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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-K
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(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, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-18805
ELECTRONICS FOR IMAGING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3086355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2002.
Common Stock, $.01 par value: $843,968,598 **
The number of shares outstanding of each of the registrant's classes of
common stock as of February 28, 2002.
Common Stock, $.01 par value: 54,126,970
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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 23, 2002
are incorporated by reference into Part III hereof.
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** Based upon the last trade price of the Common Stock reported on the Nasdaq
National Market on February 28, 2002. Excludes approximately 10,374,720
shares of common stock held by Directors, Officer and holders of 5% or more
of the Registrant's outstanding Common Stock on December 31, 2001. 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.
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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,
Fiery Driven and Design, ColorWise, RIP-While-Print, PowerPage, the PowerPage
logo, PowerBand, PowerSmooth, PSClone, PSView, EDOX, Mousitometer, Spot-On,
Spot-On and Design, Check Mate, Freedom of Press, Go Wide, Splash, Velocity and
Solitaire are registered trademarks of Electronics for Imaging, Inc. with the
U.S. Patent and Trademark Office, or 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, EDOX Profile Manager, RIP Ahead, Instant Reprint, Document
Recovery, Sapphire, Opal, PrintMe, PrintMe Networks, Harmony 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 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
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 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 products include
stand-alone servers, which are connected to digital copiers and other
peripheral devices, and controllers, which are embedded in digital copiers and
desktop color laser printers. The Company sells its products primarily to
original equipment manufacturers ("OEM's") 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 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
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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 supported printing on
digital color copiers and, until 1999, substantially all of its revenue
resulted from the development and sale of these stand-alone products. Although
development and marketing of embedded solutions began in prior years, during
1999, 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 1999, the Company also developed newer 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. During 1999, the Company expanded
its line of digital color servers through its merger with Management Graphics,
Inc. ("MGI") and its EDOX line of digital color servers ("EDOX Color Servers")
and introduced its first Internet appliance product, eBeam. In 2000, the
Company continued to develop Fiery and Edox Products as well as new software
applications for existing and new generations of a variety of new peripheral
devices, including the development of its Velocity software. During 2000, the
Company expanded its line of digital color servers through its acquisition of
Splash Technology Holdings, Inc. ("Splash") and its Splash line of digital
color servers ("Splash Color Servers" and together with Fiery Color Servers and
EDOX Color Servers, "EFI Color Servers").
In 2001, the Company continued to develop Fiery, Splash and EDOX Products as
well as new software applications for existing and new generations of a variety
of new peripheral devices, including the development of its Fiery Graphics Arts
Package, new Velocity workflow software, new document security software and
Variable Data Printing solutions. See "Growth and Expansion
Strategies--Proliferate and Expand Product Lines." Additionally, in 2001, the
Company introduced its Internet printing solution--PrintMe Networks. See
"Growth and Expansion Strategies--Develop and Expand PrintMe Networks."
In the past, the Company has achieved significant growth in net revenue and
operating income before adjustments for purchase accounting. The Company's
growth is contingent on a number of factors, however, many of which are outside
its control. These factors include the overall rate of growth in the color
server market and the impact of economic conditions on the demand for the
Company's products. Due to these and other factors (including an increasingly
higher base from which to grow and general domestic and global economic
conditions), the Company's historical growth rate has been difficult to sustain
and will be difficult to exceed in the future. The United States recession and
global economic slowdown has resulted in a slowdown in capital spending on
color printers and copiers in both the professional printing and office markets
which has had a significant negative impact on the Company's growth rate.
Accordingly, the Company believes that period-to-period comparisons of its
financial results should not be relied upon as an indication of future
performance.
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 migration of PDAs
to color and 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 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 high-quality color documents easily, quickly and cost-effectively. As
a result, EFI's Color Servers transform digital color copiers into fast,
high-quality, networked color printers.
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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 EFI 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 to introduce new generations
of controller 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 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 supported 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 introduced its next generation of
products based upon EFI's Fiery Z4 and Fiery X4 platforms and in 2000, the
Company again introduced its next generation of products based upon EFI's new
Fiery X3 platform. In 2000, the Company also introduced the EDOX 2000 Document
Server, an upgrade to the EDOX Color Servers. In 2001, the Company again
introduced its next generation of products based upon EFI's Fiery Z5 and Z18
platforms; the Fiery Z18 platform includes EFI's latest technology innovations,
including ColorWise 3.0, EFI's next generation of DocBuilder Pro and a Variable
Data Printing Solution. By utilizing the advantages of these new platforms, the
Company intends to continue to develop new products. The Company also intends
to continue to develop new software applications that advance the performance
and usability of its servers and embedded controllers. In 2000, the Company
developed a new line of software designed to maximize workflow efficiencies
which includes VelocityBalance(TM), VelocityBuild(TM), VelocityEstimate(TM) and
VelocityScan(TM), as well as Harmony Software Developers Kit which enables
users to develop custom applications that maximize the power, speed and
throughput of copiers and printers powered by Fiery technology. In 2001, the
Company developed VelocityBalance(TM) 2.0 which provides a number of new
functionalities including, Dynamic PPD technology. In 2001, the Company also
developed new software aimed at the graphics arts professional including, the
Fiery Graphics Arts Package(TM) and the EFI Color Profiler Kit(TM), document
security software, Advanced Secure Print Module(TM) as well as variable data
printing solutions. See "Products and Technology--EFI Technology." We expect to
continue developing new software applications.
The Company also plans to continue to expand its product line to include
Internet appliance products. In November, 1999, the Company introduced eBeam.
eBeam converts a conventional whiteboard into a digital workspace, allowing
users to capture whiteboard 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 standard web browser. In May, 2000, the Company introduced
its second generation eBeam product and in 2001, the Company introduced its
third generation of eBeam software. In 2001, the Company also introduced eBeam
System 3(TM), the next generation of eBeam hardware which is believed to be the
smallest digital whiteboard solution on the market and the eBeam ImagePort(TM)
accessory, a whiteboard system that allows data to be beamed to a Palm(TM)
handheld computer. In 2001, the Company also formed alliances with Interlink
Electronics, Inc. and 3M to
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develop new whiteboard products and office presentation systems. Currently,
eBeam is being sold through resellers and distributors, as well as directly to
consumers via the Web and a toll-free number.
