UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number: 0-18805
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2855 Campus Drive, San Mateo, CA 94403
(Address of principal executive offices) (Zip Code)
(650) 286-8600
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 11, 1999.
Common Stock, $.01 par value: $1,370,167,760**
The number of shares outstanding of each of the registrant's classes of
common stock as of March 11, 1999.
Common Stock, $.01 par value: 53,696,238
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 6, 1999 are incorporated by reference into Part III hereof.
** Based upon the last trade price of the Common Stock reported on the Nasdaq
National Market on March 11, 1999. Excludes approximately 16,974,824 shares of
common stock held by Directors, Officer and holders of 5% or more of the
Registrant's outstanding Common Stock on December 31, 1998. Exclusion of shares
held by any person should not be construed to indicate that such person
possesses the power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person is controlled by
or under common control with the Registrant.
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PART I
This Annual Report on Form 10-K includes certain registered trademarks
and trademarks of Electronics for Imaging, Inc. and others. EFI, the EFI logo,
Fiery, the Fiery logo, Fiery Driven, the Fiery Driven logo, ColorWise,
RIP-While-Print, PowerPage, the PowerPage logo, PowerBand, PowerSmooth, PSClone
and PSView are registered trademarks of Electronics for Imaging, Inc. with the
U.S. Patent and Trademark Office, and certain other foreign jurisdictions. Fiery
Prints, Fiery ZX, Fiery LX, Fiery SI, Fiery XJ, Fiery XJe, Fiery XJ-W,
BookletMaker, Fiery Downloader, Fiery Scan, Fiery Spooler, RIPChips, WebTools,
WebSpooler, WebInstaller, WebStatus, Command Workstation, Continuous Print,
DocBuilder, EFICOLOR, EFICOLOR Works, FreeForm, Memory Multiplier, NetWise,
STARR Compression and Welcome to the Revolution are trademarks of Electronics
for Imaging, Inc. All other terms and product names may be registered trademarks
or trademarks of their respective owners, and are hereby acknowledged.
Certain of the information contained in this Annual Report on Form
10-K, including without limitation statements made under this Part I, Item 1
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk" which are not historical facts, may
include "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. When used herein, the words "anticipate," "believe," "estimate,"
"expect" and similar expressions as they relate to the Company or its management
are intended to identify such statements as "forward-looking statements." The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Important factors that could cause the Company's actual results to differ
materially from those included in the forward-looking statements made herein
include, without limitation, those factors discussed in "--Competition," in
"Item 7. Management's Discussion and Results of Operations--Factors That Could
Adversely Affect Performance" and elsewhere in this Annual Report on Form 10-K
and in the Company's other filings with the Securities and Exchange Commission,
including the Company's most recent Quarterly Report on Form 10-Q. Certain other
factors and assumptions not identified above or herein were also involved in the
derivation of the forward-looking statements contained in this Annual Report on
Form 10-K and the failure of such other assumptions to be realized, as well as
other factors, may also cause actual results to differ materially from those
projected. The Company assumes no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements.
ITEM 1: BUSINESS
General
Electronics for Imaging, Inc., a Delaware corporation (the "Company" or
"EFI"), was founded in 1989 to develop innovative solutions to enable color
desktop publishing in the same manner that laser printers and PostScript
software first enabled black-and-white desktop publishing in the mid-1980s. In
pursuit of this goal, the Company first developed the Fiery(R) line of color
servers ("Fiery Color Servers") to enable in-house, short-production run color
printing, together with application and system software to facilitate color
correction and device-independent color. Fiery Color Servers are sophisticated
stand-alone computers that enable digital copier machines to accept, process,
and print digital images from personal computers and computer networks.
Historically, the Company primarily focused its efforts on its
stand-alone Fiery Color Servers that support printing on digital color copiers
and, until 1998, substantially all of its revenue resulted from the development
and sale of these stand-alone products. During 1998, the Company expanded its
focus to include several additional embedded solutions that support printing on
a broader range of devices, including digital black-and-white copiers and
desktop color laser and inkjet printers ("Fiery Controllers" and, together with
Fiery Color Servers, "Fiery Products"). In 1998, the Company also developed
stand-alone Fiery Color Servers for wide-format color inkjet printers and
restructured its sales model by entering into direct relationships with the
manufacturers of such wide-format printers rather than selling to sales
distributors. Throughout 1998, the Company continued to develop Fiery Color
Servers for existing and new generations of digital color copiers.
Background
Prior to the mid-1980s, in order to obtain quality black-and-white,
typeset documents, a manuscript was typically sent to a specialized trade shop
where craftspeople labored on typesetting and photocomposition
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machines. This process was expensive and frequently involved delays and numerous
proofing cycles. As a result, only a limited number of documents were typeset,
typically books or periodicals printed in thousands or millions of copies.
However, the advent of desktop publishing in the mid-1980s enabled users to
create the professional look of typeset documents in an office environment. As a
result, desktop publishing systems offered users without specialized training
increased control over the black-and-white document creation process. It also
enabled the production of documents more quickly without relying on special
trade shops and outside services. A single copy of a letter, a hundred copies of
a memo, or a thousand copies of a newsletter could be produced with a personal
computer, a laser printer and a black-and-white copier. These systems became
increasingly popular with users of low-volume printing, such as small
businesses, large corporations, government agencies, educational institutions,
graphic artists and business professionals.
However, users were still limited in their ability to use desktop
systems to produce color documents for short-run printing at a reasonable cost.
In the late 1970s, color images were typically prepared on an electronic color
pre-press system. These pre-press systems were expensive, ran proprietary
software, were not compatible with other systems, and required highly-trained
operators to properly edit and render color. Users routinely endured a lengthy
pre-press process, including the review of numerous interim proofs before final
printing. While suitable for high volume printing applications such as catalogs
or magazines, pre-press equipment and commercial printing presses were of
limited value to in-house users. EFI was founded to develop innovative solutions
for those users who wished to design and proof material in-house and to produce
a limited number of color copies quickly and cost-effectively.
The Company believes that consumers generally prefer color as evidenced
by the migration of photographs, motion pictures and television from
black-and-white to color. In the personal computer field, EFI believes this
preference is shown by the almost exclusive use of color monitors with color
oriented graphical user interfaces, application software and internet content.
In each of these cases, once the enabling technology developed sufficiently,
consumer adoption of color quickly followed. The Company believes that consumers
prefer color in documents created through desktop publishing. Until recently,
however, the technology was not available to do this in a high quality, quick
and cost-effective manner. Accurate color reproduction is far more complex than
black-and-white reproduction. In black-and-white printing, the principal
variable is the amount of black ink printed on the page. By contrast, producing
color on a page requires, in most cases, a combination of four inks (cyan,
magenta, yellow and black) applied in differing percentages to create varying
colors. In addition, the human eye is extremely sensitive to variations in color
images. Minor inconsistencies in the way various input, display and output
devices display color, and even small differences in ambient lighting
conditions, can result in significant variations in the way a color image is
printed and perceived.
The Company also believes that the black-and-white copier market is
migrating toward the development and use of digital black-and-white copiers.
Fiery Controllers allow users to print documents directly from their computers
to the digital copier. The Company plans to continue to develop products for use
with these devices.
The Electronics for Imaging Solution
The Company develops products with a wide range of price and
performance levels designed to make high-quality color printing in short-run
productions easier and more accessible to the broader market. More specifically,
Fiery Color Servers permit users of digital color copiers to transmit and
convert digital data from a computer to a color copier so that the color copier
can print color documents easily, quickly and cost-effectively. As a result,
Fiery Color Servers transform digital color copiers into fast, high-quality
networked color printers.
In addition to Fiery Color Servers for digital color copiers, the
Company has leveraged its technology to develop and manufacture other products
that support both color and black-and-white printing. These products include (i)
Fiery servers for digital black-and-white copiers; (ii) Fiery Color Servers for
wide-format inkjet printers; and (iii) embedded Fiery Controllers for digital
black-and-white copiers and desktop color laser printers. Unlike Fiery servers
which are sold as stand-alone products to be connected to copiers, Fiery
Controllers are embedded inside copiers and desktop printers. The Company seeks
to have printing solutions that include an embedded Fiery Controller marketed
with the "Fiery Driven(R)" logo. The Company believes that the Fiery name and
trademark, including the trademark "Fiery Driven(R)," are associated with
substantial goodwill and recognition in the marketplace.
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Strategy
The Company's overall objective is to establish Fiery Products as the
solution of choice to enable short-run digital printing on a variety of
peripheral printing devices. With respect to its current products, the Company's
primary goal is to provide a range of processing and printing solutions that
address broad sections of the color printing market and to continue to leverage
its technology to enable digital black-and-white printing on additional
peripheral devices including digital black-and-white copiers and multi-function
devices. The Company's strategy to accomplish these goals consists of four key
elements.
Proliferate and Expand the Fiery Product Line
Traditionally, the Company has sold products that support three to nine
page-per-minute ("ppm") digital color copiers. While the Company believes that
the demand for color laser copiers is still expanding, the Company has also
expanded the uses of its technology. For example, in 1996 the Company expanded
its line of color servers, the Fiery XJ family, to drive a wide range of output
devices including desktop color laser printers and wide-format color inkjet
printers with poster-size output. In 1997, the Company further expanded the use
of its technology, shipping its first products that support black-and-white
printing systems and copiers.
In 1998, the Company introduced its next generation of products based
upon EFI's new Fiery ZX and Fiery X2 platforms. These new platforms include more
advanced hardware, EFI's newly developed proprietary software (such as
ColorWise(R) and NetWise(TM)) and PostScript(R) 3 interpreter software licensed
from Adobe Systems Incorporated ("Adobe"). By utilizing the advantages of these
new platforms, the Company intends to continue to develop new Fiery Products
that are scalable and offer a broad range of features and performance when
connected to or integrated with digital color and black-and-white copiers, as
well as desktop color laser printers.
Develop and Expand Relationships with Key Industry Participants
The Company has established relationships with such companies as Canon,
Danka, ENCAD, Epson, Fuji Film, Fuji-Xerox, Hewlett-Packard, Hitachi, Konica,
KME, Minolta, Mita, Oce, Ricoh, Sharp, Toshiba and Xerox (collectively, the
"Strategic Partners"). The Company is also seeking to establish relationships
with other digital copier and printer companies for the distribution of Fiery
Products with their copiers and printers. EFI seeks to expand its relationships
with its Strategic Partners in pursuit of the goal of offering Fiery Products
for additional digital color and black-and-white devices produced by its
Strategic Partners.
Establish Enterprise Coherence
In its development of new products and platforms, EFI seeks to
establish coherence across its entire product line by designing products which
provide a consistent "look and feel" to the end-user. The Company believes that
this effort to achieve enterprise coherence will continue to engender goodwill
among its Strategic Partners and the end-users of Fiery Products and assist in
the development of new strategic relationships and markets for the Company.
Leverage Color Expertise to Expand the Scope of Products and Markets
The Company has assembled an experienced team of technical personnel
with backgrounds in color reproduction, electronic pre-press, image processing
and software and hardware engineering. By applying its expertise in color
imaging, the Company expects to continue to expand the scope and sophistication
of its products and gain access to new markets.
Products and Technology
Since the introduction of the first Fiery Color Server in 1991, the
Company has expanded its product line. In 1995, the Company introduced its
third-generation platform, the Fiery XJ. During 1996, the Company migrated the
majority of its product line to the XJ platform and later refined these products
by transitioning to a variation of the XJ platform known as the Fiery XJ+, which
included shifting from a 100Mhz to 133Mhz CPU, an improvement in bus speed from
50Mhz to 66Mhz and an improvement in the application-specific integrated circuit
("ASIC") chip sets incorporated into Fiery Products. During 1998, the Company
introduced two new platforms, the Fiery ZX and the Fiery X2 and began migrating
its product line to these platforms. The Fiery ZX platform is designed to
support 5 to 65 ppm color copiers and high speed digital presses that print at
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rates in excess of 65 ppm. The Fiery X2 platform is designed to support 4 to 25
ppm color copiers, digital black-and-white copiers, desktop color printers and
wide-format color inkjet printers.
Stand-alone Fiery Color Servers and embedded color Fiery Controllers
(collectively, "Fiery Color Products") enable color laser copiers to perform as
high performance, plain-paper color printers with the ability to produce full
color pages at up to 400 dots-per-inch ("dpi") resolution for copiers and 600
dpi resolution for printers in continuous tone (upto 2400 dpi in bi-level
printers). In addition, Fiery Color Products support the scanning capabilities
of certain color laser copiers providing full color scanning capability to the
network. Fiery Color Products are designed to provide a solution for short
production runs and on-demand color proofing for the desktop environment. In
addition, Fiery Products enable digital black-and-white copiers to perform as
plain-paper printers. Fiery Products are capable of connecting color and digital
black-and-white copiers with networked desktop computers such as Windows-based
PCs, Apple Macintosh computers and UNIX workstations. In 1998, the Company
shipped stand-alone Fiery Color Servers for use with color copiers, color inkjet
printers and wide-format color printers distributed by such companies as Canon,
Epson, Fuji-Xerox, Minolta, Oce, Ricoh and Xerox and stand-alone Fiery servers
for use with digital black-and-white copiers distributed by Oce and Sharp. In
1998, the Company also shipped Fiery Controllers embedded in color and digital
black-and-white copiers and desktop color printers distributed by such companies
as Canon, Fuji-Xerox, Konica, Minolta, Mita, Panasonic and Ricoh. In addition,
the Company shipped software and components to Hewlett-Packard to enable
Hewlett-Packard to build a Fiery Controller that is embedded in a color laser
printer distributed by Hewlett-Packard. With the exception of sales to Canon,
stand-alone Fiery servers are sold under the Fiery trademark. The Company seeks
to have products incorporating Fiery Controllers marketed with the Fiery
Driven(R) logo.
