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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 quarterly period ended MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to______________
Commission File No.: 000-29029
FARGO ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1959505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6533 FLYING CLOUD DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (952) 941-9470
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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 No X
--- ---
As of May 3, 2000, 11,766,250 shares of our Common Stock were
outstanding.
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PART 1: FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FARGO ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
ASSETS MARCH 31, 2000 DEC. 31, 1999
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 1,206,171 $ 1,508,603
Accounts receivable, net 6,789,180 5,538,137
Inventories 6,007,064 6,577,586
Prepaid expenses 475,929 364,071
Deferred income taxes 2,789,000 2,789,000
--------------- ----------------
Total current assets 17,267,344 16,777,397
--------------- ----------------
Equipment and leasehold improvements, net 2,138,102 2,006,433
Other assets:
Deferred income taxes 28,644,000 29,169,000
Other 307,210 1,141,121
--------------- ----------------
Total assets $ 48,356,656 $ 49,093,951
=============== ================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current liabilities:
Current portion of notes payable, bank $ 5,000,000 $ 5,000,000
Line of credit, bank 1,000,000
Accounts payable and accrued liabilities 3,103,538 4,209,284
--------------- ----------------
Total current liabilities 9,103,538 9,209,284
--------------- ----------------
Notes payable, bank, less current portion 20,087,000 45,100,000
Note payable, stockholder 10,000,000
Series B, 8% redeemable preferred stock including accrued
dividends, $.01 par value; 30,000 shares authorized,
30,000 shares issued and outstanding 34,733,000
Convertible participating preferred stock, $.01 par value; 10,000
shares authorized, 8,000 shares issued and outstanding 75,000,000
Commitments
Stockholders' equity (deficiency):
Common stock, $.01 par value; 50,000,000 shares authorized,
11,766,250 and 1,765,625 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively 117,662 17,656
Additional paid-in capital 145,239,756 1,781,844
Accumulated deficit (125,273,300) (125,822,833)
Deferred compensation (93,000) (100,000)
Stock subscription receivable (825,000) (825,000)
--------------- ----------------
Total stockholders' equity (deficiency) 19,166,118 (124,948,333)
--------------- ----------------
Total liabilities and stockholders' equity (deficiency) $ 48,356,656 $ 49,093,951
=============== ================
The accompanying notes are an integral part of the unaudited
condensed financial statements.
2
FARGO ELECTRONICS, INC
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2000 1999
Net sales $ 14,617,095 $ 12,067,343
Cost of sales 8,076,282 6,214,921
-------------------- ---------------------
Gross profit 6,540,813 5,852,422
-------------------- ---------------------
Operating expenses:
Research and development 1,172,626 715,094
Selling, general and administrative 2,584,469 2,377,354
-------------------- ---------------------
Total operating expenses 3,757,095 3,092,448
-------------------- ---------------------
Operating income 2,783,718 2,759,974
-------------------- ---------------------
Other income (expense):
Interest expense (1,069,455) (1,527,317)
Interest income 22,598 17,942
Other, net 4,200 140,056
-------------------- ---------------------
Total other expense (1,042,657) (1,369,319)
-------------------- ---------------------
Income before provision for income taxes and
extraordinary loss 1,741,061 1,390,655
Provision for income taxes 635,000 507,000
-------------------- ---------------------
Income before extraordinary loss 1,106,061 883,655
Extraordinary loss, net of applicable income taxes (206,128)
-------------------- ---------------------
Net income 899,933 883,655
Accrued dividends on Series B, 8% redeemable
preferred stock (350,400) (633,000)
-------------------- ---------------------
Net income available to common
stockholders $ 549,533 $ 250,655
-------------------- ---------------------
Net income per common share:
Basic earnings:
Income before extraordinary loss $ 0.10 $ 0.15
Extraordinary loss (0.02) -
-------------------- ---------------------
Net income $ 0.08 $ 0.15
-------------------- ---------------------
Diluted earnings:
Income before extraordinary loss $ 0.08 $ 0.04
Extraordinary loss (0.02) -
-------------------- ---------------------
Net income $ 0.06 $ 0.04
-------------------- ---------------------
Basic shares outstanding 7,260,130 1,687,500
Diluted shares outstanding 9,694,982 6,819,909
The accompanying notes are an integral part of the unaudited
condensed financial statements.
