UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-18805 ELECTRONICS FOR IMAGING, INC. (Exact name of registrant as specified in its charter) Delaware 94-3086355 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2855 Campus Drive, San Mateo, CA 94403 (Address of principal executive offices, including zip code) (415) 286-8600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The number of shares of Common Stock outstanding as of March 31, 1998 was 52,605,237. An Exhibit Index can be found on Page 15.
<PAGE> ELECTRONICS FOR IMAGING, INC. INDEX Page No.
PART I - Financial Information
Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Statements of Income Three Months Ended March 31, 1998 and 1997 ..........................................................3 Condensed Consolidated Balance Sheets March 31, 1998 and December 31, 1997 .....................4 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 1998 and 1997 ...............5 Notes to Condensed Consolidated Financial Statements ..........6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...............................8
PART II - Other Information
Items 1-5. Not Applicable ...................................................15
Item 6. Exhibits and Reports on Form 8-K .................................16 Signatures ...................................................................17 2
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE> ELECTRONICS FOR IMAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) <CAPTION> Three Months Ended ---------------------------------------- March 31, March 31, 1998 1997 -------------- ------------- <S> <C> <C> Revenue $ 82,523 $ 91,006 Cost of revenue 45,356 41,093 -------------- ------------- 37,167 49,913 -------------- ------------- Operating expenses: Research, development and contract costs 14,084 8,126 Sales and marketing 15,322 9,558 General and administrative 3,461 2,873 -------------- ------------- 32,867 20,557 -------------- ------------- Income from operations 4,300 29,356 Other income, net 2,221 2,563 -------------- ------------- Income before income taxes 6,521 31,919 Provision for income taxes 2,348 11,491 -------------- ------------- Net income $ 4,173 $ 20,428 ============== ============= Net income per basic common share $ 0.08 $ 0.40 ============== ============= Shares used in per share calculation (basic) 52,582 51,640 ============== ============= Net income per diluted common share $ 0.08 $ 0.37 ============== ============= Shares used in per share calculation (diluted) 54,891 55,740 ============== ============= <FN> See accompanying notes to condensed consolidated financial statements. </FN> </TABLE>
<TABLE> ELECTRONICS FOR IMAGING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) <CAPTION> March 31, December 31, 1998 1997 -------------- ------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 58,988 $ 57,195 Short-term investments 185,257 185,536 Accounts receivable, net 38,069 30,930 Inventories 23,305 23,790 Other current assets 37,963 32,445 -------------- ------------- Total current assets 343,582 329,896 Property and equipment, net 47,894 46,502 Other assets 9,243 9,600 -------------- ------------- Total assets $ 400,719 $ 385,998 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 26,651 $ 20,255 Accrued and other liabilities 22,723 19,891 Income taxes payable 3,953 2,923 -------------- ------------- Total current liabilities 53,327 43,069 -------------- ------------- Long-term debt 4,064 4,064 -------------- ------------- 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; 52,605,237 and 52,558,383 shares issued and outstanding, respectively 526 524 Additional paid-in capital 137,552 137,264 Retained earnings 205,250 201,077 -------------- ------------- Total stockholders' equity 343,328 338,865 -------------- ------------- Total liabilities and stockholders' equity $ 400,719 $ 385,998 ============== ============= <FN> See accompanying notes to condensed consolidated financial statements. </FN> </TABLE>
<TABLE> ELECTRONICS FOR IMAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <CAPTION> Three Months Ended March 31, ---------------------------------------- 1998 1997 -------------- ------------- <S> <C> <C> Cash flows from operating activities: Net income $ 4,173 $ 20,428 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,823 1,441 Changes in operating assets and liabilities: Accounts receivable (7,139) (7,062) Inventories 485 (1,951) Receivable from subcontract manufacturers (4,749) (7,118) Other current assets (769) (2,484) Accounts payable and accrued liabilities 9,228 11,364 Income taxes payable 1,030 9,034 -------------- ------------- Net cash provided by operating activities 5,082 23,652 -------------- ------------- Cash flows from investing activities: Purchase of short-term investments (28,653) (36,097) Sales and maturities of short-term investments 28,932 34,136 Purchases of property and equipment, net (3,887) (1,544) Purchase of other assets 29 7 -------------- ------------- Net cash used for investing activities (3,579) (3,498) -------------- ------------- Cash flows from financing activities: Issuance of common stock related to stock plans 290 1,706 -------------- ------------- Net cash provided by financing activities 290 1,706 -------------- ------------- Net change in cash and cash equivalents (1,793) 21,860 Cash and cash equivalents at beginning of period 57,195 71,946 -------------- ------------- Cash and cash equivalents at end of period $ 58,988 $ 93,806 ============== ============= <FN> See accompanying notes to condensed consolidated financial statements. </FN> </TABLE>
