UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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.
ENCAD, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
INTRODUCTION.........................................................................................2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 2000 (as restated) and December 31, 1999...............................3
Consolidated Statements of Operations for the
three months ended March 31, 2000 (as restated) and 1999.........................4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 (as restated) and 1999.........................5
Notes to Consolidated Financial Statements.........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................................9
SIGNATURES..........................................................................................16
i
PART I. - FINANCIAL INFORMATION
Introduction
The purpose of this form 10-Q/A is to restate the Company's first quarter 2000
financial information to reflect the restatement of the Company's financial
information, included in Item 1, as discussed in Note 9 thereto and Item 2.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, the Company has amended and
restated in its entirety each item of the 2000 first quarter Form 10-Q which has
been affected by the restatement. In order to preserve the nature and character
of the disclosures originally set forth in the 2000 first quarter 10-Q filed on
May 11, 2000, this form 10Q/A does not reflect events occurring after the filing
of the original Form 10-Q or modify or update those disclosures in any way,
except as required to reflect the effects of the restatement.
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands, except per share data) MARCH 31, 2000 December 31, 1999
As Restated -
See Note 9
-------------------- ---------------------
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 14,251 14,264
RESTRICTED CASH 1,231 -
OTHER ASSETS 3,871 2,421
-------------------- ---------------------
TOTAL ASSETS $ 80,762 $ 68,479
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,777 $ 7,882
Accrued expenses and other liabilities 8,885 8,090
Current portion of financing obligation 479 -
-------------------- ---------------------
Total current liabilities 18,141 15,972
-------------------- ---------------------
LONG TERM PORTION OF FINANCING OBLIGATION 11,578 -
OTHER LIABILITIES 2,090 1,263
STOCKHOLDERS' EQUITY:
Preferred stock, par value - $.001 per share, 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 29,464 31,891
-------------------- ---------------------
Total stockholders' equity 48,953 51,244
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,762 $ 68,479
==================== =====================
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2000 1999
As Restated -
See Note 9
----------------- --------------------
NET SALES $ 22,805 $ 28,982
COST OF SALES 13,317 16,579
----------------- --------------------
GROSS PROFIT 9,488 12,403
----------------- --------------------
MARKETING AND SELLING 6,363 5,722
RESEARCH AND DEVELOPMENT 3,127 2,932
GENERAL AND ADMINISTRATIVE 3,314 3,091
----------------- --------------------
12,804 11,745
----------------- --------------------
(LOSS) INCOME FROM OPERATIONS (3,316) 658
INTEREST EXPENSE (79) (122)
INTEREST INCOME 166 4
----------------- --------------------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) PROVISION (3,229) 540
INCOME TAX (BENEFIT) PROVISION (802) 191
----------------- --------------------
NET (LOSS) INCOME $ (2,427) $ 349
================= ====================
(LOSS) EARNINGS PER SHARE - BASIC $ (0.21) $ 0.03
================= ====================
(LOSS) EARNINGS PER SHARE - DILUTED $ (0.21) $ 0.03
================= ====================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 11,783 11,636
================= ====================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 11,783 11,725
================= ====================
See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
As Restated -
See Note 9
------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,427) $ 349
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 766 821
Provision for losses on accounts receivable and inventories (433) 29
Tax benefit from exercise of stock options 3 -
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 (1,967) (363)
Accounts payable 895 (2,099)
Accrued expenses and other liabilities 1,622 1,257
------------------ ----------------
Cash provided by operating activities 1,499 5,033
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (753) (695)
------------------ ----------------
Cash used in investing activities (753) (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) -
Additions to financing obligation 12,200 -
Payments on financing obligation (143) -
Net borrowings under line of credit - (3,500)
------------------ ----------------
Cash provided by (used in) financing activities 10,959 (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 $ 79 $ 117
See Notes to Consolidated Financial Statements.
5
ENCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited (in thousands, except per
share data) (as restated)
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 accounting
principles generally accepted in the United States of America 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:
MARCH 31, December 31,
2000 1999
---------------- ----------------
Raw materials $ 5,926 $ 6,017
Work-in-process 97 131
Finished goods 7,732 5,844
---------------- ----------------
Total $ 13,755 $ 11,992
================ ================
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 a $1,222 collateral
deposit to secure a letter of credit required by the headquarters property
lease. This deposit is 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 Offered 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.
6
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 Offered
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.
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 shares plus all dilutive potential common shares that were
outstanding for the period.
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:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------------ -----------
Net (loss) income $ (2,427) $ 349
------------ -----------
(Loss) earnings per share - basic $ (.21) $ 0.03
============ ===========
Basic weighted average common
shares outstanding
11,783 11,636
Effect of dilutive securities:
Stock options
- 89
------------ -----------
Diluted weighted average number of
common shares plus all dilutive
potential common shares that were
outstanding for the period 11,783 11,725
------------ -----------
(Loss) earnings per share - diluted $ (.21) $ 0.03
============ ===========
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) FINANCING OBLIGATION - 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 lease requires the Company
to maintain a letter of credit secured by a cash deposit of $1,222. The
lease also requires the Company to pay customary operating and repair
expenses and to observe certain operating restrictions and covenants.
