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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the fiscal quarter ended June 30, 1997
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number: 0-23034
ENCAD-REGISTERED TRADEMARK-, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3672088
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6059 CORNERSTONE COURT WEST 92121
SAN DIEGO, CA
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 452-0882
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock as of June 30,
1997, was 11,390,258.
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ENCAD, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . .3
Consolidated Statements of Income for the
three and six months ended June 30, 1997 and 1996. . . . . . . . .4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996. . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . . .6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . .7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . . 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . 14
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
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PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCAD, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) JUNE 30, December 31,
1997 1996
---------------------------
(UNAUDITED) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,357 $ 6,949
Accounts receivable 30,809 19,762
Inventories 16,936 13,630
Deferred income taxes 4,554 4,538
Prepaid expenses 1,458 373
---------- ----------
Total current assets 57,114 45,252
PROPERTY - net 13,434 10,881
OTHER ASSETS 926 1,334
---------- ----------
TOTAL $ 71,474 $ 57,467
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,294 $ 8,244
Accrued expenses and other liabilities 8,026 6,181
---------- ----------
Total current liabilities 18,320 14,425
---------- ----------
OTHER LIABILITIES 854 -
SHAREHOLDERS' EQUITY:
Common stock 14,679 13,338
Accumulated earnings 37,621 29,704
---------- ----------
Total shareholders' equity 52,300 43,042
---------- ----------
TOTAL $ 71,474 $ 57,467
---------- ----------
---------- ----------
Note:
The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to consolidated financial statements.
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ENCAD, INC.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(in thousands, except for per share amounts)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
--------- --------- --------- ---------
REVENUE
Product sales $ 37,498 $ 24,752 $ 68,839 $ 44,370
Royalty and contract revenue 227 - 397 -
--------- --------- --------- ----------
TOTAL REVENUE 37,725 24,752 69,236 44,370
COST OF GOODS SOLD 20,060 12,762 36,165 23,163
--------- --------- --------- ----------
GROSS PROFIT 17,665 11,990 33,071 21,207
MARKETING AND SELLING 6,100 4,065 11,214 7,192
RESEARCH AND DEVELOPMENT 2,775 2,136 5,565 3,769
GENERAL AND ADMINISTRATIVE 2,392 1,432 4,252 2,732
--------- --------- --------- ----------
11,267 7,633 21,031 13,693
--------- --------- --------- ----------
INCOME FROM OPERATIONS 6,398 4,357 12,040 7,514
INTEREST INCOME - NET 78 24 142 94
--------- --------- --------- ----------
INCOME BEFORE INCOME TAXES 6,476 4,381 12,182 7,608
PROVISION FOR INCOME TAXES 2,253 1,576 4,265 2,704
--------- --------- --------- ----------
NET INCOME $ 4,223 $ 2,805 $ 7,917 $ 4,904
--------- --------- --------- ----------
--------- --------- --------- ----------
EARNING PER SHARE $ 0.35 $ 0.24 $ 0.66 $ 0.42
--------- --------- --------- ----------
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES 12,046 11,800 12,038 11,637
--------- --------- --------- ----------
--------- --------- --------- ----------
See notes to consolidated financial statements.
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ENCAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
SIX MONTHS ENDED JUNE 30,
1997 1996
----------- ----------
OPERATING ACTIVITIES:
Net income $ 7,917 $ 4,904
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,465 1,175
Provision for losses on accounts
receivable and inventories (200) 1,058
Tax benefit from exercise of stock options 766 186
Changes in assets and liabilities:
Accounts receivable (11,177) (3,113)
Inventories (2,976) (6,340)
Deferred income taxes (16) (708)
Prepaid expenses and other assets (677) 81
Accounts payable 2,050 2,107
Accrued expenses and other liabilities 2,699 1,024
----------- --------
Cash provided by (used in)
operating activities (149) 374
----------- --------
INVESTING ACTIVITIES:
Purchases of property (4,018) (7,824)
Net cash from short-term investments - 6,072
----------- --------
Cash used in investing activities (4,018) (1,752)
----------- --------
FINANCING ACTIVITIES:
Exercise of common stock options and sale
of stock under employee stock purchase plan 575 375
----------- --------
Cash provided by financing
activities 575 375
----------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,592) (1,003)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,949 3,067
----------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,357 $ 2,064
----------- --------
----------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 1,584 $ 2,574
See notes to consolidated financial statements.
