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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-23034
ENCAD, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of 95-3672088
incorporation or organization) (I.R.S. Employer
Identification No.)
6059 CORNERSTONE COURT WEST 92121
SAN DIEGO, CA
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (619) 452-0882
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K.
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Aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed using the closing price as reported by Nasdaq for the
Company's common stock on February 28, 1997: $202,893,668.*
Indicate the number of shares outstanding of the registrant's common stock as of
the latest practicable date:
Outstanding at
Class February 28, 1997
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Common Stock, no par value 11,336,216
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1996 Annual Report (the "1996 Annual Report") to
security holders to be furnished to the Securities and Exchange Commission
(the "Commission") pursuant to Rule 14a-3(b) in connection with Registrant's
1997 Annual Meeting of Shareholders scheduled to be held on or about May 13,
1997 (the "1997 Annual Meeting"), as attached hereto as Exhibit 13.1, are
incorporated herein by reference into Parts II and IV of this Annual Report
on Form 10-K (this "Report".)
Portions of Registrant's Definitive Proxy Statement (the "Proxy Statement")
to be filed with the Commission pursuant to Regulation 14A in connection with
the 1997 Annual Meeting are incorporated herein by reference into Part III of
this Report.
Certain Exhibits filed with the Registrant's Registration Statement on
Form S-1 (Registration No. 33-70220), as amended, Registrant's Registration
Statement on Form S-8 (Registration No. 33-95252), and Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 are incorporated
herein by reference into Part IV of this Report.
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* Excludes 5,390,414 shares of Common Stock held by executive officers,
directors and shareholders whose ownership exceeds 5% of the Common Stock
outstanding at February 28, 1997. Exclusion of such shares should not be
construed to indicate that any such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant or that such person is controlled by or under common control
with the Registrant.
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PART I
ITEM 1: BUSINESS
The discussion of the Company's business contained in this Annual Report
on Form 10-K may contain certain projections, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed below at "Risks and Uncertainties." While this
outlook represents management's current judgment on the future direction of
the business, such risks and uncertainties could cause actual results to
differ materially from any future performance suggested 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.
GENERAL
ENCAD, Inc. ("ENCAD" or the "Company") designs, develops, manufactures and
markets wide-format (up to 60"), color inkjet printers designed to increase
productivity of computer applications requiring quality printed output. ENCAD's
primary products, currently, are the NovaJet-Registered Trademark-,
CADJET-Registered Trademark- , NovaCut-TM-, Croma24-TM-, and NovaJet PROe
product lines(1). Typical uses for these printers are in graphic arts ("GA"),
such as digital photo imaging , sign-making, three-dimensional renderings and
presentation graphics; in the industries utilizing computer-aided design
("CAD"), such as architectural, engineering and construction design; and in
geographic information systems ("GIS"), such as surveying and mapping. In
support of its wide-format inkjet printers, ENCAD sells a variety of accessories
and supplies, including specialty ink and media. The market for wide-format,
color inkjet printers and the related supplies and accessories is relatively new
and is still developing as a result of technological advancements in performance
and quality and continuing improvements in price/performance ratios. ENCAD
believes these advancements will make quality wide-format inkjet output more
affordable, allowing its products to be more widely used in ENCAD's existing
markets, including the GA market, as well as addressing potential new market
applications.
MARKET
The market for wide-format, color inkjet printers emerged in the early
1990s as a result of the rapid growth in high-powered personal computers by a
wide variety of technical professionals. More recently, GA professionals have
begun to take advantage of the performance and cost features associated with
wide-format inkjet printers as a result of expanded use of sophisticated
graphics interface software programs.
IT Strategies ("ITS"), a market research firm, estimates the 1996 worldwide
market for wide-format, color inkjet printers, based upon the price to the
reseller, to exceed $200 million. ITS also projected market growth at a
compounded average annual growth rate of 28% over the next three years. If that
growth rate is achieved, the worldwide market will exceed $400 million by 1999.
The market for wide-format, color inkjet printers currently consists of
three primary segments: GA, CAD and GIS. The Company currently serves each of
these market segments. In addition, the market for printer accessories and
supplies, such as inks, ink cartridges and print media, is expected to become an
increasingly important market for the Company.
Users in the GA segment include graphic artists, print shops, photolabs,
sign shops and service bureaus. Applications in the GA segment include back-lit
and other signs, point-of-sale advertising, posters, pre-press proofing (proofs
or other quick output to demonstrate concepts for advertising or graphics
layouts), and digital photo imaging. The Company is a leader in the GA
segment. The Company's product lines are particularly well-suited to the GA
segment since they are capable of producing a full range of outputs, from
single line monochrome to full color, photorealistic images. GA users require
output in three distinct segments of the GA and design process, all of which
require performance balanced by low-cost, quickly-produced output. In the
pre-press segment, GA users require proofs or other quick output to demonstrate
concepts for advertising or graphics layouts. Pre-press output involves any
output where form, shape or color is emphasized. In the quick print segment, GA
users include print shops, service bureaus and corporate GA departments that
produce signs or posters. Quick print output includes backlit and wall-mount
signs and point-of-sale displays. In the digital photo segment, GA users include
photo labs, service bureaus
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(1) NovaJet and CADJET are registered trademarks of ENCAD.
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and corporate GA departments that produce high resolution digitized photographs.
Digitized photo output is used when photographic images are manipulated,
including architectural images and text overlay.
The CAD segment includes architectural, engineering and construction design
users. This is a diverse group that utilizes technical graphics applications to
automate the design process and include architects, mechanical engineers,
electrical engineers and users involved in many aspects of building design and
construction. Historically, output for the CAD segment consisted mostly of
two-dimensional monochrome line drawings. With the introduction of wide-format
inkjet printers, CAD users are now able to create full color and
three-dimensional output. CAD and other design users often require spot color
and speed in their output and look for productivity enhancement in producing the
output. The Company's CADJET product line offers a CAD user spot color in
addition to excellent line quality and the NovaJet product line offers a full
range of color outputs. Historically, this market segment was serviced by pen
plotters. ITS estimates that by 1998 inkjet printers will have replaced 65% of
the installed pen plotters in the worldwide CAD segment.
GIS users are a more specialized group that utilizes technical graphics
applications similar to those used in the CAD segment, primarily for mapping.
GIS users include civil engineers, mining engineers and geologists working for
government agencies, utilities and natural resource companies. GIS involves a
distinct use of CAD databases to manage, analyze and present data in a
three-dimensional "mapping" format. Generally, GIS users require more color
than CAD users since GIS involves the use of color fills and varied fonts for
richer presentations. This segment, although smaller than the CAD and GA
segments, represents opportunities for the Company's product lines since GIS
applications require, in some instances, both three-dimensional renderings and
color fills to differentiate acreage, objects and topographical features.
PRINTING TECHNOLOGIES
There are a number of printing technologies, including thermal inkjet,
pen, electrostatic, light emitting diode ("LED") and thermal, that allow
users to produce wide-format output. Each of these technologies has specific
qualities that can be critical to any given application, including
resolution, speed, accuracy, color fill capability, the ability to render a
three-dimensional image, reliability and cost.
A combination of characteristics has made thermal inkjet the fastest
growing technology in the wide-format printer market. The characteristics of
wide-format inkjet printers include relatively low cost, high speed and the
ability to print high-quality color. Inkjet printers form images, lines and
other characters by placing very small dots of ink as the print head moves
horizontally, called a raster scan, while the media is scrolled vertically.
Because inkjet print heads move above the paper and never actually make
contact with the paper, there is less mechanical wear and tear than
experienced by a pen plotter. Inkjet printers can print on almost any media.
Pen plotters draw lines and make symbols and other characters by moving a
pen on the surface of the media. This creates high quality output for working
drawings, reports, presentations or archival copies. Pen plotters offer the
advantages of low-cost color output and different levels of line quality using
liquid ink, fiber tip or ball-point pens. Although cost effective, pen plotters
are relatively slow and are generally limited to eight colors.
Electrostatic printers generally are more expensive than inkjet or pen
plotters and require special plotting paper. They offer certain advantages to
users requiring enhanced color, color fills and high-speed characteristics.
Thermal printer/plotters are similar to electrostatic printers and
generally require special paper to take advantage of the thermal print head.
Thermal printers cost considerably more than inkjet printers.
LED Plotters are the most expensive "plain paper" technology, producing
monochrome output at high speed, but the cost is much higher than inkjet.
Other technologies that can be adapted to wide-format use include
photographic output, electrophotographic output and dot matrix printers. Each
of these technologies has disadvantages for the CAD, GIS and GA markets,
including relatively poor resolution or high costs when compared to inkjet
technology.
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ENCAD PRODUCTS
ENCAD has designed a variety of wide-format hard copy peripherals,
including color inkjet printers and pen plotters. The Company currently sells
the second generation of the CADJET product line, the first of which was
introduced in November 1994, and the fourth and fifth generation of the
NovaJet product line, including the NovaJet family, NovaCut, NovaJet PROe Series
and the Croma24, the first of which was originally introduced in October 1991.
All of ENCAD's products support at least one, and typically several, emulation
graphics languages and interfaces, including, the industry standard,
HP-GL-Registered Trademark-, HP-GL/2-Registered Trademark- and HP-RTL-Registered
Trademark-, to provide compatibility and utility for the end user.(1) In
addition, ENCAD products allow users to print in standard small-format and
wide-format sizes. ENCAD's automatic media sensing feature also permits the
accommodation of some special sizes. Finally, ENCAD products have a relatively
easy-to-operate keyboard and display, with layered menus to set printer
parameters and store pre-set configurations.
NOVAJET FAMILY
NovaJet 4 is targeted at sophisticated mid-range and high-end pen and
thermal printer users, as well as electrostatic printer users. The NovaJet 4 was
first shipped in February 1996. NovaJet 4, which can produce drawings ranging
in size from A (8-1/2" by 11") to E (36" by 48"), offers performance benefits
over existing pen plotter technology, costs less than comparable thermal and
electrostatic printers and is up to 25 times faster than existing pen plotters.
NovaJet 4 uses four ENCAD customized inkjet heads and snap-in refillable
cartridges, one filled with black ink and the remaining three filled with color
ink, and is capable of printing in either monochrome or color. It offers 256
color selections. NovaJet 4 uses standard paper, vellums and transparencies, as
well as specialized inkjet media and can generate output on roll or cut-sheet
media with vector or raster input options.
The NovaJet Pro series, which includes the NovaJet Pro (36" width) and the
NovaJet Pro 50 (50" width), is targeted at sophisticated mid-range and high-end
printer users, as well as electrostatic printer users in the GA market.
NovaJet Pro was first shipped in November 1995 and the NovaJet Pro 50
was first shipped in March 1996. The NovaJet Pro Series has been designed
specifically for the professional graphic artist, and other short run production
oriented professional users. The NovaJet Pro series was the first wide-format
color inkjet printer to include a manufacturer designed and integrated
continuous flow ink supply. The NovaJet Pro series products use four inkjet
print heads, one for black ink and the remaining three for colored ink, and are
capable of printing in either monochrome or color. They offer a full-gamut
color, up to 16 million colors, and use standard paper, vellums and
transparencies, as well as specialized inkjet media.
NOVACUT
The NovaCut family of printer/cutters, introduced in September 1996, was
first shipped in February 1997. The NovaCut, available in both 24" width and
54" width models, functions as both a printer and a cutter in one product,
and thus costs less than a separate printer and cutter. The NovaCut features
a friction-feed media moving technology that provides precision delivery of
media and a "swivel" style cutting knife which assures high-precision
cutting, combined with NovaJet color printing accurate enough for paneling.
The NovaCut also features ENCAD's 500 ml continuous flow ink system that
allows for unattended operation and offers NovaJet Pro color capability. The
NovaCut is targeted to users in the graphics and signage markets.
NOVAJET PROe SERIES
The NovaJet PROe Series, introduced in March 1997 and scheduled to ship
during the second quarter of 1997, is available in both 42" width and 60" width
models. These models, three to five times faster than other printers in their
class, are the most full-featured inkjet printers on the market and feature a
500 ml continuous ink system with dual plumbing for two ink sets, automatic
feed/take-up system, and a new built-in dryer. The NovaJet PROe Series was
designed specifically for users that require a faster, more productive, and even
wider media solution to their
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(1) HP-GL, HP-GL/2 and HP-RTL are registered trademarks of Hewlett-Packard
Company ("Hewlett-Packard").