<PAGE> ELECTRONICS FOR IMAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (Unaudited) 1. Basis of Presentation The unaudited interim condensed consolidated financial statements of Electronics for Imaging, Inc. (the Company) as of and for the interim period ended March 31, 1998, have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 1997, contained in the Company's Annual Report to Stockholders, and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company and the results of its operations and cash flows, in accordance with generally accepted accounting principles. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto referred to above. The preparation of the interim condensed consolidated financial statements in conformity with generally accepted accounting principles for such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. The interim results of the Company are subject to fluctuation. As a result, the Company believes the results of operations for the interim period ended March 31, 1998 are not necessarily indicative of the results to be expected for any other interim period or the full year. 2. Comprehensive Income Effective January 1, 1998, the company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This Statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. For the quarters ending March 31, 1998 and 1997, the differences between the Company's net income and comprehensive income were immaterial. 6
<PAGE> 3. Earnings Per Share
<TABLE> In February 1997, The Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. The Statement redefines earnings per share (EPS) under generally accepted accounting principles. Under the new standard, primary (EPS) is replaced by basic EPS and fully diluted EPS is replaced by diluted EPS. It also requires dual presentation of basic and diluted EPS on the face of the financial statements. SFAS No. 128 was adopted in the fourth quarter of 1997 and the EPS for all periods presented have been restated to conform with the provisions of SFAS No. 128. The following table represents unaudited disclosures of basic and diluted EPS in accordance with SFAS No. 128 assuming the standard was applied during all periods presented below: <CAPTION> March 31, March, 31, 1998 1997 ----------- ---------- <S> <C> <C> <C> (in thousands, except per share amounts) Net income available to common shareholders $ 4,173 $ 20,428 Shares Basic shares 52,582 51,640 Effect of Dilutive Securities 2,309 4,100 ----------- ---------- Diluted shares 54,891 55,740 =========== ========== Earnings per common share Basic EPS $ 0.08 $ 0.40 Diluted EPS $ 0.08 $ 0.37 </TABLE>
<TABLE> Antidilutive Options. Options to purchase 1,852,799 and 32,492 shares of common stock outstanding as of March 31, 1998 and 1997, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of the common shares for the quarters then ended. <CAPTION> 4. Balance Sheet Components (in thousands) March 31, December 31, 1998 1997 ----------- ---------- <S> <C> <C> <C> Inventories: Raw materials $ 18,404 $ 19,216 Work-in-process 4,283 3,183 Finished goods 618 1,391 ----------- ---------- $ 23,305 $ 23,790 =========== ========== Other Current Assets: Receivable from subcontract manufacturers $ 22,391 $ 17,642 Other 15,572 14,803 ----------- ---------- $ 37,963 $ 32,445 =========== ========== </TABLE>
TEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis and the audited consolidated financial statements of Electronics for Imaging, Inc. (the Company) and related notes thereto contained in the Company's 1997 Annual Report to Stockholders. Results for the three months ended March 31, 1998 are not necessarily indicative of the results expected for the entire fiscal year ended December 31, 1998. All assumptions, anticipations, expectations and forecasts contained herein are forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. For a more complete discussion of factors which might impact the Company's results, please see the section entitled "Factors that Could Adversely Affect Performance" below and in the Company's 1997 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. The Company periodically reviews such factors to ensure their appropriateness. Results of Operations Revenue Revenue decreased 9.3% to $ 82.5 million in the first quarter of 1998, as compared to $91.0 million in the first quarter of 1997. The decrease in revenue is primarily due to price reductions on existing product lines in anticipation of new product introductions as well as continued weak sales from Asia particularly in Japan due to the ongoing weakness in those economies. The Company's new generation Fiery ZX products, new black and white products, and a new line of embedded printer products (under the name "Fiery Driven" for use in desktop color printers) began shipping in limited volume during the first quarter of 1998. In coordination with the introduction of these new products, the Company lowered prices on existing product lines. Although sales of these new products are expected to increase, they accounted for less than 8% of total revenues in the first quarter of 1998. The majority of revenues continue to be derived from the Company's stand-alone Fiery XJ and XJ+ color servers for digital color copiers. As discussed below, the decline in revenue is also partially due to the continued weakness in Asian economies. Comparing international revenue in the first quarter of 1998 to the first quarter of 1997, these sales increased from $43.7 million or 48.0% of total revenues to $44.8 million or 54.3% of total revenues, respectively. However, the Company believes the increase in international revenue is due to a change in the way the Company ships products to one of its major customers. Starting in