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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 September 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
September 30, 1997, was 11,412,530.
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ENCAD, INC.
INDEX PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996. . . . . . . . . . . 3
Consolidated Statements of Income for the
three and nine months ended September 30, 1997 and 1996. . . . 4
Consolidated Statements of Cash Flows for the
nine months ended September 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. . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
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PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCAD, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, December 31,
1997 1996
------------- ------------
(UNAUDITED) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,252 $ 6,949
Accounts receivable 35,035 19,762
Inventories 20,388 13,630
Deferred income taxes 4,259 4,538
Prepaid expenses 1,742 373
--------- ---------
Total current assets 62,676 45,252
PROPERTY - NET 14,519 10,881
OTHER ASSETS 1,225 1,334
--------- ---------
TOTAL $ 78,420 $ 57,467
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,474 $ 8,244
Accrued expenses and other liabilities 6,949 6,181
Borrowings under line of credit 2,000 -
--------- ---------
Total current liabilities 19,423 14,425
--------- ---------
OTHER LIABILITIES 1,054 -
SHAREHOLDERS' EQUITY:
Common stock 15,879 13,338
Accumulated earnings 42,064 29,704
--------- ---------
Total shareholders' equity 57,943 43,042
--------- ---------
TOTAL $ 78,420 $ 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Product sales $ 38,382 $ 30,047 $ 107,221 $ 74,417
Royalty and contract revenue 127 - 524 -
--------- --------- ---------- ---------
TOTAL REVENUE 38,509 30,047 107,745 74,417
COST OF GOODS SOLD 20,409 15,905 56,574 39,068
--------- --------- ---------- ---------
GROSS PROFIT 18,100 14,142 51,171 35,349
MARKETING AND SELLING 6,874 4,594 18,088 11,786
RESEARCH AND DEVELOPMENT 2,487 2,167 8,052 5,936
GENERAL AND ADMINISTRATIVE 1,928 1,787 6,180 4,519
--------- --------- ---------- ---------
11,289 8,548 32,320 22,241
--------- --------- ---------- ---------
INCOME FROM OPERATIONS 6,811 5,594 18,851 13,108
INTEREST (EXPENSE) INCOME - NET (39) 33 103 127
--------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 6,772 5,627 18,954 13,235
PROVISION FOR INCOME TAXES 2,329 1,895 6,594 4,599
--------- --------- ---------- ---------
NET INCOME $ 4,443 $ 3,732 $ 12,360 $ 8,636
--------- --------- ---------- ---------
--------- --------- ---------- ---------
EARNINGS PER SHARE $ 0.37 $ 0.31 $ 1.03 $ 0.73
--------- --------- ---------- ---------
--------- --------- ---------- ---------
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES 12,048 11,940 12,042 11,798
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
4
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ENCAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 12,360 $ 8,636
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation and amortization 2,503 2,077
Tax benefit from exercise of stock options 1,495 401
Changes in assets and liabilities:
Accounts receivable (15,273) (4,013)
Inventories (6,758) (7,615)
Deferred income taxes 279 (1,970)
Prepaid expenses and other assets (1,260) (405)
Accounts payable 2,230 3,163
Accrued expenses and other liabilities 1,822 2,463
--------- --------
Cash (used in) provided by operating activities (2,602) 2,737
--------- --------
INVESTING ACTIVITIES:
Purchases of property (6,141) (9,097)
Net cash from short-term investments - 6,072
--------- --------
Cash used in investing activities (6,141) (3,025)
--------- --------
FINANCING ACTIVITIES:
Exercise of common stock options and sale of stock under
employee stock purchase plan 1,046 486
Net borrowings under line of credit 2,000 -
--------- --------
Cash provided by financing activities 3,046 486
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,697) 198
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,949 3,067
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,252 $ 3,265
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 3,195 $ 4,769
</TABLE>
See notes to consolidated financial statements.
5
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ENCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
1) BASIS OF PRESENTATION - The accompanying consolidated financial
statements as of September 30, 1997 and for the three and nine month
periods ended September 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 nine months ended September 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)
SEPTEMBER 30, December 31,
1997 1996
------------- ------------
Raw materials $ 13,734 $ 7,247
Work-in-process 374 253
Finished goods 6,280 6,130
----------- ----------
Total $ 20,388 $ 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) NEW ACCOUNTING STANDARDS - 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 nine month periods ended September 30, 1997
and 1996, basic and diluted earnings per share would have been as
follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
Earnings per share - basic $ 0.39 $ 0.33 $ 1.09 $ 0.77
Earnings per share - diluted $ 0.37 $ 0.31 $ 1.03 $ 0.73
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130").