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growing print-for-pay needs. It is targeted to high-volume producers of large
photorealistic prints, murals, point-of-sale displays and imposition proofs for
direct-to-plate applications.
CROMA24
The Croma24, introduced in March 1997 and scheduled to ship during the
second quarter of 1997, is the industry's first cost-effective, color inkjet
printer which produces 24-inch photo-realistic images. Expanding traditional
11" x 17" print widths by more than doubling the size, the ENCAD Croma24
surpasses the width limitations of current desktop printers and provides new
alternatives for the creative professional or first-time wide-format user. It
is targeted to CAD users, creative professionals, small service bureaus,
photographers, sign shops, and small office/home office users. Offered in
three models at prices believed to be affordable to these users, the Croma24
also has MAC, PC, and PostScript interfaces and advanced software drivers to
enable the user to control color calibration, ink counting, paper selection,
automatic cutting and dry time functions from the desktop. As with ENCAD's
other printer models, a full range of scientifically matched supplies is
available.
CADJET 2
CADJET 2 was first shipped in October 1995. CADJET 2 is targeted at
sophisticated low-end pen plotter and thermal printer users, primarily in the
CAD and GIS markets. CADJET 2, which can produce drawings ranging in size from
A (8-1/2" by 11") to E (36" by 48"), offers performance benefits over existing
pen plotter technology and costs less than comparable thermal printers. The
CADJET 2 has two inkjet print heads. A black cartridge produces fast monochrome
drawings and 600 dpi can be used to produce higher quality images. A
tri-chamber cyan-magenta-yellow cartridge can be used to produce color lines
and/or spot color fills. Output can be generated on roll or cut-sheet media.
SUPPLIES
In support of its wide-format inkjet printers and with the goal of
providing a comprehensive output system to its wide-format customers, ENCAD
has developed and sells its Quality Imaging Supplies-TM-(1) ("QIS") which
consist of a variety of supplies, including 3 sets of specialty inks, inkjet
cartridges and numerous varieties of high-quality print media. Sales of
supplies accounted for 14% and 7% of net sales in 1996 and 1995,
respectively. In 1994 the Company did not separate sales of supplies.
ENCAD's custom ink cartridges are filled with specially formulated inks
optimized for ENCAD's printers. When used with ENCAD print media, these
environmentally sound inks produce a broad palette of dynamic colors.
ENCAD's inkjet papers, films and specialty media are specially coated to
provide the user with bright, saturated colors when used with ENCAD inks.
ENCAD QIS print media consists of photo and paper based films and canvas for
color presentations, signs and posters, as well as for specialized
applications such as overlays, overhead projection and back-lit displays.
ACCESSORIES
In support of its goal of providing a comprehensive output system and to
ensure compatibility to its wide-format customers, ENCAD has developed and sells
a wide variety of software and hardware accessories. Sales of accessories
accounted for 2% of net sales in 1996.
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(1) Quality Imaging Supplies is a trademark of ENCAD.
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The ENCAD print utility and Windows drivers provide the user with the power
to control color output by providing five screening options, seven print quality
modes, user-selectable color device tables, gamma correction and the ability to
set ink drying times. The ENCAD FastPort 3400X Micro Print Server allows a
printer or plotter to be available to users of multiple network protocols
simultaneously. In order to minimize the need for costly on-board printer memory
and increase print speed, ENCAD provides software to run on the host computer
which converts the vector output (HP-GL, HP-GL/2) of third party application
programs into raster data.
THIRD PARTY INTERFACES
Third-party PostScript-Registered Trademark- hardware and software
developers have created products that interface with the NovaJet products.
These products allow NovaJet to output color near photo-realistic images in its
enhanced mode. In addition, numerous software packages, such as
AutoCAD-Registered Trademark-, Adobe Photoshop-Registered Trademark-,
VersaCAD-Registered Trademark-, Adobe PrintShop-Registered Trademark-, Adobe
Ilustrator-Registered Trademark-, Quark XPress-Registered Trademark- and
ARC/INFO-Registered Trademark-, are used with ENCAD products in
Macintosh-Registered Trademark-, DOS-Registered Trademark- and
Windows-Registered Trademark- platforms.(1)
RESEARCH, PRODUCT DEVELOPMENT AND ENGINEERING
ENCAD's ability to compete successfully in its target markets depends on,
among other things, anticipating and reacting to market demands and developing
appropriate products to satisfy customer requirements. ENCAD believes that the
timely development and introduction of new products is essential. In its
development of new products and enhancement of existing products, ENCAD focuses
on simplicity of design, technological advancements in performance and image
quality and continuing improvements in price/performance ratios. ENCAD is
presently developing new products that incorporate its experience and expertise
with the latest inkjet technologies. In addition, ENCAD markets hardware and
software accessories that convert industry standard PostScript data to a raster
data format which can then be directly printed at high speed without the need
for the addition of costly memory to the printer.
In developing new products, ENCAD has assembled design teams consisting of
engineers with expertise in hardware, software, chemistry, physics, color
science, material science, firmware, electrical, mechanical, manufacturing and
design. The Company's design engineers have expertise and experience in digital
servo/motion control, inkjet technology and emulation of HP-GL, HP-GL/2 and
HP-RTL languages and interfaces.
As part of its research and development efforts, ENCAD complements its
existing resources by utilizing industry consultants and technology suppliers to
assist in and influence design and cost decisions, ensure continued
compatibility with software and hardware leaders, and advise the Company of the
latest technological advances. ENCAD has also designed custom gate arrays to
control aspects of its proprietary technology which permits a reduction in parts
and an increase in reliability at lower cost than is achievable using standard
components.
Since its founding in 1981, ENCAD has introduced numerous product families,
each of which incorporated advances in mechanical, electronic and software or
firmware technologies. Within product families, model differences are based
upon the size of the plotting area, as well as feature and performance
characteristics. ENCAD intends to develop products that reach markets or market
segments currently not served by the Company's products.
Research and development expenses were $8,794,000, $5,578,000 and
$3,265,000 in fiscal 1996, 1995 and 1994, respectively, which represent
approximately 8%, 9% and 7% of net sales in those respective periods.
MANUFACTURING AND SUPPLIERS
ENCAD's printer manufacturing operations consist of subassembly, final
assembly and testing, quality assurance, packaging and shipping. ENCAD contracts
with various outside vendors for printed circuit board fabrication and assembly,
and for fabrication of metal and plastic parts, and then performs the final
assembly of its products in its San Diego facility. For its supplies business,
ENCAD partners with large multi-national companies for the acquisition of inks
and media. Inks are acquired from three sources and the various forms of media
from multiple sources. Assembly of refill and accessory ink kits are outsourced
prior to distribution.
Most materials for printer manufacturing operations are available locally
in Southern California from multiple vendors, and the majority are produced in
the United States. Certain components used in ENCAD's products are available
only from single sources. Although ENCAD generally buys components under
purchase orders and does not have long-term agreements with most of its
suppliers, it anticipates that its suppliers will be able to continue to satisfy
its requirements. Although alternative suppliers are readily available for most
of these components, for some components the process of qualifying replacement
suppliers, replacing existing tooling, or ordering and receiving replacement
components could take up to six additional months. Any difficulty in
receiving components on time could have a material adverse effect on ENCAD's
results of operations.
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(1) Windows is a trademark of the Microsoft Corporation. Macintosh is a
registered trademark of Apple Computer, Inc. Illustrator, Print Shop,
Postscript and Photoshop are trademarks of Adobe Systems, Inc. AutoCAD and
VersaCAD are registered trademarks of AutoDesk. Other product names are
trademarks or registered trademarks of their manufacturers.
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Any significant increase in component prices or decrease in component
availability could have a material adverse effect on ENCAD's results of
operations. Certain key components of ENCAD's products are supplied indirectly
by its principal competitor, Hewlett-Packard, and the inkjet cartridge, used in
some of the Company's older generation products, are purchased from
Hewlett-Packard resellers. The Company believes that Hewlett-Packard supplies
these components to many other companies.
Because ENCAD places strong emphasis on product quality and customer
satisfaction, it requires that quality is designed into products, components
and the manufacturing processes. As a result, ENCAD has developed quality
control programs with its suppliers in its new product development and
manufacturing operations.
Suppliers are encouraged to participate in new product designs.
Suppliers' manufacturing capabilities are statistically evaluated to allow
for certification and direct shipment to the production floor. ENCAD uses a
"Just-in-Time" program for materials and manufacturing. The Company
maintains a material requirements planning system that is intended to aid in
making "Just-in-Time" decisions. The Company maintains raw materials which
includes printer safety stock, ink and media, and parts for service.
MARKETING, SALES AND DISTRIBUTION
ENCAD markets and sells its products worldwide primarily through specialty
distributors, dealers, OEMs and VARs.
DISTRIBUTORS, VARS AND DEALERS
Neither the Company nor its seven domestic distributors sell a material
amount of products directly to end users, reflecting ENCAD's philosophy that its
approximately 400 domestic dealers are a critical link with the end user.
ENCAD's domestic distribution channel consists of regional specialty
distributors. In addition to the Company's sales and marketing headquarters
located in San Diego, California, ENCAD has field salespersons residing in
Georgia, Texas, New Jersey, Michigan and California. These salespersons work
closely with ENCAD's regional distributors and dealers.
Internationally, ENCAD generally utilizes one major distributor in each
market. ENCAD's approximately 100 international distributors sell to dealers,
specialized systems integrators and VARs. ENCAD's international distributor
network provides the Company with a presence in Canada, Mexico, Europe, the
Pacific Rim, the Middle East, Central and South America, South Africa, China and
India. ENCAD also maintains a European sales office in Germany and a Pacific
Rim sales office in Hong Kong, and has a sales subsidiary located in France.
International sales accounted for approximately 59%, 63% and 57% of net sales in
1996, 1995 and 1994, respectively. Europe accounts for approximately one-half
of such international sales. The Pacific Rim market continues to become an
increasingly significant component of international sales. Japan, Korea and
Australia are the major markets within the Pacific Rim, with 13%, 6% and 4%,
respectively, of international sales for the year ended December 31, 1996.
ENCAD's dependence on international sales subjects it to the normal risks
associated with conducting business internationally, including currency
fluctuations (to the extent they affect local office expenses), export and
import controls, and other governmental regulations.
ENCAD supports the marketing and sales efforts of its worldwide
distributors and dealers through participation at worldwide general computer
industry trade shows as well as specialized trade shows targeted at specific
applications for the Company's products. In addition, the Company encourages
its distributors and dealers to participate in these trade shows.
ENCAD's agreements with its worldwide distributors generally grant each
distributor the non-exclusive right to distribute the Company's products in its
market. The Company's form of distribution agreement generally provides any
outstanding amounts remain owing subsequent to termination of the agreements.
These agreements generally provide for payment net 30 days after shipment, by
irrevocable letters of credit or by prepayment by wire transfer.
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The Company provides price protection to some of its distributors such that,
if the Company reduces the price of its products, a distributor is entitled
to a credit for the difference between the reduced price and the price it
previously paid for products purchased within the preceding 30 days or, in
some cases, 60 days and which remain in inventory at the time of the price
reduction. As a result, price reductions could have a material adverse
effect on results of operations, depending on distributor inventory levels at
the time of such price reduction.
The Company believes that it maintains good relationships with its
distributors and dealers. ENCAD has developed an authorized dealer network
through an active domestic dealer-support campaign consisting of advertising,
lead referrals, product literature, promotional pricing, training and telephone
support. ENCAD offers its distributors a cooperative advertising program that
partially reimburses them for expenses spent in advertising and promoting
ENCAD's products. Such reimbursements are determined based upon the
distributor's sales levels.
In 1996, one customer accounted for 15% of product sales. In 1995, no one
customer accounted for more than 10% of product sales and in 1994, one customer
accounted for 11% of product sales.
ORIGINAL EQUIPMENT MANUFACTURERS
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 geographical areas. Total combined OEM and private label
arrangements accounted for 25%, 19% and 15% of net sales in 1996, 1995 and
1994, respectively. The Company continually assesses these arrangements and
believes that they will continue to represent a substantial portion of its
revenue. There can be no assurance that the Company will retain these
existing arrangements or obtain additional ones. If the Company is not able
to obtain additional OEM and private label customers, a loss of existing OEM
and private label customers could adversely affect the Company's results of
operations.
