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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31, 2000
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number: 0-23034
ENCAD-Registered Trademark-, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3672088
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6059 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 452-0882
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
The number of shares outstanding of the Registrant's Common Stock as of March
31, 2000, was 11,810,575.
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ENCAD, INC.
INDEX
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<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999.............................................1
Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999.......................................2
Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999.......................................3
Notes to Consolidated Financial Statements.........................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.....................................................................11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................................13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................13
ITEM 5. OTHER INFORMATION.................................................................13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................13
SIGNATURES..........................................................................................14
</TABLE>
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PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) MARCH 31, December 31,
2000 1999
------------------------------------------
(UNAUDITED) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,658 $ 3,953
Accounts receivable - net 25,240 30,546
Inventories 13,755 11,992
Income taxes receivable - 281
Deferred income taxes 5,221 4,004
Prepaid expenses 1,535 1,018
-------------------- --------------------
Total current assets 61,409 51,794
PROPERTY - NET 7,808 14,264
RESTRICTED CASH 1,231 -
OTHER ASSETS 3,631 2,421
-------------------- --------------------
TOTAL ASSETS $ 74,079 $ 68,479
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,777 $ 7,882
Accrued expenses and other liabilities 8,885 8,090
-------------------- --------------------
Total current liabilities 17,662 15,972
-------------------- --------------------
OTHER LIABILITIES 7,432 1,263
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value; 5,000 shares authorized, Series A
Junior Participating Preferred Stock - no shares
issued and outstanding - -
Common stock, par value - $.001 per share, 60,000 shares
authorized, 11,811 and 11,780 shares issued and
outstanding at March 31, 2000 and December 31, 1999 12 12
Additional paid -in capital 19,477 19,341
Accumulated earnings 29,496 31,891
-------------------- --------------------
Total stockholders' equity 48,985 51,244
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,079 $ 68,479
==================== ====================
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Consolidated Financial Statements.
1
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CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2000 1999
----------------- --------------------
<S> <C> <C>
NET SALES $ 22,805 $ 28,982
COST OF SALES 13,360 16,579
----------------- --------------------
GROSS PROFIT 9,445 12,403
----------------- --------------------
MARKETING AND SELLING 6,411 5,722
RESEARCH AND DEVELOPMENT 3,174 2,932
GENERAL AND ADMINISTRATIVE 3,335 3,091
----------------- --------------------
12,920 11,745
----------------- --------------------
(LOSS) INCOME FROM OPERATIONS (3,475) 658
OTHER INCOME 130 -
INTEREST INCOME (EXPENSE) - NET 148 (118)
----------------- --------------------
(LOSS) INCOME BEFORE INCOME TAXES (3,197) 540
PROVISION FOR INCOME TAXES (802) 191
----------------- --------------------
NET (LOSS) INCOME $ (2,395) $ 349
================= ====================
(LOSS) EARNINGS PER SHARE - BASIC $ (0.20) $ 0.03
================= ====================
(LOSS) EARNINGS PER SHARE - DILUTED $ (0.20) $ 0.03
================= ====================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 11,783 11,636
================= ====================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING -
DILUTED 11,783 11,725
================= ====================
</TABLE>
See Notes to Consolidated Financial Statements.
2
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CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
------------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,395) $ 349
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 726 821
Provision for losses on accounts receivable and inventories (433) 29
Tax benefit from exercise of stock options 3 -
Amortization of deferred gain on sale of headquarters (130) -
Changes in assets and liabilities:
Accounts receivable 5,301 1,330
Inventories (1,325) 950
Income taxes receivable 281 2,403
Deferred income taxes (1,217) 356
Prepaid expenses and other assets (1,727) (363)
Accounts payable 895 (2,099)
Accrued expenses and other liabilities 1,622 1,257
------------------ ----------------
Cash provided by operating activities 1,601 5,033
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (753) (695)
Net proceeds from sale of headquarters 11,955 -
------------------ ----------------
Cash provided by (used in) investing activities 11,202 (695)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options and sale of stock under employee stock
purchase plan 133 111
Increase in restricted cash (1,231) -
Net borrowings under line of credit - (3,500)
------------------ ----------------
Cash used in financing activities (1,098) (3,389)
------------------ ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,705 949
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,953 586
------------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,658 $ 1,535
------------------ ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash received during the period for income taxes $ 2,346 $ 3,416
------------------ ----------------
Cash paid during the period for interest $ - $ 117
------------------ ----------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
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ENCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited (in thousands, except per
share data)
1) BASIS OF PRESENTATION - The accompanying consolidated financial statements
as of March 31, 2000 and for the three-month periods ended March 31, 2000
and 1999 are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. These consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. The
results of operations for the interim periods are not necessarily
indicative of the results to be expected for any other interim period or
for the entire fiscal year.
