UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-18805
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Velocity Way, Foster City, CA 94404
(Address of principal executive offices, including zip code)
(650) 357 - 3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
The number of shares of Common Stock outstanding as of Apri1 30, 2000 was
56,138,710.
An Exhibit Index can be found on Page 25.
<PAGE>
ELECTRONICS FOR IMAGING, INC.
INDEX
Page No.
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
Three Months Ended March 31, 2000 and 1999...............3
Condensed Consolidated Statements of Income
March 31, 2000 and December 31, 1999 ....................4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999...............5
Notes to Condensed Consolidated Financial Statements .........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......22
PART II - Other Information
Item 1. Legal Proceedings ...............................................23
Item 2. Changes in Securities and Use of Proceeds .......................23
Item 3. Defaults Upon Senior Securities .................................23
Item 4. Submission of Matters to a Vote of Security Holders..............23
Item 5. Other Information ...............................................23
Item 6. Exhibits and Reports on Form 8-K ................................23
Signatures ..................................................................24
2
<PAGE>
PART I Financial Information
ITEM 1. Condensed Consolidated Financial Statements
<TABLE>
Electronics for Imaging, Inc.
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
March 31, December 31,
(In thousands, except share and per share amounts) 2000 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 138,644 $ 163,824
Short-term investments 355,161 306,504
Accounts receivable, net 93,805 81,904
Inventories 12,723 11,878
Other current assets 29,504 24,902
- -----------------------------------------------------------------------------------------------------
Total current assets 629,837 589,012
- -----------------------------------------------------------------------------------------------------
Property and equipment, net 50,340 49,776
Other assets 16,664 17,287
- -----------------------------------------------------------------------------------------------------
Total assets $ 696,841 $ 656,075
- -----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 48,653 47,102
Accrued and other liabilities 29,623 29,771
Income taxes payable 25,119 24,548
- -----------------------------------------------------------------------------------------------------
Total current liabilities 103,395 101,421
- -----------------------------------------------------------------------------------------------------
Long - term obligations, less current portion 3,467 3,467
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued and outstanding -- --
Commonstock, $.01 par value; 150,000,000 shares
authorized; 56,119,265 and 55,722,214 shares issued and
outstanding, respectively 561 557
Additional paid-in capital 214,272 200,907
Retained earnings 375,146 349,723
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 589,979 551,187
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 696,841 $ 656,075
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
Electronics for Imaging, Inc.
Consolidated Statements of Income
(unaudited)
Three Months
Ended March 31,
(In thousands, except per share amounts) 2000 1999
- --------------------------------------------------------------------------------
Revenue $ 151,515 $ 124,204
Cost of revenue 77,903 65,549
- --------------------------------------------------------------------------------
Gross profit 73,612 58,655
- --------------------------------------------------------------------------------
Operating expenses:
Research and development 19,778 16,953
Sales and marketing 16,355 14,802
General and administrative 5,035 4,206
--------- ---------
Total operating expenses 41,168 35,961
- --------------------------------------------------------------------------------
Income from operations 32,444 22,694
- --------------------------------------------------------------------------------
Other income, net 5,501 3,475
--------- ---------
Income before income taxes 37,945 26,169
Provision for income taxes (12,522) (8,883)
- --------------------------------------------------------------------------------
Net income $ 25,423 $ 17,286
- --------------------------------------------------------------------------------
Net income per basic common share $ 0.45 $ 0.32
Shares used in per-share calculation 55,921 54,140
Net income per diluted common share $ 0.44 $ 0.31
Shares used in per-share calculation 58,202 56,028
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
Three Months
Ended March 31,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,423 $ 17,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,116 3,470
Change in reserve for bad debts 156 (26)
Other (6) (32)
Changes in operating assets and liabilities:
Accounts receivable (12,057) (8,428)
Inventories (845) 3,600
Receivable from subcontract manufacturers (2,422) 702
Other current assets 429 411
Accounts payable and accrued liabilities 1,074 5,866
Income taxes payable 3,471 8,345
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 19,339 31,194
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases and sales / maturities of short-term investments, net (48,782) 8,643
Investment in property and equipment, net (4,371) (2,866)
Purchase of other assets 314 11
- -----------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (52,839) 5,788
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term obligations (224) (44)
Issuance of common stock 8,544 4,962
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 8,320 4,918
- -----------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (25,180) 41,900
Cash and cash equivalents at beginning of year 163,824 58,909
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 138,644 $ 100,809
- -----------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
Electronics for Imaging, Inc.
Notes to unaudited Consolidated Financial Statements
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements of Electronics
for Imaging, Inc., a Delaware corporation (the "Company"), as of and for the
interim period ended March 31, 2000, have been prepared on the same basis as the
audited consolidated financial statements as of and for the year ended December
31, 1999, contained in the Company's Annual Report to Stockholders. All periods
presented have been restated to include the financial results of the company
formerly known as Management Graphics Inc. that was acquired by the Company on
August 31, 1999 in a pooling of interests transaction as if the acquired entity
was a wholly-owned subsidiary of the Company since inception. In the opinion of
management, the unaudited interim condensed consolidated financial statements of
the Company, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position of the Company
and the results of its operations and cash flows, in accordance with generally
accepted accounting principles. The interim condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements referred to above and notes thereto.
The preparation of the interim condensed consolidated financial statements in
conformity with generally accepted accounting principles for such financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the interim condensed consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
The interim results of the Company are subject to fluctuation. As a result, the
Company believes the results of operations for the interim periods ended March
31, 2000 are not necessarily indicative of the results to be expected for any
other interim period or the full year.
