<PAGE>
================================================================================
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 September 30, 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 October
31, 2000, was 11,686,035.
<PAGE>
ENCAD, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
September 30, 2000 and December 31, 1999..............................................1
Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999...............................2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 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..........................................................................13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................................14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..............................................14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................14
ITEM 5. OTHER INFORMATION......................................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................15
SIGNATURES...............................................................................................16
</TABLE>
i
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) SEPTEMBER 30, December 31,
2000 1999
-------------------- -------------------
(UNAUDITED) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,505 $ 3,953
Accounts receivable - net 13,331 30,546
Income taxes receivable - 281
Inventories 15,590 11,992
Deferred income taxes 1,201 4,004
Prepaid expenses 1,004 1,018
-------------------- -------------------
Total current assets 49,631 51,794
PROPERTY - NET 7,176 14,264
RESTRICTED CASH 1,222 -
OTHER ASSETS 2,072 2,421
-------------------- -------------------
TOTAL ASSETS $ 60,101 $ 68,479
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,104 $ 7,882
Accrued expenses and other liabilities 8,187 8,090
-------------------- -------------------
Total current liabilities 15,291 15,972
-------------------- -------------------
OTHER LIABILITIES 6,441 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, 11,868 and 11,780 shares issued and
outstanding at September 30, 2000 and December 31, 1999 12 12
Additional paid -in capital 19,612 19,341
Accumulated earnings 18,745 31,891
-------------------- -------------------
Total stockholders' equity 38,369 51,244
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,101 $ 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
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 18,285 $ 27,022 $ 67,775 $ 85,257
COST OF SALES 12,422 15,102 41,325 48,129
---------------- -------------- -------------- --------------
GROSS PROFIT 5,863 11,920 26,450 37,128
---------------- -------------- -------------- --------------
MARKETING AND SELLING 6,533 5,963 19,612 17,338
RESEARCH AND DEVELOPMENT 3,277 2,614 8,831 8,874
GENERAL AND ADMINISTRATIVE 3,395 2,350 9,654 7,963
LITIGATION SETTLEMENT 1,500 - 1,500 -
---------------- -------------- -------------- --------------
14,705 10,927 39,597 34,175
---------------- -------------- -------------- --------------
(LOSS) INCOME FROM OPERATIONS (8,842) 993 (13,147) 2,953
OTHER INCOME 195 - 520 -
INTEREST INCOME (EXPENSE) - NET 243 (28) 543 (197)
---------------- -------------- -------------- --------------
(LOSS) INCOME BEFORE INCOME TAXES (8,404) 965 (12,084) 2,756
PROVISION FOR INCOME TAXES 2,035 275 1,062 910
---------------- -------------- -------------- --------------
NET (LOSS) INCOME $ (10,439) $ 690 $ (13,146) $ 1,846
================ ============== ============== ==============
(LOSS) EARNINGS PER SHARE - BASIC $ (0.88) $ 0.06 $ (1.11) $ 0.16
================ ============== ============== ==============
(LOSS) EARNINGS PER SHARE - DILUTED $ (0.88) $ 0.06 $ (1.11) $ 0.16
================ ============== ============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC 11,846 11,736 11,813 11,689
================ ============== ============== ==============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING - DILUTED 11,846 12,087 11,813 11,892
================ ============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (13,146) $ 1,846
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Depreciation and amortization 2,123 2,456
Provision for losses on accounts receivable and inventories (173) (688)
Tax benefit from exercise of stock options 9 22
Amortization of deferred gain on sale of headquarters (521) -
Changes in assets and liabilities:
Accounts receivable 16,950 940
Inventories (3,160) 3,665
Income taxes receivable 281 2,403
Deferred income taxes 2,803 2,056
Prepaid expenses and other assets 363 (726)
Accounts payable (778) (4,320)
Accrued expenses and other liabilities 324 (119)
------------------ -----------------
Cash provided by operating activities 5,075 7,535
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (1,518) (1,629)
Net proceeds from sale of headquarters 11,955 -
------------------ -----------------
Cash provided by (used in) investing activities 10,437 (1,629)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options and sale of stock under
employee stock purchase plan 262 520
Increase in restricted cash (1,222) -
Net borrowings under line of credit - (6,000)
------------------ -----------------
Cash used in financing activities (960) (5,480)
------------------ -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,552 426
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,953 586
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,505 $ 1,012
================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash received during the period for income taxes $ 2,242 $ 3,416
================== =================
Cash paid during the period for interest $ 12 $ 256
================== =================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
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 September 30, 2000 and for the three and nine month periods ended
September 30, 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 ("1999 Annual Report"). 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 and nine month periods ended September 30,
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>
SEPTEMBER 30, December 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Raw materials $ 6,016 $ 6,017
Work-in-process 149 131
Finished goods 9,425 5,844
---------------- ---------------
Total $ 15,590 $ 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 September 30, 2000, the Company had $1,222 of
collateral deposits to secure a letter of credit required by the
headquarter buildings 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 7.
