ELECTRONICS FOR IMAGING INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

[ ] 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 (State or other jurisdiction of incorporation or organization)		94-3086355 (I.R.S. Employer Identification No.)

303 Velocity Way, Foster City, CA 94404
(Address of principal executive offices, including zip code)

(650) 357-3500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

The number of shares of Common Stock outstanding as of October 31, 2002 was 54,221,757.

An Exhibit Index can be found on Page 33.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
	ITEM 1. Condensed Consolidated Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statements of Cash Flows
		Notes to unaudited Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX

ELECTRONICS FOR IMAGING, INC.

INDEX


		Page No.

PART I — Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets September 30, 2002 and December 31, 2001	3
	Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29
PART II — Other Information
Item 1.	Legal Proceedings	30
Item 2.	Changes in Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits and Reports on Form 8-K	30
Signatures		31
Certifications		31

PART I FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

Electronics for Imaging, Inc.
Consolidated Balance Sheets


		September 30,			December 31,
		2002			2001
(In thousands, except per share amounts)
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	183,210		$	190,816
Short-term investments			286,060			260,391
Accounts receivable, net			58,885			53,966
Inventories			5,026			9,297
Other current assets			19,022			19,639

Total current assets			552,203			534,109

Property and equipment, net			55,417			55,046
Restricted investments			43,080			40,135
Other assets			73,153			73,697

	Total assets	$	723,853		$	702,987

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	23,558		$	21,616
Accrued and other liabilities			45,222			46,036
Income taxes payable			31,639			28,437

Total current liabilities			100,419			96,089

Long-term obligations			307			331
Commitments and contingencies (Note 8)
Stockholder’s equity:
Preferred stock, $0.01 par value, 5,000 shares authorized; none issued and outstanding			—			—
Common stock, $0.01 par value; 150,000 authorized; 54,407 and 53,755 shares issued and outstanding, respectively			589			583
Additional paid-in capital			269,524			261,703
Treasury stock, at cost, 4,478 shares			(99,959	)		(99,959	)
Accumulated other comprehensive income			1,852			1,219
Retained earnings			451,121			443,021

Total stockholders’ equity			623,127			606,567

	Total liabilities and stockholders’ equity	$	723,853		$	702,987

See accompanying notes to consolidated financial statements.

Electronics for Imaging, Inc.
Consolidated Statements of Income
(unaudited)


		Three Months				Nine Months
		Ended September 30,				Ended September 30,

(In thousands, except per share amounts)		2002		2001		2002		2001

Revenue		$	92,652	$	127,024	$	259,476	$	412,054
Cost of revenue			43,444		68,049		126,871		226,108

Gross profit			49,208		58,975		132,605		185,946

Operating expenses:
	Research and development		22,998		23,278		68,422		75,017
	Sales and marketing		12,833		14,024		37,583		44,880
	General and administrative		5,424		6,198		16,358		19,284
	Amortization of goodwill and other identified intangibles		1,144		3,053		3,246		9,186

	Total operating expenses		42,399		46,553		125,609		148,367

Income from operations			6,809		12,422		6,996		37,579

Other income, net			2,760		4,788		8,984		13,058
Non-recurring charges			4,409		—		4,409		—

Income before income taxes			5,160		17,210		11,571		50,637
Provision for income taxes			1,548		6,110		3,471		17,976

Net income		$	3,612	$	11,100	$	8,100	$	32,661

Net income per basic common share		$	0.07	$	0.21	$	0.15	$	0.61

Shares used in per-share calculation			54,308		53,675		54,173		53,362

Net income per diluted common share		$	0.07	$	0.20	$	0.15	$	0.60

Shares used in per-share calculation			54,659		54,694		54,794		54,613

See accompanying notes to consolidated financial statements.

Electronics for Imaging, Inc.
Consolidated Statements of Cash Flows
(unaudited)


		Nine Months
		Ended September 30,

(In thousands)		2002			2001

Cash flows from operating activities:
Net income		$	8,100		$	32,661
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization		11,270			20,895
	Bad debt reserve		(124	)		(540	)
	Deferred income tax		376			1,200
Changes in operating assets and liabilities:
	Accounts receivable		(4,650	)		5,717
	Inventories		4,271			12,497
	Receivable from subcontract manufacturers		(1,140	)		12,647
	Other current assets		1,431			1,991
	Accounts payable and accrued liabilities		(837	)		(9,229	)
	Income taxes payable		3,991			24,804

Net cash provided by operating activities			22,688			102,643

Cash flows from investing activities:
Purchases and sales/maturities of short-term investments, net			(25,051	)		(16,813	)
Purchases of restricted investments, net			(2,945	)		(22,600	)
Investment in property and equipment, net			(7,874	)		(13,731	)
Acquisition of businesses			(1,870	)		—
Change in other assets			433			(159	)

Net cash used for investing activities			(37,307	)		(53,303	)

Cash flows from financing activities:
Repayment of long-term obligation			(24	)		(159	)
Issuance of common stock			7,037			16,869

Net cash provided by financing activities			7,013			16,710

	(Decrease) Increase in cash and cash equivalents		(7,606	)		66,050
Cash and cash equivalents at beginning of period			190,816			102,804

Cash and cash equivalents at end of period		$	183,210		$	168,854

See accompanying notes to consolidated financial statements.