2. Accounting for Derivative Instruments and Hedging
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 (SFAS 133) "Accounting for
Derivative Instruments and Hedging". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires, among other things, that all derivatives be recognized as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments
and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133".
SFAS 133, as amended by SFAS 137, is effective for fiscal years beginning after
June 15, 2000. The Company is currently studying the provisions of the SFAS 133
and the potential impact it may have on its financial statements.
6
<PAGE>
3. Earnings Per Share
The following table represents unaudited disclosures of basic and diluted
earnings per share for the periods presented below:
Three Months Ended March 31,
(In thousands, unaudited) 2000 1999
- --------------------------------------------------------------------------------
Net income available to common shareholders $25,423 $17,286
Shares
Basic shares 55,921 54,140
Effect of Dilutive Securities 2,281 1,888
------- -------
Diluted shares 58,202 56,028
- --------------------------------------------------------------------------------
Earnings per common share
Basic EPS $ 0.45 $ 0.32
Diluted EPS $ 0.44 $ 0.31
- --------------------------------------------------------------------------------
7
<PAGE>
4. Balance Sheet Components
March 31,
(In thousands, unaudited) 2000 1999
- --------------------------------------------------------------------------------
Accounts receivable:
Accounts receivable $ 95,227 $ 83,170
Less reserves and allowances (1,422) (1,266)
--------- ---------
$ 93,805 $ 81,904
- --------------------------------------------------------------------------------
Inventories:
Raw materials $ 10,316 $ 10,844
Work in process 25 33
Finished goods 2,382 1,001
--------- ---------
$ 12,723 $ 11,878
- --------------------------------------------------------------------------------
Other current assets:
Receivable from subcontract manufacturers $ 7,164 $ 4,742
Deferred income taxes, current portion 17,381 14,772
Other 4,959 5,388
--------- ---------
$ 29,504 $ 24,902
- --------------------------------------------------------------------------------
Property and equipment:
Land and land improvements $ 28,740 $ 27,681
Equipment and purchased software 61,568 59,499
Furniture and leasehold improvements 14,108 13,261
--------- ---------
104,416 100,441
Less accumulated depreciation and amortization (54,076) (50,665)
--------- ---------
$ 50,340 $ 49,776
- --------------------------------------------------------------------------------
Other assets:
Deferred income taxes, non-current portion $ 14,915 $ 14,915
Other 1,749 2,372
--------- ---------
$ 16,664 $ 17,287
- --------------------------------------------------------------------------------
Accrued and other liabilities:
Accrued product-related obligations $ 7,207 $ 7,809
Accrued royalty payments 7,944 7,327
Accrued compensation and benefits 7,587 7,263
Other accrued liabilities 6,885 7,372
--------- ---------
$ 29,623 $ 29,771
- --------------------------------------------------------------------------------
8
<PAGE>
5. 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 15, 1997, and the United States
District Court for the Northern District of California on December 31, 1997 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. 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.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis and the audited consolidated financial
statements of Electronics for Imaging, Inc. (the "Company") and related notes
thereto contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. All periods presented have been restated to include the
financial results of the company formerly known as Management Graphics Inc. that
was acquired by the Company on August 31, 1999 in a pooling of interests
transaction as if the acquired entity was a wholly-owned subsidiary of
Electronics For Imaging, Inc. since inception. Results for the three months
ended March 31, 2000 are not necessarily indicative of the results expected for
the entire fiscal year ended December 31, 2000. All assumptions, anticipations,
expectations and forecasts contained herein are forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed here. For a more complete discussion of factors
which might impact the Company's results, please see the section entitled
"Factors that Could Adversely Affect Performance" below and in the Company's
1999 Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission.
Results of Operations
Revenue
Revenue increased by 22% to $151.5 million in the three month period ended March
31, 2000, compared to $124.2 million in the three month period ended March 31,
1999. The corresponding unit volume increased by 30%. 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 following new
product introductions and a decline in average selling prices due to changes in
product mix.
The Company's revenue is principally derived from three major categories. The
first category is made up of stand-alone servers which connect digital color
copiers with computer networks. This category includes the Fiery X2, X4, ZX and
Z4 products and accounted for a majority of the Company's revenue prior to 1998.
The second category consists of embedded desktop controllers, bundled color
solutions and chipsets primarily for the office market. The third category
consists of controllers for digital black and white products.
10
<PAGE>
<TABLE>
The following is a break-down of categories by revenue, both in terms of
absolute dollars and as a percentage (%) of total revenue. Also shown is volume
as a percentage (%) of total units shipped.
<CAPTION>
Revenue Three Months Ended Three Months Ended
(in thousands) March 31, 2000 March 31, 1999 % change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stand-alone Servers Connecting
to Digital Color Copiers $ 73,747 49% $ 62,221 50% 19%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 33,214 22% 31,664 25% 5%
Controllers for Digital
Black and White Solutions 26,828 18% 16,794 14% 60%
Spares, Licensing
& Other misc. sources 17,726 11% 13,525 11% 31%
- ---------------------------------------------------------------------------------------------
Total Revenue $151,515 100% $124,204 100% 22%
- ---------------------------------------------------------------------------------------------
</TABLE>
Three Months Ended Three Months Ended
Volume March 31, 2000 March 31, 1999
- --------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers 21% 16%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 50% 58%
Controllers for Digital
Black and White Solutions 29% 26%
Spares, Licensing
& Other misc. sources -- --
- --------------------------------------------------------------------------------
Total Volume 100% 100%
- --------------------------------------------------------------------------------
Growth in revenue for the three months ended March 31, 2000 primarily took place
in the category of stand-alone servers connecting to digital color copiers and
in the category of controllers for digital black and white solutions.
