<PAGE>
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 March 31, 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, 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 March
31, 1997, was 11,340,030.
<PAGE>
ENCAD, INC.
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . 3
Consolidated Statements of Income for the
three months ended March 31, 1997 and 1996 . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . .7-13
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
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCAD, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands) MARCH 31, December 31,
1997 1996
---------- -------------
(UNAUDITED) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,695 $ 6,949
Accounts receivable 23,404 19,762
Inventories 13,890 13,630
Deferred income taxes 4,681 4,538
Prepaid expenses 891 373
---------- ----------
Total current assets 48,561 45,252
PROPERTY - net 12,299 10,881
OTHER ASSETS 1,528 1,334
---------- ----------
TOTAL $ 62,388 $ 57,467
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,879 $ 8,244
Accrued expenses and other liabilities $ 6,538 6,181
---------- ----------
Total current liabilities 14,417 14,425
---------- ----------
OTHER LIABILITIES 719 -
SHAREHOLDERS' EQUITY:
Common stock 13,854 13,338
Accumulated earnings 33,398 29,704
---------- ----------
Total shareholders' equity 47,252 43,042
---------- ----------
TOTAL $ 62,388 $ 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.
3
<PAGE>
ENCAD, Inc.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(in thousands, except for per share amounts)
THREE MONTHS ENDED MARCH 31,
1997 1996
---------- ----------
REVENUE
Product sales $ 31,341 $ 19,618
Royalty and contract revenue 170 -
---------- ----------
TOTAL REVENUE 31,511 19,618
COST OF GOODS SOLD 16,105 10,401
---------- ----------
GROSS PROFIT 15,406 9,217
MARKETING AND SELLING 5,114 3,127
RESEARCH AND DEVELOPMENT 2,790 1,633
GENERAL AND ADMINISTRATIVE 1,860 1,300
---------- ----------
9,764 6,060
---------- ----------
INCOME FROM OPERATIONS 5,642 3,157
INTEREST INCOME - NET 64 70
---------- ----------
INCOME BEFORE INCOME TAXES 5,706 3,227
PROVISION FOR INCOME TAXES 2,012 1,128
---------- ----------
NET INCOME $ 3,694 $ 2,099
---------- ----------
---------- ----------
EARNINGS PER SHARE $ 0.31 $ 0.18
---------- ----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES 12,028 11,434
---------- ----------
---------- ----------
See notes to consolidated financial statements.
4
<PAGE>
ENCAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
THREE MONTHS ENDED MARCH 31,
1997 1996
---------- ----------
OPERATING ACTIVITIES:
Net income $ 3,694 $ 2,099
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 624 516
Provision for losses on accounts
receivable and inventories (200) 489
Tax benefit from exercise of
stock options 311 167
Changes in assets and liabilities:
Accounts receivable (3,642) (2,575)
Inventories (60) (1,720)
Deferred income taxes (143) (61)
Prepaid expenses and other assets (712) (77)
Accounts payable (365) 656
Accrued expenses and other liabilities 1,076 650
---------- ----------
Cash provided by operating activities 583 144
---------- ----------
INVESTING ACTIVITIES:
Purchases of property (2,042) (7,124)
Net Cash from Short-Term Investments - 5,272
---------- ----------
Cash used in investing activities (2,042) (1,852)
---------- ----------
FINANCING ACTIVITIES:
Exercise of common stock options and sale
of stock under employee stock purchase plan 205 177
---------- ----------
Cash provided by financing activities 205 177
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,254) (1,531)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,949 3,067
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,695 $ 1,536
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for income
taxes $ 105 $ 94
See notes to consolidated financial statements.
5
<PAGE>
ENCAD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
1) The accompanying consolidated financial statements as of March 31, 1997 and
for the three month periods ended March 31, 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 fiscal year ended December 31, 1996. The results of operations for the
three months ended March 31, 1997, are not necessarily indicative of the
results for the entire fiscal 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) March 31, December 31,
1997 1996
---------- ----------
Raw materials $ 6,028 $ 7,247
Work-in-process 44 253
Finished goods 7,818 6,130
---------- ----------
Total $ 13,890 $ 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 ("SFAS") No. 128,
"Earnings Per Share." This statement specifies the computation,
presentation, and disclosure requirements for earnings per share for
entities with publicly held Common Stock. SFAS No. 128 is not in effect
for the first quarter of 1997, but will be in effect for the year ended
December 31, 1997. The Company does not expect the adoption of SFAS No.
128 to have a material effect on its financial statements.
