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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, 1999 Commission File Number: 0-18805
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Velocity Way, Foster City, CA 94404
(Address of principal executive offices) (Zip Code)
(650) 357-3500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 11, 2000.
Common Stock, $.01 par value: $1,370,167,760 **
The number of shares outstanding of each of the registrant's classes of
common stock as of March 11, 2000.
Common Stock, $.01 par value: 53,696,238
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 11, 2000
are incorporated by reference into Part III hereof.
** Based upon the last trade price of the Common Stock reported on the NASDAQ
National Market on March 11, 2000. Excludes approximately 16,974,824 shares of
common stock held by Directors, Officer and holders of 5% or more of the
Registrant's outstanding Common Stock on December 31, 1999. Exclusion of shares
held by any person should not be construed to indicate that such person
possesses the power, direct or indirect, to direct or cause the direction of the
management or policies of the Registrant, or that such person is controlled by
or under common control with the Registrant.
PART I
This Annual Report on Form 10-K includes certain registered trademarks and
trademarks of Electronics for Imaging, Inc. ("EFI or the Company") and others.
EFI, the EFI logo, Fiery, the Fiery logo, Fiery Driven, the Fiery Driven logo,
ColorWise, RIP-While-Print, PowerPage, the PowerPage logo, PowerBand,
PowerSmooth, PSClone, PSView, EDOX and Solitaire are registered trademarks of
Electronics for Imaging, Inc. with the U.S. Patent and Trademark Office, and
certain other foreign jurisdictions. Fiery Prints, Fiery ZX, Fiery LX, Fiery SI,
Fiery XJ, Fiery XJe, Fiery XJ-W, BookletMaker, Fiery Downloader, Fiery Scan,
Fiery Spooler, Fiery FreeForm, Fiery Link, Fiery Driver, PowerWise Architecture,
RIPChips, WebTools, WebSpooler, WebInstaller, WebStatus, Command Workstation,
Continuous Print, DocBuilder, EFICOLOR, EFICOLOR Works, FreeForm, Memory
Multiplier, NetWise, STARR Compression, Mousitometer, Spot-One, Check Mate, EDOX
Profile Manager, RIP Ahead, Instant Reprint, Document Recovery, Sapphire, Opal
and eBeam are trademarks of Electronics for Imaging, Inc. All other terms and
product names may be registered trademarks or trademarks of their respective
owners, and are hereby acknowledged.
Certain of the information contained in this Annual Report on Form 10-K,
including without limitation, statements made under this Part I, Item 1
"Business" and Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk" which are not historical facts, may
include "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. When used herein, the words
"anticipate," "believe," "estimate," "expect," "intend," "will" and similar
expressions, as they relate to the Company or its management, are intended to
identify such statements as "forward-looking statements." Such statements
reflect the current views of the Company and its management with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Important factors that
could cause the Company's actual results to differ materially from those
included in the forward-looking statements made herein include, without
limitation, those factors discussed in Item 1 "Business -Competition," in "Item
7 Management's Discussion and Analysis of Financial Condition and Results of
Operations -Factors That Could Adversely Affect Performance" and elsewhere in
this Annual Report on Form 10-K and in the Company's other filings with the
Securities and Exchange Commission, including the Company's most recent
Quarterly Report on Form 10-Q. The Company assumes no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
Item 1: Business.
General
Electronics for Imaging, Inc., a Delaware corporation (the "Company" or "EFI")
was founded in 1989 by Efraim Arazi. EFI designs and markets products that
support color and black-and-white printing on a variety of peripheral devices.
Its Fiery(R) products incorporate hardware and software technologies that
transform digital copiers and printers from many leading copier manufacturers
into fast, high-quality networked printers. The Company's Fiery products include
stand-alone servers, which are connected to digital copiers and other peripheral
devices, and Fiery controllers, which are embedded in digital copiers and
desktop color laser printers. The Company sells its products primarily to
original equipment manufacturers in North America, Europe and Japan.
The Company was founded to develop innovative solutions to enable color desktop
publishing. In pursuit of this goal, the Company first developed the Fiery(R)
line of color servers ("Fiery Color Servers") to enable in-house,
short-production run color printing, together with application and system
software to facilitate color correction and device-independent color. Fiery
Color Servers are sophisticated, stand-alone computers that enable digital
copier machines to accept, process, and print digital images from personal
computers and computer networks. Historically, the Company primarily focused its
efforts on its stand-alone Fiery Color Servers that support printing on digital
color copiers and, until 1998, substantially all of its revenue resulted from
the development and sale of these stand-alone products. During 1998, the Company
expanded its focus to include several additional embedded solutions that support
printing on a broader range of devices, including digital black-and-white
copiers and desktop color laser and inkjet printers ("Fiery Controllers" and,
together with Fiery Color Servers, "Fiery Products"). In 1998, the Company also
developed stand-alone Fiery Color Servers for wide-format color inkjet printers
and restructured its sales model by entering into direct relationships with the
manufacturers of such wide-format printers rather than selling to sales
distributors.
In 1999, the Company continued to develop Fiery Products and new software
applications for existing and new generations of a variety of peripheral
devices. In 1999, the Company also expanded its line of digital color servers
through its acquisition of Management Graphics, Inc. ("MGI") and its EDOX(R)
line of digital color servers ("EDOX Color Servers"). In an effort to expand its
product lines and markets, the Company recently announced EFI Professional
Services in an effort to provide technical support, training and strategic
consulting to end users. See "-Growth and Expansion Strategies - Develop and
Expand Professional Services." Additionally, in 1999, the Company introduced its
first Internet appliance product, eBeamTM. See "-Growth and Expansion Strategies
- - Proliferate and Expand Product Lines."
2
The Electronics for Imaging Solution
The Company develops products with a wide range of price and performance levels
designed to make high-quality color printing in short-run productions easier and
more accessible to the broader market. The Company believes that consumers
generally prefer color as evidenced by the migration of photographs, motion
pictures and television from black-and-white to color. In the personal computer
field, EFI believes this preference is shown by the almost exclusive use of
color monitors with color oriented graphical user interfaces, application
software and Internet content. In each of these cases, once the enabling
technology developed sufficiently, consumer adoption of color quickly followed.
The Company believes that consumers prefer color in documents created through
desktop publishing. Until recently, however, the technology was not available to
do this in a high quality, quick and cost-effective manner due to the complexity
of accurate color reproduction. EFI's Fiery Color Servers permit users of
digital color copiers to transmit and convert digital data from a computer to a
color copier so that the color copier can print color documents easily, quickly
and cost-effectively. As a result, Fiery Color Servers transform digital color
copiers into fast, high-quality networked color printers.
The Company also believes that the black-and-white copier market is migrating
toward the development and use of digital black-and-white copiers. Thus, in
addition to Fiery Color Servers and EDOX Color Servers for digital color
copiers, the Company has leveraged its technology to develop and manufacture
other products that support both color and black-and-white printing. These
products include: (i) Fiery servers for digital black-and-white copiers; (ii)
Fiery Color Servers for wide-format inkjet printers; and (iii) embedded Fiery
Controllers for digital black-and-white copiers and desktop color laser
printers. See "-Products and Technology."
Growth and Expansion Strategies
The Company's overall objective is to continue its pattern of growth in sales
and profitability by introducing new generations of Fiery Products, new software
applications, and other new product lines. With respect to its current products,
the Company's primary goal is to provide a range of processing and printing
solutions that address broad sections of the color printing market and to
continue to leverage its technology to enable digital black-and-white printing
on additional peripheral devices including digital black-and-white copiers and
multi-function devices. The Company's strategy to accomplish these goals
consists of five key elements.
Proliferate and Expand Product Lines
The Company intends to continue to develop new Fiery Products that are scalable
and offer a broad range of features and performance when connected to or
integrated with digital color and black-and-white copiers, as well as desktop
color laser printers. Historically, the Company sold products that supported
digital color copiers. In 1996 the Company expanded its line of color servers to
drive a wide range of output devices including desktop color laser printers and
wide-format color inkjet printers with poster-size output. In 1997, the Company
further expanded the use of its technology, shipping its first products that
support black-and-white printing systems and copiers. In 1998, the Company
introduced its next generation of products based upon EFI's Fiery ZX and Fiery
X2 platforms. In 1999, the Company again introduced its next generation of
products based upon EFI's new Fiery Z4 and Fiery X4 platforms. These new
platforms include more advanced hardware and EFI's latest technology
innovations, including ColorWise(R) 2.0, NetWiseTM 2.0, DocBuilderPro and
PowerWise Architecture which provide for advances in color performance,
networking capabilities and workflow productivity. By utilizing the advantages
of these new platforms, the Company intends to continue to develop new Fiery
Products. The Company also intends to continue to develop new software
applications that advance the performance and usability of its Fiery servers and
embedded controllers. The Company is currently developing a new line of software
designed to maximize workflow efficiencies which includes VelocityBalanceTM,
VelocitySplitTM and VelocityDesignTM. These new software applications are the
first of many Velocity software offerings from the Company.
On August 31, 1999, the Company acquired MGI in a stock-for-stock merger, valued
at approximately $30.1 million. MGI was a Minneapolis, Minnesota-based
corporation that developed and manufactured digital print on demand products and
other digital imaging products, including EDOX(R) Document Servers and
Solitaire(R), SapphireTM and OpalTM film recorders. The acquisition of MGI adds
to EFI's engineering talent and complements the Company's product strategy of
bringing high-performance, cost-effective digital printing technology to a wide
range of markets. EFI's Minnesota office will retain responsibility for MGI's
current product lines.