The consolidated financial statements include the accounts of ENCAD, Inc.
and its wholly owned subsidiaries (collectively, the "Company"). All
intercompany transactions and balances are eliminated in consolidation.
Certain reclassifications have been made to amounts included in the prior
year's financial statements to conform to the financial statement
presentation for the three-month period ended March 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial
statements and related notes. Changes in those estimates may affect
amounts reported in future periods.
2) INVENTORIES:
<TABLE>
<CAPTION>
MARCH 31, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw materials $ 5,926 $ 6,017
Work-in-process 97 131
Finished goods 7,732 5,844
---------------- ----------------
Total $ 13,755 $ 11,992
================ ================
</TABLE>
3) COMPREHENSIVE INCOME - There are no material current differences between
net income and comprehensive income, and accordingly, no amounts have been
reflected in the accompanying consolidated financial statements.
4) RESTRICTED CASH - At March 31, 2000, the Company had $1,231 of collateral
deposits to secure a letter of credit required by the headquarters
building lease. These deposits are invested in money market funds. The
non-current classification is determined based upon the expected term of
the collateral requirement and not necessarily the maturity date of the
underlying investment. See Note 8.
5) REVOLVING LINE OF CREDIT - At March 31, 2000, the Company had available a
$15,000 revolving line of credit which expired in April 2000, at which
time it was replaced as described below. The line bore interest at the
bank's prime rate (9.00% at March 31, 2000) or, at the Company's option, a
rate based on the London Interbank Overnight Rate (6.29% at March 31,
2000) plus 2.25% on outstanding balances. The Company paid a commitment
fee on the unused portion of the line. The line was secured by specified
assets with a borrowing base limited to eligible accounts receivable and
inventory. In addition, the availability of the line was subject to
maintaining financial covenants including working capital and tangible net
worth ratios. No amounts were outstanding under the line of credit at
March 31, 2000 or December 31, 1999.
On April 26, 2000 the Company signed an agreement with a different bank
which provides for a $15,000 revolving line of credit through April 2002.
The line bears interest at the bank's prime rate (9.00% at April 26, 2000)
or, at the Company's option, a rate based on the London Interbank
Overnight Rate (6.38% at April 26, 2000) plus 1.25% on outstanding
balances. The Company pays a commitment fee on the unused portion of the
4
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line. In addition, the availability of the line is subject to maintaining
financial covenants including profitability, working capital and tangible
net worth ratios.
6) EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
income by the weighted average common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted average
number of common and common equivalent shares outstanding.
The following table is a reconciliation of the basic and diluted earnings
per share computations for the three month periods ended March 31, 2000
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------- -----------
<S> <C> <C>
Net (loss) income $ (2,395) $ 349
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(Loss) earnings per share - basic $ (0.20) $ 0.03
============= ===========
Basic weighted average common
shares outstanding 11,783 11,636
Effect of dilutive securities:
Stock options 0 89
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Diluted weighted average common and
common equivalent shares outstanding 11,783 11,725
------------- -----------
(Loss) earnings per share - diluted $ (0.20) $ 0.03
============= ===========
</TABLE>
7) SEGMENT INFORMATION - For the years ended December 31, 1997 and 1998, and
during the first quarter of 1999 the Company's business was organized,
managed and internally reported as two segments: the Digital Imaging
Solutions business unit and the Textile business unit. Due to the
similarity of production processes, distribution methods, customers and
products, the segment information for the Digital Imaging Solutions and
Textile business units had been aggregated into one segment. On April 22,
1999, the Company consolidated its Digital Imaging Solutions and Textile
business units in order to further leverage the Company's resources in
support of its solutions-based, vertical market strategy. As a result, the
Company is managing and internally reporting the Company's business as one
reportable segment, principally, the design, development, manufacture and
sales of digital imaging solutions, including wide-format color inkjet
printers and related supplies, accessories, software and service for the
graphic arts and computer aided design markets.
