<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 1996
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, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3672088
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6059 CORNERSTONE COURT WEST 92121
SAN DIEGO, CA
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 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
September 30, 1996, was 11,231,918.
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ENCAD, INC.
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 . . . . . . . . . . . . 3
Consolidated Statements of Income for the
three and nine months ended September 30, 1996 and 1995. . . . . 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995. . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . .7-12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . .13
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . . .13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . .13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . .13
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . .13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . .13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2
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PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCAD, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands) SEPTEMBER 30, December 31,
1996 1995
---------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,265 $ 3,067
Short-term investments - 6,072
Accounts receivable 17,041 13,029
Inventories 15,660 8,047
Deferred income taxes 4,224 2,254
Prepaid expenses 392 285
-------- --------
Total current assets 40,582 32,754
PROPERTY - Net 10,158 3,138
OTHER ASSETS 534 236
-------- --------
Total $ 51,274 $ 36,128
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,735 $ 4,572
Accrued expenses and other liabilities 5,341 2,878
-------- --------
Total current liabilities 13,076 7,450
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 12,714 11,827
Accumulated earnings 25,484 16,851
-------- --------
Total shareholders' equity 38,198 28,678
-------- --------
TOTAL $ 51,274 $ 36,128
-------- --------
-------- --------
</TABLE>
Note:
The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See notes to consolidated financial statements
3
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ENCAD, Inc.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, Nine months ended September 30,
1996 1995 1996 1995
-------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
REVENUE $ 30,047 $ 15,606 $ 74,417 $ 47,796
COST OF GOODS SOLD 15,905 8,829 39,068 26,333
-------- -------- -------- --------
GROSS PROFIT 14,142 6,777 35,349 21,463
MARKETING AND SELLING 4,594 2,029 11,786 5,645
RESEARCH AND DEVELOPMENT 2,167 1,434 5,936 4,174
GENERAL AND ADMINISTRATIVE 1,787 792 4,519 2,687
-------- -------- -------- --------
8,548 4,255 22,241 12,506
-------- -------- -------- --------
INCOME FROM OPERATIONS 5,594 2,522 13,108 8,957
INTEREST INCOME - Net 33 141 127 250
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 5,627 2,663 13,235 9,207
PROVISION FOR INCOME TAXES 1,895 877 4,599 3,192
-------- -------- -------- --------
NET INCOME $ 3,732 $ 1,786 $ 8,636 $ 6,015
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE $ 0.31 $ 0.16 $ 0.73 $ 0.53
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 11,940 11,372 11,798 11,250
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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ENCAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,636 $ 6,015
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Depreciation and amortization 2,077 636
Provision for losses on accounts receivable and inventories 2,231 125
Tax benefit from exercise of stock options 401 69
Changes in assets and liabilities:
Accounts receivable (4,219) (2,952)
Inventories (9,640) (1,153)
Deferred income taxes (1,970) (320)
Prepaid expenses and other assets (405) 321
Accounts payable 3,163 617
Accrued expenses and other liabilities 2,463 598
--------------- --------------
Cash provided by operating activities 2,737 3,956
--------------- --------------
INVESTING ACTIVITIES:
Purchases of property (9,097) (1,393)
Net cash from (purchases of) short-term investments 6,072 461
--------------- --------------
Cash used in investing activities (3,025) (932)
--------------- --------------
FINANCING ACTIVITIES:
Exercise of common stock options and sale of stock under
employee stock purchase plan 486 324
Net proceeds from issuance of common stock - 282
--------------- --------------
Cash provided by financing activities 486 606
--------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 198 3,630
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,067 842
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,265 $ 4,472
--------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 4,769 $ 2,974
</TABLE>
See notes to consolidated financial statements.
5
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ENCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
1) The consolidated financial statements at September 30, 1996 and for the
three and nine months then ended 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. The 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 to Shareholders incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995. The results of operations for the three and nine months ended
September 30, 1996, are not necessarily indicative of the results for the
entire fiscal year ending December 31, 1996.
2) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents consist of
highly liquid investments with original maturities of three months or less.
Short-term investments have original maturities of greater than three
months but less than one year and are highly liquid.
3) BALANCE SHEET DETAILS
INVENTORIES: IN THOUSANDS SEPTEMBER 30, December 31,
1996 1995
--------------------------------------------------------------
Raw materials $ 8,147 4,601
Work-in-process 324 224
Finished goods 7,189 3,222
------------ -----------
Total $ 15,660 8,047
------------ -----------
------------ -----------
4) SHAREHOLDERS' EQUITY
Effective May 31, 1996, for shareholders of record on May 17, 1996, the
Company effected a two-for-one stock split payable in the form of a stock
dividend resulting in the issuance of 5,599,007 shares of common stock.
The effects of the stock split have been retroactively restated in these
financial statements.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. The Company undertakes 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.
REVENUE - Total revenues for the third quarter and nine months ended
September 30, 1996 increased to $30.0 and $74.4 million, respectively, up 93%
and 56%, respectively compared to the same periods in 1995. The increase is
primarily attributable to an increased sales volume of the Company's NovaJet
product line, including sales of the NovaJet Pro and the NovaJet Pro 50, which
were introduced in November 1995 and February 1996, respectively. The Company's
original equipment manufacturer ("OEM") sales for the third quarter and nine
months ended September 30, 1996 increased to 27% and 25% of revenue,
respectively, as compared with 26% and 18% of revenue in the third quarter and
first nine months of 1995, respectively. During the quarter ended September 30,
1996, one OEM customer accounted for 17% of revenue. International sales
accounted for approximately 58% and 55% of the Company's revenue for the third
quarter of 1996 and the third quarter of 1995, respectively.
COST OF GOODS SOLD - Cost of goods sold for the third quarter and nine
months ended September 30, 1996 as a percentage of revenue decreased to 53% and
52%, respectively, in 1996 compared to 57% and 55%, respectively, for the same
periods in 1995, causing a comparable increase in gross margin as a percentage
of revenues. This decrease in the cost of goods sold is due primarily to a
favorable product mix including the higher margin NovaJet products, offsetting
the lower margin products - CadJet, supplies (as a group) and accessories.
Gross margins as a percentage of revenue are affected by competitive price
pressures causing a reduction in unit selling prices, product mix, as described
above, and short product life cycles.
MARKETING AND SELLING - Marketing and selling expenses for the third quarter
and nine months ended September 30, 1996 increased approximately $2.6 and $6.1
million, respectively, over the same periods in 1995. These expenses
represented 15% and 16% of revenue, respectively, as compared to 13% and 12% of
revenue for the third quarter and nine months of 1995. Most of the increase is
related to costs associated with increased staffing, the advertising of new
products, increased emphasis on promoting the supplies portion of the Company's
business and increased tradeshow activity compared to the same periods in the
prior year. Marketing and selling expenses in absolute dollars and as a percent
of revenue are expected to continue to increase over prior year amounts as the
Company promotes its competitive products and supports its marketing and selling
activities.
RESEARCH AND DEVELOPMENT - Research and development expenses for the third
quarter and nine months ended September 30, 1996 increased $0.7 million and $1.8
million, respectively, to $2.2 and $5.9 million compared to the same periods in
1995. These expenses represented 7% and 8% of revenue for the third quarter and
first nine months of 1996, respectively, as compared to 9% of revenue for both
periods in 1995. The absolute dollar increase was primarily attributable to
increased staffing and related costs associated with additional development
projects, and increased consulting expenses. The Company expects to continue to
invest significant resources in new product development and enhancements to
existing products. The Company expects that research
7
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and development expenses will continue to increase in absolute dollars and
may increase as a percentage of revenue as compared to prior periods.
