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, 2001
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, 2001 was
53,329,122.
An Exhibit Index can be found on Page 25.
ELECTRONICS FOR IMAGING, INC.
INDEX
Page No.
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000.................3
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000 .........4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000...........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
PART I Financial Information
ITEM 1. Condensed Consolidated Financial Statements
Electronics for Imaging, Inc.
Consolidated Balance Sheets
March 31, December 31,
2001 2000
(In thousands, except share and per share amounts) (unaudited)
--------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $134,897 $102,804
Short-term investments 240,765 250,799
Accounts receivable, net 73,998 72,006
Inventories 31,038 27,076
Other current assets 37,001 43,166
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 517,699 495,851
- ---------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 53,268 51,456
Restricted investments 19,596 14,134
Other assets 89,612 92,949
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $680,175 $654,390
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $49,363 $49,252
Accrued and other liabilities 51,575 50,483
Income taxes payable 11,189 6,199
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 112,127 105,934
- ---------------------------------------------------------------------------------------------------------------------------
Long-term obligations, less current portion 3,140 3,140
Commitments and Contingencies (Note 7)
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued and outstanding -- --
Common stock, $.01 par value; 150,000,000 shares authorized;
53,222,937 and 52,685,593 shares outstanding, respectively 577 572
Additional paid-in capital 248,835 240,202
Treasury stock, at cost, 4,477,500 shares (99,959) (99,959)
Accumulated other comprehensive income 1,477 420
Retained earnings 413,978 404,081
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 564,908 545,316
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $680,175 $654,390
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
3
Electronics for Imaging, Inc.
Consolidated Statements of Income
(unaudited)
Three Months
Ended March 31,
(In thousands, except per share amounts) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Revenue $141,093 $151,515
Cost of revenue 78,345 77,903
- -------------------------------------------------------------------------------------------------------------------
Gross profit 62,748 73,612
- -------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 26,464 19,778
Sales and marketing 15,610 16,355
General and administrative 6,603 5,035
Amortization of goodwill and other acquisition-related charges 3,045 --
----- ----------
Total operating expenses 51,722 41,168
- -------------------------------------------------------------------------------------------------------------------
Income from operations 11,026 32,444
- -------------------------------------------------------------------------------------------------------------------
Other income, net 4,318 5,501
----- -----
Income before income taxes 15,344 37,945
Provision for income taxes (5,447) (12,522)
- -------------------------------------------------------------------------------------------------------------------
Net income $9,897 $25,423
- -------------------------------------------------------------------------------------------------------------------
Net income per basic common share $0.19 $0.45
Shares used in per-share calculation 53,009 55,921
Net income per diluted common share $0.18 $0.44
Shares used in per-share calculation 54,180 58,202
- -------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
4
Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months
Ended March 31,
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $9,897 $25,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,395 4,116
Deferred income tax 656 --
Changes in operating assets and liabilities:
Accounts receivable (1,993) (11,901)
Inventories (3,962) (845)
Receivable from subcontract manufacturers 10,258 (2,422)
Other current assets (4,753) 423
Accounts payable and accrued liabilities 1,203 1,074
Income taxes payable 4,996 3,471
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,697 19,339
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases and sales / maturities of short-term investments, net 11,090 (48,782)
Net purchases of restricted investments (5,462) --
Investment in property and equipment, net (6,162) (4,371)
Purchase of other assets 293 314
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (241) (52,839)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term obligations -- (224)
Issuance of common stock 8,637 8,544
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,637 8,320
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 32,093 (25,180)
Cash and cash equivalents at beginning of year 102,804 163,824
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $134,897 $138,644
- ----------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
5
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, 2001, have been prepared on the same basis as the
audited consolidated financial statements as of and for the year ended December
31, 2000, contained in the Company's Annual Report to Stockholders. 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 March
31, 2001 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 adopted SFAS 133 on January 1, 2001 and the adoption
of this pronouncement has not had a material impact on the Company's financial
position and results of operations.