In 1998, the Company focused its development efforts on improvements to
its products' performance, features, and ease of use. In 1998, the Company
developed a Fiery Color Server utilizing Microsoft's Windows NT system software
and shipped its first Fiery Color Server utilizing such system software for the
Xerox DocuColor 70 high speed digital press. The Company also shipped a Fiery
server utilizing Microsoft's Windows NT for Oce's 600 ppm digital
black-and-white device. In 1998, the Company developed and shipped products
utilizing its ColorWise(R) color management system and NetWise(TM) network
architecture software features. The ColorWise(R) color management system enables
production of precise colors with better consistency across different
applications, computer platforms and color file formats while the NetWise(TM)
network architecture automatically switches among most major protocols and
supports 10BaseT and 100BaseT ethernet connections. In addition, the Company
developed and announced ColorWise(R) Pro Tools, which enables remote control of
the capabilities of the color management system, and shipped the Fiery LX Color
Server for the Epson Stylus Pro 5000, the Company's first product to utilize its
ColorWise(R) Pro Tools software. Also in 1998, the Company developed and
announced its DocBuilder Pro(TM) software which allows more than one page in a
document to be imposed onto a single page before raster image processing,
thereby decreasing the amount of memory required and increasing the speed at
which pages can be imposed. Finally in 1998, the Company developed enhanced
compression software, which decreases the amount of memory necessary to store
documents during processing and enables faster printing of documents.
As the Company migrated its product line to the Fiery ZX and Fiery X2
platforms during 1998, it continued to ship several versions of its Fiery XJ+
Color Servers, Fiery XJe Controllers, Fiery XJ-W Color Servers and Fiery SI
products.
Fiery ZX Color Servers
The Company first shipped the Fiery ZX Color Server, a new product
designed to drive 5 to 65 ppm color copiers and high speed digital presses that
print at rates in excess of 65 ppm, in mid-1998 and began migrating portions of
its Fiery XJ+ product line to its Fiery ZX product line. Fiery ZX Color Servers
utilize the Company's next generation hardware platform and are shipped in
configurations that include a 400 or 533 MHz DEC Alpha microprocessor and 160 to
512 MB of DRAM. The microprocessor is augmented by specially designed RipChips-
ASICs, which off-load data movement from the microprocessor and reduce overall
print times. Fiery ZX Color Servers deliver better performance than comparable
Fiery XJ+ Color Servers.
Fiery ZX Color Servers support Adobe Postscript(R) 3 and include
software features developed or further refined by the Company during 1998.
Software features developed during 1998 include the ColorWise(R) color
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management system and the NetWise(TM) network architecture. Software features
further refined during 1998 include STARR(TM) Compression which optimizes memory
usage and permits faster printing and reprinting; Fiery DocBuilder(TM) which
enables electronic collation, reverse order printing, job merging and editing;
and Fiery WebTools(TM) which enables print job management from different
computer platforms via a Java--enabled Web Browser. Fiery WebTools(TM) also
provides remote access to the print queue so an administrator can obtain instant
updates on job status and error messages, allowing for a timely response to
problems, and provides job accounting and job security capabilities which are
essential in network printing environments. In addition, Fiery ZX Color Servers
utilize the Company's proprietary RIP-While-Print(R) technology, which allows
one page to be printed while subsequent pages are simultaneously processed and
the Company's proprietary Continuous Print(TM) technology, which allows
processed pages to be stored in memory before printing, eliminating the need for
the copier or printer to cycle down between unique pages. These printing
technologies were further refined by the Company during 1998.
The Fiery ZX Color Server is currently sold in four configurations, the
Fiery ZX-2100, the Fiery ZX-3300, the Fiery ZX-5300 and the Fiery ZX-7200, all
of which, except for those sold to Canon, are marketed under the name Fiery ZX.
The Fiery ZX-2100 and ZX-3300 Color Servers are designed for use with 5 to 25
ppm color copiers, the Fiery ZX-5300 Color Server is designed for use with 25 to
65 ppm color copiers and the Fiery ZX-7200 Color Server is designed for use with
high speed digital presses that print in excess of 65 ppm. In 1998, the Company
shipped Fiery ZX Color Servers for use with color copiers distributed by such
companies as Canon, Danka, Fuji-Xerox, Minolta, Oce, Ricoh and Xerox, and high
speed digital presses distributed by Fuji-Xerox and Xerox.
Fiery XJ+ Color Servers
Throughout 1998, the Company continued to ship its product line based
upon the Fiery XJ+ architecture while migrating portions of its Fiery XJ+
product line to its Fiery ZX product line. The Fiery XJ+ architecture delivers
improved performance at lower costs than earlier models. The Company designed
specialized RipChips(TM) that accompany the MIPS R4600/R4700/R5000,
100MHz/133MHz/200MHz RISC microprocessors and accelerate color PostScript(R)
processing. Through the use of these ASICs in Fiery Controllers, the Company has
minimized the chip count and reduced the key technology of its color server to a
single board. Additional cost reductions result from the Company's proprietary
STARR(TM) Compression technology, which allows for faster printing with half the
memory previously required. The Fiery XJ+ architecture also incorporates the
Company's proprietary RIP-While-Print(R) and Continuous Print-printing
technologies. As with previous Fiery Products, the Fiery XJ+ architecture
incorporates PostScript(TM) Level 2 interpreter software from Adobe, related
system software and the Company's proprietary software utilities for use on the
user's networked personal computer.
The Fiery XJ+ Color Server is sold in four configurations which, except
for those sold to Canon, are marketed under the name Fiery XJ+. The four
configurations are Fiery XJ+ 170, Fiery XJ+ 250, Fiery XJ+ 325 and Fiery XJ+
525. In 1998, the Company continued to ship Fiery XJ+ Color Servers for use with
Canon, Danka, Fuji-Xerox, Minolta, Ricoh and Xerox products.
Fiery X2 Product Line
In 1998, the Company continued to ship products based on its Fiery LX
architecture, the Company's first Fiery architecture to support Adobe
PostScript(R) 3, and expanded its product line based upon the Fiery LX
architecture. The Company developed the Fiery LX architecture in 1997. In 1998,
the Company introduced its Fiery X2 Color Server, Fiery X2e Controller, Fiery LX
server and Fiery LX-W Color Server, each based upon the Fiery LX architecture,
and began migrating portions of its product line from the Fiery XJ+ architecture
to the Fiery LX architecture.
The streamlined design of the Fiery LX architecture is a key component
in increasing the speed and reducing the cost of Fiery Products, thereby making
the Company's technology available to a wider range of copier and printer
devices. In addition, the Fiery LX architecture utilizes proprietary ASICs for
faster document processing time during printing. Fiery Products based upon the
Fiery LX architecture have similar end-user interfaces, thereby increasing
coherence across the Company's Fiery X2 product line.
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Fiery X2 Color Servers
The Fiery X2 Color Server is a newly designed chassis for use with 5 to
25 ppm color copiers. The hardware platform for Fiery X2 Color Servers includes
a 200 MHz MIPS R5000 microprocessor and 64 to 160 MB of DRAM. Fiery X2 Color
Servers utilize the Company's printing technologies that maximize throughput,
including RIP-While-Print(R) and Continuous Print(TM). Fiery X2 Color Servers
utilize software features which include the ColorWise(R) color management
system, STARR(TM) Compression, the NetWise(TM) network architecture, Fiery
DocBuilder(TM) and Fiery WebTools(TM). In 1998, the Company began migrating
portions of its Fiery XJ+ and SI product lines to Fiery X2 Color Server products
and began shipping Fiery X2 Color Servers which are connected to color copiers
distributed by such companies as Canon, Minolta and Xerox.
Fiery SI
In 1998, the Company continued to ship the Fiery SI Color Server and
began migrating Fiery SI Color Server products to its Fiery X2 Color Server
product line. The Fiery SI Color Server is a stand-alone, entry-level color
server that is optimized for fast, high-quality performance on common business
graphics applications. In 1998, the Company shipped Fiery SI Color Servers that
support color copiers and printers distributed by such companies as Canon,
Fuji-Xerox, Minolta, Oce, and Xerox. In addition, the Company shipped an
embedded version of the Fiery SI designed for a Canon product.
Fiery X2e Controllers
The Fiery X2e Controller is designed for use with color and digital
black-and-white laser copiers and desktop color laser printers. The hardware
platform for Fiery X2e Controllers generally includes a 200 MHz MIPS R5000
microprocessor and 16 to 160 MB of DRAM. Fiery X2e Controllers have a smaller
footprint than Fiery XJe Controllers which enhances the ability to embed Fiery
X2e Controllers in digital copiers and printers. Fiery X2e Controllers utilize
the Company's printing technologies that maximize throughput, including
RIP-While-Print(R) and Continuous Print(TM). Fiery X2e Controllers may utilize
software features which include the ColorWise(R) color management system,
STARR(TM) Compression, the NetWise(TM) network architecture, Fiery DocBuilder
and Fiery WebTools(TM). In 1998, the Company began migrating its Fiery XJe
Controller products to Fiery X2e Controller products and began shipping Fiery
X2e Controllers embedded in color and digital black-and-white copiers and color
laser printers distributed by such companies as Canon, Fuji-Xerox, Konica,
Minolta, Mita, Panasonic and Ricoh. In addition, the Company shipped software
and components to Hewlett-Packard to enable Hewlett-Packard to build a Fiery X2e
Controller for a color laser printer distributed by Hewlett-Packard.
Fiery XJe Embedded Controllers
During 1998, the Company continued to offer manufacturers of color
laser printers and copiers embedded Fiery XJ+ technology in the Fiery XJe
Controller and began migrating its Fiery XJe Controller products to Fiery X2e
Controller products. Fiery XJe Controllers are based on the technology and
scalable architecture developed for the Company's Fiery XJ+ Color Servers. The
single-board design of the Fiery XJ+ architecture allows the Fiery XJe to be
installed inside a color laser printer or color copier. The Fiery XJe Controller
employs both a RISC-based CPU and ASICs for faster raster image processing.
These specially-designed Fiery XJ RipChips(TM) speed up the output of color
documents by off loading all data movement functions from the controller's main
CPU, which is then available for PostScript(R) processing. Fiery XJe Controllers
utilize the Company's Rip-While-Print(R) and Continuous Print(TM) printing
technologies.
In 1998, the Company continued to ship Fiery XJe Controllers to such
companies as Canon and Ricoh. The Fiery XJe for the Ricoh Aficio 2000 was the
Company's first embedded controller for a color laser copier.
Fiery LX Servers
The Fiery LX server is a stand-alone server designed for use with
digital black-and-white copiers and high-end desktop color inkjet printers.
Fiery LX servers utilize the Company's RIP-While-Print(R) and Continuous
Print(TM) printing technologies and software features which include the
ColorWise(R) Pro Tools color management system (in color models), the
NetWise(TM) network architecture and Fiery WebTools(TM). In 1998, the Company
shipped Fiery LX servers for use with a digital black-and-white copier
distributed by Sharp and a color inkjet printer distributed by Epson.
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Fiery LX-W Color Servers
The Fiery LX-W Color Server is a stand-alone server for use with
wide-format color inkjet printers. Fiery LX-W Color Servers utilize the
Company's RIP-While-Print(R) and Continuous Print(TM) printing technologies and
software features which include the ColorWise(R) color management system, the
NetWise(TM) network architecture, Fiery WebTools(TM) and Fiery Spooler for print
job management and job accounting. In 1998, the Company began shipping Fiery
LX-W Color Servers for wide-format printers distributed by ENCAD and Epson. Also
in 1998, the Company announced an agreement with ENCAD whereby ENCAD is given
the right to distribute Fiery LX-W Color Servers for use with ENCAD wide-format
devices.
Fiery XJ-W Color Servers
Based on the Fiery XJ+ architecture, the Fiery XJ-W Color Server drives
wide-format color inkjet printers at their maximum-rated speed for most software
applications. In 1998, the Company transitioned its Fiery XJ-W Color Server
products to Fiery LX-W Color Server products and shipped Fiery XJ-W Color
Servers for use with wide-format color inkjet printers marketed by ENCAD,
Hewlett-Packard and VivigrafX. During 1998, the Company sold Fiery XJ-W Color
Servers through distributors and wide-format color inkjet printer dealers.
Significant Relationships
The Company has established, and continues to try to build and expand
relationships with its Strategic Partners and other leading copier and printer
companies (collectively, the "OEMs"), in order to benefit from the OEMs'
products, distribution channels and marketing resources. These OEMs include
domestic and international manufacturers, distributors and sellers of digital
copiers (both black-and-white and color), wide-format printers and desktop color
printers. The Company works closely with the OEMs with the aim of developing
solutions that incorporate leading technology and which are optimally suited to
work in conjunction with such companies' products. OEMs that the Company sold
products to in 1998 include: Agfa, Canon, Danka, ENCAD, Epson, Fuji Xerox,
Hewlett-Packard, Konica, Minolta, Mita, Panasonic, Oce, Ricoh, Sharp and Xerox
and Xerox's worldwide subsidiaries and affiliates. Together, sales to Canon and
Xerox accounted for 59% of the Company's 1998 revenue, with sales to each of
these customers accounting for more than 10% of the Company's revenue.
