
to avoid any risks associated with external products. At this time, the Company
cannot determine how much impact, if any, these factors may have.
New Product Introductions
The Company continues to explore opportunities to develop product lines distinct
from its Fiery color servers. Such new products may require the investment of
capital for the development of new distribution and marketing channels at an
unknown cost to the Company. There can be no guarantee that the Company would be
successful in the development of such channels or that any new products would
gain market acceptance. If the Company is not able to successfully manage the
introduction of new products, its results of operations may be adversely
affected. In addition to these risks, if the Company is successful in
introducing new products, there can be no assurance that such product
introductions (including more powerful products sold at a lower price) will not
adversely impact gross margins or sales of existing products.
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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 performance of third-party manufacturers or the status of the Company's
relationships with its key suppliers. The Company's results have typically
followed a seasonal pattern reflecting the buying patterns of its large OEM
customers. In the past, this pattern has indicated that the Company's fiscal
fourth quarter results may be adversely affected by a desire on the part of some
or all of its OEM customers to slow down, or otherwise delay fourth quarter
orders in an effort to minimize their inventory investment at the end of their
fiscal year. Additionally, the first fiscal quarter is also a traditionally
weaker quarter as the Company's OEM partners focus on training of their sales
forces. Moreover, the Company's ability to develop and market new products, the
timing and amount of sales and marketing expenditures, and the general demand
for what are discretionary purchase items (color copiers, digital
black-and-white copiers, and color laser printers) and general global economic
conditions will also effect operating results.
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Interest Rate Risk
The Company has an investment portfolio of mainly fixed income securities
classified as available-for-sale 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
revenues and earnings might be subject to significant volatility. Any shortfall
in revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. The Company participates in a highly dynamic
industry, which often results in significant volatility for the Company's common
stock price.
International Operations and Currency Fluctuations
Approximately 55% and 54% of the Company's product revenue for the three-month
periods ended March 31, 1999 and March 31, 1998, respectively, were attributable
to sales outside North America, primarily to Europe and Japan. The Company
expects that sales to international destinations 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 export sales to the Company, the Company faces a
continuing risk in that the strengthening of the U.S. dollar versus the Japanese
yen, the Euro and other major European currencies, and numerous Southeast Asian
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.
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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.
Quarterly Fluctuations in Operating Results
The Company's operating results have historically been subject to quarterly
fluctuations due, for example, to the following factors: economic situations in
various geographic locations around the world, acceptance of new products by OEM
partners and their customers, demand for the Company's products by its OEM
partners, which is in turn subject to fluctuations because of customer demand
and inventory levels, timing of training and product releases by the Company's
OEM partners and the Company's timing of expenses which could affect one quarter
significantly more than another (for expenditures in connection with the move to
the new corporate headquarters during the first quarter of 1999). The Company
anticipates that future operating results might be subject to quarterly
fluctuations.
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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 enter into derivatives or other financial
instruments for trading or speculative purposes. The Company enters into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates. The counterparts are 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-month period ended March
31, 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 March 31, 1999, the Company had one outstanding forward foreign exchange
contract to sell Yen equivalent to approximately $4.9 million with an expiration
date of April 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 March 31, 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 of the amount of Yen to purchase one US Dollar. A
10% fluctuation in the exchange rate for this currency would change the fair
value 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
March 31, 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 March 31, 1999, the
Company's cash and short-term investment portfolio includes debt securities of
$300 million, subject to interest rate risk. A 100 basis-point increase in
market interest rates would result in a decrease of fair value of approximately
$2.5 million.
The fair value of the Company's long-term debt, including current maturities was
estimated to be $4.1 million as of March 31, 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 March 31, 1999.
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PART II OTHER INFORMATION
ITEMS 1 - 5.
There is no applicable information to report under Part II, Items 1 - 5 during
the period covered by this report.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.28 1999 Equity Incentive Plan
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 March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRONICS FOR IMAGING, INC.
Date: May 13, 1999
By /s/ Dan Avida
-----------------------------------------
Dan Avida
Chairman of the Board of Directors and
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)
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EXHIBIT INDEX
Exhibit
No. Description
- --- -----------
10.28 1999 Equity Incentive Plan
27.1 Financial Data Schedule
27
EXHIBIT 10.28
ELECTRONICS FOR IMAGING, INC.
