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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File Number: 0-18805
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Velocity Way, Foster City, CA 94404
(Address of principal executive offices) (Zip Code)
(650) 357- 3500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 Par Value
(Title of Class)
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 aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 2001.
Common Stock, $.01 par value: $1,166,534,171 **
The number of shares outstanding of each of the registrant's classes of
common stock as of February 28, 2001.
Common Stock , $.01 par value: 53,820,155
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the Annual Meeting of Stockholders to be held on May 17,
2001 are incorporated by reference into Part III hereof.
** Based upon the last trade price of the Common Stock reported on the
NASDAQ National Market on February 28, 2001. Excludes approximately
5,386,418 shares of common stock held by Directors, Officer and holders of
5% or more of the Registrant's outstanding Common Stock on December 31,
2000. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control
with the Registrant.
1
PART I
This Annual Report on Form 10-K includes certain registered trademarks and
trademarks of Electronics for Imaging, Inc. ("EFI or the Company") and others.
EFI, the EFI logo, Fiery, the Fiery logo, Fiery Driven, the Fiery Driven logo,
Fiery Driven and Design, ColorWise, RIP-While-Print, PowerPage, the PowerPage
logo, PowerBand, PowerSmooth, PSClone, PSView, EDOX, Mousitometer, Spot-On,
Spot-On and Design, Check Mate, Freedom of Press, Go Wide and Solitaire are
registered trademarks of Electronics for Imaging, Inc. with the U.S. Patent and
Trademark Office, and certain other foreign jurisdictions. Fiery Prints, Fiery
ZX, Fiery LX, Fiery SI, Fiery XJ, Fiery XJe, Fiery XJ-W, Bookleaker, Fiery
Downloader, Fiery Scan, Fiery Spooler, Fiery FreeForm, Fiery Link, Fiery Driver,
PowerWise Architecture, RIPChips, WebTools, WebSpooler, WebInstaller, WebStatus,
Command Workstation, Continuous Print, DocBuilder, EFICOLOR, EFICOLOR Works,
FreeForm, Memory Multiplier, NetWise, STARR Compression, EDOX Profile Manager,
RIP Ahead, Instant Reprint, Document Recovery, Sapphire, Opal, Velocity and
eBeam are trademarks of Electronics for Imaging, Inc. All other terms and
product names may be registered trademarks or trademarks of their respective
owners, and are hereby acknowledged.
Certain of the information contained in this Annual Report on Form 10-K,
including without limitation, statements made under this Part I, Item 1
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk" which are not historical facts, may
include "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. When used herein, the words
"anticipate," "believe," "estimate," "expect," "intend," "will" and similar
expressions as they relate to the Company or its management are intended to
identify such statements as "forward-looking statements." Such statements
reflect the current views of the Company and its management with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Important factors that
could cause the Company's actual results to differ materially from those
included in the forward-looking statements made herein include, without
limitation, those factors discussed in Item 1 "Business - Competition," in "Item
7 Management's Discussion and Results of Operations - Factors That Could
Adversely Affect Performance" and elsewhere in this Annual Report on Form 10-K
and in the Company's other filings with the Securities and Exchange Commission,
including the Company's most recent Quarterly Report on Form 10-Q. The Company
assumes no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements.
Item 1: Business.
General
EFI, a Delaware corporation was founded in 1989 by Efraim Arazi. EFI designs and
markets products that support color and black-and-white printing on a variety of
peripheral devices. Its products incorporate hardware and software technologies
that transform digital copiers and printers from many leading copier
manufacturers into fast, high-quality networked printers. The Company's products
include stand-alone servers, which are connected to digital copiers and other
peripheral devices, and controllers, which are embedded in digital copiers and
desktop color laser printers. The Company sells its products primarily to
original equipment manufacturers ("OEMs") in North America, Europe and Japan.
The Company was founded to develop innovative solutions to enable color desktop
publishing. In pursuit of this goal, the Company first developed the Fiery(R)
line of color servers ("Fiery Color Servers") to enable in-house,
short-production run color printing, together with application and system
software to facilitate color correction and device-independent color. Fiery
Color Servers are sophisticated, stand-alone computers that enable digital
copier machines to accept, process, and print digital images from personal
computers and computer networks. Historically, the Company primarily focused its
efforts on its stand-alone Fiery Color Servers that supported printing on
digital color copiers and, until 1999, substantially all of its revenue resulted
from the development and sale of these stand-alone products. Although
development and marketing of embedded solutions began in prior years, during
1999, the Company expanded its focus to include several additional embedded
solutions that support printing on a broader range of devices, including digital
black-and-white copiers and desktop color laser and inkjet printers ("Fiery
Controllers" and, together with Fiery Color Servers, "Fiery Products"). In 1999,
the Company also developed newer stand-alone Fiery Color Servers for wide-format
color inkjet printers and restructured its sales model by entering into direct
relationships with the manufacturers of such wide-format printers rather than
selling to sales distributors. During 1999, the Company expanded its line of
digital color servers through its merger with Management Graphics, Inc. ("MGI")
and its EDOX(R) line of digital color servers ("EDOX Color Servers") and
introduced its first Internet appliance product, eBeam(TM).
In 2000, the Company continued to develop Fiery and EDOX Products as well as new
software applications for existing and new generations of a variety of new
peripheral devices, including the development of its Velocity(TM) software. See
"Growth and Expansion
2
Strategies - Proliferate and Expand Product Lines." In 2000, the Company again
expanded its line of digital color servers through its acquisition of Splash
Technology Holdings, Inc. ("Splash") and its Splash(TM) line of digital color
servers ("Splash Color Servers" and together with Fiery Color Servers and EDOX
Color Servers, "EFI Color Servers"). Additionally, in 2000, the Company
announced EFI Professional Services in an effort to provide technical support,
training and strategic consulting to end users. See "Growth and Expansion
Strategies - Develop and Expand Professional Services." Also in 2000 the company
began selling its Velocity(TM) brand of workflow software ("Velocity Workflow
Software"). See "Growth and Expansion Strategies - Develop and Expand Velocity
Workflow Software."
In the past, the Company has achieved significant growth in net revenue and
operating income before adjustments for purchase accounting. The Company's
growth is contingent on a number of factors, many of which are outside of its
control. These factors include the overall rate of growth in the color server
market and the impact of economic conditions on the demand for the Company's
products. Due to these and other factors (including an increasingly higher base
from which to grow), the Company's historical growth rate has been difficult to
sustain and will be difficult to exceed in the future. Accordingly, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance.
The Electronics for Imaging Solution
The Company develops products with a wide range of price and performance levels
designed to make high-quality color printing in short-run productions easier and
more accessible to the broader market. The Company believes that consumers
generally prefer color as evidenced by the migration of photographs, motion
pictures and television from black-and-white to color. In the personal computer
field, EFI believes this preference is shown by the almost exclusive use of
color monitors with color-oriented graphical user interfaces, application
software and Internet content. In each of these cases, once the enabling
technology developed sufficiently, consumer adoption of color quickly followed.
The Company believes that consumers prefer color in documents created through
desktop publishing. Until recently, however, the technology was not available to
do this in a high quality, quick and cost-effective manner due to the complexity
of accurate color reproduction. EFI Color Servers permit users of digital color
copiers to transmit and convert digital data from a computer to a color copier
so that the color copier can print high-quality color documents easily, quickly
and cost-effectively. As a result, the Company's color servers transform digital
color copiers into fast, high-quality, networked color printers.
The Company also believes that the black-and-white copier market is migrating
toward the development and use of digital black-and-white copiers. Thus, in
addition to EFI Color Servers for digital color copiers, the Company has
leveraged its technology to develop and manufacture other products that support
both color and black-and-white printing. These products include: (i) Fiery
servers for digital black-and-white copiers; (ii) Fiery Color Servers for
wide-format inkjet printers; and (iii) embedded Fiery Controllers for digital
black-and-white copiers and desktop color laser printers. See "Products and
Technology."
Growth and Expansion Strategies
The Company's overall objective is to continue to introduce new generations of
controller products, new software applications, and other new product lines, as
well as offering professional consulting services. With respect to its current
products, the Company's primary goal is to provide a range of processing and
printing solutions that address broad sections of the color printing market and
to continue to leverage its technology to enable digital black-and-white
printing on additional peripheral devices including digital black-and-white
copiers and multi-function devices. The Company's strategy to accomplish these
goals consists of six key elements.
Proliferate and Expand Lines
The Company intends to continue to develop new products that are scalable and
offer a broad range of features and performance when connected to, or integrated
with, digital color and black-and-white copiers, as well as desktop color laser
printers. Historically, the Company sold products that supported digital color
copiers. In 1996 the Company expanded its line of color servers to drive a wide
range of output devices including desktop color laser printers and wide-format
color inkjet printers with poster-size output. In 1997, the Company further
expanded the use of its technology, shipping its first products that supported
black-and-white printing systems and copiers. In 1998, the Company introduced
its next generation of products based upon EFI's Fiery ZX and Fiery X2 platforms
and in 1999, the Company introduced its next generation of products based upon
EFI's Fiery Z4 and Fiery X4 platforms. In 2000, the Company again introduced its
next generation of products based upon EFI's new Fiery X3 platform which
includes more advanced hardware and EFI's latest technology innovations,
including ColorWise(R) 2.0, NetWise(TM) 2.0, Fiery Link(TM) and Fiery Driver(TM)
which provide for advances in color performance, networking capabilities and
workflow productivity. In 2000, the Company also introduced the EDOX 2000
Document Server, an upgrade to the EDOX Color Servers. By utilizing the
advantages of these new platforms, the Company intends to continue to develop
new products. The Company also intends to continue to develop new software
applications
3
that advance the performance and usability of its servers and embedded
controllers. In 2000, the Company developed a new line of software designed to
maximize workflow efficiencies which includes VelocityBalance(TM),
VelocityBuild(TM), VelocityEstimate(TM) and VelocityScan(TM). In 2000, the
Company also developed Harmony(TM) Software Developers Kit which enables users
to develop custom applications that maximize the power, speed and throughput of
copiers and printers powered by Fiery technology. We expect these new software
applications will be the first of many software offerings from the Company.
On October 23, 2000, the Company acquired Splash in a cash transaction, valued
at approximately $159.7 million. Splash was a Sunnyvale, California-based
corporation that developed and manufactured color servers that provide an
integrated link between desktop computers and digital color laser copiers and
wide format printers, including Splash(TM) Servers. The acquisition of Splash
adds to EFI's engineering talent and complements the Company's product strategy
of bringing high-performance, cost-effective digital printing technology to a
wide range of markets.
The Company also plans to expand its product line to include Internet appliance
products. In November, 1999, the Company introduced eBeam(TM). eBeam(TM)
converts a conventional whiteboard into a digital workspace, allowing users to
capture whiteboard meeting-notes and diagrams in real time on their personal
computers. Words and images can be viewed, edited and shared across the world
using a standard web browser. eBeam(TM) will be competing in a new market for
EFI - the market for office supplies and meeting-related services. In May, 2000,
the Company introduced its second generation eBeam(TM) product. Currently,
eBeam(TM) is being sold through resellers and distributors, as well as directly
to consumers via the Web and a toll-free number.
Develop and Expand Velocity(TM) Workflow Software
The Company is continuing to develop software workflow solutions designed to
provide print production operations with important new value-adding capabilities
while at the same time increasing equipment utilization and overall throughput.
Upcoming Velocity(TM) modules are expected to include scanning, imposition and
editing, Internet print services, content management, advance ticketing, and job
estimating and bidding.
Develop and Expand Professional Services
In February, 2000, the Company announced EFI Professional Services. While
contract-based technical support has been available from EFI for some time, an
expanded-services group has been formed and is offering end users greater
options for technical support, training with both standardized and customized
curriculums, and strategic consulting. EFI strategic consultants offer large
organizations expertise in network print architecture and support, printer
management, data visualization, and document management. EFI believes that
offering professional services will help to lower the total cost of networked
corporate printing, lead to greater productivity, and improve the overall
quality and visual appeal of documents. EFI also believes that offering
professional services will help accelerate the migration of color printing in
the corporate marketplace.
Develop and Expand Relationships with Key Industry Participants
The Company has established relationships with leading color printer industry
companies such as Canon, Danka Business Systems, Epson, Fuji-Xerox,
Hewlett-Packard, Ikon Office Solutions, Konica, Minolta, Oce, Ricoh, Sharp,
Toshiba, and Xerox (collectively, the "Strategic Partners" or "OEM partners").
EFI seeks to expand its relationships with its Strategic Partners in pursuit of
the goal of offering Fiery, EDOX and Splash products for additional digital
color and black-and-white devices produced by its Strategic Partners. The
Company also seeks to establish relationships with other digital copier and
printer companies for the distribution of Fiery, EDOX and Splash products with
their copiers and printers.
Establish Enterprise Coherence
In its development of new products and platforms, EFI seeks to establish
coherence across its entire product line by designing products that provide a
consistent "look and feel" to the end-user. EFI believes enterprise coherence
should create higher productivity levels as a result of shortened learning
curves. Additionally, enterprise coherence should lower the total cost of
ownership by providing one source for sales, support and training. The Company
believes that its effort to achieve enterprise coherence will continue to
engender goodwill among its Strategic Partners and the end-users of its products
and assist in the development of new strategic relationships and markets for the
Company.