In 1998, the Company announced a new relationship with Hewlett-Packard
pursuant to which the Company provides software and components to
Hewlett-Packard to enable Hewlett-Packard to build Fiery Controllers that are
embedded in desktop color laser printers distributed by Hewlett-Packard. These
Fiery Controllers are the first of the Company's products to be distributed by
Hewlett-Packard. The Company's Fiery Color Servers designed for use with
wide-format color inkjet printers marketed by Hewlett-Packard were distributed
through distributors and wide-format color inkjet printer dealers during 1998.
The Company also announced a worldwide strategic partnership with the Copy
Systems Division of Agfa Gevaert N.V. ("Agfa"), a European developer of analog
and digital black-and-white copiers and color copying and digital printing
systems, pursuant to which Agfa distributes Fiery SI Color Servers in Europe. In
1998, Agfa was acquired by Lanier Worldwide, Inc. Also in 1998, the Company
announced a strategic relationship with ENCAD, pursuant to which ENCAD has the
right to sell the Company's Fiery LX-W server in support of ENCAD's family of
wide-format color inkjet printers.
The Company customarily enters into development and distribution
agreements with its OEM customers. These agreements can be terminated under a
range of circumstances, and often upon relatively short notice. The
circumstances under which an agreement can be terminated vary from agreement to
agreement and there can be no assurance that the Company's OEM customers will
continue to purchase products from the Company in the future, despite such
agreements. The Company recognizes the importance of, and works hard to
maintain, its good relationships with its customers. However, the Company's
relationships with its customers can be affected by a number of factors
including, among others: competition from other suppliers, competition from
internal development efforts by the customers themselves (including the OEMs),
and changes in general economic, competitive or market conditions (such as
changes in demand for the Company's or the OEM's products, or fluctuations in
currency exchange rates). There can be no assurance that the Company will
continue to maintain or build the relationships it has developed to date.
In addition to its development and sales relationships with the OEMs,
to increase the distribution and presence of Fiery Color Servers connected to
both color and black-and-white copiers and wide-format printing
8
<PAGE>
devices, the Company has developed strategic relationships with well-known
print-for-pay companies, including Kinko's, AlphaGraphics, the CopyMax
operations of office products superstore OfficeMax, the American Speedy group of
franchised printing centers (including Allegra Print and Imaging, American
Speedy, Speedy Printer, Zippy Print and Quik Print) and the SAMPA Corporation,
franchiser of Signal Graphics Printing Centers.
The Company also has a continuing relationship pursuant to a license
agreement with Adobe and licenses PostScript(R) software from Adobe for use in
many Fiery Products. This relationship is important because each Fiery Product
requires page description language software in order to operate. Adobe's
PostScript(R) software is widely used to manage the geometry, shape and
typography of hard copy documents and Adobe is a recognized leader in providing
page description software. Pursuant to its October 1997 acquisition of the
former Pipeline Associates, Inc. and Pipeline Asia, Inc. (collectively,
"Pipeline"), the Company acquired software development expertise and certain
intellectual property associated with Pipeline's specialization in
PostScript(R), HTML and PCL interpreter technologies.
Distribution and Marketing
The Company's primary distribution method for its Fiery servers has
been to sell the Fiery servers to its OEMs. The Company's OEMs in turn sell
these products to end-users for use with the OEMs' copiers as part of an
integrated printing system. For Fiery Controllers, the Company's primary
distribution method has been to sell the products to the OEMs that embed the
products into their copiers and printers. There can be no assurance that the
risks of distributing the Company's Fiery Products primarily through its OEM
customers will not negatively impact the Company in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That Could Adversely Affect Performance--Reliance on OEM
Resellers; Risks Associated With Significant OEM Group Concentration".
The Company promotes all of its products through public relations,
direct mail, advertising, promotional material, trade shows and ongoing customer
communication programs.
Research and Development
Research and development costs for 1998, 1997, and 1996 were $57.9
million, $40.3 million, and $22.4 million, respectively. As of December 31,
1998, 299 of the Company's 583 full-time employees were involved in research and
development. The Company believes that development of new products and
enhancement of existing products are essential to its continued success, and
management intends to continue to devote substantial resources to research and
new product development. The Company expects to make significant expenditures to
support its research and development programs for the foreseeable future.
The Company is developing Fiery Products to support additional color
and black-and-white printing devices including desktop printers, high-end color
copiers, digital black-and-white copiers and multi-function devices. This
ongoing development work includes a multiprocessor architecture for high-end
systems and lower-cost designs for desktop color laser printers. Substantial
additional work will be required to complete the development of these projects.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That Could Adversely Affect Performance--Product
Transitions".
Manufacturing
The Company subcontracts with other companies to manufacture its
products. These companies are closely supervised by the Company and work closely
with the Company to assure low costs and good quality in the manufacture of the
Company's products. Subcontractors purchase components needed for the Company's
products from third parties. The Company is totally reliant on the ability of
its subcontractors to produce products sold by the Company, and although the
Company supervises its subcontractors, there can be no assurance that such
subcontractors will continue to perform for the Company as well as they have in
the past. There can also be no assurance that difficulties experienced by the
Company's subcontractors (such as interruptions in a subcontractor's ability to
make or ship the Company's products or quality assurance problems) would not
adversely affect the Company's operations.
Certain components necessary for the manufacture of the Company's
products, including ASICs and certain other semiconductor components, are
obtained from a sole supplier or a limited group of suppliers. The
9
<PAGE>
purchase of certain of these key components may involve significant lead times.
Accordingly, in the event of interruptions in the supply of these key components
or unanticipated increases in demand for the Company's products, the Company
could be unable to manufacture certain of its products in a quantity sufficient
to meet customer demand. There can be no assurance that such supply or
manufacturing problems would not adversely affect the Company's results of
operations or financial condition.
Human Resources
As of December 31, 1998, the Company employed 583 persons, with
approximately 396 full time employees located primarily in its Northern
California offices. Of the 583 total employees, approximately 173 were in sales
in marketing, 65 were in management and administration, 46 were in
manufacturing, and 299 were in research and development. Of the total number of
employees, the Company had approximately 100 employees located in Canadian and
U.S. offices outside of Northern California, and 87 employees located in
international offices including employees based in Great Britain, The
Netherlands, Germany, Japan, France, Italy, Finland, Spain, Australia, and Hong
Kong. The Company's employees are not represented by any collective bargaining
organization and the Company has never experienced a work stoppage.
Competition
Competition in the Company's markets is intense and involves rapidly
changing technologies and frequent new product introductions. To maintain and
improve its competitive position, the Company must continue to develop and
introduce, on a timely and cost-effective basis, new products and features that
keep pace with the evolving needs of its customers. The principal competitive
factors affecting the markets for the Company's Fiery Products include, among
others, customer service and support, product reputation, quality, performance,
price and product features such as functionality, scalability, ability to
interface with OEM products and ease of use. The Company believes it has
generally competed effectively in the past with product offerings of its
competitors on the basis of such factors. However, there can be no assurance
that the Company will continue to be able to compete effectively in the future
based on these or any other competitive factors.
The Company competes directly with other independent manufacturers of
color servers, independent manufacturers of embedded solutions, copier
manufacturers, printer manufacturers and others. The Company has a number of
direct competitors for color server products and embedded solutions, including
Splash Technology Holdings, Inc., Management Graphics Incorporated and Peerless
Systems Corporation. The Company's Fiery XJ-W and Fiery LX-W products face
competition from wide-format printer manufacturers that develop their own
controllers and other companies that develop controllers for wide-format
printers. These companies include Lasermaster, Onyx, Visual Edge and Cactus. The
Company also faces competition from copier and printer manufacturers that offer
internally developed server products or that incorporate internally developed
embedded solutions or server features into their copiers and printers, thereby
eliminating the need for the Company's products and limiting future
opportunities for the Company. In addition, the Company faces competition from
manufacturers of desktop color laser printers which do not utilize a controller
and which offer increasing speed and color capability. The Company believes that
it competes effectively due to, among other things, its efforts to continually
advance its technology, name recognition, sizable installed base, number of
products supported and price. The Company expects that competition in its
markets will increase due to, among other factors, market demand for higher
performance products at lower prices, rapidly changing technology and product
offerings from competitors and customers. There can be no assurance that the
Company will be able to continue to compete effectively against other companies'
product offerings, and any failure to do so would have a material adverse effect
upon the Company's business, operating results and financial condition.
Intellectual Property Rights
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its intellectual property rights, all of which
afford only limited protection. As of December 31, 1998, the Company had 13
issued U.S. patents, 52 pending U.S. patent applications and various foreign
counterparts. There can be no assurance that patents will issue from these
pending applications or from any future applications or that, if issued, any
claims allowed will be sufficiently broad to protect the Company's technology.
Failure of any patents to protect
10
<PAGE>
the Company's technology may make it easier for the Company's competitors to
offer equivalent or superior technology. In addition, third parties may
independently develop similar technology without breach of the Company's trade
secrets or other proprietary rights. Any failure by the Company to take all
necessary steps to protect its trade secrets or other intellectual property
rights may have a material adverse effect on the Company's ability to compete in
its markets.
The Company has registered certain trademarks, which include its
Fiery(R), Fiery Driven(R), ColorWise(R) and RIP-While-Print(R) trademarks, and
has applied for registration of certain additional trademarks. The Company will
continue to evaluate the registration of additional trademarks as appropriate.
Any failure by the Company to properly register or maintain its trademarks or to
otherwise take all necessary steps to protect its trademarks may diminish the
value associated with the Company's trademarks. The Company's products include
software sold pursuant to "shrink wrap" licenses that are not signed by the end
user and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries, including
several in which the Company operates or sells its products, do not protect
proprietary rights to as great an extent as do the laws of the United States.
From time to time, litigation may be necessary to defend and enforce
the Company's proprietary rights. Such litigation, whether or not concluded
successfully for the Company, could involve significant expense and the
diversion of management's attention and other Company resources.
Risk Factors
In addition to the above information, a discussion of factors that may
adversely affect the Company's future performance and financial results can be
found in Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Financial Information About Foreign and Domestic Operations and Export Sales
See Note 10 of the Company's Notes to Consolidated Financial
Statements.
ITEM 2: PROPERTIES
The Company's principal offices are located in San Mateo, California.
The Company has also leased additional facilities in San Mateo and in Foster
City, California for research and development, quality assurance, sales,
marketing, administration, and other support operations. These offices in
Northern California collectively include approximately 127,000 square feet of
space. Employees formerly with Pipeline Associates, Inc., acquired by the
Company in 1997, are based in an office in Parsippany, New Jersey.
In 1997, the Company entered into an operating lease for a building to
be constructed on land which the Company owns in Foster City, California. This
facility, which includes approximately 295,000 square feet of space, is to be
used as a corporate headquarters for the Company. Construction of this facility
began in 1997 and is scheduled to be completed in the first half of 1999. The
Company plans to vacate and sublease its existing facilities in San Mateo and
Foster City upon completion of the new corporate headquarters. In addition to
its principal offices in San Mateo, the Company also leases a number of domestic
and international sales offices.
The Company believes that its facilities, in general, are adequate for
its present and currently foreseeable needs.
ITEM 3: LEGAL PROCEEDINGS
On December 15, 1997, a shareholder class action lawsuit, entitled
Steele, et al. v. Electronics for Imaging, Inc., et al., No. CV 403099, was
filed against the Company and certain of its officers and directors in the
California Superior Court, San Mateo County (the "San Mateo Superior Court").
Five virtually identical class action complaints were subsequently filed in the
San Mateo Superior Court. On December 31, 1997, a putative shareholder class
action entitled Smith v. Electronics for Imaging, Inc., et al., No. C97-4739 was
filed against the Company and certain of its officers and directors in the
United States District Court for the Northern District of California. The state
court class actions allege that the Company made false and misleading statements
concerning its business during a putative class period of April 10, 1997 through
December 11, 1997 and allege violations of California Corporations Code Sections
25400 and 25500 and Civil Code Sections 1709 and 1710.
11
<PAGE>
The federal court class action complaint makes the same factual allegations, but
alleges violations of certain United States federal securities laws. The
complaints do not specify the damages sought. The Company believes that these
lawsuits are without merit and intends to contest them vigorously, but there can
be no assurance that if damages are ultimately awarded against the Company, the
litigation will not adversely affect the Company's results of operations.
In addition, the Company is involved from time to time in litigation
relating to claims arising in the normal course of its business. The Company
believes that the ultimate resolution of such claims will not materially affect
the Company's business or financial condition. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors That Could Adversely Affect Performance--Infringement and
Potential Litigation."
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for a vote
during the fourth quarter of 1998.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
The Company's common stock was first traded on the NASDAQ National
Market System under the symbol EFII on October 2, 1992. The table below lists
the high and low closing quotation during each quarter the stock was traded in
1998 and 1997 and reflects the Company's February 1997 two-for-one stock split.
As of February 22, 1999, there were approximately 422 stockholders of record.
The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for business, and
does not anticipate paying any cash dividends in the foreseeable future.