1999 EQUITY INCENTIVE PLAN
Adopted March 29, 1999
Approved By Stockholders May 6, 1999
Termination Date: March 28, 2009
1. PURPOSES.
(a) Eligible Stock Award Recipients. The persons eligible to receive Stock
Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) Available Stock Awards. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock appreciation rights, (iv) stock bonuses and (v) rights to
acquire restricted stock.
(c) General Purpose. The Company, by means of the Plan, seeks to retain the
services of the group of persons eligible to receive Stock Awards, to secure and
retain the services of new members of this group and to provide incentives for
such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation of
the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee appointed by the Board in accordance with
subsection 3(c).
(e) "Common Stock" means the common stock of the Company.
(f) "Company" means Electronics for Imaging, Inc., a Delaware corporation.
(g) "Consultant" means any person, including an advisor, (1) engaged by the
Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (2) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors of the Company who are not compensated by the Company for their
services as Directors or Directors of the Company who are merely paid a
director's fee by the Company for their services as Directors.
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(h) "Continuous Service" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director of the
Company will not constitute an interruption of Continuous Service. The Board or
the chief executive officer of the Company, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case
of any leave of absence approved by that party, including sick leave, military
leave or any other personal leave.
(i) "Covered Employee" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(j) "Director" means a member of the Board of Directors of the Company.
(k) "Disability" means the inability of a person, in the opinion of a
qualified physician acceptable to the Company, to perform the major duties of
that person's position with the Company or an Affiliate of the Company because
of the sickness or injury of the person.
(l) "Employee" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(n) "Fair Market Value" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
traded on the NASDAQ National Market or the NASDAQ SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Common Stock) on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
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(o) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "Non-Employee Director" means a Director of the Company who either (i)
is not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly) from the
Company or its parent or a subsidiary for services rendered as a consultant or
in any capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K promulgated
pursuant to the Securities Act ("Regulation S-K")), does not possess an interest
in any other transaction as to which disclosure would be required under Item
404(a) of Regulation S-K and is not engaged in a business relationship as to
which disclosure would be required under Item 404(b) of Regulation S-K; or (ii)
is otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(q) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(r) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option
granted pursuant to the Plan.
(t) "Option Agreement" means a written agreement between the Company and an
Optionholder evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(u) "Optionholder" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(v) "Outside Director" means a Director of the Company who either (i) is
not a current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(w) "Participant" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.
(x) "Plan" means this Electronics for Imaging, Inc. 1999 Equity Incentive
Plan.
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(y) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any
successor to Rule 16b-3, as in effect from time to time.
(z) "Securities Act" means the Securities Act of 1933, as amended.
(aa) "Stock Award" means any right granted under the Plan, including an
Option, a stock appreciation right, a stock bonus and a right to acquire
restricted stock.
(bb) "Stock Award Agreement" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(cc) "Ten Percent Stockholder" means a person who owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates.
3. ADMINISTRATION.
(a) Administration by Board. The Board will administer the Plan unless and
until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) Powers of Board. The board shall have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall be
granted; what type or combination of types of Stock Award shall be granted; the
provisions of each Stock Award granted (which need not be identical), including
the time or times when a person shall be permitted to receive stock pursuant to
a Stock Award; and the number of shares with respect to which a Stock Award
shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) Delegation to Committee.
(i) General. The Board may delegate administration of the Plan to a
Committee or Committees of one or more members of the Board, and the term
"Committee"
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shall apply to any person or persons to whom such authority has been delegated.
If administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, including the power to delegate to a subcommittee any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or subcommittee),
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan.
(ii) Committee Composition when Common Stock is Publicly Traded. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (i) delegate to a committee of one or
more members of the Board who are not Outside Directors, the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or (ii)
delegate to a committee of one or more members of the Board who are not
Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.
(d) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Board or Committee shall be final and binding on all
Optionholders.
4. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve. Subject to the provisions of Section 11 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Stock Awards shall not exceed in the aggregate six hundred thousand (600,000)
shares of Common Stock.
