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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, 1996 Commission File Number: 0-18805
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2855 Campus Drive, San Mateo, CA 94403
(Address of principal executive offices) (Zip Code)
(415) 286-8600
(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
- -
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or an amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 24, 1997.
Common Stock, $.01 par value: $38.00
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 24, 1997.
Common Stock, $.01 par value: 51,772,802
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 1, 1997 are incorporated by reference into Part III.
A list of all exhibits to this Form 10-K is located
on pages 37 through 40.
1
PART I
Item 1: Business.
The Company was founded to develop innovative solutions to enable color
desktop publishing in the same manner that laser printers and PostScript(TM)
software enabled black-and-white desktop publishing in the mid-1980s. In pursuit
of this goal, the Company developed the Fiery(R) line of color servers (the
"Fiery Color Servers") to enable short-production run color printing in an
office environment, together with application and system software to facilitate
color correction and device-independent color. The Company has focused the
majority of its efforts on its Fiery Color Servers and the development of new
models of Fiery products designed to control digital printing on a wide range of
devices including digital color copiers, desktop color laser printers and
wide-format color inkjet printers. Substantially all of the Company's revenue to
date has resulted from the sale of Fiery Color Servers and Fiery Color
Controllers (collectively, "Fiery Products").
Background
Prior to the mid-1980s, to obtain quality black-and-white, typeset
documents, a manuscript was typically sent to a specialized trade shop where
craftsmen labored on typesetting and photo composition machines. This process
was expensive and frequently involved delays and numerous proofing cycles. As a
result, only a limited number of documents were typeset, typically books or
periodicals printed in thousands or millions of copies. However, the advent of
desktop publishing in the mid-1980s enabled users to create the professional
look of typeset documents in an office environment. As a result, desktop
publishing systems offered users, without specialized training, increased
control over the black-and-white document creation process and enabled documents
to be produced more quickly without relying on special trade shops and outside
services. A single copy of a letter, a hundred copies of a memo, or a thousand
copies of a newsletter could be produced with a personal computer, a laser
printer and a black-and-white copier. These systems became increasingly popular
with users of low volume printing, such as small businesses, large corporations,
government agencies, educational institutions, graphic artists and business
professionals.
However, users were still limited in their ability to use desktop
systems to produce color documents for short-run printing at a reasonable cost.
In the late 1970s, color images were typically prepared on an electronic color
pre-press system developed by companies such as Scitex. These pre-press systems
were expensive, ran proprietary software, were not compatible with other
systems, and required highly-trained operators to properly edit and render
color. Users routinely endured a lengthy pre-press process, including the review
of numerous interim proofs, before final printing. While suitable for high
volume printing applications such as catalogs or magazines, pre-press equipment
and commercial printing presses were of limited value to users who wished to
design and proof material in-house and produce a limited number of color copies
quickly and cost-effectively.
The consumer preference for color is clearly evidenced by the migration
of photographs, motion pictures and television from black-and-white to color. In
the personal computer field, this preference is seen 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 quickly followed. The
Company believes that consumers prefer color in documents created through
desktop publishing, but until recently the technology was not available to do
this in a quick and cost-effective manner. Accurate color reproduction is far
more complex than black-and-white reproduction. In black-and-white printing, the
principal variable is the amount of black ink printed on the page. In contrast,
producing color on a page requires a combination of four inks (cyan, magenta,
yellow and black) applied in differing percentages to create varying colors. In
addition, the human eye is extremely sensitive to variations in color images.
Minor inconsistencies in the way various input, display and output devices
display color, even small differences in ambient lighting conditions, can result
in significant variations in the way a color image is printed and perceived.
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The Electronics for Imaging Solution
The Company is the industry pioneer and market leader in developing
products that enable high-quality color printing in short production runs. The
Company's product line solves the limitations described above by permitting
users to produce color documents easily, quickly and cost-effectively in the
office on a range of peripheral devices. Fiery Color Servers incorporate
hardware and software technologies that transform digital color copiers from all
leading copier manufacturers into fast, high-quality networked color printers.
Further, Fiery Color Server products are fully scalable to meet the needs of
both the high and low ends of the color printing market. Additionally, the
Company has developed and manufactures variations of the Fiery Color Servers for
wide-format inkjet printers and Fiery Color Controllers, which are an embedded
solution to enable color printing on desktop color laser printers. Printing
solutions that integrate the Fiery Products are marketed with the "Fiery Driven"
logo.
Strategy
The Company's overall objective is to establish Fiery Products as the
solution of choice to enable short-run digital color printing on a variety of
peripheral printing devices. With respect to its current products, the Company's
goal is to provide a broad range of color processing and printing solutions that
address broad sections of the color printing market. The Company's strategy to
accomplish these objectives consists of three key elements.
Proliferate and Expand the Fiery Product Line
Traditionally, the Company has sold products that support five to nine
page-per-minute ("ppm") color laser copiers. While the market for color laser
copiers is expanding, the Company has expanded its technology to an even broader
market for color printing devices. For example, in 1996, the Company expanded
its line of color servers, the Fiery XJ family, to drive a wide range of output
devices including desktop color laser printers and wide-format color inkjet
printers with poster-size output and announced plans to further develop products
to support high speed black-and-white printing systems. By utilizing the
advantages of the Fiery XJ design, the Company intends to continue to develop
new Fiery Products that are scalable and offer a broad range of features and
performance.
Develop Additional Relationships with Key Industry Participants
The Company has established relationships with Canon, Xerox, Kodak,
Minolta, Ricoh, Oce, IBM and Digital Equipment Corporation (collectively, "the
OEMs") and is seeking relationships with other digital copier and printer
companies for the distribution of Fiery Products with their copiers and
printers. See "Significant Relationships." As the Company addresses a broader
range of color printing markets, it will continue to seek to develop additional
relationships with companies that offer digital copy and/or print devices.
Leverage Color Expertise
The Company has assembled an experienced team of technical personnel
with backgrounds in color reproduction, electronic pre-press, image processing
and software and hardware engineering. By applying its expertise in color
imaging the Company expects to continue to expand the scope and sophistication
of its products and gain access to new markets.
Products and Technology
Shipments of the first generation Fiery Color Server began in August
1991. In 1995, the Company introduced the third-generation platform, the Fiery
XJ. During 1996, the Company migrated the majority of its product line to the XJ
platform and later refined these products through migration to a variation of
the XJ platform known as the Fiery XJ+, which included shifting from a 100Mhz to
133Mhz CPU, an improvement in
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bus speed from 50Mhz to 66Mhz and an improvement in the application-specific
integrated circuit ("ASIC") chip sets incorporated into the Servers. To date,
the Company has sold over 50,000 Fiery Color Servers and Fiery Color
Controllers. The Fiery Color Servers enable a color laser copier to perform as a
high performance, plain-paper color printer with the ability to produce full
color pages at up to 400 dots-per-inch ("dpi") resolution for copiers and 600
dpi resolution for printers in continuous tone or halftone. Fiery Color Servers
are capable of connecting color laser copiers with networked desktop computers
such as Windows-based PCs, Apple Macintosh computers and UNIX workstations. In
addition, Fiery Color Servers provide the scanning capabilities of certain color
laser copiers providing full color scanning capability to the network. The Fiery
Color Server is designed to provide a solution for short production runs and
on-demand color proofing for the desktop environment. Fiery Color Servers are
currently used with all full color copiers supplied by Canon, Xerox, Kodak,
Minolta, Ricoh and Oce. With the exception of Canon, the Fiery Color Server is
sold under the Fiery trademark.
In 1996, the Company began shipping Fiery XJ printer Controllers
(marketed under the name Fiery XJe) to IBM, Canon and Digital. The Fiery XJe is
embedded in desktop color laser printers sold by those companies. In 1996, the
Company also released a version of the Fiery XJe which is embedded in the Ricoh
Aficio 2000 series color copier. The Company is currently developing
relationships with other color laser printer manufacturers in an effort to
develop Fiery XJ embedded controllers for those companies' desktop color laser
printers as well. During 1996, the Company also released the Fiery SI (see
"Fiery SI" below) and announced an agreement to develop a controller for Oce's
high-speed black-and-white print system.
Fiery XJ Technology
In 1996, the Company focused its product line on its new generation of
the XJ architecture, the Fiery XJ+. The Fiery XJ+ architecture and product
family allowed the Company's OEMs to provide the fastest document processing
time available in the short-run color printing industry. The streamlined design
of the Fiery XJ architecture is a key component in increasing speed and reducing
the cost of Fiery Color Servers and Fiery embedded controllers, thereby making
this technology available to a wider range of consumers. Fiery XJ+ architecture
delivers double the performance at substantially lower costs than earlier
models. The Company designed specialized RipChips(TM) that accompany the MIPS
R4600/R4700 100 Mhz/133 Mhz RISC microprocessors and accelerate color
PostScript(TM) processing. Through the use of these ASICs, the Company has
minimized the chip count and reduced the key technology of the color server to a
single board. Additional cost reductions result from the Company's Memory
Multiplier(TM) technology, which allows for full-resolution continuous-tone
output with half the memory previously required. The Fiery XJ architecture also
incorporates a new software technology, Rip-While-Print(TM), which enables one
page to be printed while subsequent pages are simultaneously processed, thus
eliminating the delay caused by the cycling down of the copier or printer. As
with previous Fiery products, the Fiery XJ+ incorporates PostScript(TM) Level 2
interpreter software from Adobe Systems, related system software and the
Company's proprietary software utilities for use on the user's networked
personal computer. The Company has designed the Fiery XJ+ for use with Canon,
Xerox, Kodak, Minolta, Ricoh and Oce color copiers and is pursuing relationships
with other manufacturers of color copiers.
The Fiery XJ for color copiers is currently sold in four configurations
which, except for those sold to Canon, are marketed under the name Fiery XJ+ and
offer a wider range of price/performance capabilities than the Company's
previous products. Initial shipments began in April 1996 of the Fiery XJ+ 170,
Fiery XJ+ 250 and Fiery XJ+ 300, and in June 1996 for the Fiery XJ+ 500.
Estimated street prices for those products are $16,000, $22,000, $28,000 and
$45,000, respectively. Actual street prices are set by the Company's OEMs and
may vary by dealer and specific product configuration.
Fiery XJe - Desktop Color Laser Printers
In 1996, the Company continued to offer manufacturers of color laser
printers proven Fiery XJ technology embodied in the Fiery XJe Controller.
The Fiery XJe Controller enables a new class of desktop color laser
printers to print at faster speeds than the current market-leading desktop
printers, while maintaining superior output quality. With unrivaled performance
and output, these printers are designed to fit in a wide range of environments,
including desktop
4
publishing, pre-press and graphic environments. Speed, output quality,
networkability, and remote management software make color printing with Fiery
Driven printers both affordable and easy. Most jobs that once required a service
bureau can now be done in-house, saving time and money for end users.