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 except per share amounts, unaudited) 2001 2000
- --------------------------------------------------------------------------------
Net income available to common shareholders $9,897 $25,423
Shares
Basic shares 53,009 55,921
Effect of Dilutive Securities 1,171 2,281
------- -------
Diluted shares 54,180 58,202
- --------------------------------------------------------------------------------
Earnings per common share
Basic EPS $0.19 $0.45
Diluted EPS $0.18 $0.44
Options to purchase 8,042,142 and 365,869 shares of common stock outstanding as
of March 31, 2001 and 2000, respectively were not included in the computations
of diluted EPS because the options' exercise prices were greater than the
average market price of the common shares for the periods then ended.
6
4. Comprehensive Income
The Company's comprehensive income, which encompasses net income and currency
translation adjustments, is as follows:
Three Months Ended March 31,
(In thousands, unaudited) 2001 2000
- --------------------------------------------------------------------------------
Net income $9,897 $25,423
Market valuation of investments 1,129 (17)
Currency translation adjustment (72) (6)
---------- ------------
Comprehensive income $10,954 $25,400
- --------------------------------------------------------------------------------
5. Mergers and Acquisitions
2000 Acquisitions
On October 23, 2000, the Company acquired Splash Technology Holdings, Inc.
("Splash") for total consideration of approximately $159.7 million, comprising
of $146.8 million in cash, $6.0 million for the fair value of stock options
assumed and $6.9 million of capitalized transaction-related costs. The
acquisition was accounted for as a purchase business combination and
accordingly, the purchase price has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their estimated fair values on the date of acquisition. Amortization of goodwill
and other intangibles related to acquisition of Splash were $3.0 million for the
three months ended March 31, 2001. At March 31, 2001 the unamortized portion of
goodwill and other intangibles totaled $72.9 million and is being amortized over
estimated lives ranging from 4 to 7 years.
The unaudited pro forma information set forth below represents the revenue, net
income and earnings per share of the Company and Splash as if the acquisition
were effective on January 1, 2000, and includes certain pro forma adjustments,
including the adjustment of amortization expense to reflect purchase price
allocations, interest income to reflect net cash used for the purchase and the
related income tax effects of these adjustments.
Three Months
Ended March 31,
(in thousands, except per share data) 2000
- --------------------------------------------------------------------------------
Revenue $175,369
Net income $23,836
Basic earnings per common share $0.43
Diluted earnings per common share $0.41
- --------------------------------------------------------------------------------
The unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated at the beginning
of the period presented.
6. Balance Sheet Components
March 31, December 31,
(In thousands, unaudited) 2001 2000
- --------------------------------------------------------------------------------
Accounts receivable:
Accounts receivable $76,215 $74,436
Less reserves and allowances (2,217) (2,430)
-------- --------
$73,998 $72,006
- --------------------------------------------------------------------------------
7
6. Balance Sheet Components (continued)
March 31, December 31,
(In thousands, unaudited) 2001 2000
- --------------------------------------------------------------------------------
Inventories:
Raw materials $21,191 $25,928
Work-in-process 1,194 --
Finished goods 8,653 1,148
-------- -------
$31,038 $27,076
- --------------------------------------------------------------------------------
Other current assets:
Receivable from subcontract manufacturers $ 8,653 $18,911
Deferred income taxes, current portion 17,035 17,695
Other 11,313 6,560
------- -------
$37,001 $43,166
- --------------------------------------------------------------------------------
Property and equipment:
Land and land improvements $30,026 $ 28,930
Equipment and purchased software 49,929 70,413
Furniture and leasehold improvements 12,627 16,354
Buildings 3,556 --
-------- --------
96,138 115,697
Less accumulated depreciation and amortization (42,870) (64,241)
-------- --------
$53,268 $ 51,456
- --------------------------------------------------------------------------------
Other assets:
Deferred income taxes, non-current portion $15,031 $15,031
Goodwill 53,039 53,406
Other intangibles 28,970 29,432
Accumulated amortization of goodwill and intangibles (9,142) (6,560)
Other 1,714 1,640
-------- --------
$89,612 $92,949
- --------------------------------------------------------------------------------
Accrued and other liabilities:
Accrued compensation and benefits $11,814 $15,019
Accrued product-related obligations 18,668 13,427
Accrued royalty payments 8,638 8,564
Other accrued liabilities 12,455 13,473
------ ------
$51,575 $50,483
- --------------------------------------------------------------------------------
7. 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. Additionally, 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 and certain of its officers on behalf of purchasers of
the common stock of Splash during the class period from January 7, 1997 through
8
October 13, 1998. The complaints allege violations of securities laws during the
class period. Management believes the lawsuits are without merit. 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.