(b) Share Limitation for Stock Bonuses and Restricted Stock Awards. Subject
to the provisions of Section 11 relating to adjustments upon changes in stock,
the stock that may be issued pursuant to stock bonuses and restricted stock
awards shall not exceed in the aggregate ten percent (10%) of the aggregate
shares reserved for issuance under subsection 4(a).
(c) Reversion of Shares to the Share Reserve. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full (or vested in the case of Restricted Stock), the stock
not acquired under such Stock Award shall revert to and again become available
for issuance under the Plan. Shares subject to stock appreciation rights
exercised in accordance with the Plan shall not be available for subsequent
issuance under the Plan. If any Common Stock acquired pursuant to the exercise
of an Option shall for any reason be repurchased by the Company under an
unvested share repurchase option provided under the Plan, the stock repurchased
by the Company under such repurchase option shall not revert to and again become
available for issuance under the Plan.
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(d) Source of Shares. The stock subject to the Plan may be unissued shares
or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.
(b) Ten Percent Stockholders. No Ten Percent Stockholder shall be eligible
for the grant of an Incentive Stock Option unless the exercise price of such
Option is at least one hundred ten percent (110%) of the Fair Market Value of
the Common Stock at the date of grant and the Option is not exercisable after
the expiration of five (5) years from the date of grant.
(c) Section 162(m) Limitation. Subject to the provisions of Section 11
relating to adjustments upon changes in stock, no Employee shall be eligible to
be granted Options and/or stock appreciation rights covering more than two
million (2,000,000) shares of the Common Stock during any fiscal year of the
Company with respect to options granted to any Employee in connection with his
or her initial employment with the Company or one million (1,000,000) shares of
the Common Stock during any fiscal year of the Company with respect to options
granted to Employees for all other purposes.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and a separate certificate or certificates will be issued for shares
purchased on exercise of each type of Option. The provisions of separate Options
need not be identical, but each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of each
of the following provisions:
(a) Term. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) Exercise Price of an Incentive Stock Option. Subject to the provisions
of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of
each Incentive Stock Option shall be not less than one hundred percent (100%) of
the Fair Market Value of the stock subject to the Option on the date the Option
is granted. Notwithstanding the foregoing, an Incentive Stock Option may be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(c) Exercise Price of a Nonstatutory Stock Option. The exercise price of
each Nonstatutory Stock Option shall be not less than one hundred percent (100%)
of the Fair Market
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Value of the stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with
an exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(d) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) by delivery to the
Company of other Common Stock, according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock) with the Participant or in any other
form of legal consideration that may be acceptable to the Board; provided,
however, that at any time that the Company is incorporated in Delaware, payment
of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) Transferability of an Incentive Stock Option. An Incentive Stock Option
shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing provisions of this
subsection 6(e), the Optionholder may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.
(f) Transferability of a Nonstatutory Stock Option. A Nonstatutory Stock
Option shall be transferable to the extent provided in the Option Agreement. If
the Nonstatutory Stock Option does not provide for transferability, then the
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of
the Optionholder only by the Optionholder. Notwithstanding the foregoing
provisions of this subsection 6(f), the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.
(g) Vesting Generally. The total number of shares of Common Stock subject
to an Option may, but need not, vest and therefore become exercisable in
periodic installments which may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares as to which an Option may be exercised.
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(h) Termination of Continuous Service. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionholder's Continuous Service (or
such longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination, the Optionholder does not exercise his or her Option within
the time specified in the Option Agreement, the Option shall terminate.
(i) Extension of Termination Date. An Optionholder's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionholder's Continuous Service (other than upon the Optionholder's death or
Disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in subsection 6(a) or (ii) the expiration of a period of
three (3) months after the termination of the Optionholder's Continuous Service
during which the exercise of the Option would not be in violation of such
registration requirements.
(j) Disability of Optionholder. In the event an Optionholder's Continuous
Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement) or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, after termination, the Optionholder does not
exercise his or her Option within the time specified herein, the Option shall
terminate.
(k) Death of Optionholder. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise the Option as of the date of death) by the
Optionholder's estate, by a person who acquired the right to exercise the Option
by bequest or inheritance or by a person designated to exercise the option upon
the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within
the period ending on the earlier of (1) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement) or (2) the expiration of the term of such Option as set forth in the
Option Agreement. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate.