3
FARGO ELECTRONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2000 1999
Cash flows from operating activities:
Net income $ 899,933 $ 883,655
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss on write-off of deferred financing costs 206,128
Depreciation and amortization 272,913 200,369
Deferred income taxes 635,000 385,000
Deferred compensation 7,000
Changes in operating items
Accounts receivable (1,251,043) (269,292)
Inventories 570,522 867,007
Prepaid expenses (111,858) 30,388
Accounts payable and accrued liabilities (1,105,746) 613,516
--------------------- --------------------
Net cash provided by operating activities 122,849 2,710,643
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Cash flows from investing activities:
Purchases of equipment and leasehold improvements (355,000) (264,179)
Other 17,499 62,840
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Net cash used in investing activities (337,501) (201,339)
--------------------- --------------------
Cash flows from financing activities:
Proceeds from initial public offering, net of $5,992,380
for offering costs 69,007,620
Redemption of redeemable preferred stock, including
accrued dividends (35,083,400)
Proceeds from line of credit, bank 1,000,000
Payments on notes payable, bank (25,013,000) (750,000)
Payments on note payable, stockholder (10,000,000)
Proceeds from exercise of stock options 1,000
--------------------- --------------------
Net cash used in financing activities (87,780) (750,000)
--------------------- --------------------
Net (decrease) increase in cash and cash equivalents (302,432) 1,759,304
Cash and cash equivalents, beginning of period 1,508,603 1,103,052
--------------------- --------------------
Cash and cash equivalents, end of period $ 1,206,171 $ 2,862,356
--------------------- --------------------
Significant noncash transactions:
Conversion of convertible participating preferred
stock into common stock $ 75,000,000
Accrued dividends on Series B, 8% redeemable
preferred stock $ 633,000
The accompanying notes are an integral part of the unaudited
condensed financial statements.
4
FARGO ELECTRONICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed financial statements presented herein as of March
31, 2000, and for the three months ended March 31, 2000 and 1999, are
unaudited; however, in our opinion, the interim condensed financial statements
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of financial position, results of operations and cash
flows for the periods presented.
The results of operations for the three months ended March 31, 2000, do
not necessarily indicate the results to be expected for the full year. The
December 31, 1999, balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. These unaudited interim condensed financial
statements should be read in conjunction with our financial statements and
notes thereto, contained in our Annual Report on Form 10-K for the year ended
December 31, 1999 (file no. 000-29029).
NOTE 2 - INVENTORIES
March 31, Dec. 31,
2000 1999
(unaudited)
---------------- ----------------
Raw materials and purchased parts 5,153,007 5,970,920
Work in process 248,782 133,707
Finished goods 605,275 472,959
---------------- ----------------
Total inventories 6,007,064 6,577,586
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NOTE 3 - INITIAL PUBLIC OFFERING
5
In February 2000, we completed an initial public offering in which
we sold 5,000,000 shares of our common stock at $15 per share. The aggregate
offering price of the shares offered was $75,000,000. All of the offered
shares were sold, and the net proceeds to us from the offering were
$69,750,000 after deducting the underwriting discounts and commissions of
$5,250,000. Offering expenses were approximately $750,000. All of the
expenses incurred in connection with the initial public offering were paid to
unrelated parties or entities.
From February 2000 to March 31, 2000, we spent the net proceeds from the
offering as follows:
Repayment of a note payable, stockholder, plus accrued interest $10,153,333
Redemption of redeemable preferred stock, plus accrued dividends 35,083,400
Repayment of principal and interest under our senior bank facility 23,763,267
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Total $69,000,000
===========
Upon the closing of the offering, all of our then outstanding
convertible preferred stock automatically converted into common stock on a
one-for-one basis. After the offering, our authorized capital consists of
50,000,000 shares of common stock, of which 11,766,250 shares were
outstanding as of March 31, 2000.
In connection with our offering of common stock, we recorded an
extraordinary loss, net of tax, of $206,000 for the write-off of deferred
financing costs related to the pay-down of senior bank debt.
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average
number of shares outstanding during the period. Diluted earnings per share is
computed on the basis of the weighted average basic shares outstanding plus
the dilutive effect of convertible participating preferred stock and
outstanding stock options using the "treasury stock" method.
The following table sets forth the computation of basic and diluted net
income per share:
Three month period
ended March 31
---------------------------------
2000 1999
---------------- ----------------
BASIC EARNINGS PER SHARE:
Numerator:
Net income available to common stockholders $ 549,533 $ 250,655
---------------- ----------------
Denominator:
Weighted average common shares 7,260,130 1,687,500
---------------- ----------------
Weighted average basic shares outstanding 7,260,130 1,687,500
---------------- ----------------
Basic net income per share $ 0.08 $ 0.15
================ ================
DILUTED EARNINGS PER SHARE:
6
Numerator:
Net income available to common stockholders $ 549,533 $ 250,655
---------------- ----------------
Denominator:
Weighted average common shares 7,260,130 1,687,500
Dilutive effect of convertible participating preferred stock 2,252,747 5,000,000
Dilutive effect of stock options 182,105 132,409
---------------- ----------------
Weighted average dilutive shares outstanding 9,694,982 6,819,909
---------------- ----------------
Diluted net income per share $ 0.06 $ 0.04
================ ================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with our Condensed Financial Statements and related Notes included in this
report. This report contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. The statements
contained in this report that are not historic in nature, particularly those
that utilize terminology such as "may", "will", "should", "expects",
"anticipates", "estimates", "believes", or "plans" or comparable terminology
are forward-looking statements based on current expectations and assumptions.