The Company also plans to expand its product line to include Internet appliance
products. In November, 1999, the Company introduced the first in a new family of
Internet appliance products, eBeamTM. eBeamTM converts any whiteboard into a
digital workspace, allowing users to capture meeting-notes and diagrams in real
time on their personal computers. Words and images can be viewed, edited and
shared across the world using a web browser. eBeamTM will be competing in a new
market for EFI: the market for office supplies and meeting-related services.
Currently, eBeamTM is being sold through resellers and distributers, as well as
directly to consumers via the Web and a toll-free number.
3
Develop and Expand Professional Services
The Company recently announced EFI Professional Services. While contract-based
technical support has been available from EFI, an expanded-services group has
been formed and is offering end users greater options for technical support,
training with both standardized and customized curriculums, and strategic
consulting. EFI strategic consultants are offering large organizations expertise
in network print architecture and support, printer management, data
visualization, and document management. EFI believes that offering professional
services will help to lower the total cost of networked corporate printing, lead
to greater productivity, and improve the overall quality and visual appeal of
documents. EFI believes that offering professional services will also help
accelerate the migration of color printing in the corporate marketplace.
Develop and Expand Relationships with Key Industry Participants
The Company has established relationships with such companies as Canon, Danka
Business Systems, ENCAD, Epson, Fuji-Xerox, Hewlett-Packard, Hitachi, Ikon
Office Solutions, Konica, Minolta, Oce, Ricoh, Sharp, Toshiba, and Xerox
(collectively, the "Strategic Partners"). EFI seeks to expand its relationships
with its Strategic Partners in pursuit of the goal of offering Fiery and EDOX
products for additional digital color and black-and-white devices produced by
its Strategic Partners. The Company is also seeking to establish relationships
with other digital copier and printer companies for the distribution of Fiery
and EDOX products with their copiers and printers.
Establish Enterprise Coherence
In its development of new products and platforms, EFI seeks to establish
coherence across its entire product line by designing products that provide a
consistent "look and feel" to the end-user. EFI believes enterprise coherence
should create higher productivity levels as a result of shortened learning
curves. Additionally, enterprise coherence should lower the total cost of
ownership by providing one source for sales, support and training. The Company
believes that this effort to achieve enterprise coherence will continue to
engender goodwill among its Strategic Partners and the end-users of its products
and assist in the development of new strategic relationships and markets for the
Company.
Leverage Color Expertise to Expand the Scope of Products and Markets
The Company has assembled an experienced team of technical personnel with
backgrounds in color reproduction, electronic pre-press, image processing 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
The Company is a leader in enabling networked printing solutions. EFI technology
allows copiers, printers and digital presses to be shared across work groups,
the enterprise and the Internet. The Company develops products with a wide range
of price and performance levels designed to make high-quality, short-run color
and black and white digital printing easier and more accessible to the broader
market. The Company has a model for almost every major digital printing
technology today, including:
|X| desktop color laser printers,
|X| high-end desktop ink jet printers,
|X| wide-format printers,
|X| mid-range color copiers,
|X| mid-range digital black and white copiers,
|X| production color copiers and
|X| high-speed digital presses.
Thus, the Company's products are attractive to a variety of end users including,
a multimedia author, advertising agency, print-for-pay business, graphic
designer, pre-press provider or small to large business. The Company currently
has two main product lines that support color and black-and-white printing: (i)
stand-alone servers which are connected to digital copiers and other peripheral
devices and (ii) controllers which are embedded in digital copiers and desktop
laser printers. All of EFI's products incorporate EFI's proprietary software and
hardware features.
4
EFI Technology
From its inception, EFI has invested heavily in research and development. EFI
has focused on developing technologies that could be implemented in a variety of
products. Examples of such technologies include Fiery DocBuilderTM, which
enables electronic collation, reverse order printing, job merging and editing,
and Fiery WebToolsTM which enables print job management from different computer
platforms via a JavaTM-enabled Web Browser. Fiery WebToolsTM also provides
remote access to the print queue so an administrator can obtain instant updates
on job status and error messages, allowing for a timely response to problems,
and provides job accounting and job security capabilities which are essential in
network printing environments. Other examples of EFI technologies include,
RIP-While-Print(R) which allows one page to be printed while subsequent pages
are simultaneously processed, and Continuous PrintTM which allows processed
pages to be stored in memory before printing, eliminating the need for the
copier or printer to cycle down between unique pages. In addition to such
software innovations, EFI custom designs its hardware to increase productivity.
For example, EFI's custom designed RipChipsTM, application specific integrated
circuit ("ASIC") chips, decrease overall print times by off-loading data
movement from the microprocessor. The Company continues to refine these printing
technologies.
In 1999, the Company continued its efforts to improve its products' performance,
features and ease of use. The Company developed and announced the new
PowerWiseTM architecture which combines the benefits of Fiery hardware, an
advanced Intel processor and a high-speed PCI bus to provide the throughput
required for maximum printing productivity. Software features developed by the
Company during 1999 include: (i) ColorWise(R)2.0, EFI's next-generation color
management system which simplifies color printing for beginners through features
like automatic Pantone-matching and the ability to process multiple files on the
same page while providing expert users with even greater color control and
accuracy; (ii) NetWiseTM 2.0, EFI's second generation networking architecture
which simplifies network installation, configuration and maintenance; (iii) the
next generation DocBuilder ProTM which provides users with all of the classic
DocBuilder ProTM capabilities but now at the pre-RIP stage; (iv) Fiery DriverTM
which is a unified printing interface that simplifies the printing process; (v)
Fiery LinkTM which provides users with information on print job status and
connected Fierys allowing users to monitor the status of any print job, its
position in the queue, as well as general information on the Fiery and paper and
toner levels from any workstation; and (vi) ECT compression, an improved and
more advanced compression scheme than EFI's previous STARRTM compression
technologies, which offers definite compression ratios and virtually lossless
image quality. Compression software decreases the amount of memory necessary to
store documents during processing and enables faster printing of documents.
Stand-Alone Servers
Fiery Color Servers and EDOX Color Servers permit users of digital color copiers
to transmit and convert digital data from a computer to a color copier so that
the color copier can print color documents easily, quickly and cost-effectively.
As a result, Fiery Color Servers and EDOX Color Servers transform digital color
copiers into fast, high-quality networked color printers. In addition to Fiery
Color Servers and EDOX Color Servers for digital color copiers, the Company has
leveraged its technology to develop and manufacture other products that support
both color and black-and-white printing. These products include Fiery servers
for digital black-and-white copiers and Fiery Color Servers for wide-format
inkjet printers. EDOX Color Servers also support wide-format inkjet printers.
Since the introduction of the first Fiery Color Server in 1991, the Company has
expanded its product line. In 1995, the Company introduced its third-generation
platform, the Fiery XJ. During 1996, the Company shifted the majority of its
product line to the XJ platform and later refined these products by
transitioning to a variation of the XJ platform known as the Fiery XJ+. During
1998, the Company introduced two new platforms, the Fiery ZX and the Fiery X2,
which included software features developed or further refined by the Company
during 1998, and began migrating its product line to these platforms. In 1999,
the Company again focused its development efforts on improvements to its
products' performance, features and ease of use and again introduced two new
server platforms, the Fiery Z4 and the Fiery X4. The Fiery Z4 and X4 product
lines incorporate several new technologies or enhancements from EFI including,
ColorWise(R)2.0, NetWiseTM 2.0, the PowerWiseTM architecture and the next
generation DocBuilder ProTM. The Fiery Z4 is approximately twice as fast as its
predecessor the Fiery ZX, is optimized for high-speed processing and
photographic-quality color and is designed for demanding graphic arts,
print-for-pay and advertising agency environments. The Fiery X4 is approximately
three times as fast as its predecessor the Fiery X2 and is designed for users in
a corporate environment. In 1999, the Company shipped stand-alone Fiery Color
Servers and EDOX Color Servers for use with color copiers, color inkjet printers
and wide-format color printers to be distributed by companies such as Canon,
Epson, Fuji-Xerox, Ikon Office Solutions, Minolta, Oce, Ricoh, Toshiba and
Xerox. In 1999, the Company also shipped Fiery servers for use with digital
black-and-white copiers to be distributed by Canon, ENCAD, Konica, Minolta, Oce
and Sharp.
Controllers
5
Unlike Fiery and EDOX servers which are sold as stand-alone products to be
connected to copiers, Fiery Controllers are embedded inside copiers and desktop
printers. Fiery Controllers allow users to print documents directly from their
computers to the digital copier. Embedded Fiery Controllers support both color
and black-and-white printing for digital black-and-white copiers and desktop
color laser printers. The Company seeks to have printing solutions that include
an embedded Fiery Controller marketed with the "Fiery Driven(R)" logo. The
Company believes that the Fiery name and trademark, including the trademark
"Fiery Driven(R)," are associated with substantial goodwill and recognition in
the marketplace. In 1999, the Company shipped Fiery Controllers embedded in
color and digital black-and-white copiers and desktop color printers to be
distributed by companies such as Canon, Fuji-Xerox, Hewlett Packard, Konica,
Minolta, Ricoh and Xerox.
Significant Relationships
The Company has established, and continues to try to build and expand
relationships with its Strategic Partners and other leading copier and printer
companies (collectively, the "OEMs"), in order to benefit from the OEMs'
products, distribution channels and marketing resources. These OEMs include
domestic and international manufacturers, distributors and sellers of digital
copiers (both black-and-white and color), wide-format printers and desktop color
printers. The Company works closely with the OEMs with the aim of developing
solutions that incorporate leading technology and which are optimally suited to
work in conjunction with such companies' products. OEMs that the Company sold
products to in 1999 include, among others, Canon, ENCAD, Epson, Fuji-Xerox,
Hewlett-Packard, Ikon Office Solutions, Konica, Minolta, Oce, Ricoh, Sharp,
Toshiba and Xerox. Together, sales to Canon, Ricoh and Xerox accounted for
approximately 68% of the Company's 1999 revenue, with sales to each of these
customers accounting for more than 10% of the Company's revenue.