Develop and Expand PrintMe Networks
In October, 2001, the Company announced PrintMe Networks, a complete
Internet printing solution that enables remote printing without requiring print
drivers, cables or complex setup. PrintMe Networks allows people to access and
print their e-mail messages, Internet content and other documents at any time,
anywhere, from any device, to any printer connected to the Internet. The
Company also announced, along with other industry leaders such as Adobe Systems
Incorporated, Xerox, IBM, Canon, Minolta, Toshiba, Sharp, Palm, Sir Speedy,
Office Max, STSN and Yahoo! plans to provide the technologies and channels
necessary to make this new technology widely available. The Company believes
that PrintMe Networks expands the scope and sophistication of its products and
will help it gain access to new markets.
Develop and Expand Relationships with Key Industry Participants
The Company has established relationships with leading color printer
industry companies such as Canon, Danka Business Systems, Epson, Fuji-Xerox,
Hewlett-Packard, Ikon Office Solutions, Konica, Minolta, Oce, Ricoh, Sharp,
Toshiba, and Xerox (collectively, the "Strategic Partners" or "OEM partners").
EFI seeks to expand its relationships with its Strategic Partners in pursuit of
the goal of offering Fiery, EDOX and Splash products for additional digital
color and black-and-white devices produced by its Strategic Partners. The
Company also seeks to establish relationships with other digital copier and
printer companies for the distribution of Fiery, EDOX and Splash 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 its 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 Technology 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,
networking, and software and hardware engineering. By applying its expertise in
these areas, 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's
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:
. desktop color laser printers,
. high-end desktop ink jet printers,
. wide-format printers,
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. mid-range color copiers,
. mid-range digital black and white copiers,
. production color copiers and
. high-speed digital presses.
Thus, we believe the Company's products are attractive to a variety of end
users including, multimedia authors, advertising agencies, print-for-pay
businesses, graphic designers, pre-press providers and small to large
businesses. 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.
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 DocBuilder,
which enables electronic collation, reverse order printing, job merging and
editing, and Fiery WebTools which enables print job management from different
computer platforms via a Java(TM)-enabled Web Browser. Fiery WebTools 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, (i)RIP-While-Print which allows one page to be printed
while subsequent pages are simultaneously processed; (ii) Continuous Print
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; (iii) NetWise 3.0, EFI's third generation networking architecture which
provides enhanced programmability that helps users build customized printing
solutions and provides extensive Internet-based functionality; (iv) Fiery
Driver which is a unified printing interface that simplifies the printing
process; (v) Fiery Link 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, and 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 STARR 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. In
addition to such software innovations, EFI custom designs its hardware to
increase productivity. For example, EFI's custom designed RIPChips, 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 2001, the Company continued its efforts to improve its products'
performance, features and ease of use. Software features developed by the
Company during 2001 include: (i) Colorwise 3.0, EFI's third generation color
management system which provides greater image quality and calibration accuracy
(ii) the next generation DocBuilder Pro(TM) which provides users with enhanced
workflow; (iii) the EFI Color Profiler(TM) kit which includes profile creation
software and an integrated EFI Spectrometer(TM), a hand-held optical color
measurement device that is designed to provide the ability to quickly and
accurately measure the color of any paper or other material; and (iv) the Fiery
Graphics Arts Package(TM) designed to address the needs of graphic arts
professionals by emphasizing increased workflow and productivity while
stringently adhering to industry color standards.
Stand-alone Servers
EFI 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
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result, EFI Color Servers transform digital color copiers into fast,
high-quality networked color printers. In addition to EFI 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 and Splash 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. During 1999, the Company again introduced two new server platforms,
the Fiery Z4 and the Fiery X4, which incorporated several new technologies or
enhancements from EFI including, ColorWise2.0, NetWise 2.0, the PowerWise
Architecture and the next generation DocBuilder Pro(TM). 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. During 2000 the Company
introduced one new platform, the X3, which includes features developed or
further refined by the Company during 2000. The X3 is approximately seven times
faster than its predecessor the Fiery X2. During 2001, the Company again
focused its development efforts on improvements to its products' performance,
features and ease of use and introduced two new platforms, the Fiery Z5 and the
Fiery Z18. The Fiery Z5 for mid-range color copiers and the Fiery Z18 for
high-end printers provide the power, precision, and advanced workflow controls
needed to maximize both print quality and productivity for the print-for-pay,
CRD, commercial printer and graphic arts markets. Each platform features a
major re-architecture--enabling improvements in printing speed--and is designed
to run new EFI software featuring specialized tools for graphic arts
professionals. In 2001, the Company shipped stand-alone EFI Color Servers for
use with color copiers, color inkjet printers and wide-format color printers
distributed by companies such as Canon, Epson, Fuji-Xerox, Minolta, Oce, Ricoh,
Toshiba, Ikon Office Solutions, Sharp and Xerox. In 2001, the Company also
shipped Fiery servers for use with digital black-and-white copiers distributed
by Canon, Danka, Konica, Minolta, Oce and Sharp.
Controllers
Unlike our Fiery, EDOX and Splash 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. Fiery Controllers support
both color and black-and-white printing on desktop color laser printers, color
multi-function devices and digital black-and-white copiers. Because the Company
believes that the Fiery name and trademark, including the trademark "Fiery
Driven," are associated with substantial goodwill and recognition in the
marketplace, the Company seeks to have the "Fiery Driven" logo placed on
printing solutions that include an embedded Fiery Controller. In 2001, the
Company shipped Fiery Controllers embedded in color and digital black-and-white
copiers and desktop color printers 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, in order to benefit from the OEMs' products, distribution channels
and marketing resources. The OEMs include domestic and international
manufacturers, distributors and sellers of digital copiers (both color and
black-and-white), 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 that optimally work in conjunction with such
companies' products. OEMs that the
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Company sold products to in 2001 include, among others, Canon, Epson,
Fuji-Xerox, Hewlett-Packard, Ikon Office Solutions, Konica, Minolta, Oce,
Ricoh, Sharp, Toshiba and Xerox. Together, sales to Canon, Xerox, Minolta and
Ricoh accounted for approximately 79% of the Company's 2001 revenue, with sales
to each of these customers accounting for more than 10% of the Company's
revenue.
In 2001, the Company announced two alliances to further the development of
eBeam: an alliance with Interlink Electronics, Inc. to develop a new family of
business communications whiteboard products and an alliance with 3M Visual
Systems Division to develop office presentation systems.
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 relationships
with its customers. However, the Company's relationships with its customers is
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, in
order to increase the distribution and presence of EFI 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), MultiCopy, Inc. and the SAMPA Corporation,
franchiser of Signal Graphics Printing Centers. Several of these print-for-pay
companies, including, American Speedy, OfficeMax, MultiCopy, Inc. and SAMPA
Corporation, have entered into worldwide strategic alliances with the Company
whereby they agreed to continue standardization efforts on EFI's Fiery 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 leader in providing page
description software.