The category of stand-alone servers connecting to digital color copiers made up
49% of total revenue and 20% of total unit volume for the three month period
ended March 31, 2000. For the same period a year ago, it made up 50% of total
revenue and 16% of total unit volume. The products in this category continue to
offer higher margins relative to the other product lines. The desktop product
category made up 22% of total revenue and 48% of total unit volume in the first
quarter of 2000. It made up 25% of total revenue and 58% of total unit volume in
the first quarter of 1999. 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 but significantly higher per unit margins compared to the
traditional stand-alone server line of products. The black and white product
category made up 18% of total revenue and 28% of total unit volume in the three
month period ended March 31, 2000. In the three month period ended March 31,
1999, it made up 14% of total revenue and 26% of total unit volume. This product
category also can be characterized by much higher
11
<PAGE>
unit volumes and lower unit prices and associated margins than the Company has
experienced in its more traditional stand-alone server line of products. To the
extent these categories do not grow over time in absolute terms, or if the
Company is not able to meet demand for higher unit volumes, it could have a
material adverse effect on the Company's operating results. There can be no
assurance that any new products for 2000 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 will 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 result from price reductions with an increased volume of sales, its
results of operations could be adversely affected. In addition, if the Company's
revenue in the future depends more upon sales of products with relatively lower
gross margins than the Company obtained in the first quarter of 2000 (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.
Shipments by geographic area for the three months period ended March 31, 2000
and March 31, 1999 were as follows:
Three Months ended March 31, % change
Q1 2000
over
(In thousands) 2000 1999 Q1 1999
- -------------------------------------------------------------------------------
North America $73,935 49% $56,784 46% 30%
Europe 52,849 35% 42,690 34% 24%
Japan 18,727 12% 22,175 18% (16)%
Rest of World 6,004 4% 2,555 2% 135%
- -------------------------------------------------------------------------------
$151,515 100% $124,204 100% 22%
- -------------------------------------------------------------------------------
Shipments to each geographic area increased significantly in all areas except
for Japan. The Rest of World, North America and Europe experienced an increase
of 135%, 30% and 24% for the three month period ended March 31, 2000 compared to
the three month period ended March 31, 1999. The Rest of World region is
predominantly represented by the Southeast Asian countries and the significant
increase from the prior year first quarter is a reflection of the successful
introduction of new products. Japan experienced a decrease of 16% for the three
month period ended March 31, 2000 compared to the three months period ended
March 31, 1999, which the Company believes is due to difficult economic
conditions that primarily changed the product mix, shifting more sales to lower
priced units. Changes in worldwide economic conditions may have an adverse
impact on the Company's results of operations in the future.
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, Encad, Epson, Fuji-Xerox, Hewlett-Packard, Kodak/Danka Business Systems,
Konica, Lanier, Minolta, Oce, Ricoh, Sharp, Toshiba, Xerox and others. During
2000, the Company has continued to work on both increasing the number of OEM
partners, and expanding the size of existing relationships with OEM partners.
The Company relied on three OEM customers, Canon, Xerox and Ricoh for 68% of its
revenue in the aggregate for the three month period ended March 31, 2000 and
Canon, Xerox and Minolta for 68% of its revenue for the three month period ended
March 31,1999. 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.
During the first quarter of 2000, the Company launched the Velocity brand of
software products as well as announced the launch of the professional services
business. The Company continues to work on the development of products utilizing
both the Fiery architecture and other products and services and intends to
continue to introduce new generations of Fiery products and other new
12
<PAGE>
product lines and services with current and new OEM's in 2000 and beyond. No
assurance can be given that the introduction or market acceptance of new,
current or future products or services will be successful.
Cost of Revenue
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 directly sources processors,
memory, certain ASICs, and software licensed from various sources, including
PostScript interpreter software, which the Company licenses from Adobe Systems,
Inc.
Included in cost of revenue as well as operating expenses for the three month
period ended March 31, 1999 are one-time costs of moving to the Company's new
corporate headquarters in Foster City, California. Total moving costs for the
three month period March 31, 1999 amounted to $1.8 million of which
approximately $0.2 million related to cost of revenue.
Gross Margins
The Company's gross margins were 49% and 47% for the three month periods ended
March 31, 2000 and March 31, 1999, respectively. The increase in gross margin
was attributable to volume driven economies of scale as well as increased
outsourcing of manufacturing operations to lower cost subcontract manufacturers.
The Company expects that sales of products with relatively lower margins may
increase as a percentage of revenue. Such products include embedded products for
both desktop printers and copiers, embedded controllers for black-and-white
copiers and older products for which prices are reduced during product
transitions. If such sales increase as a percentage of the Company's revenue,
gross margins may decline. In addition, 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 and therefore the Company's ability to maintain current
gross margins may not continue.
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, Processors and Postscript interpreter
software), third party manufacturing costs, product, channel and geographic mix,
the success of the Company's product transitions and new products, competition,
and general economic conditions in the United States and abroad. Consequently,
the Company anticipates gross margins will fluctuate from period to period.