8) HEADQUARTERS BUILDINGS SALE-LEASEBACK - In January 2000, the Company
received net cash proceeds of $11,955 for a transaction in which the
Company sold its headquarters buildings and land in San Diego, California
and leased the property back for a period of seven years. The leaseback
will be accounted for as an operating lease. The sale-leaseback resulted
in a gain of $5,472 which will be deferred and amortized to income over
the term of the lease. The lease requires the Company to pay customary
operating and repair expenses and to observe certain operating
restrictions and covenants.
Future scheduled minimum rental payments required are as follows: 2000 -
$1,121; 2001 - $1,319; 2002 - $1,414; 2003 - $1,465; 2004 - $1,523;
thereafter - $3,324; total - $10,166.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (in thousands, except percentages)
This discussion may contain forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. We undertake no obligation to release publicly the results
of any revisions to these forward-looking statements to reflect events or
circumstances arising after the date hereof.
The following table sets forth, as a percentage of net sales, certain
consolidated statements of income data for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
- -------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES 100.0% 100.0%
COST OF SALES 58.6% 57.2%
- -------------------------------------------------------------------------------------
GROSS PROFIT 41.4% 42.8%
- -------------------------------------------------------------------------------------
MARKETING AND SELLING 28.1% 19.7%
RESEARCH AND DEVELOPMENT 13.9% 10.1%
GENERAL AND ADMINISTRATIVE 14.6% 10.7%
- -------------------------------------------------------------------------------------
(LOSS) INCOME FROM OPERATIONS (15.2%) 2.3%
OTHER INCOME 0.6% -
INTEREST INCOME (EXPENSE) - NET 0.6% (0.4%)
- -------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (14.0%) 1.9%
PROVISION FOR INCOME TAXES (3.5%) 0.7%
- -------------------------------------------------------------------------------------
NET (LOSS) INCOME (10.5%) 1.2%
=====================================================================================
</TABLE>
RESULTS OF OPERATIONS
NET SALES - Our net sales for the three-month period ended March 31,
2000 decreased 21% from the same period of 1999. This decrease was due
primarily to lower North American distributor sales due to the disruption
caused by our shift during the quarter from a two-tier distributor channel
model to a one-tier value added reseller model. We believe that the one-tier
distribution channel will enable us to compete more effectively in the
marketplace, although we may experience a temporary negative impact on sales.
Lower sales in Europe, due to unfavorable currency exchange rates, and lower
average selling prices worldwide, as a result of increased competition, also
contributed to the decrease. During the first quarter of 2000, supply sales
decreased 17% from the first quarter of 1999, and accounted for approximately
34% of net sales during the first quarter of 2000 versus 32% during the same
period of 1999. Net sales to OEM customers for the first quarter of 2000
remained flat when compared to the first quarter of 1999 and accounted for
26% of product sales in the first quarter of 2000 versus 20% during the same
period of 1999.
No one customer accounted for more than 10% of net sales during the first
quarter of 2000, whereas one customer, Tekgraf, Inc., accounted for 14% of net
sales during the first quarter of 1999.
COST OF SALES - Cost of sales includes costs related to product shipments,
including materials, labor, overhead, inventory reserves, manufacturing
variances, and other direct or allocated costs involved in the manufacture,
warehousing, delivery, support and maintenance of products. Cost of sales as a
percentage of net sales increased to 59% during the first quarter of 2000 up
from 57% during the same period of 1999, causing a comparable decrease in gross
profit margin percentages. This increase was due largely to a higher percentage
of sales of lower margin older generation products as well as lower average
selling prices for our newer products.
6
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Our future success will depend, in part, on our ability to develop and
manufacture competitive higher margin products and continue to achieve cost
reductions for our existing products.