CUSTOMER SUPPORT
ENCAD considers ongoing support of its products to be an essential
element of its business. The Company has established a customer service and
support organization which provides technical support and hardware repair to
distributors, dealers and end-users of its printers and supplies. Customers
have telephone access to technical specialists who respond to hardware,
software, supplies and applications questions. In addition, the Company has
established an electronic bulletin board on which the Company posts notes and
software updates to provide on-line connectivity to its customers. The
Company provides a standard one-year warranty against defects in material and
workmanship in its products. In the first quarter of 1996, the Company began
offering third party on-site warranty repair on certain products sold in the
U.S. and Australia. An extended warranty for most products sold in the U.S.
is also available at additional cost. The Company's OEM suppliers do their
own warranty service, and the Company has authorized service centers in
certain regions of the United States. Any product sold domestically that
needs to be repaired and is not returned to a regional service center can be
returned directly to the Company for repair. International distributors
repair the Company's products with ENCAD supplying the parts to them
directly. Warranty expense has constituted less than 5% of net sales and, to
date, has not had a material adverse effect on the Company's operations.
Since a large number of ENCAD's products are the sole color inkjet printers
in a facility, the Company offers a head swap-out program for domestic
purchases during the warranty period. The domestic end user can return the
head to the Company directly for service during the warranty period, and the
Company will provide a replacement head for use within 24 to 48 hours during
the warranty period.
COMPETITION
The market for ENCAD's products is highly competitive and rapidly changing
and the Company believes that new competitors will enter the market. The
Company's principal competitor is Hewlett-Packard. Hewlett-Packard dominates
the CAD segment of the wide-format inkjet market and is the Company's principal
competitor in the GA segment of that market. Hewlett-Packard has significantly
greater financial, technical, manufacturing and marketing resources than the
Company.
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In addition to the direct competition in inkjet printers, ENCAD's
products face competition from other technologies in the wide-format market,
namely pen plotters, electrostatic printers and thermal printers, supplied by
several companies. While the Company believes that it competes favorably
against these other technologies and the products currently offered by its
competitors using these technologies, these alternative technologies may
compete favorably for certain applications in which speed or low cost are of
key importance. In addition, while the Company believes that it currently
competes favorably with respect to these factors based on its price and
performance, there can be no assurance that the Company will be able to
compete successfully in the future.
The Company competes in the wide-format market mainly on the basis of
performance and price. ENCAD has seen price competition increase during 1996
and expects that it will continue to increase in the future. Historically,
the Company has reduced prices on older generation products upon introduction
of the newer generation models. The Company's most recent price reduction
took effect in May 1996. There can be no assurance that additional price
reductions will not be required in the future. Price reductions will effect
gross margins, and may adversely affect the Company's results of operations.
PROPRIETARY RIGHTS AND LICENSES
ENCAD relies on a combination of trade secret, copyright, trademark and
patent protection, as well as confidentiality and non-disclosure agreements
in order to protect its proprietary rights. The Company has pursued, and
intends to continue to pursue patent protection for inventions it considers
important, and the Company believes its success will also continue to be
largely dependent upon its reputation for technology, product innovation,
affordability, marketing ability and response to customers' needs. The
Company currently holds nine patents related to inkjet technology and design.
In 1996, ENCAD applied for two patents covering the Company's imaging
technology, and the Company continues to rely on trade secret protection as
well. There can be no assurance that the Company will be successful in
protecting its proprietary technology, or that ENCAD's proprietary rights
will preclude competitors from developing products or technology equivalent
or superior to that of the Company.
From time to time, certain competitors have asserted patent, copyright and
other intellectual property rights against the Company, and the Company expects
that this may continue. The Company evaluates each assertion relating to its
products, and the Company may seek a license with respect to asserted claims, if
appropriate. If the Company is not successful in establishing that any asserted
rights have not been violated, or in licensing 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.
EMPLOYEES
As of February 28, 1997, the Company employed approximately 440 persons,
including 92 in sales, marketing and related activities, 171 in manufacturing
and operations, 79 in research, product development and engineering, 40 in
technical support and service, and 58 in management, administration and
finance. The Company's success is highly dependent on its ability to attract
and retain qualified employees. Competition for employees is intense in its
industry. None of the Company's employees is represented by a labor union or
is the subject of a collective bargaining agreement. The Company has never
experienced a work stoppage and believes that its employee relations are good.
RISK 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 net sales 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
9
<PAGE>
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
is Hewlett-Packard, which dominates certain 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 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 will likely continue to do so 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 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. 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 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 has
developed strategic relationships with single suppliers of several of its
components. 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 several months and cause substantial disruption to the Company's
operations. The Company uses 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 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.
10
<PAGE>
POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY RIGHTS
From time to time, certain competitors, including Hewlett-Packard, have
asserted patent 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
asserted rights have not been violated, 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.
DEPENDENCE ON EXPORT SALES
For 1996, 1995 and 1994, sales outside the United States represented
approximately 59%, 63% and 57% of net sales, respectively. The Company expects
export sales to continue to represent a significant portion of its net sales.
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 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.
RELIANCE ON INDIRECT DISTRIBUTION
The Company markets and sells it products domestically and internationally
primarily through specialty distributors, dealers, VARs and OEMs. 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 the Company's results of operations. To
11
<PAGE>
expand its distribution channels, the Company has entered into select 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
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, although the Company has recently put into place
severance arrangements with this group. 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 net sales from
product sales have increased to $107.4 million for the year ended December 31,
1996, compared to $65.5 million in 1995. 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.
ENTERPRISE-WIDE INFORMATION SYSTEM
The Company is planning to replace its current management information
system with a comprehensive enterprise-wide information system. The Company
expects that this system will allow it to realize significant operational
efficiencies and facilitate future growth, and it will devote significant
resources to system design selection and testing. The Company's operations
could be disrupted, however, if the transition to the new system is not effected
smoothly or if the system does not perform as expected.
DEVELOPING WIDE-FORMAT INKJET AND SUPPLIES MARKETS AND APPLICATIONS
The markets for wide-format, color inkjet printers and related supplies are
relatively new and are 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 markets and applications for wide-format printers
and related supplies will continue to grow. Other technologies are constantly
improving and there can be no assurance that products based on these other
technologies will not have a material adverse effect on the markets 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
12
<PAGE>
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 in 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.
ITEM 2: PROPERTIES
The Company's headquarters are located in San Diego, California, in
facilities it purchased in February 1996 for $6 million. The property consists
of two buildings of approximately 50,600 and 46,874 square feet and includes the
principal administrative, research and manufacturing facility. The Company also
leases a facility in close proximity to its primary facility, consisting of
approximately 18,000 square feet, which is used primarily for warehousing. The
Company considers its facilities adequate for its current needs, and believes
that additional space can be obtained in the future if necessary.
ITEM 3: LEGAL PROCEEDINGS
From time to time, ENCAD may be involved in litigation relating to
claims arising out of its operations in the usual course of business.
In December 1994, Hewlett-Packard filed a lawsuit against an OEM
customer of the Company, LaserMaster Technologies, Inc. ("LaserMaster"),
alleging infringement of numerous Hewlett-Packard patents. Two of the
patents (one of which was subsequently withdrawn from the lawsuit) pertain to
products sold by the Company to LaserMaster. The lawsuit was settled and
dismissed in August 1995. In response to Hewlett-Packard's subsequent
position that the Company infringes one of the patents described in the
LaserMaster litigation, the Company filed a lawsuit in September 1995 against
Hewlett-Packard in the U.S. District Court of the Southern District of
California, seeking to have the Court declare that the Company does not
infringe such patent, and that the patent is invalid. Hewlett-Packard filed a
counterclaim for infringement of the patent. The outcome of this lawsuit
cannot be determined; however, management believes that Hewlett-Packard's
counterclaim is without merit, and the Company intends to vigorously defend
such counterclaim. No amounts have been reported in the financial statements
for any losses which may result from this lawsuit.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this item is included on page 28 of the
1996 Annual Report and is incorporated herein by reference.
13
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The information required by this item is included on page 13 of the
1996 Annual Report and is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included on pages 14 through 16 of
the 1996 Annual Report and is incorporated herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements for December 31, 1996
and 1995, and for each of the three years in the period ended December 31,
1996 and the Report of Deloitte & Touche LLP, Independent Auditors, is
included on pages 17 through 24 of the 1996 Annual Report and are
incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is incorporated by reference from the
Proxy Statement in the sections entitled "Election of Directors", "Executive
Officers" and Section 16(a) "Beneficial Ownership Reporting Compliance."
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Compensation of Executive Officers."
ITEM 12: SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The information required by this item is incorporated by reference from
the Proxy Statement in the section entitled "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Certain Relationships and Related
Transactions."
14
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
Number
------
(a) DOCUMENTS FILED AS PART OF THE REPORT:
(1) Consolidated Balance Sheets at December 31, 1996 and 1995... *
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.......................... *
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................... *
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994........... *
Notes to Consolidated Financial Statements.................. *
Independent Auditors' Report................................ *
(2) Consolidated Financial Statement Schedules
Financial statement schedules have been omitted because they are either
not required, not applicable or the information is otherwise included.
-----------------
* Incorporated herein by reference on pages 17 through 24 of the
1996 Annual Report.
(3) Exhibits:
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of the Company
(filed as Exhibit 3.3). (1)
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit
3.5). (1)
10.1 Form of Distributor Agreement (Domestic)(filed as Exhibit
10.14). (1)
10.2 Form of International Distributor Agreement (filed as
Exhibit 10.15). (1)
10.3 Form of OEM Agreement (filed as Exhibit 10.16). (1)
+ 10.4 The Company's Incentive Stock Option Plan (filed as
Exhibit 10.29). (1)
15
<PAGE>
+ 10.5 The Company's 1986 Non-Qualified Stock Option Plan, as
amended (filed as Exhibit 10.30). (1)
+ 10.6 Form of Incentive Stock Option Agreement (filed as Exhibit
10.31). (1)
+ 10.7 Form of Non-Qualified Stock Option Agreement (filed as
Exhibit 10.32). (1)
+ 10.8 The Company's 1993 Stock Option/Stock Issuance Plan (filed
as Exhibit 99.1). (2)
+ 10.9 Form of Notice of Grant of Stock Option and Stock Option
Agreement (filed as Exhibit 10.34). (1)
+ 10.10 Form of Stock Issuance Agreement (filed as Exhibit
10.35). (1)
+ 10.11 1993 Employee Stock Purchase Plan (filed as Exhibit
10.36). (1)
+ 10.12 Form of Stock Purchase Agreement (filed as Exhibit
10.37). (1)
10.13 Form of Non-Disclosure Agreement (filed as Exhibit
10.38). (1)
10.14 Form of Employee Proprietary Information Agreement (filed
as Exhibit 10.39). (1)
+ 10.15 Form of Indemnification Agreements between the Company and
each of its directors (filed as Exhibit 10.41). (1)
+ 10.16 Form of Indemnification Agreements between the Company and
each of its officers (filed as Exhibit 10.42). (1)
+ 10.17 Sales Incentive Compensation Arrangement with Jiri Modry
dated February 15, 1995 (with certain confidential portions
omitted)(filed as Exhibit 10.46). (3)
10.18 Agreement to Sell Real Estate dated January 31, 1996
between the Registrant and The Chase Manhattan Bank, N.A.,
Real Estate Finance. (4)
10.19 Form of Severance Letter Agreements between the Company
and each of its officers.
10.20 Form of Senior Executive 1997 Annual Performance Bonus
between the Company and each of its officers.
11.1 Statement regarding computation of net earnings per share.
13.1 Portions of the Registrant's Annual Report to Shareholders
for the year ended December 31, 1996.
16
<PAGE>
21.1 Subsidiaries.
23.1 Independent Auditors' Consent, Deloitte & Touche LLP.
24.1 Power of Attorney (See page 18).
- --------------
(1) Filed as exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-70220) or amendments, except as set forth above, thereto and
incorporated herein by reference.
(2) Filed as exhibit to the Registrant's Registration Statement on Form S-8
(No. 33-95252) and incorporated herein by reference.
(3) Filed as exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(4) Filed as exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
+ Management compensatory plan.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this Item are
listed under Item 14(a)(2).
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ENCAD, INC.