4
Leverage Technology Expertise to Expand the Scope of Products and Markets
The Company has assembled an experienced team of technical personnel with
backgrounds in color reproduction, electronic pre-press, image processing,
networking, and software and hardware engineering. By applying its expertise in
these areas, the Company expects to continue to expand the scope and
sophistication of its products and gain access to new markets.
Products and Technology
The Company is a leader in enabling networked printing solutions. EFI's
technology allows copiers, printers and digital presses to be shared across work
groups, the enterprise and the Internet. The Company develops products with a
wide range of price and performance levels designed to make high-quality,
short-run color and black and white digital printing easier and more accessible
to the broader market. The Company has a model for almost every major digital
printing technology today, including:
o desktop color laser printers,
o high-end desktop ink jet printers,
o wide-format printers,
o mid-range color copiers,
o mid-range digital black and white copiers,
o production color copiers and
o high-speed digital presses.
Thus, we believe the Company's products are attractive to a variety of end users
including, multimedia authors, advertising agencies, print-for-pay businesses,
graphic designers, pre-press providers and small to large businesses. The
Company currently has two main product lines that support color and
black-and-white printing: (i) stand-alone servers which are connected to digital
copiers and other peripheral devices and (ii) controllers which are embedded in
digital copiers and desktop laser printers. All of EFI's products incorporate
EFI's proprietary software and hardware features.
EFI Technology
From its inception, EFI has invested heavily in research and development. EFI
has focused on developing technologies that could be implemented in a variety of
products. Examples of such technologies include Fiery DocBuilder(TM), which
enables electronic collation, reverse order printing, job merging and editing,
and Fiery WebTools(TM) which enables print job management from different
computer platforms via a Java(TM)-enabled Web Browser. Fiery WebTools(TM) also
provides remote access to the print queue so an administrator can obtain instant
updates on job status and error messages, allowing for a timely response to
problems, and provides job accounting and job security capabilities which are
essential in network printing environments. Other examples of EFI technologies
include, (i)RIP-While-Print(R) which allows one page to be printed while
subsequent pages are simultaneously processed; (ii) Continuous Print(TM) which
allows processed pages to be stored in memory before printing, eliminating the
need for the copier or printer to cycle down between unique pages; (iii)
ColorWise(R)2.0, EFI's next-generation color management system that simplifies
color printing for beginners through features like automatic Pantone-matching
and the ability to process multiple files on the same page while providing
expert users with even greater color control and accuracy; (iv) Fiery Driver(TM)
which is a unified printing interface that simplifies the printing process; (v)
Fiery Link(TM) which provides users with information on print job status and
connected Fierys allowing users to monitor the status of any print job, its
position in the queue, and general information on the Fiery and paper and toner
levels from any workstation; and (vi) ECT compression, an improved and more
advanced compression scheme than EFI's previous STARR(TM) compression
technologies, which offers definite compression ratios and virtually lossless
image quality. Compression software decreases the amount of memory necessary to
store documents during processing and enables faster printing of documents. In
addition to such software innovations, EFI custom designs its hardware to
increase productivity. For example, EFI's custom designed RipChips(TM),
application specific integrated circuit ("ASIC") chips, decrease overall print
times by off-loading data movement from the microprocessor. The Company
continues to refine these printing technologies.
In 2000, the Company continued its efforts to improve its products' performance,
features and ease of use. Software features developed by the Company during 2000
include: (i) NetWise(TM) 3.0, EFI's third generation networking architecture
which provides enhanced programmability that helps users build customized
printing solutions and provides extensive Internet-based functionality and (ii)
the next generation DocBuilder Pro(TM) which provides users with comprehensive
in-RIP job editing.
Stand-Alone Servers
EFI Color Servers permit users of digital color copiers to transmit and convert
digital data from a computer to a color copier so that the color copier can
print color documents easily, quickly and cost-effectively. As a result, EFI
Color Servers transform digital color copiers into fast, high-quality networked
color printers. In addition to EFI Color Servers for digital color copiers, the
Company has leveraged its technology to develop and manufacture other products
that support both color and black-and-white printing. These products include
Fiery servers
5
for digital black-and-white copiers and Fiery Color Servers for wide-format
inkjet printers. EDOX Color Servers and Splash Color Servers also support
wide-format inkjet printers.
Since the introduction of the first Fiery Color Server in 1991, the Company has
expanded its product line. In 1995, the Company introduced its third-generation
platform, the Fiery XJ. During 1996, the Company shifted the majority of its
product line to the XJ platform and later refined these products by
transitioning to a variation of the XJ platform known as the Fiery XJ+. During
1998, the Company introduced two new platforms, the Fiery ZX and the Fiery X2,
which included software features developed or further refined by the Company
during 1998, and began migrating its product line to these platforms. During
1999, the Company again introduced two new server platforms, the Fiery Z4 and
the Fiery X4, which incorporated several new technologies or enhancements from
EFI including, ColorWise(R)2.0, NetWise(TM) 2.0, the PowerWise(TM) architecture
and the next generation DocBuilder Pro(TM). The Fiery Z4 is approximately twice
as fast as its predecessor, the Fiery ZX, is optimized for high-speed processing
and photographic-quality color and is designed for demanding graphic arts,
print-for-pay and advertising agency environments. The Fiery X4 is approximately
three times as fast as its predecessor, the Fiery X2, and is designed for users
in a corporate environment. In 2000, the Company again focused its development
efforts on improvements to its products' performance, features and ease of use
and introduced one new platform, the X3, which includes features developed or
further refined by the Company during 2000. The X3 is approximately seven times
faster than its predecessor the Fiery X2. In 2000, the Company shipped
stand-alone EFI Color Servers for use with color copiers, color inkjet printers
and wide-format color printers distributed by companies such as Canon, Epson,
Fuji-Xerox, Minolta, Oce, Ricoh, Toshiba, Ikon Office Solutions, Sharp and
Xerox. In 2000, the Company also shipped Fiery servers for use with digital
black-and-white copiers distributed by Canon, Danka, Konica, Minolta, Oce and
Sharp.
Controllers
Unlike our Fiery, EDOX and Splash servers, which are sold as stand-alone
products to be connected to copiers, Fiery Controllers are embedded inside
copiers and desktop printers. Fiery Controllers allow users to print documents
directly from their computers to the digital copier. Embedded Fiery Controllers
support both color and black-and-white printing on desktop color laser printers,
color multi-function devices and digital black-and-white copiers. Because the
Company believes that the Fiery name and trademark, including the trademark
"Fiery Driven(R)," are associated with substantial goodwill and recognition in
the marketplace, the Company seeks to have the "Fiery Driven(R)" logo placed on
printing solutions that include an embedded Fiery Controller. In 2000, the
Company shipped Fiery Controllers embedded in color and digital black-and-white
copiers and desktop color printers distributed by companies such as Canon,
Fuji-Xerox, Hewlett Packard, Konica, Minolta, Ricoh and Xerox.
Significant Relationships
The Company has established, and continues to try to build and expand
relationships with its Strategic Partners and other leading copier and printer
companies, in order to benefit from the OEMs' products, distribution channels
and marketing resources. The OEMs include domestic and international
manufacturers, distributors and sellers of digital copiers (both color and
black-and-white ), wide-format printers and desktop color printers. The Company
works closely with the OEMs with the aim of developing solutions that
incorporate leading technology and that optimally work in conjunction with such
companies' products. OEMs that the Company sold products to in 2000 include,
among others, Canon, ENCAD, Epson, Fuji-Xerox, Hewlett-Packard, Ikon Office
Solutions, Konica, Minolta, Oce, Ricoh, Sharp, Toshiba and Xerox. Together,
sales to Canon, Xerox and Ricoh accounted for approximately 70% of the Company's
2000 revenue, with sales to each of these customers accounting for more than 10%
of the Company's revenue.
In April, 2000, the Company announced an agreement to provide updated Fiery
controllers for Hewlett Packard's new color laser jet printer series.
Hewlett-Packard also distributes Fiery Controllers designed for use with their
wide-format color inkjet and Fiery Servers designed for use with their graphics
large-format printers.
In 2000 the Company announced a product partnership with Atlas Software B.V. for
the development of Velocity Design(TM) which enables users to create and print
variable data documents more efficiently; the Company also recently announced a
partnership with Pageflex in an effort to offer customers industry standard
variable data printing solutions. Additionally, in 2000, the Company announced a
partnership with PictureTel Corporation and Edding International GmbH for the
distribution of eBeam.
The Company customarily enters into development and distribution agreements with
its OEM customers. These agreements can be terminated under a range of
circumstances, and often upon relatively short notice. The circumstances under
which an agreement can be terminated vary from agreement to agreement and there
can be no assurance that the Company's OEM customers will continue to purchase
products from the Company in the future, despite such agreements. The Company
recognizes the importance of, and works
6
hard to maintain, its relationships with its customers. However, the Company's
relationships with its customers can be affected by a number of factors
including, among others: competition from other suppliers, competition from
internal development efforts by the customers themselves (including the OEMs),
and changes in general economic, competitive or market conditions (such as
changes in demand for the Company's or the OEM's products, or fluctuations in
currency exchange rates). There can be no assurance that the Company will
continue to maintain or build the relationships it has developed to date.
In addition to its development and sales relationships with the OEMs, in order
to increase the distribution and presence of EFI Color Servers connected to both
color and black-and-white copiers and wide-format printing devices, the Company
has developed strategic relationships with well-known print-for-pay companies,
including Kinko's, AlphaGraphics, the CopyMax operations of office products
superstore OfficeMax, the American Speedy group of franchised printing centers
(including Allegra Print and Imaging, American Speedy, Speedy Printer, Zippy
Print and Quik Print) , MultiCopy, Inc. and the SAMPA Corporation, franchiser of
Signal Graphics Printing Centers. Several of these print-for-pay companies,
including, American Speedy, OfficeMax, MultiCopy, Inc. and SAMPA Corporation,
have entered into worldwide strategic alliances with the Company whereby they
agreed to continue standardization efforts on EFI's Fiery(R) Color Servers with
respect to their printing services.
The Company also has a continuing relationship pursuant to a license agreement
with Adobe and licenses PostScript(R) software from Adobe for use in many Fiery
Products. This relationship is important because each Fiery Product requires
page description language software in order to operate. Adobe's PostScript(R)
software is widely used to manage the geometry, shape and typography of hard
copy documents and Adobe is a leader in providing page description software.
Distribution and Marketing
The Company's primary distribution method for its Fiery and Splash servers has
been to sell the Fiery and Splash servers to its OEMs. The Company's OEMs in
turn sell these products to distributors and end-users for use with the OEMs'
copiers or printers as part of an integrated printing system. For Fiery
Controllers, the Company's primary distribution method has been to sell the
products to the OEMs that embed the products into their copiers and printers.
The Company's primary distribution method for its EDOX servers has been to sell
the EDOX servers directly to its distributors. There can be no assurance that
the Company will continue to successfully distribute its products through these
channels. Any interruption of the distribution methods will negatively impact
the Company in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors That Could Adversely
Affect Performance - Reliance on OEM Resellers; Risks Associated With
Significant OEM Group Concentration".
The Company promotes all of its products through public relations, direct mail,
advertising, promotional material, trade shows and ongoing customer
communication programs.
Research and Development
Research and development costs for 2000, 1999, and 1998 were $94.1 million,
$75.0 million, and $60.2 million, respectively. As of December 31, 2000, 476 of
the Company's 895 full-time employees were involved in research and development.
The Company believes that development of new products and enhancement of
existing products are essential to its continued success, and management intends
to continue to devote substantial resources to research and new product
development. The Company expects to make significant expenditures to support its
research and development programs for the foreseeable future.
The Company is developing products to support additional color and
black-and-white printing devices including desktop printers, high-end color
copiers, digital black-and-white copiers and multi-function devices. This
ongoing development work includes a multiprocessor architecture for high-end
systems and lower-cost designs for desktop color laser printers. The Company is
also developing new software applications designed to maximize workflow
efficiencies. This includes VelocityBalance(TM), VelocityEstimate(TM),
VelocityScan(TM), and VelocityBuild(TM).
The Company expects to enhance functionality of its Internet appliance product
eBeam(TM). See "-Growth and Expansion Strategies - Proliferate and Expand
Product Lines". Substantial additional work and expense will be required to
complete the development of these projects. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That Could
Adversely Affect Performance - Product Transitions".
Manufacturing
The Company utilizes subcontractors to manufacture its products. These
subcontractors work closely with the Company to ensure low
7
costs and high quality in the manufacture of the Company's products.
Subcontractors purchase components needed for the Company's products from third
parties. The Company is totally reliant on the ability of its subcontractors to
produce products sold by the Company, and although the Company supervises its
subcontractors, there can be no assurance that such subcontractors will continue
to perform for the Company as well as they have in the past. Difficulties
experienced by the Company's subcontractors (such as interruptions in a
subcontractor's ability to make or ship the Company's products, quality
assurance problems or the ongoing business viability of a subcontractor) would
adversely affect the Company's operations.