MARKETING AND SELLING - Marketing and selling expenses were 28% of net
sales during the first quarter of 2000 compared to 20% during the same period of
1999 and increased by 12% in absolute dollars from the first quarter of 1999.
The increases as a percentage of sales and in absolute dollars were due to an
increase in labor and related expenses primarily as a result of the transition
of the North American distribution channel from two-tier to one-tier. We intend
to restructure our sales and marketing organization to provide additional
support for this new channel model.
RESEARCH AND DEVELOPMENT - Research and development spending during the
first quarter of 2000 grew by 8% in absolute dollars over the same period of
1999, and increased as a percentage of sales from 10% during the first quarter
of 1999 to 14% during the first quarter of 2000. The increase in spending was
driven by new product development. We expect to continue to invest significant
resources in our strategic programs and enhancements to existing products and
consequently expect that 2000 research and development expenses will continue to
increase in absolute dollars over 1999.
GENERAL AND ADMINISTRATIVE - General and administrative expenses were 15%
of net sales during the first quarter of 2000 compared to 11% during the same
period of 1999 and increased by 8% in absolute dollars over the first quarter of
1999. This increase was due largely to increased legal fees related primarily to
the litigation in which we are currently engaged.
OTHER INCOME - Other income for the first quarter of 2000 is due primarily
to the amortization of the deferred gain on the sale of our headquarters
buildings.
INTEREST INCOME (EXPENSE) - NET - Interest income net of interest expense
for the first quarter of 2000 was $148 as compared to interest expense net of
interest income of $118 during the same period of 1999. Investment of excess
cash during the first quarter of 2000 yielded the income as compared to
borrowings under our line of credit during the same period of 1999.
PROVISION FOR INCOME TAXES - The effective income tax rate for the first
quarter of 2000, based on annual projections for the year, was 25% compared to
35% for the same quarter of 1999. The decrease in the effective tax rate is due
primarily to a benefit received in 2000 which resulted from an adjustment of
prior estimates of the foreign sales corporation benefit, caused by filing the
tax returns, and other book to tax differences from prior tax years.
NET (LOSS) INCOME - The previously described elements caused net loss
during the first quarter of 2000 to stand at $2,395 compared to a net income of
$349 during the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances increased during the first quarter of 2000 by $11,705 as
operating cash inflows of $1,601 and net inflows from financing activities of
$11,202 exceeded financing outflows of $1,098. During the comparable 1999
period, operations provided cash inflows of $5,033, exceeding investing
outflows of $695 and financing outflows of $3,389. Operations outflows during
the 2000 period resulted primarily from cash collections exceeding the net
loss and increases in inventory and prepaid expenses and other assets.
Investing inflows during the first quarter of 2000 principally resulted from
the sale, and subsequent leaseback, of our headquarters buildings for $11,955
net of fees and commissions. Capital expenditures increased to $753 during
the first quarter of 2000, compared with $695 in the 1999 period, primarily
for computer and related systems. Financing cash outflows during the first
quarter of 2000 resulted from restricted collateral deposits of $1,231 as
security for our headquarters building lease. The major factor affecting
financing outflows in the comparable 1999 period was a $3,500 reduction of
borrowings under our line of credit.
7
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At March 31, 2000, the Company had available a $15,000 revolving line of
credit which expired in April 2000, at which time it was replaced as described
below. The line bore interest at the bank's prime rate (9.00% at March 31, 2000)
or at the Company's option, a rate based on the London Interbank Overnight Rate
(6.29% at March 31, 2000) plus 2.25% on outstanding balances. The Company paid a
commitment fee on the unused portion of the line. The line was secured by
specified assets with a borrowing base limited to eligible accounts receivable
and inventory. In addition, the availability of the line was subject to
maintaining financial covenants including working capital and tangible net worth
ratios. No amounts were outstanding under the line of credit at March 31, 2000
or December 31, 1999.
On April 26, 2000 the Company signed an agreement with a different bank
which provides for a $15,000 revolving line of credit through April 2002. The
line bears interest at the bank's prime rate (9.00% at April 26, 2000) or at the
Company's option, a rate based on the London Interbank Overnight Rate (6.38% at
April 26, 2000) plus 1.25% on outstanding balances. The Company pays a
commitment fee on the unused portion of the line. In addition, the availability
of the line is subject to maintaining financial covenants including
profitability, working capital and tangible net worth ratios.