In 1999, the Company announced a strategic relationship with Hewlett-Packard
pursuant to which the Company developed the new Fiery X2-CP color server for
Hewlett Packard's newest graphics large-format printers. Hewlett-Packard also
distributes Fiery Controllers designed for use with their wide-format color
inkjet. Also in 1999, the Company announced a strategic relationship with
Toshiba, pursuant to which Toshiba has the right to sell the Company's Fiery Z4
server and Fiery Controller in support of Toshiba's full-color digital
copier/printer.
The Company customarily enters into development and distribution agreements with
its OEM customers. These agreements can be terminated under a range of
circumstances, and often upon relatively short notice. The circumstances under
which an agreement can be terminated vary from agreement to agreement and there
can be no assurance that the Company's OEM customers will continue to purchase
products from the Company in the future, despite such agreements. The Company
recognizes the importance of, and works hard to maintain, its good relationships
with its customers. However, the Company's relationships with its customers can
be affected by a number of factors including, among others: competition from
other suppliers, competition from internal development efforts by the customers
themselves (including the OEMs), and changes in general economic, competitive or
market conditions (such as changes in demand for the Company's or the OEM's
products, or fluctuations in currency exchange rates). There can be no assurance
that the Company will continue to maintain or build the relationships it has
developed to date.
In addition to its development and sales relationships with the OEMs, to
increase the distribution and presence of Fiery Color Servers connected to both
color and black-and-white copiers and wide-format printing devices, the Company
has developed strategic relationships with well-known print-for-pay companies,
including Kinko's, AlphaGraphics, the CopyMax operations of office products
superstore OfficeMax, the American Speedy group of franchised printing centers
(including Allegra Print and Imaging, American Speedy, Speedy Printer, Zippy
Print and Quik Print) and the SAMPA Corporation, franchiser of Signal Graphics
Printing Centers. In 1999, several of these print-for-pay companies, including,
American Speedy, OfficeMax and SAMPA Corporation, entered into worldwide
strategic alliances with the Company whereby they agreed to continue
standardization efforts on EFI's Fiery(R) Color Servers with respect to their
printing services.
The Company also has a continuing relationship pursuant to a license agreement
with Adobe and licenses PostScript(R) software from Adobe for use in many Fiery
Products. This relationship is important because each Fiery Product requires
page description language software in order to operate. Adobe's PostScript(R)
software is widely used to manage the geometry, shape and typography of hard
copy documents and Adobe is a recognized leader in providing page description
software. Pursuant to its October 1997 acquisition of the former Pipeline
Associates, Inc. and Pipeline Asia, Inc. (collectively, "Pipeline"), the Company
acquired software development expertise and certain intellectual property
associated with Pipeline's specialization in PostScript(R), HTML and PCL
interpreter technologies.
Distribution and Marketing
The Company's primary distribution method for its Fiery servers has been to sell
the Fiery servers to its OEMs. The Company's
6
OEMs in turn sell these products to distributors and end-users for use with the
OEMs' copiers or printers as part of an integrated printing system. For Fiery
Controllers, the Company's primary distribution method has been to sell the
products to the OEMs that embed the products into their copiers and printers.
The Company's primary distribution method for its EDOX servers has been to sell
the EDOX servers directly to its distributors. There can be no assurance that
the risks of distributing the Company's products primarily through its OEM
customers will not negatively impact the Company in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That Could Adversely Affect Performance - Reliance on OEM
Resellers; Risks Associated With Significant OEM Group Concentration".
The Company promotes all of its products through public relations, direct mail,
advertising, promotional material, trade shows and ongoing customer
communication programs.
Research and Development
Research and development costs for 1999, 1998, and 1997 were $75.0 million,
$60.2 million, and $42.9 million, respectively. As of December 31, 1999, 386 of
the Company's 758 full-time employees were involved in research and development.
The Company believes that development of new products and enhancement of
existing products are essential to its continued success, and management intends
to continue to devote substantial resources to research and new product
development. The Company expects to make significant expenditures to support its
research and development programs for the foreseeable future.
The Company is developing products to support additional color and
black-and-white printing devices including desktop printers, high-end color
copiers, digital black-and-white copiers and multi-function devices. This
ongoing development work includes a multiprocessor architecture for high-end
systems and lower-cost designs for desktop color laser printers. The Company is
also developing new software applications designed to maximize workflow
efficiencies. This includes VelocityBalanceTM, VelocitySplitTM and
VelocityDesignTM.
The Company is also developing Internet appliance products. See "-Growth and
Expansion Strategies - Proliferate and Expand Product Lines". Substantial
additional work will be required to complete the development of these projects.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That Could Adversely Affect Performance - Product
Transitions".
Manufacturing
The Company utilizes subcontractors to manufacture its products. These
subcontractors work closely with the Company to ensure low costs and high
quality in the manufacture of the Company's products. Subcontractors purchase
components needed for the Company's products from third parties. The Company is
totally reliant on the ability of its subcontractors to produce products sold by
the Company, and although the Company supervises its subcontractors, there can
be no assurance that such subcontractors will continue to perform for the
Company as well as they have in the past. There can also be no assurance that
difficulties experienced by the Company's subcontractors (such as interruptions
in a subcontractor's ability to make or ship the Company's products or quality
assurance problems) would not adversely affect the Company's operations.
Certain components necessary for the manufacture of the Company's products
including ASICs and certain other semiconductor components, are obtained from a
sole supplier or a limited group of suppliers. The purchase of certain of these
key components may involve significant lead times. Accordingly, in the event of
interruptions in the supply of these key components or unanticipated increases
in demand for the Company's products, the Company could be unable to manufacture
certain of its products in a quantity sufficient to meet customer demand. There
can be no assurance that such supply or manufacturing problems would not
adversely affect the Company's results of operations or financial condition.
Human Resources
As of December 31, 1999, the Company employed 758 employees. Of the 758 total
employees, approximately 213 were in sales and marketing, 91 were in management
and administration, 68 were in manufacturing, and 386 were in research and
development. Of the total number of employees, the Company had approximately 662
employees located in Canadian and U.S. offices, and 96 employees located in
international offices including employees based in The United Kingdom, The
Netherlands, Germany, Japan, France, Italy, Finland, Spain, Australia,
Singapore, Brazil, Sweden and Hong Kong. The Company's employees are not
represented by any collective bargaining organization and the Company has never
experienced a work stoppage.
7
Competition
Competition in the Company's markets is intense and involves rapidly changing
technologies and frequent new product introductions. To maintain and improve its
competitive position, the Company must continue to develop and introduce, on a
timely and cost-effective basis, new products and features that keep pace with
the evolving needs of its customers. The principal competitive factors affecting
the markets for the Company's Fiery and EDOX products include, among others,
customer service and support, product reputation, quality, performance, price
and product features such as functionality, scalability, ability to interface
with OEM products and ease of use. The Company believes it has generally
competed effectively in the past against product offerings of its competitors on
the basis of such factors. However, there can be no assurance that the Company
will continue to be able to compete effectively in the future based on these or
any other competitive factors.
The Company competes directly with other independent manufacturers of color
servers, independent manufacturers of embedded solutions, copier manufacturers,
printer manufacturers and others. The Company also faces competition from
wide-format printer manufacturers that develop their own controllers and other
companies that develop controllers for wide-format printers. The Company also
faces competition from copier and printer manufacturers that offer internally
developed server products or that incorporate internally developed embedded
solutions or server features into their copiers and printers, thereby
eliminating the need for the Company's products and limiting future
opportunities for the Company. In addition, the Company faces competition from
manufacturers of desktop color laser printers which do not utilize a controller
(relying instead on host based processing of data) and which offer increasing
speed and color capability. The Company believes that it competes effectively
due to, among other things, its efforts to continually advance its technology,
name recognition, sizable installed base, number of products supported and
price. The Company expects that competition in its markets will increase due to,
among other factors, market demand for higher performance products at lower
prices, rapidly changing technology and product offerings from competitors and
customers. There can be no assurance that the Company will be able to continue
to compete effectively against other companies' product offerings, and any
failure to do so would have a material adverse effect upon the Company's
business, operating results and financial condition.
Intellectual Property Rights
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its intellectual property rights, all of which
afford only limited protection. As of December 31, 1999, the Company had 39
issued U.S. patents, 60 pending U.S. patent applications and various foreign
counterparts. There can be no assurance that patents will issue from these
pending applications or from any future applications or that, if issued, any
claims allowed will be sufficiently broad to protect the Company's technology.
The Company's issued patents expire between May 4, 2002 and January 19, 2019.
Failure of any patents to protect the Company's technology may make it easier
for the Company's competitors to offer equivalent or superior technology. In
addition, third parties may independently develop similar technology without
breach of the Company's trade secrets or other proprietary rights. Any failure
by the Company to take all necessary steps to protect its trade secrets or other
intellectual property rights may have a material adverse effect on the Company's
ability to compete in its markets.
The Company has registered certain trademarks, which include its EFI(R),
Fiery(R), Fiery and Design(R), Fiery Driven(R), Fiery Driven and Design(R),
ColorWise(R) and RIP-While-Print(R) trademarks, and has applied for registration
of certain additional trademarks. The Company will continue to evaluate the
registration of additional trademarks as appropriate. Any failure by the Company
to properly register or maintain its trademarks or to otherwise take all
necessary steps to protect its trademarks may diminish the value associated with
the Company's trademarks. The Company's products include software sold pursuant
to "shrink wrap" licenses that are not signed by the end user and, therefore,
may be unenforceable under the laws of certain jurisdictions. In addition, the
laws of some foreign countries, including several in which the Company operates
or sells its products, do not protect proprietary rights to as great an extent
as do the laws of the United States.