Fiery XJe Controllers are based on the proven technology and scalable
architecture developed for the Company's Fiery XJ Color Servers. The
single-board design of the Fiery XJ and Fiery XJ+ allow the Fiery XJe to be
installed inside a color laser printer or color copier. The Fiery XJe employs
both a RISC-based CPU and ASICs for the industry's fastest raster image
processing (RIP). These specially-designed Fiery XJ Rip Chips speed up the
output of color documents by off loading all data movement functions from the
Controller's main CPU, which is then free for PostScript processing. The
Company's Rip-While-Print technology further speeds printing by enabling one
page to be printed while subsequent pages are concurrently processed. With
Continuous Print, Fiery XJe Controllers eliminate the delay caused when printers
"cycle down" between printing pages or jobs. Fiery XJe Controllers also provide
enhanced print quality, generating near photographic-quality, 600 dpi,
continuous-tone output on all prints. Fiery Driven printers deliver consistently
high output quality even when printing large and complex color documents.
With a built-in Ethernet interface and support for simultaneous Novell
IPX, TCP/IP and EtherTalk network protocols, Fiery Driven printers are
compatible with all popular networks. Fiery Driven printers come with a suite of
software tools that offer complete remote management of print output from a PC,
Macintosh or UNIX desktop. The tools provide users with complete control over
print queue operations, print options and print order. Fiery Driven printers
also include a print calibrator, enabling accurate calibration of color output.
The Company began shipping Fiery XJe Controllers to IBM in the third
quarter of 1996, in addition to the Fiery XJe Controllers it began shipping to
Canon and Digital in 1995. Furthermore, the Company began shipping an XJe
embedded controller for the Ricoh Aficio 2000 series digital color copier in the
4th quarter of 1996. The Fiery XJe for the Ricoh Aficio 2000 is the Company's
first embedded controller for a color laser copier.
Fiery XJ-W - Wide-format Inkjet Printers
In October 1996, the Company further broadened its Fiery XJ product
offerings by announcing the Fiery XJ-W, a controller for wide-format color
printers. Based on the Fiery XJ architecture, the Fiery XJ-W drives wide-format
color inkjet printers at their maximum-rated speed. By December 1996, the
Company was shipping the Fiery XJ-W for the ENCAD NovaJet Pro and in January
1997 the Company began shipping the Fiery XJ-W for the Hewlett Packard DesignJet
750C printer. The Company is currently selling the Fiery XJ-W through
distributors and wide-format color inkjet printer dealers. The Fiery XJ-W has a
list price of $7,995.
The Company's Fiery XJ-W product faces competition from wide-format
printer manufacturers that develop their own controllers and other companies
that develop controllers for wide-format printers. These companies include
Lasermaster, Onyx, Visual Edge, Cactus, Pisa Systems and Hewlett-Packard. Future
versions of these and other companies' controllers for wide-format printers
developed by these companies and new companies who develop products for this
market may compete with the Fiery XJ-W Controllers.
Fiery SI
In December 1996, the Company released the first Fiery SI. The Fiery SI
is a standalone color server that combines Fiery qualities to print business
documents. Based on the proven Fiery XJ architecture, the Fiery SI is optimized
for printing in the business office environment. The Fiery SI currently supports
color copiers and printers manufactured by Canon, Xerox, Minolta, Fuji Xerox and
Oce, and has a list price of $9,995.
Fiery For High Speed Black-and-White Printers
In September 1996, the Company announced that it had entered into an
agreement with Oce Printing Systems for the Company to develop a Fiery Server
designed to drive Oce's high speed black-and-white printing systems.
5
Distribution and Marketing
Distribution
Sales of Fiery XJ Color Servers designed for Canon, Xerox, Kodak,
Minolta, Ricoh and Oce copiers have been made through these copier companies
acting as systems integrators for distribution of these products worldwide.
Sales of Fiery XJe Controllers designed for Digital, Canon, IBM and Ricoh are
made through these companies which integrate the Controllers into their
products. See "Significant Relationships." There is no assurance that future
operations will be successful, nor that the risks of doing a significant amount
of business with few OEM customers, will not negatively impact the Company in
the future. See "Risk Factors - Reliance On OEM Resellers; Risks Associated With
Significant OEM Group Concentration."
The Company is currently selling the Fiery XJ-W through distributors
and wide-format color inkjet printer dealers. There is no assurance that future
sales of the Fiery XJ-W will be successful, nor that the risks of selling the
Fiery XJ-W through distributors and printer dealers will not negatively impact
the Company in the future. See "Risk Factors - XJ-W Sales Channels."
Marketing
The Company promotes its products through public relations, direct
mail, advertising, promotional material, trade shows and ongoing customer
communication programs.
Training, Technical Support and Warranties
The Company offers its OEM partners training in the sale and servicing
of the Fiery XJ and SI Color Server and the Fiery XJe Controller. The Company
offers its VARs and the various dealers training in the sale and servicing of
Fiery XJ-W controllers for wide-format printers. The Company's training programs
include sales training, marketing support and systems engineering to ensure that
Fiery products are effectively sold, integrated into computing environments and
properly installed and maintained. The Company endeavors to provide responsive
service and support to its OEM partners and dealers that sell Fiery products,
who in turn have responsibility for support and service to end users. See
"Distribution and Marketing."
The Company warrants its products against defects in materials and
workmanship on its hardware and software products. To date, the Company has not
experienced significant claims under such warranties.
Research and Development
Research and development costs for 1996, 1995, and 1994 were $22.4
million, $12.9 million, and $10.4 million, respectively. As of December 31,
1996, 164 of the Company's 354 full time employees were involved in research and
development, quality assurance and documentation. 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.
The Company is developing Fiery products to support additional color
and black-and-white printing devices including desktop printers high-end color
copiers, black-and-white copiers and multi-function devices. The ongoing
development work includes multiprocessor architecture for high-end systems and
lower-cost designs for desktop color laser printers. The Company is also
developing several options that it expects to make available to users of Fiery
XJ, Fiery SI, Fiery XJe and Fiery XJ-W products. To remain competitive, the
Company is continuing to research improved compression and calibration
techniques that would be released with future revisions of the Fiery XJ, Fiery
SI, Fiery XJe and Fiery XJ-W. The Company will continue to conduct research and
development to reduce the cost of manufacturing its products, as well as update
and expand its Fiery product
6
line. Substantial additional work will be required to complete the development
of these projects. See "Risks Factors - New Product Introductions."
Manufacturing
Having successfully produced the Fiery XJ controllers, the Company has
extended its product line into newer controller products, the Fiery XJ+ Color
Servers, the Fiery XJe Controllers, the Fiery XJ-W Controllers and the Fiery SI
Color Servers. The Company made a smooth transition from the Fiery XJ lines to
the Fiery XJ+ product line during the second quarter of 1996. All of the Fiery
XJ-related products are assembled at Solectron Corporation, SMTC Center, KBM
Electronics and at Micron Technology. All subcontractors purchase a significant
quantity of the components included in the Fiery XJ Products. The Fiery XJ
design enables the Company to reduce the number of component suppliers. All the
boards used in the Fiery XJ servers are built at ISIS Surface Mounting. These
subcontractors provide turnkey manufacturing which minimizes the inventory
carrying costs for the Company. This strategy has allowed the Company to
continue to maximize additional quality improvements and cost reduction. The
only part consigned at the assembly subcontractors are dynamic random access
memory ("DRAM"), components. The Company continues to seek and to qualify
additional second-source suppliers for all components of the Fiery XJ series to
protect against potential supply shortages. (See "Risk Factors - Dependence on
Component Availability and Cost.")
Throughout 1996, the Company's focus on cost reductions and product
quality, combined with price decreases in certain memory components, resulted in
improved gross margins for the company, and greater in process manufacturing
yield rates. In 1996, the Company continued to use a manufacturing/accounting
software package that is shared by the Company's subcontractors to display real
time quality control and inventory information. The Company's multiple sourcing
plan, participation in the quality control process and the use of the
manufacturing/accounting software package should allow the Company to further
improve product quality. The Company provides a warranty accrual at the time of
sale that approximates projected expenses to be incurred over the warranty
period which, for the Fiery XJ products, ranges from ninety days to fifteen
months from the date of delivery. There can be no assurance that the Company's
estimates regarding these matters will be accurate.
The Company's strategy includes an investment in critical component
inventory to ensure the timely delivery of Fiery Products and in spare
components to maintain the installed base of Fiery Products. The Company
attempts to minimize finished goods on hand. The Company had inventory on-hand
of approximately $11.0 million and $7.8 million as of December 31, 1996 and
1995, respectively. Significant fluctuations in the amount of inventory could
adversely affect the Company's operating results. No assurance can be given that
the Company will continue to be successful in implementing its strategy or
achieving its objectives.
Human Resources
As of December 31, 1996, the Company employed 354 employees, with
approximately 273 full time employees located primarily in its San Mateo
headquarters and a new Foster City facility which the Company subleased
beginning in August 1996 (see "Item 2 - Properties"), and also 81 in its other
worldwide sales offices. Of this total, 164 employees were engaged primarily in
research and development, quality assurance and documentation, 125 employees
were engaged primarily in sales and marketing and technical support, 48
employees were engaged primarily in corporate management and administration and
17 employees were engaged in manufacturing support. Of the total number of
employees, the Company had 13 employees located in the United Kingdom, 5
employees in the Netherlands, 11 employees in Germany, 11 employees in Japan, 12
employees in France, 2 employees in Italy and 1 employee in Finland. The
Company's employees are not represented by any collective bargaining
organization and the Company has never experienced a work stoppage.
The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate highly qualified technical, marketing
and management personnel, all of whom are in great demand. To date, in the
highly competitive Silicon Valley job market, the Company has been successful in
attracting and
7
retaining required personnel. However, there can be no assurance that the
Company will continue to be successful in its recruiting efforts, and the
inability to recruit, or the loss of certain personnel in positions of
substantial responsibility could materially adversely affect the Company's
business, operating results and financial condition.
Significant Relationships
The Company has established relationships with a number of companies in
order to benefit from their products, distribution channels or marketing
resources. The following is a discussion of the Company's significant
relationships with other companies.
Adobe Systems
Each Fiery Color Server requires page description language software in
order to operate. Adobe's PostScript(TM) software is widely used to manage the
geometry, shape and topography of hard copy documents. In March 1991, the
Company entered into a Custom PostScript(TM) Interpreter (CPSI) License
Agreement under which the Company received a non-exclusive license to such
software. For each copy of PostScript(TM) utilized in a Fiery Color Server or
controller, the Company is required to pay Adobe a royalty determined by a
percentage of the aggregate list price of the Fiery Color Server and the print
device with which it is used. In September 1995, the Company entered into a
PostScript(TM) Support Source and Object Code Distribution License Agreement
with Adobe. With this Agreement, the Company has access to support source code
that will enable customization of that code to create and enhance new feature
developed by the Company.