the second quarter of 1997, instead of receiving product in the United States and then shipping the product to its European facilities, one of the Company's major customers began having its product shipped directly to Europe. In conjunction with this change, sales revenue that was formerly being recorded as domestic sales began being recorded as European sales. During the first quarter of 1998 under the new more direct distribution model, sales to Europe totaled $29.7 million or 35.9% of total revenues as compared to $22.5 million or 24.7% of total revenues in the first quarter of 1997 under the old distribution model - representing on its face a 32% increase. Reflecting historical shipment methods, during the first quarter of 1998, proforma sales to Europe showed a 2% decline from the comparable sales during the first quarter of 1997. Sales to Japan in the first quarter of 1998 decreased to $12.8 million or 15.5% of total revenues as compared to $18.5 million or 20.4% of total revenues in the first quarter of 1997. The decline in sales to Japan is primarily due to a continued weakness in the Japanese and other Asian economies. Foreign sales to areas other than Europe and Japan for the first quarter of 1998 totaled $2.3 million and comprised 2.8% of total revenues as compared to $2.6 million and 2.8% of total revenues in the first quarter of 1997. 8
<PAGE> Substantially all of the revenue of both periods was attributable to the sale of Fiery products through the Company's OEM channels with such partners as Canon, Xerox, Ricoh, Minolta, Fuji Xerox, Epson, Sharp and others. For the first quarter of 1998 the company continued to rely on three OEM customers, Canon, Xerox and Ricoh for 77% of it's first quarter revenue as compared to 85% reported for all of 1997. In the event that any of such relationships are scaled back or discontinued, the Company may experience a significant negative impact on its consolidated financial position and results of operations. In addition, no assurance can be given that the Company's relationships with these OEM partners will continue. As discussed above, 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. The Company continues to work on the development of products utilizing the Fiery architecture and other products and intends to continue to introduce new generations of Fiery products and other new product lines in the remainder of 1998 and beyond. No assurance can be given that the introduction or market acceptance of new, current or future products will be successful. Cost of Revenue A substantial majority of the Company's cost of revenue to date has been attributable to the sale of Fiery Color Servers. Fiery Color Servers are manufactured by third-party manufacturers who purchase most of the necessary components. The Company sources directly proprietary memory and certain ASICs, and software licensed from various sources, including PostScript interpreter software, which the Company licenses from Adobe Systems, Inc. The Company's gross margin was 45.0% in the first quarter of 1998, down from 54.8% in the corresponding quarter of 1997. This was due to a combination of factors including a higher mix of low end products with relatively lower margins including new embedded products and black and white products that the Company introduced in the first quarter of 1998. The company also initiated price reductions on older products as an inducement for continued older product purchases in light of pending transitions to newer products. The Company expects that sales of products with relatively lower margins may further increase as a percentage of revenue. Such products include older products for which prices are reduced during product transitions, embedded products for both desktop printers and copiers, and stand-alone and embedded controllers for black-and -white copiers. If such sales increase as a percentage of the Company's revenue, gross margins may further decline. In general, the Company believes that gross margin will continue to be impacted by a variety of factors. These factors include the availability and pricing of key components (including DRAM and Postscript interpreter software), third party manufacturing costs, product, channel and geographic mix, the success of the Company's product transitions and new products, competition, and general economic conditions in the United States and abroad. 9
<PAGE> Operating Expenses Operating expenses for the quarter ended March 31, 1998 increased $12.3 million or 59.9% from the same period in 1997. Operating expenses in the first quarter of 1998 also constituted a higher percentage of revenues than in the first quarter of 1997, 39.8% versus 22.6%, respectively. Increases in operating expenses were primarily caused by the hiring of additional full time employees - a net increase of 183 people or 49% from March 31, 1997 to March 31, 1998. The Company has hired additional employees to support product development as well as to support expanded operations. The company anticipates that operating expenses will continue to grow and may increase both in absolute dollars and as a percentage of revenue. The components of operating expenses are detailed below. Research and Development. Expenses for research and development consist primarily of personnel expenses and, to a lesser extent, consulting and nonrecurring engineering expenses, depreciation, and costs of prototype materials. Research and development expenses were $14.1 million or 17.1% of revenue in the first quarter of 1998, compared to $8.1 million or 8.9% of revenue in the corresponding quarter of 1997. Research and development expenses have increased primarily due to an