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 September 30, 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 October 31, 2000 was
53,722,062.
An Exhibit Index can be found on Page 25.
<PAGE>
ELECTRONICS FOR IMAGING, INC.
<TABLE>
INDEX
<CAPTION>
Page No.
<S> <C> <C>
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2000 and 1999............3
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 ..........................4
Condensed Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 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 ........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................21
PART II - Other Information
Item 1. Legal Proceedings .........................................................22
Item 2. Changes in Securities and Use of Proceeds .................................22
Item 3. Defaults Upon Senior Securities ...........................................22
Item 4. Submission of Matters to a Vote of Security Holders........................22
Item 5. Other Information .........................................................22
Item 6. Exhibits and Reports on Form 8-K ..........................................22
Signatures ..............................................................................24
</TABLE>
2.
<PAGE>
PART I Financial Information
<TABLE>
ITEM 1. Condensed Consolidated Financial Statements
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $153,182 $158,211 $456,874 $423,101
Cost of revenue 79,683 79,236 236,819 216,211
----------------------------------------------------------------------------------------------
Gross profit 73,499 78,975 220,055 206,890
----------------------------------------------------------------------------------------------
Operating expenses:
Research and development 25,843 19,360 67,796 54,541
Sales and marketing 16,243 14,843 48,545 44,278
General and administrative 6,439 4,607 17,843 13,568
Merger related expenses -- 1,422 -- 1,422
-------- -------- -------- -------
48,525 40,232 134,184 113,809
----------------------------------------------------------------------------------------------
Income from operations 24,974 38,743 85,871 93,081
----------------------------------------------------------------------------------------------
Other income, net 4,944 4,160 16,071 11,631
----------------------------------------------------------------------------------------------
Income before income taxes 29,918 42,903 101,942 104,712
----------------------------------------------------------------------------------------------
Provision for income taxes 9,873 13,545 33,641 34,544
----------------------------------------------------------------------------------------------
Net income $ 20,045 $ 29,358 $ 68,301 $ 70,168
----------------------------------------------------------------------------------------------
Net income per basic common share $ 0.37 $ 0.53 $ 1.22 $ 1.28
Shares used in per share
calculation (basic) 53,969 55,314 55,780 54,754
Net income per diluted common share $ 0.37 $ 0.51 $ 1.19 $ 1.23
Shares used in per share
calculation (diluted) 54,698 57,709 57,313 56,906
----------------------------------------------------------------------------------------------
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3.
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30 December 31,
(in thousands, except per share amounts) 2000 1999
-----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 90,834 $ 163,824
Short-term investments 360,166 306,504
Accounts receivable, net 89,944 81,904
Inventories 18,136 11,878
Other current assets 45,287 24,902
-----------------------------------------------------------------------------------------------------------
Total current assets 604,367 589,012
-----------------------------------------------------------------------------------------------------------
Property and equipment, net 51,588 49,776
Other assets 16,034 17,287
-----------------------------------------------------------------------------------------------------------
Total assets $ 671,989 $ 656,075
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 58,854 $ 47,102
Accrued and other liabilities 32,725 29,771
Income taxes payable 11,985 24,548
-----------------------------------------------------------------------------------------------------------
Total current liabilities 103,564 101,421
Long-term debt 3,308 3,467
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; 56,858,142 and 55,722,214 shares issued,
respectively 575 557
Additional paid-in capital 230,205 200,907
Retained earnings 418,024 349,723
Common stock held in treasury, at cost (83,687) --
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 565,117 551,187
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 671,989 $ 656,075
-----------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4.
<PAGE>
<TABLE>
ELECTRONICS FOR IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 68,301 $ 70,168
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,767 10,073
Change in reserve for bad debts 992 (40)
Deferred income tax -- (893)
Other (23) 43
Changes in operating assets and liabilities:
Accounts receivable (9,032) (27,103)
Inventories (6,258) 7,836
Receivable from subcontract manufacturers (9,983) (72)
Other current assets (3,038) 4,652
Accounts payable and accrued liabilities 14,600 10,277
Income taxes payable (7,101) 19,037
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 59,225 93,978
--------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases and sales / maturities of short-term investments, net (53,044) (64,794)
Investment in property and equipment, net (11,922) (13,196)
Purchase of other assets 594 185
--------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (64,372) (77,805)
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term obligations (607) (531)
Issuance of common stock 16,451 24,228
Repurchase of common stock (83,687) --
--------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (67,843) 23,697
--------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (72,990) 39,870
Cash and cash equivalents at beginning of year 163,824 58,909
--------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 90,834 $ 98,779
--------------------------------------------------------------------------------------------
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5.