Distribution and Marketing
The Company's primary distribution method for its Fiery and Splash servers
has been to sell the Fiery and Splash servers to its OEMs. The Company's 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 Company will continue to successfully distribute its products through these
channels. Any interruption of the distribution methods will 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.
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Research and Development
Research and development costs for 2001, 2000, and 1999 were $98.1 million,
$94.1 million, and $75.0 million, respectively. As of December 31, 2001, 481 of
the Company's 917 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 as well as new software applications designed to meet the needs of
the graphics arts professional. The Company is also developing Internet
printing solutions.
The Company expects to enhance functionality of its Internet appliance
product eBeam. See "--Growth and Expansion Strategies--Proliferate and Expand
Product Lines". Substantial additional work and expense 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. Difficulties experienced by the
Company's subcontractors (such as interruptions in a subcontractor's ability to
make or ship the Company's products, quality assurance problems or the ongoing
business viability of a subcontractor) would 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. In an attempt to mitigate these supply issues, the Company will
purchase components for later resale to the Company's subcontractors thus
increasing the Company's inventory balances and the risk associated with
inventory obsolescence.
Human Resources
As of December 31, 2001, the Company employed 917 individuals. Of the 917
total employees, approximately 218 were in sales and marketing, 131 were in
management and administration, 87 were in manufacturing, and 481 were in
research and development. Of the total number of employees, the Company had
approximately 780 employees located in U.S. and Canadian offices, and 137
employees located in international offices including employees based in The
United Kingdom, The Netherlands, Germany, Japan, France, Italy, Finland, Spain,
Australia, Singapore, Brazil, Mexico, 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. However, there can be no
assurance that collective bargaining, work stoppage or other employment related
issues will not arise.
9
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, EDOX and Splash 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 faces competition from its customers and other 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. The Company also
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. 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, end-user loyalty, 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 advance its
technology and its products or 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, 2001, the Company had
84 issued U.S. patents, 56 pending U.S. patent applications and various foreign
counterpart patents and applications. 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 2002 and
March 2020. Failure of the Company to obtain or maintain patent protection 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 misappropriation of the Company's trade secrets or breach of
other proprietary rights. Any failure by the Company to take all necessary
steps to protect its trade secrets or other intellectual property rights and
failure to enforce these 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, among others,
its EFI, Fiery, Fiery and Design(R), Fiery Driven, Fiery Driven and Design,
ColorWise, EDOX, and RIP-While-Print 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
10
jurisdictions. In addition, the laws of some foreign countries, including
several in which the Company operates or sells its products, do not protect
intellectual property and 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
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 on approximately 35 acres of land which the Company owns. The
corporate headquarters facility, which includes approximately 295,000 square
feet, was completed in July, 1999 and is leased by the Company. Tthe Company
entered into an agreement in 1999 to lease additional facilities to be
constructed on the Foster City property. Construction of 163,000 square feet of
additional facilities was completed in December 2001. In addition to the Foster
City offices, the Company has leased facilities in Parsippany, New Jersey;
Minneapolis, Minnesota; Vancouver, Washington and Amsterdam, The Netherlands.
The Company also leases a number of domestic and international sales offices.
In January 2001 the Company purchased facilities with approximately 44,000
square feet in Minneapolis, Minnesota.
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.
11
In January 1999, two class action complaints were filed, and subsequently
consolidated into one case, in the United States District Court for the
Northern District of California against Splash and certain of its officers. The
complaints allege that defendants made false and misleading statements about
Splash's business condition and prospects during a class period of January 7,
1997--October 13, 1998, and assert claims for violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. On August 28,
2001, the federal court judge granted the Company's motion to dismiss the
plaintiff's claim against Splash and certain of its officers. The plaintiffs
have filed a notice of appeal with the Ninth Circuit Court of Appeals. The
complaint seeks damages of an unspecified amount. The Company believes it has
meritorious defenses in this action and intends to defend it vigorously.
Failure by the Company to obtain a favorable resolution of the claims set forth
in these actions could have a material adverse affect on the Company's
business, results of operations and financial condition. Currently, the amount
of such material effect cannot be reasonably estimated.
On August 31, 2000, after the announcement of the tender offer for Splash, a
shareholder class action lawsuit was filed against Splash and its directors for
violation of federal and state securities laws. The plaintiffs, Splash and the
Company agreed to enter into a settlement agreement that would resolve the
outstanding disputes and dismiss the case with prejudice. On November 30, 2001,
the Court approved the non-cash settlement and signed the Final Judgment and
Order of Dismissal. The Company and Splash deny any wrongdoing whatsoever, but
agreed to the settlement to eliminate the burden and expense of further
litigation.
Over the past five years, Mr. Jan R. Coyle, an individual living in Nevada,
has repeatedly requested that the Company buy technology allegedly invented by
his company, Kolbet Labs. In December 2001, Mr. Coyle threatened to sue the
Company and all of its customers for infringing a purportedly soon to be issued
patent and for misappropriating his trade secrets. The Company believes that
Mr. Coyle's threats are without merit and that it has no liability under claims
threatened by Mr. Coyle. On December 11, 2001, the Company filed a declaratory
relief action in the United States District Court for the Northern District of
California, seeking a declaration from the court that the Company and its
customers have not breached any nondisclosure agreement with Mr. Coyle or
Kolbet Labs, and that it has not infringed any patent claims or misappropriated
any trade secrets belonging to Mr. Coyle or Kolbet Labs through its sale of
Fiery, Splash or EDOX print controllers. The Company also seeks an injunction
enjoining both Mr. Coyle and Kolbet Labs from bringing or threatening to bring
a lawsuit against the Company, its suppliers, vendors, customers and users of
its products for breach of contract and misappropriation of trade secrets.
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.
None.
12
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 2001 and
2000.
2001 2000
--------------------------- ---------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------ ------ ------ ------ ------ ------ ------ ------
High.................... $28.31 $29.50 $29.04 $23.80 $65.13 $64.06 $29.42 $24.69
Low..................... 13.75 22.24 15.34 15.36 45.19 22.31 21.38 11.94
As of February 28, 2002, there were approximately 286 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 its
business, and does not anticipate paying any cash dividends in the foreseeable
future.
13
Item 6: Selected Financial Data.
The following tables summarize selected consolidated financial data as of,
and for the five years in the period ended December 31, 2001. This information
should be read in conjunction with the audited consolidated financial
statements and related notes thereto.