increase in research and development projects, which has resulted in an engineering headcount increase of 62.1% from March 31, 1997 to March 31, 1998. The Company believes that the development of new products and enhancement of existing products is 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 increase in absolute dollars and possibly also as a percentage of revenue. Sales and Marketing. Such expenses include personnel expenses, costs for tradeshows, marketing programs and other promotional material, sales commissions, travel and entertainment expense, depreciation, and costs associated with sales offices in the United States, Europe and Japan and other locations around the world. Sales and marketing expenses were $15.3 million or 18.6% of revenue in the first quarter of 1998, compared to $9.6 million or 10.5% of revenue in the corresponding quarter of 1997. Sales and marketing expenses increased as a percentage of total revenue due primarily to a 30.5 % increase in employee headcount from March 31, 1997 to March 31, 1998. In addition, cost required for the introduction, promotion and support of a broader range of current products with both existing and new OEM relationships as well as technology alliance partners has increased. Also, in coordination with its new product releases, the Company has increased its participation in trade shows during the first quarter of 1998. 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 models and other products, and continue to build its worldwide sales and marketing organization. General and Administrative. Such expenses consist primarily of personnel expenses and, to a lesser extent, professional fees, expenses required of a public company, and depreciation and facility costs. General and administrative expenses were $3.5 million or 4.2% of revenue in the first quarter of 1998, compared to $2.9 million or 3.2% of revenue in the corresponding quarter of 1997. The increases were primarily due to the addition of personnel to support the Company's operations. The Company expects that its general and administrative expenses may increase in absolute dollars and possibly also as a percentage of revenue in order to support any growth in operations. 10
<PAGE> Income Taxes The Company's effective tax rate was 36.0% for the first quarter of 1998 and 1997. In each period the Company benefited from increased tax-exempt interest income, increases in foreign sales and to a lesser extent the utilization of research and development credits in achieving a consolidated effective tax rate lower than the consolidated federal and state statutory income tax rate. 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 $244.2 million as of March 31, 1998, up from $235.9 million as of March 31, 1997. The company has an investment portfolio of short-term investments comprised of fixed income securities that are classified as "held to maturity securities". These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. The Company attempts to limit this exposure by investing primarily in short-term securities. Working capital increased to $290.3 million as of March 31, 1998, up from $259.4 million as of March 31, 1997. Net cash provided by operating activities was $5.1 million and $23.7 million for the three-month periods ended March 31, 1998 and 1997, respectively, primarily as a result of profitable operations in both periods. The Company purchased approximately $3.9 million of capital equipment and furniture during the three-month period ended March 31, 1998, compared to purchases of $1.5 million in the corresponding period of 1997. The Company does not have a comprehensive and formal Year 2000 plan for all of its operations. The Company has informally reviewed its internal MIS systems and believes that Year 2000 issues will not materially affect its internal MIS systems. Also, the Company has tested its products to determine if the products will successfully rollover from the years 1999 to 2000 and 2000 to 2001, and if the products will correctly recognize the date February 29, 2000. Products first released after November 1, 1997 have passed internal tests for these criteria, and future products will be required to pass the same internal tests before shipping. Because the Company cannot control other companies' products used in conjunction with the Company's products (such as other companies' software), the Company does not intend to assure its customers that its products will meet the above-referenced criteria when used in conjunction with any other software or hardware not manufactured by the Company. The Company has not reviewed Year 2000 plans and preparations of its manufacturers, suppliers, customers, and other third parties with whom it does business. The effects and costs associated with possible Year 2000 issues are unknown to the Company at this time, and there can be no assurance that such effects and costs will not have a material adverse effect on the Company, its financial condition, results of operations. The Company believes that its existing capital resources together with cash generated from continuing operations will be sufficient to fund its operations and meet capital requirements through at least 1999. Factors That Could Adversely Affect Performance The following factors may adversely impact the Company's future performance and financial results: Reliance on OEM Resellers; Risks Associated with Significant OEM Group Concentration 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 Company's 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. 11