On August 31, 2000, after the announcement of the merger agreement between
Splash and the Company, a class action lawsuit was filed against Splash and its
directors. The Plaintiffs, Splash and the Company have agreed in principle to
enter into a settlement agreement that would resolve all outstanding disputes
and dismiss the case with prejudice. The parties are currently finalizing the
details of the settlement agreement. The Company and Splash deny any wrongdoing
whatsoever, but agreed to the settlement to eliminate the burden and expense of
further litigation. In addition, the Company is involved from time to time in
litigation relating to claims arising in the normal course of its business.
9
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 the Company and related notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. Results for the
three months ended March 31, 2001 are not necessarily indicative of the results
expected for the entire fiscal year ended December 31, 2001. 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 2000 Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission.
Results of Operations
The following tables set forth items in the Company's consolidated statements of
income as a percentage of total revenue for the three months ended March 31,
2001 and 2000 and the percentage change from 2001 over 2000. These operating
results are not necessarily indicative of results for any future period.
% change
2001
Three Months ended March 31, over
2001 2000 2000
- ---------------------------------------------------------------------------------------------------------------------------
Revenue 100 % 100 % (7)%
Cost of revenue 56 % 51 % 1 %
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 44 % 49 % (15)%
- ---------------------------------------------------------------------------------------------------------------------------
Research and development 19 % 13 % 34 %
Sales and marketing 11 % 11 % (5)%
General and administrative 4 % 3 % 31 %
Amortization of goodwill and other acquisition-
related charges 2 % -- % -- %
----- -----
Operating expenses 36 % 27 % 26 %
- ---------------------------------------------------------------------------------------------------------------------------
Income from operations 8 % 22 % (66)%
- ---------------------------------------------------------------------------------------------------------------------------
Other income, net 3 % 3 % (22)%
----- -----
Income before income taxes 11 % 25 % (60)%
Provision for income taxes 4 % 8 % (57)%
----- -----
- ---------------------------------------------------------------------------------------------------------------------------
Net income 7 % 17 % (61)%
- ---------------------------------------------------------------------------------------------------------------------------
Revenue
Revenue decreased by 7% to $141.1 million in the three month period ended March
31, 2001, compared to $151.5 million in the three month period ended March 31,
2000. The corresponding unit volume increased by 13%. The decrease in revenue
was primarily due a decline in average selling prices due to changes in product
mix.
10
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. 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.
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.