5) REVOLVING LINE OF CREDIT - At September 30, 2000, the Company had
available a $15,000 revolving line of credit which expires in April 2002.
No amounts were outstanding under the line of credit at September 30, 2000
or at December 31, 1999. The line bears interest at the bank's prime rate
(9.50% at September 30, 2000) or, at the Company's option, a rate based on
the London Interbank Overnight Rate (6.64% at September 30, 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. The Company is currently not in
compliance with certain conditions required under the line and is
renegotiating a waiver to address the non-compliance issue, however, the
Company may be unable to negotiate a waiver on terms acceptable to the
Company.
4
<PAGE>
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 and nine month periods ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net (loss) income $ (10,439) $ 690 $ (13,146) $ 1,846
-------------- ------------- ------------- --------------
(Loss) earnings per share - basic $ (0.88) $ 0.06 $ (1.11) $ 0.16
============== ============= ============= ==============
Basic weighted average common
shares outstanding 11,846 11,736 11,813 11,689
Effect of dilutive securities:
Stock options 0 351 0 203
-------------- ------------- ------------- --------------
Diluted weighted average common and
common equivalent shares outstanding 11,846 12,087 11,813 11,892
-------------- ------------- ------------- --------------
(Loss) earnings per share - diluted $ (0.88) $ 0.06 $ (1.11) $ 0.16
============== ============= ============= ==============
</TABLE>
7) HEADQUARTER 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 is
accounted for as an operating lease. The sale-leaseback resulted in a gain
of $5,472 which was deferred and is being amortized to other income over
the term of the lease. The lease requires the Company to pay customary
operating and maintenance expenses and to observe certain operating
restrictions and covenants.
Future scheduled minimum rental payments required are as follows: 2000 -
$305; 2001 - $1,319; 2002 - $1,414; 2003 - $1,465; 2004 - $1,523;
thereafter - $3,324; total - $10,166.
8) REDUCTION IN THE COMPANY'S WORKFORCE - During the third quarter of 2000,
the Company incurred one-time severance related costs of approximately
$1,642 as a result of a reduction of the Company's workforce to reflect
current and expected business conditions. The severance costs include six
officer and 22 middle manager and staff level positions. The severance
costs were classified as $753 to general and administrative expense, $619
to sales and marketing expense, $164 to cost of sales, and $106 to
research and development expense. These severance costs include payments
under the Company's severance policy or, in the case of certain officers,
individual severance agreements, related payroll taxes and outplacement
expenses. At September 30, 2000, $1,266 remained to be paid, comprised
primarily of installment severance payments.
9) LITIGATION SETTLEMENT - In November 1998, a class-action lawsuit was filed
against the Company in the U.S. District Court for the District of
Colorado, alleging anti-trust violations pertaining to the sale of a
specified printer. Class members sought damages caused by allegedly faulty
ink used in the printer including the cost of the ink, the cost of
third-party replacement ink, and damage to printing projects caused by the
allegedly faulty ink. The Company believed the claims were without merit
and that it could have successfully defended the lawsuit. Nevertheless,
the Company deemed it to be in the best interest of its stockholders and
customers to negotiate a settlement and has reached a tentative
settlement, in principal, with the attorneys representing the plaintiffs.
This tentative settlement must ultimately be agreed to in writing,
approved by the Court and approved by the Plaintiff class. While the exact
amount of the expense to be incurred by the Company is not certain, a
reasonable estimate, based on information currently available, is $1,500.
This amount has been recorded as an expense in the third quarter of 2000.