<PAGE>
Electronics for Imaging, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements of Electronics
for Imaging, Inc., a Delaware corporation (the "Company"), as of and for the
interim period ended September 30, 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 the 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
September 30, 2000 are not necessarily indicative of the results to be expected
for any other interim period or the full year.
2. Recent Accounting Pronouncements
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 implementing procedures to capture the
information necessary for compliance with the provisions of the SFAS 133. At
this time the Company does not expect SFAS 133 to materially impact its
financial statements.
In December 1999 the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The effective date of implementation of SAB 101 was deferred until the fourth
quarter of fiscal 2000 by the SEC through SAB 101B, issued in June 2000. The
Company does not expect the adoption of SAB 101 to have a material effect upon
its financial position or results of operation.
3. Earnings Per Share
<TABLE>
The following table represents disclosures of basic and diluted earnings per
share for the periods presented below:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(in thousands, except per share amounts), (unaudited) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income available to
common shareholders $20,045 $29,358 $68,301 $70,168
------------------------------------------------------------------------------------------------------
Shares
Basic shares 53,969 55,314 55,780 54,754
Effect of Dilutive Securities 729 2,395 1,533 2,152
------- ------- ------- -------
Diluted shares 54,698 57,709 57,313 56,906
------------------------------------------------------------------------------------------------------
Earnings per common share
Basic EPS $ 0.37 $ 0.53 $ 1.22 $ 1.28
Diluted EPS $ 0.37 $ 0.51 $ 1.19 $ 1.23
------------------------------------------------------------------------------------------------------
</TABLE>
6.
<PAGE>
Options to purchase 7,138,928 shares of common stock were excluded in
the computations of diluted earnings per share for the three and nine months
ended September 30, 2000, because the options' exercise prices were greater than
the average market price of the common stock for the periods then ended and if
included would have resulted in an antidilutive effect.
4. Stock Repurchase
In June 2000 the Board of Directors authorized the repurchase of up to $100
million of the Company's common stock. During the third quarter of 2000 the
Company repurchased 1,567,500 shares of common stock at an average price of
$24.82 per share. The Company has spent $83.7 million to date to repurchase
3,372,500 shares of common stock. The Company's repurchases of shares of common
stock are recorded at cost, and are classified as "Treasury Stock", resulting in
a reduction of "Stockholders' Equity."
5. Balance Sheet Components
September 30, December 31,
(in thousands), (unaudited) 2000 1999
-------------------------------------------------------------------------------
Accounts receivable:
Accounts receivable $ 92,202 $ 83,170
Less reserves and allowances (2,258) (1,266)
--------- ---------
$ 89,944 $ 81,904
-------------------------------------------------------------------------------
Inventories:
Raw materials $ 16,584 $ 10,844
Work in process 26 33
Finished goods 1,526 1,001
--------- ---------
$ 18,136 $ 11,878
-------------------------------------------------------------------------------
Other current assets:
Receivable from subcontract manufacturers $ 14,727 $ 4,742
Deferred income taxes, current portion 22,136 14,772
Other 8,424 5,388
--------- ---------
$ 45,287 $ 24,902
-------------------------------------------------------------------------------
Property and equipment:
Land and land improvements $ 28,938 $ 27,681
Equipment and purchased software 68,066 59,499
Furniture and leasehold improvements 15,589 13,261
--------- ---------
112,593 100,441
Less accumulated depreciation and amortization (61,005) (50,665)
--------- ---------
$ 51,588 $ 49,776
-------------------------------------------------------------------------------
Other assets:
Deferred income taxes, non-current portion $ 14,914 $ 14,915
Other 1,120 2,372
--------- ---------
$ 16,034 $ 17,287
-------------------------------------------------------------------------------
Accrued and other liabilities:
Accrued product-related obligations $ 8,830 $ 7,809
Accrued royalty payments 7,924 7,327
Accrued compensation and benefits 9,961 7,263
Other accrued liabilities 6,010 7,372
--------- ---------
$ 32,725 $ 29,771
-------------------------------------------------------------------------------
7.