We believe that our existing cash and cash equivalents, cash generated
from operations and funds available under the bank line of credit will be
sufficient to satisfy our currently anticipated working capital needs. Actual
cash requirements may vary from planned amounts, depending on the timing of the
launch and extent of acceptance of new products, as well as the selling price
and costs of these products. There can be no assurances that future cash
requirements to fund operations will not require us to seek additional capital,
or that such additional capital will be available when required on terms
acceptable to us. To date, inflation has not had a significant effect on our
operating results.
RISKS AND UNCERTAINTIES
OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results can fluctuate significantly depending on a
number of factors. Any one of these factors could have a material adverse effect
on our financial condition or results of operations. Factors affecting net sales
include:
- the timing of product announcements and subsequent introductions of
products by us and our competitors;
- timing of shipments of our products, including the mix of product
families shipped;
- market acceptance of new products;
- seasonality;
- changes in prices by us and our competitors; and
- price protection for price reductions offered to customers.
In addition, the availability and cost of components, the timing of
expenditures for staffing and related support costs, marketing programs and
research and development can have an effect on our operating results. Of course,
changes in general economic conditions and currency fluctuations can also affect
quarterly performance. We may experience significant quarterly fluctuations in
net sales as well as operating expenses with respect to future new product
introductions. Our component purchases, production and spending levels are based
upon forecast demand for our products. Accordingly, any inaccuracy in
forecasting could adversely affect our financial condition and results of
operations. Demand for our products could be adversely affected by a slowdown in
the overall demand for computer systems, printer products or digitally printed
images. Quarterly results are not necessarily indicative of future performance
for any particular period.
THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING
AND WE MAY NOT BE SUCCESSFUL IN COMPETING IN THIS MARKET.
The markets for our printers and supplies are highly competitive and
rapidly changing. Several new competitors have entered the market. Our principal
competitor is Hewlett-Packard, which dominates the CAD category of the
wide-format inkjet markets and is our principal competition in the graphic arts
category. In addition to direct competition in inkjet printers and related
supplies, our products also face competition from other technologies in the
8
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wide-format market. The competition to sell ink, media and software products to
the customer is also intense. Some of our current and prospective competitors,
particularly Hewlett-Packard, have significantly greater financial, technical,
manufacturing and marketing resources than us. Our ability to compete in the
wide-format inkjet market depends on a number of factors within and outside our
control, including:
- the success and timing of product introductions by us and our
competitors;
- selling prices;
- product performance;
- product distribution;
- marketing ability; and
- customer support.
THE MARKETS IN WHICH WE COMPETE ARE CHARACTERIZED BY SHORT PRODUCT LIFE
CYCLES AND REDUCTIONS IN UNIT SELLING PRICES.
The markets for wide-format printers and related supplies are
characterized by rapidly evolving technology, frequent new product introductions
and significant price competition. Consequently, short product life cycles and
reductions in unit selling prices due to competitive pressures over the life of
a product are common. Our financial condition and results of operations could be
adversely affected if we are unable to develop and manufacture new, competitive
products in a timely manner. Our future success will depend on our ability to
develop and manufacture technologically competitive products, price them
competitively, and achieve cost reductions for our existing products. Advances
in technology will require increased investment to maintain our market position.
THE GROWTH OF OUR BUSINESS WILL REQUIRE SUBSTANTIAL CAPITAL RESOURCES THAT
MAY NOT BE AVAILABLE WHEN NEEDED.
The growth of our business will require the commitment of substantial
capital resources. If funds are not available from operations, we will need
additional funds. Such additional funds may not be available when required on
terms acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED
EMPLOYEES AND CONSULTANTS.
Our success is dependent, in part, on our ability to attract and retain
qualified management and technical employees. Competition for such personnel is
intensifying. The inability to attract additional key employees or the loss of
key employees could adversely affect our ability to execute our business
strategy. We do not have employment agreements with members of senior
management. We may not be able to retain our key personnel. We rely heavily on
industry consultants and other specialists to assist and influence decisions,
keep abreast of technological and industry advances, and assist in other
processes.