Operating Expenses
Operating expenses increased by 14% in the three month period ended March 31,
2000 compared to the three month period ended March 31, 1999. Operating expenses
as a percentage of revenue amounted to 27% and 29% for the three month periods
ended March 31, 2000 and March 31, 1999, respectively. Increases in operating
expenses in absolute dollars of $5.2 million, 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 71 people at March 31, 2000 over March 31, 1999). The Company has
hired additional employees to support product development as well as to support
expanded operations.
Operating expenses for the three month period ended March 31, 1999 included
non-recurring expenses in connection with the Company's move to a new central
facility in Foster City, California. Total moving costs amounted to $1.8 million
of which approximately $0.2 million related to cost of revenue. Excluding the
moving costs, operating expenses as a percentage of revenue for the three month
period ended March 31, 1999 amounted to 28%. The slight decrease in operating
expenses as a percentage of revenue is a result of the Company's successful
spending control as well as the leverage realized from additional revenue in the
black and white and embedded, bundled and chipset categories which require less
support.
The Company anticipates that operating expenses will continue to grow and may
increase both in absolute dollars and as a percentage of revenue.
13
<PAGE>
The components of operating expenses are detailed below.
Research and Development
Expenses for research and development consist primarily of personnel
expenses and, to a lesser extent, consulting, depreciation and costs
of prototype materials. Research and development expenses were $19.8
million or 13% of revenue for the three month period ended March 31,
2000 compared to $17.0 million or 14% of revenue for the three month
period ended March 31, 1999. The 17% increase in research and
development expenses from the prior year first quarter was mainly due
to additional headcount and component expenses for prototype
development. 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 the three month period ended March 31, 2000 were $16.4
million or 11% of revenue compared to $14.8 million or 12% of revenue
for the three months ended March 31, 1999. Sales and marketing
expenses increased by 10% in absolute dollars, however decreased as a
percentage of revenue during the two periods. The increase in
absolute dollars of $1.6 million is due primarily to increased salary
expenses caused by an increased headcount of 6%. The decrease as a
percentage of revenue from the three month period ended March 31,
2000 compared to March 31, 1999, is due to the fact that the
gravitation toward desktop and embedded products require less support
from the Company as the OEMs take over some of the financial
responsibilities for the support.
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 services 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 $5.0 million or 3% of
revenue for the three month period ended March 31, 2000, compared to
$4.2 million or 3% of revenue for the three month period ended March
31, 1999. While general and administrative expenses have remained
relatively constant as a percentage of total revenue, these expenses
have increased in absolute dollars. The increase of $0.8 million was
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.
Other Income
Other income relates mainly to interest income and expense, and gains and losses
on foreign currency transactions. Other income of $5.5 million for the three
month period ended March 31, 2000 increased by 58% from $3.5 million for the
three month period ended March 31, 1999. The increase is due to a 40% increase
of the average investment balance for the three month period ended March 31,
2000 as compared to the three month period ended March 31, 1999, as well as a
higher return on investments as a result of more favorable market interest rates
in the first quarter of 2000 as compared to the first quarter of 1999.
14
<PAGE>
Income Taxes
The Company's effective tax rate was 33% for the three month period ended March
31, 2000 and 34% for the three month period ended March 31, 1999. In each of
these periods, the Company benefited from tax-exempt interest income, foreign
sales, and the utilization of the 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 currently anticipates that the
tax rate for the remainder of 2000 will remain approximately 33%.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $23.5 million to
$493.8 million as of March 31, 2000, from $470.3 million as of December 31,1999.
Working capital increased by $38.8 million to $526.4 million as of March 31,
2000, up from $487.6 million as of December 31, 1999. 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 $19.3 million for the three month
period ended March 31, 2000. The Company has continued to invest cash in
short-term investments, mainly municipal securities. Purchases in excess of
sales of short-term investments were $48.8 million for the three month period
ended March 31, 2000. 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 $4.4
million of such equipment and furniture during the three month period ended
March 31, 2000.
In 1997, the Company began development of a corporate campus on a 35-acre parcel
of land in Foster City, California. During 1997 the Company spent approximately
$27.0 million on the land and associated improvement costs. During 1998 the
Company spent approximately $0.3 million on land 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 on the site. The lessor
of the building committed to fund the construction of the building which
amounted to $57.0 million. Rent payments for the building commenced in July
1999, the time the construction was completed. Rent payments bear a direct
relationship to the carrying cost of the commitment amount. The initial term of
the lease is 7 years with options to purchase at any time. Also in conjunction
with the lease, the Company has entered into a separate ground lease with the
lessor of the building for approximately 35 years. The Company has guaranteed a
residual value associated with the building to the lessor of 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 ($69.4 million at March 31, 2000) 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 release would also result in an increase to the lease rate and
the imposition of additional financial covenant restrictions.
On December 29, 1999, the Company entered into an agreement to lease additional
facilities, for up to 543,000 square feet, to be constructed on the property
that the Company owns in Foster City, California. The lessor of the building has
committed to fund up to a maximum of $137.0 million for the construction of the
facilities, with the portion of the committed amount actually used for
construction to be determined by the Company. The construction of the additional
facilities is scheduled to be completed over the next 36 months. Rent
obligations for the building will bear a direct relationship to the carrying
cost of the commitments drawn down. Construction of the facilities began in
January 2000.
The lease associated with the additional Foster City facilities has a term of
seven years with an option to renew subject to certain conditions. The Company
may, at its option, purchase the facilities during or at the end of the term of
the lease for the amount expended by the lessor to construct the facilities. In
connection with the lease, the Company entered into a lease of the related
parcels of land in Foster City to the lessor of the buildings at a nominal rate
and for a term of 30 years. 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 term of the lease for 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 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 the purchase of the facility at the end of the
lease term, it may be liable to the lessor for the amount of the residual
guarantee.