As of and for the years ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Operations
Revenue........................................ $517,608 $588,449 $570,752 $446,999 $373,404
Cost of revenue................................ 282,113 311,152 290,636 249,179 171,138
-------- -------- -------- -------- --------
Gross profit................................... 235,495 277,297 280,116 197,820 202,266
-------- -------- -------- -------- --------
Operating expenses
Research and development.................... 98,116 94,097 74,971 60,150 42,868
Sales and marketing......................... 56,767 64,526 59,373 60,615 46,776
General and administrative.................. 25,456 24,784 18,403 16,637 13,578
Amortization of goodwill and other
acquisition--related charges *............ 12,255 23,621 -- -- 9,400
Merger-related expense **................... -- -- 1,422 -- --
-------- -------- -------- -------- --------
Total operating expenses................ 192,594 207,028 154,169 137,402 112,622
-------- -------- -------- -------- --------
Income from operations......................... 42,901 70,269 125,947 60,418 89,644
-------- -------- -------- -------- --------
Other income, net.............................. 17,471 21,550 16,250 9,859 10,309
-------- -------- -------- -------- --------
Income before income taxes..................... 60,372 91,819 142,197 70,277 99,953
Provision for income taxes..................... (21,432) (37,461) (46,914) (22,456) (35,944)
-------- -------- -------- -------- --------
Net income..................................... $ 38,940 $ 54,358 $ 95,283 $ 47,821 $ 64,009
======== ======== ======== ======== ========
Net income per basic common share ***.......... $ 0.73 $ 0.99 $ 1.74 $ 0.89 $ 1.21
Net income per diluted common share ***........ $ 0.71 $ 0.97 $ 1.67 $ 0.87 $ 1.13
Shares used in computing net income per basic
common share ***............................. 53,468 54,649 54,853 53,507 52,831
Shares used in computing net income per diluted
common share ***............................. 54,605 55,983 56,963 54,972 56,713
Financial Position
Cash and short-term investments................ $451,207 $353,603 $470,328 $328,732 $246,764
Working capital................................ 438,020 389,917 487,591 355,361 293,972
Long term liabilities, less current portion.... 331 3,140 3,467 4,142 4,267
Total assets................................... 702,987 654,390 656,075 484,191 395,949
Stockholders' equity........................... $606,567 $545,316 $551,187 $408,680 $346,727
Ratios and Benchmarks
Current ratio.................................. 5.6 4.7 5.8 6.0 7.5
Inventory turns................................ 15.5 13.2 20.5 11.6 8.3
Full-time employees............................ 917 895 758 660 614
- --------
* See Note 2 of notes to Consolidated Financial Statements.
** The Company incurred approximately $1.4 million of non-recurring expenses
related to the merger with Management Graphics, Inc. in 1999.
*** See Note 1 of Notes to Consolidated Financial Statements.
14
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 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."
The preparation of the consolidated financial statements which are the basis
of the following discussion and analysis requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. The
Company evaluates its estimates, including those related to bad debts,
inventories, intangible assets, income taxes, warranty obligations, purchase
commitments and contingencies. The estimates are based upon historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances at the time of the estimate, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
The following are believed to be the critical accounting policies of the
Company:
. revenue recognition;
. estimating allowance for doubtful accounts inventory reserves and other
allowances;
. accounting for income taxes;
. valuation of long-lived and intangible assets and goodwill;
. determining functional currencies for the purposes of consolidating our
international operations; and
. accounting for the synthetic lease arrangement.
Revenue recognition. We derive our revenue from primarily two sources (i)
product revenue, which includes servers, controllers, chipsets and royalties,
and (ii) services and support revenue which includes consulting and development
fees. As described below, significant management judgments and estimates must
be made and used in connection with the revenue recognized in any accounting
period. Material differences may result in the amount and timing of our revenue
for any period if our management made different judgments or utilized different
estimates.
We recognize revenue from the sale of servers, controllers and chipsets when
persuasive evidence of an arrangement exists, the product has been delivered,
the fee is fixed and determinable and collection of the resulting receivable is
reasonably assured. Delivery generally occurs when product is delivered to a
common carrier.
At the time of the transaction, we assess whether the fee associated with
our revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with the transaction.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the
customer. We do not request collateral from our customers. If we determine that
collection of a fee is not reasonably assured, we defer the fee and recognize
revenue at the time collection becomes reasonably assured, which is generally
upon receipt of cash.
For all sales, we use either a binding purchase order or signed contract as
evidence of an arrangement. Sales through some of our OEMs are evidenced by a
master agreement governing the relationship together with binding purchase
orders on a transaction by transaction basis.
15
Our arrangements do not generally include acceptance clauses.
We recognize revenue for consulting and development services ratably over
the contract term. Our consulting and development services are billed based on
hourly rates, and we recognize revenue as these services are performed. If
these services are related to product development, we recognize the entire fee
using the percentage of completion method. We estimate the percentage of
completion based on our estimate of the total costs estimated to complete the
project as a percentage of the costs incurred to date and the estimated costs
to complete.
Allowance for doubtful accounts, inventory reserves and other
allowances. The preparation of financial statements requires our management to
make estimates and assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Specifically, management must make estimates of the
uncollectability of our accounts receivables. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $54.0 million, net of allowance
for doubtful accounts and sales returns of $1.6 million as of December 31,
2001. Similarly, management must make estimates of potential future inventory
obsolesence and purchase commitments. Management analyzes current economic
trends, changes in customer demand and acceptance of our products when
evaluating the adequacy of allowances. Significant management judgments and
estimates must be made and used in connection with establishing the allowances
in any accounting period. Material differences may result in the amount and
timing of our revenue for any period if management made different judgments or
utilized different estimates.
Accounting for income taxes. In preparing our consolidated financial
statements we are required to estimate our income taxes in each of the
jurisdictions in which we operate. We estimate our actual current tax exposure
and the temporary differences resulting from differing treatment of items, such
as deferred revenue, for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income. If we believe
that recovery of these deferred assets is not likely, we must establish a
valuation allowance. To the extent we either establish or increase a valuation
allowance in a period, we must include an expense within the tax provision in
the statement of operations.
We provide US taxes on earnings of our non-US subsidiaries, to the extent
such earnings are not permanently reinvested. Significant management judgment
is needed in estimating the extent to which earnings are considered permanently
reinvested. As of December 31, 2001, the non-US earnings considered permanently
reinvested were not material.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have not recorded a
valuation allowance as of December 31, 2001. If actual results differ from
these estimates or we adjust these estimates in future periods we may need to
establish a valuation allowance that could materially impact our financial
position and results of operations.
The net deferred tax asset as of December 31, 2001 was $22.6 million.