Canon
In 1996, the Company continued its relationship with Canon under the
terms of the OEM Purchase Agreement entered into between the Company in December
1995. The Company's OEM Purchase Agreement with Canon provides for the sale and
distribution of Fiery XJ Color Servers designed for Canon's CLC 700 and CLC 800
color copiers and Fiery SI Color Servers designed for Canon's CLC 320 color
copier under the Canon brand name "ColorPASS." The Agreement provides Canon
exclusive, worldwide distribution rights to distribute the Fiery XJ Color
Servers that support all functions and features of the Canon color copiers. The
OEM Purchase Agreement has an initial term of two years and may be renewed for
successive terms of one year by mutual agreement of the parties. Under the
Agreement, Canon has committed to certain minimum purchase requirements over the
two-year term. Either the Company or Canon may terminate the Agreement upon the
expiration of sixty days notice of material breach of the agreement by the other
party, provided such breach is not cured within such sixty day period.
During 1996, the Company shipped product based on the Fiery XJ
technology to Canon Inc. for the CLC family of copiers. Fiery Color Servers are
now sold through Canon Inc. to approximately 1,000 Canon dealers and
distributors worldwide. The substantial majority of these dealers are
independently owned and the remainder are owned by Canon.
To date, neither the Company nor its competitors offer full feature set
support for the CLC 700 and CLC 800 copiers. The Company expects to offer full
feature set support for the CLC 700 and CLC 800 in version 3.1 software,
available in early April 1997.
If Canon or a third party offers a controller that supports the full
feature set of the CLC 700 and CLC 800 copiers before the Company offers such a
controller, sales of the Company's products to support the CLC 700 and CLC 800
could be adversely affected.
In addition, Canon currently markets its own PS-IPU3 and ColorPass 1000
controllers that compete with the Fiery Color Server. These controllers are also
compatible with Kodak and Agfa copiers. Wide market acceptance of Canon's color
servers could adversely affect sales of the Company's Fiery Color Server.
8
In March 1996, the Company entered into a Purchase Agreement with Canon
for the sale and distribution by the Company of Fiery XJe embedded controllers
to Canon for use in Canon's LBP line of desktop color laser printers. The
Company began shipping these controllers to Canon in December 1995.
Xerox
In September 1991, the Company entered into an agreement with Xerox for
the sale and distribution of Fiery Color Servers designed for Xerox color
copiers. In September 1996, the Company began shipping its Fiery XJ family of
network color server products with support for the DocuColor 4040 - the fastest
color copier from Xerox. During 1996, the Company also shipped product to Xerox
based on the Fiery XJ technology for the Xerox Regan and MajestiK Color copiers.
Fiery Color Servers are sold through the Xerox worldwide direct and indirect
sales organization under the Fiery trademark.
The Company's agreement with Xerox had an initial term of three years,
but is automatically extended in one year increments if neither party provides
written notice of termination. Either the Company or Xerox may terminate the
agreement upon the expiration of forty-five days notice of material breach of
the agreement by the other party, provided such breach is not cured within such
forty-five day period.
Kodak/Danka
In November 1991, the Company entered into an agreement with Kodak for
the sale and distribution of Fiery Color Servers designed for Kodak color
copiers. In 1996, Danka Business Systems PLC ("Danka") acquired the sales,
marketing and equipment service operations of Kodak's office imaging business
and the Company agreed to assign Kodak's rights under its Agreement with Kodak
to Danka. During 1996, the Company shipped products to Kodak/Danka based on the
Fiery XJ technology for the Color Edge family of color copiers, which includes
the ColorEdge 1525+, ColorEdge 1550+, ColorEdge 1560, and ColorEdge 1565
copiers. Fiery Color Servers are sold through the Kodak/Danka worldwide direct
and indirect sales organization under the Fiery trademark.
The Company's agreement with Kodak/Danka automatically renews in
December of each year for successive one year terms unless terminated by the
Company in writing at least thirty days prior to the renewal date. However,
Kodak may terminate the agreement at any time on thirty days' notice to the
Company. Either the Company or Kodak may terminate the agreement upon the
expiration of thirty days notice of a material breach of the agreement by the
other party, provided such breach is not cured within such thirty day period.
The PS-IPU3 and ColorPass 1000 currently marketed by Canon are
compatible with Kodak's copiers, which are functionally equivalent to and
include the same interface as the Canon CLC 300, CLC 500, CLC 700 and CLC 800
series of color copiers. At present, neither the Company nor its competitors
offers full feature set support for the ColorEdge 1565 and ColorEdge 1560
copiers. If Kodak or a third party offers a controller that supports the full
feature set of the ColorEdge 1565 and ColorEdge 1560 copiers before the Company
offers such a controller, sales of the Company's products to support the
ColorEdge 1565 and ColorEdge 1560 could be adversely affected.
Minolta
In October 1993, the Company entered into an agreement with Minolta for
the sale and distribution of Fiery Color Servers designed for Minolta color
copiers. During 1996, the Company shipped product to Minolta based on the Fiery
XJ technology for the Minolta CF80 and CF900 color copier. Fiery Color Servers
are sold through the Minolta worldwide direct and indirect sales organization
under the Fiery trademark.
The Company's agreement with Minolta had an initial term of three years
ending in October 1996, and automatically continues from year to year thereafter
unless terminated on ninety days written notice by either party. The Agreement
was not terminated by either party in 1996 and has therefore been automatically
extended pursuant to its terms. Either the Company or Minolta may terminate the
agreement upon the expiration of forty-
9
five days notice of material breach of the agreement by the other party,
provided such breach is not cured within such forty-five day period.
In July 1996, the Company began shipping color server products for
Minolta's newly introduced CF900 digital color copier/printer.
Ricoh
The Company entered into an agreement with Ricoh effective September
1994 for the sale and distribution of a version of the Fiery Color Server for
Ricoh's NC5006 color copier. This Agreement was renewed for an additional
two-year term in September 1996. During 1996, the Company shipped product to
Ricoh based on the technology for Ricoh's Aficio 5000 Series, NC5006 and NC8115,
Preter 300, 500 and 600 color copiers. In September 1996, the Company began
shipping the Fiery XJe Controller to Ricoh for use in Ricoh's Aficio 2000 series
digital copiers. Fiery Color Servers are sold through the Ricoh worldwide direct
and indirect sales organization under the Fiery trademark.
The Company's agreement with Ricoh has an initial term of two years
ending in September 1998, but may be renewed for additional one year terms by
mutual agreement of the parties. Either the Company or Ricoh may terminate the
agreement upon the expiration of sixty days notice of material breach of the
agreement by the other party, provided such breach is not cured within such
sixty day period.
Oce
During 1996, the Company shipped product to Oce based on the Fiery XJ
technology for Oce's 3107C and 3108C color copiers and entered into an agreement
with Oce to develop controllers for the Oce 3125c color copier. In September
1996, the Company and Oce announced that the Company would develop a Fiery
Controller for the high-speed black-and-white printing system developed by Oce.
Fiery Color Servers are sold through the Oce worldwide distribution channel
under the Fiery trademark.
The PS-IPU3 and ColorPass 1000 currently marketed by Canon are
compatible with Oce copiers, which are functionally equivalent to, and include
the same interface as the Canon CLC 300, CLC 500, CLC 700 and CLC 800 series of
color copiers. At present, neither the Company nor its competitors offers full
feature set support for Oce's 3107C and 3108C copiers. If Oce or a third party
offers a Controller that supports the full feature set of Oce's 3107C and 3108C
copiers before the Company offers such a controller, sales of the Company's
products to support the Oce's 3107C and 3108C copiers could be adversely
affected.
Fuji Xerox
In March 1996, the Company entered into a Purchase Agreement with Fuji
Xerox Co. Ltd. ("Fuji Xerox"), pursuant to which Fuji Xerox is entitled to
purchase Fiery Products from the Company.
Digital
In March 1996, the Company and Digital entered into an Order Agreement
for the sale and distribution by the Company of Fiery XJe embedded controllers
to digital for use in the Digital Colorwriter LSR 2000+ color laser printer. The
Company began shipping the Fiery XJe embedded controllers to Digital in December
1995.
IBM
In May 1996, the Company entered into a Product Purchase Agreement with
IBM for the sale and distribution by the Company of Fiery XJe embedded
controllers to IBM for use in the IBM Network Color Printer, a desktop color
laser printer. The Company began shipping Fiery XJe embedded controllers to IBM
in the third quarter of 1996 pursuant to the terms of the Product Purchase
Agreement.
10
Risk Factors
In addition to the above information, the following factors may impact
the Company's future performance and financial results:
Product Transitions
The Company plans to introduce new Fiery and other products in 1997.
Delays in the launch or availability of these new products could have an adverse
effect on the Company's financial results. Product transitions also carry the
risk that customers will delay or cancel orders for existing models pending
shipments of new models. If the Company is not able to successfully manage
future product transitions or cannot guarantee the availability of products, its
results of operations could be adversely affected.
New Product Introductions
The Company continues to look at opportunities to develop product lines
distinct from the Fiery line. Such new products may require the investment of
capital for the development of new distribution and marketing channels at an
unknown cost to the Company. There can be no guarantee that the Company would be
successful in the development of such channels or that any new products will
gain market acceptance. Further, new products may directly impact the sales of
the Company's Fiery Products. If the Company is not able to successfully manage
the introduction of new products, its results of operations could be adversely
affected.
Competition
The Company has seen competition in the marketplace from companies and
products that provide similar functionality and believes that such competition
will continue and may intensify. There can be no assurance that the Company will
be able to continue to successfully compete against other companies' product
offerings.
Fiery XJe
The Company is currently selling the Fiery XJe Controller to Canon, IBM
and Digital under OEM agreements. No assurance can be given that the Company
will continue to recognize significant revenue from such sales or that the
Company will be successful in further marketing this product to other OEM
partners or other parties.
Reliance on OEM Partners
No assurance can be given that the Company will continue to supply
products to each of its current OEM partners. In the event that an OEM partner
discontinues or reduces its level of purchases of Fiery Products, the Company
would experience a significant negative impact on its consolidated financial
position and results of operations.
Fluctuations in Operating Results
Operating results may fluctuate due to factors such as demand for the
Company's products, success and timing of the introduction of new products,
price reductions by the Company and its competitors, delay, cancellation or
rescheduling of orders, product performance, seasonal purchasing patterns of its
OEM partners, performance of third-party manufacturers, product inventory
levels, availability of key components for the Company's products, the status of
the Company's relationships with its OEM partners and Adobe, among others, the
Company's ability to develop and market new products, the timing and amount of
sales and marketing expenditures, and the general demand for color copiers and
color laser printers.
11
Limited Backlog
The Company typically does not obtain long-term volume purchase
contracts from its customers, and a substantial portion of the Company's backlog
is scheduled for delivery within 90 days or less. Customers may cancel orders
and change volume levels or delivery times without penalty. Quarterly sales and
operating results therefore depend on the volume and timing of the backlog as
well as bookings received during the quarter. A significant portion of the
Company's operating expenses are fixed, and planned expenditures are based
primarily on sales forecasts and product development programs. If sales do not
meet the Company's expectations in any given period, the adverse impact on
operating results may be magnified by the Company's inability to adjust
operating expenses sufficiently or quickly enough to compensate for such a
shortfall.