Certain components necessary for the manufacture of the Company's products,
including ASICs and certain other semiconductor components, are obtained from a
sole supplier or a limited group of suppliers. The purchase of certain of these
key components may involve significant lead times. Accordingly, in the event of
interruptions in the supply of these key components or unanticipated increases
in demand for the Company's products, the Company could be unable to manufacture
certain of its products in a quantity sufficient to meet customer demand. There
can be no assurance that such supply or manufacturing problems would not
adversely affect the Company's results of operations or financial condition. In
an attempt to mitigate these supply issues, the Company will purchase components
for later resale to the Company's subcontractors thus increasing the Company's
inventory balances and the risk associated with inventory obsolence.
Human Resources
As of December 31, 2000, the Company employed 895 individuals. Of the 895 total
employees, approximately 216 were in sales and marketing, 114 were in management
and administration, 89 were in manufacturing, and 476 were in research and
development. Of the total number of employees, the Company had approximately 782
employees located in U.S. and Canadian offices, and 113 employees located in
international offices including employees based in The United Kingdom, The
Netherlands, Germany, Japan, France, Italy, Finland, Spain, Australia,
Singapore, Brazil, Mexico, Sweden and Hong Kong. The Company's employees are not
represented by any collective bargaining organization and the Company has never
experienced a work stoppage.
Competition
Competition in the Company's markets is intense and involves rapidly changing
technologies and frequent new product introductions. To maintain and improve its
competitive position, the Company must continue to develop and introduce, on a
timely and cost-effective basis, new products and features that keep pace with
the evolving needs of its customers. The principal competitive factors affecting
the markets for the Company's Fiery, EDOX and Splash products include, among
others, customer service and support, product reputation, quality, performance,
price and product features such as functionality, scalability, ability to
interface with OEM products and ease of use. The Company believes it has
generally competed effectively in the past against product offerings of its
competitors on the basis of such factors. However, there can be no assurance
that the Company will continue to be able to compete effectively in the future
based on these or any other competitive factors.
The Company competes directly with other independent manufacturers of color
servers, independent manufacturers of embedded solutions, copier manufacturers,
printer manufacturers and others. The Company also faces competition from
wide-format printer manufacturers that develop their own controllers and other
companies that develop controllers for wide-format printers. The Company also
faces competition from its customers and other copier and printer manufacturers
that offer internally developed server products or that incorporate internally
developed embedded solutions or server features into their copiers and printers,
thereby eliminating the need for the Company's products and limiting future
opportunities for the Company. In addition, the Company faces competition from
manufacturers of desktop color laser printers which do not utilize a controller
(relying instead on host based processing of data) and which offer increasing
speed and color capability. The Company believes that it competes effectively
due to, among other things, its efforts to continually advance its technology,
name recognition, sizable installed base, number of products supported and
price. The Company expects that competition in its markets will increase due to,
among other factors, market demand for higher performance products at lower
prices, rapidly changing technology and product offerings from competitors and
customers. There can be no assurance that the Company will be able to continue
to advance its technology and its products or to compete effectively against
other companies' product offerings, and any failure to do so would have a
material adverse effect upon the Company's business, operating results and
financial condition.
Intellectual Property Rights
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its intellectual property rights, all of which
afford only limited protection. As of December 31, 2000, the Company had 54
issued U.S. patents, 63 pending U.S. patent applications and various foreign
counterpart
8
patents and applications. There can be no assurance that patents will issue from
these pending applications or from any future applications or that, if issued,
any claims allowed will be sufficiently broad to protect the Company's
technology. The Company's issued patents expire between May 2002 and March 2019.
Failure of the Company to obtain or maintain patent protection may make it
easier for the Company's competitors to offer equivalent or superior technology.
In addition, third parties may independently develop similar technology without
misappropriation of the Company's trade secrets or breach of other proprietary
rights. Any failure by the Company to take all necessary steps to protect its
trade secrets or other intellectual property rights and failure to enforce these
rights may have a material adverse effect on the Company's ability to compete in
its markets.
The Company has registered certain trademarks, which include, among others, its
EFI(R), Fiery(R), Fiery and Design(R), Fiery Driven(R), Fiery Driven and
Design(R), ColorWise(R), EDOX(R), and RIP-While-Print(R) trademarks, and has
applied for registration of certain additional trademarks. The Company will
continue to evaluate the registration of additional trademarks as appropriate.
Any failure by the Company to properly register or maintain its trademarks or to
otherwise take all necessary steps to protect its trademarks may diminish the
value associated with the Company's trademarks. The Company's products include
software sold pursuant to "shrink wrap" licenses that are not signed by the end
user and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries, including
several in which the Company operates or sells its products, do not protect
intellectual property and proprietary rights to as great an extent as do the
laws of the United States.
From time to time, litigation may be necessary to defend and enforce the
Company's proprietary rights. Such litigation, whether or not concluded
successfully for the Company, could involve significant expense and the
diversion of management's attention and other Company resources.
Risk Factors
In addition to the above information, a discussion of factors that may adversely
affect the Company's future performance and financial results can be found in
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Financial Information About Foreign and Domestic Operations and Export Sales
See Note 10 of the Company's Notes to Consolidated Financial Statements. See
also Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations -Factors That Could Adversely Affect Performance -We face
risks from our international operations and from currency fluctuations."
Item 2: Properties
The Company's principal offices are located at 303 Velocity Way, Foster City,
California on approximately 35 acres of land which the Company owns. The
corporate headquarters facility, which includes approximately 295,000 square
feet, was completed in July, 1999 and is leased by the Company. In 1999, the
Company entered into an agreement to lease additional facilities, for up to
543,000 square feet of space, to be constructed on the Foster City property.
Construction of the first 163,000 square feet of the additional facilities was
begun in 2000, with an estimated completion date of June 2001. In addition to
the Foster City offices, the Company has leased facilities in Parsippany, New
Jersey; Minneapolis, Minnesota; Vancouver, Washington and Amsterdam, The
Netherlands. The Company also leases a number of domestic and international
sales offices. In January 2001 the Company purchased facilities in Minneapolis,
Minnesota.
The Company believes that its facilities, in general, are adequate for its
present and currently foreseeable future needs.
Item 3: Legal Proceedings.
On December 15, 1997, a shareholder class action lawsuit, entitled Steele, et
al. v. Electronics for Imaging, Inc., et al., No. CV 403099, was filed against
the Company and certain of its officers and directors in the California Superior
Court, San Mateo County (the "San Mateo Superior Court"). Five virtually
identical class action complaints were subsequently filed in the San Mateo
Superior Court. On December 31, 1997, a putative shareholder class action
entitled Smith v. Electronics for Imaging, Inc., et al., No. C97-4739 was filed
against the Company and certain of its officers and directors in the United
States District Court for the Northern District of California. The state court
class actions allege that the Company made false and misleading statements
concerning its business during a putative class period of April 10, 1997 through
December 11, 1997 and allege violations of California Corporations Code Sections
25400 and 25500 and Civil Code Sections 1709 and 1710. The federal court class
action complaint makes the same factual allegations, but alleges violations of
certain United States federal securities laws. The complaints do not specify the
damages sought. The
9
Company believes that these lawsuits are without merit and intends to contest
them vigorously, but there can be no assurance that if damages are ultimately
awarded against the Company, the litigation will not adversely affect the
Company's results of operations.
On February 16, 2001, the U.S. Magistrate Judge handling the patent litigation
between the Company and 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.
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. 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.
On August 31, 2000, after the announcement of the tender offer for Splash, a
shareholder class action lawsuit was filed against Splash and its directors for
violation of federal and state securities laws. The plaintiffs, Splash and the
Company have agreed in principle to enter into a settlement agreement that would
resolve the 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. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That Could
Adversely Affect Performance - Infringement and Potential Litigation."
Item 4: Submission of Matters to a Vote of Security Holders.
A special meeting of the Company's shareholders was held on December 7, 2000 to
approve an amendment to the Company's 1999 Equity Incentive Plan to increase the
number shares of Common Stock authorized for issuance by 4,500,000 shares. The
meeting was adjourned until December 14, 2000, at which time 18,678,156 votes
were cast for the amendment, 16,509,165 votes were cast against and 95,035 votes
abstained. Accordingly, the amendment passed.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock was first traded on the Nasdaq National Market under
the symbol EFII on October 2, 1992. The table below lists the high and low
closing sales price during each quarter the stock was traded in 2000 and 1999.
2000 1999
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- -----------------------------------------------------------------------------------------------------------------------
High $65.13 $64.06 $29.42 $24.69 $41.56 $54.75 $62.69 $58.88
Low 45.19 22.31 21.38 11.94 32.75 41.13 51.41 36.19
- -----------------------------------------------------------------------------------------------------------------------
As of February 28, 2001, there were approximately 322 stockholders of record.
The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for its business,
and does not anticipate paying any cash dividends in the foreseeable future.
10
Item 6: Selected Financial Data.
The following tables summarize selected consolidated financial data as of, and
for the five years ended December 31, 2000. This information should be read in
conjunction with the audited consolidated financial statements and related notes
thereto.
As of and for the years ended December 31,
(In thousands, except per share amounts) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Operations
Revenue $588,449 $570,752 $446,999 $373,404 $316,458
Cost of revenue 311,152 290,636 249,179 171,138 155,171
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 277,297 280,116 197,820 202,266 161,287
Operating expenses
Research and development 94,097 74,971 60,150 42,868 25,388
Sales and marketing 64,526 59,373 60,615 46,776 34,275
General and administrative 24,784 18,403 16,637 13,578 11,142
Amortization of goodwill and other acquisition-
related charges * 23,621 -- -- 9,400 --
Merger-related expense ** -- 1,422 -- -- --
------- ------- ------- ----- ------
Total operating expenses 207,028 154,169 137,402 112,622 70,805
Income from operations 70,269 125,947 60,418 89,644 90,482
Other income, net 21,550 16,250 9,859 10,309 7,426
-------- -------- -------- -------- --------
Income before income taxes 91,819 142,197 70,277 99,953 97,908
Provision for income taxes (37,461) (46,914) (22,456) (35,944) (35,211)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 54,358 $95,283 $47,821 $64,009 $62,697
======== ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------
Net income per basic common share *** $ 0.99 $1.74 $0.89 $1.21 $1.23
Net income per diluted common share *** $0.97 $1.67 $0.87 $1.13 $1.13
Shares used in computing net income
per basic common share *** 54,649 54,853 53,507 52,831 51,144
Shares used in computing net income per
diluted common share *** 55,983 56,963 54,972 56,713 55,338
Financial Position
Cash and short-term investments $353,603 $470,328 $328,732 $246,764 $215,781
Working capital 389,917 487,591 355,361 293,972 245,245
Long term liabilities, less current portion 3,140 3,467 4,142 4,267 398
Total assets 654,390 656,075 484,191 395,949 310,058
Stockholders' equity $545,316 $551,187 $408,680 $346,727 $258,105
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and Benchmarks
Current ratio 4.7 5.8 6.0 7.5 5.8
Inventory turns 13.2 20.5 11.6 8.3 11.5
Full-time employees 895 758 660 614 456
- -----------------------------------------------------------------------------------------------------------------------------
* See Note 2 of notes to Consolidated Financial Statements.
** The Company incurred approximately $1.4 million of non-recurring expenses
related to the merger with Management Graphics, Inc. in 1999. *** See Note 1 of
Notes to Consolidated Financial Statements.
11
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and related notes thereto included in
this Annual Report on Form 10K.
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
discussion of the factors that could impact the Company's results, readers are
referred to the section below entitled "Factors that Could Adversely Affect
Performance. "
Results of Operations
The following tables set forth items in the Company's consolidated statements of
income as a percentage of total revenue for 2000, 1999 and 1998, and the
year-to-year percentage change from 2000 over 1999 and from 1999 over 1998,
respectively. These operating results are not necessarily indicative of results
for any future period.
Years ended December 31, % change
2000 1999
over over
2000 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenue 100 % 100 % 100 % 3 % 28 %
Cost of revenue 53 % 51 % 56 % 7 % 17 %
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 47 % 49 % 44 % (1)% 42 %
- ---------------------------------------------------------------------------------------------------------------------------
Research and development 16 % 13 % 13 % 26 % 25 %
Sales and marketing 11 % 11 % 13 % 9 % (2) %
General and administrative 4 % 3 % 4 % 35 % 11 %
Amortization of goodwill and other acquisition-
related charges 4 % -- % -- % 100 % -- %
Merger-related expenses 0 % -- % -- % -- % -- %
----- ------ ----
Operating expenses 35 % 27 % 30 % 34 % 12 %
Income from operations 12 % 22 % 14 % (44)% 108 %
Other income, net 4 % 3 % 2 % 33 % 65 %
--- --- ---
Income before income taxes 16 % 25 % 16 % (35)% 102 %
Provision for income taxes 6 % 8 % 5 % (20)% 109 %
- ---------------------------------------------------------------------------------------------------------------------------
Net income 10 % 17 % 11 % (43)% 99 %
Revenue
The Company's revenue in 2000 was principally derived from three major
categories. The first category was made up of stand-alone servers which connect
digital color copiers with computer networks. This category includes the Fiery
X2, X4, ZX and Z4 products and accounted for a majority of the Company's revenue
prior to 1999. The second category consisted of embedded desktop controllers,
bundled color solutions and chipsets primarily for the office market. The third
category consisted of controllers for digital black and white products.