Valuation of long-lived and intangible assets and goodwill. We assess the
impairment of identifiable intangibles, long-lived assets and related goodwill
and enterprise level goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include the following:
. significant underperformance relative to expected historical or projected
future operating results;
16
. significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
. significant negative industry or economic trends;
. significant decline in our stock price for a sustained period; and
. our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets
and related goodwill and enterprise level goodwill may not be recoverable based
upon the existence of one or more of the above indicators of impairment, we
measure any impairment based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk
inherent in our current business model. Net intangible assets, long-lived
assets, and goodwill amounted to $117.9 million as of December 31, 2001.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we
will cease to amortize approximately $52.0 million of goodwill. We had recorded
approximately $7.6 million of amortization on these amounts during 2001 and
would have recorded approximately $7.3 million of amortization during 2002. In
lieu of amortization, we are required to perform an initial impairment review
of our goodwill in 2002 and an annual impairment review thereafter. We expect
to complete our initial review during the first half of 2002.
We currently do not expect to record an impairment charge upon completion of
the initial impairment review. However, there can be no assurance that at the
time the review is completed a material impairment charge will not be recorded.
Determining functional currencies for the purpose of consolidation. We have
several foreign subsidiaries which together account for approximately 45% of
our net revenues, 7% of our assets and 19% of our total liabilities as of
December 31, 2001.
In preparing our consolidated financial statements, we are required to
translate the financial statements of the foreign subsidiaries from the
currency in which they keep their accounting records, generally the local
currency, into United States dollars. This process results in exchange gains
and losses which, under the relevant accounting guidance are either included
within the statement of operations or as a separate part of our net equity
under the caption "cumulative translation adjustment."
Under the relevant accounting guidance the treatment of these translation
gains or losses is dependent upon our management's determination of the
functional currency of each subsidiary. The functional currency is determined
based on management judgment and involves consideration of all relevant
economic facts and circumstances affecting the subsidiary. Generally, the
currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures would be
considered the functional currency but any dependency upon the parent and the
nature of the subsidiary's operations must also be considered. If any
subsidiary's functional currency is deemed to be the local currency, then any
gain or loss associated with the translation of that subsidiary's financial
statements is included in cumulative translation adjustments. However, if the
functional currency is deemed to be the United States dollar then any gain or
loss associated with the translation of these financial statements would be
included within our statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would be realized into
our statement of operations. If we determine that there has been a change in
the functional currency of a subsidiary to the United States dollar, any
translation gains or losses arising after the date of change would be included
within our statement of operations.
Based on our assessment of the factors discussed above, we consider the
United States Dollar to be the functional currency for each of our
international subsidiaries except for our Japanese subsidiary, where we
consider the Japanese Yen to be the subsidiary's functional currency.
17
Accounting for the synthetic lease arrangement. We have arrangements with
two financial institutions whereby we are leasing two buildings built on a
parcel of land which we own in Foster City, California. The lessors funded the
construction of the buildings. Construction for the first building was
completed in July 1999 and the second building was completed in December 2001.
We are satisfied that the arrangements meet the requirements of FAS 13
"Accounting for Leases" and meet the requirements of construction period risk
under EITF 97-10 "The Effect of Lessee Involvement in Asset Construction" and
as a result, we are accounting for these arrangements as operating leases. The
collateral required by the lessor under one lease has been recorded as
restricted investments in the long-term assets section of the balance sheet.
See Note 6 of the financial statements for further details of these
arrangements and the future minimum lease payments due.
Results of Operations
The following tables set forth items in the Company's consolidated
statements of income as a percentage of total revenue for 2001, 2000 and 1999,
and the year-to-year percentage change from 2001 over 2000 and from 2000 over
1999, respectively. These operating results are not necessarily indicative of
results for any future period.
% change
---------
Years ended December 31, 2001 2000
----------------------- over over
2001 2000 1999 2000 1999
---- ---- ---- ---- ----
Revenue.................................................... 100% 100% 100% (12)% 3 %
Cost of revenue............................................ 55% 53% 51% (9)% 7 %
--- --- ---
Gross profit............................................... 45% 47% 49% (15)% (1)%
--- --- ---
Research and development................................... 19% 16% 13% 4 % 26 %
Sales and marketing........................................ 11% 11% 11% (12)% 9 %
General and administrative................................. 5% 4% 3% 3 % 35 %
Amortization of goodwill and other acquisition-related
charges.................................................. 2% 4% -- % (48)% 100 %
--- --- ---
Operating expenses......................................... 37% 35% 27% (7)% 34 %
--- --- ---
Income from operations..................................... 8% 12% 22% (39)% (44)%
--- --- ---
Other income, net.......................................... 3% 4% 3% (19)% 33 %
--- --- ---
Income before income taxes................................. 11% 16% 25% (34)% (35)%
Provision for income taxes................................. 4% 6% 8% (43)% (20)%
--- --- ---
Net income................................................. 7% 10% 17% (28)% (43)%
=== === ===
Revenue
The Company's revenue in 2001 was 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
X3, X4, Z4, Z5 and Z18 products and accounted for a majority of the Company's
revenue prior to 1999. 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.
18
The following is a break-down of revenue in dollars and volumes as a
percentage of total units shipped by category.
% change
---------
2001 2000
over over
Revenue 2001 Revenue 2000 Revenue 1999 Revenue 2000 1999
- ------- ------------ ------------ ------------ ---- ----
(in thousands)
Stand-alone Servers Connecting to
Digital Color Copiers........... $215,155 42% $268,436 46% $244,028 43% (20)% 10 %
Embedded Desktop Controllers,
Bundled Color Solutions &
Chipset Solutions............... 151,499 29% 129,277 22% 149,899 26% 17 % (14)%
Controllers for Digital Black and
White Solutions................. 95,522 18% 130,780 22% 121,071 21% (27)% 8 %
Spares, Licensing & Other misc.
sources......................... 55,432 11% 59,956 10% 55,754 10% (8)% 8 %
-------- --- -------- --- -------- ---
Total Revenue.................. $517,608 100% $588,449 100% $570,752 100% (12)% 3 %
======== === ======== === ======== ===
2001 2000 1999
Volume Volume Volume Volume
- ------ ------ ------ ------
Stand-alone Servers Connecting to Digital Color Copiers.... 12% 16% 14%
Embedded Desktop Controllers, Bundled Color Solutions &
Chipset Solutions........................................ 52% 48% 50%
Controllers for Digital Black and White Solutions.......... 30% 32% 36%
Spares, Licensing & Other misc. sources.................... 6% 4% --
--- --- ---
Total Volume............................................ 100% 100% 100%
=== === ===
Revenue decreased to $517.6 million in 2001, compared to $588.4 million in
2000 and $570.8 million in 1999, which resulted in a 12% decrease in 2001
versus 2000 and an increase of 3% in 2000 compared to 1999. The corresponding
unit volume decreased by 12% in 2001 over 2000 and increased by 20% in 2000
over 1999. The decrease in revenue in 2001 from 2000 was primarily from a
decline in average selling prices due to changes in product mix, which was a
reflection of the slowdown in the general economic conditions. The increase in
revenue in 2000 from 1999 was primarily due to increases in unit volumes and
positive market acceptance of new product introductions, partially offset by a
decline in average selling prices due to changes in product mix.
