10-Q/A 1 a2040825z10-qa.txt 10-Q/A 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

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

See Notes to Consolidated Financial Statements. 3

See Notes to Consolidated Financial Statements. 4

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:

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:

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:

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.

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

ENCAD INC 10-Q/A