MANY OF OUR COMPONENTS ARE SUPPLIED BY SINGLE-SOURCE SUPPLIERS THAT MAY
NOT BE ABLE TO BE REPLACED WITHOUT DISRUPTING OUR OPERATIONS.
Selected components used in our products are only available from single
sources. We generally do not have long-term agreements with our suppliers.
Although alternate suppliers are readily available for many of these components,
for some components the process of qualifying replacement suppliers, replacing
tooling or ordering and receiving replacement components could take up to six
months and cause substantial disruption to our operations. If a supplier is
unable to meet our needs or supplies parts which we find unacceptable, we may
not be able to meet production demands. Key components of our products are
supplied indirectly by our principal competitor, Hewlett-Packard.
IF OUR COMPETITORS PROVE THAT OUR PRODUCTS VIOLATE THEIR INTELLECTUAL
PROPERTY RIGHTS, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
From time to time, various competitors, including Hewlett-Packard, have
asserted patent rights relevant to our business. We expect that this will
continue. We carefully evaluate each assertion relating to our products. If our
competitors are successful in establishing that asserted rights have been
violated, we could be prohibited from
9
<PAGE>
marketing the products that incorporate such rights. We could also incur
substantial costs to redesign our products or to defend any legal action taken
against us. If our products should be found to infringe upon the intellectual
property rights of others, we could be enjoined from further infringement and be
liable for any damages. The measures adopted by us for the protection of our
intellectual property may not be adequate to protect our interests. In addition,
our competitors may independently develop technologies that are substantially
equivalent or superior to our technologies.
A SIGNIFICANT PORTION OF OUR NET SALES IS DERIVED FROM SALES TO COUNTRIES
OUTSIDE THE UNITED STATES AND FACTORS OUTSIDE OUR CONTROL COULD ADVERSELY
AFFECT THOSE SALES.
For the three months ended March 31, 2000 and 1999, sales outside the
United States represented approximately 62% and 56% of our net sales,
respectively. We expect export sales to continue to represent a significant
portion of our sales. All of our products sold in international markets are
denominated in U.S. dollars; therefore an increase in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in these markets. International sales and operations may also be subject to
risks such as:
- currency exchange fluctuations;
- difficulties in staffing and managing international operations;
- collecting accounts receivable;
- restrictions on the export of critical technology;
- changes in tariffs;
- trade restrictions;
- export license requirements;
- political instability; and
- the imposition of governmental controls.
In addition, the laws of some countries do not protect our products and
intellectual property rights to the same extent as the laws of the United
States. As we continue to pursue our international business, these factors may
have an adverse effect on our net sales and, consequently, on our business.
WE ARE DEPENDENT ON OUR DISTRIBUTORS, VARS, DEALERS AND OEMS TO SELL AND
MARKET OUR PRODUCTS AND THEY MAY NOT DEVOTE SUFFICIENT RESOURCES TO THIS
TASK TO ENSURE OUR SUCCESS.
Our sales are principally made through independent distributors, VARs and
dealers, which may carry competing product lines. We believe that our future
growth and success will continue to depend in large part upon our distribution
channels. They could reduce or discontinue sales of our products, which could
have a material adverse effect on our business. They may not devote the
resources necessary to provide effective sales, service and marketing support of
our products. In addition, we are dependent upon their continued viability and
financial stability, and many of them are organizations with limited capital.
They, in turn, are substantially dependent upon general economic conditions and
other unique factors affecting the wide-format printer market.
In the first quarter of 2000, we began to move from a two-tier to a
single-tier distribution network. This strategy will initially occur only to our
North American distribution and shift some of the sales from distributors to
VARs. As a result, we will sell our products directly to a network of
approximately 70 major VARs. This model will allow us to increase our knowledge
of our customers and their channel inventory and improve end-user customer
satisfaction. As VARs normally do not carry inventory, and existing distributor
inventory needs to sell through the distribution channel, there may be a
temporary negative impact on sales. Although VARs are, in general, not as well
financed as distributors, any collection risk we may have will be spread over
more accounts.