Electronics for Imaging, Inc.
Notes to unaudited Consolidated Financial Statements

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements of Electronics for Imaging, Inc., a Delaware corporation (the “Company”), as of and for the interim period ended September 30, 2002, have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2001, contained in the Company’s Annual Report to Stockholders. In the opinion of management, the unaudited interim condensed consolidated financial statements of the Company include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company and the results of its operations and cash flows, in accordance with generally accepted accounting principles. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements referred to above and the notes thereto. Certain prior year balances have been reclassified to conform with the current year presentation.

The preparation of the interim condensed consolidated financial statements in conformity with generally accepted accounting principles for such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

The interim results of the Company are subject to fluctuation. As a result, the Company believes the results of operations for the interim periods ended September 30, 2002 are not necessarily indicative of the results to be expected for any other interim period or the full year.

2. Recent Accounting Pronouncements

SFAS 142

In July 2001, the FASB issued SFAS No. 142 , Goodwill and Other Intangible Assets, which is effective for fiscal years beginning after March 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, upon adoption, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, and reclassification of certain intangibles out of previously reported goodwill. Upon adoption of the standard on January 1, 2002, we ceased amortizing goodwill and reclassified net intangible assets and deferred tax liabilities relating to acquired workforce totaling $0.9 million to goodwill. Purchased technology and other intangible assets are being amortized over their estimated useful lives of 4 to 7 years using the straight-line method. No changes were made to the useful lives of amortizable intangible assets in connection with the adoption of SFAS No. 142.

The provisions of SFAS No. 142 also require periodic testing of goodwill for impairment. A transitional impairment test must be completed within six months of adoption of SFAS No. 142, with any impairments treated as a cumulative effect of change in accounting principle. The Company completed the transitional impairment test, which did not indicate any impairment during June 2002.

A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill and workforce amortization, net of the related income tax effect, follows:


	Three months ended					Nine months ended
	September 30,					September 30,

(in thousands, except per share amounts, unaudited)	2002		2001			2002		2001

Reported net income	$	3,612	$	11,100		$	8,100	$	32,661
Goodwill amortization		—		1,903			—		5,708
Workforce amortization, reclassified to goodwill		—		137			—		412
Tax impact		—		(653	)		—		(1,958	)

Adjusted net income	$	3,612	$	12,487		$	8,100	$	36,823


	Three months ended					Nine months ended
	September 30,					September 30,

(in thousands, except per share amounts, unaudited)	2002		2001			2002		2001

Basic earnings per share:
Reported earnings per share — basic	$	0.07	$	0.21		$	0.15	$	0.61
Goodwill amortization		—		0.03			—		0.11
Workforce amortization, reclassified to goodwill		—		—			—		0.01
Tax impact		—		(0.01	)		—		(0.04	)

Adjusted earnings per share — basic	$	0.07	$	0.23		$	0.15	$	0.69

Diluted earnings per share:
Reported earnings per share — diluted	$	0.07	$	0.20		$	0.15	$	0.60
Goodwill amortization		—		0.04			—		0.10
Workforce amortization, reclassified to goodwill		—		—			—		0.01
Tax impact		—		(0.01	)		—		(0.04	)

Adjusted earnings per share — diluted	$	0.07	$	0.23		$	0.15	$	0.67

SFAS 146

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities that are initiated after December 31, 2002. This Statement applies to costs associated with an exit activity, including restructuring, that does not involve an entity newly acquired in a business combination, or with the disposal of long-lived assets. The Company does not expect that adoption of SFAS 146 will have a material effect upon our consolidated financial statements.

3. Acquisitions and Mergers

In May 2002, the Company acquired Unimobile, Inc., a wireless messaging software company for approximately $1.7 million in cash and capitalized transaction-related costs. The acquisition was accounted for as a purchase business combination and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the date of acquisition. The Company may be required to pay certain additional amounts of up to $1.0 million in cash contingent upon Unimobile achieving certain revenue goals within 18 months of the acquisition. In accordance with SFAS No. 141, the contingent portion of the purchase price has been recognized as a liability in the amount equal to the difference between the net acquired assets and the purchase price. The Consolidated Financial Statements include the operating results from the date of acquisition. Pro forma results of operations have not been presented because the effects of this acquisition were not material.

4. Earnings Per Share

The following table represents unaudited disclosures of basic and diluted earnings per share for the periods presented below:

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except per share amounts, unaudited)

2002

2001

2002

2001

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