No amounts have been recorded for any losses which may result from this
lawsuit in the event our settlement efforts are not concluded.
5
<PAGE>
10) RECENT ACCOUNTING PRONOUNCEMENTS - In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101"), which
summarizes the SEC's interpretation of applying generally accepted
accounting principals to revenue recognition in the financial statements.
SAB No. 101 was subsequently amended in June 2000 and becomes effective
for the fourth quarter of fiscal years beginning after December 15, 1999.
Based on the Company's current revenue recognition policies, the Company
does not expect the adoption of SAB No. 101, as amended, to have a
material impact on the Company's consolidated financial position or the
results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB No. 25". FIN No. 44
clarifies the application of Opinion No. 25 for certain issues including:
(a) the definition of employee for purposes of applying Opinion No. 25,
(b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN No. 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998 or January 12, 2000. The Company does not expect that the adoption of
FIN No. 44 to have a material impact the Company's consolidated financial
position or the results of operations.
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" described 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, consolidated
statements of income data for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0%
COST OF SALES 67.9% 55.9% 61.0% 56.5%
----------------------------------------------------------------------- --------------------------------
GROSS PROFIT 32.1% 44.1% 39.0% 43.5%
----------------------------------------------------------------------- --------------------------------
MARKETING AND SELLING 35.7% 22.1% 29.0% 20.4%
RESEARCH AND DEVELOPMENT 18.0% 9.7% 13.0% 10.4%
GENERAL AND ADMINISTRATIVE 18.6% 8.7% 14.2% 9.3%
LITIGATION SETTLEMENT 8.2% - 2.2% -
----------------------------------------------------------------------- --------------------------------
(LOSS) INCOME FROM OPERATIONS (48.4%) 3.6% (19.4%) 3.4%
OTHER INCOME 1.1% - 0.8% -
INTEREST INCOME (EXPENSE) - NET 1.3% (0.1%) 0.8% (0.2%)
----------------------------------------------------------------------- --------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (46.0%) 3.5% (17.8%) 3.2%
PROVISION FOR INCOME TAXES 11.1% 1.0% 1.6% 1.0%
----------------------------------------------------------------------- --------------------------------
NET (LOSS) INCOME (57.1%) 2.5% (19.4%) 2.2%
======================================================================= ================================
</TABLE>
6
<PAGE>
RESULTS OF OPERATIONS
NET SALES - Our net sales for the three and nine month periods ended
September 30, 2000 decreased 32% and 21%, respectively, from the same periods of
1999. The decline in third quarter 2000 sales, as compared to the same quarter
last year, was due largely to the impact on unit sales and selling prices of the
Company's current NovaJet product lines caused by our introduction of the
next-generation wide-format inkjet printer, the eight-color NovaJet 850, at a
trade show in early September. Demand for the current generation of NovaJet
products declined in anticipation of the NovaJet 850, which began shipping in
October 2000. During the nine months ended September 30, 2000, the decrease was
also affected by lower sales to our European distributors. This decrease was
caused partially by the strengthening of the U.S. dollar against many European
currencies which, due to the denomination of all our sales in U.S. dollars,
causes our products to be more expensive. Also contributing to the decrease for
the nine month period was lower sales to our OEM partners, and lower North
American distribution sales during the first quarter of 2000 as a result of the
switch to a single-tier distribution model in that quarter. During the three and
nine month periods ended September 30, 2000, supply sales increased 7% and
decreased 1%, respectively, from the same periods of 1999, and accounted for
approximately 49% and 39% of net sales during the three and nine month periods
ended September 30, 2000, respectively, as compared to 31% during each of the
same periods of 1999.
One customer, Laser Computer Ltd. accounted for 12% and 10% of net sales
during the three and nine month periods ended September 30, 2000, respectively,
whereas one customer, Tekgraf, Inc., accounted for 13% and 14%, respectively,
during the same periods of 1999. Net sales to OEM customers for the three and
nine month periods ended September 30, 2000 accounted for 15% and 19% of net
sales, respectively, as compared to 14% and 18% during the same periods of 1999.
International sales accounted for approximately 60% for both the three and nine
month periods ended September 30, 2000, compared to 69% and 64% of net sales for
the same periods of 1999.