The category of stand-alone servers made up 42% of total revenue and 12 % of
total unit volume in 2001. The decrease in revenue over 2000 was a result of
the move from the high-end stand alone servers to less expensive solutions.
This category made up 46% of total revenue and 16% of total unit volume in 2000
and 43% of total revenue and 14% of total unit volume in 1999. Sales of
products in this category declined in 2001 as business users were cautious in
buying high ticket items in the recession-bound economy. There appears to be a
transition to equipment with embedded controllers as that equipment offers
products that were previously only offered with the stand-alone servers. This
transition is reflected in the 17% increase in revenue in 2001 over 2000 in the
desktop product category. This category made up 29% of total revenue and 52% of
total unit volume in 2001. It made up 22% of total revenue and 48% of total
unit volume in 2000 and 26% of total revenue and 50% of total unit volume in
1999. The decline from 1999 to 2000 in absolute dollars in this category was
primarily the result of product transitions. These products, except for the
chipset solutions, are 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
black and white product category saw a decline in 2001, with 18% of total
revenue and 30% of total unit volume in 2001, compared to 22% of the revenue
and 32% of the volume in 2000. In 1999 black and white
19
controllers represented only 21% of the revenue and 36% of the 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. 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. There can be no assurance that the
new products for 2002 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
in order to drive demand and remain competitive. 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 2001 (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 December 31, 2001, 2000 and
1999 were as follows:
% change
---------
Years ended December 31, 2001 2000
---------------------------------------- over over
2001 2000 1999 2000 1999
------------ ------------ ------------ ---- ----
(In thousands)
North America................ $256,781 50% $291,679 50% $277,997 49% (12)% 5 %
Europe....................... 181,605 35% 191,403 32% 182,602 32% (5)% 5 %
Japan........................ 61,459 12% 85,983 15% 90,781 16% (29)% (5)%
Rest of World................ 17,763 3% 19,384 3% 19,372 3% (8)% 0 %
-------- --- -------- --- -------- ---
$517,608 100% $588,449 100% $570,572 100% (12)% 3 %
======== === ======== === ======== ===
The decrease in revenue between 2000 and 2001stems from increasing sales of
low end products as well as the continuing difficult economic times across all
regions, particularly in Japan. Deteriorating worldwide economic conditions may
continue to 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, Epson, Fuji-Xerox, IBM, Hewlett-Packard, Kodak/Danka Business Systems,
Konica, Lanier, Minolta, Oce, Ricoh, Sharp, Xerox and others. During 2001, 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 four OEM customers, Canon, Xerox, Minolta and Ricoh in aggregate for
79%, 76%, and 75% of its revenue for 2001, 2000 and 1999, 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.
20
The Company continues to work on the development of products utilizing the
Fiery, Splash and EDOX architecture and other products and intends to continue
to introduce new generations of server and controller products and other new
product lines with current and new OEM's in 2001 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
The Company's 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 45%, 47% and 49% for 2001, 2000 and 1999
respectively. The decrease in gross margin from 47% to 45% from 2000 to 2001
and from 49% to 47% from 1999 to 2000 was primarily due to a higher mix of
low-end products with relatively lower margins and the volatile components
market.
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 general, the Company believes that gross margins 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.
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
current gross margins may be volatile.
Operating Expenses
Operating expenses decreased by 7% in 2001 over 2000 and increased by 34% in
2000 over 1999. Operating expenses as a percentage of revenue amounted to 37%,
35%, and 27% for 2001, 2000 and 1999, respectively. Operating expenses in
absolute dollars decreased $3.1 million before the amortization of goodwill and
other acquisition-related charges in 2001 compared to 2000, the result of
management's focus on reducing expenses during a difficult business climate.
There was an increase of $29.2 million in 2000 compared to 1999, 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 137 people at December 31, 2000 over
December 31, 1999).
Operating expenses for 2001 included approximately $12.3 million for the
amortization of goodwill and other intangibles. In 2000 the Company included in
operating expenses $23.6 million of acquisition related costs and the
amortization of goodwill and other intangibles from the acquisition of Splash.
In 1999 the Company incurred non-recurring expenses of $1.4 million of
merger-related expenses associated with the merger of MGI and $1.8 million of
expense associated with the Company's move to central facilities in Foster
City, of which approximately $0.2 million related to cost of revenue.
21
The Company anticipates that operating expenses 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 $98.1 million or
19% of revenue in 2001 compared to $94.1 million or 16% of revenue in 2000 and
$75.0 million or 13% of revenue in 1999. 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 26% increase in research and
development expenses in 2000 compared to 1999 was due to a 23% growth in
engineering headcount. 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 product development efforts. Accordingly, the Company expects that
its research and development expenses may 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 2001 were $56.8 million or 11% of
revenue compared to $64.5 million or 11% of revenue in 2000 and $59.4 million
or 11% in 1999. Sales and marketing expenses have been maintained at 11% of
revenue through controlled spending. The increase in desktop and embedded
product sales has contributed to the reduction in marketing expenses, as the
OEM's require less support from the Company for these products.
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, and launch new products. This expected
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 marketing support from the Company.
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 $25.5 million or 5% of revenue in 2001, compared to $24.8 million
or 4% of revenue in 2000 and $18.4 million or 3% of revenue in 1999. General
and administrative expenses have increased as a percentage of total revenue and
in absolute dollars over the three year period ended 2001. The increases in
2001 over 2000 and in 2000 over 1999 were primarily due to the increase in
headcount to support the needs of the growing Company's operations, including a
business development department, a Dutch transaction processing center, and a
ERP implementation team. 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.
Amortization of goodwill and acquisition-related charges
Amortization of goodwill and other intangibles was $12.3 million or 2% of
revenue in 2001 and $3.3 million or less than 1% of revenue for 2000.