By Date:
------------------------------------- ----------------------------------
David A. Purcell
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints David A. Purcell or Thomas L. Green, his
attorney-in-fact, with power of substitution in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chairman of the Board and
- -------------------------- Chief Executive Officer -------------------------
(David A. Purcell) (Principal Executive Officer)
President and
- -------------------------- Chief Operating Officer -------------------------
(Richard A. Plante)
Director
- -------------------------- -------------------------
(Robert V. Adams)
Director
- -------------------------- -------------------------
(Ronald J. Hall)
Director
- -------------------------- -------------------------
(Howard L. Jenkins)
Director
- -------------------------- -------------------------
(Charles E. Volpe)
Director
- -------------------------- -------------------------
(Craig S. Andrews)
18
<PAGE>
EXHIBIT 10.19
ENCAD, INC.
FORM OF SEVERANCE LETTER AGREEMENTS BETWEEN
THE COMPANY AND EACH OF ITS OFFICERS
<PAGE>
[EXEC V.P. FORM]
ENCAD, INC.
6059 Cornerstone Court West
San Diego, California 92121
________________, 199__
Dear _______________:
The purpose of this letter agreement is to document the terms and
conditions of the severance package to which you shall be entitled should
your employment with ENCAD, Inc. (the "Company") terminate under certain
specified circumstances.
Part One of this letter agreement sets forth certain definitional
provisions to be in effect for purposes of determining your benefit
entitlements. Part Two hereof specifies the terms and conditions upon which
you may become entitled to receive severance benefits in the event your
employment with the Company were to be involuntarily terminated. Part Three
hereof specifies the terms and conditions upon which you may become entitled
to additional severance benefits should your employment with the Company be
involuntarily terminated in connection with certain changes in control of the
Company. Part Four hereof concludes this letter agreement with a series of
general terms and conditions applicable to your severance benefits.
PART ONE -- DEFINITIONS
For purposes of this letter agreement, the following definitions shall
be in effect:
1. "BASE SALARY" means the annual rate of base salary in effect for
you immediately prior to your Termination Without Cause or Resignation for
Good Cause.
2. "BOARD" means the Company's Board of Directors.
3. "CHANGE IN CONTROL" means any of the following transactions
effecting a change in ownership or control of the Company:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is
to change the state in which the Company is incorporated,
(b) the sale, transfer or other disposition of all or
substantially all of the assets of the Company other than in the ordinary
course,
(c) any reverse merger in which the Company ceases to exist as an
independent corporation and becomes the subsidiary of another corporation,
<PAGE>
(d) any Hostile Take-Over,
(e) the acquisition by any person (or related group of persons),
whether by tender or exchange offer made directly to the Company's
shareholders, private purchases from one or more of the Company's
shareholders, open market purchases or any other transaction, of beneficial
ownership of securities possessing more than twenty-five percent (25%) of the
total combined voting power of the Company's outstanding securities,
(f) the acquisition by any person (or related group of persons),
whether by tender or exchange offer made directly to the Company's
shareholders, private purchases from one or more of the Company's
shareholders, open market purchases or any other transaction, of additional
securities of the Company which increase the total holdings of such person
(or group) to a level of securities possessing more than fifty percent (50%)
of the total combined voting power of the Company's outstanding securities, or
(g) the acquisition by any person (or related group of persons),
whether by tender or exchange offer made directly to the Company's
shareholders, private purchases from one or more of the Company's
shareholders, open market purchases or any other transaction, of securities
of the Company possessing sufficient voting power in the aggregate to elect
an absolute majority of the members of the Board (rounded up to the nearest
whole number).
4. "CIC SEVERANCE PAYMENTS" mean the severance payments to which you
may become entitled under Part Three hereof in the event of your Termination
Without Cause or Resignation for Good Cause.
5. "CODE" means the Internal Revenue Code of 1986, as amended.
6. "COMMON STOCK" means the Company's common stock.
7. "FAIR MARKET VALUE" means, with respect to any shares of Common
Stock subject to any of your Options, the closing selling price per share of
Common Stock on the date in question, as reported on the Nasdaq National
Market (if there is no reported sale of Common Stock on such date, then the
closing selling price on the Nasdaq National Market on the next preceding day
for which there does exists such quotation shall be determinative of Fair
Market Value).
8. "GENERAL RELEASE" means that form of general release attached
hereto as EXHIBIT A, that must be executed by you within three (3) days of
your Termination Without Cause or Resignation for Good Cause, as the case may
be, for you to receive any of the severance benefits set forth in either Part
Two or Part Three hereof, as the case may be.
9. "HOSTILE TAKE-OVER" means any of the following transactions:
(a) the successful acquisition by a person or a group of related
persons, other than the Company or a person controlling, controlled by or
under common control with the Company, of beneficial ownership (as determined
pursuant to the provisions of Rule 13d-3 under the Securities Exchange Act of
1934, as amended) of securities possessing more than twenty-five percent
(25%) of the total combined voting power of the Company's outstanding
securities pursuant to a transaction or series of related transactions which
the Board does not at any time recommend the Company's shareholders to accept
or approve, or
<PAGE>
(b) a change in the composition of the Board over a period of
twenty-four (24) consecutive months or less such that a majority of the Board
ceases, by reason of one or more contested elections for Board membership, to
be comprised of individuals who either (I) have been members of the Board
continuously since the beginning of such period or (II) have been elected or
nominated for election as Board members during such period by at least a
two-thirds majority of the Board members described in clause (I) who were
still in office at the time such election or nomination was approved by the
Board,
10. "OPTION" means any option granted to you under the Plan which is
outstanding at the time of the Change in Control or upon your Termination
Without Cause or Resignation for Good Reason. "Acquisition-Accelerated
Options" means any outstanding Option (or installment thereof) which
automatically accelerates, pursuant to the Plan or the acceleration
provisions of the agreement evidencing that Option, upon a change in control
or ownership of the Company under certain specified circumstances.
"Severance-Accelerated Options" means any outstanding Option (or installment
thereof) which accelerates upon your Termination Without Cause or Resignation
for Good Reason pursuant to Part Three of this letter agreement. Except for
the circumstances described above in this Paragraph, the terms and conditions
contained in the Options shall remain unchanged.
11. "OPTION PARACHUTE PAYMENT" means, with respect to any
Acquisition-Accelerated Option or any Severance-Accelerated Option, the
portion of that Option which is treated as a payment described in Code
Section 280G(b)(2)(A)(i) and the Treasury Regulations issued thereunder. The
portion of such Option which is categorized as an Option Parachute Payment
shall be calculated in accordance with the valuation provisions established
under Code Section 280G and the applicable Treasury Regulations and shall
include an appropriate dollar adjustment to reflect the lapse of your
obligation to remain in the Company's employ as a condition to the vesting of
the accelerated installment. In no event, however, shall the Option
Parachute Payment attributable to any Acquisition-Accelerated Option or
Severance-Accelerated Option (or accelerated installment) exceed the spread
(the excess of the Fair Market Value of the accelerated option shares over
the option exercise price payable for those shares) existing at the time of
acceleration.
12. "OTHER PARACHUTE PAYMENT" means any payment in the nature of
compensation (other than the benefits to which you become entitled under Part
Two of this letter agreement) which are made to you in connection with the
Change in Control and which are payments described in Code Section
280G(b)(2)(A)(i) and the Treasury Regulations issued thereunder. Your Other
Parachute Payments shall include (without limitation) the Present Value,
measured as of the Change in Control, of the aggregate Option Parachute
Payment attributable to your Acquisition-Accelerated Options (if any).
13. "PLAN" means (i) the Company's 1993 Stock Option/Stock Issuance
Plan, as amended or restated from time to time, and (ii) any successor stock
incentive plan subsequently implemented by the Company.
14. "PRESENT VALUE" means the value, determined as of the date of the
Change in Control, of any payment in the nature of compensation to which you
become entitled in connection with the Change in Control or your subsequent
Termination Without Cause or Resignation for Good Cause of your employment,
including (without limitation) the Option Parachute Payment attributable to
your Severance-Acceleration Options, your CIC Severance Payments under Part
Three of this letter agreement and the Option Parachute Payment attributable
to your Acquisition-Accelerated Options (if any). The Present Value of each
such payment shall be determined in accordance with the provisions of Code
Section 280G(d)(4), utilizing a discount rate equal to one hundred twenty
percent (120%) of the
<PAGE>
applicable Federal rate in effect at the time of such determination,
compounded semi-annually to the effective date of the Change in Control.
15. "RESIGNATION FOR GOOD CAUSE" means your voluntary resignation
subsequent to a Change in Control following (a) a change in your position
with the Company which materially reduces your duties or level of
responsibility, (b) a reduction in your level of compensation (including base
salary, fringe benefits and participation in non-discretionary bonus programs
under which awards are payable pursuant to objective financial or performance
standards) by an amount in excess of fifteen percent (15%) or (c) a change in
your place of employment which is more than twenty five (25) miles from your
place of employment prior to the Change in Control, PROVIDED AND ONLY IF such
change or reduction is effected without your written concurrence.
In the event of a Hostile Take-Over, any subsequent percentage
reduction in the level of your compensation shall constitute grounds for a
clause (b) triggering Resignation for Good Cause of your employment under
this letter agreement.
In no event shall Resignation for Good Cause be deemed to occur
should your employment terminate by reason of your death or disability.
16. "REVOCATION PERIOD" means the seven (7) day period following your
execution of a General Release in which you may revoke such General Release.
17. "STANDARD SEVERANCE PAYMENTS" mean the severance payments to which
you may become entitled under Part Two hereof in the event of your
Termination Without Cause.
18. "TERMINATION FOR CAUSE" means the termination of your employment by
the Company upon your:
(a) dishonesty resulting, or intending to result, directly or
indirectly, in gain or personal enrichment at the expense of the Company; or
(b) gross misconduct, including, without limitation, fraud, sexual
harassment or misappropriation of Company property or confidential
information; or
(c) conviction for a felony under the laws of the United States or
any state thereof; or
(d) willful and continued failure substantially to perform your
duties with the Company (other than any such failure resulting from your
incapacity due to physical or mental illness), which is not remedied within a
reasonable period after a written demand for substantial performance is
delivered to you which specifically identifies the manner in which it is
believed that you have not substantially performed your duties.
19. "TERMINATION WITHOUT CAUSE" means the Company's termination of your
employment with the Company other than a Termination for Cause.
20. "TOTAL COMPENSATION" means the aggregate of (a) Base Salary, (b)
the average cash bonuses paid to you by the Company for services rendered
during the two (2) Company fiscal years immediately preceding the fiscal year
of your Termination Without Cause or Resignation for Good Cause, as the case
may be, and (c) the total costs to the Company of any other benefits made
available to
<PAGE>
you by the Company in the Company fiscal year immediately preceding the year
of your Termination Without Cause or Resignation for Good Reason, as the case
may be. In the event that you were not employed during the entire two (2)
Company fiscal years, any of the bonuses or benefits described in (b) and (c)
above for a partial year of employment shall be annualized, in accordance
with the frequency which such compensation is paid during such partial year.
PART TWO -- GENERAL SEVERANCE BENEFITS
Upon the Termination Without Cause of your employment after a period of
at least nine (9) months after the start of your employment with the Company
and seven (7) days after your execution of a General Release (provided that
such General Release is not revoked by you prior to the end of the Revocation
Period) to the Company within three (3) days of such Termination Without
Cause, you shall become entitled to receive the special severance benefits
provided in this Part Two. However, in order to continue to receive these
severance benefits, you must abide by the restrictive covenants set forth in
Paragraph 3 of this Part Two.
1. STANDARD SEVERANCE PAYMENTS. You shall be entitled to Standard
Severance Payments in an aggregate amount equal to (a) your Base Salary plus
(b) the average of the bonuses paid to you for services rendered in the two
(2) fiscal years immediately preceding the fiscal year of your Termination
Without Cause.
The aggregate Standard Severance Payments shall be paid to you in
equal installments over the one-year period following your Termination
Without Cause in accordance with the Company's normal payroll practices and
subject to all applicable withholding taxes. However, these payments shall
immediately terminate in the event you fail to abide by the restrictive
covenants set forth in Paragraph 3 of this Part Two.
In the event your employment terminates by reason of your death or
disability or your Termination for Cause, you shall not be entitled to
receive any Standard Severance Payments or other benefits under this letter
agreement.
2. ADDITIONAL BENEFITS. You shall receive an immediate lump sum
payment of all unpaid paid time off that you have accrued through the date of
your Termination Without Cause.