<PAGE>
6. Legal Proceedings
The Company and certain principal officers and directors were named as
defendants in class action complaints filed in both the California Superior
Court of the County of San Mateo on December 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.
In November 2000, the U.S. Magistrate Judge handling the patent litigation
between the Company and Splash Technology Holdings, Inc. ("Splash") granted the
Company's motion to dismiss the complaint and Splash's counterclaims. The
Court's order ends the litigation and brings to a close all pending patent
issues between the Company and Splash.
7. Subsequent Events
During October 2000 the Company completed the acquisition of Splash through a
cash tender offer at $10 per share of common stock. The transaction is valued at
approximately $146 million. Splash had 1999 revenues of approximately $70
million.
Subsequent to the acquisition, Splash and the Company entered into a settlement
agreement for the class action lawsuit filed against Splash and its directors on
August 31, 2000 after the announcement of the merger agreement between Splash
and the Company. The court approved the settlement agreement in October and the
case was dismissed with prejudice of the litigation. The Company and Splash deny
any wrongdoing whatsoever, but agreed to the settlement to eliminate the burden
and expense of further litigation.
8.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
section entitled "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. In August 1999 the Company
acquired Management Graphics Inc. The transaction has been accounted for as a
pooling of interests which requires that all prior period consolidated financial
statements be restated to include the combined results of operations, financial
position and cash flows. Results for the three and nine months ended September
30, 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 decreased by 3% to $153.2 million in the three-month period ended
September 30, 2000, compared to $158.2 million in the three-month period ended
September 30, 1999. The decrease in quarterly revenue year over year was due to
a lower demand for desktop and black and white products. The corresponding unit
volume increased by 16%, primarily due to increases in the spares and eBeam
category. For the nine months ended September 30, 2000 revenue was $456.9
million compared to $423.1 million in the nine months ended September 30, 1999,
an increase of 8%. The corresponding unit volume increased 15%. The increase in
revenue for the nine months is primarily due to an increase in stand-alone
server sales.
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. The second category consists of embedded desktop
controllers, bundled and embedded color solutions for printers and copiers and
chipsets primarily for the office market. The third category consists of
controllers for digital black and white products.
<TABLE>
The following is a breakdown 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>
Three Months Ended September 30, Nine Months Ended September 30,
Revenue ---------------------------------- % ---------------------------------- %
(in thousands) 2000 1999 Change 2000 1999 Change
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stand-alone Servers
Connecting to Digital
Color Copiers $67,666 44% $60,184 38% 12% $218,269 48% $180,511 42% 21%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 33,801 22% 43,940 28% (23%) 90,797 20% 112,517 27% (19%)
Controllers for Digital
Black and White Solutions 37,052 24% 41,907 26% (12%) 100,702 22% 93,877 22% 7%
Spares, Licensing
& Other misc. sources 14,663 10% 12,180 8% 20% 47,106 10% 36,196 9% 30%
---------------------------------------------------------------------------------------------------------------------------
Total Revenue $153,182 100% $158,211 100% (3%) $456,874 100% $423,101 100% 8%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
9.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Volume 2000 1999 2000 1999
Stand-alone Servers Connecting
to Digital Color Copiers 14% 12% 18% 13%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 47% 43% 43% 48%
Controllers for Digital
Black and White Solutions 35% 45% 35% 39%
Spares, Licensing
& Other misc. sources 4% - 4% -
---------------------------------------------------------------------------------------------------------
Total Volume 100% 100% 100% 100%
---------------------------------------------------------------------------------------------------------
</TABLE>
The category of stand-alone servers connecting to digital color copiers made up
44% and 38% of total revenue and 14% and 12% of total unit volume for the three
month period ended September 30, 2000 and 1999, respectively. For the nine
months ended September 30, 2000 and 1999, the same category made up 48% and 42%
of total revenue, and the percentage of total unit volume was 18% and 13%,
respectively. The revenues for 2000 reflect an increase in Xerox sales as
customers purchased Xerox products launched late in 1999. The products in this
category continue to offer higher margins relative to the other product lines.