Currency Fluctuations
The Company realized approximately 51% of its revenue in 1996 from
sales outside the United States, including 21% from Japan. As such, the Company
faces a continuing risk in that the strengthening of the U.S. dollar versus the
Japanese yen and major European currencies could adversely impact the Company's
revenues and gross margin through lower unit demand and the necessity to lower
average selling prices to compensate for the reduced strength of local
currencies.
Volatility of Stock Price
Due to various factors, including those noted above, the Company's
future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenue or earnings from
levels expected by securities analysts could have an immediate and significant
adverse effect on the trading price of the Company's common stock in any given
period. The Company participates in a highly dynamic industry, which often
results in significant volatility for the Company's common stock price.
Reliance on OEM Resellers; Risks Associated With Significant OEM Group
Concentration
In fiscal 1996, approximately 92% of the Company's net sales were
accounted for by sales to Canon, Xerox, Ricoh and Minolta. As of December 31,
1996, these four customers accounted for approximately 84% of the Company's
accounts receivable balance.
The Company's strategy of selling principally to OEMs anticipates that
the Company will be relying on high sales volumes to a relatively small number
of customers. Although there can be no assurance that the major customers will
continue to utilize the Company's products at current levels, if at all, the
Company expects to continue to depend upon such customers for a significant
percentage of its revenues. A decline in demand for color copiers or color laser
printers, or other factors affecting the computer industry in general, or major
customers in particular, could have a material adverse effect on the Company's
results of operations.
The Company relies upon the ability of its OEM's to develop new
products, applications and product enhancements on a timely and cost-effective
basis. The ability of these OEMs to meet changing customer needs and respond to
emerging industry standards and other technological changes is essential to the
Company's continued success. There is no assurance that the Company's OEMs will
effectively meet these technological challenges. These OEMs are not within the
control of the Company, may incorporate into their products the technologies of
other companies in addition to those of the Company, and, with the exception of
certain minimum purchase obligations, are not obligated to purchase products
from the Company. There can be no assurance that any OEM will continue to carry
the Company's products, and the loss of important OEMs, or an inability to
recruit additional OEMs, could materially adversely affect the Company's
business, operating results and financial condition.
The Company's sales have been and will continue to be heavily
influenced by order quantities and timing of delivery to its OEMs. No assurance
can be given that the Company will be able to successfully maintain sales of the
Fiery Products in any OEM channel. The Company's sales could be adversely
affected if an OEM introduces or supports additional products that compete with
Fiery Color Servers, fails to effectively market the
12
Fiery Color Server, modifies its color copiers or printers such that the Fiery
Color Server is no longer compatible, or introduces new color copiers or
printers that are incompatible with the Fiery Color Server or does not allow the
Fiery Color Server to support all of the features available on its new copiers
or printers.
Although the Company is pursuing, and will continue to pursue, the
business of additional color and black-and-white copier and color and
black-and-white laser printer OEMs, customer concentration will continue to be a
risk due to the limited number of OEMs producing color and black-and-white
copiers and color and black-and-white laser printers in sufficient volume to be
attractive to the Company.
International Operations
Approximately 51% of the Company's product revenue for 1996 was
attributable to international sales, primarily in Europe and Japan. The Company
expects that international sales will continue to represent a significant
portion of its total revenue. The Company is subject to certain risks associated
with international operations, including tariff regulations and requirements for
export licenses, particularly with respect to the export of certain
technologies, which may on occasion be delayed or difficult to obtain.
Proprietary Information
The Company relies on a combination of copyright, patent and trade
secret protection, nondisclosure agreements, and licensing and cross-licensing
arrangements to establish and protect its proprietary rights. In addition, the
Company owns eleven issued U.S. patents and has six U.S. patent applications
pending, as well as some counterparts to these patents in other countries. The
Company intends to file additional patent applications as appropriate. There can
be no assurance that patents will issue from any of these pending applications
or, if patents do issue, that any claims allowed will be sufficiently broad to
protect the Company's technology. In addition, there can be no assurance that
any patents that may be issued to the Company, or which the Company may license
from third parties, will not be challenged, invalidated or circumvented, or that
any rights granted thereunder would provide proprietary protection to the
Company. Although the Company continues to implement protective measures and
intends to defend its proprietary rights, policing unauthorized use of the
Company's technology or products is difficult and there can be no assurance that
these measures will be successful. The Company has also entered into licensing
or cross-licensing agreements with several companies, including an agreement
with the Massachusetts Institute of Technology granting the Company an exclusive
license to two U.S. patents. There can be no assurance that such agreements will
not be terminated or that the Company will be able to enter into similar
arrangements on favorable terms, if required, in the future. In addition, the
laws of certain foreign countries may not protect the Company's proprietary
rights to the same extent as do the laws of the United States.
Infringement and Potential Litigation
The Company may receive in the future communications from third parties
asserting that the Company's products infringe, or may infringe, the proprietary
rights of third parties. There can be no assurance that any of these claims will
not result in protracted and costly litigation. While it may be necessary or
desirable in the future to obtain licenses relating to one or more of its
products or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms, or at all.
13
Reliance on Adobe Systems
Under the Adobe License Agreement, a separate license must be granted
for each type of copier or printer used with a Fiery Server or Controller. To
date, the Company has successfully obtained licenses to use Adobe's
PostScript(TM) software for all Fiery Servers and Controllers that it offers.
However, the Company is required to seek Adobe's approval to expand the terms of
the Adobe License Agreement to use Adobe's PostScript(TM) in new products and in
certain new versions of the Company's existing products. Adobe is not required
to grant any such approval. Although the Company has been able to obtain
licenses for Adobe's PostScript(TM) software as requested to date, no assurance
can be given that Adobe will continue to grant future licenses to PostScript(TM)
software as required by the Company on reasonable terms, in a timely manner, or
at all.
The Company is required under the Adobe License Agreement to
participate in Adobe's quality assurance program and receive approval each time
it integrates a new version of Adobe's PostScript(TM) software with its products
or develops a new product or significantly changes an existing product that
incorporates Adobe's PostScript(TM) software. Obtaining such approval is not
within the Company's control and may be a lengthy process. Although in the past
the Company has received approval for its products from Adobe on a timely basis
and has not been required to delay product development efforts, no assurance can
be given that future approvals will be granted in a timely manner, or at all. If
the Company is unable to obtain approval of a product from Adobe, product
introduction will be delayed because the Company would be required to seek
alternative page description language software from another supplier.
If the Adobe License Agreement is terminated for any reason or the
Company's relationship with Adobe is otherwise impaired, the Company's
operations could be adversely affected. Although the Company believes that it
would be able to incorporate alternative page description language software in
its products, such a change could limit the marketability of its products. The
Adobe License Agreement expired in March 1996, and was extended for a one-year
period at the Company's option. The Company may continue to extend the license
at its option, subject to certain limitations, for successive periods subject to
Adobe's consent which may not be unreasonably withheld. The Adobe License
Agreement may be canceled by either Adobe or the Company after the expiration of
thirty days written notice of a material breach of the agreement by the other
party, provided such breach is not cured within such thirty-day period.
XJ-W Sales Channels
The Company is currently selling the Fiery XJ-W through distributors
and wide-format color inkjet dealers. There are certain risks associated with
selling through this channel. These risks include the risk of default on
payments by the distributors and dealers and, because the dealers and
distributors generally do not make volume purchase commitments, the risk that
the Company may accumulate unsold units of the Fiery XJ-W in inventory.
14
Item 2: Properties.
The Company's principal facility, located in San Mateo, California,
consists of approximately 50,000 square feet of office space leased pursuant to
an agreement that terminates on June 30, 1999. On March 8, 1996 the Company
entered into a sublease for an additional 28,000 square feet of office space in
a building adjacent to its principal facility pursuant to an agreement that
terminates on January 6, 1998. This space is used for research and development,
quality assurance, sales, marketing and administration. On August 1 1996, the
Company entered into a sublease for an additional 21,000 square feet of office
space in a building located in Foster City, California, pursuant to an Agreement
that terminates on August 1, 1997. The office space in Foster City is used
primarily for the Company's support and manufacturing operations.
In September 1996, the Company's entered into a master operating lease
for land and a building to be constructed in Foster City, California. The
facility is to be used as a corporate headquarters for the Company. The Company
expects to vacate its existing rental facilities in San Mateo and Foster City
upon completion of the new corporate headquarters.
The Company also leases sales offices in: Newport Beach, California;
Arlington, Texas; Chicago, Illinois; Rockland, Massachusetts; Iselin, New
Jersey; Aventura, Florida; Arlington, Virginia; Denver, Colorado and Clayton,
Ohio. Additionally, the Company leases office space in the following cities
outside the United States: Ontario, Canada; Middlesex, United Kingdom; Cedex,
France; Munich, Germany; Dusseldorf, Germany; Amsterdam, The Netherlands; Milan,
Italy; and Tokyo, Japan.
Item 3: Legal Proceedings.
The Company is involved from time to time in litigation relating to
claims arising in the normal course of business. Management is of the opinion
that the ultimate resolution of such claims will not materially affect the
Company's business or financial position. See "Risk Factors - Infringement and
Potential Litigation."
Item 4: Submission of Matters to a Vote of Security Holders.
None.
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 quotation during each quarter the stock was traded in 1996 and
1995, and reflects the effect of the Company's two-for-one stock split (See Note
8 of Notes to Consolidated Financial Statements). As of December 31, 1996, there
were approximately 252 stockholders of record. The Company has never paid cash
dividends on its capital stock. The Company currently anticipates that it will
retain all available funds for business, and does not anticipate paying any cash
dividends in the foreseeable future.
1996
---------------------------------------------
Q1 Q2 Q3 Q4
---------------------------------------------
High $22.88 $42.69 $38.50 $42.75
Low 15.38 22.25 25.63 33.75
1995
---------------------------------------------
Q1 Q2 Q3 Q4
---------------------------------------------
High $14.00 $14.31 $17.94 $25.06
Low 6.00 9.44 12.63 15.13
15
Item 6: Selected Financial Data.
The following tables summarize selected consolidated financial data as
of and for the five years ended December 31, 1996. This information should be
read in conjunction with the audited consolidated financial statements and
related notes thereto.