<CAPTION>
1998 1997
--------------------------------------------- ---------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High .......... $ 28.00 $ 25.19 $ 22.38 $ 40.00 $ 49.00 $ 50.00 $ 56.00 $ 54.63
Low ........... 15.66 18.69 13.80 15.63 38.00 35.63 47.25 13.63
</TABLE>
12
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
The following tables summarize selected consolidated financial data as
of, and for the five years ended December 31, 1998. This information should be
read in conjunction with the audited consolidated financial statements and
related notes thereto.
<CAPTION>
As of and for the years ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operations
Revenue ............................................ $ 430,723 $ 360,631 $ 298,013 $ 190,451 $ 130,381
Cost of revenue .................................... 242,096 163,955 145,399 95,451 64,333
--------- --------- --------- --------- ---------
Gross profit ....................................... 188,627 196,676 152,614 95,000 66,048
--------- --------- --------- --------- ---------
Operating expenses .................................
Research and development ........................ 57,887 40,318 22,440 12,922 10,387
Sales and marketing ............................. 57,214 43,414 30,221 21,938 18,601
General and administrative ...................... 15,486 12,348 10,107 7,023 6,690
In-process research and development * ........... -- 9,400 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses ..................... 130,587 105,480 62,768 41,883 35,678
--------- --------- --------- --------- ---------
Income from operations ............................. 58,040 91,196 89,846 53,117 30,370
Other income, net .................................. 9,668 10,181 7,318 5,476 2,931
--------- --------- --------- --------- ---------
Income before income taxes ......................... 67,708 101,377 97,164 58,593 33,301
Provision for income taxes ......................... (21,667) (36,495) (34,980) (21,093) (11,995)
--------- --------- --------- --------- ---------
Net income ......................................... $ 46,041 $ 64,882 $ 62,184 $ 37,500 $ 21,306
========= ========= ========= ========= =========
Net income per basic common share ** ............... $ 0.87 $ 1.24 $ 1.23 $ 0.76 $ 0.46
Net income per diluted common share ** ............. $ 0.85 $ 1.15 $ 1.13 $ 0.71 $ 0.43
Shares used in computing net income per
basic common share ** ............................. 53,029 52,359 50,672 49,210 47,208
Shares used in computing net income per
diluted common share ** ........................... 54,481 56,198 54,828 53,100 49,836
Financial Position
Cash and short-term investments .................... $ 323,033 $ 242,731 $ 212,100 $ 144,018 $ 106,974
Working capital .................................... 346,303 286,827 237,366 157,059 108,071
Long term debt, less current portion ............... 3,777 4,064 -- -- --
Total assets ....................................... 472,032 385,998 298,953 194,469 135,461
Stockholders' equity ............................... $ 398,923 $ 338,865 $ 249,370 $ 163,940 $ 113,529
Ratios and Benchmarks
Current ratio ...................................... 6.0 7.7 5.8 6.1 5.9
Inventory turns .................................... 12.9 9.4 15.5 11.8 9.9
Full-time employees ................................ 583 538 354 222 192
<FN>
- ------------
* See Item 7: Management's Discussion and Analysis of Financial Condition and
Results: Operating expenses--Acquisition.
** See Note 1 of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
13
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the audited consolidated financial statements and related notes thereto.
All assumptions, anticipations, expectations and forecasts con-tained herein are
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed here. For a
discussion of the factors that could impact the Company's results, readers are
referred to the section below entitled "--Factors that Could Adversely Affect
Performance."
Results of Operations
<TABLE>
The following tables set forth items in the Company's consolidated
statements of income as a percentage of total revenue for 1998, 1997 and 1996,
and the year-to-year percentage change from 1998 over 1997 and from 1997 over
1996, respectively. These operating results are not necessarily indicative of
results for any future period.
<CAPTION>
Years ended December 31, % change
------------------------------------- -----------------------
1998 1997
over over
1998 1997 1996 1997 1996
---------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenue ................................. 100% 100% 100% 19% 21%
Cost of revenue ........................... 56% 46% 49% 48% 13%
---------- --------- ------------ ---------- ----------
Gross profit .............................. 44% 54% 51% (4)% 29%
---------- --------- ------------ ---------- ----------
Research and development .................. 13% 11% 8% 44% 80%
Sales and marketing ..................... 13% 12% 10% 32% 44%
General and administrative ............... 4% 3% 3% 25% 22%
In-process research and development ...... -- 3% -- N/A N/A
---------- --------- ------------ ---------- ----------
Operating expenses ........................ 30% 29% 21% 24% 68%
Income from operations .................. 14% 25% 30% (36)% 2%
Other income, net ........................ 2% 3% 3% (5)% 39%
---------- --------- ------------ ---------- ----------
Income before income taxes ............... 16% 28% 33% (33)% 4%
Provision for income taxes ............... 5% 10% 12% (41)% 4%
---------- --------- ------------ ---------- ----------
Net income .............................. 11% 18% 21% (29)% 4%
</TABLE>
Revenue
Revenue increased to $430.7 million in 1998, compared to $360.6 million
in 1997 and $298.0 million in 1996, which yielded a 19% increase in 1998 as
compared to 1997 and a 21% increase in 1997 as compared to 1996. The
corresponding unit volume increased by 164% in 1998 over 1997 and by 40% in 1997
over 1996. The increase in revenue was primarily due to significant increases in
unit volumes, positive market acceptance of new product introductions and the
impact of new customers, partially offset by price reductions on older product
lines early in the year in anticipation of new product introductions.
The Company's revenue for 1998 was principally derived from three major
categories. The first category was 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 was made up of embedded desktop controllers,
bundled color solutions and chipsets primarily for the office market. The third
category is made up of controllers for digital black and white products.
14
<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>
1998 1997 1996
Revenue Revenue Revenue
--------------------- --------------------- ----------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue
Stand-alone Servers Connecting to
Digital Color Copiers ......... $282,081 66% $290,347 81% $252,041 85%
Embedded Desktop Controllers,
Bundled Color Solutions &
Chipset Solutions ............ 90,133 21% 34,133 9% 25,465 8%
Controllers for Digital Black and
White Solutions ............... 19,196 4% -- -- -- --
Spares, Licensing & Other misc.
sources ..................... 39,313 9% 36,151 10% 20,507 7%
--------- ---- --------- ---- --------- ----
Total Revenue ............... $430,723 100% $360,631 100% $298,013 100%
========= ==== ========= ==== ========= ====
</TABLE>
1998 1997 1996
Volume Volume Volume
-------- -------- -------
Volume
Stand-alone Servers Connecting to Digital
Color Copiers .................................. 27% 73% 69%
Embedded Desktop Controllers, Bundled
Color Solutions & Chipset Solutions ............ 62% 27% 31%
Controllers for Digital Black and
White Solutions .............................. 11% -- --
Spares, Licensing & Other misc. sources ........ -- -- --
---- ---- ----
Total Volume .................................. 100% 100% 100%
==== ==== ====
Growth in 1998 primarily took place in the category of embedded desktop
controllers, bundled color solutions and chipset solutions. This reflects the
bifurcation of the market moving from mid-range to high-end and desktop
products. The desktop product category made up 21% of total revenue and 62% of
total unit volume in 1998. Whereas, it made up 9% of total revenue and 27% of
total unit volume in 1997 and 8% of total revenue and 31% of total unit volume
in 1996. These products, except for the 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 the desktop
category as a percentage of total revenue. To the extent this category does 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 year over year revenue growth in 1998 due largely to price
reductions on the Company's older generations of product. The Company believes
these products are being effectively replaced by newer products as its OEM
customers continue to qualify the new products and begin to order in increasing
volumes. In addition, low-end products which previously shipped as stand-alone
products have begun to ship in 1998 as embedded products. There can be no
assurance that the
15
<PAGE>
new products for 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 (excluding chipset solutions) than
the Company obtained in 1998 (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.
<TABLE>
Shipments by geographic area for the years ended 1998, 1997 and 1996
were as follows:
<CAPTION>
Years ended December 31, % change
---------------------------------------- ----------------------------
1998 1997
over over
1998 1997 1996 1997 1996
---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
North America * .......... 48% 48% 52% 21 % 11%
Europe * ................. 33% 30% 25% 30 % 47%
Japan .................... 16% 18% 21% 9 % 1%
Rest of World ............ 3% 4% 2% (24)% 187%
--------- -------- ---------- ----------- ----------
100% 100% 100% 19 % 21%
========= ======== ========== =========== ==========
<FN>
- ------------
* In the middle of the second quarter of 1997, one of the Company's major
customers began having its products for the European market shipped directly
to Europe rather than through the United States. The Company does not know the
dollar amount of the corresponding shipments that went through North America
to Europe for the periods prior to the second quarter of 1997. Therefore
shipments to North America in 1996 and early 1997 are slightly overstated and
shipments that went to Europe in the same period are slightly understated when
compared to 1998. Consequently the above indicated revenue information and the
increases and decreases from 1998 over 1997 and from 1997 over 1996 for North
America and Europe should be read with caution.
</FN>
</TABLE>
Whereas shipments to North America, Europe and Japan increased in 1998
compared to 1997 and in 1997 compared to 1996, the Rest of World region
experienced a decrease in 1998 over 1997. Although export sales to Japan
increased sequentially, the future results might be impaired by the economic
turmoil in that region. The Rest of World is predominantly represented by the
Southeast Asian region, and the decrease in export sales in 1998 compared to
1997 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 economic conditions in Asia in
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, though accurate data is difficult
to obtain. 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, Minolta, Oce, Ricoh, Sharp, Xerox and others. During 1998, the
Company has continued to work on both increasing the number of OEM partners, and
expanding the size of
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existing relationships with OEM partners. The Company relied on three OEM
customers, Canon, Xerox and Ricoh in aggregate for 67%, 85% and 82% of it's
revenue for 1998, 1997 and 1996, respectively. 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.
On October 28, 1998, the Company announced that it has provided
Hewlett-Packard with embedded Fiery X2e technology for the new HP Color Laserjet
8500 Printer which is HP's first A3/Tabloid Color Laser Printer for the
corporate workgroup market. Hewlett-Packard is the market leader among computer
printer manufacturers for the Desktop market. The 8500 project calls for the
Company to provide chipsets and embedded software to HP which will have a lower
per unit revenue but a much higher per unit margin as a percentage of revenues
than the Company's traditional products have had. The HP chipset solution is
classified in the embedded, desktop and bundled category.
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 in 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. At this time, the Company cannot
determine how much impact, if any, this factor may have.
Cost of Revenue
Historically, a majority of the Company's cost of revenue has been
attributable to the sale of Fiery color servers. Fiery color servers as well as
embedded desktop controllers and digital black and white products are
manufactured by third-party manufacturers who purchase most of the necessary
components. The Company sources directly processors, memory, certain ASICs, and
software licensed from various sources, including PostScript interpreter
software, which the Company licenses from Adobe Systems, Inc.
Gross Margins
The Company's gross margin was 44%, 54% and 51% for 1998, 1997 and 1996
respectively. The decrease in gross margin in 1998 from 1997 was due to a
combination of factors, including a higher mix of low-end products with
relatively lower margins and a different mix of OEM partners purchasing a
different mix of products during 1998 as compared to 1997. The Company also
initiated price reductions on older products as of January 1, 1998 in light of
pending introductions of newer generations of products. The Company expects that
sales of products with relatively lower margins may further increase as a
percentage of revenue. Such products include older products for which prices are
reduced during product transitions, embedded products for both desktop printers
and copiers, and stand-alone servers and embedded controllers for
black-and-white copiers. If such sales increase as a percentage of the Company's
revenue, gross margins may further decline. The increase in gross margin in 1997
as compared to 1996 was due to the fact that the Company benefited in 1997 from
lower component prices used in the Company's products in addition to lower
manufacturing costs due to economies of scale.
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.
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.
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Operating Expenses
Operating expenses increased by 24% in 1998 over 1997 and by 68% in
1997 over 1996. Operating expenses as a percentage of revenue amounted to 30%,
29% and 21% for 1998, 1997 and 1996, respectively. Increases in operating
expenses in absolute dollars of $25.1 million in 1998 compared to 1997, and
$42.7 million in 1997 compared to 1996, were primarily caused by costs
associated with the development and introduction of new products and the hiring
of additional full time employees to support the growing business (a net
increase of 45 people at December 31, 1998 over December 31, 1997 and a net
increase of 184 people at December 31, 1997 over December 31, 1996). The Company
has hired additional employees to support product development as well as to
support expanded operations.
The increase in operating expenses in 1997 compared to 1996 includes a
$9.4 million charge for in process technology that was expensed in 1997 as part
of the acquisition of Pipeline Associates, Inc. and Pipeline Asia, Inc. (the
"Pipeline Acquisition"), a leading software developer specializing in
PostScript, HTML and PCL interpreter technologies. Excluding the $9.4 million
charge in 1997, the increase in operating expenses in 1998 over 1997 would have
been 36% or $34.5 million and in 1997 over 1996 would have been 53% or $33.3
million. The lower percentage increase in operating expenses in 1998 over 1997
compared to 1997 over 1996 is the result of the Company's successful spending
control.
The Company anticipates that operating expenses will continue to grow
and may increase both in absolute dollars and as a percentage of revenue. In
addition, the Company anticipates additional non-recurring operating expenses
beginning in the first quarter of 1999, and possibly for one or two quarters
thereafter, related to the Company's pending move to a new central facility in
Foster City, California.
