ELECTRONICS FOR IMAGING INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-18805

ELECTRONICS FOR IMAGING, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of shares of Common Stock outstanding as of April 29, 2005 was 54,117,193.

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Electronics for Imaging, Inc.

Condensed Consolidated Balance Sheets


	March 31,			December 31,
(In thousands, except per share amounts)	2005			2004
	(unaudited)
Assets

Current assets:
Cash and cash equivalents	$	216,696		$	156,322
Short-term investments		440,098			503,237
Accounts receivable, net		42,310			41,128
Inventories		5,952			5,529
Other current assets		23,134			22,157


Total current assets		728,190			728,373

Property and equipment, net		44,227			44,324
Restricted investments		88,580			88,580
Goodwill		73,866			73,768
Intangible assets, net		37,696			40,842
Other assets		41,539			41,990


Total assets	$	1,014,098		$	1,017,877


Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable	$	20,658		$	24,286
Accrued and other liabilities		59,062			62,219
Income taxes payable		24,261			23,812


Total current liabilities		103,981			110,317

Long-term obligations		240,000			240,000

Total liabilities		343,981			350,317
Commitments and contingencies (Note 12) Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value; 150,000 shares authorized; 54,081 and 53,828 shares outstanding, respectively		640			638
Additional paid-in capital		363,351			359,340
Treasury stock, at cost, 9,963 shares		(214,722	)		(214,722	)
Accumulated other comprehensive income		(2,010	)		(1,212	)
Retained earnings		522,858			523,516


Total stockholders’ equity		670,117			667,560


Total liabilities and stockholders’ equity	$	1,014,098		$	1,017,877

See accompanying notes to condensed consolidated financial statements.

Electronics for Imaging, Inc.

Condensed Consolidated Statements of Income

(unaudited)


	Three Months Ended
	March 31,
(In thousands, except per share amounts)	2005			2004
Revenue	$	82,003		$	106,682
Cost of revenue		28,794			38,120

Gross profit		53,209			68,562
Operating expenses:
Research and development		26,379			27,164
Sales and marketing		16,838			18,962
General and administrative		7,493			6,633
Restructuring charges		2,685			—
Amortization of identified intangibles and other acquisition-related expense		3,176			4,462

Total operating expenses		56,571			57,221

(Loss) income from operations		(3,362	)		11,341

Interest and other income, net:
Interest and other income		3,774			3,071
Interest expense		(1,255	)		(1,250	)
Gain on sale of product line		—			2,994

Total interest and other income, net		2,519			4,815

(Loss) income before income taxes		(843	)		16,156
Benefit from (provision for) income taxes		185			(5,147	)

Net (loss) income	$	(658	)	$	11,009

Net (loss) income per basic common share	$	(0.01	)	$	0.20
Shares used in basic per-share calculation		53,945			54,209

Net (loss) income per diluted common share	$	(0.01	)	$	0.18
Shares used in diluted per-share calculation		53,945			65,075

See accompanying notes to condensed consolidated financial statements.

Electronics for Imaging, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Three Months Ended
	March 31,
(in thousands)	2005			2004
Cash flows (used in) from operating activities:
Net (loss) income	$	(658	)	$	11,009
Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:
Depreciation and amortization		5,307			6,161
Purchased in-process research & development		—			1,000
Deferred taxes		42			—

Provision for (reduction in) allowance for bad debts and sales-related allowances		265			(941	)
Equity compensation related items		429			1,863
Gain on sale of product line					(2,994	)
Other		76			—
Changes in operating assets and liabilities, net of effect of acquired companies:
Accounts receivable		(1,272	)		11,326
Inventories		(491	)		(814	)
Receivables from sub-contract manufacturers		512			(569	)
Other current assets		(566	)		(1,072	)
Accounts payable, accrued and other liabilities		(6,965	)		(11,846	)
Income taxes payable		449			2,652


Net cash (used for) provided by operating activities		(2,872	)		15,775

Cash flows from investing activities:
Purchases and sales / maturities of short-term investments, net		61,307			3,050
Net purchases of restricted cash, cash equivalents and short-term investments		—			(182	)

Purchases of property and equipment, net		(1,645	)		(1,378	)

Businesses acquired, net of cash received		—			(11,550	)
Sale of Unimobile product line and other		—			4,134
Purchase of other assets, net		(15	)		(48	)


Net cash provided by (used for) investing activities		59,647			(5,974	)

Cash flows from financing activities:
Proceeds from issuance of common stock		3,584			10,273
Purchases of treasury stock		—			(28,930	)


Net cash provided by (used for) financing activities		3,584			(18,657	)


Effect of foreign exchange changes on cash & cash equivalents		15			(55	)

Increase (decrease) in cash and cash equivalents		60,374			(8,911	)

Cash and cash equivalents at beginning of period	$	156,322		$	113,163


Cash and cash equivalents at end of period	$	216,696		$	104,252

See accompanying notes to condensed consolidated financial statements.