GENERAL AND ADMINISTRATIVE - General and administrative expenses for the
third quarter and nine months ended September 30, 1996 increased to $1.8 and
$4.5 million, respectively, compared to $0.8 million and $2.7 million in the
same periods during 1995. These expenses represented 6% of revenue for both the
third quarter and nine months ended September 30, 1996 compared to 5% and 6% of
revenue in the third quarter and nine months ended September 30, 1995,
respectively. The increase in absolute dollars was for both periods due to
higher staffing levels necessary to support increased Company staffing and
additional legal expenses.
PROVISION FOR INCOME TAXES - The Company's combined state, federal and
foreign tax rate was approximately 34% for the quarter ended September 30, 1996,
and 35% for the nine months then ended, compared to 33% and 35% for the
comparable periods in 1995. The combined tax rate differed from the federal
statutory rate primarily as a result of the imposition of state taxes, the tax
benefit derived from the Company's Foreign Sale Corporation, and foreign
earnings taxed at local rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily through cash flow provided by
operations. As of September 30, 1996, the Company had cash, cash equivalents
and short-term investments totaling $3.3 million, and working capital of $27.5
million. The corresponding amounts at December 31, 1995 were $9.1 and $25.3
million, respectively.
The Company currently invests its excess cash in certificates of deposit,
U.S. Treasury bills and money market accounts. The Company has established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. The Company has not
experienced, to date, any losses on its short-term investments.
The Company has received and anticipates it will continue to receive the
majority of its cash from collections on its accounts receivable, which are
generated from its worldwide distributors and a small number of OEMs. These
groups have a history of timely payments, however, an increase in international
sales tends to increase the aggregate amount of the Company's accounts
receivable due to typically slower payments by international customers.
Net accounts receivable increased $4.0 million at September 30, 1996, up from
$13.0 million at the end of 1995. The increase was primarily due to increased
revenues over the period.
At September 30, 1996 net inventories had increased by $7.6 million from $8.0
million at the end of 1995. The increase was due to increased inventories of
ink and media intended to support the Company's plans to place greater emphasis
on the development and marketing of supplies and increased inventories to
support the increased sales of the NovaJet product lines.
In the nine month period ended September 30, 1996, and 1995, the Company made
capital expenditures of $9.1 and $1.4 million, respectively. The capital
expenditures for the nine month period ended September 30, 1996, included
approximately $6.0 million for the purchase of the Company's headquarter
facilities in February 1996.
The growth of the Company's business will require the commitment of
substantial capital resources. Actual cash requirements may vary from planned
amounts, depending on timing of product introductions and extent of acceptance
of new products. To date, inflation has not had a significant effect on the
Company's operating results. The Company's overall level of operating expense
is expected to increase, primarily due to increased expense associated with
costs of
8
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developing and marketing new products. Management believes that its
existing cash, cash equivalents, short-term investments, cash generated from
operations, borrowing capacity on its headquarter facilities, and up to amounts
available under a bank line of credit, expiring in June 1998, will be sufficient
to satisfy its anticipated working capital needs through 1997. During the
quarter ended September 30, 1996, the Company borrowed and repaid $3.0 million
under the line of credit.
RISKS AND UNCERTAINTIES
POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE - The Company's quarterly
operating results can fluctuate significantly depending on factors such as the
timing of product announcements and subsequent introductions by the Company and
its competitors, availability and cost of components, timing of shipments of the
Company's products, mix of product families shipped, market acceptance of new
products, seasonality, currency fluctuations, changes in prices by the Company
and its competitors, price protection for selling price reductions offered to
distributors and OEMs, the timing of expenditures for staffing and related
expenditures, advertising, promotion, research and development and changes in
general economic conditions. Any one of these factors could have a material
adverse effect on the Company's results of operations. The Company may
experience significant quarterly fluctuations in total revenues as well as
operating expenses with respect to future new product introductions. In
addition, the Company's component purchases, production and spending levels are
based upon forecast demand for the Company's products. Accordingly, any
inaccuracy in forecasting could adversely affect the Company's results of
operations. Demand for the Company's products could be adversely affected by a
slowdown in the overall demand for computer systems or printer products. The
Company's failure to complete shipments during a quarter could have a material
adverse effect on the Company's results of operations for that quarter.
