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.
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.
The following table sets forth, for the periods indicated, certain selected financial data expressed as a percentage of net sales:
Comparison of Three Months Ended March 31, 2001 and 2000
Net sales. Net sales decreased 9.9% to $13.2 million for the three-month period ended March 31, 2001 from $14.6 million in the same period of 2000. Sales of plastic card personalization products decreased 9.5% to $13.1 million in the first quarter of 2001 from $14.4 million in the same period of 2000. The remaining sales in the first quarter of 2001 and 2000 are from products not related to plastic card personalization. Of the $13.1 million in sales attributable to plastic card personalization products in the first quarter of 2001, sales of equipment increased 0.2% to $6.6 million from $6.5 million in the first quarter of 2000, and sales of supplies decreased 17.5% to $6.5 million from $7.9 million in the first quarter of 2000. We believe the decrease in sales of supplies is largely attributable to the company focusing on higher margin supply sales during the first quarter of 2001.
International sales decreased 2.4% to $5.2 million in the first quarter of 2001 from $5.4 million in the same period of 2000 and accounted for 39.8% of net sales for the three months ended March 31, 2001 compared to 36.8% of net sales in the same period of 2000. The increase in international sales as a percent of total sales was principally due to the decline in total sales in the first quarter of 2001.
Gross profit. Gross profit as a percentage of net sales decreased to 37.4% for the three months ended March 31, 2001 from 44.7% in the same period of 2000. This decrease was primarily due to manufacturing start-up costs related to our new products, increased discounts and sales of more lower margin printers as a percentage of the overall mix of printers sold in the first quarter of 2001. The mix of printers sold contributed to an increase in the average unit cost of our printers.
Research and development. Research and development expenses decreased 12.0% to $1.0 million for the three months ended March 31, 2001 from $1.2 million in the same period of 2000. Research and development expenses as a percentage of net sales were 7.8% for the first quarter of 2001 compared to 8.0% for the same period of 2000. The decrease in the first quarter of 2001 was primarily due to lower salary expense.
Selling, general and administrative. Selling, general and administrative expenses increased 12.0% to $2.9 million for the three months ended March 31, 2001 from $2.6 million in the same period of 2000. As a percentage of net sales, selling, general and administrative expenses were 22.0% in the first quarter of 2001, compared to 17.7% for the same period of 2000. The increase is principally attributable to additional professional fees paid to outside consultants to improve our manufacturing processes, but was partially offset by lower marketing expenses.
Operating income. Operating income decreased 64.1% to $1.0 million for the quarter ended March 31, 2001 from $2.8 million during the same period of 2000. As a percentage of net sales, operating income was 7.6% in the first quarter of 2001 compared to 19.0% in the same period of 2000.
Interest expense. Interest expense totaled $480,000 for the three months ended March 31, 2001, compared to $1.1 million for the comparable period in 2000. Upon completion of the initial public offering of our common stock in February 2000, $33.9 million of the offering proceeds were used to reduce our outstanding debt. This reduction in our debt combined with reduced interest rates led to the lower interest expense. The weighted average interest rate on our outstanding debt for the three months ended March 31, 2001 was 7.8% as compared to 8.8% in the same period of 2000.
Income tax expense. Income tax expense was $183,000 for the three months ended March 31, 2001, which results in an effective tax rate of 36.9%, compared to income tax expense of $635,000 and an effective tax rate of 36.5% for the same period of 2000.
Liquidity and Capital Resources
We have historically financed our operations, debt service and capital requirements through cash flows generated from operations. Our working capital was $11.5 million and $14.9 million, respectively, at March 31, 2001 and December 31, 2000. The decrease at March 31, 2001 was principally attributable to a $4.0 million increase in current bank debt.
During the first three months of 2001 and 2000, net cash flows provided by operating activities were $1.2 million and $123,000, respectively. Net cash flows used in investing activities were $203,000 and $338,000 in each of these periods. Net cash flows provided by financing activities was $4,000 during the three months ended March 31, 2001. Net cash flows used in financing activities was $87,000 for the same period of 2000.
As of March 31, 2001, our borrowings consisted of $22.9 million owed under the revolving credit agreement with LaSalle Bank and Harris Bank. In April 2001, we amended our credit facility, which under the terms of the amendment, has been converted to a $19.0 million term loan and up to a $5.0 million revolving credit facility as defined by the agreement, of which $3.9 million was outstanding at April 20, 2001. The agreement calls for principal repayments of $1.0 million per quarter commencing June 30, 2001, with the remaining principal balance and unpaid interest under both the term loan and the revolving loan becoming due and payable in full on April 1, 2002. In 2002, we plan to extend our existing credit facility for an additional period of time.
The revolving credit facility requires, among other things, the maintenance of specified financial ratios including fixed charge coverage and total debt to EBITDA, as defined in the agreement, and restrictions on capital expenditures and the payment of dividends. On April 20, 2001, we obtained a waiver for noncompliance related to certain covenants with our revolving credit facility at March 31, 2001.
We believe that funds generated from operations and funds available to us under our credit facility agreement 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 our market risk during the three months ended March 31, 2001. For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section (Item 7A) of our Annual Report on Form 10-K for the year ended December 31, 2000.
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
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
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
| Item No. | Description |
| | |
| 10.1 | Amendment No. 1 to Credit Agreement and Waiver, dated April 20, 2001, between Fargo Electronics, Inc., LaSalle Bank National Association and the other parties thereto. |
(b) Reports on Form 8-K
None.
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 15, 2001 | Gary R. Holland |
| | President and Chief Executive Officer |
| | |
| | |
| | /s/ Paul W.B. Stephenson
|
| | Paul W.B. Stephenson |
| | Chief Financial Officer |