(In thousands, except per share amounts)
As of and for the years ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------
Operations
Revenue $298,013 $190,451 $130,381 $ 89,526 $ 53,690
Gross profit 152,614 95,000 66,048 49,603 32,178
Income before taxes 97,164 58,593 33,301 20,551 8,763
Net income 62,184 37,500 21,306 12,751 6,588
Net income per share(1) $ 1.13 $ 0.71 $ 0.43 $ 0.26 $ 0.18
Shares used in computing net income per
share(1) 54,828 53,100 49,836 49,156 35,788
Financial Position
Cash and short-term investments $212,100 $144,018 $106,974 $ 79,491 $ 45,193
Working capital 237,366 157,059 108,071 82,745 43,625
Total assets 298,953 194,469 135,461 104,044 58,533
Stockholders' equity 249,370 163,940 113,529 88,307 47,374
Ratios and Benchmarks
Current ratio 5.8 6.1 5.9 6.3 4.9
Inventory turns 15.5 11.8 9.9 9.1 8.2
Full-time employees 354 222 192 173 129
(1) All per share data and shares used in computing net income per share have been restated to reflect the Company's two-for-one
stock split effective February 20, 1997. See Notes 1 and 8 of Notes to Consolidated Financial Statements.
16
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction
with the audited consolidated financial statements and related notes thereto.
All assumptions, anticipations, expectations and forecasts 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 complete
discussion of the factors that could impact the Company's results, please see
the section below entitled "Factors that Could Adversely Affect Performance" and
the section entitled "Risk Factors" above.
Results of Operations
The following tables set forth items in the Company's consolidated
statements of income as a percentage of total revenue for 1996, 1995 and 1994,
and the year-to-year percentage change for certain items in 1996 and 1995. These
operating results are not necessarily indicative of results for any future
period.
Years ended December 31,
1996 1995 1994
--------------------------------
Revenue 100% 100% 100.0%
------- ------- ------
Gross profit 51.2% 49.9% 50.7%
Research and development 7.5% 6.8% 8.0%
Sales and marketing 10.1% 11.5% 14.3%
General and administrative 3.4% 3.7% 5.1%
------- ------- ------
Income from operations 30.2% 27.9% 23.3%
Other income 2.5% 2.9% 2.2%
------- ------- ------
Income before taxes 32.7% 30.8% 25.5%
Provision for taxes 11.8% 11.1% 9.2%
------- ------- ------
Net income 20.9% 19.7% 16.3%
======= ======= ======
Years ended December 31,
--------------------------------------------------------
1996 Change 1995 Change 1994
--------------------------------------------------------
Total revenue $298,013 56% $190,451 46% $130,381
Gross profit 152,614 61% 95,000 44% 66,048
Operating expenses 62,768 50% 41,883 17% 35,678
Net income 62,184 66% 37,500 76% 21,306
Net income per share $ 1.13 59% $ 0.71 64% $ 0.43
Revenue
The Company's revenue was $298.0 million in 1996, compared to $190.5
million and $130.4 million in 1995 and 1994, respectively, and is generally
attributable to the sale of Fiery Products during these periods. Substantially
all of the Company's sales in 1996 were to its OEM partners, reflecting the
Company's new OEM partnerships with IBM and Digital and its continuing
relationships with Canon, Xerox, Ricoh, Kodak, Minolta and Oce (see Note 7 of
Notes to Consolidated Financial Statements). The increase in revenue reflects
continued market acceptance of the Company's Fiery XJ and Fiery XJe products,
the expansion of the Company's sales and marketing organizations, and increased
revenue from the Company's OEM sales channels due to the above-mentioned market
acceptance and an increase in the number of the Company's OEM partners.
17
The Company completed agreements in the first quarter of 1996 with Canon
and Digital Equipment Corporation, and in the second quarter of 1996 with IBM
Corporation, under which these companies are producing desktop color laser
printers using the Company's Fiery XJe Controller. The Fiery XJe Controller is
an embedded controller which, when combined with a specified color laser engine,
results in a desktop color laser printer with superior speed and output quality.
International revenue continued to grow, from 41% of revenue in 1995 to 51%
in 1996. Direct sales into Europe increased $23.9 million to $75.3 million and
accounted for approximately 25% of revenue in 1996, compared to 27% in 1995 and
1994, respectively. Direct sales into Japan increased $37.7 million to $63.7
million and accounted for approximately 21% of revenue in 1996, compared with
14% and 15% in 1995 and 1994, respectively. Increased international revenue in
each year was due primarily to the continued development of distribution
channels, new agreements with certain OEM partners and the Company's continued
investment in its international sales organizations. Further, shipments to some
of the Company's OEM partners are made to centralized purchasing and
manufacturing locations, which in turn sell through to foreign locations. As a
result of these factors, the Company believes that sales of its products into
Europe and Japan may actually be higher, though accurate data is difficult to
obtain. The Company expects that international revenue will continue to
represent a significant portion of its total revenue.
During 1996, the Company introduced new generations of its Fiery XJ
platform, including the Fiery XJ+ series of color servers, and broadened its
product lines, including a Fiery XJ+ 500 series of high-speed servers for 40
page-per-minute color copiers, the Fiery XJ-W, a server for wide-format
printers, and a low-end Fiery SI series for the under-$10,000 market. These
product offerings were introduced in the latter half of 1996 and, while the
initial response has been favorable, it is too soon to assess the extent of
market acceptance. The Company continues to work on the development of products
utilizing the Fiery XJ architecture and other products and intends to continue
to introduce new generations of Fiery Products and other new product lines in
1997.
Cost of Revenue
The substantial majority of the Company's cost of revenue to date has
been attributable to the sale of Fiery Products. Such products are manufactured
by third-party manufacturers who purchase most of the necessary components. The
Company sources directly proprietary memory and certain ASIC components, and
software licensed from various sources, including PostScript interpreter
software, which the Company licenses from Adobe Systems, Inc.
The Company's gross margin was 51.2%, 49.9% and 50.7% of revenue in
1996, 1995, and 1994, respectively. Overall gross margins in 1996 were favorably
affected, beginning in the second quarter, by broad declines in market prices
for DRAM and certain other components used in the Company's products, combined
with shipments late in the year of higher-margin Fiery XJ+ 500 units. Offsetting
this favorable impact were the effect of certain reductions in average selling
prices for selected Fiery products and a change in the mix of sales as shipments
of Fiery XJe Controllers, sold at margins substantially lower than those of the
Company's other products, became a more noticeable portion of total revenue.
Gross margins in 1995 were unfavorably impacted by the initial shipments in the
fourth quarter of Fiery XJe Controllers and by the reduction of shipments to
independent Canon dealers and distributors, pursuant to the Company's 1995
agreement with Canon, which were at higher margins than those achieved through
the Company's OEM sales.
18
The Company's gross margin depends in part on prices it is able to
attain on its Fiery Products, Fiery XJe Controllers and future products. The
lower manufacturing costs of the Fiery models have given the Company the
flexibility to offer products with a broad range of prices. In addition, as the
Company continues to introduce new Fiery Products, it may continue to lower
prices on existing products. The Fiery XJe Controller will continue to have
lower margins than the Company's other products, reflecting the different
distribution and marketing practices employed for desktop color laser printers.
Accordingly, if the Fiery XJe Controller continues to increase as a percentage
of revenue, the Company's overall gross margin is expected to decline, all other
things being equal. In general, gross margin will continue to be impacted by a
variety of factors including, among others, the availability and pricing of key
components (including DRAM and PostScript interpreter software), product,
channel and geographic mix, the success of the Company's product transitions and
new products, competition, and general economic conditions. The Company expects
to continue to take further steps to reduce product costs, expand product
offerings and control operating expenses; however, no assurance can be given
that these efforts will be successful.
Research and Development
Expenses for research and development consist primarily of personnel
expenses and, to a lesser extent, consulting and nonrecurring engineering
services, depreciation, and costs of prototype materials. Research and
development expenses were $22.4 million or 7.5% of revenue in 1996, compared to
$12.9 million (6.8% of revenue) and $10.4 million (8.0% of revenue) in 1995 and
1994, respectively. Research and development expenses rose due primarily to
costs associated with an 80% growth in engineering headcount and increased
depreciation, prototype and nonrecurring engineering expenses related to the
development of Fiery Products. The Company believes that the 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. Accordingly, the Company expects that its
research and development expenses may continue to increase in absolute dollars
and possibly 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 and Japan. Sales and marketing expenses for
1996 were $30.2 million or 10.1% of revenue, compared to $21.9 million (11.5% of
revenue) and $18.6 million (14.3% of revenue) in 1995 and 1994, respectively.
While sales and marketing expenses decreased as a percentage of total revenue in
both 1996 and 1995, these expenses have increased in absolute dollars. The
increase in 1996 was due to a 40% increase in headcount, primarily in the United
States, and costs required for the introduction, promotion and support of Fiery
XJ+ products. The increase in 1995 was due to increases in headcount, also
primarily in the United States, and costs related to the introduction, promotion
and support of Fiery XJ products, including the Fiery XJe Controller line.
Decreases in sales and marketing expenses as a percentage of revenue
are due to the Company's increased sales to its OEM partners and continuing cost
control measures, including the consolidation in 1995 of certain duplicative
European sales facilities. 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 Fiery and
other products, and build its sales and marketing organization, particularly in
Europe and Japan.
19
General and Administrative
General and administrative expenses consist primarily of personnel
expenses and, to a lesser extent, depreciation and facility costs, professional
fees and certain costs associated with public companies. General and
administrative expenses were $10.1 million or 3.4% of revenue in 1996, compared
to $7.0 million (3.7% of revenue) and $6.7 million (5.1% of revenue) in 1995 and
1994, respectively. While general and administrative expenses decreased as a
percentage of total revenue in both 1996 and 1995, these expenses have increased
in absolute dollars. The increases in 1996 and 1995 were primarily due to the
addition of personnel to support the Company's operations. 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 any growth in operations.
Income Taxes
The Company's effective tax rate was 36.0% in 1996, 1995 and 1994. In
each year the Company benefited from increased tax-exempt income, increases in
foreign sales and the utilization of research and development credits in
achieving a consolidated effective tax rate lower than that prescribed by the
respective taxing authorities. The Company anticipates that these benefits will
continue to have a favorable impact on the Company's consolidated effective tax
rate.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased to $212.1
million as of December 31, 1996, up from $144.0 million as of December 31, 1995.
Working capital increased to $237.4 million as of December 31, 1996, up from
$157.1 million as of December 31, 1995. These increases are primarily the result
of profitable operations and stock-related financing activities.
Net cash provided by operating activities was $55.7 million, $28.6
million and $26.4 million in 1996, 1995 and 1994, respectively. Cash provided by
operating activities was offset by an increased investment in inventory and
accounts receivable due to growth in the Company's business and by an increase
in other current assets primarily related to consigned inventory sales to
third-party subcontractors.
The Company's capital expenditures to date have generally consisted of
investments in computers and related peripheral equipment for use in the
Company's operations and research and development, and office furniture. The
Company purchased approximately $10.7 million, $4.5 million and $2.8 million of
such equipment and furniture during 1996, 1995 and 1994, respectively.
The Company is working with the City of Foster City to develop a
corporate campus on a 35-acre parcel of land in Foster City. The anticipated
purchase price of this parcel is approximately $24.5 million. The Company
anticipates funding this purchase during the year ending December 31, 1997.
Net cash provided by financing activities of $23.2 million, $12.9
million and $3.9 million in 1996, 1995 and 1994, respectively, were the result
of exercises of common stock options and the related tax benefits.