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 were $57.9
million or 13% of revenue in 1998 compared to $40.3 million or 11% of
revenue in 1997 and $22.4 million or 8% of revenue in 1996. The year
over year increase in research and development expenses was mainly due
to an increase in research and development projects. The majority of
the 44% increase of research and development expenses in 1998 compared
to 1997 was due to headcount related costs as well as a significant
increase in costs of prototype materials used for pre-production units
on projects under development. The 80% increase of research and
development expenses in 1997 over 1996 was primarily due to an 80%
growth in engineering headcount in 1997 compared to 1996. The Company
believes that the development of new products and the enhancement of
existing products are essential to its continued success, and intends
to continue to devote substantial resources to research and new product
development efforts. Accordingly, the Company expects that its research
and development expenses may continue to increase in absolute dollars
and also as a percentage of revenue.
Sales and Marketing
Sales and marketing expenses include personnel expenses, costs for
trade shows, marketing programs and promotional materials, sales
commissions, travel and entertainment expenses, depreciation, and costs
associated with sales offices in the United States, Europe, Japan and
other locations around the world. Sales and marketing expenses for 1998
were $57.2 million or 13% of revenue compared to $43.4 million or 12%
of revenue in 1997 and $30.2 million or 10% of revenue in 1996. Sales
and marketing expenses increased steadily as a percentage of revenue
and in absolute dollars over the past three years. Contributing to this
increase is a 7% and 29% increase in headcount in 1998 and 1997,
respectively. In addition, costs required for the introduction,
promotion and support of a broader range of current products with both
existing and new OEM relationships as well as technology alliance
partners have also increased. The Company has also developed strategic
relationships with well known print-for-pay companies, including
Kinko's, AlphaGraphics, the CopyMax operations of office products
superstore OfficeMax, the American Speedy group of franchised printing
centers (including Allegra Print and Imaging, American Speedy, Speedy
Printer, Zippy Print and Quik Print) and the SAMPA Corporation,
franchiser of Signal Graphics Printing Centers. Although these
relationships increase the demand for Fiery products they also increase
the sales and marketing expenses.
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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 desktop and embedded products 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 were $15.5 million or 4% of revenue
in 1998, compared to $12.3 million or 3% of revenue in 1997 and $10.1
million or 3% of revenue in 1996. While general and administrative
expenses have remained relatively constant as a percentage of total
revenue over the three year period ended 1998, these expenses have
increased in absolute dollars. The increases in 1998 over 1997 and in
1997 over 1996 were primarily due to the increase in headcount to
support the needs of the growing Company's operations, including the
use of outside consultants. 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.
Acquisition
In October of 1997, the Company acquired Pipeline Associates, Inc. and
Pipeline Asia, Inc. ("the Pipeline Acquisition") for $12.6 million, net
of cash received. The Pipeline acquisition was intended to expand the
Company's core technologies and thereby decrease its dependence on
software licensed from outside sources. The Pipeline acquisition allows
the Company to offer the industry's only Hewlett-Packard approved PCL
interpreter not produced by Hewlett-Packard. In conjunction with the
acquisition, the Company recorded a charge of $9.4 million for in
process research and development.
Other Income
Other income relates mainly to interest income and expense, and gains
and losses on foreign currency transactions. Other income of $9.7 million in
1998 decreased by 5% from $10.2 million in 1997. Other income of $10.2 million
in 1997 increased by 39% from $7.3 million in 1996. The decrease in 1998 from
1997 is mainly due to approximately $1.3 million in losses suffered on Asian
currency denominated transactions in the first half of 1998. Although to date,
the Company's exposure to currency fluctuations has been relatively minor, in
response to recent currency fluctuations in Asia, the, Company began to
implement a hedging program in June 1998. In addition, the Company has been
earning less on interest in 1998 compared to 1997 due to a decline in market
interest rates. The increase in 1997 compared to 1996 is mainly due to an
increase of the average investment balance.
Income Taxes
The Company's effective tax rate was 32% in 1998 and 36% in 1997 and
1996, respectively. In each of these years, the Company benefited from increased
tax-exempt interest income, increases in foreign sales and the utilization of
research and development credits in achieving a consolidated effective tax rate
lower than that prescribed by the respective Federal and State taxing
authorities. The Company anticipates that the tax rate for 1999 will increase to
reflect the fact that the Federal R&D credit is scheduled to expire mid-year
1999.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $80.3
million to $323.0 million as of December 31, 1998, from $242.7 million as of
December 31, 1997. Working capital increased by $59.5 million to $346.3 million
as of December 31, 1998, up from $286.8 million as of December 31, 1997. These
increases are 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 $79.1 million, $72.5
million and $71.3 million in 1998, 1997 and 1996, respectively. Cash provided by
operating activities increased in 1998 primarily due to a reduction in
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inventory levels, a reduction of receivables from subcontractors and an increase
in accounts payable and accrued liabilities, partially offset by, an increase in
accounts receivable due to the increased volume of revenue, and a decrease in
net income in 1998 from 1997.
The Company has continued to invest cash in short-term investments,
mainly municipal securities. Purchases in excess of sales of short-term
investments were $84.3 million, $45.4 million and $42.1 million in 1998, 1997
and 1996, respectively. 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 $12.3
million, $11.5 million and $10.7 million of such equipment and furniture during
1998, 1997 and 1996, respectively. During 1997, the Company invested $12.6
million, net of cash received, in the Pipeline Acquisition. Also in 1997, the
Company began development of a corporate campus on a 35-acre parcel of land in
Foster City, California. During 1998 the Company spent approximately $0.3
million on land improvement costs and during 1997 the Company spent
approximately $27.0 million on the land and associated improvement costs. In
addition to purchasing the land, the Company entered into an agreement to lease
a ten-story 295,000 square foot building to be constructed in 1998 and 1999. 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
December 31, 1998, the Company has drawn $36.3 million on the commitment. The
building construction is scheduled to be completed in the second 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 ($44.0 million at December 31, 1998) 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.
Net cash provided by financing activities of $13.9 million, $9.9
million and $7.7 million in 1998, 1997 and 1996, respectively, were primarily
the result of exercises of common stock options and the tax benefits to the
Company associated with those exercises. Net cash provided by financing
activities in 1998 and 1997 includes approximately $0.3 million and $0.1 million
of repayment of bonds assumed as part of the Foster City, California land
acquisition.
The Company's inventory consists primarily of memory subsystems,
processors and ASICs, which are consigned to third-party contract manufacturers
responsible for manufacturing substantially all of the Company's products.
Should the Company decide to purchase components and do its own manufacturing,
or should it become necessary for the Company to purchase and consign components
other than the processors, ASICs or memory subsystems for its contract
manufacturers, inventory balances would increase significantly, thereby reducing
the Company's available cash resources. Further, these contract manufacturers
produce substantially all of the Company's products. The Company believes that,
should the services of any of these contract manufacturers become unavailable, a
significant negative impact on the Company's consolidated financial position and
results of operations could result. The Company is also reliant on several
sole-source suppliers for certain key components and could experience a further
significant negative impact on its consolidated financial position and results
of operations if such supply were reduced or not available.
The Company, along with its directors and certain officers and
employees, have been named in class action lawsuits filed in both the San Mateo
County Superior Court and the United States District Court for the Northern
District of California. The lawsuits are all related to the precipitous decline
in the trading price of the Company's stock that occurred in December 1997. The
Company believes the lawsuits are without merit and intends to contest them
vigorously, but there can be no assurance that if damages are ultimately awarded
against the Company, the litigation will not adversely affect the Company's
results of operations.
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The Company believes that its existing capital resources, together with
cash generated from continuing operations will be sufficient to fund its
operations and meet capital requirements through at least 1999.
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, thus management believes that all critical pieces of
hardware and software have been represented to be Year 2000 compliant by their
manufacturers. In some cases this compliance is expected to be met by releases
of software updates from the manufacturers that are currently scheduled to be
released in the first half of 1999. For software that is currently available and
represented to be compliant, the Company has performed limited tests on the
manufacturer's representations. In addition, because the Company is moving into
a new building during the first half of 1999 and has a relatively new computer
system, the Company has spent a comparatively small amount of time to date on
testing. Incremental costs incurred to date related to the Year 2000 problem
have been less than $0.1 million. However, the Company currently anticipates
spending approximately $1 million over the next fiscal year on internal
resources and consultants to implement software updates, assist with testing,
analyze risks associated with third parties and further develop contingency
plans and capabilities. 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.
Also, the Company has tested its products to determine if the products
will successfully rollover from the years 1999 to 2000 and 2000 to 2001, and if
the products will correctly recognize the date February 29, 2000. Products first
released after November 1, 1997 have passed internal tests for these criteria,
and future products will be required to pass the same internal tests before
shipping. Because the Company cannot control other companies' products used in
conjunction with the Company's products (such as other companies' software), the
Company does not intend to assure its customers that its products will meet the
above referenced criteria when used in conjunction with any other software or
hardware not manufactured by the Company.
To date the Company has not reviewed Year 2000 plans and preparations
of its manufacturers, suppliers, customers and other third parties with whom it
does business. The Company is currently in the process of identifying and
contacting these critical third parties. The Company hopes to complete 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.
Product Transitions
Although the Company plans to introduce new products, delays in the
launch or availability of these products could have an adverse effect on the
Company's financial results. Product transitions also carry the risk that
customers will delay or cancel orders for existing products. If the Company is
not able to successfully manage product transitions or cannot guarantee the
availability of products once they have been introduced, its results of
operations may be adversely affected.
Product Diversification and Coordination of Development with Customers
The Company's customers have 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.
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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 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.
New Product Introductions
The Company continues to explore opportunities to develop product lines
distinct from its Fiery color servers. Such new products may require the
investment of capital for the development of new distribution and marketing
channels at an unknown cost to the Company. There can be no guarantee that the
Company would be successful in the development of such channels or that any new
products would gain market acceptance. If the Company is not able to
successfully manage the introduction of new products, its results of operations
may be adversely affected. In addition to these risks, if the Company is
successful in introducing new products, there can be no assurance that such
product introductions (including more powerful products sold at a lower price)
will not adversely impact gross margins or sales of existing products.
Competition
The Company has seen competition in the market from companies and
products that provide similar functionality to the Company's products and
believes that such competition will continue and may intensify. It is also
possible that the Company's customers may themselves internally develop and
supply products presently sold by the Company. There can be no assurance that
the Company will be able to continue to successfully compete against other
companies' product offerings or their financial and other resources. In addition
to competition among suppliers of the Company's products, the Company believes
that competition among the Company's customers and potential customers,
including competition over price, may increase. Such competition may have an
adverse impact on the Company's results of operations.
Managing Growth
The Company continues to increase its headcount, and is working to
build relationships with OEMs and other customers. As a result, the number and
complexity of relationships the Company must manage, including relationships
with customers, manufacturers, and suppliers, has increased and may increase
further. If the Company cannot successfully manage growth, its results of
operations may be adversely affected.
Hiring and Retention of Employees
The Company depends upon skilled employees, such as software and
hardware engineers, quality assurance engineers, marketing and sales
professionals, and persons in administrative and managerial positions. Demand
for such employees in Northern California, where the Company's main offices are
located, is high. To assure that the Company can adequately support its
business, the Company undertakes a number of efforts to hire and retain
qualified employees. If the Company cannot successfully hire and retain
employees, its results of operations could be adversely affected.
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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
followed a seasonal pattern reflecting the buying patterns of its large OEM
customers. In the past, that pattern has indicated the Company's fiscal fourth
quarter results may be adversely affected by a desire on the part of some or all
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.
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 earnings and stock price 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.
Risks Associated With The Company's Ownership of Real Property And
Transition To New Facilities
In early 1999, the Company anticipates moving into a new leased
headquarters in Foster City, California on land that the Company owns. If the
Company cannot successfully manage the transition, disruption to the Company's
business and delays in sales or development of new products could arise, and
results of operations may be adversely affected.
International Operations and Currency Fluctuations
Approximately 52%, 52% and 48%, respectively, of the Company's product
revenue for the years ended 1998, 1997 and 1996, 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
24
<PAGE>
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.
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 of the Company's 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 example, the Pipeline acquisition which was
consummated during the fourth quarter of 1997 and expenditures in connection
with the move to the new corporate headquarters). The Company anticipates that
future operating results might be subject to quarterly fluctuations.
Item 7A: 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 counterparties 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 1998, the
transactions hedged were intercompany accounts receivable and payable between
the Company and its Japanese subsidiary. The periods
25
<PAGE>
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 December 31, 1998, the Company had one outstanding forward
foreign exchange contract to sell Yen equivalent to approximately $5.6 million
with an expiration date of January 29, 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 December 31, 1998, 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 $0.6 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 December 31, 1998, 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
December 31, 1998, the Company's cash and short-term investment portfolio
includes debt securities of $323 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 $2.9 million.
The fair value of the Company's long-term debt, including current
maturities was estimated to be $4.1 million as of December 31, 1998, 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 December 31, 1998.
26
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Electronics for Imaging, Inc.