5
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ENCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
1) The accompanying consolidated financial statements as of June 30, 1997 and
for the three and six month periods ended June 30, 1997 and 1996 are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the
interim period. The consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition
and results of operations, contained in the Company's Annual Report to
Shareholders incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. The results of operations
for the three and six months ended June 30, 1997, are not necessarily
indicative of the results for the entire year ending December 31, 1997.
2) CASH EQUIVALENTS - Cash equivalents consist of highly liquid investments
with original maturities of three months or less.
3) INVENTORIES:
(IN THOUSANDS)
JUNE 30, December 31,
1997 1996
--------- ------------
Raw materials $ 10,784 $ 7,247
Work-in-process 642 253
Finished goods 5,510 6,130
--------- ------------
Total $ 16,936 $ 13,630
--------- ------------
--------- ------------
4) SHAREHOLDERS' EQUITY - Effective May 31, 1996, for shareholders of record
on May 17, 1996, the Company effected a two-for-one stock split payable in
the form of a stock dividend resulting in the issuance of 5,599,007 shares
of Common Stock. The effects of the stock split have been retroactively
restated in these financial statements.
5) EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS No. 128"). SFAS No. 128 requires the presentation of
basic and diluted earnings per share amounts. Basic earnings per share is
calculated based on the weighted average number of common shares
outstanding during the period while diluted earnings per share also gives
effect to all potential dilutive common shares outstanding during the
period such as options, warrants, convertible securities, and contingently
issuable shares. SFAS No. 128 is effective for periods ending after
December 15, 1997. If SFAS No. 128 had been applied for the three and six
month periods ended June 30, 1997 and 1996, basic and diluted earnings per
share would have been as follows:
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
Earnings per share - basic $ 0.37 $ 0.25 $ 0.70 $ 0.44
Earnings per share - diluted $ 0.35 $ 0.24 $ 0.66 $ 0.42
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(in thousands, except percentages)
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
PRODUCT SALES 99% 100% 99% 100%
ROYALTY AND CONTRACT
REVENUE 1% 0% 1% 0%
----------- ----------- ---------- ----------
TOTAL REVENUE 100% 100% 100% 100%
COST OF GOODS SOLD 53% 52% 52% 52%
----------- ----------- ---------- ----------
GROSS PROFIT 47% 48% 48% 48%
MARKETING AND SELLING 16% 16% 16% 16%
RESEARCH AND DEVELOPMENT 8% 9% 8% 9%
GENERAL AND ADMINISTRATIVE 6% 6% 6% 6%
----------- ----------- ---------- ----------
INCOME FROM OPERATIONS 17% 17% 17% 17%
INTEREST INCOME - NET 0% 0% 0% 0%
----------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES 17% 17% 17% 17%
PROVISION FOR INCOME TAXES 6% 6% 6% 6%
----------- ----------- ---------- ----------
NET INCOME 11% 11% 11% 11%
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
RESULTS OF OPERATIONS
This discussion may contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. The Company undertakes no obligation to release publicly
the results of any revisions to these forward-looking statements to reflect
events or circumstances arising after the date hereof.
REVENUE - Total revenue for the second quarter and six months ended June 30,
1997 increased by 52% and 56%, respectively, over the same periods in 1996.
Revenue growth was enhanced by the introduction of two new products, the NovaJet
PROe and Croma24. Also contributing to the Company's growth during the second
quarter and first six months of 1997 was the continued success of its ink and
media ("supplies") products, which represented 21% and 20%, respectively, of
total revenue compared to 12% and 11% during the same periods of 1996. The
Company's multiple original equipment manufacturer ("OEM") arrangements
contributed to the increase in product sales for the second quarter and first
six months of 1997, and accounted for 21% and 20%, respectively, of product
sales as compared to 23% for each of the comparable periods of 1996.