Electronics for Imaging, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

(In thousands, except for per share amounts)

1. Basis of Presentation
The unaudited interim condensed consolidated financial statements of Electronics for Imaging, Inc., a Delaware corporation (the “Company”, “we”, “our”, “us”), as of and for the interim period ended March 31, 2005, have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2004 contained in our Annual Report to Stockholders on Form 10-K. The December 31, 2004 Consolidated Balance Sheet was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, our unaudited interim condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to state fairly our financial position and the results of our operations and cash flows, in accordance with accounting principles generally accepted in the United States of America. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements referred to above and the notes thereto. Certain prior year balances have been reclassified to conform with the current year presentation.

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

Our interim results are subject to fluctuation. As a result, we believe the results of operations for the interim period ended March 31, 2005 are not necessarily indicative of the results to be expected for any other interim period or the full year.

2. Accounting for Derivative Instruments and Hedging

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, requires companies to reflect the fair value of all derivative instruments, including those embedded in other contracts, as assets or liabilities in an entity’s balance sheet. We had two embedded derivatives related to the 1.50% Senior Convertible Debentures as of March 31, 2005, the fair values of which were insignificant. We had no other derivatives as of March 31, 2005.

3. Stock-based Employee Compensation

We have elected to use the intrinsic value method as set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) in accounting for our stock options and other stock-based employee awards. Accordingly, no compensation cost related to stock options granted to employees has been recorded in the income statement. Had compensation cost for options and restricted stock granted under the Company’s stock-compensation plans been determined based on the fair value at the grant dates as prescribed by SFAS 123, the Company’s net income and pro forma net income (loss) per share for the three months ended March 31, 2005 and 2004 would have been as follows:

Electronics for Imaging, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except for per share amounts)


		Three Months Ended
		March 31,
		2005			2004
Net (loss) income	As reported	$	(658	)	$	11,009
Add: Stock-based employee compensation expenses for restricted grants included in reported net income, net of related tax effect			165			92
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			(2,984	)		(5,172	)

Net (loss) income	Pro forma	$	(3,477	)	$	5,929


(Loss) Earnings per basic common share	As reported	$	(0.01	)	$	0.20
	Pro forma	$	(0.06	)	$	0.11


(Loss) Earnings per diluted common share	As reported	$	(0.01	)	$	0.18
	Pro forma	$	(0.06	)	$	0.11

4. Comprehensive (Loss) Income

Comprehensive (loss) income, which includes net income, market valuation adjustments and currency translation adjustments, consists of the following:


	Three Months Ended
	March 31,
(unaudited)	2005			2004
Net (loss) income	$	(658	)	$	11,009

Change in market valuation of investments, net of tax		(1,099	)		1,000
Change in currency translation adjustment		300			(118	)


Comprehensive (loss) income	$	(1,457	)	$	11,891

5. Restructuring charges

We incurred restructuring costs of $2,685 for the three-month period ended March 31, 2005. These costs related to employee severance related to a reduction in workforce in all of our operating categories and at all of our principal locations. As of March 31, 2005, we had charged approximately $2,153 against the restructuring accrual for employee severance costs for approximately 65 employees. We anticipate the accrual balance of $532 for employee severance costs will be paid within the next six months.

6. Earnings Per Share

Net income per basic common share is computed using the weighted average number of common shares outstanding during the period. Net income per diluted common share is computed using the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding common stock options having a dilutive effect using the treasury stock method and from the potential conversion of our 1.50% Senior Convertible Debentures (the “Debentures”). In addition, in computing the dilutive effect of the convertible securities, the numerator is adjusted to add back the after-tax amount of interest and amortized debt-issuance costs recognized in the period associated with our convertible debt. Any potential shares that are anti-dilutive as defined in SFAS 128 are excluded from the effect of dilutive securities. We adopted EITF 04-08 in December 2004, and therefore have restated the diluted earnings per share calculation for 2004 for the effect of the potential conversion of our Debentures.