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SFAS No. 130 establishes standards for reporting and display of
comprehensive income and it's components in financial statements.
Comprehensive income is defined as "the change in equity (net assets) of
a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners
and distributions to owners." SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company believes that the
adoption of SFAS No. 130 will not have a material effect on the
financial statements or disclosures of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about it's
products, services, geographic areas, and major customers. SFAS No. 131
is effective for periods beginning after December 15, 1997. The Company
believes that the adoption of SFAS No. 131 will not have a material
effect on the financial statements or disclosures of the Company.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------
Product sales 99.7% 100.0% 99.5% 100.0%
Royalty and contract revenue 0.3% 0.0% 0.5% 0.0%
------ ------ ------ ------
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 53.0% 52.9% 52.5% 52.5%
------ ------ ------ ------
Gross profit 47.0% 47.1% 47.5% 47.5%
Marketing and selling 17.8% 15.4% 16.8% 15.8%
Research and development 6.5% 7.2% 7.5% 8.0%
General and administrative 5.0% 5.9% 5.7% 6.1%
------ ------ ------ ------
Income from operations 17.7% 18.6% 17.5% 17.6%
Interest (expense) income - net (0.1%) 0.1% 0.1% 0.2%
------ ------ ------ ------
Income before income taxes 17.6% 18.7% 17.6% 17.8%
Provision for income taxes 6.1% 6.3% 6.1% 6.2%
------ ------ ------ ------
Net income 11.5% 12.4% 11.5% 11.6%
------ ------ ------ ------
------ ------ ------ ------
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 three months and nine months ended
September 30, 1997 increased by 28% and 45%, respectively, over the same
periods in 1996. Revenue growth was enhanced by the late second quarter
introduction of two new product lines, the NovaJet-Registered Trademark- PROe
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Series and the ENCAD Croma24-TM-(1). Also contributing to the Company's
growth during the third quarter and first nine months of 1997 was the
continued success of its ink, cartridge and media ("supplies") products,
which represented 21% and 20%, respectively, of total revenue compared to 15%
and 12%, respectively, during the same periods of 1996. The Company's
multiple original equipment manufacturer ("OEM") arrangements contributed to
the increase in product sales for the third quarter and first nine months of
1997, and accounted for 25% and 24%, respectively, of product sales as
compared to 27% and 25%, respectively, for the comparable periods of 1996.
For the third quarter of 1997, no one customer accounted for more than 10%
of product sales whereas one customer accounted for 12% of product sales
during the same quarter of 1996. This same customer accounted for 12% and
14%, respectively, of product sales for the nine months ended September 30,
1997 and 1996 International sales accounted for approximately 57% and 58% of
the Company's product sales for the three months and nine months ended
September 30, 1997, respectively, compared to 58% and 60% 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 remained
essentially constant, increasing from 52.9% in the third quarter of 1996 to
53.0% in the third quarter of 1997. For the nine months ended September 30,
1997 and 1996 cost of goods sold as a percentage of total revenue remained
constant at 52.5%. The Company anticipates a flat or slightly lower gross
profit percentage for the last quarter of 1997 due to overall lower average
unit selling prices for its printer product line, and increased sales of
supplies.
MARKETING AND SELLING - Marketing and selling expenses for the three
months and nine months ended September 30, 1997 increased $2,280 and $6,302,
respectively, over the comparable periods in 1996. These expenses
represented 17.8% and 16.8%, respectively, of total revenue, as compared to
15.4% and 15.8%, respectively, of total revenue for the third quarter and
first nine months of 1996. Most of the increase in absolute dollars was
related to costs associated with promoting the Company's new product lines
through product advertising and tradeshow attendance and increased staffing.
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 three
months and nine months ended September 30, 1997 increased $320 and $2,116,
respectively, over the comparable periods in 1996. These expenses
represented 6.5% and 7.5%, of total revenue, respectively, for the third
quarter and first nine months of 1997 as compared to 7.2% and 8.0%,
respectively, for the comparable periods of 1996. The increase in absolute
dollar 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
third quarter and first nine months of 1997 represented 5.0% and 5.7%,
respectively, of total revenue, as compared to 5.9% and 6.1%, respectively,
for the comparable 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. The Company
- ---------------
(1) NovaJet and Croma24 are trademarks of ENCAD, Inc.
8
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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
34.4% and 34.8%, respectively, for the three months and the nine months ended
September 30, 1997, compared to 33.7% and 34.7%, respectively, for the same
periods of 1996. The increase in the effective tax rate for the three months
ended September 30, 1997 over the same period of 1996 is due to the Company
reaching a higher tax bracket during 1997.
