-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, It1C20pqws17TO35lcuiiW/5BMKPwVXTEIQFUmHsALs28UyZXOAWSD79B5tJ3TY1 4xuC2qYSLT5BdBshK5aEIQ== 0001047469-97-004519.txt : 19971117 0001047469-97-004519.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004519 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENCAD INC CENTRAL INDEX KEY: 0000913599 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 953672088 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23034 FILM NUMBER: 97717779 BUSINESS ADDRESS: STREET 1: 6059 CORNERSTONE COURT W CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6196775179 MAIL ADDRESS: STREET 1: 6059 CORNERSTONE COURT WEST CITY: SANSAN DIEGO STATE: CA ZIP: 92122 10-Q 1 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 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. 3 ENCAD, INC. CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (in thousands, except for per share amounts)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996 -------------- -------------- --------------- ------------- 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 --------- --------- ---------- --------- --------- --------- ---------- ---------
See Notes to Consolidated Financial Statements. 4 ENCAD, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ------------- ------------- 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
See notes to consolidated financial statements. 5 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"). 6 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 7 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 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 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. 10 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 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 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 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 EX-11.1 2 EXHIBIT 11.1 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 EX-27 3 EXHIBIT 27
5 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. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1,252 0 35,035 0 20,388 62,676 21,858 7,339 78,420 19,423 0 0 0 15,879 0 78,420 107,221 107,745 56,574 56,574 32,320 0 0 18,954 6,594 12,360 0 0 0 12,360 1.03 1.03
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