12
The following is a break-down of revenue in dollars and volumes as a percentage
of total units shipped by category.
% change
2000 1999
Revenue 2000 1999 1998 over over
(in thousands) Revenue Revenue Revenue 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers $268,436 46% $244,028 43% $291,785 66% 10 % (16)%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 129,277 22% 149,899 26% 90,133 20% (14)% 66 %
Controllers for Digital
Black and White Solutions 130,780 22% 121,071 21% 19,196 4% 8 % 531 %
Spares, Licensing
& Other misc. sources 59,956 10% 55,754 10% 45,885 10% 8 % 22 %
- ---------------------------------------------------------------------------------------------------------------------------
Total Revenue $588,449 100% $570,752 100% $446,999 100% 3 % 28 %
2000 1999 1998
Volume Volume Volume Volume
- ---------------------------------------------------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers 16 % 14 % 27 %
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 48 % 50 % 62 %
Controllers for Digital
Black and White Solutions 32 % 36 % 11 %
Spares, Licensing
& Other misc. sources 4 % -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Volume 100% 100% 100%
- ---------------------------------------------------------------------------------------------------------------------------
Revenue increased to $588.4 million in 2000, compared to $570.8 million in 1999
and $447.0 million in 1998, which yielded a 3% increase in 2000 as compared to
1999 and a 28% increase in 1999 as compared to 1998. The corresponding unit
volume increased by 20% in 2000 over 1999 and by 75% in 1999 over 1998. The
increase in revenue in 2000 from 1999 and in 1999 from 1998 was primarily due to
increases in unit volumes and positive market acceptance of new product
introductions, partially offset by a decline in average selling prices due to
changes in product mix. The small sequential increase in 2000 from 1999 compared
to the increase from 1999 over 1998 was due to delays in OEM partner product
launches, disruption in distribution channels due to financial and operating
constraints in the imaging market and worsening general economic conditions
The category of stand-alone servers made up 46% of total revenue and 16 % of
total unit volume in 2000. The increase in revenue over 1999 was driven by
introduction of new products by our OEM partners. It made up 43% of total
revenue and 14% of total unit volume in 1999 and 66% of total revenue and 27% of
total unit volume in 1998. The products in this category continue to offer
higher margins relative to the other product lines. As products that were
previously only offered with the stand-alone servers are now offered with
embedded controllers, some of the volume in this category will transition to the
embedded category. The desktop product category made up 22% of total revenue and
48% of total unit volume in 2000. It made up 26% of total revenue and 50% of
total unit volume in 1999 and 20% of total revenue and 62% of total unit volume
in 1998. The decline from 1999 in absolute dollars in this category was
primarily the result of product transitions. As OEM partners planned to move to
new platforms, sales of existing products declined. These products, except for
the chipset solutions, are also generally characterized by much higher unit
volumes but
13
lower unit prices and associated margins than the Company has experienced in its
more traditional stand-alone server line of products. The chipset solutions can
be characterized by lower unit prices but significantly higher per unit margins
compared to the traditional stand-alone server line of products. The black and
white product category made up 22% of total revenue and 32% of total unit volume
in 2000. This category, first introduced in 1998, has seen continued growth,
with 21% of the revenue and 36% of the volume in 1999 and only 4% of the revenue
and 11% of the unit volume in 1998. This product category can 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. The Company anticipates further growth in the black and white as well
as in the desktop category as a percentage of total revenue. To the extent these
categories do not grow over time in absolute terms, or if the Company is not
able to meet demand for higher unit volumes, it could have a material adverse
effect on the Company's operating results. There can be no assurance that the
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 may affect revenues in the future. The
Company has made and may in the future make price reductions for its products.
Depending upon the price-elasticity of demand for the Company's products, the
pricing and quality of competitive products, and other economic and competitive
conditions, such price reductions may have an adverse impact on the Company's
revenues and profits. If the Company is not able to compensate for lower gross
margins that may result from price reductions with an increased volume of sales,
its results of operations could be adversely affected. In addition, if the
Company's revenue in the future depends more upon sales of products with
relatively lower gross margins than the Company obtained in 2000 (such as
embedded controllers for printers, embedded controllers for color and
black-and-white copiers, and stand-alone controllers for black-and-white
copiers), results of operations may be adversely affected.
Shipments by geographic area for the years ended December 31, 2000, 1999 and
1998 were as follows:
Years ended December 31, % change
2000 1999
over over
(In thousands) 2000 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
North America $291,679 50 % $277,997 49 % $221,638 50 % 5 % 25 %
Europe 191,403 32 % 182,602 32 % 144,076 32 % 5 % 27 %
Japan 85,983 15 % 90,781 16 % 68,991 15 % (5)% 32 %
Rest of World 19,384 3 % 19,372 3 % 12,294 3 % 0 % 58 %
- ---------------------------------------------------------------------------------------------------------------------------
$588,449 100 % $570,752 100 % $446,999 100 % 3 % 28 %
- ---------------------------------------------------------------------------------------------------------------------------
While shipments to North America and Europe saw a 5% increase in 2000 over 1999,
Japan saw a decrease of 5% and the Rest of World Region, primarily Asia Pacific,
remained flat. The Asia Pacific and Japan drop in revenue stems from increasing
sales of low end products as well as the continuing difficult economic times in
these regions. Worldwide economic conditions may have an adverse impact on the
Company's results of operations in the future.
As shipments to some of the Company's OEM partners are made to centralized
purchasing and manufacturing locations which in turn sell through to other
locations, the Company believes that export sales of its products into each
region may differ from what is reported, though accurate data is difficult to
obtain. The Company expects that export sales will continue to represent a
significant portion of its total revenue.
Substantially all of the revenue for the last three years was attributable to
sales of products through the Company's OEM channels with such partners as
Canon, Encad, Epson, Fuji-Xerox, IBM, Hewlett-Packard, Kodak/Danka Business
Systems, Konica, Lanier, Minolta, Oce, Ricoh, Sharp, 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 in aggregate
for 70%, 68%, and 67% of its revenue for 2000, 1999 and 1998, 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.
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
14
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
The Company's color servers as well as embedded desktop controllers and digital
black and white products are manufactured by third-party manufacturers who
purchase most of the necessary components. The Company sources directly
processors, memory, certain ASICs, and software licensed from various sources,
including PostScript interpreter software, which the Company licenses from Adobe
Systems, Inc.
Gross Margins
The Company's gross margin was 47%, 49% and 44% for 2000, 1999 and 1998
respectively. The decrease in gross margin from 49% to 47% from 1999 to 2000 was
primarily due to a higher mix of low-end products with relatively lower margins
as well as increased component costs in the volatile components market
experienced throughout most of 2000. The increase in gross margin from 44% to
49% from 1998 to 1999 was attributable to volume driven economies of scale as
well as increased outsourcing of manufacturing operations to lower cost
subcontract manufacturers..
The Company expects that sales of products with relatively lower margins may
further increase as a percentage of revenue. Such products include embedded
products for both desktop printers and copiers, stand-alone servers, 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 general, the Company believes that gross margins will continue to be impacted
by a variety of factors. These factors include the market prices that can be
achieved on the Company's current and future products, the availability and
pricing of key components (including DRAM, Processors and Postscript interpreter
software), third party manufacturing costs, product, channel and geographic mix,
the success of the Company's product transitions and new products, competition,
and general economic conditions in the United States and abroad. Consequently,
the Company anticipates gross margins will fluctuate from period to period.
In addition to the factors affecting revenue described above, the Company
expects to be subject to pressures to reduce prices, and as a result, gross
margins for all of its products may be lower and therefore the Company's ability
to maintain current gross margins may not continue.
Operating Expenses
Operating expenses increased by 34% in 2000 over 1999 and by 12% in 1999 over
1998. Operating expenses as a percentage of revenue amounted to 35%, 27% and 30%
for 2000, 1999 and 1998, respectively. Increases in operating expenses in
absolute dollars of $29.2 million before the amortization of goodwill and other
acquisition-related charges in 2000 compared to 1999 and $16.8 million in 1999
compared to 1998, were primarily caused by costs associated with the development
and introduction of new products and the hiring of additional full time
employees to support the growing business (a net increase of 137 people at
December 31, 2000 over December 31, 1999 and a net increase of 98 people at
December 31, 1999 over December 31, 1998). The Company hired additional
employees to support product development as well as to support expanded
operations, including new operations and functions being performed in The
Netherlands.
Operating expenses for 2000 included approximately $23.6 million of
acquisition-related costs and the amortization of goodwill and other intangibles
in connection with the acquisition of Splash in October 2000. In 1999 the
Company incurred $1.4 million of merger-related expenses associated with the
merger of MGI. In addition, the Company incurred additional non-recurring
expenses during 1999 in connection with the Company's move to a new central
facility in Foster City, California. Total moving costs amounted to $1.8 million
of which approximately $0.2 million related to cost of revenue.
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.
15
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 $94.1 million or 16% of
revenue in 2000 compared to $75.0 million or 13% of revenue in 1999 and $60.2
million or 13% of revenue in 1998. The year over year increase in research and
development expenses was mainly due to an increase in research and development
projects. The majority of the 26% increase in research and development expenses
in 2000 compared to 1999 and in 1999 compared to 1998 was due to a 23% and 21%
growth, respectively, in engineering headcount. 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 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 2000 were $64.5 million or 11% of revenue compared to
$59.4 million or 11% of revenue in 1999 and $60.6 million or 13% in 1998. Sales
and marketing expenses showed no change in 2000 over 1999 as a percentage of
revenue. The nominal increase in absolute dollars is primarily due to the
broader product line the company now supports offset by continued efforts to
control spending across the Company during 2000. In addition the gravitation
toward desktop and embedded products require less support from the Company as
the OEM's take over some of the financial responsibilities for the support. The
decrease of sales and marketing expenses in 1999 over 1998 is primarily due to
tightly controlled spending, offset by a 12% increase in headcount.
The Company expects that its sales and marketing expenses may increase in
absolute dollars and possibly also as a percentage of revenue as it continues to
actively promote its products, launch new products and continue to build its
sales and marketing organization, particularly in Europe and Asia Pacific,
including Japan. This expected 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
$24.8 million or 4% of revenue in 2000, compared to $18.4 million or 3% of
revenue in 1999 and $16.6 million or 4% of revenue in 1998. While general and
administrative expenses have remained relatively constant as a percentage of
total revenue over the three year period ended 2000, these expenses have
increased in absolute dollars. The increases in 2000 over 1999 and in 1999 over
1998 were primarily due to the increase in headcount to support the needs of the
growing Company's operations, including a growing business development
department, the establishment of a Dutch transaction processing center which now
handles the majority of the Company's international business and higher legal
costs to register and defend 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 acquisition-related charges
In October of 2000, the Company acquired Splash for approximately $83.8 million,
net of cash received. The acquisition was intended to expand the Company's
product line and further increase the Company's market share, primarily in the
graphic arts arena. In conjunction with the acquisition, the Company recorded a
charge of $20.3 million for in-process research and development. Amortization of
goodwill and other intangibles related to acquisition were $3.3 million for the
year ended December 31, 2000. At December 31, 2000 the unamortized portion of
goodwill and other intangibles totaled $76.3 million and will be amortized over
estimated lives ranging from 4 to 7 years.
16
Merger related expenses
On August 31, 1999 the Company merged with MGI, a Minnesota-based corporation
that develops digital print on demand products and other digital imaging
products through a pooling-of-interests transaction. The Company incurred
approximately $1.4 million of non-recurring expenses related to the merger which
consisted primarily of professional fees, severance costs, and travel expenses.
Other Income
Other income relates mainly to interest income and expense, and gains and losses
on foreign currency transactions. Other income of $21.6 million in 2000
increased by 33% from $16.3 million in 1999. Other income of $16.3 million in
1999 increased by 65% from $9.9 million in 1998. The increase in 2000 from 1999
and in 1999 from 1998 is due to an increase in the average investment balance as
well as a higher return on investments as a result of more favorable market
interest rates in 2000 compared to 1999.
Income Taxes
The Company's pro forma effective tax rate, excluding the effect of
non-deductible in-process technology and goodwill, was 33% in 2000, while the
actual tax rate was 40.8%. In 1999 and 1998, the actual effective tax rate was
33% and 32%, respectively. In each of these years, the Company benefited from
tax-exempt interest income, a foreign sales corporation, 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 anticipates that the pro forma effective tax rate for
2001 will remain approximately 33%.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased by $116.7 million to
$353.6 million as of December 31, 2000, from $470.3 million as of December 31,
1999. Working capital decreased by $97.7 million to $389.9 million as of
December 31, 2000, down from $487.6 million as of December 31, 1999. These
decreases are primarily the result of the repurchase of approximately $100.0
million of the Company's common stock during 2000. In addition, the Company has
classified $14.1 million as restricted investments as of December 31, 2000.
These funds collateralize the 1999 Lease discussed below.
Net cash provided by operating activities was $76.5 million, $131.5 million and
$81.1 million in 2000, 1999 and 1998, respectively. Cash provided by operating
activities decreased in 2000 primarily due to a decrease in net income and an
increase in deferred income taxes and inventories.