3. RESTRICTIVE COVENANTS. During the period of your Standard
Severance Payments, you shall not:
(a) directly or indirectly, whether for your own account or as an
employee, director, consultant or advisor, provide services to any business
enterprise which is at the time in competition with any of the Company's
then-existing or formally planned product lines and which is located
geographically in an area where the Company maintains substantial business
activities, or
(b) directly or indirectly encourage or solicit any individual to
leave the Company's employ for any reason or interfere in any other manner
with the employment relationships at the time existing between the Company
and its current or prospective employees, or
(c) induce or attempt to induce any customer, supplier,
distributor, licensee or other business affiliate of the Company to cease
doing business with the Company or in any way interfere with
<PAGE>
the existing business relationship between any such customer, supplier,
distributor, licensee or other business affiliate and the Company.
You acknowledge that monetary damages may not be sufficient to
compensate the Company for any economic loss which may be incurred by reason
of your breach of the foregoing restrictive covenants. Accordingly, in the
event of any such breach, the Company shall, in addition to the Company's
cessation of the Standard Severance Payments provided under this letter
agreement and any remedies available to the Company at law, be entitled to
obtain equitable relief in the form of an injunction precluding you from
continuing to engage in such breach.
PART THREE -- CHANGE IN CONTROL BENEFITS
Upon your Termination Without Cause or Resignation for Good Reason
within twelve (12) months following a Change in Control and seven (7) days
after your execution of a General Release (provided that such General Release
is not revoked by you prior to the end of the Revocation Period) on behalf of
the Company within three (3) days of such Termination Without Cause or
Resignation for Good Reason, as the case may be, you shall become entitled to
receive the special severance benefits provided in this Part Three in
substitution of those benefits set forth in Part Two hereof. However, in the
absence of a Hostile Take-Over, the severance benefits set forth in this Part
Three shall continue to be paid to you only for so long as you abide by the
restrictive covenants set forth in Paragraph 4 of this Part Three.
1. CIC SEVERANCE PAYMENTS. You shall be entitled to CIC Severance
Payments in an aggregate amount equal to your Total Compensation determined
as of the date of your Termination Without Cause or Resignation for Good
Reason.
In the absence of a Hostile Take-Over, your CIC Severance Payments
shall be paid to you in equal installments over the one-year period following
your Termination Without Cause or Resignation for Good Cause in accordance
with the Company's normal payroll practices and subject to all applicable
withholding taxes. However, these payments shall immediately terminate in
the event you fail to abide by the restrictive covenants set forth in
Paragraph 4 of this Part Three.
Should your Termination Without Cause or Resignation for Good Cause
occur in connection with a Hostile Take-Over, the CIC Severance Payments
shall be made to you in a lump sum payment (subject to all applicable
withholding taxes) within thirty (30) days after your Termination Without
Cause or Resignation for Good Cause, and the provisions of Paragraph 4 of
this Part Three shall not apply.
In the event your employment terminates by reason of your death or
disability or your Termination for Cause, you shall not be entitled to
receive any CIC Severance Payments or other benefits under this letter
agreement.
2. OPTION ACCELERATION. Each of your outstanding Options shall (to
the extent not then otherwise fully exercisable) automatically accelerate so
that each such Option shall become fully vested and immediately exercisable
for the total number of shares of Common Stock at the time subject to that
Option. Each such accelerated Option, together with all of your other vested
Options, shall remain exercisable for fully-vested shares until the earlier
of (i) the expiration date of the option term or (ii) the end of the three
(3)-month period measured from the date of your Termination Without Cause or
Resignation for Good Cause.
<PAGE>
3. ADDITIONAL BENEFITS. You shall receive an immediate lump sum
payment of all unpaid paid time off that you have accrued through the date of
your Termination Without Cause or Resignation for Good Cause.
4. RESTRICTIVE COVENANTS. During the period of your CIC Severance
Payments, you shall not:
(a) directly or indirectly, whether for your own account or as an
employee, director, consultant or advisor, provide services to any business
enterprise which is at the time in competition with any of the Company's
then-existing or formally planned product lines and which is located
geographically in an area where the Company maintains substantial business
activities, or
(b) directly or indirectly encourage or solicit any individual to
leave the Company's employ for any reason or interfere in any other manner
with the employment relationships at the time existing between the Company
and its current or prospective employees, or
(c) induce or attempt to induce any customer, supplier,
distributor, licensee or other business affiliate of the Company to cease
doing business with the Company or in any way interfere with the existing
business relationship between any such customer, supplier, distributor,
licensee or other business affiliate and the Company.
You acknowledge that monetary damages may not be sufficient to
compensate the Company for any economic loss which may be incurred by reason
of your breach of the foregoing restrictive covenants. Accordingly, in the
event of any such breach, the Company shall, in addition to the Company's
cessation of the CIC Severance Payments provided under this letter agreement
and any remedies available to the Company at law, be entitled to obtain
equitable relief in the form of an injunction precluding you from continuing
to engage in such breach.
None of the foregoing restrictive covenants shall be applicable in
the event your Termination Without Cause or Resignation for Good Cause occurs
in connection with a Hostile Take-Over.
5. BENEFIT REDUCTION. In the event of a Change in Control, the
following limitations shall become applicable:
(a) BENEFIT REDUCTION. If the Change in Control does not
constitute a Hostile Take-Over, first the dollar amount of your severance
payment under Paragraph 1 shall be reduced to the extent necessary to assure
that the present value of those benefits shall not, when added to the present
value of your Option Parachute Payment and your Other Parachute Payments,
exceed the maximum amount which may be paid hereunder without such amounts
being treated as an excess parachute payment under Code Section 280(G). In
the event of a Hostile Take-Over, no reduction shall be made to your
severance payment (or any other benefit to which you become entitled
hereunder), unless necessary to provide you with the maximum after-tax
benefit available, after taking into account any parachute excise tax which
might otherwise be payable by you under Code Section 4999 and any analogous
State income tax provision.
(b) RESOLUTION OF DISPUTES. In the event there is any
disagreement between you and the Company as to whether one or more benefits
to which you become entitled (whether under this letter agreement or
otherwise) in connection with a Change in Control constitute Option Parachute
Payments
<PAGE>
or Other Parachute Payments or would result in an excess parachute payment
within the meaning of Code Section 280G, such dispute is to be resolved as
follows:
(i) In the event temporary, proposed or final Treasury
Regulations in effect at the time under Code Section 280G specifically
address the status of such benefits or the method for their valuation, the
characterization afforded to such benefits by the Regulations, together with
the methods prescribed for their valuation, shall be controlling.
(ii) In the event such Regulations do not address the status
of the benefits in dispute, the matter shall be submitted for resolution to
independent counsel mutually acceptable to you and the Company ("Independent
Counsel"). The resolution reached by Independent Counsel shall be final and
controlling. However, should the Independent Counsel determine that the
status of the benefits in dispute can be resolved through the obtainment of a
private letter ruling from the Internal Revenue Service, a formal and proper
request for such ruling shall be prepared and submitted by Independent
Counsel, and the determination made by the Internal Revenue Service in the
issued ruling shall be controlling. All expenses incurred in connection with
the retention of Independent Counsel and (if applicable) the preparation and
submission of the ruling request shall be paid by the Company.
The full amount of your severance benefit under Paragraph 1
shall not be paid to you until any amounts in dispute under this Paragraph
5(b) have been resolved in accordance herewith. However, any portion of such
severance payment which would not otherwise exceed the benefit limitation of
Paragraph 5(a) even if all amounts in dispute under this Paragraph 5(b) were
to be resolved against you shall be paid to you in accordance with the
applicable provisions of this letter agreement.
(c) OVERRIDING LIMITATION. You shall in all events be entitled to
receive the full amount of your severance payment under Paragraph 1 of this
Part Three, to the extent those benefits, when added to the present value of
your Option Parachute Payment and your Other Parachute Payments (excluding
such severance payment), shall nevertheless qualify as reasonable
compensation within the standards established under Code Section 280G(b)(4).
(d) INTERPRETATION. The provisions of this Paragraph 5 shall in
all events be interpreted in such manner as shall avoid the imposition of
excise taxes under Code Section 4999, and the disallowance of deductions
under Code Section 280G(a), with respect to your severance benefits under
this letter agreement.
PART FOUR -- MISCELLANEOUS PROVISIONS
1. TERMINATION FOR CAUSE. Should your termination constitute
Termination for Cause, then the Company shall only be required to pay you (i)
any unpaid compensation earned for services previously rendered through the
date of such termination and (ii) any accrued but unpaid vacation benefits or
sick days, and no other benefits shall be payable to you under either Parts
Two or Three of this letter agreement.
2. DEATH. Should you die after your Termination Without Cause or
Resignation for Good Cause, as the case may be, but before receipt of one or
more of either the Standard Severance Payments or the CIC Severance Payments
to which you become entitled under Parts Two or Three hereof, respectively,
of this letter agreement, then those payment(s) shall be made to the
executors or administrators of your estate. Should you die before you
exercise all your outstanding Options, then such Options may be exercised,
within twelve (12) months after your death, by the executors or
<PAGE>
administrators of your estate or by persons to whom the Options are
transferred pursuant to your will or in accordance with the laws of
inheritance. In no event, however, may any such Option be exercised after the
specified expiration date of the option term.
3. GENERAL CREDITOR STATUS. The payments and benefits to which you
become entitled hereunder shall be paid, when due, from the general assets of
the Company, and no trust fund, escrow arrangement or other segregated
account shall be established as a funding vehicle for such payment.
Accordingly, your right (or the right of the personal representatives or
beneficiaries of your estate) to receive any payments or benefits hereunder
shall at all times be that of a general creditor of the Company and shall
have no priority over the claims of other general creditors.
4. INDEMNIFICATION. If applicable, the indemnification provisions for
Officers and Directors under the Company Bylaws shall (to the maximum extent
permitted by law) be extended to you, during the period following your
Termination Without Cause or Resignation for Good Cause, with respect to any
and all matters, events or transactions occurring or effected during your
employment with the Company.
5. MISCELLANEOUS. This letter agreement shall be binding upon the
Company, its successors and assigns (including, without limitation, the
surviving entity in any Change in Control) and is to be construed and
interpreted under the laws of the State of California applicable to
agreements executed and to be wholly performed within the State of
California. This letter agreement supersedes all prior agreements between
you and the Company relating to the subject of severance benefits payable to
you upon the cessation of your employment with the Company and may only be
amended by written instrument signed by you and an authorized officer of the
Company. If any provision of this letter agreement as applied to you or the
Company or to any circumstance should be adjudged by a court of competent
jurisdiction to be void or unenforceable for any reason, the invalidity of
that provision shall in no way affect (to the maximum extent permissible by
law) the application of such provision under circumstances different from
those adjudicated by the court, the application of any other provision of
this letter agreement, or the enforceability or invalidity of this letter
agreement as a whole. Should any provision of this letter agreement become
or be deemed invalid, illegal or unenforceable in any jurisdiction by reason
of the scope, extent or duration of its coverage, then such provision shall
be deemed amended to the extent necessary to conform to applicable law so as
to be valid and enforceable or, if such provision cannot be so amended
without materially altering the intention of the parties, then such provision
shall be stricken and the remainder of this letter agreement shall continue
in full force and effect.
6. REMEDIES. All rights and remedies provided pursuant to this letter
agreement or by law will be cumulative, and no such right or remedy will be
exclusive of any other. A party may pursue any one or more rights or
remedies hereunder or may seek damages or specific performance in the event
of another party's breach hereunder or may pursue any other remedy by law or
equity, whether or not stated in this letter agreement.
7. ARBITRATION. Any controversy which may arise between you and the
Company with respect to the construction, interpretation or application of
any of the terms, provisions or conditions of this agreement or any monetary
claim arising from or relating to this agreement will be submitted to final
and binding arbitration in San Diego, California in accordance with the rules
of the American Arbitration Association then in effect.
<PAGE>
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
8. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this letter
agreement is intended to provide you with any right to continue in the employ
of the Company (or any subsidiary) for any period of specific duration or
interfere with or otherwise restrict in any way your rights or the rights of
the Company (or any subsidiary), which rights are hereby expressly reserved
by each, to terminate your employment at any time for any reason whatsoever,
with or without cause.