NET INCOME - Net income for the three months and nine months ended
September 30, 1997 increased 19% and 43%, respectively, over the same periods
of 1996. Net income represented 11.5% of total revenue for both the three
months and the nine months ended September 30, 1997 as compared to 12.4% and
11.6%, respectively, for the comparable periods in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily through cash flow provided from
operations. As of September 30, 1997, the Company had cash and cash
equivalents totaling $1,252, and working capital of $43,253. In comparison,
the Company had cash and cash equivalents totaling $6,949, 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 both accounts receivable and
inventories.
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, international sales tend
to increase the aggregate amount of the Company's accounts receivable due to
slower payments by these international customers.
At September 30, 1997, net accounts receivable had increased by $15,273
from the balance at December 31, 1996. Accounts receivable increased due to
the high volume of sales made in the last month of the third quarter and the
continued sales expansion of the international customer base.
At September 30, 1997, inventories had increased by $6,758 from the
December 31, 1996 balance. The increase was due to an increase in raw
materials to support anticipated fourth quarter demand for printers and new
supplies products, both primarily related to the new NovaJet PROe Series and
ENCAD Croma24 printer products.
At September 30, 1997, prepaid expenses and other assets had increased by
$1,260 from the balance at December 31, 1996. The increase was due primarily
to prepaid royalties related to image processing software shipped with some
of the new ENCAD Croma24 printer units and translation costs related to
manuals shipped with both the new printer lines.
During the first nine months of 1997, the Company made capital
expenditures of approximately $6,000, primarily related to new product
tooling, expenditures for computers and information systems, engineering
equipment, and building improvements, all necessary to support an increased
staff and new products.
At September 30, 1997, the Company had available a $12,000 revolving line
of credit (the "Line") which provides for interest at the bank's prime rate
or 2.25% over the London Interbank Overnight Rate on outstanding balances.
The Line has certain operating covenants, including financial ratios and
working capital and net worth restrictions. At September 30, 1997,
9
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borrowings outstanding under the Line were $2,000, an increase of $2,000 from
December 31, 1996. The Line expires on January 2, 1999.
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
support 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 the Line will be
sufficient to satisfy its currently anticipated working capital needs through
the end of 1998. Actual cash requirements may vary from planned amounts. 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 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, printer products or digitally printed images.
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.
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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.
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 September 30, 1997 and
1996, sales outside the United States represented approximately 57% and 58%
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
11
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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 key employees
could adversely affect the Company. Although the Company has severance
arrangements with its senior management team, it does not have employment
agreements with members of 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.
12
<PAGE>
MANAGEMENT OF GROWTH - The Company has recently experienced significant
growth as total revenues have increased to $107,745 for the nine month
period ended September 30, 1997, compared to $74,417 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, employees, 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 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
demand 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
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Earnings Per Share
27 Summary Financial Data
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1997
ENCAD, Inc.
(Registrant)
/s/ TODD W. SCHMIDT
--------------------------------------
(Todd W. Schmidt)
Vice President, Chief Financial
Officer (Principal Financial and
Accounting Officer)
14
<PAGE>
EXHIBIT 11.1
ENCAD, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Three months ended Nine months ended
September 30, 1997 September 30, 1997
------------------ ------------------
EARNINGS PER SHARE
(in thousands, except for
per share amounts)
PRIMARY
Weighted average number of common
shares outstanding 11,400 11,365
Assumed exercise of outstanding stock
options (1) 648 677
-------- ---------
Weighted average common and common
equivalent shares 12,048 12,042
-------- ---------
-------- ---------
Net income $ 4,443 $ 12,360
-------- ---------
-------- ---------
Primary earnings per share $ .37 $ 1.03
-------- ---------
-------- ---------
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding 11,400 11,365
Assumed exercise of outstanding stock
options (1) 648 676
-------- ---------
Weighted average common and common
equivalent shares 12,048 12,041
-------- ---------
-------- ---------
Net income $ 4,443 $ 12,360
-------- ---------
-------- ---------
Fully diluted earnings per share $ .37 $ 1.03
-------- ---------
-------- ---------
(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.
September 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,252
<SECURITIES> 0
<RECEIVABLES> 35,035
<ALLOWANCES> 0
<INVENTORY> 20,388
<CURRENT-ASSETS> 62,676
<PP&E> 21,858
<DEPRECIATION> 7,339
<TOTAL-ASSETS> 78,420
<CURRENT-LIABILITIES> 19,423
<BONDS> 0
0
0
<COMMON> 15,879
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 78,420
<SALES> 107,221
<TOTAL-REVENUES> 107,745
<CGS> 56,574
<TOTAL-COSTS> 56,574
<OTHER-EXPENSES> 32,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,954
<INCOME-TAX> 6,594
<INCOME-CONTINUING> 12,360
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,360
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