The Company has continued to invest cash in short-term investments, mainly
municipal securities. Sales in excess of purchases of short-term investments
were $57.5 million in 2000, while purchases in excess of sales were $38.0
million and $84.3 million in 1999 and 1998, respectively. The Company's capital
expenditures generally consist of investments in computers and related
peripheral equipment and office furniture for use in the Company's operations.
The Company purchased approximately $15.5 million, $15.6 million and $13.2
million of such equipment and furniture during 2000, 1999 and 1998,
respectively. During 2000 the Company invested $83.8 million, net of cash
received, in the acquisition of Splash.
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. As of December 31,
2000 the lessor has funded $13.4 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
17
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 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 ($70.2 million at
December 31, 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 ($14.1 million at December
31, 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 of $82.5 million in 2000 was primarily the
difference between the $100.0 million used to repurchase common stock and the
cash received from exercises of common stock options, net of the tax benefits
associated with the exercises. Net cash provided by financing activities of
$26.7 million and $14.2 million in 1999 and 1998, respectively, were primarily
the result of exercises of common stock options and the tax benefits to the
Company associated with those exercises. Net cash provided by financing
activities in 2000, 1999 and 1998 includes approximately $0.8 million , $0.9
million and $0.1 million of cash used to repay long-term obligations.
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 obsolescent thereby negatively impacting the Company's consolidated
financial position and results of operations. The Company is also reliant on
several sole-source suppliers for certain key components and could experience a
further significant negative impact on its consolidated financial position and
results of operations if such supply were reduced or not available.
The Company, along with its directors and certain officers and employees, has
been named in class action lawsuits filed in both the San Mateo County Superior
Court and the United States District Court for the Northern District of
California. The lawsuits are all related to the precipitous decline in the
trading price of the Company's stock that occurred in December 1997. The Company
believes the lawsuits are without merit and 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. See Item 3 "Legal proceedings."
Splash, along with former Splash officers were named in class action lawsuits
filed in the United States District Court for the 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. See Item 3 "Legal proceedings."
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 2000.
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. Failure to comply Euro requirements could have a material
adverse effect on the Company's operating results.
18
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.
Our OEMs work closely with us to develop products that are specific to each
OEM's copiers and printers. For many of the products we are developing, we need
to coordinate development, quality testing, marketing and other tasks with our
OEMs. We cannot control our OEMs' development efforts and coordinating with our
OEMs may cause delays that we cannot manage by ourselves. In addition, our sales
revenue and results of operations may be adversely affected if we cannot meet
our OEM's product needs for their specific copiers and printers, as well as
successfully manage the additional engineering and support effort and other
risks associated with such a wide range of products.
We are pursuing, and will continue to pursue, the business of additional copier
and printer OEMs. However, because there are a limited number of OEMs producing
copiers and printers in sufficient volume to be attractive customers for us, we
expect that customer concentration will continue to be a risk.
If we are unable to develop new products, or execute product introductions on a
timely basis, our future revenue and operating results may be harmed.
Our operating results will depend to a significant extent on continual
improvement of existing technologies and rapid innovation of new products and
technologies. Our success depends not only on our ability to predict future
requirements, but also to develop and introduce new products that successfully
address customer needs. Any delays in the launch or availability of new products
we are planning could harm our financial results. During transitions from
existing products to new products, customers may delay or cancel orders for
existing products. Our results of operations may be adversely affected if we
cannot successfully manage product transitions or provide adequate availability
of products after they have been introduced.
In this environment, we must continue to make significant investments in
research and development in order to enhance performance and functionality of
our products, including product lines different than our Fiery servers and
embedded controllers. We cannot assure you that we will successfully identify
new product opportunities, develop and introduce new products to market in a
timely manner, and achieve market acceptance of our products. Also, if we decide
to develop new products, our research and development expenses may increase in
the short term without a corresponding increase in revenue. Finally, we cannot
assure you that products and technologies developed by others will not render
our products or technologies obsolete or noncompetitive.
We license software used in most of our products from Adobe Systems
Incorporated, and the loss of this license would prevent us from shipping these
products
19
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
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 color printing of digital data decreases,
our sales revenue may decrease
Our products are primarily targeted at enabling the color 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 color
printers and copiers has increased in recent years, we cannot assure you that
such demand will continue, nor can we control whether the demand will continue
for the specific OEM printers and copiers that utilize our products will
continue. We believe that demand for our products may also be affected by a
variety of economic conditions and considerations, and we cannot assure you that
demand for our products will continue at current levels.
If we enter new markets or distribution channels this could result in delayed
revenues or higher operating expenses
We continue to explore opportunities to develop product lines different from our
servers and embedded controllers, such as our new line of software products and
EFI Professional Services that we announced in February 2000. We expect to
invest funds to develop new distribution and marketing channels for these new
products and services. We do not know if we will be successful in developing
these channels or whether the market will accept any of our new products or
services. In addition, even if we are able to introduce new products or
services, the lack of marketplace acceptability of these new products or
services may adversely impact the Company's operating results.
We sell products that are large capital expenditures as well as discretionary
purchase items. In difficult economic times, such as the current economic
climate, 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.
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
20
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 in operating results 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
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 or our products, and the related OEM copiers and printers, are purchased
utilizing lease contracts or bank financing. If prospective purchasers of
digital copiers and printers are unable to obtain credit, or interest rate
changes make credit terms undesirable, this may significantly reduce the demand
for digital copiers and printers, negatively impacting our revenues and
operating results.
Typically we do not have long-term volume purchase contracts with our customers,
and a substantial portion of our backlog is scheduled for delivery within 90
days or less. Our customers may cancel orders and change volume levels or
delivery times for product they have ordered from us without penalty. However, a
significant portion of our operating expenses are fixed in advance, and we plan
these expenditures based on the sales forecasts from our OEM customers and
product development programs. If we were unable to adjust our operating expenses
in response to a shortfall in our sales, it could harm our quarterly financial
results.
We attempt to hire additional employees to match growth in projected demand for
our products. If we project a higher demand than materializes, we will hire too
many employees and incur expenses that we need not have incurred and our
financial results 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 in this section as well as:
o Fluctuations in our results of operations, revenues or earnings
or those of our competitors;
o Failure of 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;
21
o Real or perceived technological advances by our competitors;
o Financial performance of OEM partners and key suppliers;
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 50% of our revenue from the sale of products for the twelve month
periods ended December 31, 2000 and December 31, 1999, 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
and Japan, 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 substantial fluctuations in the value 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 could 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.
Seasonal purchasing patterns of our OEM customers have historically caused lower
fourth quarter revenue, which may negatively impact the stock price
22
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 (the quarter ending December 31) 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 customers,
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 typically achieved their
yearly sales goals during the fourth quarter and consequently
delayed further purchases into the next fiscal year, and the
fact that we do not know when the OEMs reach these sales goals
as they generally do not share them with us.
As a result of these factors, we believe that period to period comparisons of
our operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. We anticipate that future
operating results may fluctuate significantly due to this seasonal demand
pattern.
We may make 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 a
substantial part of or 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 are totally
reliant on the ability of our subcontractors to produce 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 produce 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.
23
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The Company is exposed to various market risks, including 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 to such contracts 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 December 31, 2000, the Company had one outstanding forward foreign
exchange contract to sell Yen equivalent to approximately $3.2 million with an
expiration date of January 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
December 31, 2000, the difference between the fair value of the outstanding
contract and the contract amount was immaterial. Market risk was estimated as
the potential decrease in fair value resulting from a hypothetical 10% increase
of the amount of Yen to purchase one US Dollar. A 10% fluctuation in the
exchange rate for this currency would change the fair value by approximately
$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 December 31, 2000,
approximated carrying value. Market risk was estimated as the potential decrease
in fair value resulting from an instantaneous hypothetical 100 basis-point
increase in interest rates for any debt instruments in the Company's investment
portfolio. As of December 31, 2000, the Company's cash equivalents and
short-term investment portfolio includes debt securities of $259.6 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 $2.1 million.
The fair value of the Company's long-term debt, including current maturities,
was estimated to be $3.5 million as of December 31, 2000, and equaled the
carrying value. The Company's long-term debt requires interest payments based on
a variable rate and therefore its fair value is not subject to interest rate
risk.
24
Item 8: Financial Statements and Supplementary Data
Electronics for Imaging, Inc.
Consolidated Balance Sheets
December 31,
(In thousands, except share and per share amounts) 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $102,804 $163,824
Short-term investments 250,799 306,504
Accounts receivable, net 72,006 81,904
Inventories 27,076 11,878
Other current assets 43,166 24,902
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 495,851 589,012
- ---------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 51,456 49,776
Restricted investments 14,134 --
Other assets 92,949 17,287
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $654,390 $656,075
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $49,252 $47,102
Accrued and other liabilities 50,483 29,771
Income taxes payable 6,199 24,548
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 105,934 101,421
- ---------------------------------------------------------------------------------------------------------------------------
Long - term obligations, less current portion 3,140 3,467
Commitments and Contingencies (Note 6)
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued and outstanding -- --
Commonstock, $.01 par value; 150,000,000 shares authorized; 52,685,593 and
55,722,214 shares issued and outstanding, respectively 575 557
Additional paid-in capital 240,199 201,679
Treasury stock, at cost, 4,477,500 shares (99,959) --
Accumulated other comprehensive income (loss) 420 (772)
Retained earnings 404,081 349,723
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 545,316 551,187
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $654,390 $656,075
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
Electronics for Imaging, Inc.
Consolidated Statements of Income
Years ended December 31,
(In thousands, except per share amounts) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Revenue $588,449 $570,752 $446,999
Cost of revenue 311,152 290,636 249,179
- -------------------------------------------------------------------------------------------------------------------
Gross profit 277,297 280,116 197,820
- -------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 94,097 74,971 60,150
Sales and marketing 64,526 59,373 60,615
General and administrative 24,784 18,403 16,637
Amortization of goodwill and other acquisition-related charges 23,621 -- --
Merger related expenses -- 1,422 --
------- ------- -------
207,028 154,169 137,402
- -------------------------------------------------------------------------------------------------------------------
Income from operations 70,269 125,947 60,418
- -------------------------------------------------------------------------------------------------------------------
Other income, net 21,550 16,250 9,859
------ ------ -----
Income before income taxes 91,819 142,197 70,277
Provision for income taxes (37,461) (46,914) (22,456)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 54,358 $ 95,283 $ 47,821
- -------------------------------------------------------------------------------------------------------------------
Net income per basic common share $0.99 $1.74 $0.89
Shares used in per-share calculation 54,649 54,853 53,507
Net income per diluted common share $0.97 $1.67 $0.87
Shares used in per-share calculation 55,983 56,963 54,972
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
Electronics for Imaging, Inc.
Consolidated Statements of Stockholders' Equity
Additional Other Total
Common Stock Paid-in Treasury Comprehensive Retained Stockholders'
(in thousands) Shares Amount Capital Stock Income (Loss) Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 1997 53,030 $530 $139,578 -- -- $206,619 $346,727
Comprehensive income
Net income 47,821 47,821
Functional currency adjustment (199) (199)
-------------------------------------------------
Comprehensive income (199) 47,821 47,622
Exercise of common stock options 954 10 8,683 8,693
Tax benefit related to stock plans 5,638 5,638
- ---------------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 1998 53,984 540 153,899 -- (199) 254,440 408,680
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 95,283 95,283
Functional currency adjustment 71 71
Market valuation on short-term
investments (644) (644)
-------------------------------------------------
Comprehensive income (573) 95,283 94,710
Exercise of common stock options 1,738 17 27,573 -- 27,590
Tax benefit related to stock plans 20,207 20,207
- ---------------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 1999 55,722 557 201,679 -- (772) 349,723 551,187
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 54,358 54,358
Functional currency adjustment (96) (96)
Market valuation on short-term
investments 1,288 1 ,288
-------------------------------------------------
Comprehensive income 1,192 54,358 55,550
Exercise of common stock options 1,441 18 18,294 18,312
Tax benefit related to stock plans 14,271 14,271
Fair value of stock options
assumed 5,955 5,955
Repurchase of common stock -
(treasury method) (4,477) (99,959) (99,959)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 2000 52,686 $575 $240,199 $(99,959) $420 $404,081 $545,316
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27
Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
Years ended December 31,
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 54,358 $ 95,283 $47,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,461 14,464 14,051
Purchased in-process research & development 20,300 -- --
Deferred taxes (3,039) (13,304) (2,110)
Change in reserve for bad debts 988 (431) 250
Other 96 71 (199)
Changes in operating assets and liabilities:
Accounts receivable 10,196 (21,813) (27,431)
Inventories (10,305) 4,607 9,912
Receivable from subcontract manufacturers (11,022) (407) 12,276
Other current assets (3,965) 2,245 (38)
Accounts payable and accrued liabilities (887) 13,988 19,802
Income taxes payable 1,354 36,806 6,795
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 76,535 131,509 81,129
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of short-term investments (1,134,284) (132,188) (327,483)
Sales / maturities of short-term investments 1,191,777 94,171 243,196
Net purchases of restricted investments (14,134) -- --
Investment in property and equipment, net (15,510) (15,622) (13,210)
Business acquired, net of cash received (83,769) -- --
Purchase of other assets 825 347 (181)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (55,095) (53,292) (97,678)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term obligations (813) (892) (101)
Issuance of common stock 18,312 27,590 14,331
Repurchase of common stock (99,959) -- --
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (82,460) 26,698 14,230
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (61,020) 104,915 (2,319)
Cash and cash equivalents at beginning of year 163,824 58,909 61,228
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $102,804 $163,824 $58,909
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $355 $303 $369
Cash paid for income taxes 40,984 22,591 11,448
Equipment purchased under capital leases -- -- 430
- ----------------------------------------------------------------------------------------------------------------------
28
See accompanying notes to consolidated financial statements.