REDUCTION IN THE COMPANY'S WORKFORCE - During the third quarter of 2000,
the Company incurred one-time severance related costs of approximately $1,642 as
a result of a reduction of the Company's workforce to reflect current and
expected business conditions. The severance costs include six officer and 22
middle manager and staff level positions. The severance costs were classified as
$753 to general and administrative expense, $619 to sales and marketing expense,
$164 to cost of sales, and $106 to research and development expense. These
severance costs include payments under the Company's severance policy or, in the
case of certain officers, individual severance agreements, related payroll taxes
and outplacement expenses. At September 30, 2000, $1,266 remained to be paid,
comprised primarily of installment severance payments.
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 stood at 68% and 61% for the three and nine month
periods ended September 30, 2000, respectively, as compared to 56% and 57% for
the same periods of 1999. This increase was due largely to lower average selling
prices for our current generation of NovaJet products, unfavorable manufacturing
variances as a result of lower unit volumes manufactured, and the severance
costs previously described. Our future success will depend, in part, on our
ability to develop and manufacture competitive profitable products and continue
to achieve cost reductions for our existing products.
MARKETING AND SELLING - Marketing and selling expenses were 36% and 29%,
respectively, of net sales during the three and nine month periods ended
September 30, 2000 compared to 22% and 20% during the same periods of 1999,
which represents an increase in absolute dollars of 10% and 13%, respectively.
This increase was due primarily to the severance costs previously described,
increased travel and entertainment expenditures, increased spending for trade
shows and increased labor and related expenses required to support the one tier
North American channel. These increases were partially reduced in the third
quarter by lower labor and related expense as a result of the workforce
reduction.
RESEARCH AND DEVELOPMENT - Research and development expenses were 18% and
13%, respectively, of net sales for the three and nine month periods ended
September 30, 2000 compared to 10% in both of the same periods of 1999. In
absolute dollars, 2000 research and development spending increased by 25% and 0%
from the three
7
<PAGE>
and nine month periods ended September 30, 1999, respectively. The increase in
spending during the third quarter is due primarily to a $487 one-time write-off
of license fees, tooling and inventory, related to the abandonment of a
development project. Also contributing to the increase during the third quarter
were the severance costs previously described. Comparing the nine month periods,
the one-time expense increases in 2000 were offset by reduced expenses for
consulting, relocation, internal product usage, and prototyping and testing of
new products during 2000 as compared to 1999.
GENERAL AND ADMINISTRATIVE - General and administrative expenses were 19%
and 14% of net sales during the three and nine month periods ended September 30,
2000, respectively, compared to 9% during each of the same periods of 1999 and
increased by 44% and 21% in absolute dollars over the three and nine month
periods ended September 30, 1999, respectively. The three month increase was due
primarily to the severance costs previously described and increased bad debt
expense. For the nine month period the increase is also due to increased legal
fees primarily related to the Hewlett-Packard lawsuits which were settled
mid-way through the second quarter of 2000.
LITIGATION SETTLEMENT - In November 1998, a class-action lawsuit was filed
against the Company in the U.S. District Court for the District of Colorado,
alleging anti-trust violations pertaining to the sale of a specified printer.
Class members sought damages caused by allegedly faulty ink used in the printer
including the cost of the ink, the cost of third-party replacement ink, and
damage to printing projects caused by the allegedly faulty ink. The Company
believed the claims were without merit and that it could have successfully
defended the lawsuit. Nevertheless, the Company deemed it to be in the best
interest of its stockholders and customers to negotiate a settlement and has
reached a tentative settlement, in principal, with the attorneys representing
the plaintiffs. This tentative settlement must ultimately be agreed to in
writing, approved by the Court and approved by the Plaintiff class. While the
exact amount of the expense to be incurred by the Company is not certain, a
reasonable estimate, based on information currently available, is $1,500. This
amount has been recorded as an expense in the third quarter of 2000. No amounts
have been recorded for any losses which may result from this lawsuit in the
event our settlement efforts are not concluded.
OTHER INCOME - Other income for the three and nine month periods ended
September 30, 2000 was due primarily to the amortization of the deferred gain on
the sale of our headquarter buildings.