For the second quarter of 1997, one customer accounted for 10% of product
sales whereas this customer accounted for 12% of product sales during the same
quarter of 1996. International sales accounted for approximately 61% and 59% of
the Company's product sales for the second quarter and six months ended June 30,
1997, respectively, compared to 60% and 61% for the same periods in 1996.
COST OF GOODS SOLD - Cost of goods sold 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 goods sold as a percentage of total revenue increased from
1996's 52% to 53% for the second quarter of 1997, causing a comparable decrease
in gross profit percentages. The increase in the cost of goods sold as a
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percentage of net revenue during the second quarter of 1997 was principally due
to selling price reductions for the mature printer products and the effects of a
larger supplies business component which, in general, carries a lower gross
margin than the Company's printer products. For the six months ended June 30,
1997 and 1996 cost of goods sold as a percentage of total revenue remained
constant at 52%. The Company anticipates a lower gross profit percentage for
the remainder of 1997 due to overall lower average unit selling prices for its
printer product line, and increased sales of supplies. The Company's future
success will depend on its ability to continue to develop, manufacture, and sell
competitive products and achieve cost reductions for its existing products.
MARKETING AND SELLING - Marketing and selling expenses for the second quarter
and six months ended June 30, 1997 increased $2,000 and $4,000, respectively,
over the comparable periods in 1996. These expenses remained constant at 16% of
total revenue for the second quarter and six months ended June 30, 1997 and
1996. Most of the increase in absolute dollars was related to costs associated
with increased staffing, product advertising and an increased emphasis on
promoting the Company's supplies business. Marketing and selling expenses are
expected to continue to increase in absolute dollars over prior period amounts
as the Company promotes its products and supports its marketing and selling
activities.
RESEARCH AND DEVELOPMENT - Research and development spending for the second
quarter and six months ended June 30, 1997 increased $600 and $1,800,
respectively, over the comparable periods in 1996. These expenses represented
8% of total revenue for both the second quarter and first six months of 1997 as
compared to 9% for the comparable periods of 1996. The increase in spending was
driven by increased product testing 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 continue to
increase in absolute dollars as compared to prior periods.
GENERAL AND ADMINISTRATIVE - General and administrative expenses for the
second quarter and first six months of 1997 remained constant at 6% of total
revenue when compared to the same periods of 1996. The increase in absolute
dollars for both periods over the comparable periods of the prior year was due
primarily to increases in staffing levels necessary to support an increased
level of business and increases in legal expenses. In the second quarter, costs
associated with investor relations activities also contributed to the increase
in absolute dollars. The Company expects that general and administrative
expenses will continue to increase in absolute dollars over prior quarters.
PROVISION FOR INCOME TAXES - The Company's effective income tax rate was
approximately 35% for the quarter and six months ended June 30, 1997,
compared to approximately 36% for the same periods in 1996. The decrease in
the effective tax rate is due primarily to a research and development credit
available to the Company during the second quarter of 1997 that was
unavailable during the same period of 1996.
NET INCOME - Net income for the second quarter and six months ended June 30,
1997 increased 51% and 61%, respectively, over the same periods of 1996, and
remained constant at 11% of total revenue for the second quarter and first six
months of 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily through cash flow provided from
operations. As of June 30, 1997, the Company had cash and cash equivalents
totaling $3,357, and working capital of $38,794. In comparison, the Company had
cash and cash equivalents totaling $6,949,
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and working capital of $30,827 as of December 31, 1996. The decrease in cash
and cash equivalents was due primarily to an increase in accounts receivable.