7
The following is a schedule by year of future minimum payments under the
financing obligation, together with the present value of the net minimum
payments for the years ending December 31:
2000 $ 917
2001 1,319
2002 1,414
2003 1,465
2004 1,523
Thereafter 9,423
--------------
Total minimum payments 16,061
Amount representing interest (4,004)
--------------
Present value of net minimum payments 12,057
Less: Current portion of financing obligation (479)
--------------
Long term portion of financing obligation $ 11,578
==============
Of the $9,423 amount due after 2004, $6,099 represents the residual value
of the property and the deferred gain on its sale.
9) RESTATEMENT - Subsequent to the issuance of the Company's report on Form
10Q for the quarter ended March 31, 2000, the Company's management
determined that because of the Company's continuing involvement on the
buyer-lessor's behalf in the form of a letter of credit secured by a cash
deposit of $1,222, the recording of the sale-leaseback transaction to
reflect the disposition of the Company's headquarters in January, 2000,
should have been accounted for as a financing arrangement. As such, the
Company should have recorded the sale proceeds of $12,200 as a liability,
not recorded a deferred gain of $5,472 on the sale of the property, and
continued to report the buildings, land and building improvements, with a
net book value on the date of the transaction of $6,483 as assets and
continued to depreciate the property. Rent payments, exclusive of an
interest portion, should have decreased the financing obligation with a
portion of the rent payments being recorded as interest expense. A summary
of the significant effects of the restatement is as follows:
MARCH 31, 2000
------------------------------------------
As Previously
CONSOLIDATED BALANCE SHEETS Reported As Restated
-------------------- --------------------
Property - net $ 7,808 $ 14,251
Other assets 3,631 3,871
Total Assets 74,079 80,762
Current portion of financing obligation - 479
Long term portion of financing obligation - 11,578
Other liabilities 7,432 2,090
Total stockholders' equity 48,985 48,953
Total Liabilities and Stockholders' Equity 74,079 80,762
8
THREE MONTHS ENDED MARCH 31, 2000
-------------------------------------------
As Previously
CONSOLIDATED STATEMENTS OF OPERATIONS Reported As Restated
----------------- --------------------
Gross profit $ 9,445 $ 9,488
Loss from operations (3,475) (3,316)
Other income 130 -
Interest expense (18) (79)
Net loss (2,395) (2,427)
Loss per share - basic $ (0.20) $ (0.21)
Loss per share - diluted (0.20) (0.21)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(in thousands, except percentages) (as restated)
The Company's financial statements as of and for the three month period
ended March 31, 2000 have been restated. See Note 9 in the accompanying
financial statements for further discussion. The information included in the
following discussion reflects the effects of this restatement.
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.
THREE MONTHS ENDED MARCH 31,
------------------------------------
2000 1999
-------------------------------------------------------------------------------------------
Net sales 100.0% 100.0%
Cost of sales 58.4% 57.2%
-------------------------------------------------------------------------------------------
Gross profit 41.6% 42.8%
-------------------------------------------------------------------------------------------
Marketing and selling 27.9% 19.7%
Research and development 13.7% 10.1%
General and administrative 14.5% 10.7%
-------------------------------------------------------------------------------------------
(Loss) income from operations (14.5%) 2.3%
Interest expense (0.4%) (0.4%)
Interest income 0.7% -
-------------------------------------------------------------------------------------------
(Loss) income before income tax (benefit) provision (14.2%) 1.9%
Income tax (benefit) provision (3.5%) 0.7%
-------------------------------------------------------------------------------------------
Net (loss) income (10.7%) 1.2%
-------------------------------------------------------------------------------------------
9
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 58% 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. 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 11% 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 7% 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 7% 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.
INTEREST EXPENSE - Interest expense for the first quarter of 2000 was $79
as compared to $122 during the same period of 1999. The decline was the result
of a reduction in borrowings on the line of credit combined with an increase in
imputed interest on our financing obligation.
INTEREST INCOME - Interest income for the first quarter of 2000 was $166 as
compared to $4 during the same period of 1999. Investment of excess cash yielded
the additional interest income.
INCOME TAX (BENEFIT) PROVISION - 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
10
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 $2,427 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 $1,499 and net inflows from financing activities of
$10,959 exceeded investing outflows of $753. During the comparable 1999 period,
operations provided cash inflows of $5,033, exceeding investing outflows of $695
and financing outflows of $3,389. Operations inflows during the 2000 period
resulted primarily from cash collections exceeding the net loss offset by
increases in inventory and prepaid expenses and other assets. Investing outflows
during the first quarter of 2000 principally resulted from capital expenditures
of $753 during the first quarter of 2000, compared with $695 in the 1999 period,
primarily for computer and related systems. Financing cash inflows during the
first quarter of 2000 resulted from the financing obligation related to the sale
and subsequent leaseback of our headquarters property for net proceeds of
$11,955, offset by an increase in restricted collateral deposits of $1,222 as
security for our headquarters property lease. The major factor affecting
financing outflows in the comparable 1999 period was a $3,500 reduction of
borrowings under our 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 Offered 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 Offered 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.
11
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
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.
12
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. 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.
13
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.
14
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.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to the report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: March 9, 2001
ENCAD, Inc.
(Registrant)
/s/ Todd W. Schmidt
---------------------------------------------
(Todd W. Schmidt)
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
16