Electronics for Imaging, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except for per share amounts)

The following table presents a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2005 and 2004:


	Three months ended
	March 31,
	2005			2004
Basic net (loss) income per share:
Net (loss) income available to common shareholders	$	(658	)	$	11,009

Weighted average common shares outstanding		53,945			54,209
Basic net (loss) income per share	$	(0.01	)	$	0.20


Dilutive net income per share
Net (loss) income	$	(658	)	$	11,009
After-tax equivalent of expense related to 1.50% senior convertible debentures		—			750

(Loss)Income for purposes of computing diluted net income per share	$	(658	)	$	11,759


Weighted average common share outstanding		53,945			54,209

Dilutive stock options (1), (2)		—			1,782

Weighted average assumed conversion of 1.50% senior convertible debentures (1)		—			9,084

Weighted average common shares outstanding for purposes of computing diluted net income per share		53,945			65,075

Dilutive net (loss) income per share	$	(0.01	)	$	0.18

(1) All stock options and potential debt conversion shares are considered anti-dilutive as of March 31, 2005 as there was a net loss for the period.

(2) As of March 31, 2005, 8,332 weighted shares of common stock options have been excluded from the effect of dilutive securities because to include them would have been anti-dilutive since we recorded a loss for the period. Anti-dilutive weighted shares of common stock of 2,461 as of March 31, 2004, have been excluded from the effect of dilutive securities because the options’ exercise prices were greater than the average market price of the common shares for the years then ended.

7. Acquisitions

2004 Acquisitions
Automated Dispatch Systems Inc.
In February 2004 we acquired Automated Dispatch Systems, Inc. (“ADS”), for approximately $11,811 in cash. We acquired ADS to further develop relationships with equipment distributors. The acquisition was accounted for as a purchase business combination and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the date of acquisition. The following table summarizes the allocation of the purchase price to assets acquired and liabilities assumed:


(in thousands)
Cash	$	261
Other tangible assets		336
In-process research and development		1,000
Acquired technology		3,800
Other intangible assets		1,200
Goodwill		8,613

		15,210
Liabilities assumed		(1,791	)
Deferred tax liability related to assets acquired		(1,608	)

	$	11,811

Electronics for Imaging, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
(In thousands, except for per share amounts)

The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives of five years except for developed technology which has a three-year life and customer relationships which have a four-year life.

ADS’s operating results have been included in our operating results since February 2004.

8. Balance Sheet Components


	March 31, 2005			December 31, 2004
Accounts receivable:
Accounts receivable	$	45,399		$	44,214
Less allowances		(3,089	)		(3,086	)


	$	42,310		$	41,128


Inventories:
Raw materials	$	3,749		$	3,475
Finished goods		2,203			2,054


	$	5,952		$	5,529


Other current assets:
Deferred income taxes, current portion	$	17,424		$	16,666
Receivable from subcontract manufacturers		865			1,377
Other		4,845			4,114


	$	23,134		$	22,157


Property and equipment:
Land, building and improvements	$	37,049		$	37,018
Equipment and purchased software		43,378			42,767
Furniture and leasehold improvements		14,647			14,231

		95,074			94,016
Less accumulated depreciation and amortization		(50,847	)		(49,692	)


	$	44,227		$	44,324


Other assets:
Deferred income taxes, non-current, net	$	35,094		$	35,184
Debt issuance costs, net		4,392			4,726
Other		2,053			2,080


	$	41,539		$	41,990


Accrued and other liabilities:
Accrued compensation and benefits	$	13,409		$	18,089
Deferred revenue		17,818			16,113
Accrued warranty provision		1,906			1,838
Accrued royalty payments		6,561			6,347
Other accrued liabilities		19,368			19,832


	$	59,062		$	62,219


			Page No.
PART I – Financial Information

Item 1.	Condensed Consolidated Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets March 31, 2005 and December 31, 2004		3

		Condensed Consolidated Statements of Income Three Months Ended March 31, 2005 and 2004		4

		Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2005 and 2004		5

		Notes to Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			32

Item 4.	Controls and Procedures			33

PART II – Other Information

Item 1.	Legal Proceedings			33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			33

Item 3.	Defaults Upon Senior Securities			34

Item 4.	Submission of Matters to a Vote of Security Holders			34

Item 5.	Other Information			34

Item 6.	Exhibits			34

Signatures				36
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

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