The Company has received, and anticipates it will continue to receive, the
majority of its cash from collections on its accounts receivable, which are
generated from its worldwide distributors and a small number of OEMs. These
groups have a history of timely payments; however, the increasing percentage of
international sales tends to increase the aggregate amount of the Company's
accounts receivable due to typically slower payments by international customers.
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.
At June 30, 1997, net accounts receivable had increased by $11,177 from the
balance at December 31, 1996. The increase was directly related to increased
sales of existing products and the introduction of new products late in the
second quarter.
At June 30, 1997, inventories had increased by $3,306 from $13,630 at
December 31, 1996. The increase was due to an increase in printer raw materials
and new supplies products, both related to the new PROe and Croma24 printer
product launches during the quarter.
In the first half of 1997, the Company made capital expenditures of
approximately $4 million, primarily related to new product tooling, computers
and information systems, equipment, and building improvements to support an
increased staff. During the remainder of 1997, the Company plans to increase
its capital expenditures, especially for computers, information systems and
related network assets.
The Company's overall level of operating expense is expected to increase
during the remainder of 1997 in order to provide the resources necessary to keep
pace with anticipated increased revenues, and to fund the development and
marketing of new products. Management believes that its existing cash, cash
generated from operations, and funds available under a bank line of credit will
be sufficient to satisfy its currently anticipated working capital needs through
the end of 1998. 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.
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
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demand for the Company's products. Accordingly, any inaccuracy in forecasting
could adversely affect the Company's results of operations. Demand for the
Company's products could be adversely affected by a slowdown in the overall
demand for computer systems or printer products. The Company's failure to
complete shipments during a quarter could have a material adverse effect on the
Company's results of operations for that quarter. Quarterly results are not
necessarily indicative of future performance for any particular period, and
there can be no assurance that the Company can maintain the levels of revenue
and profitability experienced over the past three years on a quarterly or annual
basis.
HIGHLY COMPETITIVE INDUSTRY - The markets for the Company's products, both
printers and supplies, is highly competitive and rapidly changing and the
Company believes that new competitors will likely enter the market. The
Company's principal competitor 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 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
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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 the quarters ended June 30, 1997 and 1996,
sales outside the United States represented approximately 61% and 60% of the
Company's product sales, respectively. The Company expects export sales to
continue to represent a significant portion of its 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
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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 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 total revenues have increased to $69,236 for the six month period
ended June 30, 1997, compared to $44,370 for the comparable period in 1996.
For the years ended December 31, 1996 and 1995, respectively, total revenues
were $107,437 and $65,548. 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 continue 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
12
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1995, the Company filed a lawsuit against Hewlett-Packard in the
U.S. District Court for the Southern District of California, seeking to have the
court declare that the Company's products do not infringe a Hewlett-Packard
patent, as has been asserted by Hewlett-Packard, and that the patent is invalid.
Hewlett-Packard filed a counterclaim alleging that the Company did infringe the
patent. On July 29, 1997 Hewlett-Packard advised the Company that it had
abandoned all claims of the patent asserted against the Company in the pending
litigation due to a prior invention which invalidated the claims, and that it
had requested that the Court dismiss the lawsuit.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Shareholders was held on July 17, 1997, in
San Diego, California, for the following purposes:
1. The following seven directors were elected to serve a one-year term
that will expire at the Company's 1998 Annual Meeting of Shareholders:
FOR WITHHELD
--- --------
Robert V. Adams 10,421,860 72,904
Craig S. Andrews 10,423,048 71,716
Ronald J. Hall 10,424,270 70,494
Howard L. Jenkins 10,424,395 70,369
Richard A. Plante 10,421,830 72,934
David A. Purcell 10,423,809 70,955
Charles E. Volpe 10,424,335 70,429
2. The shareholders ratified the appointment of Deloitte & Touche LLP as
the Company's independent public accountants for the fiscal year
ending December 31, 1997. The total number of votes cast for, against
and withheld were 10,462,586, 14,821, and 17,357, respectively.