From time to time, litigation may be necessary to defend and enforce the
Company's proprietary rights. Such litigation, whether or not concluded
successfully for the Company, could involve significant expense and the
diversion of management's attention and other Company resources.
Risk Factors
In addition to the above information, a discussion of factors that may adversely
affect the Company's future performance and financial results can be found in
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Financial Information About Foreign and Domestic Operations and Export Sales
8
See Note 10 of the Company's Notes to Consolidated Financial Statements. See
also Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations -Factors That Could Adversely Affect Performance -We face
risks from our international operations and from currency fluctuations."
Item 2: Properties
The Company's principal offices are located at 303 Velocity Way, Foster City,
California. These offices are situated on approximately 35 acres of land which
the Company owns. In 1997, the Company entered into an agreement for a building
to be constructed on the Foster City property. Construction of this facility was
completed and an operating lease commenced in July, 1999. This facility, which
includes approximately 295,000 square feet of space, is used as a corporate
headquarters for the Company. The Company subleases its former facilities
located in San Mateo and Foster City, California. In 1999, the Company entered
into an agreement to lease additional facilities, for up to 543,000 square feet
of space, to be constructed on the Foster City property. Two parcels of land
remain undeveloped for future use on the Foster City property. Employees
formerly with Pipeline Associates, Inc., acquired by the Company in 1997, are
based in an office in Parsippany, New Jersey. Employees formerly with MGI are
based in an office in Minneapolis, Minnesota. The Company also leases a number
of domestic and international sales offices.
The Company believes that its facilities, in general, are adequate for its
present and currently foreseeable future needs.
Item 3: Legal Proceedings.
On December 15, 1997, a shareholder class action lawsuit, entitled Steele, et
al. v. Electronics for Imaging, Inc., et al., No. CV 403099, was filed against
the Company and certain of its officers and directors in the California Superior
Court, San Mateo County (the "San Mateo Superior Court"). Five virtually
identical class action complaints were subsequently filed in the San Mateo
Superior Court. On December 31, 1997, a putative shareholder class action
entitled Smith v. Electronics for Imaging, Inc., et al., No. C97-4739 was filed
against the Company and certain of its officers and directors in the United
States District Court for the Northern District of California. The state court
class actions allege that the Company made false and misleading statements
concerning its business during a putative class period of April 10, 1997 through
December 11, 1997 and allege violations of California Corporations Code Sections
25400 and 25500 and Civil Code Sections 1709 and 1710. The federal court class
action complaint makes the same factual allegations, but alleges violations of
certain United States federal securities laws. The complaints do not specify the
damages sought. The Company believes that these lawsuits are without merit and
intends to contest them vigorously, but there can be no assurance that if
damages are ultimately awarded against the Company, the litigation will not
adversely affect the Company's results of operations.
In addition, the Company is involved from time to time in litigation relating to
claims arising in the normal course of its business. The Company believes that
the ultimate resolution of such claims will not materially affect the Company's
business or financial condition. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That Could
Adversely Affect Performance - Infringement and Potential Litigation."
Item 4: Submission of Matters to a Vote of Security Holders.
No matters were submitted to the Company's stockholders for a vote during the
fourth quarter of 1999.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock was first traded on the Nasdaq National Market under
the symbol EFII on October 2, 1992. The table below lists the high and low
closing sales price during each quarter the stock was traded in 1999 and 1998.
1998 1999
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- -------------------------------------------------------------------------------------------------------------------------
High $28.00 $25.19 $22.38 $40.00 $41.56 $54.75 $62.69 $58.88
Low 15.66 18.69 13.75 15.63 32.75 41.13 51.41 36.19
- -------------------------------------------------------------------------------------------------------------------------
9
As of February 28, 2000, there were approximately 348 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.
10
Item 6: Selected Financial Data.
The following tables summarize selected consolidated financial data as of, and
for the five years ended December 31, 1999. This information should be read in
conjunction with the audited consolidated financial statements and related notes
thereto. All periods presented have been restated to include the financial
results of the company formerly known as Management Graphics Inc. that merged
with Electronics for Imaging, Inc. on August 31, 1999 in a pooling of interests
transaction, as if the acquired entity was a wholly-owned subsidiary of
Electronics for Imaging, Inc. since inception.
As of and for the years ended December 31,
(In thousands, except per share amounts) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Operations
Revenue $570,752 $446,999 $373,404 $316,458 $208,934
Cost of revenue 290,636 249,179 171,138 155,171 105,415
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 280,116 197,820 202,266 161,287 103,519
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses
Research and development 74,971 60,150 42,868 25,388 15,380
Sales and marketing 59,373 60,615 46,776 34,275 26,149
General and administrative 18,403 16,637 13,578 11,142 7,937
In-process research and development * -- -- 9,400 -- --
Merger related expenses ** 1,422 -- -- -- --
------- ------- ------- ----- ------
Total operating expenses 154,169 137,402 112,622 70,805 49,466
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations 125,947 60,418 89,644 90,482 54,053
- -----------------------------------------------------------------------------------------------------------------------------
Other income, net 16,250 9,859 10,309 7,426 5,542
------ ----- ------ ----- -----
Income before income taxes 142,197 70,277 99,953 97,908 59,595
Provision for income taxes (46,914) (22,456) (35,944) (35,211) (21,340)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $95,283 $47,821 $64,009 $62,697 $38,255
======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------
Net income per basic common share *** $1.74 $0.89 $1.21 $1.23 $0.77
Net income per diluted common share *** $1.67 $0.87 $1.13 $1.13 $0.71
Shares used in computing net income
per basic common share *** 54,853 53,507 52,831 51,144 49,681
Shares used in computing net income per
diluted common share *** 56,963 54,972 56,713 55,338 53,581
- -----------------------------------------------------------------------------------------------------------------------------
Financial Position
Cash and short-term investments $470,328 $328,732 $246,764 $215,781 $146,345
Working capital 487,591 355,361 293,972 245,245 164,474
Long term liabilities, less current portion 3,467 4,142 4,267 398 448
Total assets 656,075 484,191 395,949 310,058 205,398
Stockholders' equity $551,187 $408,680 $346,727 $258,105 $172,162
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and Benchmarks
Current ratio 5.8 6.0 7.5 5.8 6.0
Inventory turns 20.5 11.6 8.3 11.5 8.5
Full-time employees 758 660 614 456 322
- -----------------------------------------------------------------------------------------------------------------------------
* Consists solely of a charge taken in connection with the acquisition of Pipeline Associates, Inc. and
Pipeline Asia, Inc. in October 1997.
** See Item 7: Management's Discussion and Analysis of Financial Condition and Results: - Results of Operations
- Operating expenses - Merger related expenses.
*** See Note 1 of Notes to Consolidated Financial Statements.
11
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and related notes thereto included in
this Annual Report on Form 10K. All periods presented have been restated to
include the financial results of the company formerly known as Management
Graphics Inc. that merged with Electronics for Imaging, Inc. on August 31, 1999
in a pooling of interests transaction as if the acquired entity was a
wholly-owned subsidiary of Electronics for Imaging, Inc. since inception.
All assumptions, anticipations, expectations and forecasts contained herein are
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed here. For a
discussion of the factors that could impact the Company's results, readers are
referred to the section below entitled " - Factors that Could Adversely Affect
Performance. "
Results of Operations
The following tables set forth items in the Company's consolidated statements of
income as a percentage of total revenue for 1999, 1998 and 1997, and the
year-to-year percentage change from 1999 over 1998 and from 1998 over 1997,
respectively. These operating results are not necessarily indicative of results
for any future period.
Years ended December 31, % change
1999 1998
over over
1999 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Revenue 100 % 100 % 100 % 28 % 20 %
Cost of revenue 51 % 56 % 46 % 17 % 46 %
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 49 % 44 % 54 % 42 % (2)%
- ---------------------------------------------------------------------------------------------------------------------------
Research and development 13 % 13 % 11 % 25 % 40 %
Sales and marketing 11 % 13 % 12 % (2)% 30 %
General and administrative 3 % 4 % 4 % 11 % 23 %
In-process research and development -- % -- % 3 % -- % (100)%
Merger related expenses -- % -- % -- % -- % -- %
Operating expenses 27 % 30 % 30 % 12 % 22 %
- ---------------------------------------------------------------------------------------------------------------------------
Income from operations 22 % 14 % 24 % 108 % (33)%
- ---------------------------------------------------------------------------------------------------------------------------
Other income, net 3 % 2 % 3 % 65 % (4)%
Income before income taxes 25 % 16 % 27 % 102 % (30)%
Provision for income taxes 8 % 5 % 10 % 109 % (38)%
- ---------------------------------------------------------------------------------------------------------------------------
Net income 17 % 11 % 17 % 99 % (25)%
Revenue
Revenue increased to $570.8 million in 1999, compared to $447.0 million in 1998
and $373.4 million in 1997, which yielded a 28% increase in 1999 as compared to
1998 and a 20% increase in 1998 as compared to 1997. The corresponding unit
volume increased by 75% in 1999 over 1998 and by 164% in 1998 over 1997. The
increase in revenue in 1999 from 1998 and in 1998 from 1997 was primarily due to
significant increases in unit volumes, positive market acceptance of new product
introductions and the impact of new customers, partially offset by price
reductions on older product lines late in the year following new product
introductions and a decline in average selling prices due to changes in product
mix.