INTEREST INCOME (EXPENSE) - NET - Interest income net of interest expense
for the three and nine month periods ended September 30, 2000 was $243 and $543,
respectively, as compared to interest expense net of interest income of $28 and
$197 during the same periods of 1999. Investment of excess cash during the first
nine months of 2000 yielded the income as compared to borrowings under our line
of credit during the same periods of 1999.
PROVISION FOR INCOME TAXES - Income tax expense during the three and nine
month periods ended September 30, 2000 was $2,035 and $1,062, respectively,
compared to $275 and $910 during the same periods of 1999. The recording of
income tax expense during the three and nine month periods ended September 30,
2000, instead of a tax benefit that historically accompanies a loss before
income taxes, is due to an increase in the valuation allowance against the
deferred tax asset. Based upon our history of prior earnings and our current
estimates for future years, we deemed that the current benefit, as well as
previously recorded income tax benefits, may not be realized. Consequently, the
deferred tax asset valuation allowance, which provides for future tax benefits
that may not be realized, was increased.
NET (LOSS) INCOME - The previously described elements caused net loss
during the three and nine month periods ended September 30, 2000 to stand at
$10,439 and $13,146, respectively, as compared to net income of $690 and $1,846
for the same periods of 1999.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash balances increased during the first nine months of 2000 by $14,552 as
operating cash inflows of $5,075 and net inflows from investing activities of
$10,437 exceeded financing outflows of $960. During the comparable 1999 period,
operations provided cash inflows of $7,535, exceeding investing outflows of
$1,629 and financing outflows of $5,480. Operations inflows during the 2000
period resulted primarily because the combination of collections on accounts
receivable and the decrease in the deferred tax asset exceeded the net loss and
increases in inventory. Investing inflows during the first nine months of 2000
principally resulted from the sale-leaseback of our headquarter buildings.
Capital expenditures, primarily for computer and related expenses, decreased to
$1,518 during the first nine months of 2000, compared with $1,629 in the 1999
period. Financing cash outflows during the first nine months of 2000 were
principally the result of a restricted collateral deposit of $1,222 as security
for our headquarters building lease
At September 30, 2000, the Company had available a $15,000 revolving line
of credit which expires in April 2002. No amounts were outstanding under the
line of credit at September 30, 2000 or at December 31, 1999. The line bears
interest at the bank's prime rate (9.50% at September 30, 2000) or, at the
Company's option, a rate based on the London Interbank Overnight Rate (6.64% at
September 30, 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. The Company is currently
not in compliance with certain conditions required under the line and is
renegotiating a waiver to address the non-compliance issue, however, the Company
may be unable to negotiate a waiver on terms acceptable to the Company.
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 for the
next 12 months. 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. Future cash
requirements to fund operations may require us to seek additional capital which
may not be available when required on terms acceptable to us.
To date, inflation has not had a significant effect on our operating results.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
which summarizes the SEC's interpretation of applying generally accepted
accounting principals to revenue recognition in the financial statements. SAB
No. 101 was subsequently amended in June 2000 and becomes effective for the
fourth quarter of fiscal years beginning after December 15, 1999. Based on the
Company's current revenue recognition policies, the Company does not expect the
adoption of SAB No. 101, as amended, to have a material impact on the Company's
consolidated financial position or the results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB No. 25". FIN No. 44 clarifies the
application of Opinion No. 25 for certain issues including: (a) the definition
of employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company does not expect that the
adoption of FIN No. 44 to have a material impact on the Company's consolidated
financial position or the results of operations.
9
<PAGE>
RISKS AND UNCERTAINTIES
OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results, including net sales, 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 as a result of 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 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. For instance, during the third quarter of 2000 we
introduced a new product which adversely affected our net sales as customers
delayed their purchase of printers in anticipation of our new product. In
addition, 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 which could result
in increased expenses as compared to historical periods.
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. 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. Several new competitors have also
entered the market. In addition to direct competition in inkjet printers and
related supplies, our products also face competition from other technologies in
the 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.
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<PAGE>
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 initially occurred in North
America and shifted sales from distributors to VARs. As a result, in North
America we currently sell our products directly to a network of approximately 85
major VARs. We believe this model allows us to increase our knowledge of our
customers and improve end-user customer satisfaction. Although VARs are, in
general, not as well financed as distributors, any collection risk we may have
is spread over more accounts.