Quarterly results are not necessarily indicative of future performance for any
particular period, and there can be no assurance that the Company can maintain
the levels of revenue and profitability experienced over the past three years on
a quarterly or annual basis.
HIGHLY COMPETITIVE INDUSTRY - The markets for the Company's products, both
printers and supplies, is highly competitive and rapidly changing and the
Company believes that new competitors will likely enter the market. The
Company's principal competitor in the United States and overseas is Hewlett-
Packard Company ("Hewlett-Packard"), which dominates the wide-format inkjet
markets. In addition to direct competition in inkjet printers and related
supplies, the Company's products also face competition from other technologies
in the wide-format inkjet market. Such technologies include pen, electrostatic
and thermal methods. Some of the Company's current and prospective competitors,
particularly Hewlett-Packard, have significantly greater financial, technical,
manufacturing and marketing resources than the Company. The Company's ability
to compete in the wide-format inkjet market depends on a number of factors
within and outside its control, including the success and timing of product
introductions by the Company and its competitors, price, performance, product
distribution, marketing ability, and customer support. A key element of the
Company's strategy is to provide competitively priced, quality products. There
can be no assurance that the Company's products will continue to be
competitively priced. The Company has reduced prices on certain of its products
in the past and there can be no assurance that price reductions will not be
required in the future. Price reductions, if not offset by similar reductions
in cost of goods sold, will affect gross margins and may adversely affect the
Company's results of operations.
SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE - The markets for wide-format
printers and related supplies is 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. The
Company's future success will depend on its ability to continue to develop and
manufacture competitive products and achieve cost reductions for its existing
products. Advances
9
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in technology will require increased investment in product engineering to
maintain the Company's market position. In addition, the Company monitors
new technology developments and coordinates with suppliers, distributors and
dealers to enhance existing products and lower costs. The Company's future
operating results could be adversely affected if the Company is unable to
develop and manufacture new, competitive products in a timely manner.
COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES - While most
components are available locally from multiple vendors, certain components used
in the Company's products are only available from single sources. Although the
Company generally buys components under purchase orders and does not have long-
term agreements with its suppliers, it expects that its suppliers will be able
to continue to satisfy its requirements. The Company's plan is to develop
strategic relationships with single suppliers of its components rather than to
develop second sources. Although alternate suppliers are readily available for
most 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 the
Company's operations. The Company maintains a material requirements planning
system that is intended to aid in making "Just-in-Time" decisions; however, if a
supplier is unable to meet the Company's needs or supplies parts which the
Company finds unacceptable, the Company may not be able to meet production
demands. Certain key components of the Company's products are supplied directly
or indirectly by its principal competitor, Hewlett-Packard. The Company
believes that Hewlett-Packard supplies these components to many other customers.
Any significant increase in component prices or decrease in component
availability could have a material adverse effect on the Company's results of
operations.
POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY
RIGHTS - From time to time, certain competitors, including Hewlett-Packard, have
asserted patent, copyright and other intellectual property rights relevant to
the Company's business. The Company expects that this will continue. The
Company carefully evaluates each assertion relating to its products. If the
Company is not successful in establishing that any asserted rights have not been
violated, or has licensed a disputed technology, the Company could be prohibited
from marketing the products that incorporate such technology. The Company could
also incur substantial costs to redesign its products or to defend any legal
action taken against the Company. If the Company's products should be found to
infringe upon the intellectual property rights of others, the Company could be
enjoined from further infringement and be liable for any damages. The Company
relies on a combination of trade secret, copyright, trademark and patent
protection and non-disclosure agreements to protect its proprietary rights.
There can be no assurance, however, that the measures adopted by the Company for
the protection of its intellectual property will be adequate to protect its
interests, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies.