Please indicate your acceptance of the foregoing provisions of this
employment agreement by signing the enclosed copy of this agreement and
returning it to the Company.
ENCAD, INC.
By:
---------------------------------------------
Title:
------------------------------------------
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing
letter agreement governing the special benefits to which I may become
entitled in connection with the cessation of my employment under certain
specified conditions with ENCAD, Inc.
Signature:
--------------------------------------
Dated: , 199__
--------------
<PAGE>
EXHIBIT 10.20
ENCAD, INC.
FORM OF SENIOR EXECUTIVE 1997 ANNUAL PERFORMANCE BONUS
BETWEEN THE COMPANY AND EACH OF ITS OFFICERS
<PAGE>
ENCAD, Inc.
Senior Executive Annual Performance Bonus
1997
Name of Executive Officer
BONUS ELEMENTS CRITERIA WEIGHTING
-------------- ------------------
Pre Tax Income* - $ Million %
Revenue Target - $ Million %
* Pre Tax Income Adjusted for unusual items such as sale of real estate.
QUARTERLY TARGETS
Q1 Q2 Q3 Q4
|----------------------------|---------|----------|---------|----------|
| Pre Tax Income (million) | | | | |
| YTD | | | | |
|----------------------------|---------|----------|---------|----------|
|Revenue (million) | | | | |
| YTD | | | | |
|----------------------------|---------|----------|---------|----------|
ANNUAL PAY OUT TABLE
|------------------------------------|----------||------------||----------|
| Bonus Element | % || 100% || % |
| | || Target || |
|------------------------------------|----------||------------||----------|
| Pre Tax Income (million) | $ || $ || $ |
|Pay out as a % of salary | % || % || % |
|------------------------------------|----------||------------||----------|
| Revenue (million) | $ || $ || $ |
|Pay out as a % of salary % || % || % |
|------------------------------------|----------||------------||----------|
|Total Pay out as a % of salary | % || % || % |
|------------------------------------|----------||------------||----------|
Bonus pay out will be interpolated on a linear basis between performance levels.
Must achieve minimum Operating Profit level of $___ to receive any pay out. Pay
out will be on a quarterly basis for the portion earned based on year-to-date
results up to the targeted amount. Quarterly bonuses will include a 20% hold
back which will be payable following the close of the fiscal year, along with
the full year pay out of any bonus earned in excess of the targeted amount.
Bonus eligibility requires that the participant be an active employee on the
last day of the quarter or year. Eligibility for holdback and excess over
target requires active employee status on 12/31/97. Bonus pay out is also at
the discretion of the President, CEO, and Board of Directors.
<PAGE>
EXHIBIT 11.1
ENCAD, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
EARNINGS PER SHARE
PRIMARY
Weighted average number of common
shares outstanding 11,217,000 10,970,000 10,788,000
Assumed exercise of outstanding
stock options (1) 654,000 222,000 186,000
--------------- --------------- ---------------
Weighted average common and
common equivalent shares 11,871,000 11,192,000 10,974,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Net income $ 12,853,000 $ 7,857,000 $ 6,015,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Primary earnings per share $ 1.08 $ .70 $ .55
--------------- --------------- ---------------
--------------- --------------- ---------------
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding 11,217,000 10,970,000 10,788,000
Assumed exercise of outstanding
stock options (1) 765,000 222,000 200,000
--------------- --------------- ---------------
Weighted average common and
common equivalent shares 11,982,000 11,192,000 10,988,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Net income $ 12,853,000 7,857,000 6,015,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Fully diluted earnings per share (2) $ 1.07 $ .70 $.55
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
(1) Computed using the treasury stock method.
<PAGE>
EXHIBIT 13.1
ENCAD, INC.
REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE>
ENCAD, Inc.
FIVE YEAR FINANCIAL
DATA
(in thousands, except per share data,
percentages and employees)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $ 107,437 $ 65,548 $ 43,653 $ 23,229 $ 15,000
Cost of sales $ 56,021 $ 36,471 $ 22,917 $ 12,123 $ 6,990
Gross profit $ 51,416 $ 29,077 $ 20,736 $ 11,106 $ 8,010
Research and development $ 8,794 $ 5,578 $ 3,265 $ 1,995 $ 1,397
Operating income $ 19,572 $ 11,619 $ 9,137 $ 4,118 $ 2,672
Interest income (expense) $ 183 $ 307 $ 270 $ (66) $ (69)
Pretax income $ 19,755 $ 11,926 $ 9,407 $ 4,052 $ 2,603
Taxes $ 6,902 $ 4,069 $ 3,392 $ 1,317 $ 963
Extraordinary item $ -- $ -- $ -- $ 463 $ 738
Net income $ 12,853 $ 7,857 $ 6,015 $ 3,198 $ 2,378
Earnings per share $ 1.08 $ 0.70 $ 0.55 $ 0.41 $ 0.31
MARGINS
Gross profit 48% 44% 48% 48% 53%
Research and development 8% 9% 7% 9% 9%
Operating income 18% 18% 21% 18% 18%
Pretax income 18% 18% 22% 17% 17%
Net income 12% 12% 14% 14% 16%
YEAR END FISCAL POSITION
Cash and cash equivalents $ 6,949 $ 3,067 $ 842 $ 7,388 $ 203
Short-term investments $ -- $ 6,072 $ 4,902 $ -- $ --
Accounts receivable-net $ 19,762 $ 13,029 $ 8,582 $ 4,177 $ 2,831
Inventories $ 13,630 $ 8,047 $ 4,628 $ 2,064 $ 2,478
Property - net $ 10,881 $ 3,138 $ 2,224 $ 1,028 $ 592
Total current liabilities $ 14,425 $ 7,450 $ 4,136 $ 3,417 $ 2,818
Shareholders' equity $ 43,042 $ 28,678 $ 19,948 $ 12,556 $ 3,498
Working capital $ 30,827 $ 25,304 $ 17,619 $ 11,279 $ 3,072
CAPITAL MANAGEMENT
Depreciation expense $ 2,726 $ 1,599 $ 732 $ 518 $ 466
Capital expenditures $ 10,469 $ 2,513 $ 1,928 $ 954 $ 365
Operating return on average assets 42% 39% 46% 36% 57%
Return on average equity 36% 32% 37% 40% 105%
Long-term debt to equity 0.0% 0.0% 0.0% 0.2% 7.5%
Current Ratio 3.1 4.4 5.3 4.3 2.1
Inventory turnover 5.2 5.8 6.8 5.3 4.0
Average days receivable 56 60 53 55 48
HUMAN RESOURCE MANAGEMENT
Average number of employees 355 272 197 138 83
Average assets per employee 132 111 102 82 57
Sales per employee 303 241 222 168 141
COMMON SHARES OUTSTANDING*
Weighted average common and common equiva-
lent shares outstanding 11,871 11,192 10,974 7.786 7,674
Number of shares outstanding at year end 11,300 11,100 10,900 10,300 7,300
</TABLE>
*Adjusted for the two-for-one stock split in the form of a 100% stock dividend
on May 31, 1996.
<PAGE>
ENCAD, Inc.
MANAGEMENT'S
DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except percentages)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Net sales 100% 100% 100%
Cost of sales 52% 56% 52%
- -------------------------------------------------------------------------------
Gross profit 48% 44% 48%
Marketing and selling 15% 12% 12%
Research and development 8% 9% 7%
General and administrative 6% 6% 7%
- -------------------------------------------------------------------------------
Income from operations 18% 18% 21%
Interest income - net 0% 0% 1%
- -------------------------------------------------------------------------------
Income before income taxes 18% 18% 22%
Provision for income taxes 6% 6% 8%
- -------------------------------------------------------------------------------
Net income 12% 12% 14%
- -------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
YEARS ENDED
DECEMBER 31, 1966 AND 1995
ENCAD's 1996 net sales increased 64% over 1995 net sales. This increase was
primarily due to increased unit sales of the Company's NovaJet product lines,
including sales of the NovaJet Pro and NovaJet Pro 50 which were introduced in
November 1995 and February 1996, respectively. Also contributing to the
Company's growth was the successful introduction of two new lines of ink and
media ("supplies"). In 1996, supplies sales increased 208% over 1995, and
accounted for approximately 14% of 1996 net sales versus 7% in 1995. The
Company's multiple original equipment manufacturer ("OEM") arrangements
contributed to the increase in net sales for 1996, accounting for 25% of
product sales as compared to 19% for 1995.
For the year ended December 31, 1996, one customer accounted for 15% of
product sales whereas no one customer accounted for more than 10% of product
sales in 1995. International sales accounted for approximately 59% and 63% of
the Company's product sales in 1996 and 1995, respectively.
Cost of sales includes costs related to product shipments, including
materials, labor, overhead and other direct or allocated costs involved in the
manufacture, delivery, support and maintenance of products. Cost of sales as a
percentage of net sales decreased to 52% in 1996, from 56% in 1995, causing a
comparable increase in gross margin percentages. The decrease in the cost of
sales was 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. The Company expects lower gross profit margins in 1997
due to higher technical support costs, possible lower average unit selling
prices and increased sales of new products and supplies, which, in general,
have lower gross margins than the NovaJet products. The Company's future
success
<PAGE>
ENCAD, Inc.
MANAGEMENT'S
DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except percentages)
will depend on its ability to continue to develop and manufacture competitive
products and achieve cost reductions for its existing products.
Marketing and selling expenses were 15% of net sales compared to 12% in 1995
and grew by 104% over 1995. Most of the increase was related to costs associated
with increased staffing, the advertising of new products, increased emphasis on
promoting the Company's supplies business and increased trade show activity
compared to the same period in the prior year. Marketing and selling expenses
are expected to continue to increase over prior periods as the Company promotes
its products and supports its marketing and selling activities.
Research and development spending grew by 58% from 1995 to 1996 and slightly
decreased as a percentage of net sales. The increase in spending was driven by
increased project costs and staffing levels related to new product development.
The Company expects to continue to invest significant resources in these
strategic programs and enhancements to existing products. The Company expects
that research and development expenses will increase in absolute dollars as
compared to prior periods.
General and administrative expenses were 6% of net sales in 1996 and 1995.
The 72% increase in absolute dollars was due to higher staffing levels necessary
to support an increased level of business. The Company expects general and
administrative expenses will continue to increase in absolute dollars over
prior periods. Net interest income decreased to $183 in 1996 from $307 in 1995
due to less cash available for external investment.
The Company's effective income tax rate in 1996 was 35%, compared to 34% in
1995. The higher rate was due to the Company moving to a higher tax bracket due
to increased income.
1996 net income increased 64% over 1995 for the reasons previously described.
YEARS ENDED
DECEMBER 31, 1995 AND 1994
ENCAD's 1995 net sales increased 50% over 1994 net sales. This increase was
primarily due to increased unit sales of the Company's CADJET and NovaJet
product lines. The increase in unit sales, however, was partially offset by
lower average per unit selling prices. Also contributing to the Company's growth
was the successful development and delivery of new products to a broadening
marketplace. Two of these products, the CADJET 2 and the NovaJet Pro, were
introduced in October and November of 1995, respectively. The Company's multiple
OEM arrangements contributed to the increase in net sales for 1995, accounting
for 19% of product sales as compared to 15% for 1994.
For the year ended December 31, 1995, no one customer accounted for more than
10% of product sales whereas one customer accounted for 11%
of product sales in 1994. In the quarter ended December 31, 1995, one customer
accounted for 11% of product sales. International sales accounted for
approximately 63% and 57% of the Company's product sales in 1995 and 1994,
respectively.
Cost of sales as a percentage of total net sales increased to 56% in 1995
from 52% in 1994, primarily due to a decrease in per unit selling prices.
Marketing and selling expenses were unchanged as a percentage of total net
sales for 1995 and 1994, remaining at 12%. In absolute dollars these expenses
increased to $8,111 in 1995 from $5,065 in 1994.
Research and development expenses in 1995 increased to $5,578 from $3,265 in
1994 or to 9% of total net sales in 1995 from 7% in 1994. The increase in
absolute dollars and as a percentage of net sales
<PAGE>
was due to increased project costs and staffing levels related to new product
development.
General and administrative expenses were 6% and 7% of total net sales in
1995 and 1994, respectively. These expenses increased, in absolute dollars, to
$3,769 in 1995 from $3,269 in 1994. The increase in absolute dollars was due to
higher staffing levels associated with the support of higher sales volume.