Acquisition-related charges in 2000 were $20.3 million, or 3% of revenue. At
December 31, 2001 the unamortized portion of goodwill and other intangibles
totaled $62.9 million and was being amortized over estimated lives ranging from
4 to 7 years. SFAS No. 142, issued in
22
July, 2001, requires, among other things, the discontinuance of goodwill
amortization for fiscal years beginning after March 15, 2001. Upon adoption of
the standard, we will cease amortizing goodwill. During the twelve months ended
December 31, 2001 goodwill amortization expense totaled $7.6 million. Net
unamortized goodwill at December 31, 2001 was $42.4 million. Net intangible
assets totaling $1.5 million will require reclassification to goodwill as of
January 1, 2002 as a result of the adoption of SFAS No. 142. Any adjustments as
a result of the initial implementation of SFAS No. 142 impairment tests will be
recorded as a cumulative effect of change in accounting principle effective
January 1, 2002.
Merger related expenses
On August 31, 1999 the Company merged with MGI, a Minnesota-based
corporation that develops digital print on demand products and other digital
imaging products through a pooling-of-interests transaction. 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.
Other Income
Other income relates mainly to interest income and expense, and gains and
losses on foreign currency transactions. Other income of $17.5 million in 2001
decreased by 19% from $21.6 million in 2000. Other income of $21.6 million in
2000 increased by 33% from $16.3 million in 1999. The decrease in 2001 from
2000 is due mainly to a lower return on investments as a result of lower market
interest rates in 2001 compared to 2000. The increase in 2000 from 1999 is due
to an increase in the average investment balance as well as more favorable
market interest rates in 2000 compared to 1999.
Income Taxes
The Company's effective tax rate was 35.5% in 2001, 40.8% in 2000 and 33% in
1999. In each of these years the Company benefited from tax-exempt interest
income, a foreign sales corporation, and the utilization of the research and
development credits. The Company's effective tax rate for 2001 and 2000 was
adversely impacted by charges associated with the acquisition of Splash (in
process research and development and amortization of intangible assets in 2000
and amortization of intangible assets in 2001). Excluding the impact of the
Splash acquisition related charges, the Company's effective tax rate for 2001
and 2000 was 33%. The Company currently estimates that its actual tax rate for
2002, will be approximately 30%.
Stock Option Repricing
During the fourth quarter of 2001, the Company authorized the implementation
of an option exchange program pursuant to which our current employees would
have the opportunity to exchange their outstanding options to purchase shares
of our common stock for new stock option grants to be made to them at a later
date. Outstanding stock options granted between December 1, 1999 and May 31,
2000 under our 1990 Plan or our 1999 Plan will be exchanged for new replacement
options to be granted under our 1999 Plan during the second quarter of 2002.
The number of shares of Common Stock subject to each new option will be equal
to two-thirds of the number of shares of Common Stock subject to the tendered
option. Options for approximately 2,590,825 shares of common stock were
eligible for participation in the option exchange program. At the conclusion of
the option exchange program on October 12, 2001, the Company accepted for
exchange and cancelled options to purchase an aggregate of 2,500,143 shares of
our common stock. As a result, we expect to issue new replacement options to
purchase approximately 1,666,762 shares of common stock in 2002 in exchange for
those cancelled options. However, no replacement options will be granted to any
employee whose options were cancelled pursuant to the option exchange program,
unless that individual continues in our employ through the grant date of the
replacement option.
23
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS No. 141 will not have a
significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. Upon
adoption of SFAS 142 the Company will cease to amortize approximately $62.9
million of goodwill. During 2001 the Company recorded approximately
$7.6 million of goodwill amortization and would have recorded approximately
$7.6 million of goodwill amortization during 2002. In addition the Company will
be required to perform an impairment review of its goodwill balance upon the
initial adoption of SFAS No. 142. The impairment review will involve a two-step
process as follows:
1. The fair value of our reporting units will be compared to the carrying
value, including goodwill, of each of those units. For each reporting
unit where the carrying value, including goodwill, exceeds the unit's
fair value, step 2 will be performed. If a unit's fair value exceeds the
carrying value, no further work is performed and no impairment charge is
necessary.
2. An allocation of the fair value of the reporting unit to its
identifiable tangible and non-goodwill intangible assets and liabilities
will be performed. This will derive an implied fair value for the
reporting unit's goodwill. The implied fair value of the reporting
unit's goodwill with the carrying amount of reporting unit's goodwill
will then be compared and if the carrying amount of the reporting unit's
goodwill is greater than the implied fair value of its goodwill, an
impairment loss will be recognized for the excess.
We expect to complete this review during the first half of 2002. We do not
expect to record an impairment charge upon completion of the initial review.
However, there can be no assurance that at the time the review is completed a
material impairment charge may not be recorded
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-lived
Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30. SFAS No. 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS No. 144 requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in
a disposal transaction. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The Company does not expect the adoption of SFAS No.
144 will have a material effect on its consolidated financial statements, when
it is adopted in 2002.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased by $97.6 million
to $451.2 million as of December 31, 2001, from $353.6 million as of December
31, 2000. Working capital increased by $48.1 million to $438.0 million as of
December 31, 2001, up from $389.9 million as of December 31, 2000.
Net cash provided by operating activities was $126.4 million, $76.5 million
and $131.5 million in 2001, 2000 and 1999, respectively. Cash provided by
operating activities increased in 2001 as a result of a decrease in
24
inventories and accounts receivable from customers and subcontract
manufacturers and an increase in income taxes payable, offset with a decrease
in accounts payable and accrued liabilities.
The Company has continued to invest cash in short-term investments, mainly
municipal securities. Purchases in excess of sales of short-term investments
were $8.3 million in 2001 and $38.0 million in 1999, while sales in excess of
purchases were $57.5 million in 2000. The Company's 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 $14.5 million, $15.5 million and $15.6 million of such equipment
and furniture during 2001, 2000 and 1999, respectively. The Company purchased
land and facilities in Minnesota for approximately $4.8 million and incurred
$7.1 million in land improvements at its Foster City campus during 2001. During
2000 the Company invested $83.8 million, net of cash received, in the
acquisition of Splash.
Net cash provided by financing activities of $13.9 million in 2001 were
primarily the result of exercises of common stock options and the tax benefits
to the Company associated with those exercises. Net cash used in financing
activities of $82.5 million in 2000 was primarily the difference between the
$100.0 million used to repurchase common stock and the cash received from
exercises of common stock options, net of the tax benefits associated with the
exercises. Net cash provided by financing activities of $26.7 million in 1999
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 2001, 1999 and 1999 includes approximately
$3.1 million, $0.8 million and $0.9 million of cash used to repay long-term
obligations.
We do not have significant long term debt outstanding. Future payments due
under lease obligations as of December 31, 2001 (in thousands):
Non-Cancelable
Operating
Leases
--------------
2002......................... $ 3,268
2003......................... 2,997
2004......................... 2,318
2005......................... 1,161
2006......................... 1,027
2007 and thereafter.......... --
-------
$10,771
=======
Off-Balance Sheet Financing--Synthetic Lease Arrangement
In 1997, the Company began development of a corporate campus on a 35-acre
parcel of land in Foster City, California. During 1997 and 1999 the Company
spent approximately $27.3 million on the land and associated improvement costs.