The desktop, bundled and chipset category made up 22% of total revenue and 47%
of total unit volume in the third quarter of 2000. It made up 28% of total
revenue and 43% of total unit volume in the third quarter of 1999. For the nine
months ended September 30, 2000 this category made up 20% of total revenue and
43% of total unit volume as compared to 27% of revenues and 48% of volume for
the same nine months in 1999. The drop in revenue from prior periods was
primarily caused by reductions in the color laser product segment. This segment
is also seeing a drop in orders as consumers are waiting on a number of new
product launches that are forthcoming. The products in this category, 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 digital black and white product category made up 24% of total revenue and
35% of total unit volume in the three-month period ended September 30, 2000. In
the three month period ended September 30, 1999, it made up 26% of total revenue
and 45% of total unit volume. For the nine month period ended September 30, 2000
the black and white category made up 22% of total revenue and 35% of total unit
volume. The same category accounted for 22% of total revenue and 39% of volume
for the same nine-month period a year ago. Canon black-and-white solutions have
consistently accounted for the majority of revenue in this category. The Company
has not launched any new black and white products with Canon this year and the
current product lineup is facing more competition. This product category can
also be characterized by much higher unit volumes and lower unit prices and
associated margins than the Company has experienced in its more traditional
stand-alone server line of products.
Spares, licensing revenue, film recorder sales and service, eBeam and other
miscellaneous sources generated 10% and 8% of total revenue for the three months
ended September 30, 2000 and 1999, respectively. For the nine months ended
September 30, 2000 and 1999, this category had 10% and 9% of total revenue,
respectively. As a percentage of total unit volume this category represented 4%
for the three and nine months ended September 30, 2000. The volumes in 1999 for
this category were less than 1%. While spares account for the majority of the
revenue in this category, eBeam sales account for most of the increase in volume
seen in this category.
To the extent any of 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 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 product
mix becomes weighted with lower gross margin products results of operations may
be adversely affected.
10.
<PAGE>
<TABLE>
Shipments by geographic area for the three and nine month periods ended
September 30, 2000 and 1999 were as follows:
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Revenue -------------------------------- % ------------------------------- %
(in thousands) 2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North America $79,855 52% $77,762 49% 3% $225,545 49% $200,179 47% 13%
Europe 43,496 28% 45,833 29% (5%) 153,530 34% 135,926 32% 13%
Japan 24,548 16% 27,614 18% (11%) 62,629 14% 72,621 17% (14%)
Rest of World 5,283 4% 7,002 4% (25%) 15,169 3% 14,375 4% 6%
--------------------------------------------------------------------------------------------------------------------
Total Revenue $153,182 100% $158,211 100% (3%) $456,874 100% $423,101 100% 8%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company saw a decrease in shipments to all areas except North America for
the third quarter of 2000 compared to the same period a year ago. The Company
believes that the difficult economic conditions in Japan have shifted the
product mix to lower priced units, while the stronger US dollar has affected
sales in the European market. 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 because 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 73 % of its
aggregate revenue for the third quarter of 2000 and 71% of its revenue for the
nine months ended September 30, 2000. For the third quarter of 1999 and the nine
months ended September 30, 1999 Canon and Xerox accounted for 72% and 69% of its
revenue, 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. While the Company has not experienced a
discontinuance in our relationships with these OEM partners, the orders from OEM
partners have declined recently, and the Company expects the fourth quarter 2000
revenue to be between $115 million and $125 million.
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 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.
Gross Margins
The Company's gross margin was 48% and 50% for the three months ended September
30, 2000 and 1999, respectively. For the nine months ended September 30, 2000
and 1999 the gross margin was 48 and 49%, respectively. The decrease in the
three month gross margin was attributable to a change in product mix within each
category, with sales of products with lower margins increasing. In addition,
higher component pricing had a negative impact on product margins.
11.
<PAGE>
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 documentation 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 21% in the quarter ended September 30, 2000
compared to the quarter ended September 30, 1999. Operating expenses as a
percentage of revenue amounted to 32% and 25% for the three-month periods ended
September 30, 2000 and 1999, respectively. The increase in operating expenses
was primarily related to an increase in the number of employees and materials
required to support the development and introduction of new products needed for
continued growth. The number of full-time employees increased by 77 people from
September 1999 to September 2000. Operating expenses increased by 18% in the
nine-month period ended September 30, 2000 compared to the nine-month period
ended September 30, 1999. Operating expenses as a percentage of revenue were 29%
for the nine-month period ended September 30, 2000 and 27% for the nine-month
period ended September 30, 1999.