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As part of this agreement, the Company must maintain a minimum tangible net
worth. In addition, the Company has committed to pledge certain securities 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. As of March 31, 2000, the Company has pledged $1.7
million in marketable securities as collateral. The Company may invest these
funds in certain securities and receive the full benefit of the investment,
however the funds are restricted as to withdrawal at all times.
Net cash provided by financing activities of $8.3 million in the three month
period ended March 31, 2000, was primarily the result of exercises of common
stock options and the tax benefits to the Company associated with those
exercises.
The Company's inventory consists primarily of memory subsystems, processors and
ASICs, which are sold 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 sell 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, has
been named in class action lawsuits filed in both the San Mateo County Superior
Court and the United States District Court for the Northern District of
California. The lawsuits are all related to the 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 is contesting them vigorously, but
there can be no assurance that if damages are ultimately awarded against the
Company, the litigation will not adversely affect the Company's results of
operations.
The Company believes that its existing capital resources, together with cash
generated from continuing operations will be sufficient to fund its operations
and meet capital requirements through at least 2001.
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
Our performance may be adversely affected by the following factors:
We rely on sales to a relatively small number of OEM partners, and the loss of
any of these customers could substantially decrease our revenues
Because we sell our products primarily to our OEM partners, we rely on high
sales volumes to a relatively small number of customers. We expect that we will
continue to depend on these OEM partners for a significant portion of our
revenues. If we lose an important OEM or we are unable to recruit additional
OEMs, our revenues may be materially and adversely affected. We cannot assure
you that our major customers will continue to purchase our products at current
levels or that they will continue to purchase our products at all. In addition,
our results of operations could be adversely affected by a decline in demand for
copiers or laser printers, other factors affecting our major customers, in
particular, or the computer industry in general.
We rely upon our OEM partners to develop new products, applications and product
enhancements in a timely and cost-effective manner. Our continued success
depends upon the ability of these OEMs to meet changing customer needs and
respond to emerging industry standards and other technological changes. However,
we cannot assure you that our OEMs will effectively meet these technological
challenges. These OEMs, who are not within our control, may incorporate into
their products the technologies of other companies in addition to, or instead of
our products. These OEMs may introduce and support products that are not
compatible with our products. We rely on these OEMs to market our products with
their products, and if these OEMs do not effectively market our products our
sales revenue may be materially and adversely affected. With the exception of
certain minimum purchase obligations, these OEMs are not obligated to purchase
products from us. We cannot assure you that our OEMs will continue to carry our
products.
Our OEMs work closely with us to develop products that are specific to each
OEM's copiers and printers. For many of the products we are developing, we need
to coordinate development, quality testing, marketing and other tasks with our
OEMs. We cannot control our OEMs' development efforts and coordinating with our
OEMs may cause delays that we cannot manage by ourselves. In addition, our sales
revenue and results of operations may be adversely affected if we cannot meet
our OEM's product needs for their specific copiers and printers, as well as
successfully manage the additional engineering and support effort and other
risks associated with such a wide range of products.
We are pursuing, and will continue to pursue, the business of additional copier
and printer OEMs. However, because there are a limited number of OEMs producing
copiers and printers in sufficient volume to be attractive customers for us, we
expect that customer concentration will continue to be a risk.
If we are unable to develop new products, or execute product introductions on a
timely basis, our future revenue and operating results may be harmed.
Our operating results will depend to a significant extent on continual
improvement of existing technologies and rapid innovation of new products and
technologies. Our success depends not only on our ability to predict future
requirements, but also to develop and introduce new products that successfully
address customer needs. Any delays in the launch or availability of new products
we are planning could harm our financial results. During transitions from
existing products to new products, customers may delay or cancel orders for
existing products. Our results of operations may be adversely affected if we
cannot successfully manage product transitions or provide adequate availability
of products after they have been introduced.
In this environment, we must continue to make significant investments in
research and development in order to enhance performance and functionality of
our products, including product lines different than our Fiery servers and
embedded controllers. We cannot assure you that we will successfully identify
new product opportunities, develop and introduce new products to market in a
timely manner, and achieve market acceptance of our products. Also, if we decide
to develop new products, our research and development expenses may increase in
the short term without a corresponding increase in revenue. Finally, we cannot
assure you that products and technologies developed by others will not render
our products or technologies obsolete or noncompetitive.
We license software used in most of our products from Adobe Systems
Incorporated, and the loss of this license would prevent us from shipping these
products
Under our license agreements with Adobe, a separate license must be granted from
Adobe to us for each type of copier or printer used with a Fiery Server or
Controller. If Adobe does not grant us such licenses or approvals, if the Adobe
license agreements are terminated, or if our relationship with Adobe is
otherwise impaired, our financial condition and results of operations may be
harmed.
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To date, we have successfully obtained licenses to use Adobe's PostScript(TM)
software for our products, where required. However, we cannot assure you that
Adobe will continue to grant future licenses to Adobe PostScript(TM) software on
reasonable terms, in a timely manner, or at all. In addition, we cannot assure
you that Adobe will continue to give us the quality assurance approvals we are
required to obtain from Adobe for the Adobe licenses.