12
The Company's revenue is principally derived from three major categories. The
first category was made up of stand-alone servers which connect digital color
copiers with computer networks. This category includes the Fiery X2, X4, ZX and
Z4 products and accounted for a majority of the Company's revenue prior to 1998.
The second category consisted of embedded desktop controllers, bundled color
solutions and chipsets primarily for the office market. The third category
consisted of controllers for digital black and white products.
The following is a break-down of categories by revenue, both in terms of
absolute dollars and as a percentage (%) of total revenue. Also shown is volume
as a percentage (%) of total units shipped.
% change
1999 1998
Revenue 1999 1998 1997 over over
(in thousands) Revenue Revenue Revenue 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers $244,028 43% $291,785 66% $293,708 79% (16)% (1)%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 149,899 26% 90,133 20% 34,133 9% 66% 164%
Controllers for Digital
Black and White Solutions 121,071 21% 19,196 4% -- -- 531% --
Spares, Licensing
& Other misc. sources 55,754 10% 45,885 10% 45,563 12% 22% 1%
- ---------------------------------------------------------------------------------------------------------------------------
Total Revenue $570,752 100% $446,999 100% $373,404 100% 28% 20%
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
Volume Volume Volume Volume
- ---------------------------------------------------------------------------------------------------------------------------
Stand-alone Servers Connecting
to Digital Color Copiers 14% 27% 73%
Embedded Desktop Controllers,
Bundled Color Solutions
& Chipset Solutions 50% 62% 26%
Controllers for Digital
Black and White Solutions 36% 11% --
Spares, Licensing
& Other misc. sources -- 0% 1%
- ---------------------------------------------------------------------------------------------------------------------------
Total Volume 100% 100% 100%
Growth in 1999 primarily took place in the category of controllers for digital
black and white solutions as well as in the category of embedded desktop
controllers, bundled color solutions and chipset solutions.
The black and white product category made up 21% of total revenue and 36% of
total unit volume in 1999. In 1998, the year the product line was introduced, it
made up 4% of total revenue and 11% of total unit volume. This product category
can be characterized by much higher unit volumes and lower unit prices and
associated margins than the Company has experienced in its more traditional
stand-alone server line of products. The desktop product category made up 26% of
total revenue and 50% of total unit volume in 1999. It made up 20% of total
revenue and 62% of total unit volume in 1998 and 9% of total revenue and 26% of
total unit volume in 1997. These products, except for the chipset solutions, are
also generally characterized by much higher unit volumes but lower unit prices
and associated margins than the Company has experienced in its more traditional
stand-alone server line of products. The chipset solutions can be characterized
by lower unit prices but significantly higher per unit margins compared to the
traditional stand-alone server line of products. The Company anticipates further
growth in the black and white as well as in the desktop category as a
13
percentage of total revenue. To the extent these categories do not grow over
time in absolute terms, or if the Company is not able to meet demand for higher
unit volumes, it could have a material adverse effect on the Company's operating
results. The Company believes that revenue for stand-alone server products
decreased in 1999 due to the fact that low-end products which previously shipped
as stand-alone products have been shipped as embedded products. There can be no
assurance that the new products for 2000 will be qualified by all the OEMs, or
that they will successfully compete, or be accepted by the market, or otherwise
be able to effectively replace the volume of revenue and / or income from the
older products.
The Company also believes that in addition to the factors described above, price
reductions for all of its products may affect revenues in the future. The
Company has made and may in the future make price reductions for its products.
Depending upon the price-elasticity of demand for the Company's products, the
pricing and quality of competitive products, and other economic and competitive
conditions, such price reductions may have an adverse impact on the Company's
revenues and profits. If the Company is not able to compensate for lower gross
margins that may result from price reductions with an increased volume of sales,
its results of operations could be adversely affected. In addition, if the
Company's revenue in the future depends more upon sales of products with
relatively lower gross margins than the Company obtained in 1999 (such as
embedded controllers for printers, embedded controllers for color and
black-and-white copiers, and stand-alone controllers for black-and-white
copiers), results of operations may be adversely affected.
Shipments by geographic area for the years ended 1999, 1998 and 1997 were as
follows:
Years ended December 31, % change
1999 1998
over over
(In thousands) 1999 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
North America * $277,997 49% $221,638 50% $181,811 49% 25% 22%
Europe * 182,602 32% 144,076 32% 111,023 30% 27% 30%
Japan 90,781 16% 68,991 15% 64,323 17% 32% 7%
Rest of World 19,372 3% 12,294 3% 16,247 4% 58% (24)%
- ---------------------------------------------------------------------------------------------------------------------------
$570,752 100% $446,999 100% $373,404 100% 28% 20%
- ---------------------------------------------------------------------------------------------------------------------------
* In the middle of the second quarter of 1997, one of the Company's major
customers began having its products for the European market shipped directly to
Europe rather than through the United States. The Company does not know the
dollar amount of the corresponding shipments that went through North America to
Europe for the periods prior to the second quarter of 1997. Therefore shipments
to North America in early 1997 are slightly overstated and shipments that went
to Europe in the same period are slightly understated when compared to 1998.
Consequently the above indicated revenue information and the increases and
decreases from 1998 over 1997 for North America and Europe should be read with
caution.
Shipments to each geographic area increased over 25% in 1999 compared to 1998,
with the largest increase of 58% in the Rest of the World region and the second
largest increase of 32% in Japan. The Rest of World region experienced a
decrease of 24% and Japan an increase of 7% in 1998 compared to 1997. The Rest
of World region is predominately represented by the Southeast Asian countries
and the increase in 1999 over 1998 in the Rest of World and Japan is a
reflection of the economic recovery in these regions. The Rest of World region
experienced a decrease in 1998 over 1997, which was a reflection of the
challenging economic situation in that region. Worldwide economic conditions may
have an adverse impact on the Company's results of operations in the future.
As shipments to some of the Company's OEM partners are made to centralized
purchasing and manufacturing locations which in turn sell through to other
locations, the Company believes that export sales of its products into each
region may differ from what is reported, though accurate data is difficult to
obtain. The Company expects that export sales will continue to represent a
significant portion of its total revenue.
Substantially all of the revenue for the last three years was attributable to
sales of products through the Company's OEM channels with such partners as
Canon, Encad, Epson, Fuji-Xerox, IBM, Hewlett-Packard, Kodak/Danka Business
Systems, Konica, Lanier, Minolta, Oce, Ricoh, Sharp, Xerox and others. During
1999, the Company has continued to work on both increasing the number of OEM
partners, and expanding the size of existing relationships with OEM partners.
The Company relied on three OEM customers, Canon, Xerox and Ricoh in aggregate
for 68%, 67%, and 85% of its revenue for 1999, 1998 and 1997, respectively. In
the event that any of these OEM relationships are scaled back or discontinued,
the Company may experience a significant negative impact on its consolidated
financial position and results of operations. In addition, no assurance can be
given that the Company's relationships with these OEM partners will continue.
14
The Company continues to work on the development of products utilizing both the
Fiery architecture and other products and intends to continue to introduce new
generations of Fiery products and other new product lines with current and new
OEM's in 2000 and beyond. No assurance can be given that the introduction or
market acceptance of new, current or future products will be successful.
Cost of Revenue
Fiery color servers as well as embedded desktop controllers and digital black
and white products are manufactured by third-party manufacturers who purchase
most of the necessary components. The Company sources directly processors,
memory, certain ASICs, and software licensed from various sources, including
PostScript interpreter software, which the Company licenses from Adobe Systems,
Inc.
Gross Margins
The Company's gross margin was 49%, 44% and 54% for 1999, 1998 and 1997
respectively. The increase in gross margin from 44% to 49% from 1998 to 1999 was
attributable to volume driven economies of scale as well as increased
outsourcing of manufacturing operations to lower cost subcontract manufacturers.
The decrease in gross margin from 54% to 44% from 1997 to 1998 was due to a
combination of factors, including a higher mix of low-end products with
relatively lower margins and a different mix of OEM partners purchasing a
different mix of products during 1998 as compared to 1997. The Company also
initiated price reductions on older products during the first half of 1998 in
light of pending introductions of newer generations of products.
The Company expects that sales of products with relatively lower margins may
further increase as a percentage of revenue. Such products include embedded
products for both desktop printers and copiers, stand-alone servers, embedded
controllers for black-and-white copiers and older products for which prices are
reduced during product transitions. If such sales increase as a percentage of
the Company's revenue, gross margins may decline.
In addition to the factors affecting revenue described above, the Company
expects to be subject to pressures to reduce prices, and as a result, gross
margins for all of its products may be lower and therefore the Company's ability
to maintain current gross margins may not continue.
In general, the Company believes that gross margin will continue to be impacted
by a variety of factors. These factors include the market prices that can be
achieved on the Company's current and future products, the availability and
pricing of key components (including DRAM, Processors and Postscript interpreter
software), third party manufacturing costs, product, channel and geographic mix,
the success of the Company's product transitions and new products, competition,
and general economic conditions in the United States and abroad. Consequently,
the Company anticipates gross margins will fluctuate from period to period.
Operating Expenses
Operating expenses increased by 12% in 1999 over 1998 and by 22% in 1998 over
1997. Operating expenses as a percentage of revenue amounted to 27%, 30% and 30%
for 1999, 1998 and 1997, respectively. Increases in operating expenses in
absolute dollars of $16.8 million in 1999 compared to 1998 and $24.8 million in
1998 compared to 1997, were primarily caused by costs associated with the
development and introduction of new products and the hiring of additional full
time employees to support the growing business (a net increase of 98 people at
December 31, 1999 over December 31, 1998 and a net increase of 46 people at
December 31, 1998 over December 31, 1997). The Company has hired additional
employees to support product development as well as to support expanded
operations.