Electronics for Imaging, Inc.
Notes to Consolidated Financial Statements
Note 1: The Company and Its Significant Accounting Policies
The Company and Its Business
Electronics for Imaging, Inc., a Delaware corporation (the "Company"), through
its subsidiaries, designs and markets products that support color and
black-and-white printing on a variety of peripheral devices. Its products
incorporate hardware and software technologies that transform digital copiers
and printers from many leading copier manufacturers into fast, high-quality
networked printers. The Company's products include stand-alone servers, which
are connected to digital copiers and other peripheral devices, and controllers,
which are embedded in digital copiers and desktop color laser printers. The
Company operates in one industry and sells its products primarily to original
equipment manufacturers in North America, Europe and Japan. Substantially all of
the Company's revenue to date has resulted from the sale of print servers and
controllers.
Basis of Presentation
The accompanying combined consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when the product is shipped, provided no significant
obligations remain and collectibility is reasonably probable. Provisions for
estimated warranty costs and potential sales returns are recorded when revenue
is recognized.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, short-term investments, accounts
receivable, long-term investments, accounts payable, accrued liabilities and
bonds payable as presented in the financial statements, approximate fair value
based on the nature of these instruments and prevailing interest rates.
Concentration of Credit Risk
The Company is exposed to credit risk in the event of default by any of its
customers to the extent of amounts recorded on the consolidated balance sheet.
The Company performs ongoing evaluations of the collectibility of the accounts
receivable balances for its customers and maintains reserves for estimated
credit losses; such actual losses have been within management's expectations.
Cash, Cash Equivalents and Short-term Investments
The Company generally invests its excess cash in deposits with major banks,
money market securities, municipal, U.S. government and corporate debt
securities. By policy, the Company invests primarily in high-grade marketable
securities. The Company is exposed to credit risk in the event of default by the
financial institutions or issuers of these investments to the extent of amounts
recorded on the consolidated balance sheet.
The Company considers all highly liquid investments, generally with a maturity
of three months or less at the time of purchase, to be cash equivalents. The
cost of these investments has generally approximated fair value. Investments
with longer maturities are classified as available-for-sale or hold-to-maturity.
Available-for-sale and hold-to-maturity securities are stated at fair value with
29
unrealized gains and losses reported as a separate component of stockholders'
equity, net of deferred income taxes. Hold-to-maturity securities collateralize
certain lease obligations. Realized gains and losses on sales of investments are
included in other revenues.
Inventories
Inventories are stated at standard cost which approximates the lower of actual
cost using a first-in, first-out method, or market. The Company periodically
reviews its inventories for potential slow-moving or obsolete items and writes
down specific items to net realizable value as appropriate.
Property and Equipment
Property and equipment is recorded at cost. Depreciation on assets is computed
using the straight-line method over the estimated useful lives of the assets,
generally 10 to 60 months. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the improvements or the
lease term, if shorter. Land improvements are amortized using the straight-line
method over the estimated useful lives of the improvements.
Amortization of Intangibles
Goodwill and other intangible assets acquired to date are being amortized on a
straight-line basis over periods ranging from 1 to 7 years.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". Under SFAS 109, deferred tax liabilities and assets are determined based
on the differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. No provision for U.S. income tax is made
for undistributed earnings of the Company's foreign subsidiaries, to the extent
it is the Company's intention to indefinitely reinvest these earnings in the
respective subsidiaries.
Foreign Currency Translation
The functional currency for all of the Company's foreign operations, except for
Japan, is the U.S. dollar. The functional currency for Japan is the Japanese
Yen. Where the U.S. dollar is the functional currency, translation adjustments
are recorded in income. Where the Japanese Yen is the functional currency,
translation adjustments are recorded as a separate component of Stockholders'
Equity. Foreign currency translation and transaction gains and losses have not
been significant in any period presented.
Accounting for Derivative Instruments and Risk Management
The Company operates internationally, giving rise to exposure to market risk
from changes in foreign exchange rates. Derivative financial instruments are
used by the Company to reduce those risks. The Company does not hold or issue
financial or derivative financial instruments for trading or speculative
purposes. The magnitude and volume of such transactions were not material for
the periods presented. As of December 31, 2000, the Company had one outstanding
forward foreign exchange contract to sell Yen equivalent to approximately $3.2
million with an expiration date of January 12, 2000.
In June 1999, 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 quarters and fiscal
years beginning after June 15, 2000. The Company adopted SFAS 133 on January 1,
2001 and the adoption of this pronouncement is not expected to have a material
impact on the Company's financial position and results of operations.
30
Stock Options
In 1997, the Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation". As permitted under this
standard, the Company has elected to follow Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees" in accounting for
its stock options and other stock-based employee awards. Pro forma information
regarding net income and earnings per share, as calculated under the provisions
of SFAS 123, are disclosed in Note 9.
Computation of Net Income per Common Share
Net income per basic common share is computed using the weighted average number
of common shares outstanding during the period. Net income per diluted common
share is computed using the weighted average number of common shares and
potential common shares outstanding during the period. Potential common shares
result from the assumed exercise, using the treasury stock method, of
outstanding common stock options having a dilutive effect.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. Comprehensive income
has been presented as part of the Consolidated Statements of Stockholder'
Equity. Accumulated other comprehensive income (losses), as presented in the
accompanying consolidated balance sheets, consists of the net unrealized gains
(losses) on available-for-sale investments, net of tax, and the cumulative
translation adjustment.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2: Mergers and Acquisitions
1999 Merger
On August 31, 1999 the Company merged with Management Graphics Inc. ("MGI"), a
Minnesota-based corporation that developed digital print on demand products and
other digital imaging products. The merger was accounted for as a tax free,
pooling of interests combination and, accordingly, the consolidated financial
statements have been restated to include the historical results of MGI for all
periods presented prior to the acquisition, as if the merged entity was a
wholly-owned subsidiary of Electronics For Imaging, Inc. since inception.
2000 Acquisitions
On October 23, 2000, the Company acquired Splash Technology Holdings, Inc.
("Splash") for total consideration of approximately $159.7 million, comprised
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 as follows:
31
(in thousands)
- --------------------------------------------------------------------------------
Fair value of assets acquired and liabilities assumed $ 59,885
In-process research and development 20,300
Developed technology 18,500
Workforce-in-place 2,200
Trademarks and trade names 5,500
Goodwill 53,275
------
$159,660
- --------------------------------------------------------------------------------
Valuation of the intangible assets acquired was determined by an independent
third-party appraiser and consists of developed technology, trademarks and trade
names, and workforce-in-place. The amount allocated to the purchased in-process
research and development ("IPR&D")was determined using established valuation
techniques and was expensed upon acquisition because technological feasibility
had not been established and no future alternative uses existed. The percentage
of completion for such products was estimated to range from 50% to 90%. The
value of this IPR&D was determined by estimating the costs to develop the
purchased IPR&D into a commercially viable product, estimating the resulting net
cash flows from the sale of the products resulting from the completion of the
IPR&D and discounting the net cash flows back to their present value at rates
ranging from 25% to 30%. The excess of the purchase price over tangible and
identifiable intangible assets acquired and liabilities assumed has been
recorded as goodwill. The developed technology, trademarks and trade names,
workforce-in-place and goodwill are being amortized over estimated useful lives
ranging from 4 to 7 years.
Capitalized transaction related costs include direct transaction costs primarily
for financial advisory and legal fees totaling $2.1 million, employee severance
costs totaling $3.4 million and costs associated with terminating certain
contracts of Splash totaling $1.4 million.
The unaudited pro forma information set forth below represents the revenues, net
income and earnings per share of the Company and Splash as if the acquisition
were effective on January 1, 1999, 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.
Years Ended December 31,
(in thousands, except per share data) 2000 1999
- --------------------------------------------------------------------------------
Revenue $640,096 $640,760
Net income $55,192 $85,901
Basic earnings per common share $1.01 $1.57
Diluted earnings per common share $0.99 $1.51
- --------------------------------------------------------------------------------
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.
Note 3: Balance Sheet Components
December 31,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Accounts receivable:
Accounts receivable $74,436 $83,170
Less reserves and allowances (2,430) (1,266)
------- -------
$72,006 $81,904
- ----------------------------------------------------------------------------------------------------------------------
32
Inventories:
Raw materials $25,928 $10,844
Work in process -- 33
Finished goods 1,148 1,001
------- -------
$27,076 $11,878
- ----------------------------------------------------------------------------------------------------------------------
Other current assets:
Receivable from subcontract manufacturers $18,911 $ 4,742
Deferred income taxes, current portion 17,695 14,772
Other 6,560 5,388
-------- -----
$43,166 $24,902
- ----------------------------------------------------------------------------------------------------------------------
Property and equipment:
Land and land improvements $28,930 $27,681
Equipment and purchased software 70,413 59,499
Furniture and leasehold improvements 16,354 13,261
-------- ------
115,697 100,441
Less accumulated depreciation and amortization (64,241) (50,665)
-------- --------
$51,456 $49,776
- ----------------------------------------------------------------------------------------------------------------------
Other assets:
Deferred income taxes, non-current portion $15,031 $14,915
Goodwill 53,406 --
Other intangibles 29,432 --
Accumulated amortization of goodwill and intangibles (6,560) --
Other 1,640 2,372
-------- -----
$92,949 $17,287
- ----------------------------------------------------------------------------------------------------------------------
Accrued and other liabilities:
Accrued compensation and benefits $15,019 $ 7,263
Accrued product-related obligations 13,427 7,809
Accrued royalty payments 8,564 7,327
Other accrued liabilities 13,473 7,372
------ -----
$50,483 $29,771
- ----------------------------------------------------------------------------------------------------------------------
Note 4: Short-term and Restricted Investments
The following tables summarize the Company's investments placed in securities:
Amortized Gross Unrealized Gross Unrealized Fair
December 31, 2000 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
(In thousands)
Municipal Securities $254,060 $782 -- $254,842
U.S. Government Securities 9,911 180 -- 10,091
- ----------------------------------------------------------------------------------------------------------
Total short-term and restricted
investments $263,971 $962 -- $264,933
- ----------------------------------------------------------------------------------------------------------
33
Amortized Gross Unrealized Gross Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
(In thousands)
Municipal Securities $246,861 -- $(804) $246,057
U.S. Government Securities 54,636 -- (139) 54,497
U.S. Corporate Debt Securities 5,969 -- (19) 5,950
- ----------------------------------------------------------------------------------------------------------
Total investments $307,466 -- $(962) $306,504
- ----------------------------------------------------------------------------------------------------------
The following table summarizes debt maturities as of December 31, 2000:
Amortized Fair
(In thousands) Cost Value
- ----------------------------------------------------------------------------------------------------------
Less than one year $163,174 $163,389
Due in 1-2 years 75,942 76,467
Due in 2-3 years 24,855 25,077
- ----------------------------------------------------------------------------------------------------------
Total short-term and restricted investments $263,971 $264,933
- ----------------------------------------------------------------------------------------------------------
Note 5: Long -Term Debt
Long Term Debt consists of amounts due to the City of Foster City for certain
bonds assumed by the Company during the purchase of land (see Note 6). Principal
amounts owing under the bonds are as follows:
(in thousands) Year ending December 31, 2000
- ----------------------------------------------------------------------------------------------------------
Total principal $3,466
Less: current portion (326)
- -----------------------------------------------------------------------------------------------------------
$3,140
- ----------------------------------------------------------------------------------------------------------
The bonds are secured by the land and bear an annual interest rate of
approximately 7%. Interest and principal payments are due semi-annually with the
last payment occurring in June 2009. Principal payments under the bonds payable
are as follows:
Year ending December 31, (in thousands)
- ----------------------------------------------------------------------------------------------------------
2001 $ 326
2002 297
2003 317
2004 340
2005 365
Thereafter 1,495
- ----------------------------------------------------------------------------------------------------------
$3,140
- ----------------------------------------------------------------------------------------------------------
34
Note 6: Commitments and Contingencies
Leases
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. As of December 31,
2000, the lessor has funded $13.4 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 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 is in proportion to the amount drawn under
each lease. Under the 1997 Lease, the pledged collateral ($70.2 million at
December 31, 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 ($14.1 million at December
31, 2000) may be invested by the Company in certain securities, however the
funds are restricted as to withdrawal at all times.
The Company also leases office facilities in various locations in the United
States and overseas for periods ranging from two to five years, expiring between
May 2002 and August 2005.