10
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DEPENDENCE ON EXPORT SALES - For the third quarter and nine months ended
September 30, 1996 and 1995, sales outside the United States represented
approximately 58% and 60%, and 55% and 62% of total revenues, respectively. The
Company expects export sales to continue to represent a significant portion of
its total revenues. All of the Company's products sold in the international
markets are denominated in U.S. dollars. An increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products less
competitive in foreign markets. International sales and operations may also be
subject to risks such as the imposition of governmental controls, export license
requirements, restrictions on the export of critical technology, currency
exchange fluctuations, political instability, trade restrictions, changes in
tariffs, difficulties in staffing and managing international operations and
collecting accounts receivable. In addition, the laws of certain countries do
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. As the Company continues to expand its
international business, there can be no assurance that these factors will not
have an adverse effect on the Company's future international sales and,
consequently, on the Company's results of operations.
FUTURE CAPITAL NEEDS - Although the Company first achieved profitability on
an annual basis in 1992, there can be no assurance that future profitability or
revenue growth, if any, will continue on a quarterly or annual basis. Losses
may occur on a quarterly or annual basis for a number of reasons outside the
Company's control. The growth of the Company's business will require the
commitment of substantial capital resources. If funds are not available from
operations, the Company may need to raise additional funds. The Company may
seek such additional funding through public and private financing, including
equity financing. Adequate funds for these purposes, whether through financial
markets or from other sources, may not be available when needed or if available
not on terms acceptable to the Company. Insufficient funds may require the
Company to delay, reduce or eliminate some or all of its planned activities.
The Company anticipates that its existing cash, cash equivalents, short-term
investments, cash generated from operations, borrowing capacity on its
headquarter facilities and amounts available under a bank line of credit will
be sufficient to satisfy its currently anticipated working capital needs through
1997.
RELIANCE ON INDIRECT DISTRIBUTION - The Company markets and sells it
products domestically and internationally primarily through specialty
distributors, dealers and VARs. The Company's sales are principally made
through distributors which may carry competing product lines. Such distributors
could reduce or discontinue sales of the Company's products which could have a
material adverse effect on the Company's operating results. There can be no
assurance that these independent distributors will devote the resources
necessary to provide effective sales and marketing support of the Company's
products. In addition, the Company is dependent upon the continued viability
and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other factors
affecting the wide-format printer market. The Company believes that its future
growth and success will continue to depend in large part upon its distribution
channels. Although the Company believes that it provides adequate allowances
for bad debts and, to date, has not experienced significant amounts of bad
debts, there can be no assurance that actual bad debts will not exceed recorded
allowances resulting in a material adverse effect on operating results. To
expand its distribution channels, the Company has entered into selected OEM and
private label arrangements that allow it to address specific market segments or
geographic areas. In order to prevent inventory writedowns, to the extent that
OEM and private label customers do not purchase products as anticipated, the
Company may need to convert such products to make them salable to other
customers.
DEPENDENCE ON KEY PERSONNEL - The success of the Company is dependent, in
part, on its ability to attract and retain qualified management and technical
personnel. Competition for such
11
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personnel is intense, and the inability to attract additional key employees
or the loss of one or more current key employees could adversely affect the
Company. None of the Company's senior management is subject to an employment
agreement with the Company. There can be no assurance that the Company will
retain its key personnel. In addition, as part of its research and
development efforts, the Company relies heavily on industry consultants to
assist and influence design decisions, ensure continued compatibility with
software and hardware leaders, keep abreast of technological advances, and
design for manufacture. A delay in product introduction is possible to the
extent key consultants become unavailable.
MANAGEMENT OF GROWTH - The Company has recently experienced significant
growth as revenues from product sales have increased to approximately $74.4
million for the nine month period ended September 31, 1996, compared to $47.8
million for the comparable period in 1995. For the years ended December 31,
1995, 1994 and 1993, respectively, sales were $65.5 million, $43.6 million and
$23.2 million. Such growth has placed, and, if continued, will continue to
place, a significant strain on the Company's management, systems and operations.