Operating expenses for 1999 included approximately $1.4 million of merger
related costs in connection with the acquisition of Management Graphics, Inc
("MGI") on August 31, 1999. Excluding the $1.4 million of expenses in 1999, the
increase in operating expenses in 1999 over 1998 would have been 11% or $15.4
million. In addition, the Company incurred additional non-recurring expenses
during 1999 in connection with the Company's move to a new central facility in
Foster City, California. Total moving costs amounted to $1.8 million of which
approximately $0.2 million related to cost of revenue.
15
Operating expenses in 1997 include a $9.4 million charge for in-process
technology that was expensed in 1997 as part of the acquisition of Pipeline
Associates, Inc. and Pipeline Asia, Inc. (the "Pipeline Acquisition"). Excluding
the $9.4 million charge in 1997, the increase in operating expenses in 1998 over
1997 would have been 33% or $34.2 million.
The lower percentage increase in operating expenses in 1999 over 1998 of 12%
compared to 1998 over 1997 of 22% is the result of the Company's successful
spending control as well as the leverage realized from additional revenue in the
black and white and embedded, bundled and chipset categories which require less
support.
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, depreciation and costs
of prototype materials. Research and development expenses were $75.0
million or 13% of revenue in 1999 compared to $60.2 million or 13% of
revenue in 1998 and $42.9 million or 11% of revenue in 1997. The year
over year increase in research and development expenses was mainly
due to an increase in research and development projects. The majority
of the 25% increase in research and development expenses in 1999
compared to 1998 was due to a 21% growth in engineering headcount.
The 40% increase of research and development expenses in 1998 over
1997 was primarily due to headcount related costs as well as a
significant increase in costs of prototype materials used for
pre-production units on projects under development. The Company
believes that the development of new products and the enhancement of
existing products are essential to its continued success, and intends
to continue to devote substantial resources to research and new
product development efforts. Accordingly, the Company expects that
its research and development expenses may continue to increase in
absolute dollars and also as a percentage of revenue.
Sales and Marketing
Sales and marketing expenses include personnel expenses, costs for
trade shows, marketing programs and promotional materials, sales
commissions, travel and entertainment expenses, depreciation, and
costs associated with sales offices in the United States, Europe,
Japan and other locations around the world. Sales and marketing
expenses for 1999 were $59.4 million or 11% of revenue compared to
$60.6 million or 13% of revenue in 1998 and $46.8 million or 12% in
1997. Sales and marketing expenses decreased in 1999 over 1998 as a
percentage of revenue as well as in absolute dollars. The decrease is
due to successful spending control across the Company during 1999,
offset by increased salary expenses caused by an increased headcount
of 12%. In addition the gravitation toward desktop and embedded
products require less support from the Company as the OEMs take over
some of the financial responsibilities for the support. The 30%
increase of sales and marketing expenses in 1998 over 1997 is due to
a 9% increase in headcount, as well as costs required for the
introduction, promotion and support of a broader range of current
products with both existing and new OEMs and an increase in
technology alliance partners. The Company has also developed
strategic relationships with well known print-for-pay companies,
including Kinko's, AlphaGraphics, the CopyMax operations of office
products superstore OfficeMax, the American Speedy group of
franchised printing centers (including Allegra Print and Imaging,
American Speedy, Speedy Printer, Zippy Print and Quik Print) and the
SAMPA Corporation, franchiser of Signal Graphics Printing Centers.
Although these relationships increase the demand for Fiery products
they also increase the sales and marketing expenses.
The Company expects that its sales and marketing expenses may
increase in absolute dollars and possibly also as a percentage of
revenue as it continues to actively promote its products, launch new
products and continue to build its sales and marketing organization,
particularly in Europe and Asia Pacific, including Japan. This
increase might not proportionally increase with increases in volume,
if the Company's sales continue to gravitate toward desktop and
embedded products which require less support from the Company as the
OEM partners take over this role.
General and Administrative
General and administrative expenses consist primarily of personnel
expenses and, to a lesser extent, depreciation and facility costs,
professional fees and other costs associated with public companies.
General and administrative expenses were $18.4 million or 3% of
revenue in 1999, compared to $16.6 million or 4% of revenue in 1998
and $13.6 million or 4% of revenue in 1997. While general and
administrative expenses have remained relatively constant as a
percentage of total revenue over the three year period ended 1999,
these expenses have increased in absolute dollars. The increases in
1999 over 1998 and in 1998 over 1997 were primarily due to the
increase in headcount to support the needs of the
16
growing Company's operations, including the use of outside
consultants. The Company expects that its general and administrative
expenses may continue to increase in absolute dollars and possibly
also as a percentage of revenue in order to support the Company's
efforts to grow its business.
In-process research and development
In October of 1997, the Company acquired Pipeline Associates, Inc.
and Pipeline Asia, Inc. for $12.6 million, net of cash received. The
Pipeline Acquisition was intended to expand the Company's core
technologies and thereby decrease its dependence on software licensed
from outside sources. In conjunction with the acquisition, the
Company recorded a charge of $9.4 million for in-process research and
development, representing the appraised value of product that was not
considered to have reached technological feasibility.
Merger related expenses
On August 31, 1999 the Company acquired MGI, a Minnesota-based
corporation that develops digital print on demand products and other
digital imaging products. The Company incurred approximately $1.4
million of non-recurring expenses related to the merger which
consisted primarily of professional fees, severance costs, and travel
expenses. Severance costs were incurred on 33 former employees of MGI
whose positions were eliminated due to duplication of resources
between the California and Minnesota locations. Functionally, the
Company eliminated 6 manufacturing, 15 service, 1 engineering, 6
sales and marketing, and 5 administrative positions. The terminations
were completed as of September 30, 1999.
Other Income
Other income relates mainly to interest income and expense, and gains and losses
on foreign currency transactions. Other income of $16.3 million in 1999
increased by 65% from $9.9 million in 1998. Other income of $9.9 million in 1998
decreased by 4% from $10.3 million in 1997. The increase in 1999 from 1998 is
due to a 39% increase in the average investment balance as well as a higher
return on investments as a result of more favorable market interest rates in
1999 compared to 1998. The decrease in 1998 from 1997 is mainly due to
approximately $1.3 million in losses suffered on Asian currency denominated
transactions in the first half of 1998. In response to currency fluctuations in
Asia, the Company began to implement a hedging program in June 1998. In
addition, the Company earned less interest in 1998 compared to 1997 due to a
decline in market interest rates in 1998.
Income Taxes
The Company's effective tax rate was 33% in 1999, 32% in 1998 and 36% in 1997,
respectively. In each of these years, the Company benefited from tax-exempt
interest income, foreign sales, and the utilization of the research and
development credits in achieving a consolidated effective tax rate lower than
that prescribed by the respective Federal and State taxing authorities. The
Company anticipates that the tax rate for 2000 will remain approximately 33%.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $141.6 million to
$470.3 million as of December 31, 1999, from $328.7 million as of December 31,
1998. Working capital increased by $132.2 million to $487.6 million as of
December 31, 1999, up from $355.4 million as of December 31, 1998. These
increases are primarily the result of net income, changes of balance sheet
components and the exercise of employee stock options.
Net cash provided by operating activities was $131.5 million, $81.1 million and
$72.9 million in 1999, 1998 and 1997, respectively. Cash provided by operating
activities increased in 1999 primarily due to a significant increase in net
income and an increase in income tax payables, partially offset by an increase
in deferred taxes and a decrease in receivables from subcontract manufacturers.
The Company has continued to invest cash in short-term investments, mainly
municipal securities. Purchases in excess of sales of short-term investments
were $38.0 million, $84.3 million and $45.4 million in 1999, 1998 and 1997,
respectively. The Company's
17
capital expenditures generally consist of investments in computers and related
peripheral equipment and office furniture for use in the Company's operations.
The Company purchased approximately $15.6 million, $13.2 million and $11.3
million of such equipment and furniture during 1999, 1998 and 1997,
respectively. During 1997, the Company invested $12.6 million, net of cash
received, in the Pipeline Acquisition.
Also in 1997, the Company began development of a corporate campus on a 35-acre
parcel of land in Foster City, California. During 1997 the Company spent
approximately $27.0 million on the land and associated improvement costs. During
1998 the Company spent approximately $0.3 million on land improvement costs. In
addition to purchasing the land, the Company entered into an agreement to lease
a ten-story 295,000 square foot building to be constructed on the site. The
lessor of the building committed to fund the construction of the building which
amounted to $57.0 million. Rent payments for the building commenced in July
1999, the time the construction was completed. Rent payments bear a direct
relationship to the carrying cost of the commitment amount. The initial term of
the lease is 7 years with options to purchase at any time. Also in conjunction
with the lease, the Company has entered into a separate ground lease with the
lessor of the building for approximately 35 years. The Company has guaranteed a
residual value associated with the building to the lessor of 82% of the lessor's
funding. If the Company defaults on the lease, does not renew the lease, does
not purchase the building or does not arrange for a third party purchase of the
building at the end of the lease term, it may be liable to the lessor for the
amount of the residual guarantee. As part of the lease agreement the Company
must maintain a minimum tangible net worth. In addition, the Company has pledged
certain marketable securities ($69.1 million at December 31, 1999) to be held in
proportion to the amount drawn in order to secure a more favorable lease rate
and avoid other covenant restrictions. The Company may use these funds at any
time, but their release would also result in an increase to the lease rate and
the imposition of additional financial covenant restrictions.