The following summarizes the future minimum lease payment under the
non-cancelable operating leases:
Fiscal Year (In thousands)
- --------------------------------------------------------------------------------
2001 $ 5,308
2002 5,024
2003 4,180
2004 2,579
2005 207
Thereafter --
- --------------------------------------------------------------------------------
Total $17,298
- --------------------------------------------------------------------------------
Note: Lease obligation related to the principal corporate facility is estimated
and is based on current market interest rates ( LIBOR) and based on
collateralized assumptions.
Rental expense amounted to approximately $6.7 million, $6.6 million, and $4.6
million for the fiscal years ended 2000, 1999 and 1998, respectively.
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
October 13, 1998. The complaints allege violations of securities laws during the
class period. Management believes the lawsuits are
35
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. The
Company believes that the ultimate resolution of such claims will not materially
affect the Company's business or financial condition.
Note 7: Income Taxes
The provision (benefit) for income taxes is summarized as follows:
Years ended December 31,
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Current:
U.S. Federal $34,451 $51,085 $20,771
State 4,197 8,044 3,749
Foreign 1,852 1,463 46
- --------------------------------------------------------------------------------------------------------------------
Total current 40,500 60,592 24,566
Deferred:
U.S. Federal (2,469) (13,265) (2,348)
State (549) (408) 238
Foreign (21) (5) --
- --------------------------------------------------------------------------------------------------------------------
Total deferred (3,039) (13,678) (2,110)
- --------------------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes $37,461 $46,914 $22,456
- --------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax assets
(liabilities) are as follows:
December 31,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------
Depreciation $ (306) $ 1,901
Inventory reserves 7,209 4,532
Other reserves and accruals 4,473 6,762
State taxes payable 523 1,568
Amortization of intangibles 1,276 4,636
Deferred tax on I/C transactions 10,117 8,148
Net operating loss carryforwards and credits 5,811 --
Manufacturing reserves 1,873 --
Other 1,750 2,140
- --------------------------------------------------------------------------------
Total deferred tax assets $32,726 $29,687
- --------------------------------------------------------------------------------
36
A reconciliation between the income tax provision computed at the federal
statutory rate and the actual tax provision is as follows:
Years ended December 31,
(In thousands) 2000 1999 1998
---- ---- ----
$ % $ % $ %
- -----------------------------------------------------------------------------------------------------------------------
Tax expense at federal statutory rate $32,137 35.0 $49,769 35.0 $24,572 35.0
State income taxes, net of federal benefit 4,798 5.2 5,502 3.9 3,063 4.4
Tax-exempt interest income (4,480) (4.9) (3,601) (2.5) (2,717) (4.0)
Research and development credits (3,934) (4.3) (2,725) (1.9) (1,874) (2.8)
FSC benefit (2,148) (2.3) (3,360) (2.4) (1,039) (1.5)
Unbenefited foreign net operating losses 2,546 2.8 -- -- -- --
In-process technology and amortization of goodwill 7,698 8.4 -- -- -- --
Other 844 0.9 1,329 0.9 451 0.9
- -----------------------------------------------------------------------------------------------------------------------
$37,461 40.8 $46,914 33.0 $22,456 32.0
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes includes $0.3 million, $2.0 million and $3.2 million
of income relating to non -U.S. operations for 2000, 1999 and 1998,
respectively.
The company has approximately $13.2 million and $1.0 million of loss and credit
carryforwards at December 31, 2000. These losses and credits will expire between
2002 and 2019.
37
Note 8: Earnings Per Share
The following table presents a reconciliation of basic and diluted earnings per
share for the three years in the period ended December 31, 2000:
Years ended December 31,
(In thousands, except per share data) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $54,358 $95,283 $47,821
Shares
Basic shares 54,649 54,853 53,507
Effect of Dilutive Securities 1,334 2,110 1,465
------ ------ ------
Diluted shares 55,983 56,963 54,972
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per common share
Basic EPS $0.99 $1.74 $0.89
Diluted EPS $0.97 $1.67 $0.87
- ---------------------------------------------------------------------------------------------------------------------------
Antidilutive Options. Options to purchase 4,729,988; 349,791, and 2,742,510
shares of common stock outstanding as of December 31, 2000, 1999, and 1998,
respectively, were not included in the computations of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares for the years then ended.
Note 9: Employee Benefit Plans
Stock Option Plans
As of December 31, 2000, the Company has six stock-based compensation plans,
described below. The Company applies APB 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for options granted in
2000, 1999 and 1998 under the Company's option plans been determined based on
the fair value at the grant dates as prescribed by SFAS 123, the Company's net
income and pro forma net income per share would have been as follows:
Years ended December 31,
(In thousands, except per share amounts) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Net income As reported $54,358 $95,283 $47,821
Pro forma $ 4,266 $61,410 $18,543
Earnings per basic As reported $0.99 $1.74 $0.89
common share Pro forma $0.08 $1.12 $0.35
Earnings per diluted As reported $0.97 $1.67 $0.87
common share Pro forma $0.08 $1.08 $0.34
- ---------------------------------------------------------------------------------------------------------------------------
The Company has five stock option plans: the 1989 Stock Plan (a "Predecessor
Plan") , the 1990 Stock Plan (a "Predecessor Plan"), the MGI 1985 Nonqualified
Stock Option Plan (a "Predecessor Plan"), the Splash 1996 Stock Option Plan (a
"Predecessor Plan") and the 1999 Equity Incentive Plan (a "Stock Plan"). The
Company does not grant any options under the Predecessor Plans, however all
outstanding options under the Predecessor Plans continue to be governed by the
terms and conditions of the existing option agreements for those grants. Under
the Stock Plans, the exercise price of each option equals the market price of
the Company's stock on the date of grant and an option's maximum term is 10
years. Options are granted periodically throughout the year and generally vest
ratably over two to four years. At December 31, 2000, approximately 2.7 million
shares were available for future grants to employees, directors or consultants.
38
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model, the attribution method with respect to
graded vesting and the following weighted-average assumptions:
Years Ended December 31,
Black Scholes Assumptions & Fair Value 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Expected Volatility 88.0% 76.3% 76.0%
Dividend Yield 0.0% 0.0% 0.0%
Risk Free Interest Rate 4.91% to 5.11% 5.95% to 6.44% 4.49% to 4.65%
Weighted Average Expected Option Term 4.0 years 4.5 years 4.4 years
Weighted Average Fair Value of Options Granted $21.96 $19.35 $6.98
- ---------------------------------------------------------------------------------------------------------------------------
A summary of the status of the Company's stock option activity is presented below:
Years ended December 31,
(In thousands, except exercise price) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------------
Beginning of Year 7,335 $27.73 6,734 $21.04 6,401 $21.76
Granted 9,045 27.92 2,955 36.81 1,931 16.05
Exercised (1,441) 12.60 (1,738) 16.06 (954) 9.19
Forfeited (2,036) 35.63 (616) 31.09 (644) 30.73
- -------------------------------------------------------------------------------------------------------------------------------
End of Year 12,903 $28.31 7,335 $27.73 6,734 $21.04
- -------------------------------------------------------------------------------------------------------------------------------
39
The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
(in thousands) (in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
$0.15 to $11.94 588 6.40 $7.70 283 $3.14
$11.95 to $12.81 2,615 9.48 $12.81 239 $12.79
$12.82 to $15.77 1,182 7.48 $14.62 677 $14.62
$15.78 to $21.38 499 8.99 $20.26 65 $18.31
$21.39 to $22.31 1,536 9.43 $22.31 306 $22.31
$22.32 to $25.63 575 5.97 $25.42 509 $25.61
$25.64 to $33.81 1,656 8.11 $33.59 673 $33.39
$33.82 to $45.18 1,008 8.56 $42.47 343 $41.89
$45.19 to $45.19 2,067 9.08 $45.19 583 $45.19
$45.20 to $60.31 1,177 7.54 $50.19 587 $49.30
- -------------------------------------------------------------------------------------------------------------------------------
$0.01 to $60.31 12,903 8.49 $28.31 4,265 $29.78
- -------------------------------------------------------------------------------------------------------------------------------
Employee Stock Purchase Plan
In 2000, the Company established an Employee Stock Purchase Plan which allows
qualified employees (as defined) to purchase designated shares of the Company's
common stock at a price equal to 85% of the closing price on specified dates.
The Company has authorized 400,000 shares for purchase under this plan, with the
first purchases occurring in 2001.
Employee 401(k) Plan
The Company sponsors a 401(k) Savings Plan (the "401(k) Plan") to provide
retirement and incidental benefits for its employees. Employees may contribute
from 1% to 20% of their annual compensation to the Plan, limited to a maximum
annual amount as set periodically by the Internal Revenue Service. The Company
currently matches 50 % of the employee contributions, up to a maximum of the
first 4% of the employee's compensation contributed to the plan, subject to IRS
limitations. The Company match is annually determined by the Board of Directors.
All matching contributions vest over four years starting with the hire date of
the individual employee. Company matching contributions to the Plan totaled $1.0
million in 2000.
Note 10: Information Concerning Business Segments and Major Customers
Information about Products and Services
The Company operates in a single industry segment, technology for high-quality
printing in short production runs. The Company does not have separate operating
segments for which discrete financial statements are prepared. The Company's
management makes operating decisions and assesses performance based on primarily
product revenues and related gross margins.
40
The following is a breakdown of revenues for the years ended December 31, 2000, 1999 and 1998 by product category:
2000 1999 1998
(In thousands) Revenue Revenue Revenue
- ------------------------------------------------------------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers $268,436 $244,028 $291,785
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 129,277 149,899 90,133
Controllers for Digital
Black and White Solutions 130,780 121,071 19,196
Spares, Licensing
& Other misc. sources 59,956 55,754 45,885
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenue $588,449 $570,752 $446,999
- ------------------------------------------------------------------------------------------------------------------------------------
Information about Geographic Areas
The Company's sales originated in the United States, The Netherlands and Japan.
Shipments to some of the Company's OEM partners are made to centralized
purchasing and manufacturing locations, which in turn sell through to other
locations. As a result of these factors, the Company believes that sales to
certain geographic locations might be higher or lower, as accurate data is
difficult to obtain.
The following is a breakdown of revenues by shipment destination for the years ended 2000, 1999 and 1998, respectively:
Years ended December 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
North America $291,679 $277,997 $221,638
Europe 191,403 182,602 144,076
Japan 85,983 90,781 68,991
Rest of World 19,384 19,372 12,294
- -------------------------------------------------------------------------------------------------------------------
$588,449 $570,752 $446,999
- -------------------------------------------------------------------------------------------------------------------
Information about Major Customers
Three customers, with total revenues greater than 10%, accounted for
approximately 36%, 23% and 11% of revenue in 2000. Two customers accounted for
36% and 23% of revenue in 1999. Three customers accounted for approximately 44%,
27% and 14% of revenue in 1998. Three customers, with accounts receivable
balances greater than 10%, in aggregate accounted for approximately 79%, 69% and
85% of the accounts receivable balance as of December 31 in 2000, 1999 and 1998,
respectively.
41
Report of Independent Accountants
To the Board of Directors and Stockholders of
Electronics for Imaging, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Electronics
for Imaging, Inc. and its subsidiaries at December 31, 2000 and December 31,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 23, 2001
42
Quarterly Consolidated Financial Information
(Unaudited)
(In thousands, except per share data)
The following table presents the Company's operating results for each of the
eight quarters in the two-year period ended December 31, 2000. The information
for each of these quarters is unaudited but has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
Annual Report. In the opinion of management, all necessary adjustments
(consisting only of normal recurring adjustments) have been included to present
fairly the unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto appearing
in this Annual Report. These operating results are not necessarily indicative of
the results for any future period.