Revenue Three Months Ended Three Months Ended
(in thousands) March 31, 2001 March 31, 2000 % change
- -------------------------------------------------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers $56,824 40% $73,747 49% (23)%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 30,074 21% 33,214 22% (9)%
Controllers for Digital
Black and White Solutions 40,769 29% 26,828 18% 52 %
Spares, Licensing
& Other misc. sources 13,426 10% 17,726 11% (24)%
- ---------------------------------------------------------------------------------------------------------------------------
Total Revenue $141,093 100% $151,515 100% (7)%
- ---------------------------------------------------------------------------------------------------------------------------
hree Months Ended Three Months Ended
Volume March 31, 2001 March 31, 2000
- -------------------------------------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers 10% 20%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 45% 48%
Controllers for Digital
Black and White Solutions 42% 28%
Spares, Licensing
& Other misc. sources 3% 4%
- -------------------------------------------------------------------------------------------------------------
Total Volume 100% 100%
- -------------------------------------------------------------------------------------------------------------
The category of stand-alone servers connecting to digital color copiers made up
40% of total revenue and 10% of total unit volume for the three month period
ended March 31, 2001. For the same period a year ago, it made up 49% of total
revenue and 20% of total unit volume. The products in this category continue to
offer higher margins relative to the other product lines, but sales of this
category have declined recently as a major customer delayed the introduction of
a new product. That product began shipping late in the first quarter of 2001.
The category of embedded desktop controllers made up 21% of total revenue and
45% of total unit volume in the first quarter of 2001. It made up 22% of total
revenue and 48% of total unit volume in the first quarter of 2000. These
products, except for the chipset solutions, are generally characterized by 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. There was a
slight reduction in revenue from this category as a result of some delays in the
introduction of new products and the acceleration of some initial sales
associated with product introductions in the fourth quarter of 2000, thus
reducing the sales in the first quarter of 2001.
11
The digital black and white controller category made up 29% of total revenue and
42% of total unit volume in the three month period ended March 31, 2001. In the
three month period ended March 31, 2000, it made up 18% of total revenue and 28%
of total unit volume. This product category can also be characterized by lower
unit prices and associated margins, but much higher unit volumes than the
Company has experienced in its more traditional stand-alone server line of
products. Sales in this category increased as new products were introduced in
late 2000 and early 2001. The Company expects that the sales in this product
category will decline in the second quarter of 2001 as OEM's sell through the
product purchased at introduction to fill their distribution pipelines.
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 2001 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 previously and may in the future reduce prices 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 (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, 2001
and March 31, 2000 were as follows:
Three Months ended March 31,
(In thousands) 2001 2000 % change
- --------------------------------------------------------------------------------
North America $69,457 49% $73,935 49% (6)%
Europe 47,563 34% 52,849 35% (10)%
Japan 19,566 14% 18,727 12% 4%
Rest of World 4,507 3% 6,004 4% (25)%
- --------------------------------------------------------------------------------
$141,093 100% $151,515 100% (7)%
- --------------------------------------------------------------------------------
Shipments to each geographic area decreased in all areas except for Japan. The
Rest of World, Europe and North America experienced decreases of 25%, 10% and
6%, respectively, for the three month period ended March 31, 2001 compared to
the three month period ended March 31, 2000. The Rest of World region is
predominantly represented by the Southeast Asian countries and the decrease from
the prior year first quarter is a reflection of difficult economic conditions in
that region as well as the timing of new product introductions. Japan
experienced a slight increase of 4% for the three month period ended March 31,
2001 compared to the three months period ended March 31, 2000, again related to
product mix and timing of new product introductions. 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, Danka, Encad, Epson, Fuji-Xerox, Hewlett-Packard, Konica, Lanier,
Minolta, Oce, Ricoh, Sharp, Toshiba, Xerox and others. During 2001, 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 four OEM customers, Canon, Xerox, Minolta and Ricoh for 80% of its
revenue in aggregate for the three month period ended March 31, 2001 and Canon,
Xerox and Minolta for 68% of its revenue for the three month period ended March
31,2000. No assurance can be given that the Company's relationships with these
OEM partners will continue. 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.
12
The Company continues to work on the development of products utilizing the
Fiery, Splash and EDOX architecture and other products and intends to continue
to introduce new generations of server and controller products and other new
product lines with current and new OEM's in 2001 and beyond. No assurance can be
given that the introduction or market acceptance of new, current or future
products 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 margins were 44% and 49% for the three month periods ended
March 31, 2001 and March 31, 2000, respectively. The decrease in gross margin
was attributable to a change in product mix, with products with lower margins,
such as digital black and white controllers, comprising a larger share of the
total sales.