On December 29, 1999, the Company entered into an agreement to lease additional
facilities, for up to 543,000 square feet, to be constructed on the property,
which the Company owns in Foster City, California. The lessor of the building
has committed to fund up to a maximum of $137.0 million for the construction of
the facilities, with the portion of the committed amount actually used for
construction to be determined by the Company. The construction of the additional
facilities is scheduled to be completed over the next 36 months. Rent
obligations for the building will bear a direct relationship to the carrying
cost of the commitments drawn down. As of December 31, 1999, the Company had not
begun construction and had not drawn any funds.
The lease associated with the additional Foster City facilities has a term of
seven years with an option to renew subject to certain conditions. The Company
may, at its option, purchase the facilities during or at the end of the term of
the lease for the amount expended by the lessor to construct the facilities. In
connection with the lease, the Company entered into a lease of the related
parcels of land in Foster City to the lessor of the buildings at a nominal rate
and for a term of 30 years. If the Company terminates or does not negotiate an
extension of its lease of the building, the ground lease to the lessor converts
to a market rate. The Company, at its option, may purchase the building during
or at the end of the term of the lease for the amount expended by the lessor to
construct the building. The Company has guaranteed a residual value associated
with the building to the lessor of 82% of the lessor's funding. If the Company
defaults on its lease, does not renew its lease, does not purchase the building
or arrange for a third party the purchase of the facility at the end of the
lease term, it may be liable to the lessor for the amount of the residual
guarantee.
As part of this agreement, the Company must maintain a minimum tangible net
worth. In addition, the Company has committed to pledge certain securities in
proportion to the amount drawn against the commitment to be held in a custodial
account as collateral to ensure fulfillment of the obligations to the lessor
under the lease agreement. No amounts were committed at December 31, 1999 as the
Company had not drawn any amounts under the arrangement. The Company may invest
these funds in certain securities and receive the full benefit of the
investment, however the funds are restricted as to withdrawal at all times.
Net cash provided by financing activities of $26.7 million, $14.2 million and
$9.7 million in 1999, 1998 and 1997, respectively, were primarily the result of
exercises of common stock options and the tax benefits to the Company associated
with those exercises. Net cash provided by financing activities in 1999, 1998
and 1997 includes approximately $892,000, $101,000 and $373,000 of cash used to
repay long-term obligations.
The Company's inventory consists primarily of memory subsystems, processors and
ASICs, which are sold to third-party contract manufacturers responsible for
manufacturing 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 sell components other than the
processors, ASICs 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 were reduced or not available.
The Company, along with its directors and certain officers and employees, has
been named in class action lawsuits filed in both the San Mateo County Superior
Court and the United States District Court for the Northern District of
California. The lawsuits are all
18
related to the precipitous decline in the trading price of the Company's stock
that occurred in December 1997. The Company believes the lawsuits are without
merit and intends to contest them vigorously, but there can be no assurance that
if damages are ultimately awarded against the Company, the litigation will not
adversely affect the Company's results of operations. See Item 3 "Legal
proceedings."
The Company believes that its existing capital resources, together with cash
generated from continuing operations will be sufficient to fund its operations
and meet capital requirements through at least 2000.
Year 2000 Status
The Company, and to its knowledge the Company's third party suppliers did not
experience any significant problems associated with information systems and
other technology during the transition to the Year 2000. During 1999, the
Company spent approximately $700,000 out of a budget of $1.2 million for
external consulting on addressing and preparing for potential Year 2000 problems
and related issues. As the new year continues the Company will continue to
assess the potential effects of possible Year 2000 related problems; however, as
a result of the work performed previously the Company does not currently foresee
any problems in this area. There can be no assurance that such problems, if
incurred, will not have a materially adverse effect on the Company, its
financial condition, or results of operations.
Euro Assessment
Eleven of the fifteen member countries of the European Union have established
fixed conversion rates between their existing sovereign currencies and the Euro
and have adopted the Euro as a common currency as of January 1, 1999. The Euro
is trading on currency exchanges and is available for non-cash transactions. The
conversion to the Euro is not expected to have a material adverse effect on the
operating results of the Company as the Company predominantly invoices in US
Dollars. The Company is currently in the process of evaluating the reporting
requirements in the respective countries and the related system, legal and
taxation requirements. The Company expects that required modifications will be
made on a timely basis and that such modifications will not have a material
adverse impact on the Company's operating results. There can be no assurance,
however, the Company will be able to complete such modifications to comply with
Euro requirements, which could have a material adverse effect on the Company's
operating results.
Factors That Could Adversely Affect Performance
Our performance may be adversely affected by the following factors:
We rely on sales to a relatively small number of OEM partners, and the loss of
any of these customers could substantially decrease our revenues
Because we sell our products primarily to our OEM partners, we rely on high
sales volumes to a relatively small number of customers. We expect that we will
continue to depend on these OEM partners for a significant portion of our
revenues. If we lose an important OEM or we are unable to recruit additional
OEMs, our revenues may be materially and adversely affected. We cannot assure
you that our major customers will continue to purchase our products at current
levels or that they will continue to purchase our products at all. In addition,
our results of operations could be adversely affected by a decline in demand for
copiers or laser printers, other factors affecting our major customers, in
particular, or the computer industry in general.
We rely upon our OEM partners to develop new products, applications and product
enhancements in a timely and cost-effective manner. Our continued success
depends upon the ability of these OEMs to meet changing customer needs and
respond to emerging industry standards and other technological changes. However,
we cannot assure you that our OEMs will effectively meet these technological
challenges. These OEMs, who are not within our control, may incorporate into
their products the technologies of other companies in addition to, or instead of
our products. These OEMs may introduce and support products that are not
compatible with our products. We rely on these OEMs to market our products with
their products, and if these OEMs do not effectively market our products our
sales revenue may be materially and adversely affected. With the exception of
certain minimum purchase obligations, these OEMs are not obligated to purchase
products from us. We cannot assure you that our OEMs will continue to carry our
products.
Our OEMs work closely with us to develop products that are specific to each
OEM's copiers and printers. For many of the products we are developing, we need
to coordinate development, quality testing, marketing and other tasks with our
OEMs. We cannot control our OEMs' development efforts and coordinating with our
OEMs may cause delays that we cannot manage by ourselves. In addition, our sales
revenue and results of operations may be adversely affected if we cannot meet
our OEM's product needs for their specific
19
copiers and printers, as well as successfully manage the additional engineering
and support effort and other risks associated with such a wide range of
products.
We are pursuing, and will continue to pursue, the business of additional copier
and printer OEMs. However, because there are a limited number of OEMs producing
copiers and printers in sufficient volume to be attractive customers for us, we
expect that customer concentration will continue to be a risk.
If we are unable to develop new products, or execute product introductions on a
timely basis, our future revenue and operating results may be harmed.
Our operating results will depend to a significant extent on continual
improvement of existing technologies and rapid innovation of new products and
technologies. Our success depends not only on our ability to predict future
requirements, but also to develop and introduce new products that successfully
address customer needs. Any delays in the launch or availability of new products
we are planning could harm our financial results. During transitions from
existing products to new products, customers may delay or cancel orders for
existing products. Our results of operations may be adversely affected if we
cannot successfully manage product transitions or provide adequate availability
of products after they have been introduced.
In this environment, we must continue to make significant investments in
research and development in order to enhance performance and functionality of
our products, including product lines different than our Fiery servers and
embedded controllers. We cannot assure you that we will successfully identify
new product opportunities, develop and introduce new products to market in a
timely manner, and achieve market acceptance of our products. Also, if we decide
to develop new products, our research and development expenses may increase in
the short term without a corresponding increase in revenue. Finally, we cannot
assure you that products and technologies developed by others will not render
our products or technologies obsolete or noncompetitive.
We license software used in most of our products from Adobe Systems
Incorporated, and the loss of this license would prevent us from shipping these
products
Under our license agreements with Adobe, a separate license must be granted from
Adobe to us for each type of copier or printer used with a Fiery Server or
Controller. If Adobe does not grant us such licenses or approvals, if the Adobe
license agreements are terminated, or if our relationship with Adobe is
otherwise impaired, our financial condition and results of operations may be
harmed. To date, we have successfully obtained licenses to use Adobe's
PostScript(TM) software for our products, where required. However, we cannot
assure you that Adobe will continue to grant future licenses to Adobe
PostScript(TM) software on reasonable terms, in a timely manner, or at all. In
addition, we cannot assure you that Adobe will continue to give us the quality
assurance approvals we are required to obtain from Adobe for the Adobe licenses.
If the demand for products that enable color printing of digital data decreases,
our sales revenue may decrease
Our products are primarily targeted at enabling the color printing of digital
data. If demand for this service declines, or if the demand for our OEMs'
specific printers or copiers that our products are designed for should decline,
our sales revenue may be adversely affected. Although demand for networked color
printers and copiers has increased in recent years, we cannot assure you that
such demand will continue, nor can we control whether the demand will continue
for the specific OEM printers and copiers that utilize our products will
continue. We believe that demand for our products may also be affected by a
variety of economic conditions and considerations, and we cannot assure you that
demand for our products will continue at current levels.
If we enter new markets or distribution channels this could result in delayed
revenues or higher operating expenses
We continue to explore opportunities to develop product lines different from our
Fiery servers and embedded controllers, such as our new line of software
products and EFI Professional Services that we announced on February 23, 2000.
We expect to invest funds to develop new distribution and marketing channels for
these new products and services. We do not know if we will be successful in
developing these channels or whether the market will accept any of our new
products or services. In addition, even if we are able to introduce new products
or services, these products and services may adversely impact the Company's
operating results.
We face competition from other suppliers as well as our own OEM customers, and
if we are not able to compete successfully then our business may be harmed
20
Our industry is highly competitive and is characterized by rapid technological
changes. We compete against a number of other suppliers of imaging products. We
cannot assure you that products or technologies developed by competing suppliers
will not render our products or technologies obsolete or noncompetitive.