Included in the third quarter 1999 operating expenses are one-time expenses
associated with the merger of the Company and Management Graphics, Inc. Costs
related to the merger were $1.4 million. Operating expenses for the nine month
period ended September 30, 1999 also included certain 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
$1.6 million related to operating expenses. Excluding the moving and merger
costs, operating expenses as a percentage of revenue for the nine months ended
September 30, 1999 were 27%.
The Company anticipates that operating expenses will continue to grow and may
increase both in absolute dollars and as a percentage of revenue.
The components of operating expenses are detailed below.
Research and Development
Expenses for research and development consist primarily of personnel
expenses and, to a lesser extent, consulting, depreciation and costs
of prototype materials. Research and development expenses were $25.8
million or 17% of revenue for the three-month period ended September
30, 2000 compared to $19.4 million or 12% of revenue for the
three-month period ended September 30, 1999. Research and development
costs increased 24%, from $54.5 million for the nine months ended
September 30, 1999 to $67.8 million for the nine months ended
September 30, 2000. The increase for the three and nine month periods
from the prior year 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 equaled 11% of revenue for the third quarter of 2000
compared to 9% for the same quarter of 1999. For the third quarter of
2000 sales and marketing expenses were $16.2 million compared to
$14.8 million for the third quarter of 1999. Increased expenses
related to trade shows account for most of the increase in 2000. For
the nine months ended September 30, 2000 and 1999 sales
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and marketing expenses were 11% of revenue or $48.5 million and $44.3
million, respectively. Sales and marketing expenses continue to
increase as our list of OEM partners, products and locations continue
to grow.
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 continues to build its sales and marketing
organization. If the Company's sales continue to gravitate toward
desktop and embedded products, which require less support from the
Company, the increase in costs may not be proportional to any
increase in volume.
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 $6.4 million or 4% of
revenue for the three months ended September 30, 2000 and $4.6
million or 3% of revenue for the three months ended September 30,
1999. For the nine months ended September 30, 2000 and 1999, general
and administrative expenses were $17.8 million or 4% of revenue and
$13.6 million or 3% of revenue, respectively. The increase in both
absolute dollars and as a percentage of revenue result from increased
headcount to support the needs of the Company's growing operations,
as well as increased investments in business development initiatives,
legal activities associated with registering and defending our
intellectual property and actions related to the Company's new
Netherlands Customer Service Center. 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 $4.9 million for the
three-month period ended September 30, 2000 increased by 19% from $4.2 million
for the three-month period ended September 30, 1999. For the nine months ended
September 30, 2000 other income was $16.1 million; a 38% increase from the $11.6
million reported for the nine months ended September 30, 1999. The increase in
other income is primarily driven by the increased cash flow seen over the past
several quarters and the correspondingly higher short-term investment balances
and higher market interest rates. Other income may be reduced in future quarters
as the Company utilizes funds for repurchasing shares or for acquisitions,
thereby decreasing cash balances available to earn interest income.
Income Taxes
The Company's effective tax rate was 33% for nine months ended September 30,
2000 and 1999. For the three months ended September 30, 2000 the effective tax
rate was 33%, compared to 32% for the three months ended September 30, 1999. The
difference in the effective tax rate for the third quarter of 1999 stems from
year-to-date changes in the 1999 effective tax rate, applied retroactively from
the beginning of the year. 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 decreased by $19.3 million to
$451.0 million as of September 30, 2000, from $470.3 million as of December
31,1999. The decrease in cash resulted primarily from the Company's stock
repurchase program begun during the second quarter of 2000 as well as the
payments of estimated income taxes. Working capital increased by $13.2 million
to $500.8 million as of September 30, 2000, up from $487.6 million as of
December 31, 1999. The increase is primarily the result of net income, changes
of balance sheet components and the exercise of employee stock options.
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Net cash provided by operating activities for the nine months ended September
30, 2000 was $59.2 million. The Company has continued to invest cash in
short-term investments, mainly municipal securities. Purchases in excess of
sales of short-term investments were $54.4 million for the nine months ended
September 30, 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 $9.0
million of such equipment and furniture during the nine months ended September
30, 2000.