<PAGE> 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, may adversely affect the Company's results of operations. The Company relies upon the ability of its OEMs 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, who are not within the control of the Company, may incorporate into their products the technologies of other companies in addition to or instead of the Company's products, 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, may have a material adverse effect on 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 its products in any OEM channel. The Company's sales may be adversely affected if an OEM introduces or supports additional products that compete with the Company's products, fails to effectively market the Company's products, modifies its color copiers or printers such that the Company's products are no longer compatible, introduces new color copiers or printers that are incompatible with the Company's products, or does not allow the Company's products 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 copier and printer OEMs, customer concentration will continue to be a risk due to the limited number of OEMs producing copiers and printers in sufficient volume to be attractive to the Company. Product Transitions Although the Company plans to introduce new products, delays in the launch or availability of these 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 products. If the Company is not able to successfully manage product transitions or cannot guarantee the availability of products once they have been introduced, its results of operations may be adversely affected. Product Diversification and Coordination of Development with Customers The Company's customers have requested a broader range of products with different and unique features, and the Company believes that this trend may continue. If the Company cannot successfully manage the effort and risks associated with a broader range of products, its results of operations may be adversely affected. The Company's customers work closely with the Company to develop products that are specific to each customer. Many of the products the Company is developing require the Company and its customers to coordinate development, quality testing, marketing and other tasks. The Company cannot control other companies' efforts, and such coordination may result in delays that the Company cannot manage by itself. If the Company cannot successfully manage the effort and risks associated with coordination, its results of operations may be adversely affected. Reliance on Products That Enable Color Printing of Digital Data and Decrease in Demand for the Company's Products 12
<PAGE> Although the Company has expanded its product line in recent years, and continues to explore opportunities to further diversify its business, the Company's business has been focused heavily on sales of products that enable the color printing of digital data. Should conditions arise that reduce the demand for this service, the Company's results of operations may be adversely affected. The Company believes that purchases of the Company's products may be affected by a variety of economic conditions and considerations, and there can be no assurance that demand for the Company's products will continue at current levels. For example, although such conditions are difficult to predict, the Company is not assuming that there will be significant improvement in economic conditions in Japan in 1998. The Company believes that continued economic distress in Japan and elsewhere in Asia may limit demand in these regions for the Company's products. In addition, it is possible that individuals with responsibility for purchasing the Company's products, such as information technology professionals, may choose to devote available discretionary resources to other perceived needs, such as technology expenses associated with Year 2000 preparation. New Product Introductions The Company continues to explore opportunities to develop product lines distinct from its Fiery Color Servers. 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 would gain market acceptance. If the Company is not able to successfully manage the introduction of new products, its results of operations may be adversely affected. In addition to these risks, if the Company is successful in introducing new products, there can be no assurance that such product introductions (including more powerful products sold at a lower price) will not adversely impact gross margins or sales of existing products. Competition The Company has seen competition in the market from companies and products that provide similar functionality to the Company's products and believes that such competition will continue and may intensify. It is also possible that the Company's customers may themselves internally develop and supply products presently sold by the Company. There can be no assurance that the Company will be able to continue to successfully compete against other companies' product offerings or their financial and other resources. In addition to competition among suppliers of the Company's products, the Company believes that competition among the Company's customers and potential customers, including competition over price, may increase. Such competition may have an adverse impact on the Company's results of operations. Managing Growth The Company continues to increase its headcount, and is working to build relationships with OEMs and other customers. As a result, the number and complexity of relationships the Company must manage, including relationships with customers, manufacturers, and suppliers, has increased and may increase further. If the Company cannot successfully manage growth, its results of operations may be adversely affected. Hiring and Retention of Employees 13