Actual bad debts may in the future exceed recorded allowances resulting in
a material adverse effect on our business. In order to prevent inventory
write-downs, to the extent that OEM customers do not purchase products as
anticipated, we may need to convert such products to make them salable to other
customers. Such a conversion would increase product costs and would likely
result in a delay in selling such products.
10
<PAGE>
MANAGEMENT OF THE GROWTH OF OUR BUSINESS MAY PLACE STRAINS ON OUR
OPERATIONS.
We have experienced growth in the past which placed, and, if continued,
will continue to place, a significant strain on our management, employees,
systems and operations. Our future operating results will depend on our ability
to continue to broaden our senior management group, attract, hire and retain
skilled employees and enhance or replace existing operational information and
financial control systems. We may encounter difficulties in successfully
integrating new personnel into the organization, and changes to our information
and financial control systems may not be effective.
AS THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE IN THE PAST AND
MAY CONTINUE TO DO SO IN THE FUTURE, AN INVESTMENT IN OUR COMMON STOCK MAY
YIELD UNCERTAIN RESULTS.
The market price of our common stock has fluctuated significantly since
our initial public offering in December 1993. We believe factors such as the
following could cause further significant volatility in the price of the common
stock:
- general stock market trends;
- adverse results of pending litigation;
- announcements of developments related to our business;
- fluctuations in our operating results;
- general conditions in the computer peripheral market or the
markets we serve;
- general economic conditions;
- shortfalls in sales or earnings from securities analysts'
expectations;
- announcements of technological innovations, new inkjet products or
enhancements by us or our competitors;
- developments in patents or other intellectual property rights; and
- developments in our relationships with our customers or suppliers.
In addition, in recent years the stock market in general, and the market
for shares of technology stocks in particular, have experienced extreme
volatility, which have often been unrelated to the operating performance of
affected companies. The market price of the common stock may continue to
experience significant fluctuations that are unrelated to our operating
performance.
WE DO NOT PAY DIVIDENDS ON THE COMMON STOCK AND YOU WILL HAVE TO RELY ON
INCREASES IN ITS PRICE TO GET A RETURN ON YOUR INVESTMENT.
We have not paid dividends on the common stock. We currently intend to
continue this policy to retain earnings, if any, for use in our business. In
addition, our line of credit arrangement prohibits the payment of cash dividends
without prior bank approval if amounts are outstanding under such line of
credit.
OUR CHARTER DOCUMENTS AND RIGHTS PLAN MAY PREVENT A CHANGE OF CONTROL
WHICH IS IN YOUR BEST INTERESTS.
The stockholder rights plan and some of our charter provisions may
discourage transactions involving an actual or potential change in control of
your company, including transactions in which you might otherwise receive a
premium for your shares over then-current market prices. These provisions may
limit your ability to approve transactions that you deem to be in your best
interests.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands, except percentages)
Our only financial instruments with market risk exposure are excess
cash held in money market funds and, to a lesser extent, domestic revolving
line of credit borrowings, of which no amounts were outstanding at March 31,
2000. The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we currently maintain a portfolio
solely of money market funds.
11
<PAGE>
Our debt instruments are non-trading in nature and carry interest at
the bank's prime rate (9.00% at March 31, 2000) or, at our option, a rate
based on the London Interbank Overnight Rate (6.29 at March 31, 2000) plus
2.25%. Our objective in maintaining these variable rate borrowings is the
flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed rate borrowings.
Under our current policies, we do not use interest rate derivative
instruments to manage our exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would result in no material change in our pre-tax earnings and cash flow.
FOREIGN CURRENCY RISK. We conduct business on a global basis and all of
our products sold in international markets are denominated in U.S. dollars.
Historically, export sales have represented a significant portion of our sales
and we expect export sales to continue to represent a significant portion of our
sales.
Our international business is subject to risks typical of an international
business, including, but not limited to:
- currency exchange fluctuations;
- difficulties in staffing and managing international operations;
- collecting accounts receivable;
- restrictions on the export of critical technology;
- changes in tariffs;
- trade restrictions;
- export license requirements;
- political instability; and
- the imposition of government controls.
Accordingly, our future results could be materially adversely impacted by
changes in these or other factors.