Net interest income increased to $307 in 1995 from $270 in 1994. This change
was due to the increase of $1,170 in short-term investments resulting from a
higher level of cash provided by operating activities of $5,208.
The Company's effective income tax rate in 1995 was 34%, compared to 36% in
1994. The lower rate reflects increased tax benefits related to the R&D tax
credits available to the Company through June of 1995.
Net income increased 31% to $7,857 in 1995 from $6,015 in 1994 for the
reasons set forth above.
FINANCIAL CONDITION
The Company funds its operations primarily through cash flow provided from
operations. As of December 31, 1996, the Company had cash and cash equivalents
totaling $6,949, and working capital of $30,827. In comparison, the Company had
cash, cash equivalents and short-term investments totaling $9,139, and working
capital of $25,304 as of December 31, 1995. The decrease in cash, cash
equivalents and short-term investments was due primarily to the Company's
acquisition of its headquarter facilities.
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. During
1996, the Company invested cash in short-term investments which generated
interest income of $188.
The Company has received and anticipates it will continue to receive the
majority of its cash from collections of accounts receivable from its
distributors and OEMs. These groups have a history of timely payments; however,
an increasing percentage of international sales can increase accounts receivable
balances due to traditionally slower payments by international customers.
At December 31, 1996 net accounts receivable increased by $6,733 over 1995's
year end balance of $13,029. The increase was directly related to increased
sales in 1996.
Inventory levels increased by $5,583 at December 31, 1996 from $8,047 at the
end of 1995. This increase was primarily attributable to a general increase in
the level of business and also to increased supplies inventories to support
increased sales and to provide shorter lead times in filling customer orders.
In the years ended December 31, 1996 and 1995, the Company had capital
expenditures of $10,469 and $2,513, respectively. 1996 expenditures include
$6,000 for the purchase of the Company's headquarter facilities. During the next
year, the Company plans to increase its capital expenditures, especially for
tooling relating to new products and computers, systems and related network
assets.
The Company's overall level of operating expense is expected to increase due
to increased expense associated with increased sales and also with the
development and marketing of new products. Management believes that its existing
cash, cash equivalents, short-term investments, cash generated from operations,
and funds available under a bank line of credit will be sufficient to satisfy
its 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. To date, inflation has not had a significant effect
on the Company's operating results.
<PAGE>
ENCAD, Inc.
INDEPENDENT
AUDITORS'
REPORT
TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF ENCAD, INC.
We have audited the accompanying consolidated balance sheets of ENCAD, Inc. and
its subsidiaries (collectively, the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1995 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
SAN DIEGO, CALIFORNIA
FEBRUARY 4, 1997
<PAGE>
ENCAD, Inc.
CONSOLIDATED
BALANCE
SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,949 $ 3,067
Short-term investments -- 6,072
Accounts receivable - net 19,762 13,029
Inventories 13,630 8,047
Deferred income taxes 4,538 2,254
Prepaid expenses 373 285
- -------------------------------------------------------------------------------------
Total current assets 45,252 32,754
Property - net 10,881 3,138
Other assets 1,334 236
- -------------------------------------------------------------------------------------
TOTAL $ 57,467 $ 36,128
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,244 $ 4,572
Accrued expenses and other liabilities 6,181 2,878
- -------------------------------------------------------------------------------------
Total current liabilities 14,425 7,450
- -------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 5,000 shares authorized,
no shares issued and outstanding -- --
Common stock - no par value; 15,000 shares authorized,
11,300 and 11,100 shares issued and outstanding in
1996 and 1995, respectively 13,338 11,827
Retained earnings 29,704 16,851
- -------------------------------------------------------------------------------------
Total shareholders' equity 43,042 28,678
- -------------------------------------------------------------------------------------
TOTAL $ 57,467 $ 36,128
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ENCAD, Inc.
CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $107,437 $ 65,548 $ 43,653
Cost of sales 56,021 36,471 22,917
- -------------------------------------------------------------------------------------
Gross profit 51,416 29,077 20,736
Marketing and selling 16,552 8,111 5,065
Research and development 8,794 5,578 3,265
General and administrative 6,498 3,769 3,269
- -------------------------------------------------------------------------------------
Operating costs and expenses 31,844 17,458 11,599
- -------------------------------------------------------------------------------------
Income from operations 19,572 11,619 9,137
Interest income - net 183 307 270
- -------------------------------------------------------------------------------------
Income before income taxes 19,755 11,926 9,407
Provision for income taxes 6,902 4,069 3,392
- -------------------------------------------------------------------------------------
Net income $ 12,853 $ 7,857 $ 6,015
- -------------------------------------------------------------------------------------
Earnings per share $ 1.08 $ 0.70 $ 0.55
- -------------------------------------------------------------------------------------
Weighted average common
and common equivalent shares 11,871 11,192 10,974
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ENCAD, Inc.
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS'
EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 10,280 $ 9,577 $ 2,979 $ 12,556
Common stock issued under stock
option and purchase plans,
including related tax benefits 150 348 -- 348
Net proceeds from over-allotment
option exercise 450 1,029 -- 1,029
Net income 6,015 6,015
- -------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 10,880 10,954 8,994 19,948
Common stock issued under stock
option and purchase plans,
including related tax benefits 120 573 -- 573
Exercise of warrants 100 300 -- 300
Net income 7,857 7,857
- -------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 11,100 11,827 16,851 28,678
Common stock issued under stock
option and purchase plans,
including related tax benefits 200 1,511 -- 1,511
Net income -- -- 12,853 12,853
- -------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 11,300 $ 13,338 $ 29,704 $ 43,042
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ENCAD, Inc.
CONSOLIDATED STATEMENT OF
CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,853 $ 7,857 $ 6,015
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation and amortization 2,726 1,599 732
Provision for losses on accounts receivable
and inventories 3,987 1,347 1,036
Tax benefit from exercise of stock options 539 173 176
Changes in assets and liabilities:
Accounts receivable (7,033) (4,692) (5,051)
Inventories (9,270) (4,521) (2,954)
Deferred income taxes (2,284) (501) (896)
Prepaid expenses and other assets (1,186) 632 (669)
Accounts payable 3,672 2,231 358
Accrued expenses and other liabilities 3,303 1,083 397
- ---------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating
activities 7,307 5,208 (856)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (10,469) (2,513) (1,928)
Net cash from (purchases of) short-term investments 6,072 (1,170) (4,902)
- ---------------------------------------------------------------------------------------------------------
Cash used in investing activities (4,397) (3,683) (6,830)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options and sale of stock
under employee stock purchase plan 972 418 172
Net proceeds from issuance of common stock -- 282 1,029
Payments on capital lease obligations -- -- (61)
- ---------------------------------------------------------------------------------------------------------
Cash provided by financing activities 972 700 1,140
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,882 2,225 (6,546)
Cash and cash equivalents at beginning of year 3,067 842 7,388
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,949 $ 3,067 $ 842
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 7,927 $ 3,551 $ 5,005
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ENCAD, Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY ENCAD, Inc. and its subsidiaries (collectively, the "Company")
operate in one industry segment, principally the design, development,
manufacture and sale of wide-format color inkjet printers and related supplies
for the graphic arts and computer-aided design markets.
The Company markets and sells its products domestically and internationally
primarily through specialty distributors, dealers, value-added resellers and
original equipment manufacturers. Export sales accounted for 59%, 63% and 57% of
1996, 1995 and 1994 net sales, respectively. Receivables from export sales at
December 31, 1996 and 1995 were approximately $11,508,000 and $7,606,000,
respectively. In 1996, one customer accounted for 15% of sales. In 1995, no one
customer accounted for more than 10% of sales, and in 1994, one customer
accounted for 11% of sales.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of the Company. All significant intercompany
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid
investments purchased with an original maturity date of three months or less
to be cash equivalents.
SHORT-TERM INVESTMENTS Short-term interest bearing investments are those
with maturities of less than one year but greater than three months when
purchased. These investments are readily convertible to cash and are stated
at cost, which approximates fair value.
INVENTORIES Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY Property is stated at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives of the property: buildings and related improvements - 40 years;
machinery, equipment, furniture and fixtures - two to five years.
REVENUE RECOGNITION Revenue from product sales is recognized at the time
of shipment. Price protection adjustments to customers are accrued when the
anticipated price reduction is known.
WARRANTY The Company warrants its products against defects, generally for
one year. Management evaluates the Company's warranty experience and adjusts
its warranty reserve accordingly.
PRODUCT RETURNS In the event the Company terminates any of its
distribution agreements, the terminated distributor may return products for a
refund. The Company has not experienced any significant terminations or
product returns to date.
RESEARCH AND DEVELOPMENT Research and development costs are expensed in
the period incurred.
EARNINGS PER SHARE Earnings per share are computed based on the weighted
average number of common dilutive and common equivalent shares outstanding
during each period using the treasury stock method. Stock options are
considered to be common stock equivalents. Fully diluted earnings per share
have not been presented as part of the consolidated statements of income
because the differences are not material.
INCOME TAXES The Company adopted the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." This statement requires
that deferred income taxes be reported in the Company's financial statements
utilizing the asset and liability method. Under this method, deferred income
taxes are determined based on enacted tax rates applied to the differences
between the financial statement and tax bases of assets and liabilities.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at the exchange rate in
effect at the balance sheet date, and revenue and expenses are translated at
the average exchange rate for the year. Translation gains or losses of the
Company's foreign subsidiaries historically have not been material. All of
the Company's worldwide sales are conducted in U.S. dollars. Gains and losses
on transactions in denominations other than the functional currency of the
Company's foreign operations, while not material in amount, are included in
the results of operations. The Company has not entered into foreign exchange
transactions to hedge certain balance sheet exposures and intercompany
balances against movements in foreign exchange rates as these balances have
historically not been material.
CONCENTRATION OF CREDIT RISK The Company sells its products primarily to
customers in the United States, Europe and Asia. The Company maintains a
reserve for potential credit losses and such losses, to date, have been
minimal.
ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
APB Opinion No. 25, "Accounting for Stock Issued to Employees," which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and has disclosed the
required proforma effect on the net income and earnings per share. See Note 6.
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 100% 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.
RECLASSIFICATIONS Certain items in the 1994 and 1995 financial statements
have been reclassified to conform to the 1996 presentation.
22
<PAGE>
2. BALANCE SHEET DETAILS (in thousands)
DECEMBER 31,
-------------------------
1996 1995
- ----------------------------------------------------------------------
ACCOUNTS RECEIVABLE:
Trade receivables $ 20,404 $ 13,472
Allowance for doubtful accounts (642) (443)
- ----------------------------------------------------------------------
Total $ 19,762 $ 13,029
- ----------------------------------------------------------------------
INVENTORIES:
Raw materials $ 7,247 $ 4,601
Work-in-process 253 224
Finished goods 6,130 3,222
- ----------------------------------------------------------------------
Total $ 13,630 $ 8,047
- ----------------------------------------------------------------------
PROPERTY - AT COST:
Machinery and equipment $ 7,289 $ 5,027
Buildings and improvements 5,601 84
Furniture and fixtures 1,787 865
Land 1,250 --
- ----------------------------------------------------------------------
15,927 5,976
Accumulated depreciation
and amortization (5,046) (2,838)
- ----------------------------------------------------------------------
Total $ 10,881 $ 3,138
- ----------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES:
Compensation and vacation pay $ 3,197 $ 937
Warranty 1,538 1,212
Co-op programs 736 482
Income taxes payable 690 114
Other 20 133
- ----------------------------------------------------------------------
Total $ 6,181 $ 2,878
- ----------------------------------------------------------------------
3. REVOLVING LINE OF CREDIT
At December 31, 1996, the Company had available a $12 million revolving line
of credit (the "Line") which provides for interest at the bank's prime rate
(8.25% at December 31, 1996) or 2.25 % over the London Interbank Overnight
Rate (5.50% at December 31, 1996) on outstanding balances. The Line requires
the Company to maintain: (i) a minimum amount of net working capital and net
worth, (ii) a quick ratio of 1.5 to 1.0, and (iii) a total debt to net worth
ratio less than .6 to 1.0. No borrowings were outstanding under the Line at
December 31, 1996. The Line expires on January 2, 1999.
4. OPERATING LEASE COMMITMENTS
During 1995 and for the first month of 1996, the Company leased its primary
facility under an operating lease, which would have expired in December 1998.