Consolidated Balance Sheets
December 31,
-------------------
1998 1997
-------- --------
(In thousands, except
share and per share
Assets
Current assets:
Cash and cash equivalents ............................... $ 53,210 $ 57,195
Short-term investments .................................. 269,823 185,536
Accounts receivable, net ................................ 57,494 30,930
Inventories ............................................. 13,726 23,790
Other current assets .................................... 21,382 32,445
-------- --------
Total current assets .................................. 415,635 329,896
Property and equipment, net .............................. 46,579 46,502
Other assets ............................................. 9,818 9,600
-------- --------
Total assets .......................................... $472,032 $385,998
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................................ $ 32,707 $ 20,255
Accrued and other liabilities ........................... 26,953 19,891
Income taxes payable .................................... 9,672 2,923
-------- --------
Total current liabilities ............................. 69,332 43,069
-------- --------
Long-term debt, less current portion ..................... 3,777 4,064
-------- --------
Commitments and Contingencies (Note 6) ...................
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; 53,499,233 and 52,558,383 shares issued and
outstanding, respectively ............................... 535 524
Additional paid-in capital ............................... 151,270 137,264
Retained earnings ........................................ 247,118 201,077
-------- --------
Total stockholders' equity ............................ 398,923 338,865
-------- --------
Total liabilities and stockholders' equity ........... $472,032 $385,998
======== ========
See accompanying notes to consolidated financial statements.
27
<PAGE>
Electronics for Imaging, Inc.
Consolidated Statements of Income
Years ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands, except
per share amounts)
Revenue ................................. $ 430,723 $ 360,631 $ 298,013
Cost of revenue ......................... 242,096 163,955 145,399
--------- --------- ---------
Gross profit ............................ 188,627 196,676 152,614
--------- --------- ---------
Operating expenses:
Research and development ............. 57,887 40,318 22,440
Sales and marketing .................. 57,214 43,414 30,221
General and administrative ........... 15,486 12,348 10,107
In-process research and development .. -- 9,400 --
--------- --------- ---------
130,587 105,480 62,768
--------- --------- ---------
Income from operations .................. 58,040 91,196 89,846
Other income, net ....................... 9,668 10,181 7,318
--------- --------- ---------
Income before income taxes .............. 67,708 101,377 97,164
Provision for income taxes .............. (21,667) (36,495) (34,980)
--------- --------- ---------
Net income .............................. $ 46,041 $ 64,882 $ 62,184
========= ========= =========
Net income per basic common share ....... $ 0.87 $ 1.24 $ 1.23
========= ========= =========
Shares used in per-share calculation .... 53,029 52,359 50,672
========= ========= =========
Net income per diluted common share ..... $ 0.85 $ 1.15 $ 1.13
========= ========= =========
Shares used in per-share calculation .... 54,481 56,198 54,828
========= ========= =========
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
Electronics for Imaging, Inc.
Consolidated Statements of Stockholders' Equity
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1995 ............ 24,971 $ 250 $ 89,679 $ 74,011 $ 163,940
Exercise of common stock options ............ 780 8 7,691 -- 7,699
Tax benefit related to stock plans .......... -- -- 15,547 -- 15,547
Effect of two-for-one stock split ........... 25,752 257 (257) -- --
Net income for the year ended
December 31, 1996 .......................... -- -- -- 62,184 62,184
--------- --------- --------- --------- ---------
Balances as of December 31, 1996 ............ 51,503 515 112,660 136,195 249,370
Exercise of common stock options ............ 1,055 9 10,059 -- 10,068
Tax benefit related to stock plans .......... -- -- 14,545 -- 14,545
Net income for the year ended
December 31, 1997 .......................... -- -- -- 64,882 64,882
--------- --------- --------- --------- ---------
Balances as of December 31, 1997 ............ 52,558 524 137,264 201,077 338,865
Exercise of common stock options ............ 941 11 8,567 -- 8,578
Tax benefit related to stock plans .......... -- -- 5,638 -- 5,638
Functional currency adjustment .............. -- -- (199) -- (199)
Net income for the year ended
December 31, 1998 .......................... -- -- -- 46,041 46,041
--------- --------- --------- --------- ---------
Balances as of December 31, 1998 ............ 53,499 $ 535 $ 151,270 $ 247,118 $ 398,923
========= ========= ========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
-----------------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 46,041 $ 64,882 $ 62,184
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .......................................... 13,551 7,376 5,484
Deferred taxes ......................................................... (1,938) (4,144) (4,135)
Change in reserve for bad debts ........................................ 250 (150) 758
In-process research and development .................................... -- 9,400 --
Other .................................................................. (199) -- --
Changes in operating assets and liabilities:
Accounts receivable ................................................. (26,814) 10,528 (14,045)
Inventories ......................................................... 10,064 (12,786) (3,195)
Receivable from subcontract manufacturers ........................... 12,276 (5,854) (9,600)
Other current assets ................................................ (374) (4,107) (778)
Accounts payable and accrued liabilities ............................ 19,498 (2,870) 19,682
Income taxes payable ................................................ 6,749 10,220 14,919
--------- --------- ---------
Net cash provided by operating activities .............................. 79,104 72,495 71,274
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments ....................................... (327,483) (195,669) (213,919)
Sales/maturities of short-term investments ................................ 243,196 150,287 171,777
Investment in property and equipment, net ................................. (12,566) (38,530) (10,655)
Business acquired, net of cash received ................................... -- (12,626) --
Purchase of other assets .................................................. (181) (644) (236)
--------- --------- ---------
Net cash used for investing activities ................................. (97,034) (97,182) (53,033)
--------- --------- ---------
Cash flows from financing activities:
Repayment of bonds payable ................................................ (271) (132) --
Issuance of common stock .................................................. 14,216 10,068 7,699
--------- --------- ---------
Net cash provided by financing activities .............................. 13,945 9,936 7,699
--------- --------- ---------
Increase (decrease) in cash and cash equivalents .......................... (3,985) (14,751) 25,940
Cash and cash equivalents at beginning of year ............................ 57,195 71,946 46,006
--------- --------- ---------
Cash and cash equivalents at end of year .................................. $ 53,210 $ 57,195 $ 71,946
========= ========= =========
Supplemental disclosures of Cash Flow Information:
Cash paid for interest .................................................... $ 313 $ 154 $ --
Cash paid for income taxes ................................................ 11,218 30,225 23,715
Assumption of debt in conjunction with land acquisition ................... -- $ 4,467 --
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
30
<PAGE>
Electronics for Imaging, Inc.
Notes to Consolidated Financial Statements
Note 1: The Company and Its Significant Accounting Policies
The Company and Its Business
Electronics For Imaging, Inc., a Delaware corporation (the "Company"),
designs and markets products that support color and black-and-white printing on
a variety of peripheral devices. Its Fiery- products incorporate hardware and
software technologies that transform digital copiers and printers from many
leading copier manufacturers into fast, high-quality networked printers. The
Company's Fiery products include stand-alone servers, which are connected to
digital copiers and other peripheral devices, and Fiery controllers, which are
embedded in digital copiers and desktop color laser printers. The Company
operates in one industry and sells its products primarily to original equipment
manufacturers in North America, Europe and Japan. Substantially all of the
Company's revenue to date has resulted from the sale of Fiery products.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when the product is shipped, provided no significant
obligations remain and collectibility is reasonably probable. Provisions for
estimated warranty costs and potential sales returns are recorded when revenue
is recognized.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities and bonds payable as
presented in the financial statements, approximate fair value based on the
nature of these instruments and prevailing interest rates.
Concentration of Credit Risk
The Company is exposed to credit risk in the event of default by any of its
customers to the extent of amounts recorded on the consolidated balance sheet.
The Company performs ongoing evaluations of the collectibility of the accounts
receivable balances for its customers and maintains reserves for estimated
credit losses; such actual losses have been within management's expectations.
Cash, Cash Equivalents and Short-Term Investments
The Company generally invests its excess cash in deposits with major banks,
money market securities, municipal, U.S. government and corporate debt
securities. By policy, the Company invests primarily in high-grade marketable
securities. The Company is exposed to credit risk in the event of default by the
financial institutions or issuers of these investments to the extent of amounts
recorded on the consolidated balance sheet.
The Company considers all highly liquid investments, generally with a
maturity of three months or less at the time of purchase, to be cash
equivalents. The cost of these investments has generally approximated fair
value. Investments with longer maturities are classified as available-for-sale
and therefore treated as current assets. Available-for-sale securities are
stated at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity. Such unrealized gains and losses have
historically not been material.
Inventories
Inventories are stated at standard cost which approximate the lower of
actual cost using a first-in, first-out method, or market. The Company
periodically reviews its inventories for potential slow-moving or obsolete items
and writes down specific items to net realizable value as appropriate.
31
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation on assets is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to five years. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the
improvements or the lease term, if shorter.
Amortization of Intangibles
Current goodwill and other intangible assets acquired to date are being
amortized on a straight-line basis over periods ranging from 3 to 5 years.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". Under SFAS 109, deferred tax liabilities and assets are determined based
on the differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. No provision for U.S. income tax is made
for undistributed earnings of the Company's foreign subsidiaries, to the extent
it is the Company's intention to indefinitely reinvest these earnings in the
respective subsidiaries.
Foreign Currency Translation
The functional currency for all of the Company's foreign operations, except
for Japan, is the U.S. dollar. The functional currency for Japan is the Japanese
Yen. Where the U.S. dollar is the functional currency, translation adjustments
are recorded in income. Where the Japanese Yen is the functional currency,
translation adjustments are recorded as a separate component of Stockholders'
Equity. Foreign currency translation and transaction gains and losses have not
been significant in any period presented.
Accounting for Derivative Instruments and Risk Management
The Company operates internationally, giving rise to exposure to market
risk from changes in foreign exchange rates. Derivative financial instruments
are used by the Company to reduce those risks. The Company does not hold or
issue financial or derivative financial instruments for trading or speculative
purposes. The magnitude and volume of such transactions were not material for
the periods presented. As of December 31, 1998, the Company had one outstanding
forward foreign exchange contract to sell Yen equivalent to approximately $5.6
million with an expiration date of January 29, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative
Instruments and Hedging". SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities and requires,
among other things, that all derivatives be recognized as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for fiscal quarters and fiscal years
beginning after June 15, 1999. The Company is currently studying the provisions
of the SFAS 133 and the potential impact it may have on its financial
statements.
Stock Options
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". As permitted
under this standard, the Company has elected to follow Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" in
accounting for its stock options and other stock-based employee awards. Pro
forma information regarding net income and earnings per share, as calculated
under the provisions of SFAS 123, are disclosed in Note 9.
Computation of Net Income per Common Share
Net income per basic common share is computed using the weighted average
number of common shares outstanding during the period. Net income per diluted
common share is computed using the weighted average
32
<PAGE>
number of common shares and potential common shares outstanding during the
period. Potential common shares result from the assumed exercise, using the
treasury stock method, of outstanding common stock options having a dilutive
effect.
Comprehensive Income
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
twelve months period ended December 31, 1998.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information". This statement establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has adopted SFAS 131 as of fiscal year 1998. See Note 10.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilites at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2: Acquisitions
In October of 1997, the Company acquired Pipeline Associates, Inc. and
Pipeline Asia, Inc. (collectively, "Pipeline")--a leading software developer of
PostScript, HTML and PCL interpreter technologies. The acquisition cost, net of
cash received was $12.6 million and was accounted for as a purchase. The excess
of the acquisition cost over the fair market value of net tangible assets
acquired was $ 12.5 million, of which $ 9.4 million was allocated to in-process
research and development and expensed immediately. The allocation to in-process
research and development was based on an independent appraiser's valuation
report which included the value of products in the development stage not
considered to have reached technological feasibility. The balance of the excess
acquisition cost was allocated to acquired technology and trademarks--$ 2.8
million, and goodwill--$0.3 million which are being amortized over 3 and 5 years
respectively. The Pipeline acquisition was not deemed material to the Company's
financial condition or results of operations, accordingly, pro forma disclosures
associated with purchase accounting have not been provided.
33
<PAGE>
Note 3: Balance Sheet Components
December 31,
----------------------
1998 1997
-------- --------
(In thousands)
Accounts receivable:
Accounts receivable ................................ $ 58,948 $ 32,315
Less reserves and allowances ....................... (1,454) (1,385)
-------- --------
$ 57,494 $ 30,930
======== ========
Inventories:
Raw materials ...................................... $ 13,261 $ 19,216
Work in process .................................... 17 3,183
Finished goods ..................................... 448 1,391
-------- --------
$ 13,726 $ 23,790
======== ========
Other current assets:
Receivable from subcontract manufacturers .......... $ 5,366 $ 17,642
Other .............................................. 16,016 14,803
-------- --------
$ 21,382 $ 32,445
======== ========
Property and equipment:
Land ............................................... $ 27,706 $ 27,351
Equipment and purchased software ................... 44,348 34,201
Furniture and leasehold improvements ............... 7,565 7,494
-------- --------
79,619 69,046
Less accumulated depreciation and amortization ..... (33,040) (22,544)
-------- --------
$ 46,579 $ 46,502
======== ========
Accrued and other liabilities:
Accrued product-related obligations ................ $ 4,650 $ 3,040
Accrued royalty payments ........................... 8,232 7,625
Accrued compensation and benefits .................. 6,383 4,043
Other accrued liabilities .......................... 7,688 5,183
-------- --------
$ 26,953 $ 19,891
======== ========
Note 4: Marketable Securities
The following is a summary of the estimated fair value of available for
sale securities classified as short-term investments. Gross unrealized holding
gain and losses for the years ended December 31, 1998 and 1997 were not
material. Gross realized gains and losses for the years ended December 31, 1998
and 1997 were also not material (in thousands);
Cost (approximates Market Value)
1998 1997
---------- ----------
Municipal Securities ............... $218,431 $183,859
U.S. Government Securities ......... 16,457 1,677
U.S. Corporate Debt Securities ...... 34,935 --
--------- ---------
Total debt securities ............... $269,823 $185,536
========= =========
34
<PAGE>
Maturities of debt securities at market value as of December 31, 1998 are as
follows (in thousands);
1998
----------
Mature in one year or less ............ $103,366
Mature after one year through two years 106,366
Mature after two years ............... 60,091
---------
Total debt securities ............ $269,823
=========
Note 5: Long-Term Debt
Long Term Debt consists of amounts due to the City of Foster City for
certain bonds assumed by the Company during the purchase of land (see Note 6).