In 1997, the Company began development of a corporate campus on a 35-acre parcel
of land in Foster City, California. During 1997 and 1998 the Company spent
approximately $27.3 million on the land and associated improvement costs. In
addition to purchasing the land, the Company entered into an agreement ("1997
Lease") to lease a ten-story 295,000 square foot building to be constructed on
the site. The lessor of the building funded $56.8 million for the construction
of the building. In July 1999 the Company completed construction of the building
and began making rent payments. 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.
In December 1999 the Company entered into a second agreement ("1999 Lease") to
lease a maximum of 543,000 square feet of additional facilities, to be
constructed adjacent to the first building discussed above. The lessor has
funded $5.7 million of a maximum commitment 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. 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 and
is scheduled for completion over the next 36 months. 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 does not renew the building lease, the ground lease
converts to a market rate.
Both leases have an initial term of seven years, with options 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
respective lessor to construct the facilities. The Company has guaranteed to the
lessors a residual value associated with the buildings equal to 82% of the their
funding. The Company may be liable to the lessor for the amount of the residual
guarantee if it either defaults on a covenant, fails to renew the lease, or does
not purchase or locate a purchaser for the leased building at the end of the
lease term. During the term of the leases the Company must maintain a minimum
tangible net worth. In addition, the Company has pledged certain marketable
securities, which is in proportion to the amount drawn under each lease. Under
the 1997 Lease, the pledged collateral ($69.8 million at September 30, 2000) may
be withdrawn at any time, but withdrawal results in an increase to the lease
rate and the imposition of additional financial covenant restrictions. The funds
pledged under the 1999 Lease ($7.0 million at September 30, 2000) may be
invested by the Company in certain securities, however the funds are restricted
as to withdrawal at all times.
Net cash used in financing activities was $31.9 million. The common stock
repurchase program, begun in June 2000, used cash funds of $39.6 million during
the third quarter of 2000. The exercises of common stock options net of the
associated tax benefits provided $7.7 million in cash. The Company expects to
complete the $100 million stock repurchase authorized by the Board of Directors
in the fourth quarter of 2000. The Company acquired Splash in October 2000 for
approximately $146 million in cash.
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. 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.
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.
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.
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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.
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. Any delays in our OEM's
ability to design and market a product with our assistance may have a
significant impact on our revenues and results of operations.
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 on both our and our OEM's ability 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.
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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 those 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. To date, we have successfully obtained licenses to use Adobe's
PostScript(TM) software for our products, where required. However, we cannot be
assured that Adobe will continue to grant future licenses to Adobe
PostScript(TM) software on reasonable terms, in a timely manner, or at all. We
are required to submit new products to Adobe for testing prior to shipping. We
cannot be assured 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 the OEM's specific
printers or copiers that our products are designed for declines, our sales
revenue may be adversely affected. We cannot assure you that such demand for
networked printers and copies will continue, or that demand will continue at the
existing price points of our products, nor can we control whether the demand
will continue for the specific OEM printers and copiers that utilize our
products. We believe that demand for our products may also be affected by a
variety of economic conditions and considerations including the discretionary
nature of spending for our products, which we believe we will experience in the
fourth quarter of 2000. We cannot assure you that demand for our products will
continue at current levels.
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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 Velocity
software products, EFI Professional Services and our eBeam internet enabled
white board appliance. We expect to invest funds to develop distribution and
marketing channels for 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.
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 our OEM's ability to get new products to market in a timely
fashion;
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
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o general economic conditions.
Many of 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
operating 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.
We face risks from our international operations and from currency fluctuations
Approximately 51% and 53% of our revenue for the three months ended September
30, 2000 and 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 in Europe.
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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 would 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.
Our products may contain defects that are not discovered until after shipping.
Our products consist of hardware and software developed by ourselves and others.
Our products may contain undetected errors when first introduced or when new
versions are released, and we have in the past discovered software and hardware
errors in certain of our new products after their introduction. There can be no
assurance that errors would not be found in new versions of our products after
commencement of commercial shipments, or that any such errors would not result
in a loss or delay in market acceptance and thus harm our reputation and
revenues. In addition, errors in our products (including errors in licensed
third party software) detected prior to new product releases could result in
delays in the introduction of new products and incurring of additional expense,
which could harm our operating results.