In February 1996, the Company acquired this facility. Rental expense under
operating leases was approximately $298,000, $604,000 and $258,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The Company has
no commitments, as of December 31, 1996, under non-cancelable operating
leases.
5. INCOME TAXES (in thousands except for percentages) The tax effects of
items comprising the Company's net deferred income tax asset are as follows:
DECEMBER 31,
-------------------------
1996 1995
- ----------------------------------------------------------------------
Non deductible reserves and accruals $ 2,817 $ 1,407
Differences between book and tax
basis in inventory and property 856 349
Accrued co-op advertising 323 208
State taxes 287 197
Accrued commissions to foreign
related party 198 50
Other 57 43
- ----------------------------------------------------------------------
Total $ 4,538 $ 2,254
- ----------------------------------------------------------------------
The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
- ------------------------------------------------------------------------
CURRENT EXPENSE:
Federal $ 7,269 $ 3,524 $ 3,277
State 1,810 1,030 1,011
Foreign 106 17 -
DEFERRED EXPENSE:
Federal (1,865) (396) (740)
State (418) (106) (156)
- ------------------------------------------------------------------------
Total $ 6,902 $ 4,069 $ 3,392
- ------------------------------------------------------------------------
The effective rate of the provision for income taxes differs from the
federal statutory rate because of the effect of the following items:
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
- -----------------------------------------------------------------------
Statutory rate 35.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 6.2 6.2 6.2
Benefit of foreign sales
corporation, net of tax (4.0) (4.2) (4.2)
Income tax credit (0.8) (1.0) 0.3
Other (1.4) (0.8) (0.2)
- ------------------------------------------------------------------------
Effective rate 35.0% 34.2% 36.1%
- ------------------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS (in thousands except for percentages and average
and exercise price data) The number of shares authorized under the following
plans, and the number of shares outstanding will be appropriately adjusted in
the event of certain changes in the Company's capital structure, such as
stock dividends or splits, or other recapitalizations.
1993 EMPLOYEE STOCK PURCHASE PLAN Under this plan, for which 400 shares
of common stock have been reserved for issuance, eligible employees may elect
up to 10% of their cash compensation to be deducted each pay period for the
purchase of common stock. Participants may not purchase more than 2 shares of
common stock in any purchase period and not more than $25 worth of common
stock in any one calendar year. On the last business day of each calendar
quarter, shares of common stock are purchased with the employees' payroll
deductions, at a price per share of 85% of the lesser of the closing market
price of the common stock on the purchase date, or the closing market price
on the first day of the period. The plan will terminate on January 1, 2003.
In 1996, 1995 and 1994, 60, 62 and 61 shares, respectively, were issued, at
average prices ranging from $7.44 to $8.49, $5.26 to $5.63, and $2.13 to
$2.20, respectively. An additional 17 shares have been purchased, but not
issued as of December 31, 1996. At December 31, 1996, 200 shares were
available for purchase under the plan.
1993 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 1,559
shares of common stock have been reserved for issuance, employees, officers,
directors and consultants may be granted incentive or non-qualified stock
options. All outstanding options under any of the Company's previous stock
option plans were incorporated into this plan but will continue to be
governed by the terms and conditions under which those options were granted.
Only non-qualified stock options have been granted under this plan to date,
at prices not less than fair market value on the date of grant. Although this
plan allows for other terms, the options granted are generally exercisable
quarterly over four years and expire in ten years.
23
<PAGE>
A summary of option activity follows:
OPTIONS OUTSTANDING
----------------------------------
AVAILABLE EXERCISE AGGREGATE
FOR GRANT NUMBER PRICES PRICE
- --------------------------------------------------------------------------------
BALANCES,
JANUARY 1, 1994 457 360 $ 0.07 - $ 2.81 $ 421
Options granted (239) 239 4.13 - 7.31 1,236
Options exercised -- (89) 4.13 - 9.25 (33)
Options canceled 14 (14) 0.07 - 1.17 (13)
- --------------------------------------------------------------------------------
BALANCES,
JANUARY 1, 1995 232 496 0.07 - 7.31 1,611
Authorized 500 -- -- -- --
Options granted (543) 543 7.13 - 13.75 4,827
Options exercised -- (57) 6.88 - 14.81 (146)
Options canceled 271 (271) 1.17 - 12.94 (2,602)
- --------------------------------------------------------------------------------
BALANCES,
JANUARY 1, 1996 460 711 0.07 - 13.75 3,690
Options granted (460) 460 8.00 - 39.88 5,201
Options exercised -- (140) 8.00 - 45.38 (546)
Options canceled 89 (89) 0.07 - 8.00 (569)
- --------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 89 942 $ 0.07 - $39.88 $ 7,776
- --------------------------------------------------------------------------------
At December 31, 1996, 89 shares were available for grant under this plan.
The following table summarizes information about stock options
outstanding at December 31, 1995 and 1996:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------
1995
$ 0.07 - $ 1.17 131 1.5 $ 0.62 106 $ 0.52
2.81 - 4.44 182 8.1 3.86 77 3.78
7.13 - 7.25 235 9.6 7.19 8 7.23
7.31 - 7.88 85 9.3 7.52 11 7.35
8.44 - 13.75 78 9.9 8.68 0 0.00
- -------------------------------------------------------------------------------
$ 0.07 - $13.75 711 7.7 $ 5.33 202 $ 2.40
- -------------------------------------------------------------------------------
1996
$ 0.07 - $ 1.17 66 0.94 $ 0.86 59 $ 0.82
2.81 - 4.44 132 7.14 3.64 90 3.58
7.19 - 7.88 243 8.53 7.31 58 7.33
8.00 - 8.50 240 8.92 8.14 39 8.19
10.63 - 11.50 226 9.26 11.39 21 11.45
13.75 - 21.75 12 9.17 18.23 1 16.17
34.75 - 39.88 23 9.88 35.39 0 0.00
- -------------------------------------------------------------------------------
$ 0.07 - $39.88 942 8.12 $ 8.36 268 $ 5.12
- -------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. Had compensation expense
for the Company's stock option plan and stock purchase plan been determined
based upon the fair value at the grant date for awards under those plans
consistent with the methodology prescribed under SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per
share for 1996 and 1995 would have been reduced by approximately $909 and
$279, respectively, and $0.08 per share and $0.02 per share respectively.
The fair value of the options granted during 1996 and 1995 is estimated
as $2,054 and $1,581, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1996 1995
- ----------------------------------------------------------------------
Volatility 65% 65%
Risk-free interest rate 6% 6%
Forfeiture rate -- --
Expected life (years) 2.68 2.80
- ----------------------------------------------------------------------
7. QUARTERLY FINANCIAL INFORMATION
(unaudited; in thousands, except per share data) Summarized quarterly
financial information for each of the three years ended December 31, 1996,
1995, and 1994 is as follows:
1ST 2ND 3RD 4TH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net sales $ 19,618 $ 24,752 $ 30,047 $ 33,020 $ 107,437
Income from
operations 3,157 4,357 5,594 6,464 19,572
Net income 2,099 2,805 3,732 4,217 12,853
Earnings
per share 0.18 0.24 0.31 0.35 1.08
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
Net sales 14,666 17,524 15,606 17,752 65,548
Income from
operations 3,169 3,266 2,522 2,662 11,619
Net income 1,991 2,238 1,786 1,842 7,857
Earnings
per share 0.18 0.20 0.16 0.16 0.70
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
Net sales 8,646 11,945 11,475 11,587 43,653
Income from
operations 1,611 2,600 2,629 2,297 9,137
Net income 1,007 1,593 1,703 1,712 6,015
Earnings
per share 0.09 0.15 0.15 0.16 0.55
- --------------------------------------------------------------------------------
24
<PAGE>
ENCAD, Inc
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, are highly competitive and rapidly changing and the
Company believes that new competitors will likely enter the market. The
Company's principal competitor is Hewlett-Packard Company
("Hewlett-Packard"), which dominates certain 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 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 will likely continue to do so 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 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. 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 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
has developed strategic relationships with single suppliers of several of its
components. 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 several months and cause substantial disruption to the Company's
operations. The Company uses a material requirements planning system that is
intended to aid in making "Just-in-Time" decisions; however, if a supplier is
unable to meet
25
<PAGE>
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 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 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 asserted rights have not been violated, 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.
DEPENDENCE ON EXPORT SALES For 1996, 1995 and 1994, sales outside the
United States represented approximately 59%, 63% and 57% of net sales,
respectively. The Company expects export sales to continue to represent a
significant portion of its net sales. 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 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.
RELIANCE ON INDIRECT DISTRIBUTION The Company markets and sells it
products domestically and internationally primarily through specialty
distributors, dealers, VARs and OEMs. 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 the Company's results of operations. To expand its distribution
channels, the Company has entered into select 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 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
26
<PAGE>
senior management is subject to an employment agreement with the Company,
although the Company has recently put into place severance arrangements with
this group. 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 $107.4 million for
the year ended December 31, 1996, compared to $65.5 million in 1995 and $43.6
million in 1994. 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.
ENTERPRISE-WIDE INFORMATION SYSTEM The Company is planning to replace its
current management information system with a comprehensive enterprise-wide
information system. The Company expects that this system will allow it to
realize significant operational efficiencies and facilitate future growth,
and it will devote significant resources to system design selection and
testing. The Company's operations could be disrupted, however, if the
transition to the new system is not effected smoothly or if the system does
not perform as expected.
DEVELOPING WIDE-FORMAT INKJET AND SUPPLIES MARKETS AND APPLICATIONS The
markets for wide-format color inkjet printers and related supplies are
relatively new and are 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 markets and applications for wide-format
printers and related supplies will continue to grow. Other technologies are
constantly improving and there can be no assurance that products based on
these other technologies will not have a material adverse effect on the
markets 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 in 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.
27
<PAGE>
ENCAD, Inc.
COMMON
STOCK
MATTERS
The Common Stock of ENCAD is traded on the Nasdaq National Market under the
symbol "ENCD." Prior to the initial public offering on December 16, 1993,
there was no established published trading market for ENCAD's Common Stock.
The following table presents quarterly information on the price range of the
Common Stock, as adjusted for the two-for-one stock split in the form of a
100% stock dividend on May 31, 1996. This information indicates the high and
low sales prices as reported by Nasdaq. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
PRICE RANGE OF COMMON STOCK
1996 1995
------------- -------------
High Low High Low
- ---------------------------------------------------------------
First Quarter 12.50 7.63 18.50 11.38
Second Quarter 25.25 11.50 29.38 17.63
Third Quarter 43.75 16.75 29.88 13.63
Fourth Quarter 46.75 34.38 20.25 13.13
- ---------------------------------------------------------------
The Company had 305 shareholders of record and approximately 4,500
beneficial shareholders as of December 31, 1996. The last sales price for
ENCAD's Common Stock as reported by Nasdaq on December 31, 1996, was $41.25.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and presently intends
to continue this policy in order to retain earnings for use in its business.
In addition, the Company's line of credit arrangement prohibits the payment
of cash dividends without prior bank approval if amounts are outstanding
under such line of credit.
28
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
ENCAD INTERNATIONAL INCORPORATED
(FOREIGN SALES CORPORATION IN U.S. VIRGIN ISLANDS)
ENCAD EUROPE, S.A.
(SALES OFFICE)
<PAGE>
EXHIBIT 23.1
<PAGE>
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders of
ENCAD, Inc.
We consent to the incorporation by reference in Registration Statements
No. 33-72978 and No. 33-95252 of ENCAD, Inc. on Form S-8 of our report
dated February 4, 1997, incorporated by reference in this Annual Report
on Form 10-K of ENCAD, Inc. for the year ended December 31, 1996.
San Diego, California
March 25, 1997
<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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,949
<SECURITIES> 0
<RECEIVABLES> 19,762
<ALLOWANCES> 0
<INVENTORY> 13,630
<CURRENT-ASSETS> 45,252
<PP&E> 15,927
<DEPRECIATION> 5,046
<TOTAL-ASSETS> 57,467
<CURRENT-LIABILITIES> 14,425
<BONDS> 0
0
0
<COMMON> 13,338
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 57,467
<SALES> 107,437
<TOTAL-REVENUES> 107,437
<CGS> 56,021
<TOTAL-COSTS> 56,021
<OTHER-EXPENSES> 31,844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,755
<INCOME-TAX> 6,902
<INCOME-CONTINUING> 12,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,853
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
</TABLE>