(l) Early Exercise. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares subject to the Option prior to the full vesting of the Option. Any
unvested shares so purchased may be subject to an unvested share
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repurchase option in favor of the Company or to any other restriction the Board
determines to be appropriate.
(m) Re-Load Options. Without in any way limiting the authority of the Board
to make or not to make grants of Options hereunder, the Board shall have the
authority (but not an obligation) to include as part of any Option Agreement a
provision entitling the Optionholder to a further Option (a "Re-Load Option") in
the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares equal to the
number of shares surrendered as part or all of the exercise price of such
Option; (ii) have an expiration date which is the same as the expiration date of
the Option the exercise of which gave rise to such Re-Load Option; and (iii)
have an exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option
shall be subject to the same exercise price and term provisions heretofore
described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares under subsection 4(a) and
the "Section 162(m) Limitation" on the grants of Options under subsection 5(c)
and shall be subject to such other terms and conditions as the Board may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) Stock Bonus Awards. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:
(i) Consideration. A stock bonus shall be awarded in consideration for
past services actually rendered to the Company for its benefit.
(ii) Vesting. Shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to a share repurchase option in favor of
the Company in accordance with a vesting schedule to be determined by the Board.
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(iii) Termination of Participant's Continuous Service. In the event a
Participant's Continuous Service terminates, the Company may reacquire any or
all of the shares of Common Stock held by the Participant which have not vested
as of the date of termination under the terms of the stock bonus agreement.
(iv) Transferability. Rights to acquire shares under the stock bonus
agreement shall be transferable by the Participant only upon such terms and
conditions as are set forth in the stock bonus agreement, as the Board shall
determine in its discretion, so long as stock awarded under the stock bonus
agreement remains subject to the terms of the stock bonus agreement.
(b) Restricted Stock Awards. Each restricted stock purchase agreement shall
be in such form and shall contain such terms and conditions as the Board shall
deem appropriate. The terms and conditions of the restricted stock purchase
agreements may change from time to time, and the terms and conditions of
separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) Purchase Price. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. The purchase price shall
not be less than fifty percent (50%) of the stock's Fair Market Value on the
date such award is made or at the time the purchase is consummated.
(ii) Consideration. The purchase price of stock acquired pursuant to
the restricted stock purchase agreement shall be paid either: (i) in cash at the
time of purchase; (ii) at the discretion of the Board, according to a deferred
payment or other arrangement with the Participant; or (iii) in any other form of
legal consideration that may be acceptable to the Board in its discretion;
provided, however, that at any time that the Company is incorporated in
Delaware, payment of the Common Stock's "par value," as defined in the Delaware
General Corporation Law, shall not be made by deferred payment.
(iii) Vesting. Shares of Common Stock acquired under the restricted
stock purchase agreement may, but need not, be subject to a share repurchase
option in favor of the Company in accordance with a vesting schedule to be
determined by the Board.
(iv) Termination of Participant's Continuous Service. In the event a
Participant's Continuous Service terminates, the Company may repurchase or
otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the terms
of the restricted stock purchase agreement.
(v) Transferability. Rights to acquire shares under the restricted
stock purchase agreement shall be transferable by the Participant only upon such
terms and conditions as are set forth in the restricted stock purchase
agreement, as the Board shall determine in its
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discretion, so long as stock awarded under the restricted stock purchase
agreement remains subject to the terms of the restricted stock purchase
agreement.
(c) Stock Appreciation Rights.
(i) Authorized Rights. The following three types of stock appreciation
rights shall be authorized for issuance under the Plan:
(1) Tandem Rights. A "Tandem Right" means a stock appreciation
right granted appurtenant to an Option which is subject to the same terms and
conditions applicable to the particular Option grant to which it pertains with
the following exceptions: The Tandem Right shall require the holder to elect
between the exercise of the underlying Option for shares of Common Stock and the
surrender, in whole or in part, of such Option for an appreciation distribution.