3. The shareholders ratified and approved an amendment to the 1993
Employee Stock Purchase Plan to increase the number of shares
authorized by 120,000 shares to a total of 520,000 shares. The total
number of votes cast for, against and withheld were 8,696,533,
191,583, and 40,994, respectively.
4. The shareholders ratified and approved an amendment to the 1993 Stock
Option/Stock Issuance Plan to increase the number of shares authorized
by 240,000 to a total of
14
<PAGE>
1,799,020 shares. The total number of votes cast for, against and
withheld were 5,951,925, 2,941,849, and 39,630, respectively.
5. The shareholders did not ratify or approve an amendment to the 1993
Stock Option/ Stock Issuance Plan to provide for automatic annual
increases in the number of shares authorized for issuance under the
Plan in an amount equal to two percent of the then outstanding shares
of the Company's Common Stock, with such increases to commence on
January 1, 1998 and to continue on the first day of January of each
year thereafter. The total number of votes cast for, against and
withheld were 4,042,714, 4,844,464, and 46,226, respectively.
6. The shareholders ratified and approved the reincorporation of the
Company in Delaware through the merger of ENCAD, Inc., a California
corporation, with a wholly-owned subsidiary of ENCAD, Inc. The total
number of votes cast for, against and withheld were 6,289,494,
2,285,926, and 58,819, respectively.
7. The shareholders ratified and approved an increase in the number of
shares of Common Stock authorized for issuance by the Delaware company
from 15,000,000 to 60,000,000 shares, concurrently with the Company's
reincorporation in Delaware. The total number of votes cast for,
against and withheld were 7,733,689, 2,476,954, and 33,337,
respectively.
8. The shareholders also ratified and approved an amendment of the
Company's Restated Articles of Incorporation to provide for an
increase in the number of shares of Common Stock authorized for
issuance by the Company from 15,000,000 to 60,000,000, in the event
the proposal for the reincorporation in Delaware was not approved.
The total number of votes cast for, against and withheld were
7,997,928, 2,458,239, and 34,817, respectively.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Earnings Per Share
27 Summary Financial Data
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended June 30, 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 8, 1997
ENCAD, Inc.
(Registrant)
/s/ Todd W. Schmidt
---------------------------------------
(Todd W. Schmidt)
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
EXHIBIT 11.1
ENCAD, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Three months ended Six months ended
June 30, 1997 June 30, 1997
------------------ ----------------
EARNINGS PER SHARE
(in thousands, except for per share amounts)
PRIMARY
Weighted average number of common
shares outstanding 11,364 11,348
Assumed exercise of outstanding stock
options (1) 682 690
-------- --------
Weighted average common and common
equivalent shares 12,046 12,038
-------- --------
-------- --------
Net income $ 4,223 $ 7,917
-------- --------
-------- --------
Primary earnings per share $ .35 $ .66
-------- --------
-------- --------
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding 11,364 11,348
Assumed exercise of outstanding stock
options (1) 714 726
-------- --------
Weighted average common and common
equivalent shares 12,078 12,074
-------- --------
-------- --------
Net income $ 4,223 $ 7,917
-------- --------
-------- --------
Fully diluted earnings per share $ .35 $ .66
-------- --------
-------- --------
(1) Computed using the treasury stock method.
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ENCAD, INC. JUNE
30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,357
<SECURITIES> 0
<RECEIVABLES> 30,809
<ALLOWANCES> 0
<INVENTORY> 16,936
<CURRENT-ASSETS> 57,114
<PP&E> 19,861
<DEPRECIATION> 6,427
<TOTAL-ASSETS> 71,474
<CURRENT-LIABILITIES> 18,320
<BONDS> 0
0
0
<COMMON> 14,679
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 71,474
<SALES> 68,839
<TOTAL-REVENUES> 69,236
<CGS> 36,165
<TOTAL-COSTS> 36,165
<OTHER-EXPENSES> 21,031
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,182
<INCOME-TAX> 4,265
<INCOME-CONTINUING> 7,917
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<EXTRAORDINARY> 0
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<NET-INCOME> 7,917
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
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