Principal amounts owing under the bonds are as follows:
Year ending December 31, 1998
-------------------------------
(In thousands)
Total principal ............ $4,064
Less: current portion ...... (287)
------
$3,777
======
The bonds are secured by the land and bear an annual interest rate of
approximately 7%. Interest and principal payments are due semi-annually with the
last payment occurring in June 2009. Principal payments under the bonds payable
are as follows:
Year ending
December 31, (In thousands)
------------ --------------
1999 ........................... $ 287
2000 ........................... 304
2001 ........................... 323
2002 ........................... 342
2003 ........................... 362
Thereafter ..................... 2,446
-------
Total ................... $4,064
=======
Note 6: Commitments and Contingencies
Leases
The Company currently leases its principal operating facilities under four
non-cancelable operating leases expiring between March 31, 1999 and June 30,
2000. In connection with the relocation to the new corporate campus in the first
half of 1999, the Company is in the process of entering into several sublease
agreements. Also the Company made a provision for the excess of future minimum
lease commitments over estimated minimum sublease rental income, including
vacant facilities. Rent expense was approximately $4.5 million, $3.3 million and
$2.1 million in 1998, 1997 and 1996, respectively.
35
<PAGE>
The following summarizes the future minimum lease payments under all other
non-cancelable operating lease obligations:
Fiscal Year (in millions)
------------ ------------
1999 .......................... $2.5
2000 .......................... $0.8
Thereafter .................... $0.0
-----
Total .......................... $3.3
=====
On July 18, 1997, the Company entered into an agreement to lease a
ten-story 295,000 square foot building to be constructed on 35 acres, which the
Company owns in Foster City, California. The lessor of the building has
committed to fund up to a maximum of $65.0 million for the construction of the
building, with the portion of the committed amount actually used for
construction to be determined by the Company. As of December 31, 1998, the
Company had drawn down an aggregate of $36.3 million. Rent obligations for the
building will bear a direct relationship to the carrying cost of the commitment
actually drawn down. The amount of this rent obligation is contingent upon
future events and is not included in the above future minimum lease commitments
under non-cancelable operating leases. Currently, carrying costs of funds drawn
also accrue as part of the construction cost being drawn from the commitment.
The Company currently anticipates that construction will be completed in second
quarter of 1999.
The lease associated with the Foster City building has a term of seven
years with an option to renew the lease for an additional three to five years
subject to certain conditions. In connection with the lease, the Company entered
into a lease of its land in Foster City to the lessor of the building at a
nominal rate and for a term of 34 years and 11 months. If the Company terminates
or does not negotiate an extension of its lease of the building, the ground
lease to the lessor converts to a market rate. The Company, at its option, may
purchase the building during or at the end of the terms of the lease at
approximately the amount expended by the lessor to construct the building. The
Company has guaranteed a residual value associated with the building to the
lessor of approximately 82% of the lessor's funding. If the Company defaults on
its lease, does not renew its lease, does not purchase the building or arrange
for a third party purchase of the building at the end of the lease term, it may
be liable to the lessor for the amount of the residual guarantee. The lease has
been classified as an operating lease.
As part of this agreement, the Company must maintain a minimum tangible net
worth. In addition, in order to obtain a favorable lease rate, the Company has
pledged certain securities ($44.0 million at December 31, 1998) in proportion to
the amount drawn against the commitment to be held in a custodial account as
collateral to ensure fulfillment of the obligations to the lessor under the
lease agreement. The Company may invest these funds in certain securities and
receive the full benefit of the investment. However, if the Company uses or
transfers these funds, the rent on the building would increase and the Company
would be required to comply with certain additional financial covenants.
The following summarizes the future minimum lease payments under the
non-cancelable operating lease obligations related to the new building based on
an estimated principal balance, current market interest rates and pricing under
collateralized assumptions:
Fiscal Year (in millions)
----------- ------------
1999 ................................ $ 1.9
2000 ................................ 3.2
2001 ................................ 3.2
2002 ................................ 3.2
2003 ................................ 3.2
Thereafter .......................... 1.9
------
Total ................................ $16.6
======
Note: Operating lease does not go into effect until approximately mid 1999.
Amounts above have been estimated.
36
<PAGE>
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.
Note 7: Income Taxes
The provision for income taxes is summarized as follows:
Years ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ------------
(In thousands)
Current:
U.S. Federal .................. $19,881 $34,623 $ 32,309
State ........................ 3,678 5,744 6,186
Foreign ........................ 46 272 620
-------- -------- --------
Total current ......... 23,605 40,639 39,115
-------- -------- --------
Deferred:
U.S. Federal .................. (2,176) (3,327) (3,203)
State ........................ 238 (817) (932)
Foreign ........................ 0 0 0
-------- -------- --------
Total deferred ......... (1,938) (4,144) (4,135)
======== ======== ========
Total provision for income taxes ...... $21,667 $36,495 $ 34,980
======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
assets are as follows:
December 31,
---------------------
1998 1997
--------- ---------
(In thousands)
Depreciation ................... $ 1,175 $ 1,007
Reserves and accruals .......... 7,964 5,795
State taxes payable ............. 672 1,140
Deferred revenue ................ 631 1,466
Intangibles ................... 3,803 3,777
Other ......................... 1,428 550
-------- --------
Total deferred tax assets ...... $15,673 $13,735
======== ========
37
<PAGE>
<TABLE>
A reconciliation between the income tax provision computed at the federal
statutory rate and the actual tax provision is as follows:
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
(In thousands)
$ % $ % $ %
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax expense at federal statutory rate ...... $23,698 35.0 $35,482 35.0 $34,007 35.0
State income taxes, net of federal benefit 2,999 4.4 3,203 3.2 3,415 3.5
Tax-exempt interest income .................. (2,717) (4.0) (2,245) (2.2) (2,099) (2.2)
Tax credits ................................. (1,874) (2.8) (1,091) (1.1) (501) (0.5)
Other ....................................... (439) (0.6) 1,146 1.1 158 0.2
-------- ----- -------- ----- -------- -----
$21,667 32.0 $36,495 36.0 $34,980 36.0
======== ===== ======== ===== ======== =====
</TABLE>
Income before income taxes includes $3.2 million, $1.0 million and $0.8
million of income relating to non- U.S. operations for 1998, 1997 and 1996,
respectively.
Note 8: Earnings Per Share
<TABLE>
The following table presents a reconciliation of basic and diluted earnings
per share for the three years ended December 31, 1998:
<CAPTION>
Years ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Net income available to common shareholders ...... $46,041 $64,882 $62,184
Shares
Basic shares ................................. 53,029 52,359 50,672
Effect of Dilutive Securities .................. 1,452 3,839 4,156
-------- -------- --------
Diluted shares .................................... 54,481 56,198 54,828
Earnings per common share
Basic EPS .................................... $ 0.87 $ 1.24 $ 1.23
Diluted EPS .................................... $ 0.85 $ 1.15 $ 1.13
</TABLE>
Antidilutive Options. Options to purchase 2,737,629, 585,529 and 95,625
shares of common stock outstanding as of December 31, 1998, 1997, and 1996,
respectively, were not included in the computations of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the years then ended.
38
<PAGE>
Note 9: Stock Compensation Plans
<TABLE>
As of December 31, 1998, the Company has two stock-based compensation
plans, described below. The Company applies APB 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for options
granted in 1998, 1997 and 1996 under the Company's option plans been determined
based on the fair value at the grant dates as prescribed by SFAS 123, the
Company's net income and pro forma net income per share would have been as
follows:
<CAPTION>
Years ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income .................. As reported $46,041 $64,882 $62,184
Pro forma $33,570 $52,015 $58,304
Earnings per basic .......... As reported $ 0.87 $ 1.24 $ 1.23
common share ................ Pro forma $ 0.63 $ 0.99 $ 1.15
Earnings per diluted ........ As reported $ 0.85 $ 1.15 $ 1.13
common share ................ Pro forma $ 0.62 $ 0.93 $ 1.06
</TABLE>
Under the Company's 1989 and 1990 Stock Plans (the Plans), the Company may
grant options to employees, directors and consultants for up to 20.5 million
shares of common stock. Under the Plans, the exercise price of each option
equals the market price of the Company's stock on the date of grant and an
option's maximum term is 10 years. Options are granted periodically throughout
the year and generally vest ratably over four years. At December 31, 1998,
approximately 2.5 million shares were available for future grants.
<TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, the attribution method with respect to
graded vesting and the following weighted-average assumptions:
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1998 1997 1996
Black Scholes Assumptions & Fair Value ---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected Volatility ................................. 76.0 % 69.0 % 48.0 %
Dividend Yield ....................................... 0.0 % 0.0 % 0.0 %
Risk Free Interest Rate .............................. 4.49% to 4.65% 5.35% to 5.83% 5.68% to 6.71%
Weighted Average Expected Option Term ............... 4.4 years 5.2 years 4.3 years
Weighted Average Fair Value of Options Granted ...... $6.97 $25.22 $9.42
</TABLE>
<TABLE>
A summary of the status of the Company's stock option activity is presented
below:
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------------ ------------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- ----------- ---------- ----------- ----------
(In thousands, except exercise price)
<S> <C> <C> <C> <C> <C> <C>
Beginning of Year ...... 6,342 $ 21.84 6,085 $ 13.19 6,338 $ 7.34
Granted ............... 1,919 16.05 1,613 47.14 1,950 25.80
Exercised ............... (941) 9.20 (1,055) 9.51 (1,560) 4.89
Forfeited ............... (630) 31.16 (301) 25.70 (643) 13.86
----- ------- -------
End of Year ............ 6,690 $ 21.09 6,342 $ 21.84 6,085 $13.19
----- ------- -------
</TABLE>
39
<PAGE>
<TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------ ---------------- ---------------- ---------------- ---------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$0.01 to $5.00 ......... 1,052 4.39 $ 3.28 1,052 $ 3.28
$5.63 to $9.97 ......... 434 5.89 $ 6.42 382 $ 6.07
$10.75 to $12.81 ....... 801 6.51 $12.78 500 $12.78
$13.25 to $19.25 ....... 1,721 8.93 $15.47 328 $16.01
$19.38 to $25.63 ....... 1,073 7.67 $24.88 455 $25.13
$26.81 to $47.25 ...... 1,339 8.34 $42.60 388 $41.65
$47.56 to $55.13 ....... 270 8.70 $52.62 71 $52.59
------ ------
$0.01 to $55.13 ........ 6,690 7.40 $21.09 3,176 $15.35
====== ======
</TABLE>
Note 10: Information Concerning Business Segments and Major Customers
Information about Products and Services
The Company operates in one single industry segment, technology for
high-quality printing in short production runs. The Company does not have
separate operating segments for which discrete financial statements are
prepared. The Company's management makes operating decisions and assesses
performance based on primarily product revenues and related gross margins.
<TABLE>
The following is a breakdown of revenues for the years ended December 31,
1998, 1997 and 1996 by product category:
<CAPTION>
1998 1997 1996
Revenue Revenue Revenue
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Revenue
Stand-alone Servers Connecting to Digital Color Copiers ...... $282,081 $290,347 $252,041
Embedded Desktop Controllers,
Bundled Color Solutions & Chipset Solutions .................. 90,133 34,133 25,465
Controllers for Digital Black and White Solutions ............ 19,196 -- --
Spares, Licensing & Other misc. sources ..................... 39,313 36,151 20,507
--------- --------- ---------
Total Revenue ............................................. $430,723 $360,631 $298,013
========= ========= =========
</TABLE>
40
<PAGE>
Information about Geographic Areas
Except for Japan, all of the Company's sales are originated in the United
States. 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. As a result of these factors, the Company believes that sales to
certain geographic locations might be higher or lower, though accurate data is
difficult to obtain.
The following is a breakdown of revenues by shipment destination for the
years ended 1998, 1997 and 1996, respectively:
Years ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
United States ...... $198,467 $167,972 $149,055
Netherlands ......... 79,878 62,017 35,224
Japan ............... 68,760 63,353 62,568
Rest of World ...... 83,618 67,289 51,166
--------- --------- ---------
$430,723 $360,631 $298,013
========= ========= =========
Information about Major Customers
Two customers accounted for approximately 36% and 23% of revenue in 1998.