The Company's inventory consists primarily of memory subsystems which
are consigned to third-party contract manufacturers responsible for
substantially all of the Company's products. Should the Company decide to
purchase components and do its own manufacturing, or should it become necessary
for the Company to purchase and consign components other than the ASIC or memory
subsystems for its contract manufacturers, inventory balances would increase
significantly, thereby reducing the Company's available cash resources. Further,
these contract manufacturers produce substantially all of the Company's
products. The Company believes that, should the services of any of these
contract manufacturers become unavailable, a significant negative impact on the
Company's consolidated financial position and results of operations could
result. The Company is also reliant on several sole-source suppliers for certain
key components and could experience a further significant negative impact on its
consolidated financial position and results of operations if such supply was
reduced or not available.
20
In January 1997, the Company's Board of Directors authorized a
two-for-one stock split in the form of a stock dividend payable on February 20,
1997, to stockholders of record as of February 10, 1997. All references in the
consolidated financial statements to average numbers of shares outstanding and
related prices, per share amounts and stock option plan data have been restated
to reflect the stock split.
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 1997.
Factors That Could Adversely Affect Performance
The following may impact the Company's future performance and financial
results:
Product Transitions. The Company plans to introduce new Fiery and other
products in 1997. Delays in the launch or availability of these new products
could have an adverse effect on the Company's financial results. Product
transitions also carry the risk that customers will delay or cancel orders for
existing models pending shipments of new models. If the Company is not able to
successfully manage future product transitions or cannot guarantee the
availability of products, its results of operations could be adversely affected.
New Product Introductions. The Company continues to look at opportunities
to develop product lines distinct from the Fiery line. Such new products may
require the investment of capital for the development of new distribution and
marketing channels at an unknown cost to the Company. There can be no guarantee
that the Company would be successful in the development of such channels or that
any new products will gain market acceptance. Further, new products may directly
impact the sales of the Company's Fiery products. If the Company is not able to
successfully manage the introduction of new products, its results of operations
could be adversely affected.
Competition. The Company has seen competition in the marketplace from
companies and products that provide similar functionality and believes that such
competition will continue and may intensify. There can be no assurance that the
Company will be able to continue to successfully compete against other
companies' product offerings.
Fiery XJe. The Company is currently selling the Fiery XJe Controller to
Canon, IBM and Digital under OEM agreements. No assurance can be given that the
Company will continue to recognize significant revenue from such sales or that
the Company will be successful in further marketing this product to other OEM
partners or other parties.
Reliance on OEM Partners. No assurance can be given that the Company will
continue to supply products to each of its current OEM partners. In the event
that an OEM partner discontinues or reduces its level of purchases of Fiery
Products, the Company would experience a significant negative impact on its
consolidated financial position and results of operations.
Fluctuations in Operating Results. Operating results may fluctuate due to
factors such as demand for the Company's products, success and timing of the
introduction of new products, price reductions by the Company and its
competitors, delay, cancellation or rescheduling of orders, product performance,
seasonal purchasing patterns of its OEM partners, performance of third-party
manufacturers, product inventory levels, availability of key components for the
Company's products, the status of the Company's relationships with its OEM
partners and Adobe, among others, the Company's ability to develop and market
new products, the timing and amount of sales and marketing expenditures, and the
general demand for color copiers and color laser printers.
Limited Backlog. The Company typically does not obtain long-term volume
purchase contracts from its customers, and a substantial portion of the
Company's backlog is scheduled for delivery within 90 days or less. Customers
may cancel orders and change volume levels or delivery times without penalty.
Quarterly sales and operating results therefore depend on the volume and timing
of the backlog as well as bookings received during the quarter. A significant
portion of the Company's operating expenses are fixed, and planned expenditures
are based primarily on sales forecasts and product development programs. If
sales do not meet the Company's expectations in any given period, the adverse
impact on operating results may be magnified by the Company's inability to
adjust operating expenses sufficiently or quickly enough to compensate for such
a shortfall.
21
Currency Fluctuations. The Company realized approximately 51% of its
revenue in 1996 from sales outside the United States, including 21% from Japan.
As such, the Company faces a continuing risk in that the strengthening of the
U.S. dollar versus the Japanese yen and major European currencies could
adversely impact the Company's revenues and gross margin through lower unit
demand and the necessity to lower average selling prices to compensate for the
reduced strength of local currencies.
Volatility of Stock Price. Due to various factors, including those noted
above, the Company's future earnings and stock price may be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. The Company participates in a highly dynamic
industry, which often results in significant volatility for the Company's common
stock price.
Item 8: Financial Statements and Supplementary Data.
Information with respect to this item may be found as referenced in the table
below.
Consolidated Balance Sheets..............................................23
Consolidated Statements of Income........................................24
Consolidated Statements of Stockholders' Equity..........................25
Consolidated Statements of Cash Flows....................................26
Notes to Consolidated Financial Statements...............................27
Report of Independent Accountants........................................33
Quarterly Consolidated Financial Information (Unaudited).................34
22
Electronics for Imaging, Inc.
Consolidated Balance Sheets
December 31,
-------------------
(In thousands, except share and per share amounts) 1996 1995
-------------------
Assets
Current assets:
Cash and cash equivalents $ 71,946 $ 46,006
Short-term investments 140,154 98,012
Accounts receivable 40,875 27,588
Inventories 11,004 7,809
Other current assets 22,970 8,173
-------- --------
Total current assets 286,949 187,588
Property and equipment, net 10,640 5,469
Other assets 1,364 1,412
-------- --------
Total assets $298,953 $194,469
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 16,355 $ 10,630
Accrued and other liabilities 25,980 12,023
Income taxes payable 7,248 7,876
-------- --------
Total current liabilities 49,583 30,529
-------- --------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized; none issued and
outstanding -- --
Common stock, $.01 par value; 150,000,000
shares authorized; 51,503,314 and
24,971,350 shares issued and outstanding,
respectively 515 250
Additional paid-in capital 112,660 89,679
Retained earnings 136,195 74,011
-------- --------
Total stockholders' equity 249,370 163,940
-------- --------
Total liabilities and stockholders' equity $298,953 $194,469
======== ========
See accompanying notes to consolidated financial statements.
23
Electronics for Imaging, Inc.
Consolidated Statements of Income
Years ended December 31
-----------------------------------
(In thousands, except per share amounts) 1996 1995 1994
--------- --------- ---------
Revenue $ 298,013 $ 190,451 $ 130,381
Cost of revenue 145,399 95,451 64,333
--------- --------- ---------
152,614 95,000 66,048
Operating expenses:
Research and development 22,440 12,922 10,387
Sales and marketing 30,221 21,938 18,601
General and administrative 10,107 7,023 6,690
--------- --------- ---------
62,768 41,883 35,678
--------- --------- ---------
Income from operations 89,846 53,117 30,370
Other income 7,318 5,476 2,931
--------- --------- ---------
Income before income taxes 97,164 58,593 33,301
Provision for income taxes (34,980) (21,093) (11,995)
--------- --------- ---------
Net income $ 62,184 $ 37,500 $ 21,306
========= ========= =========
Net income per share $ 1.13 $ 0.71 $ 0.43
========= ========= =========
Shares used in computing net income per share 54,828 53,100 49,836
========= ========= =========
See accompanying notes to consolidated financial statements.
24
Electronics for Imaging, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock Additional
----------------------- Paid-in Retained
(In thousands) Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
Balances as of December 31, 1993 11,596 116 72,986 15,205 88,307
Exercise of common stock options 393 4 1,188 -- 1,192
Tax benefit related to stock plans -- -- 2,724 -- 2,724
Net income for the year ended
December 31, 1994 -- -- -- 21,306 21,306
--------- --------- --------- --------- ---------
Balances as of December 31, 1994 11,989 120 76,898 36,511 113,529
Exercise of common stock options 994 10 5,465 -- 5,475
Tax benefit related to stock plans -- -- 7,436 -- 7,436
Effect of two-for-one stock split 11,988 120 (120) --
Net income for the year ended December 31, 1995 -- -- -- 37,500 37,500
--------- --------- --------- --------- ---------
Balances as of December 31, 1995 24,971 250 89,679 74,011 163,940
Exercise of common stock options 780 8 7,691 -- 7,699
Tax benefit related to stock plans -- -- 15,547 -- 15,547
Effect of two-for-one stock split (see Note 8) 25,752 257 (257) -- --
Net income for the year ended December 31, 1996 -- -- -- 62,184 62,184
--------- --------- --------- --------- ---------
Balances as of December 31, 1996 51,503 $ 515 $ 112,660 $ 136,195 $ 249,370
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
25
Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
Years ended December 31,
---------------------------------------------
(In thousands) 1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income $ 62,184 $ 37,500 $ 21,306
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,484 3,414 3,140
Deferred taxes (4,135) (1,313) (1,465)
Changes in operating assets and liabilities:
Accounts receivable (13,287) (18,849) 2,311
Inventories (3,195) 614 (4,035)
Other current assets (10,378) (1,362) (1,092)
Accounts payable and accrued liabilities 19,682 6,549 2,616
Income taxes payable (628) 2,048 3,579
--------- --------- ---------
Net cash provided by operating activities 55,727 28,601 26,360
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (213,919) (168,556) (103,759)
Sales/maturities of short-term investments 171,777 147,299 76,934
Investment in property and equipment, net (10,655) (4,528) (2,844)
Other assets (236) 60 51
--------- --------- ---------
Net cash used for investing activities (53,033) (25,725) (29,618)
--------- --------- ---------
Cash flows from financing activities - Issuance of common stock,
including tax benefit related to stock plans 23,246 12,911 3,916
--------- --------- ---------
Increase in cash and cash equivalents 25,940 15,787 658
Cash and cash equivalents at beginning of year 46,006 30,219 29,561
--------- --------- ---------
Cash and cash equivalents at end of year $ 71,946 $ 46,006 $ 30,219
========= ========= =========
Supplemental disclosure - cash paid for income taxes $ 23,715 $ 12,463 $ 6,998
========= ========= =========
See accompanying notes to consolidated financial statements.
26
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. (the "Company"), a Delaware corporation,
designs and markets products that enable high-quality color printing in short
production runs. Its Fiery products incorporate hardware and software
technologies that transform digital color copiers from all leading copier
manufacturers into fast, high-quality networked color printers. Fiery XJe
Controllers leverage these technologies to increase the output speed and improve
the print quality of desktop color laser printers. The Company operates in one
industry and sells its products primarily to original equipment manufacturers in
North America, Europe and Japan. Substantially all of the Company's revenue to
date has resulted from the sale of Fiery products.
Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of consolidated 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 as of the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Revenue Recognition. Revenue is recognized when the product is shipped,
provided no significant obligations remain and collectibility is probable.
Provisions for estimated warranty costs and potential sales returns are recorded
when revenue is recognized.