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
with third parties and our OEM partners, 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 26% in the three month period ended March 31,
2001 compared to the three month period ended March 31, 2000. Operating expenses
as a percentage of revenue amounted to 36% and 27% for the three month periods
ended March 31, 2001 and March 31, 2000, respectively. Increases in operating
expenses in absolute dollars of $10.6 million, were primarily caused by costs
associated with the hiring of additional full time employees (a net increase of
127 people at March 31, 2001 over March 31, 2000) to support product development
as well as to support expanded operations and $3.0 million for the amortization
of goodwill and purchased intangibles related to the acquisition of Splash.
The Company anticipates that operating expenses may continue to grow and
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 $26.5
million or 19% of revenue for the three month period ended March 31,
2001 compared to $19.8 million or 13% of revenue for the three month
period ended March 31, 2000. The 34% increase in research and
development expenses from the prior year first quarter was mainly due
to the inclusion of Splash as well as additional headcount and
component expenses for prototype development.
13
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, 2001 were $15.6
million or 11% of revenue compared to $16.4 million or 11% of revenue
for the three months ended March 31, 2000. The decrease in absolute
dollars of $0.8 million is due primarily to decreased promotional
expense partially offset with the inclusion of Splash. As the product
mix gravitates toward desktop and embedded products less sales and
marketing support may be required from the Company.
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, introduce
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 $6.6 million or 4% of
revenue for the three month period ended March 31, 2001, compared to
$5.0 million or 3% of revenue for the three month period ended March
31, 2000. The increase of $1.6 million was primarily due to the
increase in headcount to support the needs of the Company's growing
operations including our Dutch processing center, set up in the
second half of 2000 as well as the cost of registering and defending
our intellectual property. 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.
Amortization of Goodwill and Purchased Intangibles
Amortization of goodwill and other intangibles related to acquisition
of Splash were $3.0 million or 2% of revenue for the three months
ended March 31, 2001. At March 31, 2001 the unamortized portion of
goodwill and other intangibles totaled $72.9 million and is being
amortized over estimated lives ranging from 4 to 7 years.
Other Income
Other income relates mainly to interest income and expense, and gains and losses
on foreign currency transactions. Other income of $4.3 million for the three
month period ended March 31, 2001 decreased by 22% from $5.5 million for the
three month period ended March 31, 2000. The average investment balance for the
three month period ended March 31, 2001 as compared to the three month period
ended March 31, 2000, decreased after the Company invested $100 million in
repurchasing its common stock in 2000 and consummated the purchase of Splash.
Income Taxes
The Company's effective tax rate was 35.5% for the three month period ended
March 31, 2001 and 33% for the three month period ended March 31, 2000. The rate
increased as the result of the non-deductible write-offs of intangibles related
to the acquisition of Splash. In each of these periods, the Company benefited
from tax-exempt interest income, foreign sales, and the utilization of research
and development credits in achieving a consolidated effective tax rate lower
than that prescribed by the respective Federal and State taxing authorities. The
Company currently anticipates that the tax rate for the remainder of 2001 will
remain approximately 35.5%.
14
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $22.1 million to
$375.7 million as of March 31, 2001, from $353.6 million as of December 31,
2000. Working capital increased by $15.7 million to $405.6 million as of March
31, 2001, up from $389.9 million as of December 31, 2000. These increases are
primarily the result of net income, changes in balance sheet components and the
exercise of employee stock options.
Net cash provided by operating activities was $23.7 million for the three month
period ended March 31, 2001. The Company invests cash in excess of its operating
needs in short-term investments, mainly municipal securities. Sales in excess of
purchases of short-term and restricted investments were $5.6 million for the
three month period ended March 31, 2001. 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 $6.2 million of facilities, equipment and furniture during the
three month period ended March 31, 2001.