Actual bad debts may in the future exceed recorded allowances resulting in
a material adverse effect on our financial condition or results of operations.
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.
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 nine months ended September 30, 2000 and 1999, sales outside the
United States represented approximately 60% and 64% 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.
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.
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<PAGE>
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.
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 marketing the products that incorporate
such rights or be required to obtain a license. 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.
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.
12
<PAGE>
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
Our only financial instruments with market risk exposure are excess cash
held in money market funds and, to the extent utilized, revolving line of credit
borrowings, of which no amounts were outstanding at September 30, 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.
Our revolving line of credit facility is non-trading in nature and carries
interest at the bank's prime rate (9.50% at September 30, 2000) or, at our
option, a rate based on the London Interbank Overnight Rate (6.64% at September
30, 2000) plus 1.25%. 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
results during the first nine months of 2000 was not material.
13
<PAGE>
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 November 1998, a class-action lawsuit was filed against the Company in
the U.S. District Court for the District of Colorado, alleging anti-trust
violations pertaining to the sale of a specified printer. Class members sought
damages caused by allegedly faulty ink used in the printer including the cost of
the ink, the cost of third-party replacement ink, and damage to printing
projects caused by the allegedly faulty ink. The Company believed the claims
were without merit and that it could have successfully defended the lawsuit.
Nevertheless, the Company deemed it to be in the best interest of its
stockholders and customers to negotiate a settlement and has reached a tentative
settlement, in principal, with the attorneys representing the plaintiffs. This
tentative settlement must ultimately be agreed to in writing, approved by the
Court and approved by the Plaintiff class. While the exact amount of the expense
to be incurred by the Company is not certain, a reasonable estimate, based on
information currently available, is $1,500. This amount has been recorded as an
expense in the third quarter of 2000. No amounts have been recorded for any
losses which may result from this lawsuit in the event our settlement efforts
are not concluded.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2000 Annual Meeting of Stockholders was held on July
20, 2000, in San Diego, California, for the following purposes:
1. The following six directors were elected to serve a one-year term that
will expire at the Company's 2001 Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Robert V. Adams 10,164,463 1,002,039
Craig S. Andrews 10,265,481 901,021
Ronald J. Hall 10,264,703 901,799
Howard L. Jenkins 10,264,703 901,799
David A. Purcell 10,249,569 916,933
Charles E. Volpe 10,263,778 902,724
</TABLE>
2. The stockholders did not ratify or approve an amendment to the 1999 Stock
Option/Stock Issuance Plan to increase the number of shares reserved for
issuance thereunder by an additional 750,000 shares. The total number of
votes cast for and against were 2,355,594 and 3,210,427, respectively,
with 42,649 abstentions and 5,557,832 broker non-votes.
3. The stockholders did not ratify or approve an amendment to the 1999 Stock
Option/Stock Issuance Plan to provide for automatic annual increases in
the number of shares for issuance thereunder. The total number of votes
cast for and against were 2,320,965 and 3,243,405, respectively, with
42,649 abstentions and 5,557,832 broker non-votes.
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<PAGE>
4. The stockholders ratified and approved an amendment to the 1993 Employee
Stock Purchase Plan and the reservation of an additional 200,000 shares
authorized to be purchased thereunder. The total number of votes cast for
and against were 3,112,772 and 2,454,529, respectively, with 41,369
abstentions and 5,557,832 broker non-votes.
5. The stockholders did not ratify or approve an amendment to the 1993 Stock
Purchase Plan to provide for automatic annual increases in the number of
shares to be purchased thereunder. The total number of votes cast for and
against were 2,490,360 and 3,072,626, respectively, with 45,684
abstentions and 5,557,832 broker non-votes.
6. The stockholders ratified the appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the fiscal year ending
December 31, 2000. The total number of votes cast for and against were
9,192,908, and 1,939,477,629, respectively, with 34,117 abstentions.
ITEM 5. OTHER INFORMATION
Not applicable
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)
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 an exhibit to Registrant's Registration Statement on Form
8-A12G/A (No. 000-23034) and incorporated herein by reference.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended September 30, 2000.
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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: November 14, 2000
ENCAD, Inc.
(Registrant)
/s/ Todd W. Schmidt
----------------------------------------------
(Todd W. Schmidt)
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
16