Our sales offices in France, Germany, the United Kingdom, China and Japan
incur costs which are denominated in local currencies. As exchange rates vary,
these results, when translated, may vary from expectations and adversely impact
overall expected results. The effect of exchange rate fluctuations on our first
quarter 2000 results was not material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the usual course of business.
In February 1998, Hewlett-Packard filed a lawsuit against us in the U.S.
District Court for the District of Idaho, alleging that some of our products
infringe two of Hewlett-Packard's patents. Hewlett-Packard filed an amended
complaint alleging infringement of a third patent and seeking monetary damages
and injunctive relief. Our motion for summary judgment of non-infringement of
the initial two Hewlett-Packard patents was heard and the magistrate has
recommended that the Judge rule in our favor.
In November 1998, a class action lawsuit was filed against us in the U.S.
District Court for the District of Colorado, alleging antitrust violations
pertaining to our sales of a specified printer product. Class members seek
damages caused by the allegedly faulty ink, including the cost of the ink, the
cost of the third party replacement ink, and damage to printing projects caused
by the ink. Discovery is in progress.
The outcomes of these lawsuits cannot be determined; however, we believe
that the claims are without merit. We intend to vigorously defend against such
claims. No amounts have been reported in the financial statements for any losses
that may result from these lawsuits.
12
<PAGE>
In January 1999, we filed a lawsuit against Hewlett-Packard in the
California Superior Court for the County of San Francisco, alleging sales of
competitive products below cost and as loss leaders, in violation of the
California Unfair Trade Practices Act. We have obtained a preliminary injunction
enjoining Hewlett Packard's sale of printer products below cost. We will be
seeking permanent injunctive relief and treble damages at trial which is
scheduled to commence on May 22, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company (filed as Exhibit
3.1). (1)
3.2 Bylaws of the Company (filed as Exhibit 3.2). (1)
3.3 Certificate of Designation for Series A Junior Participating
Preferred Stock (filed as Exhibit 3.2).(2)
4.1 Rights Agreement, dated as of March 19, 1998, between the
Company and Harris Trust Company of California, which includes
the Form of Certificate of Designation for the Series A
Preferred Stock as Exhibit A, the Form of Rights Certificate
as Exhibit B and the Summary of Rights to Purchase Shares as
Exhibit C. (2)
4.2 First Amendment to the Company's Rights Plan.(3)
+ 10.2 Amendment to Form of Severance Letter Agreements between
the Company and David A. Purcell.(4)
+ 10.3 Amendment to Form of Severance Letter Agreements between the
Company and each of its officers.(4)
+ 10.4 Form of Severance Letter Agreements between the Company and
each of its vice presidents.(4)
27.1 Financial Data Schedule.
-----------------------
(1) Filed as an exhibit to Registrant's Current Report on Form 8-K dated January
5, 1998 and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Current Report on Form 8-K dated March
20, 1998 and incorporated herein by reference.
(3) Filed as exhibit to the Registrant's Registration Statement on Form 8-A12G/A
(No. 000-23034) and incorporated herein by reference.
13
<PAGE>
(4) Filed as exhibit to the Registrant's annual report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference.
+ Management compensatory plan.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
ended March 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 11, 2000
ENCAD, Inc.
(Registrant)
/s/ Todd W. Schmidt
--------------------------------------------
(Todd W. Schmidt)
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ENCAD,
INC. MARCH 31, 2000 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,658
<SECURITIES> 0
<RECEIVABLES> 25,240
<ALLOWANCES> 0
<INVENTORY> 13,755
<CURRENT-ASSETS> 61,409
<PP&E> 22,142
<DEPRECIATION> 14,334
<TOTAL-ASSETS> 74,079
<CURRENT-LIABILITIES> 17,662
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 48,973
<TOTAL-LIABILITY-AND-EQUITY> 74,079
<SALES> 22,805
<TOTAL-REVENUES> 22,805
<CGS> 13,360
<TOTAL-COSTS> 13,360
<OTHER-EXPENSES> 12,920
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<INCOME-PRETAX> (3,197)
<INCOME-TAX> (802)
<INCOME-CONTINUING> (2,395)
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<NET-INCOME> (2,395)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
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