Cash, Cash Equivalents and Short-Term Investments. The Company generally
invests its excess cash in deposits with major banks, money market securities,
and municipal and U.S. government 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 has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity Securities. In
accordance with SFAS No. 115, the Company has classified its investment
portfolio as available-for-sale. Available-for-sale securities are stated at
fair value with unrealized gains and losses reported as a separate component of
stockholders' equity. Such unrealized gains and losses have historically not
been material.
Cash equivalents consist of short-term, highly liquid investments with
original maturities of three months or less. As of December 31, 1996, the
Company had approximately $150.2 million of available-for-sale securities, of
which approximately $10.1 million were classified as cash equivalents and
approximately $68.7 million had stated maturities greater than one year. As of
December 31, 1995, the Company had approximately $100.9 million of
available-for-sale securities, of which approximately $2.9 million were
classified as cash equivalents and approximately $51.2 million had stated
maturities greater than one year. None of the Company's available-for-sale
securities had maturities greater than two years as of December 31, 1996 or
1995.
Concentration of Credit Risk. The Company asexposed 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 credit evaluations
of its customers' financial condition and maintains reserves for estimated
credit losses; such actual losses have been within management's expectations.
Inventories. Inventories are stated at standard costs which approximate the
lower of actual cost using a first-in, first-out method, or market. The Company
periodically reviews its inventories for potential slow-moving or obsolete items
and writes down specific items to net realizable value as appropriate.
27
Property and Equipment. Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the lease term, if shorter.
Income Taxes. The Company uses the asset and liability method to calculate
deferred income taxes. The realization of deferred tax assets is based on
historical tax positions and expectations about future taxable income. No
provision has been made for the undistributed earnings of the Company's foreign
subsidiaries, as it is the Company's intention to indefinitely reinvest these
earnings in the respective subsidiaries.
Foreign Currency Translation. Subsidiaries with accounts denominated in
foreign currencies have been translated in accordance with SFAS No. 52, Foreign
Currency Translation, using the U.S. dollar as the functional currency. Foreign
currency translation and transaction gains and losses have not been significant
in any period.
Stock Compensation. In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, Accounting for Stock Compensation. SFAS No. 123
establishes an accounting method based on the fair value of equity instruments
awarded to employees as compensation. The Company has elected to retain its
current application of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has adopted, as required,
the disclosure provisions of SFAS No. 123.
Stock Split. The Company effected on February 20, 1997, a two-for-one stock
split in the form of a stock dividend payable to stockholders of record as of
February 10, 1997 (see Note 8). All references in the consolidated financial
statements to weighted average numbers of shares outstanding and related prices,
per share amounts and stock option plan data have been restated to reflect the
stock split.
Net Income per Share. Net income per share is computed using the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares result from the assumed exercise, using the treasury stock
method, of outstanding common stock options having a dilutive effect.
28
Note 2: Balance Sheet Components
December 31,
------------------------
(in thousands) 1996 1995
-----------------------
Short-term investments:
Municipal securities $ 137,315 $ 93,479
U.S. government securities 2,839 4,533
--------- ---------
$ 140,154 $ 98,012
========= =========
Accounts receivable:
Accounts receivable $ 42,787 $ 29,158
Less allowances for doubtful accounts
and sales-related reserves (1,912) (1,570)
--------- ---------
$ 40,875 $ 27,588
========= =========
Inventories:
Raw materials $ 6,696 $ 3,971
Work in process 3,374 3,734
Finished goods 934 104
--------- ---------
$ 11,004 $ 7,809
========= =========
Property and equipment:
Equipment and purchased software $ 21,901 $ 12,805
Furniture and leasehold improvements 3,907 2,348
--------- ---------
25,808 15,153
Less accumulated depreciation and amortization (15,168) (9,684)
--------- ---------
$ 10,640 $ 5,469
========= =========
Accrued and other liabilities:
Accrued product-related obligations $ 13,588 $ 5,788
Accrued compensation and benefits 2,261 1,344
Other accrued liabilities 10,131 4,891
--------- ---------
$ 25,980 $ 12,023
========= =========
Note 3: Commitments
The Company leases its principal operating facility under a noncancelable
operating lease expiring in June 1997. Future minimum lease commitments under
noncancelable operating leases for facilities and certain equipment as of
December 31, 1996 are approximately $1,629,000, $799,000 and $436,000 in 1997,
1998 and 1999, respectively. Rent expense was approximately $2,062,000,
$1,895,000 and $1,850,000 in 1996, 1995 and 1994, respectively.
29
Note 4: Income Taxes
The provision for income taxes is summarized as follows:
Years ended December 31,
--------------------------------
(in thousands) 1996 1995 1994
--------------------------------
Current:
U.S. federal $ 32,309 $ 18,372 $ 10,295
State 6,186 3,673 2,778
Foreign 620 361 387
-------- -------- --------
Total current 39,115 22,406 13,460
Deferred:
U.S. federal (3,203) (1,079) (1,222)
State (932) (234) (243)
Foreign -- -- --
Total deferred (4,135) (1,313) (1,465)
-------- -------- --------
Total provision for income taxes $ 34,980 $ 21,093 $ 11,995
======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
assets are as follows:
December 31,
---------------------
(in thousands) 1996 1995
---------------------
Depreciation $ 669 $ 837
Reserves and accruals 7,457 3,368
State taxes payable 1,188 775
Other 277 476
------ ------
Total deferred tax assets $9,591 $5,456
====== ======
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) 1996 1995 1994
--------------------------------
Tax expense at federal statutory rate $ 34,007 $ 20,509 $ 11,658
State income taxes, net of federal benefit 3,415 2,235 1,648
Tax-exempt interest income (2,099) (1,488) (853)
Other (344) (163) (458)
-------- -------- --------
$ 34,979 $ 21,093 $ 11,995
======== ======== ========
Note 5: Common Stock
In October 1995, the Company's Board of Directors authorized a two-for-one
stock split in the form of a stock dividend payable on November 30, 1995, to
stockholders of record as of November 20, 1995. On
30
November 1, 1995, the stockholders of the Company approved an amendment to
the articles of incorporation to increase the number of shares of common stock
authorized for issuance to 150,000,000.
Note 6: Stock Compensation Plans
As of December 31, 1996, the Company has two stock-based compensation plans,
described below. The Company applies APB Opinion No. 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 1996 and 1995 under the Company's option plans been
determined based on the fair value at the grant dates as prescribed by SFAS No.
123, the Company's net income and pro forma net income per share would have been
as follows:
December 31,
----------------------------
(in thousands, except per share amounts) 1996 1995
----------------------------
Net income As reported $ 62,184 $ 37,500
Pro forma $ 58,304 $ 36,057
Earnings per share As reported $ 1.13 $ 0.71
Pro forma $ 1.06 $ 0.68
Under the Company's 1989 and 1990 Stock Plans (the Plans), the Company
may grant options to employees, directors and consultants for up to 19.5 million
shares of common stock. Under the Plans the exercise price of each option equals
the market price of the Company's stock on the date of grant and an option's
maximum term is 10 years. Options are granted periodically throughout the year
and vest ratably over four years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the applicable period: dividend yield of 0.0%
for both periods, expected volatility of 48%, risk-free interest rates of 5.68%
to 6.71% for options granted, and a weighted average expected option term of 4.3
years for both periods.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996 and 1995, and changes during the years then ended is presented
below:
Weighted Average
Shares Exercise Price
----------- -----------
Outstanding as of December 31, 1994 7,159,632 $ 3.76
Granted 2,400,800 13.08
Exercised (1,988,812) 2.69
Forfeited (1,233,568) 5.31
-----------
Outstanding as of December 31, 1995 6,338,052 7.34
Granted 1,949,900 25.80
Exercised (1,557,614) 4.89
Forfeited (644,900) 13.86
-----------
Outstanding as of December 31, 1996 6,085,438 13.19
===========
The weighted average fair value of options granted was $9.42 and $4.78 per
share for the years ended December 31, 1996 and 1995, respectively.
31
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
---------------- ------------- -------------- -------------- ---------- --------------
$0.01 to $4.31 827,402 5.55 $ 2.04 591,114 $ 1.24
$4.44 to $5.00 1,277,064 7.49 4.97 652,591 4.97
$5.56 to $8.94 570,000 7.86 6.14 304,149 5.69
$9.28 to $12.81 1,356,922 8.50 12.62 238,522 12.75
$13.25 to $23.69 461,950 8.96 17.51 44,700 16.68
$25.63 to $25.63 1,171,400 9.54 25.63 - -
$27.31 to $42.13 420,700 9.59 32.10 2,500 35.13
---------- ----------
$0.01 to $42.13 6,085,438 8.14 13.19 1,833,576 5.23
========== ==========
Note 7: Export Sales and Significant Customers
Export sales by geographic area consisted of the following:
Years ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
Europe $ 75,266 $ 51,338 $ 35,826
Japan 63,670 25,930 19,210
Canada 6,990 3,004 2,013
Other 5,409 1,504 2,407
-------- -------- --------
Total $151,335 $ 81,776 $ 59,456
======== ======== ========
Shipments to some of the Company's OEM partners are made to centralized
purchasing and manufacturing locations, which in turn sell through to foreign
locations. As a result of these factors, the Company believes that sales of its
products into Europe and Japan may actually be higher, though accurate data is
difficult to obtain.
Three customers accounted for approximately 47%, 23% and 12% of revenue in
1996. These customers represented 56%, 22% and 12%, and 36%, 22% and 6% of
revenue in 1995 and 1994, respectively. These customers accounted for 26%, 26%
and 18%, and 32%, 33% and 14% of accounts receivable as of December 31, 1996 and
1995, respectively. A fourth customer accounted for approximately 14% and 4% of
accounts receivable as of December 31, 1996 and 1995, respectively.
Note 8: Subsequent Event
On January 21, 1997, the Company's Board of Directors authorized a
two-for-one stock split in the form of a stock dividend payable on February 20,
1997, to stockholders of record as of February 10, 1997. All references in the
consolidated financial statements to weighted average numbers of shares
outstanding and related prices, per share amounts and stock option plan data
have been restated to reflect the stock split.
32
Report of Independent Accountants
The Board of Directors and Stockholders
Electronics for Imaging, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Electronics for
Imaging, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 14, 1997, except for Note 8,
which is as of January 21, 1997
33
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, 1996. 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. Per share amounts have been restated to
reflect the effect of the Company's two-for-one stock split.
1996: Q1 Q2 Q3 Q4
-----------------------------------------------
Revenue $63,649 $69,046 $75,121 $90,197
Gross profit 30,406 34,491 38,699 49,018
Income from operations 18,025 20,030 22,564 29,227
Net income 12,597 13,901 15,553 20,133
Net income per share $ 0.23 $ 0.25 $ 0.28 $ 0.36
1995: Q1 Q2 Q3 Q4
-----------------------------------------------
Revenue $40,364 $44,798 $48,502 $56,787
Gross profit 19,968 22,405 24,233 28,394
Income from operations 10,032 11,735 13,726 17,624
Net income 7,173 8,287 9,721 12,319
Net income per share $ 0.14 $ 0.16 $ 0.18 $ 0.23
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
34
PART III
Item 10: Directors and Executive Officers of the Registrant.