6
<PAGE>
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 MARCH 31,
----------------------------
1997 1996
- --------------------------------------------------------------------------------
PRODUCT SALES 99% 100%
ROYALTY AND CONTRACT REVENUE 1% -
---------- ----------
TOTAL REVENUE 100% 100%
COST OF GOODS SOLD 51% 53%
---------- ----------
GROSS PROFIT 49% 47%
MARKETING AND SELLING 16% 16%
RESEARCH AND DEVELOPMENT 9% 8%
GENERAL AND ADMINISTRATIVE 6% 7%
---------- ----------
INCOME FROM OPERATIONS 18% 16%
INTEREST INCOME - NET 0% 0%
---------- ----------
INCOME BEFORE INCOME TAXES 18% 16%
PROVISION FOR INCOME TAXES 6% 6%
---------- ----------
NET INCOME 12% 10%
---------- ----------
---------- ----------
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 first quarter of 1997 increased to
$31,511, up 60% compared to the same quarter in 1996. The increase is primarily
attributable to an increased sales volume of the Company's NovaJet product line,
including sales of the NovaJet Pro and NovaJet Pro 50 which were introduced in
November of 1995 and February of 1996, respectively. Also contributing to the
Company's growth was the continued success of its ink and media ("supplies")
products. The Company's multiple original equipment manufacturers ("OEM")
arrangements contributed to the increase in product sales for the first quarter
of 1997, accounting for 27% of product sales as compared to 24% for the same
period of 1996.
For the first quarter of 1997, one customer accounted for 16% of product
sales whereas this customer accounted for 11% of product sales during the same
quarter of 1996. International sales accounted for approximately 56% and 62% of
the Company's product sales for the first quarter of 1997 and the same quarter
of 1996, respectively.
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 product sales decreased to 51%
for the first quarter of 1997, from 53% for the same quarter of
7
<PAGE>
1996, causing a comparable increase in gross margin percentages. The decrease
in the cost of goods sold 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
margins for the remainder of 1997 due to lower average unit selling prices,
increased sales of new products and supplies, which, in general, have lower
gross margins than the NovaJet products and higher technical support costs. 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.
MARKETING AND SELLING - Marketing and selling expenses for the first
quarter of 1997 remained constant at 16% of total revenue when compared to the
same quarter of 1996 and grew by 64% in absolute dollars over the same quarter
of 1996. Most of the increase was related to costs associated with increased
staffing, product advertising and increased emphasis on promoting the Company's
supplies business. Marketing and selling are expected to continue to increase
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 first
quarter of 1997 grew by 71% in absolute dollars from the same quarter of 1996
and stood at 9% of revenue for the first quarter of 1997 versus 8% for the same
quarter of 1996. The increase in spending was driven by increased product 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
first quarter of 1997 decreased to 6% of total revenue, compared to 7% of
total revenue for the same quarter of 1996. The 43% increase in absolute
dollars was due primarily to increased staffing levels necessary to support
an increased level of business. 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 first quarter effective tax rate
remained at 35% for both quarters.
NET INCOME - Net income for the first quarter of 1997 increased 76% over
the same period of 1996, and stood at 12% of revenue for the first quarter of
1997 compared with 10% for the same quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily through cash flow provided from
operations. As of March 31, 1997, the Company had cash and cash equivalents
totaling $5,695, and working capital of $34,144. 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 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.
8
<PAGE>
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 March 31, 1997, net accounts receivable increased by $3,642 from 1996's
year end balance. The increase was directly related to slower collections of
outstanding balances, particularly in Europe and Latin America.
Inventory levels at March 31, 1997, of $13,890 remained relatively constant
when compared to inventory levels of $13,630 at December 31, 1996.
In the three month periods ended March 31, 1997, and 1996, the Company had
capital expenditures of $2,042 and $7,124, respectively. The capital
expenditures for the quarter ended March 31, 1996, included approximately $6,000
for the purchase of the Company's headquarter facilities. During the remainder
of 1997, 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
during the remainder of 1997 due to increased revenues and the development and
marketing of new products. Management believes that its existing cash, cash
equivalents, 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 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.
9
<PAGE>
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 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
10
<PAGE>
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 first quarters of 1997 and 1996, sales
outside the United States represented approximately 56% and 62% 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
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
11
<PAGE>
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 $31,511 for the first quarter of
1997, compared to $19,618 for the same quarter 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 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
12
<PAGE>
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 March 31, 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: May 5, 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
March 31, 1997
------------------
EARNINGS PER SHARE
(in thousands, except for per share amounts)
PRIMARY
Weighted average number of common
shares outstanding 11,331
Assumed exercise of outstanding stock
options (1) 697
----------
Weighted average common and common
equivalent shares 12,028
----------
----------
Net income $ 3,694
----------
----------
Primary earnings per share $ .31
----------
----------
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding 11,331
Assumed exercise of outstanding stock
options (1) 697
----------
Weighted average common and common
equivalent shares 12,028
----------
----------
Net income $ 3,694
----------
----------
Fully diluted earnings per share $ .31
----------
----------
(1) Computed using the treasury stock method.
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ENCAD,
INC., MARCH 31, 1997 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,695
<SECURITIES> 0
<RECEIVABLES> 23,404
<ALLOWANCES> 0
<INVENTORY> 13,890
<CURRENT-ASSETS> 48,561
<PP&E> 17,919
<DEPRECIATION> 5,620
<TOTAL-ASSETS> 62,388
<CURRENT-LIABILITIES> 14,417
<BONDS> 0
0
0
<COMMON> 13,854
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 62,388
<SALES> 31,341
<TOTAL-REVENUES> 31,511
<CGS> 16,105
<TOTAL-COSTS> 16,105
<OTHER-EXPENSES> 9,764
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,706
<INCOME-TAX> 2,012
<INCOME-CONTINUING> 3,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,694
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