<PAGE> The Company depends upon skilled employees, such as software and hardware engineers, quality assurance engineers, marketing and sales professionals, and persons in administrative and managerial positions. Demand for such employees in Northern California, where the Company's main offices are located, is high. To assure that the Company can adequately support its business, the Company undertakes a number of efforts to hire and retain qualified employees. If the Company cannot successfully hire and retain employees, its results of operations could be adversely affected. Fluctuations in Operating Results Operating results may fluctuate due to factors such as demand for the Company's products, success and timing of the new product introductions, price reductions by the Company and its competitors, delay, cancellation or rescheduling of orders, product performance, or availability of key components. Operating results may also fluctuate due to seasonal purchasing patterns of its OEM partners or the status of the Company's relationships with its OEM partners as well as to performance of third-party manufacturers or the status of the Company's relationships with its key suppliers. Moreover, 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, digital black-and-white copiers, and color laser printers will also effect operating results. 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. Sales and operating results therefore depend on the volume and timing of the backlog as well as bookings received. Significant portions 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. 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. 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. Risks Associated With The Company's Ownership of Real Property And Transition To New Facilities In late 1998 or early 1999, the Company anticipates moving into new headquarters on land in Foster City, California that the Company owns. If the Company cannot successfully manage the transition, disruption to the Company's business and delays in sales could arise, and results of operations may be adversely affected. International Operations and Currency Fluctuations Approximately 54.2% of the Company's product revenue for the first quarter of 1998 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. Given the significance of international sales to the Company, 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. Although the Company typically invoices in U.S. 14
<PAGE> dollars, these adverse impacts could occur through lower unit demand and the necessity to lower average selling prices to compensate for the reduced strength of local currencies 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. There can be no assurance that any patents that may be issued to the Company, or which the Company may license from third parties, or that any other proprietary rights of the Company will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide proprietary protection to the Company. 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. Reliance on Adobe Systems, Incorporated Under the Company's license agreements with Adobe, a separate license must be granted from Adobe to the Company 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 products that it offers. However, there can be no assurance that Adobe will continue to grant future licenses to Adobe PostScript(TM) software on reasonable terms, in a timely manner, or at all, or that Adobe will continue to give quality assurance approvals. Such actions by Adobe may adversely affect the Company's results of operations. If Adobe does not grant the Company such licenses or approvals, if the Adobe license agreements are terminated, or if the Company's relationship with Adobe is otherwise impaired, the Company's operations may be adversely affected. 15
ART II OTHER INFORMATION
ITEMS 1 - 5. There is no applicable information to report under Part II, Items 1 - 5 during the period covered by this report.
ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27.1 Financial Data Schedule...............Page 18 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the three-month period ended March 31, 1998. 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELECTRONICS FOR IMAGING, INC. Date: May 14, 1998 By /s/ Dan Avida Dan Avida President and Chief Executive Officer and Acting Principal Financial Officer By /s/ Eric Saltzman Eric Saltzman Vice President, Strategic Relations and Duly Authorized Officer 17
<TABLE> <S> <C> <ARTICLE> 5 <LEGEND> This schedule contains summary financial information extracted from the condensed balance sheet, condensed statement of operations and condensed statement of cash flows included in the Company's form 10-Q for the three month period ended march 31, 1998 and is qualified in its entirety by reference to such financial statements and notes thereto. </LEGEND> <S> <C> <PERIOD-TYPE> 3-MOS <FISCAL-YEAR-END> DEC-31-1998 <PERIOD-START> JAN-01-1998 <PERIOD-END> MAR-31-1998 <CASH> 58,988 <SECURITIES> 185,257 <RECEIVABLES> 38,657 <ALLOWANCES> 588 <INVENTORY> 23,305 <CURRENT-ASSETS> 343,582 <PP&E> 72,932 <DEPRECIATION> 25,038 <TOTAL-ASSETS> 400,719 <CURRENT-LIABILITIES> 53,327 <BONDS> 4,064 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 526 <OTHER-SE> 342,802 <TOTAL-LIABILITY-AND-EQUITY> 400,719 <SALES> 82,523 <TOTAL-REVENUES> 82,523 <CGS> 45,356 <TOTAL-COSTS> 45,356 <OTHER-EXPENSES> 32,867 <LOSS-PROVISION> 44 <INTEREST-EXPENSE> 2,461 <INCOME-PRETAX> 6,521 <INCOME-TAX> 2,348 <INCOME-CONTINUING> 4,173 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 4,173 <EPS-PRIMARY> .08 <EPS-DILUTED> .08 </TABLE>