Information with respect to Directors and Executive Officers may be
found in the sections entitled "Election of Directors" and "Executive Officers,"
respectively, appearing in the definitive Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 1, 1997. Such information is incorporated herein by reference.
Item 11: Executive Compensation.
Information with respect to this item may be found in the sections
entitled "Executive Compensation" and "Employee Benefit Plans" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held on May 1, 1997. Such information
is incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management.
Information with respect to this item may be found in the section
entitled "Security Ownership," appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on May 1, 1997. Such information is incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions.
Not Applicable.
35
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of Form 10-K
Page in this
Annual Report
on Form 10-K
-------------
1. Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 41
(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.)
36
2. Listing of Exhibits
INDEX TO EXHIBITS
Exhibit
No. Description
- --- -----------
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Bylaws as amended.(1)
4.1 See Exhibit 3.1
4.2 Specimen Common Stock certificate of the Company.(1)
10.1 Agreement of Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust for the Company's
new executive office in San Mateo, California.(1)
10.2 First Addendum to Lease dated as of July 30, 1992, by and between the
Company and The Joseph and Eda Pell Revocable Trust.(1)
10.3+ License Agreement, dated as of February 9, 1990, between the Company
and the Massachusetts Institute of Technology.(1)
10.4 Amendment to License Agreement dated December 31, 1990, between the
Company and the Massachusetts Institute of Technology.(1)
10.5 Amendment to License Agreement dated May 29, 1991 and March 19, 1991,
by and between the Company and the Massachusetts Institute of
Technology.(1)
10.6+ Third Amendment to License Agreement dated June 1, 1992, by and
between the Company and the Massachusetts Institute of Technology.(1)
10.7+ Research and Development Agreement, dated September 1, 1989, between
the Company and Toyo Ink Mfg. Co., Ltd.(1)
10.8 Cooperation Agreement, dated as of March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.9+ Patent Sublicense Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.10+ Know-How License Agreement, dated March 7, 1990, between the Company
and Toyo Ink Mfg. Co., Ltd.(1)
10.11+ License Agreement, dated as of January 11, 1991, by and between the
Company and Eastman Kodak Company, as amended March 10, 1992.(1)
10.12+ Authorized VAR Agreement dated as of November 26, 1991, by and
between the Company and Eastman Kodak Company.(1)
10.13+ License Agreement, dated March 1, 1991, by and between the Company
and Adobe Systems Incorporated, as amended May 22, 1991.(1)
10.14+ Custom PostScript(TM) Interpreter OEM License Agreement, dated as of
March 1, 1991, by and between the Company and Adobe Systems
Incorporated.(1)
37
10.15+ Agreement dated September 6, 1991, by and between the Company and
Xerox Corporation.(1)
Exhibit
No. Description
- --- -----------
10.16+ Patent License Agreement dated December 12, 1991, by and between the
Company and Xerox Corporation.(1)
10.17 Formal Agreement for Distribution of Fiery, dated June 27, 1991, by
and between the Company and Toyo Ink Mfg. Co., Ltd.(1)
10.18+ Patent License Agreement dated January 29, 1992, by and between the
Company and Minolta Camera Co., Ltd.(1)
10.19 License Agreement dated December 3, 1991, by and between the Company
and Scitex Corporation Ltd.(1)
10.20+ Development Agreement dated May 28, 1991, by and between the Company
and Canon Inc.(1)
10.21 Fiery Approval Agreement dated May 28, 1991, by and between the
Company and Canon Inc.(1)
10.22 Letter Agreement dated May 28, 1991, by and between the Company and
Canon, Inc.(1)
10.23+ Parts Purchase Agreement dated June 30, 1991, by and between the
Company and Canon Inc.(1)
10.24+ Patent License Agreement dated June 11, 1992, by and between the
Company and Victor Company of Japan.(1)
10.25+ OEM License Agreement dated July 20, 1992, by and between the Company
and QMS, Inc.(1)
10.26+ License Agreement dated May 2, 1991, by and between the Company and
Pantone, Inc.(1)
10.27+ Software Distribution License Agreement dated January 30, 1992, by
and between the Company and Storm Technology, Inc.(1)
10.28+ Agreement for OEM Software Acquisition dated April 7, 1992, by and
between the Company and Cooperative Printing Solutions, Inc.(1)
10.29+ License Agreement dated May 18, 1992, by and between the Company and
Microsoft Corporation.(1)
10.30+ Cooperation and Project Funding Agreement dated August 6, 1992, by
and among the Company, Electronics for Imaging (Israel) Ltd. and the
BIRD Foundation.(1)
10.31 Advisory Agreement, dated May 25, 1989, between the Company and
William F. Schreiber.(1)
10.32 1989 Stock Plan of the Company.(1)
10.33 1990 Stock Plan of the Company.(1)
10.34 Convertible Subordinated Note Purchase Agreement, dated as of June 1,
1990, between the Company and Frederick R. Adler, and related
Convertible Note.(1)
10.35 Convertible Subordinated Note Purchase Agreement, dated June 1, 1990,
between the Company and Hesperus XVI N.V., and related Convertible
Note.(1)
38
10.36 Convertible Subordinated Note Purchase Agreement, dated as of June 1,
1990, between the Company and Athena Venture Partners L.P., and
related Convertible Note.(1)
Exhibit
No. Description
- --- -----------
10.37 Convertible Subordinated Note Purchase Agreement, dated as of June 1,
1990, between the Company and Thomas I. Unterberg, and related
Convertible Note.(1)
10.38 Convertible Subordinated Note, dated June 1, 1990, for principal
amount of $17,500 transferred from Athena Venture Partners L.P. to
Dan Tolkowsky pursuant to Letter Agreement dated May 31, 1991.(1)
10.39 Convertible Subordinated Note, dated June 1, 1990, for principal
amount of $6,000 transferred from Athena Venture Partners L.P. to
Yadin Kaufman pursuant to Letter Agreement dated May 31, 1991.(1)
10.40 Stock Purchase Agreement, dated as of March 1, 1991, by and between
the Company and Adobe Systems Incorporated.(1)
10.41 Convertible Note Purchase Agreement dated as of March 1, 1992, by and
between the Company, Electronics for Imaging (Ireland) Limited and
European Financial Investors Holdings S.A.(1)
10.42 Series B Preferred Stock Purchase Agreement dated as of March 12,
1992, by and among the Company, funds affiliated with Weiss, Peck &
Greer Venture Partners II, L.P. and other persons and entities.(1)
10.43 Registration Rights Agreement dated as of March 12, 1992, by and
among the Company, funds affiliated with Weiss, Peck & Greer Venture
Partners II., L.P. and other persons and entities.(1)
10.44 First Addendum to Series B Stock Purchase Agreement dated as of
August 5, 1992 (the "Addendum"), by and among the Company, and the
persons listed on Schedule A to the Addendum.(1)
10.45 First Amendment to Registration Rights Agreement dated as of August
5, 1992 (the "First Amendment"), by and among the Company, and the
persons listed on Exhibit A to the First Amendment.(1)
10.46 Form of Indemnification Agreement.(1)
10.47+ Patent License Agreement dated May 28, 1991, by and between the
Company and Canon Inc.(1)
10.48 Software Publishing Agreement dated August 17, 1992, by and between
the Company and Quark, Inc.(1)
10.49 Employment Agreement dated August 1, 1992 by and between Efraim Arazi
and the Company.(1)
10.50+ Supplement to Formal Agreement for Distribution of Fiery dated August
25, 1992, by and between the Company and Toyo Ink Mfg. Co., Ltd.(1)
10.51+ OEM Software License Agreement dated August 14, 1992, by and between
the Company and RSA Data Security, Inc.(1)
10.52 Employment Agreement dated July 13, 1995, by and between Efraim Arazi
and the Company.(3)
10.53 Employment Agreement dated July 17, 1995, by and between Dan Avida
and the Company.(3)
10.54 Employment Agreement dated July 17, 1995, by and between Jeff Lenches
and the Company.(3)
39
10.55 Employment Agreement dated July 17, 1995, by and between Fred
Rosenzweig and the Company.(3)
10.56 Employment Agreement dated October 15, 1995, by and between Eric
Saltzman and the Company.(3)
11.1 Statement regarding computation of the Company's per share earnings.
21.1 List of Subsidiaries.(1)
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney.
- ------------------------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-50966) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 33-57382) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 (File No. 0-18805) and incorporated herein
by reference.
+ The Company has received confidential treatment with respect to
portions of these documents.
(b) Reports on Form 8-K
None filed during the quarter ended December 31, 1996.
(c) List of Exhibits
See Item 14(a)3.
(d) Consolidated Financial Statement Schedule II for the years ended
December 31, 1994, 1995 and 1996, respectively.
See Page 41 of this Annual Report on Form 10-K.
40
ELECTRONICS FOR IMAGING, INC.
Schedule II
Valuation and Qualifying Accounts
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
------------------ ------------- ------------- ------------- ------------- -------------
Year Ended December 31, 1996
Allowance for doubtful accounts and
sales-related reserves $ 1,570 $ 1,132 $ -- $ (790) $ 1,912
============= ============= ============= ============= =============
Year Ended December 31, 1995
Allowance for doubtful accounts and
sales-related reserves $ 2,176 $ 479 $ -- $ (1,085) $ 1,570
============= ============= ============= ============= =============
Year Ended December 31, 1994
Allowance for doubtful accounts and
sales-related reserves $ 812 $ 1,926 $ -- $ (562) $ 2,176
============= ============= ============= ============= =============
41
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of Electronics for Imaging, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 14, 1997, except for Note 8, which is as of January 21, 1997,
appearing on page 32 of this form 10-K, also included an audit of the
Consolidated Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, the Consolidated Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
San Jose, California
January 14, 1997, except for Note 8,
which is as of January 21, 1997
42
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, on the 27th day of
March 1997.
ELECTRONICS FOR IMAGING, INC.
By: /s/ Dan Avida
-----------------------------------------------------
Dan Avida
President, Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Dan Avida and Eric Saltzman jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Form 10-K Annual
Report, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and conforming 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 indicated on the 27th day of March 1997.
Signature Title Date
- --------- ----- ----
/s/ Efraim Arazi Chairman of the Board March 27, 1997
- --------------------------------------
Efraim Arazi
President, Chief Executive Officer
/s/ Dan Avida and Director March 27, 1997
- --------------------------------------
Dan Avida (Principal Executive Officer and
Principal Financial and Accounting Officer)
/s/ Gill Cogan Director March 27, 1997
- --------------------------------------
Gill Cogan
/s/ Jean-Louis Gassee Director March 27, 1997
- --------------------------------------
Jean-Louis Gassee
/s/ Dan Maydan Director March 27, 1997
- --------------------------------------
Dan Maydan
/s/ Thomas Unterberg Director March 27, 1997
- --------------------------------------
Thomas Unterberg
43