While many of our OEMs sell our products on an exclusive basis, we do not have
any formal agreements that prevent the OEMs from offering alternative products.
If an OEM offers products from alternative suppliers our market share could
decrease, which could reduce our revenue and negatively affect our financial
results.
Our OEM partners may themselves internally develop and supply products similar
to our current products. These OEMs may be able to develop similar products that
are compatible with their own products more quickly than we can. These OEMs may
choose to market their own products, even if these products are technologically
inferior, have lower performance or cost more. We cannot assure you that we will
be able to continue to successfully compete against similar products developed
internally by our OEMs or against their financial and other resources. If we
cannot compete successfully against our OEMs' internally developed products, our
business may be harmed.
If we are not able to hire and retain skilled employees, we may not be able to
develop products or meet demand for our products in a timely fashion
We depend upon skilled employees, such as software and hardware engineers,
quality assurance engineers and other technical professionals. We are located in
the Silicon Valley where competition among companies to hire engineering and
technical professionals is intense. It is difficult for us to locate and hire
qualified engineers and technical professionals and for us to retain these
people. There are many technology companies located nearby that may try to hire
our employees. The movement of our stock price may also impact our ability to
hire and retain employees. If we do not offer competitive compensation, we may
not be able to recruit or retain employees. If we cannot successfully hire and
retain employees, we may not be able to develop products timely or to meet
demand for our products in a timely fashion and our results of operations may be
adversely impacted.
Our operating results may fluctuate based upon many factors, which could
adversely affect our stock price
We expect our stock price to vary with our operating results and, consequently,
adverse fluctuations could adversely affect our stock price. Operating results
may fluctuate due to:
o demand for our products;
o success and timing of new product introductions;
o changes in interest rates and availability of bank or financing credit to
consumers of digital copiers and printers;
o price reductions by us and our competitors;
o delay, cancellation or rescheduling of orders;
o product performance;
o availability of key components, including possible delays in the deliveries
from suppliers;
o the status of our relationships with our OEM partners;
o the performance of third-party manufacturers;
o the status of our relationships with our key suppliers;
o potential excess or shortage of skilled employees; and
o general economic conditions.
Many of our products, and the related OEM copiers and printers, are purchased
utilizing lease contracts or bank financing. If prospective purchasers of
digital copiers and printers are unable to obtain credit, or interest rate
changes make credit terms undesirable, this may significantly reduce the demand
for digital copiers and printers, negatively impacting our revenues and
operating results.
Typically we do not have long-term volume purchase contracts with our customers,
and a substantial portion of our backlog is scheduled for delivery within 90
days or less. Our customers may cancel orders and change volume levels or
delivery times for product they have ordered from us without penalty. However, a
significant portion of our operating expenses are fixed in advance, and we plan
these expenditures based on the sales forecasts from our OEM customers and
product development programs. If we were unable to adjust our operating expenses
in response to a shortfall in our sales, it could harm our quarterly financial
results.
We attempt to hire additional employees to match growth in projected demand for
our products. If we project a higher demand than materializes, we will hire too
many employees and incur expenses that we need not have incurred and our margins
may be lower. If
21
we project a lower demand than materializes, we will hire too few employees, we
may not be able to meet demand for our products and our sales revenue may be
lower. If we cannot successfully manage our growth, our results of operations
may be harmed.
The value of our investment portfolio will decrease if interest rates increase
We have an investment portfolio of mainly fixed income securities classified as
available-for-sale securities. As a result, our investment portfolio is subject
to interest rate risk and will fall in value if market interest rates increase.
We attempt to limit this exposure to interest rate risk by investing primarily
in short-term securities. We may be unable to successfully limit our risk to
interest rate fluctuations and this may cause our investment portfolio to
decrease in value.
Our stock price has been and may continue to be volatile
Our common stock, and the stock market generally, have from time to time
experienced significant price and volume fluctuations. The market prices for
securities of technology companies have been especially volatile, and
fluctuations in the stock market are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock. Our common stock price
may also be affected by the factors discussed above in this section as well as:
o Fluctuations in our results of operations, revenues or earnings or those of
our competitors;
o Failure of such results of operations, revenues or earnings to meet the
expectations of stock market analysts and investors;
o Changes in stock market analysts' recommendations regarding us;
o Real or perceived technological advances by our competitors;
o Political or economic instability in regions where our products are sold or
used; and
o General market and economic conditions.
We face risks from our international operations and from currency fluctuations
Approximately 51% and 50% of our revenue from the sale of products for the
twelve month periods ended December 31, 1999 and December 31, 1998,
respectively, came from sales outside North America, primarily to Europe and
Japan. We expect that sales to international destinations will continue to be a
significant portion of our total revenue. You should be aware that we are
subject to certain risks because of our international operations. These risks
include the regulatory requirements of foreign governments which may apply to
our products, as well as requirements for export licenses which may be required
for the export of certain technologies. The necessary export licenses may be
delayed or difficult to obtain, which could cause a delay in our international
sales and hurt our product revenue. Other risks include trade protection
measures, natural disasters, and political or economic conditions in a specific
country or region.
We believe that economic conditions in other parts of the world, such as Brazil,
may also limit demand for our products. The move to a single European currency,
the Euro, and the resulting central bank management of interest rates to
maintain fixed currency exchange rates among the member nations may lead to
economic conditions which adversely impact sales of our products.
Given the significance of our export sales to our total product revenue, we face
a continuing risk from the strengthening of the U.S. dollar versus the Japanese
yen, the Euro and other major European currencies, and numerous Southeast Asian
currencies, which could cause lower unit demand and the necessity that we lower
average selling prices for our products because of the reduced strength of local
currencies. Either of these events could harm our revenues and gross margin.
Although we typically invoice our customers in U.S. dollars, when we do invoice
our customers in local currencies, our cash flows and earnings are exposed to
fluctuations in interest rates and foreign currency exchange rates between the
currency of the invoice and the U.S. dollar. We attempt to limit or hedge these
exposures through operational strategies and financial market instruments where
we consider it appropriate. To date we have mostly used forward contracts to
reduce our risk from interest rate and currency fluctuations. However, our
efforts to reduce the risk from our international operations and from
fluctuations in foreign currencies or interest rates may not be successful,
which harm our financial condition and operating results.
We may be unable to adequately protect our proprietary information
We rely on a combination of copyright, patent and trade secret protection,
nondisclosure agreements, and licensing and cross-licensing arrangements to
establish and protect our proprietary rights. Any failure to adequately protect
our proprietary information could harm our financial condition and operating
results. We cannot be certain that any patents that may be issued to us, or
which we license from third parties, or any other of our proprietary rights will
not be challenged, invalidated or circumvented. In addition, we cannot be
22
certain that any rights granted to us under any patents, licenses or other
proprietary rights will provide adequate protection of our proprietary
information.
We face risks from third party claims of infringement and potential litigation
Third parties may claim that our products infringe, or may infringe, their
proprietary rights. Such claims could result in lengthy and expensive
litigation. Such claims and any related litigation, whether or not we are
successful in the litigation, could result in substantial costs and diversion of
our resources. Although we may seek licenses from third parties covering
intellectual property that we are allegedly infringing, we cannot guarantee that
any such licenses could be obtained on acceptable terms, if at all.
Seasonal purchasing patterns of our OEM customers have historically caused lower
fourth quarter revenue, which may negatively impact the stock price
Our results of operations have typically followed a seasonal pattern reflecting
the buying patterns of our large OEM customers. In the past, our fiscal fourth
quarter results have been adversely affected because some or all of our OEM
customers wanted to decrease, or otherwise delay, fourth quarter orders. In
addition, the first fiscal quarter traditionally has been a weaker quarter
because our OEM partners focus on training of their sales forces. The primary
reasons for this seasonal pattern are:
o Fluctuation in demand for our products from our OEM partners, who have
historically sought to minimize year-end inventory investment (including
the reduction in demand following introductory "channel fill" purchases).
Fluctuation in demand is also caused by timing of new product releases and
training by our OEM partners; and
o The fact that our OEM partners have achieved their yearly sales targets and
consequently delayed further purchases into the next fiscal year, and the
fact that we do not know when our partners reach these sales targets as
they generally do not share them with us.
As a result of these factors, we believe that period to period comparisons of
our operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. We anticipate that future
operating results may fluctuate significantly due to this seasonal demand
pattern.
We may make future acquisitions and acquisitions involve numerous financial
risks
We seek to develop new technologies and products from both internal and external
sources. As part of this effort, we may make acquisitions of, or significant
investments in, other companies. Acquisitions involve numerous risks, including
the following:
o Difficulties in integration of operations, technologies, or products;
o Risks of entering markets in which we have little or no prior experience,
or entering markets where competitors have stronger market positions;
o Possible write-downs of impaired assets; and
o Potential loss of key employees of the acquired company.
Mergers and acquisitions of companies are inherently risky, and we cannot assure
you that our previous or future acquisitions will be successful and will not
harm our business, operating results, financial condition, or stock price.
The location and concentration of our facilities subjects us to the risk of
earthquakes, floods or other natural disasters
Our corporate headquarters, including most of our research and development
facilities and manufacturing operations, are located in the San Francisco Bay
Area of Northern California, an area known for seismic activity. This area has
also experienced flooding in the past. In addition, many of the components
necessary to supply our products are purchased from suppliers subject to risk
from natural disasters, based in areas including the San Francisco Bay Area,
Taiwan, and Japan. A significant natural disaster, such as an earthquake or a
flood, could harm our business, financial condition, and operating results.
We are dependent on sub-contractors to manufacture and deliver products to our
customers
We subcontract with other companies to manufacture our products. We are totally
reliant on the ability of our subcontractors to produce pro