In 1997, the Company began development of a corporate campus on a 35-acre parcel
of land in Foster City, California In July 1999 the Company completed
construction of a ten-story, 295,000 square foot building funded under an
agreement entered into in 1997 ("1997 Lease") and began making rent payments.
Also in conjunction with the 1997 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" and
together with the 1997 Lease, the "Leases") to lease a maximum of 543,000 square
feet of additional facilities, to be constructed adjacent to the first building
discussed above. As of March 31, 2001, the lessor has funded $18.9 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 in December
2002. In connection with the 1999 Lease, the Company entered into a lease of the
related parcels of land in Foster City with the lessor of the buildings for 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 approximately
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 are in proportion to the amount drawn under
each lease. Under the 1997 Lease, the pledged collateral ($70.1 million at March
31, 2001) 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 ($19.6 million at March 31, 2001) may be
invested by the Company in certain securities, however the funds are restricted
as to withdrawal at all times.
Net cash provided by financing activities of $8.6 million in the three month
period ended March 31, 2001, 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 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 and
potentially fixed assets would increase significantly, thereby reducing the
Company's available cash resources. Further, the inventory the Company carries
could become obsolete thereby negatively impacting the Company's consolidated
financial position and results of operations. The Company also relies on several
sole-source suppliers for certain key components and could experience a
significant negative impact on its consolidated financial position and results
of operations if such supplies 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 intends to contest them vigorously,
but there can be no assurance that if damages are ultimately awarded against the
Company, the litigation will not adversely affect the Company's results of
operations.
Splash, along with former Splash officers, has been named in class action
lawsuits filed in the United States District Court for the
15
Northern District of California. The lawsuits are related to a decline in
Splash's stock price during 1997. The Company became successor to the lawsuits
when it acquired Splash in October 2000. The Company believes the lawsuits are
without merit and intends to contest them vigorously, but there can be no
assurance that if damages are ultimately awarded against the Company, the
litigation will not adversely affect the Company's results of operations.
On August 31, 2000, after the announcement of the merger agreement between
Splash and the Company, a class action lawsuit was filed against Splash and its
directors. The Plaintiffs, Splash and the Company have agreed in principle to
enter into a settlement agreement that would resolve all outstanding disputes
and dismiss the case with prejudice. The parties are currently finalizing the
details of the settlement agreement. The Company and Splash deny any wrongdoing
whatsoever, but agreed to the settlement to eliminate the burden and expense of
further litigation. 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
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, that 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. Xerox, our second largest
customer, has experienced serious financial difficulties in their business over
the past year. If Xerox continues to face such difficulties, our short-term
revenues and profitability could be materially and adversely affected through,
among other things, decreased sales volumes and write-offs of accounts
receivables and inventory related to Xerox products.
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.
16
Our OEMs work closely with us to develop products that are specific to each
OEM's copiers and printers. Many of the products we are developing require that
we 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 OEMs' 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 introduction 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 one of our servers or
controllers. 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
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 assure you that 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, and we cannot assure you that demand for our products will
continue at current levels.
We sell products that are large capital expenditures as well as discretionary
purchase items. In difficult economic times spending on information technology
is often decreased. As our products are of a more discretionary nature than many
other technology products, we may be more adversely impacted than other
technology firms. We are subject to economic sensitivity that could harm our
results of operations.
If we enter new markets or distribution channels this could result in delayed
revenues or higher operating expenses
17
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. 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 OEMs' 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.
Many of our OEM partners 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,
such fluctuations could adversely affect our stock price. Operating results may
fluctuate due to:
o varying 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 the financial and operational condition of OEM partners and
key suppliers;
o potential excess or shortage of skilled employees; and
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.