All forward-looking statements in this document are based on information
currently available to us as of the date of this report, and we assume no
obligation to update any forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results to differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
BACKGROUND
We are a developer, manufacturer and supplier of desktop systems
that personalize plastic identification cards by printing images and text
onto the cards, laminating them and electronically encoding them with
information. We also sell the consumable supplies, such as ink ribbons,
printheads and blank cards that are used with our systems.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
selected financial data expressed as a percentage of net sales:
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
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Net sales..................................... 100.0% 100.0%
Cost of sales................................. 55.3 51.5
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Gross profit.................................. 44.7 48.5
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Operating expenses:
Research and development 8.0 5.9
Selling, general and administrative 17.7 19.7
7
Total operating expenses 25.7 25.6
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Operating income.............................. 19.0% 22.9%
======== ========
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET SALES. Net sales increased 21.1% to $14.6 million for the first
three months of 2000 from $12.1 million in the same period of 1999. The mix
of net sales changed significantly during this period with sales of plastic
card personalization products increasing 23.5% to $14.4 million in 2000 from
$11.7 million in 1999. Sales of equipment for plastic card personalization
increased 15.1% to $6.5 million from $5.7 million in 1999. Sales of supplies
for plastic card personalization increased 31.4% to $7.9 million from $6.0
million in 1999. Sales of products not related to plastic card
personalization decreased 52.6% to $180,000 in 2000 from $379,000 in 1999.
International sales increased 28.1% to $5.4 million in the first
quarter of 2000 from $4.2 million in 1999 and accounted for 36.8% of net
sales in 2000 compared to 34.8% of net sales in the first quarter of 1999.
GROSS PROFIT. Gross profit as a percentage of net sales decreased to
44.7% for the first three months of 2000 from 48.5% in 1999. The decrease was
primarily due to increased discounts related to sales promotions in the
quarter, which caused a 3.0% decrease in gross margins. Also, an unfavorable
change in the exchange rate on the Japanese yen verses the U.S. dollar caused
a .8% decrease in gross profit. The yen-dollar exchange rate impacts our
gross profit since we purchase much of our supplies for plastic card
personalization from Japanese suppliers.
We anticipate that our gross margin percentage for 2000 will be
lower than 1999 due to exchange rates and manufacturing start-up costs of
products scheduled for introduction in 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased 64.0% to $1.2 million for the first three months of 2000 from
$715,000 in the same period of 1999. Engineering expenses as a percentage of
net sales were 8.0% for the first quarter of 2000 compared to 5.9% for the
first quarter of 1999. The increase in 2000 was primarily due to the
continued development of our new high-definition printing (HDP) product line
and other new plastic card personalization technologies. Research and
development expenses consist primarily of engineering salaries and prototype
component costs. We expect research and development expenses to continue at
these higher levels for the foreseeable future.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 8.7% to $2.6 million for the first three
months of 2000 from $2.4 million in 1999. As a percentage of net sales,
selling, general and administrative expenses were 17.7% in the first quarter
of 2000, compared to 19.7% in the first quarter of 1999. The dollar increase
for the first quarter of 2000 was principally attributable to additional
marketing promotion expenses.
OPERATING INCOME. Operating income increased .9% to $2.8 million for
the first three months of 2000 from $2.8 million during the same period in
1999. As a percentage of net sales, operating income was 19.0% in the first
quarter of 2000 compared to 22.9% in the same period of 1999. The decrease in
operating income as a percentage of net sales in 2000 was due to lower gross
margins caused by increased discounts related to sales promotions, additional
promotional expenses and increased research and development expenses.
8
INTEREST EXPENSE. Interest expense totaled $1.1 million for the
first three months of 2000 compared to $1.5 million in 1999. Upon completion
of the initial public offering of our common stock in February 2000, $33.9
million was paid down on outstanding debt. This contributed to the lower
interest expense, however it was partially offset by higher interest rates.
The weighted average interest rate on our term loan for the three months
ended March 31, 2000 and 1999, was 8.8% and 8.0%, respectively.
EXTRAORDINARY LOSS. In connection with our offering of common stock,
we recorded an extraordinary loss, net of tax, of $206,000 for the write-off
of deferred financing costs related to the pay-down of senior bank debt.
INCOME TAX EXPENSE. Income tax expense was $635,000 for the first
three months of 2000 which results in an effective tax rate of 36.5%,
compared to $507,000 and an effective tax rate of 36.4% for the same period
of 1999.