The appreciation distribution payable on the exercised Tandem Right shall be in
cash (or, if so provided, in an equivalent number of shares of Common Stock
based on Fair Market Value on the date of the Option surrender) in an amount up
to the excess of (A) the Fair Market Value (on the date of the Option surrender)
of the number of shares of Common Stock covered by that portion of the
surrendered Option in which the Optionholder is vested over (B) the aggregate
exercise price payable for such vested shares.
(2) Concurrent Rights. A "Concurrent Right" means a stock
appreciation right granted appurtenant to an Option which applies to all or a
portion of the shares of Common Stock subject to the underlying Option and which
is subject to the same terms and conditions applicable to the particular Option
grant to which it pertains with the following exceptions: A Concurrent Right
shall be exercised automatically at the same time the underlying Option is
exercised with respect to the particular shares of Common Stock to which the
Concurrent Right pertains. The appreciation distribution payable on an exercised
Concurrent Right shall be in cash (or, if so provided, in an equivalent number
of shares of Common Stock based on Fair Market Value on the date of the exercise
of the Concurrent Right) in an amount equal to such portion as determined by the
Board at the time of the grant of the excess of (A) the aggregate Fair Market
Value (on the date of the exercise of the Concurrent Right) of the vested shares
of Common Stock purchased under the underlying Option which have Concurrent
Rights appurtenant to them over (B) the aggregate exercise price paid for such
shares.
(3) Independent Rights. An "Independent Right" means a stock
appreciation right granted independently of any Option but which is subject to
the same terms and conditions applicable to a Nonstatutory Stock Option with the
following exceptions: An Independent Right shall be denominated in share
equivalents. The appreciation distribution payable on the exercised Independent
Right shall be not greater than an amount equal to the excess of (a) the
aggregate Fair Market Value (on the date of the exercise of the Independent
Right) of a number of shares of Company stock equal to the number of share
equivalents in which the holder is vested under such Independent Right, and with
respect to which the holder is exercising the Independent Right on such date,
over (b) the aggregate Fair Market Value (on the date of the grant of the
Independent Right) of such number of shares of Company stock. The appreciation
distribution payable on the exercised Independent Right shall be in cash or, if
so
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provided, in an equivalent number of shares of Common Stock based on Fair Market
Value on the date of the exercise of the Independent Right.
(ii) Relationship to Options. Stock appreciation rights appurtenant to
Incentive Stock Options may be granted only to Employees. The "Section 162(m)
Limitation" provided in subsection 5(c) and any authority to reprice Options
shall apply as well to the grant of stock appreciation rights.
(iii) Exercise. To exercise any outstanding stock appreciation right,
the holder shall provide written notice of exercise to the Company in compliance
with the provisions of the Stock Award Agreement evidencing such right. Except
as provided in subsection 5(c) regarding the "Section 162(m) Limitation," no
limitation shall exist on the aggregate amount of cash payments that the Company
may make under the Plan in connection with the exercise of a stock appreciation
right.
8. COVENANTS OF THE COMPANY.
(a) Availability of Shares. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) Securities Law Compliance. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Stock Awards and to issue and sell shares of Common
Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any stock issued or issuable pursuant to any such
Stock Award. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for failure to issue and
sell stock upon exercise of such Stock Awards unless and until such authority is
obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) Acceleration of Exercisability and Vesting. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
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(b) Stockholder Rights. No Participant shall be deemed to be the holder of,
or to have any of the rights of a holder with respect to, any shares subject to
such Stock Award unless and until such Participant has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.
(c) No Employment or other Service Rights. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant or other holder of Stock Awards any right to continue to serve
the Company or an Affiliate in the capacity in effect at the time the Stock
Award was granted or shall affect the right of the Company or an Affiliate to
terminate (i) the employment of an Employee with or without notice and with or
without cause, (ii) the service of a Consultant pursuant to the terms of such
Consultant's agreement with the Company or an Affiliate or (iii) the service of
a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.