If the demand for products that enable printing of digital data decreases, our
sales revenue may decrease
Our products are primarily targeted at enabling the printing of digital data. If
demand for this service declines, or if the demand for our OEM's specific
printers or copiers that our products are designed for should decline, our sales
revenue may be adversely affected. Although demand for networked printers and
copiers has increased in recent years, we cannot assure you that such demand
will continue, nor can we control whether the demand will continue for the
specific OEM printers and copiers that utilize our products will continue. We
believe that demand for our products may also be affected by a variety of
economic conditions and considerations, and we cannot assure you that demand for
our products will continue at current levels.
If we enter new markets or distribution channels this could result in delayed
revenues or higher operating expenses
We continue to explore opportunities to develop product lines different from our
Fiery servers and embedded controllers, such as our new line of software
products and EFI Professional Services that we announced on February 23, 2000.
We expect to invest funds to develop new distribution and marketing channels for
these new products and services. We do not know if we will be successful in
developing these channels or whether the market will accept any of our new
products or services. In addition, even if we are able to introduce new products
or services, these products and services may adversely impact the Company's
operating results.
We face competition from other suppliers as well as our own OEM customers, and
if we are not able to compete successfully then our business may be harmed
Our industry is highly competitive and is characterized by rapid technological
changes. We compete against a number of other suppliers of imaging products. We
cannot assure you that products or technologies developed by competing suppliers
will not render our products or technologies obsolete or noncompetitive.
While many of our OEM's sell our products on an exclusive basis, we do not have
any formal agreements that prevent the OEMs from offering alternative products.
If an OEM offers products from alternative suppliers our market share could
decrease, which could reduce our revenue and negatively affect our financial
results.
Our OEM partners may themselves internally develop and supply products similar
to our current products. These OEMs may be able to develop similar products that
are compatible with their own products more quickly than we can. These OEMs may
choose to market their own products, even if these products are technologically
inferior, have lower performance or cost more. We cannot assure you that we will
be able to continue to successfully compete against similar products developed
internally by our OEMs or against their financial and other resources. If we
cannot compete successfully against our OEMs' internally developed products, our
business may be harmed.
If we are not able to hire and retain skilled employees, we may not be able to
develop products or meet demand for our products in a timely fashion
We depend upon skilled employees, such as software and hardware engineers,
quality assurance engineers and other technical professionals. We are located in
the Silicon Valley where competition among companies to hire engineering and
technical professionals is intense. It is difficult for us to locate and hire
qualified engineers and technical professionals and for us to retain these
people. There are many technology companies located nearby that may try to hire
our employees. The movement of our stock price may also impact our ability to
hire and retain employees. If we do not offer competitive compensation, we may
not be able to recruit or retain employees. If we cannot successfully hire and
retain employees, we may not be able to develop products timely or to meet
demand for our products in a timely fashion and our results of operations may be
adversely impacted.
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Our operating results may fluctuate based upon many factors, which could
adversely affect our stock price
We expect our stock price to vary with our operating results and, consequently,
adverse fluctuations could adversely affect our stock price. Operating results
may fluctuate due to:
o demand for our products;
o success and timing of new product introductions;
o changes in interest rates and availability of bank or financing credit
to consumers of digital copiers and printers;
o price reductions by us and our competitors;
o delay, cancellation or rescheduling of orders;
o product performance;
o availability of key components, including possible delays in the
deliveries from suppliers;
o the status of our relationships with our OEM partners;
o the performance of third-party manufacturers;
o the status of our relationships with our key suppliers;
o potential excess or shortage of skilled employees; and
o general economic conditions.
Many or our products, and the related OEM copiers and printers, are purchased
utilizing lease contracts or bank financing. If prospective purchasers of
digital copiers and printers are unable to obtain credit, or interest rate
changes make credit terms undesirable, this may significantly reduce the demand
for digital copiers and printers, negatively impacting our revenues and
operating results.
Typically we do not have long-term volume purchase contracts with our customers,
and a substantial portion of our backlog is scheduled for delivery within 90
days or less. Our customers may cancel orders and change volume levels or
delivery times for product they have ordered from us without penalty. However, a
significant portion of our operating expenses are fixed in advance, and we plan
these expenditures based on the sales forecasts from our OEM customers and
product development programs. If we were unable to adjust our operating expenses
in response to a shortfall in our sales, it could harm our quarterly financial
results.
We attempt to hire additional employees to match growth in projected demand for
our products. If we project a higher demand than materializes, we will hire too
many employees and incur expenses that we need not have incurred and our margins
may be lower. If we project a lower demand than materializes, we will hire too
few employees, we may not be able to meet demand for our products and our sales
revenue may be lower. If we cannot successfully manage our growth, our results
of operations may be harmed.
The value of our investment portfolio will decrease if interest rates increase
We have an investment portfolio of mainly fixed income securities classified as
available-for-sale securities. As a result, our investment portfolio is subject
to interest rate risk and will fall in value if market interest rates increase.
We attempt to limit this exposure to interest rate risk by investing primarily
in short-term securities. We may be unable to successfully limit our risk to
interest rate fluctuations and this may cause our investment portfolio to
decrease in value.
Our stock price has been and may continue to be volatile
Our common stock, and the stock market generally, have from time to time
experienced significant price and volume fluctuations. The market prices for
securities of technology companies have been especially volatile, and
fluctuations in the stock market are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock. Our common stock price
may also be affected by the factors discussed above in this section as well as:
o Fluctuations in our results of operations, revenues or earnings or
those of our competitors;
o Failure of such results of operations, revenues or earnings to meet the
expectations of stock market analysts and investors;
o Changes in stock market analysts' recommendations regarding us;
o Real or perceived technological advances by our competitors;
o Political or economic instability in regions where our products are
sold or used; and
o General market and economic conditions.