In addition to purchasing the land, the Company entered into an agreement
("1997 Lease") to lease a ten-story 295,000 square foot building to be
constructed on the site. The lessor of the building funded $56.8 million for
the construction of the building. In July 1999 the Company completed
construction of the building and began making rent payments. 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. If the
Company does not renew the building lease, the ground lease converts to a
market rate.
In December 1999 the Company entered into a second agreement ("1999 Lease"
and together with the 1997 Lease, the "Leases") to lease a maximum of 543,000
square feet of additional facilities, to be constructed adjacent to the first
building discussed above. As of December 31, 2001 the lessor has funded $38.3
million of a maximum commitment 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. Rent obligations for the
building, which
25
will begin in January 2002, will bear a direct relationship to the carrying
cost of the commitments drawn down. Construction of the first of the additional
facilities began in January 2000 and was completed in December 2001. Further
construction of additional facilities has been halted for the time being. On
January 18, 2002, the Company relinquished $93.9 million of the original loan
commitment back to the Lender. The total funding received under the 1999 Lease
at the time of relinquishment was $43.1 million. 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 does not renew the building lease, the ground lease converts to a
market rate.
Both Leases have an initial term of seven years, with options 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 respective lessor to construct the facilities ($56.8 million
for the 1997 Lease and $43.1 million for the 1999 Lease). The Company has
guaranteed to the lessors a residual value associated with the buildings equal
to approximately 82% of the their funding. The Company may be liable to the
lessor for the amount of the residual guarantee if it either fails to renew the
lease or does not purchase or locate a purchaser for the leased building at the
end of the lease term. The Company is liable to the lessor for the total amount
financed if it defaults on its covenants ($56.8 million for the 1997 Lease and
$43.1 million for the 1999 Lease). During the term of the leases the Company
must maintain a minimum tangible net worth. In addition, the Company has
pledged certain marketable securities, which are in proportion to the amount
drawn under each lease. Under the 1997 Lease, the pledged collateral ($72.0
million at December 31, 2001) may be withdrawn at any time, but withdrawal
results in an increase to the lease rate and the imposition of additional
financial covenant restrictions. The funds pledged under the 1999 Lease ($40.1
million at December 31, 2001) may be invested by the Company in certain
securities, however the funds are restricted as to withdrawal at all times. The
Company is treated as owner of these buildings for income tax purposes.
Derivatives
We conduct our operations globally, however, our transactions are primarily
conducted using the United States Dollar. We enter into a limited number of
forward foreign exchange contracts in order to hedge the currency fluctuations
between the Company and its Japanese subsidiary. No forward foreign exchange
contracts were outstanding at December 31, 2001. We do not use any derivatives
for trading or speculative purposes.
Euro
On January 1, 1999, the "Euro" was introduced. On that day, the exchange
ratios of the currencies of the eleven countries participating in the first
phase of the European Economic and Monetary Union were fixed. The Euro became a
currency in its own right and the currencies of the participating countries,
while continuing to exist for a three-year transition period, are now fixed
denominations of the Euro. The conversion to the Euro will have significant
effects on the foreign exchange markets and bond markets and is requiring
significant changes in the operations and systems within the European banking
industry. Our information system is designed to accommodate multi-currency
environments. As a result, we have the flexibility to transact business with
vendors and customers in either Euro or traditional national currency units.
Financial Risk Management
The following discussion about our risk management activities includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
As a global concern, we face exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on our financial
results. Our primary exposures related to non U.S. dollar-denominated sales in
Japan and operating expenses in Japan and the Netherlands. At the present time,
we do not hedge against these currency exposures.
26
We maintain investment portfolio holdings of various issuers, types and
maturities, typically US Treasury securities and municipal bonds. These
securities are classified as available-for-sale, and consequently are recorded
on the balance sheet at fair value with unrealized gains and losses reported as
a separate component of accumulated other comprehensive income (loss). These
securities are not leveraged and are held for purposes other than trading.
We also maintain minority investments in private companies. These
investments are reviewed for other than temporary declines in value on an
annual basis. Reasons for other than temporary declines in value include
whether the related company would have insufficient cash flow to operate for
the next twelve months, significant changes in the operating performance or
operating model and changes in market conditions. As of December 31, 2001, the
minority venture investments we continue to hold totaled $0.4 million at
estimated fair value. During 2001, we recorded a $0.2 million impairment charge
in connection with these investments.
The Company's inventory consists primarily of memory subsystems, processors
and ASICs, which are sold to third-party contract manufacturers responsible for
manufacturing 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 and
potentially fixed assets would increase significantly, thereby reducing the
Company's available cash resources. Further, the inventory the Company carries
could become obsolete, thereby negatively impacting the Company's consolidated
financial position and results of operations. 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 may be required to compensate its sub-contract manufacturers for
components purchased for orders subsequently cancelled by the Company. The
Company periodically reviews the potential liability and the adequacy of the
related reserve. The Company's consolidated financial position and results of
operations could be negatively impacted if the Company were required to
compensate the sub-contract manufacturers in amounts in excess of the accrued
liability.
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 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."
Splash, along with former Splash officers were named in class action
lawsuits filed in the United States District Court for the Northern District of
California. The lawsuits are related to a decline in Splash's stock price
during 1997. The Company became successor to the lawsuits when it acquired
Splash in October 2001. 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."
In December 2001, Mr. Jan R. Coyle threatened to sue the Company and its
customers for infringing a purported soon to be issued patent and for
misappropriating trade secrets. The Company believes that Mr. Coyle's threats
are without merit and that it has no liability under any claims Mr. Coyle could
bring. The Company has sought declaratory relief as well as an injunction
against Mr. Coyle. See Item 3 "Legal proceedings."
27
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 2002.
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. Xerox, our second largest
customer, has in the past experienced serious financial difficulties in their
business. If Xerox continues to face such difficulties, our short-term revenues
and profitability could be materially and adversely affected through, among
other things, decreased sales volumes and write-offs of accounts receivables
and inventory related to Xerox products.
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 changes. 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. Many of the products we are developing require that
we 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 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.
We establish expenditure levels for operating expenses based on projected
sales levels and margins, and expenses are relatively fixed in the short term.
Accordingly, if sales are below expectations in any given quarter, the adverse
impact of the shortfall in revenues on operating results may be increased by
our inability to adjust spending in the short term to compensate for this
shortfall.
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
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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.
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, Splash and EDOX 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