The Company's future operating results will depend on its ability to broaden the
Company's senior management group, attract, hire and retain skilled employees,
and implement new, and enhance existing, operational information and financial
control systems. There can be no assurance that any new personnel hired by the
Company will be successfully integrated into the business. The Company's
inability to manage growth effectively could have a material adverse effect on
the Company's results of operations
DEVELOPING WIDE-FORMAT INKJET MARKET AND APPLICATIONS - The market for wide-
format, color inkjet printers and related supplies is relatively new and is
still developing. The Company believes that there has been growing market
acceptance for inkjet printers and related supplies. There can be no assurance
that the market and applications for wide-format printers and related supplies
will continue to grow. As other technologies are constantly improving and
there can be no assurance that products based on these other technologies will
not have an adverse effect on the market for the Company's products.
ABSENCE OF DIVIDENDS - No cash dividends have been paid on the Company's
Common Stock to date and the Company does not anticipate paying cash dividends
in the foreseeable future.
VOLATILITY OF STOCK PRICE - The market price of the Company's Common Stock
has fluctuated significantly since the Company's initial public offering of
Common Stock in December 1993. The Company believes that factors such as
general stock market trends, announcements of developments related to the
Company's business, fluctuations in the Company's operating results, general
conditions in the computer peripheral market and the markets served by the
Company or the worldwide economy, a shortfall in revenue or earnings from
securities analysts' expectations, announcements of technological innovations or
new inkjet products or enhancements by the Company or its competitors,
developments in patents or other intellectual property rights and developments
in the Company's relationships with its customers and suppliers could cause a
further significant fluctuation the price of the Company's Common Stock. In
addition, in recent years the stock market in general, and the market for shares
of technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. There can be no assurance that the market price of the Company's
Common Stock will not experience significant fluctuations that are unrelated to
the Company's performance.
12
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August and September of 1995, the Company and two of its officers were named
defendants in shareholder class action lawsuits alleging false or misleading
statements of material facts in the Company's public disclosures. The lawsuits,
as subsequently consolidated, were voluntarily dismissed by plaintiffs' counsel
on September 17, 1996 without payment or other consideration from the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement regarding computation of earnings per share. S1
27 Summary Financial Data
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
ended September 30, 1996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1996
ENCAD, Inc.
(Registrant)
/s/ Todd Schmidt
--------------------------------------------
(Todd Schmidt)
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
EXHIBIT 11.1
ENCAD, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
EARNINGS PER SHARE
(in thousands, except for per share amounts)
PRIMARY
Weighted average number of common
shares outstanding 11,220 11,192
Assumed exercise of outstanding stock
options (1) 720 606
------------------ ------------------
Weighted average common and common
equivalent shares 11,940 11,798
------------------ ------------------
------------------ ------------------
Net income $ 3,732 $ 8,636
------------------ ------------------
------------------ ------------------
Primary earnings per share $ .31 $ .73
------------------ ------------------
------------------ ------------------
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding 11,220 11,192
Assumed exercise of outstanding stock
options (1) 810 836
------------------ ------------------
Weighted average common and common
equivalent shares 12,030 12,028
------------------ ------------------
------------------ ------------------
Net income $ 3,732 $ 8,636
------------------ ------------------
------------------ ------------------
Fully diluted earnings per share $ .31 $ .73
------------------ ------------------
------------------ ------------------
</TABLE>
(1) Computed using the treasury stock method.
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1995 AND
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,265
<SECURITIES> 0
<RECEIVABLES> 17,041
<ALLOWANCES> 0
<INVENTORY> 15,660
<CURRENT-ASSETS> 40,582
<PP&E> 14,612
<DEPRECIATION> 4,454
<TOTAL-ASSETS> 51,274
<CURRENT-LIABILITIES> 13,076
<BONDS> 0
0
0
<COMMON> 12,714
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 38,198
<SALES> 74,417
<TOTAL-REVENUES> 74,417
<CGS> 39,068
<TOTAL-COSTS> 39,068
<OTHER-EXPENSES> 22,241
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,235
<INCOME-TAX> 4,599
<INCOME-CONTINUING> 8,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,636
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