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We face risks from our international operations and from currency fluctuations
Approximately 51% and 54% of our revenue from the sale of products for the three
month periods ended March 31, 2000 and March 21, 1999, respectively, came from
sales outside North America, primarily to Europe and Japan. We expect that sales
to international destinations will continue to be a significant portion of our
total revenue. You should be aware that we are subject to certain risks because
of our international operations. These risks include the regulatory requirements
of foreign governments which may apply to our products, as well as requirements
for export licenses which may be required for the export of certain
technologies. The necessary export licenses may be delayed or difficult to
obtain, which could cause a delay in our international sales and hurt our
product revenue. Other risks include trade protection measures, natural
disasters, and political or economic conditions in a specific country or region.
We believe that economic conditions in other parts of the world, such as Brazil,
may also limit demand for our products. The move to a single European currency,
the Euro, and the resulting central bank management of interest rates to
maintain fixed currency exchange rates among the member nations may lead to
economic conditions which adversely impact sales of our products.
Given the significance of our export sales to our total product revenue, we face
a continuing risk from the strengthening of the U.S. dollar versus the Japanese
yen, the Euro and other major European currencies, and numerous Southeast Asian
currencies, which could cause lower unit demand and the necessity that we lower
average selling prices for our products because of the reduced strength of local
currencies. Either of these events could harm our revenues and gross margin.
Although we typically invoice our customers in U.S. dollars, when we do invoice
our customers in local currencies, our cash flows and earnings are exposed to
fluctuations in interest rates and foreign currency exchange rates between the
currency of the invoice and the U.S. dollar. We attempt to limit or hedge these
exposures through operational strategies and financial market instruments where
we consider it appropriate. To date we have mostly used forward contracts to
reduce our risk from interest rate and currency fluctuations. However, our
efforts to reduce the risk from our international operations and from
fluctuations in foreign currencies or interest rates may not be successful,
which harm our financial condition and operating results.
We may be unable to adequately protect our proprietary information
We rely on a combination of copyright, patent and trade secret protection,
nondisclosure agreements, and licensing and cross-licensing arrangements to
establish and protect our proprietary rights. Any failure to adequately protect
our proprietary information could harm our financial condition and operating
results. We cannot be certain that any patents that may be issued to us, or
which we license from third parties, or any other of our proprietary rights will
not be challenged, invalidated or circumvented. In addition, we cannot be
certain that any rights granted to us under any patents, licenses or other
proprietary rights will provide adequate protection of our proprietary
information.
We face risks from third party claims of infringement and potential litigation
Third parties may claim that our products infringe, or may infringe, their
proprietary rights. Such claims could result in lengthy and expensive
litigation. Such claims and any related litigation, whether or not we are
successful in the litigation, could result in substantial costs and diversion of
our resources. Although we may seek licenses from third parties covering
intellectual property that we are allegedly infringing, we cannot guarantee that
any such licenses could be obtained on acceptable terms, if at all.
Seasonal purchasing patterns of our OEM customers have historically caused lower
fourth quarter revenue, which may negatively impact the stock price
Our results of operations have typically followed a seasonal pattern reflecting
the buying patterns of our large OEM customers. In the past, our fiscal fourth
quarter results have been adversely affected because some or all of our OEM
customers wanted to decrease, or otherwise delay, fourth quarter orders. In
addition, the first fiscal quarter traditionally has been a weaker quarter
because our OEM partners focus on training of their sales forces. The primary
reasons for this seasonal pattern are:
o Fluctuation in demand for our products from our OEM partners, who have
historically sought to minimize year-end inventory investment
(including the reduction in demand following introductory "channel
fill" purchases). Fluctuation in demand is also caused by timing of new
product releases and training by our OEM partners; and
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o The fact that our OEM partners have achieved their yearly sales targets
and consequently delayed further purchases into the next fiscal year,
and the fact that we do not know when our partners reach these sales
targets as they generally do not share them with us.
As a result of these factors, we believe that period to period comparisons of
our operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. We anticipate that future
operating results may fluctuate significantly due to this seasonal demand
pattern.
We may make future acquisitions and acquisitions involve numerous financial
risks
We seek to develop new technologies and products from both internal and external
sources. As part of this effort, we may make acquisitions of, or significant
investments in, other companies. Acquisitions involve numerous risks, including
the following:
o Difficulties in integration of operations, technologies, or products;
o Risks of entering markets in which we have little or no prior
experience, or entering markets where competitors have stronger market
positions;
o Possible write-downs of impaired assets; and
o Potential loss of key employees of the acquired company.
Mergers and acquisitions of companies are inherently risky, and we cannot assure
you that our previous or future acquisitions will be successful and will not
harm our business, operating results, financial condition, or stock price.
The location and concentration of our facilities subjects us to the risk of
earthquakes, floods or other natural disasters
Our corporate headquarters, including most of our research and development
facilities and manufacturing operations, are located in the San Francisco Bay
Area of Northern California, an area known for seismic activity. This area has
also experienced flooding in the past. In addition, many of the components
necessary to supply our products are purchased from suppliers subject to risk
from natural disasters, based in areas including the San Francisco Bay Area,
Taiwan, and Japan. A significant natural disaster, such as an earthquake or a
flood, could harm our business, financial condition, and operating results.