Three customers accounted for approximately 44%, 27% and 14% of revenue in 1997
and 47%, 23% and 12% of revenue in 1996, respectively. Three customers, with
accounts receivable balances greater than 10%, accounted for approximately 69%
and 85% of the accounts receivable balance as of December 31, 1998 and December
31, 1997, respectively. Four customers, with accounts receivable balances
greater than 10%, accounted for approximately 84% of the accounts receivable
balance as of December 31, 1996.
41
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Electronics For Imaging, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Electronics For Imaging, Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 20, 1999
42
<PAGE>
Quarterly Consolidated Financial Information
<TABLE>
The following table presents the Company's operating results for each of
the eight quarters in the two-year period ended December 31, 1998. The
information for each of these quarters is unaudited but has been prepared on the
same basis as the audited consolidated financial statements appearing elsewhere
in this Annual Report. In the opinion of management, all necessary adjustments
(consisting only of normal recurring adjustments) have been included to present
fairly the unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto appearing
in this Annual Report. These operating results are not necessarily indicative of
the results for any future period.
<CAPTION>
Q1 Q2 Q3 Q4
1998: --------- --------- ---------- ----------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue ................................. $82,523 $96,157 $125,327 $126,716
Gross profit .............................. 37,167 41,179 53,891 56,390
Income from operations .................. 4,300 9,260 20,900 23,580
Net income .............................. 4,173 6,943 16,503 18,422
Net income per basic common share ......... 0.08 0.13 0.31 0.35
Net income per diluted common share ...... $ 0.08 $ 0.13 $ 0.31 $ 0.34
Q1 Q2 Q3 Q4
1997: --------- --------- ---------- ----------
Revenue ................................... $91,006 $100,633 $107,323 $ 61,669
Gross profit ............................. 49,913 55,226 59,028 32,509
Income (loss) from operations ........... 29,356 32,633 34,842 (5,635)
Net income (loss) ....................... 20,428 22,609 23,914 (2,069)
Net income (loss) per basic common share .. 0.40 0.44 0.46 (0.04)
Net income (loss) per diluted common share . $ 0.37 $ 0.41 $ 0.43 $ (0.04)
</TABLE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by reference
from the information contained under the caption "Election of Directors" in the
Company's 1999 Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders. Information regarding current executive officers of the Registrant
is incorporated by reference from information contained under the caption
"Executive Officers" in the Company's 1999 Proxy Statement. Information
regarding Section 16 reporting compliance is incorporated by reference from
information contained under the caption "Section 16 (a) Beneficial Ownership
Reporting Compliance" in the Company's 1999 Proxy Statement.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation" in the
Company's 1999 Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information contained under the caption "Security Ownership" in the Company's
1999 Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation" in the
Company's 1999 Proxy Statement.
43
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Form 10-K
(1) Index to Financial Statements
The Financial Statements required by this item are submitted in Item 8 of
this report as follows:
Report of Independent Accountants.
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Income for the three years ended December
31, 1998
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1998
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998
Notes to Consolidated Financial Statements
(2) Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Report of Independent Accountants on Financial Statement Schedule
(All other schedules are omitted because of the absence of conditions under
which they are required or because the necessary information is provided in
the consolidated financial statements or notes thereto.)
(3) Exhibits
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Bylaws as amended.(1)
4.1 See Exhibit 3.1
4.2 Specimen Common Stock certificate of the Company.(1)
10.1 Agreement of Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust for the Company's
new executive office in San Mateo, California.(1)
10.2 First Addendum to Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust.(1)
10.3+ License Agreement, dated as of February 9, 1990, between the Company
and the Massachusetts Institute of Technology.(1)
10.4 Amendment to License Agreement dated December 31, 1990, between the
Company and the Massachusetts Institute of Technology.(1)
10.5 Amendment to License Agreement dated May 29, 1991 and March 19, 1991,
by and between the Company and the Massachusetts Institute of
Technology.(1)
10.6+ Third Amendment to License Agreement dated June 1, 1992, by and
between the Company and the Massachusetts Institute of Technology.(1)
10.7+ Patent Sublicense Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.8+ Know-How License Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.9+ License Agreement, dated as of January 11, 1991, by and between the
Company and Eastman Kodak Company, as amended March 10, 1992.(1)
10.10+ License Agreement, dated March 1, 1991, by and between the Company and
Adobe Systems Incorporated, as amended May 22, 1991.(1)
10.11+ Custom PostScript Interpreter OEM License Agreement, dated as of March
1, 1991, by and between the Company and Adobe Systems Incorporated.(1)
10.12+ Agreement dated September 6, 1991, by and between the Company and
Xerox Corporation.(1)
10.13+ Patent License Agreement dated December 12, 1991, by and between the
Company and Xerox Corporation.(1)
44
<PAGE>
Exhibit
No. Description
------- -----------
10.14+ Patent License Agreement dated January 29, 1992, by and between the
Company and Minolta Camera Co., Ltd.(1)
10.15 License Agreement dated December 3, 1991, by and between the Company
and Scitex Corporation Ltd.(1)
10.16+ Patent License Agreement dated June 11, 1992, by and between the
Company and Victor Company of Japan.(1)
10.17+ License Agreement dated May 2, 1991, by and between the Company and
Pantone, Inc.(1)
10.18 Advisory Agreement, dated May 25, 1989, between the Company and
William F. Schreiber.(1)
10.19** 1989 Stock Plan of the Company.(1)
10.20** 1990 Stock Plan of the Company.(1)
10.21** Form of Indemnification Agreement.(1)
10.22+ Patent License Agreement dated May 28, 1991, by and between the
Company and Canon Inc.(1)
10.23** Employment Agreement dated July 17, 1995, by and between Dan Avida and
the Company.(3)
10.24** Employment Agreement dated July 17, 1995, by and between Jeff Lenches
and the Company.(3)
10.25** Employment Agreement dated July 17, 1995, by and between Fred
Rosenzweig and the Company.(3)
10.26** Employment Agreement dated October 15, 1995, by and between Eric
Saltzman and the Company.(3)
10.27** Master Lease and Open End Mortgages dated as of July 18, 1997 by and
between the Company and FBTC Leasing Corp. for the lease financing of
the Company's corporate headquarters building to be built in Foster
City, California.(4)
21.1 List of Subsidiaries.(1)
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see signature page)
- ------------
** Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 14 (c) of Form 10-K.
+ The Company has received confidential treatment with respect to portions of
these documents.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-50966) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 33-57382) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 (File No. 0-18805) and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (File No. 0-18805) and incorporated herein by
reference.
(b) Reports on Form 8-K
None filed during the quarter ended December 31, 1998.
(c) List of Exhibits
See Item 14 (a).
(d) Consolidated Financial Statement Schedule II for the years ended December
31, 1995, 1996 and 1997, respectively.
See Page 46 of this Annual Report on Form 10-K.
45
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
Schedule II
Valuation and Qualifying Accounts
<CAPTION>
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
----------- --------- -------- -------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Allowance for doubtful accounts and
sales-related reserves ................................. $1,385 $250 $ -- $ (181) $1,454
====== ==== ======= ====== ======
Year Ended December 31, 1997
Allowance for doubtful accounts and
sales-related reserves ................................. $1,912 $-- $ (150) $ (377) $1,385
====== ==== ======= ====== ======
Year Ended December 31, 1996
Allowance for doubtful accounts and
sales-related reserves ................................. $1,570 $ 56 $ 702 $ (416) $1,912
====== ==== ======= ====== ======
</TABLE>
46
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Electronics for Imaging, Inc.
Our audits of the consolidated financial statement referred to in our report
dated January 20, 1999 appearing in this Form 10-K also included an audit of the
Consolidated Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, the Consolidated Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 20, 1999
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELECTRONICS FOR IMAGING, INC.
March 18, 1999
By: /s/ DAN AVIDA
-------------------------------------
Dan Avida
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Dan Avida and Eric Saltzman jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Form 10-K Annual
Report, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue thereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<CAPTION>
Signature Title Date
- ---------------------------- ----------------------------------------------- ----------------
<S> <C> <C>
/s/ DAN AVIDA President, Chief Executive Officer and March 18, 1999
- ----------------------------- Director (Principal Executive Officer)
Dan Avida
/s/ ERIC SALTZMAN Chief Financial Officer March 18, 1999
- ----------------------------- (Principal Financial and Accounting Officer)
Eric Saltzman Officer)
/s/ EFRAIM ARAZI Chairman of the Board March 18, 1999
- -----------------------------
Efraim Arazi
/s/ GILL COGAN Director March 18, 1999
- -----------------------------
Gill Cogan
/s/ JEAN-LOUIS GASSEE Director March 18, 1999
- -----------------------------
Jean-Louis Gassee
/s/ DAN MAYDAN Director March 18, 1999
- -----------------------------
Dan Maydan
/s/ THOMAS UNTERBERG Director March 18, 1999
- -----------------------------
Thomas Unterberg
</TABLE>
48
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Bylaws as amended.(1)
4.1 See Exhibit 3.1
4.2 Specimen Common Stock certificate of the Company.(1)
10.1 Agreement of Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust for the Company's
new executive office in San Mateo, California.(1)
10.2 First Addendum to Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust.(1)
10.3+ License Agreement, dated as of February 9, 1990, between the Company
and the Massachusetts Institute of Technology.(1)
10.4 Amendment to License Agreement dated December 31, 1990, between the
Company and the Massachusetts Institute of Technology.(1)
10.5 Amendment to License Agreement dated May 29, 1991 and March 19, 1991,
by and between the Company and the Massachusetts Institute of
Technology.(1)
10.6+ Third Amendment to License Agreement dated June 1, 1992, by and
between the Company and the Massachusetts Institute of Technology.(1)
10.7+ Patent Sublicense Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.8+ Know-How License Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.9+ License Agreement, dated as of January 11, 1991, by and between the
Company and Eastman Kodak Company, as amended March 10, 1992.(1)
10.10+ License Agreement, dated March 1, 1991, by and between the Company and
Adobe Systems Incorporated, as amended May 22, 1991.(1)
10.11+ Custom PostScript Interpreter OEM License Agreement, dated as of March
1, 1991, by and between the Company and Adobe Systems Incorporated.(1)
10.12+ Agreement dated September 6, 1991, by and between the Company and
Xerox Corporation.(1) 10.13+ Patent License Agreement dated December
12, 1991, by and between the Company and Xerox Corporation.(1)
10.14+ Patent License Agreement dated January 29, 1992, by and between the
Company and Minolta Camera Co., Ltd.(1)
10.15 License Agreement dated December 3, 1991, by and between the Company
and Scitex Corporation Ltd.(1)
10.16+ Patent License Agreement dated June 11, 1992, by and between the
Company and Victor Company of Japan.(1)
10.17+ License Agreement dated May 2, 1991, by and between the Company and
Pantone, Inc.(1)
10.18 Advisory Agreement, dated May 25, 1989, between the Company and
William F. Schreiber.(1)
10.19** 1989 Stock Plan of the Company.(1)
10.20** 1990 Stock Plan of the Company.(1)
10.21** Form of Indemnification Agreement.(1)
10.22+ Patent License Agreement dated May 28, 1991, by and between the
Company and Canon Inc.(1)
10.23** Employment Agreement dated July 17, 1995, by and between Dan Avida and
the Company.(3)
10.24** Employment Agreement dated July 17, 1995, by and between Jeff Lenches
and the Company.(3)
<PAGE>
Exhibit
No. Description
------- -----------
10.25** Employment Agreement dated July 17, 1995, by and between Fred
Rosenzweig and the Company.(3)
10.26** Employment Agreement dated October 15, 1995, by and between Eric
Saltzman and the Company.(3)
10.27** Master Lease and Open End Mortgages dated as of July 18, 1997 by and
between the Company and FBTC Leasing Corp. for the lease financing of
the Company's corporate headquarters building to be built in Foster
City, California.(4)
21.1 List of Subsidiaries.(1)
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see signature page)
27 Financial Data Schedule
- ------------
** Items that are management contracts or compensatory plans or arrangements
required to be filed as exhibits pursuant to Item 14 (c) of Form 10-K.
+ The Company has received confidential treatment with respect to portions of
these documents.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-50966) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 33-57382) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 (File No. 0-18805) and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (File No. 0-18805) and incorporated herein by
reference.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 33-56422, 33-80523, 33-85762, 33-93602 and
333-11685) of Electronics for Imaging, Inc. of our report dated January 20, 1999
appearing in this Form 10-K. We also consent to the incorporation by reference
of our report on the Consolidated Financial Statement Schedule, which also
appears in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 12, 1999
49
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed balance sheet, condensed statement of operations and condensed
statement of cash flows included in the Company's Form 10-K for the year ended
December 31, 1998 and is qualified in its entirety by reference to such
financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 53,210
<SECURITIES> 269,823
<RECEIVABLES> 58,948
<ALLOWANCES> 1,454
<INVENTORY> 13,726
<CURRENT-ASSETS> 415,635
<PP&E> 79,619
<DEPRECIATION> 33,040
<TOTAL-ASSETS> 472,032
<CURRENT-LIABILITIES> 69,332
<BONDS> 3,777
0
0
<COMMON> 535
<OTHER-SE> 398,388
<TOTAL-LIABILITY-AND-EQUITY> 398,923
<SALES> 430,723
<TOTAL-REVENUES> 430,723
<CGS> 242,096
<TOTAL-COSTS> 242,096
<OTHER-EXPENSES> 130,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 67,708
<INCOME-TAX> 21,667
<INCOME-CONTINUING> 46,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,041
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.85
</TABLE>