Seasonal purchasing patterns of our OEM customers have historically caused lower
fourth quarter revenue, which may negatively impact our stock price
Our results of operations have typically followed a seasonal pattern reflecting
the buying patterns of our large OEM customers. In the past, our fiscal fourth
quarter results have been adversely affected because some or all of our OEM
customers wanted to 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
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.
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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 and such seasonal fluctuations may negatively impact our stock price.
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 contract manufacturers 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 contract manufacturers to produce products sold to
customers. While we closely monitor our contract manufacturers' performance we
cannot assure you that such contract manufacturers will continue to perform for
us as well as they have in the past. We also cannot assure you that difficulties
experienced by our contract manufacturers (such as interruptions in a contract
manufacturers' ability to make or ship our products, or fix quality assurance
problems) would not harm our business, operating results, or financial
condition.
20.
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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 and interest 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
The Company utilizes 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 are intercompany accounts receivable and payable between
the Company and its Japanese subsidiary. The periods of the forward foreign
exchange contracts are normally for one month or less. 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 September 30, 2000, the Company had one outstanding forward foreign
exchange contract to sell Yen equivalent to approximately $2.7 million with an
expiration date of October 12, 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
September 30, 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
$0.3 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 portfolio at September 30, 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 September 30, 2000, the Company's cash and short-term
investment portfolio includes debt securities of $428.4 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 $3.6 million as of September 30, 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 September 30, 2000.
21.
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PART II Other Information
ITEM 1. Legal proceedings
In November 2000, the U.S. Magistrate Judge handling the patent litigation
between the Company and Splash Technology Holdings, Inc. granted the Company's
motion to dismiss the complaint and Splash Technology Holdings, Inc.'s
counterclaims. The Court's order ends the litigation and brings to a close all
pending patent issues between the Company and Splash Technology Holdings, Inc.
In January 1999, two class action complaints were filed, and subsequently
consolidated into one case, in the United States District Court for the Northern
District of California against Splash, certain of its officers and directors,
and certain underwriters. The complaints allege that defendants made false and
misleading statements about Splash's business condition and prospects during a
class period of January 7, 1997 - October 13, 1998, and assert claims for
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and SEC Rule 10b-5. The complaints in both actions seek damages of an
unspecified amount. There has been no discovery to date and no trial is
scheduled in these actions. The Company believes it has meritorious defenses in
this action and intends to defend it vigorously. Failure by the Company to
obtain a favorable resolution of the claims set forth in these actions could
have a material adverse affect on the Company's business, results of operations
and financial condition. Currently, the amount of such material effect cannot be
reasonably estimated.
In October 2000 Splash and the Company entered into a settlement agreement for
the class action lawsuit filed against Splash and its directors on August 31,
2000 after the announcement of the merger agreement between Splash and the
Company. The court approved the settlement agreement and the case was dismissed
with prejudice of the litigation. The Company and Splash deny any wrongdoing
whatsoever, but agreed to the settlement to eliminate the burden and expense of
further litigation.
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 2.2**** Agreement and Plan of Merger, dated as of
August 30, 2000, by and among the
Company, Vancouver Acquisition Corp. and
Splash Technology Holdings, Inc.
Exhibit 2.3***** Amendment No. 1, dated as of October 19,
2000, to the Agreement and Plan of
Merger, dated as of August 30, 2000, by
and among the Company, Vancouver
Acquisition Corp. and Splash Technology
Holdings, Inc.
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.
22.
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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
Exhibit 10.21** 2000 Employee Stock Purchase Plan
Exhibit 10.22** Employment Agreement dated April 13,
2000, by and between Joseph Cutts and the
Company.
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.
*** Exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000 are
incorporated herein by reference.
**** Exhibit (d) (1) to the Company's Schedule TO-T
filed with the Commission on September 14, 2000 is
incorporated herein by reference.
***** Exhibit (d) (5) to the Company's TO/A Number 3 on
October 20, 2000 is incorporated herein by reference.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on August 31,
2000. The report related to the acquisition of Splash
Technology Holdings, Inc. in a cash merger, valued at
approximately $146 million. The merger was completed on
October 23, 2000.
23.
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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: November 10, 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)
24.
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EXHIBIT INDEX*
No. Description
--- -----------
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.