Net income available to common stockholders was $550,000, or $.06
per diluted share for the first quarter of 2000, compared with $251,000, or
$.04 per diluted share for the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations, debt service and
capital requirements through cash flows generated from operations. Working
capital was $8.2 million and $7.6 million at March 31, 2000 and December 31,
1999, respectively. Our current ratio was 1.9 and 1.8 at March 31, 2000 and
December 31, 1999, respectively.
Cash generated from operating activities for the first three months
of 2000 totaled $123,000 due to net income of $900,000, a non-cash
extraordinary item of $206,000, a decrease in deferred income taxes of
$635,000 and a decrease in inventories of $571,000. These cash flows were
partially offset by increases in accounts receivable of $1.3 million and
decreases in accounts payable and accrued liabilities of $1.1 million. Cash
used by investing activities was $338,000 primarily for the purchase of
equipment and leasehold improvements. Cash used in financing activities was
$88,000 primarily due to our offering of common stock. Proceeds, net of
underwriting discounts and commissions, from the stock offering were $69.0
million which were offset by a $35.1 million payment to repay all of the 8%
redeemable preferred stock and accrued dividends and principal payments of
$23.9 million and $10.0 million, respectively, on the term bank loan and note
payable to stockholder. We also generated $1.0 million from the proceeds of
our revolving bank credit line.
Cash provided by operating activities for the first three months of
1999 was $2.7 million due to net income of $884,000, depreciation and
amortization of $200,000, a decrease in deferred income taxes of $385,000, a
decrease in inventories of $867,000 and increases in accounts payable and
accrued liabilities of $614,000. These cash flows were partially offset by an
increase in accounts receivable of $269,000. Cash used in investing
activities was $201,000, primarily for the purchase of equipment and
leasehold improvements. Cash used in financing activities was exclusively for
repayments on our bank term loan of $750,000.
As of March 31, 2000, our borrowings consisted of $25.1 million owed
under the term loan agreement with a syndicate of banks led by Fleet National
Bank (formerly BankBoston, N.A.). In addition, we have a revolving credit
facility available with the same bank syndicate that permits us to borrow up
to $3.0 million, of which $1.0 million was outstanding at March 31, 2000. The
weighted average interest rate on the term loan was 8.8% for the three months
ended March 31, 2000.
9
We believe that funds generated from operations, the net proceeds
from our initial public offering, and funds available to us under our term loan
and revolving credit agreements will be sufficient to finance our current
operations and planned capital expenditure requirements for at least the next 12
months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss to future earnings, to fair values
or to future cash flows that may result from changes in the price of a
financial instrument. The value of a financial instrument may change as a
result of changes in interest rates, commodity prices, equity prices and
other market changes. Market risk is attributable to all market sensitive
financing instruments, including long-term debt.
There have been no material changes in the Company's market risk
during the first quarter ended March 31, 2000. For additional information on
market risk, refer to the "Quantitative and Qualitative Disclosures About
Market Risk" section (Item 7A) of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (file no. 000-29029).
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
SALE OF UNREGISTERED SECURITIES
Not applicable.
USE OF PROCEEDS
In November 1999, we initially filed a Registration Statement on
Form S-1 (File No. 333-90937) with the Securities and Exchange Commission for
our initial public offering. Under this Registration Statement, as amended,
we registered the offer and sale under the federal securities laws of up to
5,000,000 shares of our common stock in addition to the underwriters'
over-allotment option to purchase an additional 750,000 shares of our common
stock. The SEC declared our Registration Statement effective on February 10,
2000 and the closing of our initial public offering was held on February 16,
2000. The managing underwriters were Prudential Securities Incorporated,
FleetBoston Robertson Stephens Inc. and Raymond James & Associates, Inc.
The aggregate offering price of the shares offered, excluding the
underwriters' over-allotment option, was $75,000,000. All of the offered
shares were sold and the net proceeds to us from the offering were
$69,750,000 after deducting the underwriting discounts and commissions of
$5,250,000. Offering expenses were approximately $750,000. All of the
expenses incurred in connection with the initial public offering were paid to
unrelated parties or entities.
10
From February 16, 2000 to March 31, 2000, we spent the net proceeds
from the offering as follows:
Repayment of a note payable, stockholder, plus accrued interest $10,153,333
Redemption of redeemable preferred stock, plus accrued dividends 35,083,400
Repayment of principal and interest under our senior bank facility 23,763,267
----------
Total $69,000,000
==========
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
11
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.
FARGO ELECTRONICS, INC.
/s/ Gary R. Holland
--------------------------------
May 9, 2000 Gary R. Holland
President and
Chief Executive Officer
/s/ Kent O. Lillemoe
--------------------------------
Kent O. Lillemoe
Chief Financial Officer
12
EXHIBIT INDEX
Item No. Description Method of Filing
-------- ------------ -----------------
27.1 Financial Data Schedule Filed herewith electronically
13