18
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 securities with maturities of less than 3 years. 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% of our revenue from the sale of products for the three month
periods ended March 31, 2001 and March 21, 2000, 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. 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 need to 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
19
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, trademark and trade secret
protection, nondisclosure agreements, and licensing and cross-licensing
arrangements to establish, maintain and protect our intellectual property
rights, all of which afford only limited protection. We have patent applications
pending in the United States and in various foreign countries. There can be no
assurance that patents will issue from these pending applications or from any
future applications, or that, if issued, any claims allowed will be sufficiently
broad to protect our technology. 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.
From time to time, litigation may be necessary to defend and enforce our
proprietary rights. Such litigation, whether or not concluded successfully for
us, could involve significant expense and the diversion of our attention and
other resources.
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 which 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 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 Our OEM partners have historically sought to minimize year-end
inventory investment (including the reduction in demand following
introductory "channel fill" purchases).
o The timing of new product releases and training by our OEM partners;
and
o Our OEM partners have achieved their yearly sales targets and
consequently delay further purchases into the next fiscal year( 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.
20
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, and have in the past made,
acquisitions of other companies or other companies' technology assets.
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.
We may incur losses on our equity investments.
We recently announced the creation of a fund to invest in the equity securities
of privately held companies, many of which can still be considered in the
startup or development stages. These investments are inherently risky as the
market for the technologies or products they have under development are
typically in the early stages and may never materialize. We could lose all or
part of our entire initial investment in these companies.
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 rely on the
ability of our subcontractors to manufacture products to be sold to our
customers, and while we closely monitor our subcontractors performance we cannot
assure you that such subcontractors will continue to manufacture our products in
a timely and effective manner. 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. If we decide
to change subcontractors we could experience delays in setting up new
subcontractors which would result in delay in delivery of our products.
We depend upon a limited group of suppliers for key components in our products
Certain components necessary for the manufacture of our products are obtained
from a sole supplier or a limited group of suppliers. These include motherboards
and processors from Intel and other related semiconductor components. We may not
maintain long-term agreements with any of our suppliers of components. Because
the purchase of certain key components involves long lead times, in the event of
unanticipated volatility in demand for our products, we could be unable to
manufacture certain products in a quantity sufficient to meet end user demand,
or we may hold excess quantities of inventory. We have increased our inventory
of components for which we are dependent upon sole or limited source suppliers,
or components whose prices fluctuate dramatically. As a result, we are subject
to an increasing risk of inventory obsolescence, which could materially and
adversely affect our operating results and financial condition. The market
prices and availability of certain components, particularly memory, and Intel
designed components, which collectively represent a substantial portion of the
total manufactured cost of our products, have fluctuated significantly in the
past. Significant fluctuations in the future could have a material adverse
effect on our operating results and financial condition. These fluctuations
could result in a reduction in gross margins.
21
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 2000 the Company utilized 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, 2001, the Company had one outstanding forward foreign exchange
contract to sell Yen equivalent to approximately $3.3 million with an expiration
date of April 12, 2001. 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,
2001, the difference between the fair value of the outstanding contract and the
contract amount was not material. 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 $298,000. 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, 2001, 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, 2001, the Company's cash and short-term investment portfolio
includes debt securities of $257.1 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 $1.5 million.
The fair value of the Company's long-term debt, including current maturities,
was estimated to be $3.5 million as of March 31, 2001, 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, 2001.
22
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*
Not applicable
* Exhibits to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 are incorporated herein by
reference.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on January 2,
2001. This report amended the Form 8-K filed on October 23,
2000, which related to the acquisition of Splash Technology
Holdings, Inc., in order to include the required financial
statements and pro forma financial information.
23
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 11, 2001
--------------------------------------------
Guy Gecht
Chief Executive Officer
(Principal Executive Officer)
--------------------------------------------
Joseph Cutts
Chief Financial Officer
(Principal Financial and Accounting Officer)
24
EXHIBIT INDEX*
No. Description
--- -----------
* Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 are incorporated herein by reference.
25