2000: Q1 Q2 Q3 Q4
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $151,515 $152,176 $153,182 $131,576
Gross profit 73,612 72,943 73,499 57,243
Income (loss) from operations 32,444 28,452 24,974 (15,601)
Net income (loss) 25,423 22,832 20,045 (13,942)
Net income (loss) per basic common share $0.45 $0.41 $0.37 $(0.26)
Net income (loss) per diluted common share $0.44 $0.40 $0.37 $(0.26)
----------------------------------------------------------------------
Revenue by product
Stand-alone Servers Connecting to Digital Copiers $ 73,747 $ 76,855 $ 67,666 $ 50,168
Embedded Desktop Controllers, Bundled
Color Solutions & Chipset Solutions 33,214 23,783 33,801 38,480
Controllers for Digital Black and White Solutions 26,828 36,823 37,052 30,078
Spares, Licensing & other misc. sources 17,726 14,715 14,663 12,850
-------- --------- --------- --------
Total revenue $151,515 $152,176 $153,182 $131,576
----------------------------------------------------------------------
Shipments by geographic area
North America $ 73,935 $ 71,755 $ 79,855 $ 66,134
Europe 52,849 57,185 43,496 37,873
Japan 18,727 19,354 24,548 23,354
Rest of World 6,004 3,882 5,283 4,215
--------- --------- --------- ---------
Total $151,515 $152,176 $153,182 $131,576
1999: Q1 Q2 Q3 Q4
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $124,204 $140,686 $158,211 $147,651
Gross profit 58,655 69,260 78,975 73,226
Income from operations 22,694 31,644 38,743 32,866
Net income 17,286 23,524 29,358 25,115
Net income per basic common share 0.32 0.43 0.53 0.45
Net income per diluted common share $0.31 $0.41 $0.51 $0.44
----------------------------------------------------------------------
Revenue by product
Stand-alone Servers Connecting to Digital Copiers $ 62,221 $ 58,106 $ 60,184 $ 63,517
Embedded Desktop Controllers, Bundled
Color Solutions & Chipset Solutions 31,664 36,913 43,940 37,382
Controllers for Digital Black and White Solutions 16,794 35,176 41,907 27,194
Spares, Licensing & other misc. sources 13,525 10,491 12,180 19,558
--------- --------- --------- ---------
Total revenue $124,204 $140,686 $158,211 $147,651
----------------------------------------------------------------------
Shipments by geographic area
North America $ 56,784 $ 65,633 $ 77,762 $ 77,818
Europe 42,690 47,403 45,833 46,676
Japan 22,175 22,832 27,614 18,160
Rest of World 2,555 4,818 7,002 4,997
--------- --------- --------- ---------
Total $124,204 $140,686 $158,211 $147,651
- ---------------------------------------------------------------------------------------------------------------------------
43
PART III
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 10: Directors and Executive Officers of the Registrant
Information regarding directors of the Company is incorporated by reference
from the information contained under the caption "Election of Directors" in
the Company's Proxy Statement for the Company's 2001 Annual Meeting of
Stockholders (the "2001 Proxy Statement"). Information regarding current
executive officers of the Registrant is incorporated by reference from
information contained under the caption "Executive Officers" in the
Company's 2001 Proxy Statement. Information regarding Section 16 reporting
compliance is incorporated by reference from information contained under
the caption "Section 16 (a) Beneficial Ownership Reporting Compliance" in
the Company's 2001 Proxy Statement.
Item 11: Executive Compensation
The information required by this item is incorporated by reference from the
information contained under the caption "Executive Compensation" in the
Company's 2001 Proxy Statement.
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
information contained under the caption "Security Ownership" in the
Company's 2001 Proxy Statement.
Item 13: Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
information contained under the caption "Related Transactions" in the
Company's 2001 Proxy Statement.
44
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 10-K.
(a) Documents Filed as Part of Form 10-K
- ----------------------------------------------
(1) Index to Financial Statements
The Financial Statements required by this item are submitted in Item 8
of this report as follows:
Report of Independent Accountants.
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Income for the three years ended
December 31, 2000 Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 2000 Consolidated Statements
of Cash Flows for the three years ended December 31, 2000 Notes to
Consolidated Financial Statements
(2) Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Report of Independent Accountants on Financial Statement Schedule
(All other schedules are omitted because of the absence of conditions
under which they are required or because the necessary information is
provided in the consolidated financial statements or notes thereto.)
(3) Exhibits
Exhibits
2.1 Agreement and Plan of Merger, dated as of August 30, 2000, by
and among the Company, Vancouver Acquisition Corp. and Splash
Technology Holdings, Inc. (7)
2.2 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. (8)
2.3 Agreement and Plan of Merger and Reorganization, dated as of
July 14, 1999, among the Company, Redwood Acquisition Corp.
and Management Graphics, Inc. (5)
3.1 Amended and Restated Certificate of Incorporation. (2)
3.2 Bylaws as amended. (1)
4.1 See Exhibit 3.1
4.2 Specimen Common Stock certificate of the Company. (1)
10.1+ License Agreement, dated as of February 9, 1990, between the
Company and the Massachusetts Institute of Technology. (1)
10.2 Amendment to License Agreement dated December 21, 1990,
between the Company and the Massachusetts Institute of
Technology. (1)
10.3 Amendment to License Agreement dated May 29, 1991 and March
19, 1991, by and between the Company and the Massachusetts
Institute of Technology. (1)
45
Exhibit
No. Description
10.4+ Third Amendment to License Agreement dated June 1, 1992, by
and between the Company and the Massachusetts Institute of
Technology. (1)
10.5 First Amendment to License Agreement dated November 19, 1990,
by and between the Company and the Massachusetts Institute of
Technology.
10.6++ Agreement dated December 6, 2000, by and between Adobe Systems
Incorporated and the Company.
10.7** 1989 Stock Plan of the Company. (1)
10.8** 1990 Stock Plan of the Company. (1)
10.9** Management Graphics, Inc. 1985 Nonqualified Stock Option
Plan.(9)
10.10** The 1999 Equity Incentive Plan. (6)
10.11** Form of Indemnification Agreement.(1)
10.12** Employment Agreement dated January 11, 2000 by and between Dan
Avida and the Company.(9)
10.13** Employment Agreement dated March 8, 2000, by and between Fred
Rosenzweig and the Company.(9)
10.14** Employment Agreement dated March 8, 2000, by and between Eric
Saltzman and the Company.(9)
10.15* Employment Agreement dated March 8, 2000, by and between Jan
Smith and the Company.(9)
10.16** Employment Agreement dated March 8, 2000, by and between Guy
Gecht and the Company.(9)
10.17** Master Lease and Open End Mortgages dated as of July 18, 1997
by and between the Company and FBTC Leasing Corp. for the
lease financing of the Company's corporate headquarters
building to be built in Foster City, California.(4)
10.18 Lease Financing of Properties Located in Foster City,
California, dated as of January 18, 2000 among the Company,
Societe Generale Financial Corporation and Societe
Generale.(9)
10.19** 2000 Employee Stock Purchase Plan.(3)
10.20** Employment Agreement dated April 13, 2000, by and between
Joseph Cutts and the Company.(3)
10.21** Splash Technology Holdings, Inc. 1996 Stock Option Plan. (10)
10.22++ Fourth Amendment to License Agreement dated October 17, 1994,
by and between the Company and the Massachusetts Institute of
Technology.
10.23++ Fifth Amendment to License Agreement dated June 1, 2000, by
and between the Company and the Massachusetts Institute of
Technology.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see signature page)
** Items that are management contracts or compensatory plans
or arrangements required to be filed as exhibits pursuant
to Item 14 (c) of Form 10-K.
46
+ The Company has received confidential treatment with
respect to portions of these documents.
++ The Company has requested confidential treatment with
respect to portions of these documents.
(1) Filed as an exhibit to the Company's Registration
Statement on Form S-1 (No. 33-50966) and incorporated
herein by reference.
(2) Filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-57382) and incorporated
herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 (File No.
000-18805) and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 (File No.
0-18805) and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Report of Unscheduled
Material Events on Form 8-K on September 8, 1999 (File No.
0-18805) and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-88135) and
incorporated herein by reference.
(7) Filed as exhibit (d) (1) to the Company's Schedule TO-T on
September 14, 2000 is incorporated herein by reference.
(8) Filed as exhibit (d) (5) to the Company's TO/A Number 3 on
October 20, 2000 is incorporated herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 2000 (File No.
000-18805) and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-49298) and
incorporated herein by reference.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on October 31, 2000. The
report related to the acquisition of Splash Technology Holdings, Inc.
in a cash merger, valued at approximately $159.7 million. The merger
was completed on October 23, 2000
(c) List of Exhibits
See Item 14 (a).
(d) Consolidated Financial Statement Schedule II for the years ended
December 31, 2000, 1999 and 1998, respectively.
See Page 47 of this Annual Report on Form 10-K.
47
ELECTRONICS FOR IMAGING, INC.
Schedule II
Valuation and Qualifying Accounts
Balance at Charged to Charged to/ Balance at
beginning costs and from other end of
Description of period expenses accounts Deductions period
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Year Ended December 31, 2000
Allowance for doubtful accounts and
sales-related reserves $1,266 $979 $451 (1) $(266) $2,430
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Allowance for doubtful accounts and
sales-related reserves $1,697 $200 $-- $(631) $1,266
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Allowance for doubtful accounts and
sales-related reserves $1,628 $250 $-- $(181) $1,697
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Bad debt reserve received through acquisition of Splash Technology Holdings, Inc. - $173, and returned goods not previously
included in allowance account - $277.
48
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Stockholders
of Electronics for Imaging, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 23, 2001 appearing in this Annual Report on Form 10-K of
Electronics for Imaging, Inc. also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 23, 2001
49
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELECTRONICS FOR IMAGING, INC.
March 27, 2001 By: /s/ Guy Gecht
-----------------------------
Guy Gecht
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Guy Gecht and Joseph Cutts jointly and severally,
his attorneys-in-fact, each with the power of substitution, for him in any and
all capacities, to sign any amendments to the Form 10-K Annual Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- -----
/s/ Guy Gecht
- ----------------------------- Chief Executive Officer and Director March 27, 2001
Guy Gecht (Principal Executive Officer)
/s/ Fred Rosenzweig
- ----------------------------- President, Chief Operating Officer and
Fred Rosenzweig Director (Principal Operating Officer) March 27, 2001
/s/ Joseph Cutts
- ----------------------------- Chief Financial Officer and Corporate Secretary
Joseph Cutts (Principal Financial and Accounting Officer) March 27, 2001
/s/ Jean-Louis Gasse'e Director March 27, 2001
- -----------------------------
Jean-Louis Gasse'e
/s/ Dan Maydan Director March 27, 2001
- -----------------------------
Dan Maydan
50
Exhibit Index
Exhibit
No. Description
- --- -----------
2.1 Agreement and Plan of Merger, dated as of August 30, 2000, by and among
the Company, Vancouver Acquisition Corp. and Splash Technology
Holdings, Inc. (7)
2.2 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. (8)
2.3 Agreement and Plan of Merger and Reorganization, dated as of July 14,
1999, among the Company, Redwood Acquisition Corp. and Management
Graphics, Inc. (5)
3.1 Amended and Restated Certificate of Incorporation. (2)
3.2 Bylaws as amended. (1)
4.1 See Exhibit 3.1
4.2 Specimen Common Stock certificate of the Company. (1)
10.1+ License Agreement, dated as of February 9, 1990, between the Company
and the Massachusetts Institute of Technology. (1)
10.2 Amendment to License Agreement dated December 21, 1990, between the
Company and the Massachusetts Institute of Technology. (1)
10.3 Amendment to License Agreement dated May 29, 1991 and March 19, 1991,
by and between the Company and the Massachusetts Institute of
Technology. (1)
10.4+ Third Amendment to License Agreement dated June 1, 1992, by and between
the Company and the Massachusetts Institute of Technology. (1)
10.5 First Amendment to License Agreement dated November 19, 1990, by and
between the Company and the Massachusetts Institute of Technology.
10.6++ Agreement dated December 6, 2000, by and between Adobe Systems
Incorporated and the Company.
10.7** 1989 Stock Plan of the Company. (1)
10.8** 1990 Stock Plan of the Company. (1)
10.9** Management Graphics, Inc. 1985 Nonqualified Stock Option Plan.(9)
10.10** The 1999 Equity Incentive Plan. (6)
10.11** Form of Indemnification Agreement.(1)
10.12** Employment Agreement dated January 11, 2000 by and between Dan Avida
and the Company.(9)
10.13** Employment Agreement dated March 8, 2000, by and between Fred
Rosenzweig and the Company.(9)
10.14** Employment Agreement dated March 8, 2000, by and between Eric Saltzman
and the Company.(9)
10.15** Employment Agreement dated March 8, 2000, by and between Jan Smith and
the Company.(9)
51
Exhibit
No. Description
- --- -----------
10.16** Employment Agreement dated March 8, 2000, by and between Guy Gecht and
the Company.
10.17** Master Lease and Open End Mortgages dated as of July 18, 1997 by and
between the Company and FBTC Leasing Corp. for the lease financing of
the Company's corporate headquarters building to be built in Foster
City, California.(4)
10.18 Lease Financing of Properties Located in Foster City, California, dated
as of January 18, 2000 among the Company, Societe Generale Financial
Corporation and Societe Generale.(9)
10.19** 2000 Employee Stock Purchase Plan.(3)
10.20** Employment Agreement dated April 13, 2000, by and between Joseph Cutts
and the Company.(3)
10.21** Splash Technology Holdings, Inc. 1996 Stock Option Plan (10)
10.22++ Fourth Amendment to License Agreement dated October 17, 1994, by and
between the Company and the Massachusetts Institute of Technology.
10.23++ Fifth Amendment to License Agreement dated June 1, 2000, by and between
the Company and the Massachusetts Institute of Technology.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
24.2 Power of Attorney (see signature page)
** Items that are management contracts or compensatory plans or
arrangements required to be filed as exhibits pursuant to Item 14
(c) of Form 10-K.
+ The Company has received confidential treatment with respect to
portions of these documents.
++ The Company has requested confidential treatment with respect to
portions of these documents.
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-50966) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-57382) and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 (File No. 000-18805) and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 (File No. 0-18805) and
incorporated herein by reference.
(5) Filed as an exhibit to the Company's Report of Unscheduled
Material Events on Form 8-K on September 8, 1999 (File No.
0-18805) and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-88135) and incorporated herein by
reference.
(7) Filed as exhibit (d) (1) to the Company's Schedule TO-T on
September 14, 2000 is incorporated herein by reference.
52
(8) Filed as exhibit (d) (5) to the Company's TO/A Number 3 on
October 20, 2000 is incorporated herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 (File No. 000-18805) and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-49298) and incorporated herein by
reference.
53