We are dependent on sub-contractors to manufacture and deliver products to our
customers
We subcontract with other companies to manufacture our products. We are totally
reliant on the ability of our subcontractors to produce products sold to
customers, and while we closely monitor our subcontractors performance. We
cannot assure you that such subcontractors will continue to perform for us as
well as they have in the past. We also can not assure you that difficulties
experienced by our subcontractors ( such as interruptions in a subcontractor's
ability to make or ship our products, or fix quality assurance problems ) would
not harm our business, operating results, or financial condition.
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Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The Company is exposed to various market risks, including the changes in foreign
currency exchange rates. Market risk is the potential loss arising from adverse
changes in market rates and prices, such as foreign currency exchange and
interest rates. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes. The Company enters into
financial instrument contracts to manage and reduce the impact of changes in
foreign currency exchange rates. The counterparties are major financial
institutions.
Foreign Exchange Contracts
During 1998, the Company began utilizing 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. The transactions hedged were intercompany accounts
receivable and payable between the Company and its Japanese subsidiary. The
periods of the forward foreign exchange contracts correspond to the reporting
periods of the hedged transactions. Foreign exchange gains and losses on
intercompany balances and the offsetting losses and gains on forward foreign
exchange contracts are reflected in the income statement.
As of March 31, 2000, the Company had one outstanding forward foreign exchange
contract to sell Yen equivalent to approximately $88,000 with an expiration date
of April 28, 2000. The estimated fair value of the foreign currency contract
represents the amount required to enter into offsetting contracts with similar
remaining maturities based on quoted market prices. As of March 31, 2000, 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 $8,000. 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 portfolio at March 31, 2000, approximated
carrying value. Market risk was estimated as the potential decrease in fair
value resulting from an instantaneous hypothetical 100 basis-point increase in
interest rates for any debt instruments in the Company's investment portfolio.
As of March 31, 2000, the Company's cash and short-term investment portfolio
includes debt securities of $427.8 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 $4.3 million.
The fair value of the Company's long-term debt, including current maturities,
was estimated to be $3.8 million as of March 31, 2000, and equaled the carrying
value. The Company's long-term debt requires interest payments based on a
variable rate and therefore is subject to interest rate risk. A 10% fluctuation
in interest rates would not have a material effect on the fair value of the
outstanding long-term debt of the Company as of March 31, 2000.
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PART II Other Information
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
Exhibit 10.14** Employment Agreement dated January 11, 2000
by and between Dan Avida and the Company.
Exhibit 10.15** Employment Agreement dated March 8, 2000, by
and between Fred Rosenzweig and the Company.
Exhibit 10.16** Employment Agreement dated March 8, 2000, by
and between Eric Saltzman and the Company.
Exhibit 10.17** Employment Agreement dated March 8, 2000, by
and between Jan Smith and the Company.
Exhibit 10.18** Employment Agreement dated March 8, 2000, by
and between Guy Gecht and the Company.
Exhibit 10.20 Lease Financing of Properties Located in
Foster City, California, dated as of January
18, 2000 among the Company, Societe Generale
Financial Corporation and Societe Generale.
Exhibit 27.1 Financial Data Schedule
* Exhibits to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 are incorporated herein by
reference.
** Items that are management contracts or compensatory plans
or arrangements that are required to be filed as exhibits
pursuant to Item 6(a) of Form 10Q.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRONICS FOR IMAGING, INC.
Date: May 12, 2000
By/s/Guy Gecht
--------------------------------------------
Guy Gecht
Chief Executive Officer
(Principal Executive Officer)
By/s/Joseph Cutts
--------------------------------------------
Joseph Cutts
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX*
No. Description
--- -----------
Exhibit 10.14** Employment Agreement dated January 11, 2000
by and between Dan Avida and the Company.
Exhibit 10.15** Employment Agreement dated March 8, 2000, by
and between Fred Rosenzweig and the Company.
Exhibit 10.16** Employment Agreement dated March 8, 2000, by
and between Eric Saltzman and the Company.
Exhibit 10.17** Employment Agreement dated March 8, 2000, by
and between Jan Smith and the Company.
Exhibit 10.18** Employment Agreement dated March 8, 2000, by
and between Guy Gecht and the Company.
Exhibit 10.20 Lease Financing of Properties Located in
Foster City, California, dated as of January
18, 2000 among the Company, Societe Generale
Financial Corporation and Societe Generale.
Exhibit 27.1 Financial Data Schedule
* Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 are incorporated herein by reference.
** Items that are management contracts or compensatory plans or
arrangements that are required to be filed as exhibits pursuant to
Item 6(a) of Form 10Q.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed balance sheet, condensed statement of operations and condensed
statement of cash flows included in the Company's Form 10-Q for the three
months period ended March 31, 2000 and is qualified in its entirety by
reference to such financial statements and the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 138,644
<SECURITIES> 355,161
<RECEIVABLES> 95,227
<ALLOWANCES> 1,422
<INVENTORY> 12,723
<CURRENT-ASSETS> 629,837
<PP&E> 104,416
<DEPRECIATION> 54,076
<TOTAL-ASSETS> 696,841
<CURRENT-LIABILITIES> 103,395
<BONDS> 3,467
0
0
<COMMON> 561
<OTHER-SE> 589,418
<TOTAL-LIABILITY-AND-EQUITY> 696,841
<SALES> 151,515
<TOTAL-REVENUES> 151,515
<CGS> 77,903
<TOTAL-COSTS> 77,903
<OTHER-EXPENSES> 41,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 37,945
<INCOME-TAX> 12,522
<INCOME-CONTINUING> 25,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,423
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.44
</TABLE>