(d) Incentive Stock Option $100,000 Limitation. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) Investment Assurances. The Company may require a Participant, as a
condition of exercising or acquiring stock under any Stock Award, (i) to give
written assurances satisfactory to the Company as to the Participant's knowledge
and experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (ii) to give written assurances
satisfactory to the Company stating that the Participant is acquiring the stock
subject to the Stock Award for the Participant's own account and not with any
present intention of selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (iii) the issuance of the shares upon the exercise or acquisition
of stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act or (iv) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(f) Withholding Obligations. To the extent provided by the terms of a Stock
Award Agreement, the Participant may satisfy any federal, state or local tax
withholding obligation relating to the exercise or acquisition of stock under a
Stock Award by any of the following
13
<PAGE>
means (in addition to the Company's right to withhold from any compensation paid
to the Participant by the Company) or by a combination of such means: (i)
tendering a cash payment; (ii) authorizing the Company to withhold shares from
the shares of the Common Stock otherwise issuable to the participant as a result
of the exercise or acquisition of stock under the Stock Award; or (iii)
delivering to the Company owned and unencumbered shares of the Common Stock.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) Capitalization Adjustments. If any change is made in the stock subject
to the Plan, or subject to any Stock Award, without the receipt of consideration
by the Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of securities subject to the Plan pursuant to
subsection 4(a) and the maximum number of securities subject to award to any
person pursuant to subsection 5(c), and the outstanding Stock Awards will be
appropriately adjusted in the class(es) and number of securities and price per
share of stock subject to such outstanding Stock Awards. Such adjustments shall
be made by the Board, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a transaction "without receipt of consideration" by the
Company.)
(b) Dissolution or Liquidation. In the event of a dissolution or
liquidation of the Company, then such Stock Awards shall be terminated if not
exercised (if applicable) prior to such event.
(c) Change in Control--Asset Sale, Merger, Consolidation or Reverse Merger.
In the event of (1) a sale of substantially all of the assets of the Company,
(2) a merger or consolidation in which the Company is not the surviving
corporation or (3) a reverse merger in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, then any surviving corporation or
acquiring corporation shall assume or continue any Stock Awards outstanding
under the Plan or shall substitute similar stock awards (including an award to
acquire the same consideration paid to the stockholders in the transaction
described in this subsection 11(c)) for those outstanding under the Plan. In the
event any surviving corporation or acquiring corporation refuses to assume or
continue such Stock Awards or to substitute similar stock awards for those
outstanding under the Plan, then with respect to Stock Awards held by
Participants whose Continuous Service has not terminated, the vesting of such
Stock Awards (and, if applicable, the time during which such Stock Awards may be
exercised) shall be accelerated in full, and the Stock Awards shall terminate if
not exercised (if applicable) by a time established by the Board at or following
the occurrence of such event. With respect to any other Stock Awards outstanding
under the Plan, such Stock Awards shall terminate if not exercised (if
applicable) at or prior to such event.
14
<PAGE>
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) Amendment of Plan. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any NASDAQ or securities exchange listing requirements.
(b) Stockholder Approval. The Board may, in its sole discretion, submit any
other amendment to the Plan for stockholder approval, including, but not limited
to, amendments to the Plan intended to satisfy the requirements of Section
162(m) of the Code and the regulations thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) Contemplated Amendments. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) No Impairment of Rights. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Plan Term. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Rights and obligations under any Stock Award
granted while the Plan is in effect shall not be impaired by suspension or
termination of the Plan, except with the written consent of the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Stock Award shall be exercised (or, in the case of a stock bonus, shall be
granted) unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed balance sheet, condensed statement of operations and condensed
statement of cash flows included in the Company's Form 10 Q for the three month
period ended March 31, 1999 and is qualified in its entirety by reference to
such financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 94,671
<SECURITIES> 261,180
<RECEIVABLES> 67,032
<ALLOWANCES> 1,436
<INVENTORY> 10,319
<CURRENT-ASSETS> 452,021
<PP&E> 82,265
<DEPRECIATION> 35,976
<TOTAL-ASSETS> 507,872
<CURRENT-LIABILITIES> 79,295
<BONDS> 3,777
0
0
<COMMON> 538
<OTHER-SE> 324,262
<TOTAL-LIABILITY-AND-EQUITY> 507,872
<SALES> 120,016
<TOTAL-REVENUES> 120,016
<CGS> 63,721
<TOTAL-COSTS> 63,721
<OTHER-EXPENSES> 34,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25,706
<INCOME-TAX> 8,740
<INCOME-CONTINUING> 16,966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,966
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>