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ENCAD Reports 2Q Loss of $2.3 Million Includes Impact of a 13% Staff Reduction

Friday, July 27, 2001

Press release from the issuing company

SAN DIEGO, July 26 ENCAD, Inc. today reported a net loss of $2,257,000 or $.19 per share for the quarter ended June 30, 2001, which included one-time severance costs of approximately $1,059,000. In the second quarter of 2000, the Company reported a net loss of $449,000, or $.04 per share. Sales totaled $23,454,000 in the second quarter of 2001, down 12% from the $26,685,000 reported in the second quarter of 2000. Sequentially, second quarter 2001 results, when adjusted for the impact of the one-time severance costs, showed an improvement over first quarter 2001, when ENCAD lost $1,977,000 on sales of $23,216,000. In spite of improved OEM sales, second quarter 2001 sales were down from the same period last year due largely to lower levels of dealer sales in the US and Europe, which continued to be impacted by the change from a two-tier to a one-tier distribution model. The Company was also impacted by softness in the economy, increasing competitive pressures, and lower average selling prices, resulting in lower gross margins, which are expected to continue into future quarters. Second quarter supplies sales of $10,641,000 increased by 10% over the $9,704,000 of supplies sales recorded in the second quarter last year with both ink and media products increasing. OEM sales accounted for 23% of total sales for the second quarter of 2001, compared to 16% for the same period last year. International sales accounted for 61% of total sales in the second quarter of 2001, versus 58% in the comparable period of 2000. As a percentage of sales, Asia and Europe were 22% and 30%, respectively, identical with those reported in the second quarter of 2000. During the quarter, ENCAD recorded one-time severance costs resulting from a 13% reduction in its workforce. This action was taken to realign the Company's cost structure in light of the weakened economy, increased competition and lower gross margins. The severance costs were classified as $216,000 to cost of sales, $352,000 to marketing and selling expense, $151,000 to research and development expense, and $340,000 to general and administrative expense. Gross profit as a percent of sales for the second quarter of 2001 was 32.9% as compared to 42.0% in the second quarter of 2000. The decrease was due primarily to lower average selling prices for printers, severance costs, and an unfavorable manufacturing overhead variance. Total operating expenses of $9,874,000 for the quarter ended June 30, 2001 were down 16% from the $11,797,000 recorded in the second quarter of 2000. Marketing and selling expenses declined 17% from the same period in 2000 due to reduced expenses for labor and benefits, travel, trade shows, and promotions, offset by the severance charge. Research and development expenses increased by 14% compared to second quarter 2000 amounts due to the severance charge, as well as increased product prototype costs. General and administrative expenses were below June 30, 2000 amounts by 37% due primarily to reduced expenses for labor and benefits and lower legal expenses associated with litigation that was settled in the second quarter of 2000, offset by the severance charge. As a result of the reduction in workforce and other positions eliminated during the quarter, ENCAD currently employs 331 employees versus 380 at March 31, 2001 and 419 at June 30, 2000, a reduction of 13% and 21%, respectively. At June 30, 2001, ENCAD's cash and cash equivalents decreased to $10,984,000 from $17,123,000 at December 31, 2000. The decrease resulted from an increase in inventories, a reduction of accrued expenses, and the six-month loss. Collections continue to be strong as accounts receivable declined to $15,645,000 at June 30, 2001 from $16,738,000 at December 31, 2000. Days sales outstanding (the average number of days required to collect a receivable) were at 63 days at the end of the second quarter of 2001 versus 82 days for the comparable quarter of 2000. Inventories at June 30, 2001 totaled $17,572,000 compared to $14,608,000 at December 31, 2000. This increase was due primarily to an increase in printer and accessories inventory to support sales for the remainder of the year. Inventory turnover for the second quarter of 2001 was 3.8 times per year as compared to 4.5 turns for the second quarter of 2000. Commenting on the Company's workforce reduction, Terry Vandewarker, President and Chief Executive Officer, stated, "The current soft economic environment, continuing issues with moving to a one-tier distribution model, and faster than expected printer price erosion in our key markets all contributed to our decision to reduce expenses beyond the reductions we had initiated in the first quarter. We estimate that this workforce reduction and additional employee turnover in the second quarter have lowered our annual labor and benefit expense by over $4.5 million. In addition, we have taken steps to eliminate or minimize other discretionary spending and monitor and control those expenditures which are necessary. We have strengthened our management accountability and controls and have established a highly disciplined system of expense authorization and control. These controls and the related discipline is evident in our second quarter operating expenses, which when adjusted for the one-time severance costs, totaled $9,031,000 compared to $11,237,000 in the first quarter of 2001, a reduction of 20%. We will continue to aggressively attack our costs in the upcoming quarters, as we continue to introduce new products and build our channel.'' Vandewarker continued, "Second quarter printer unit sales of ENCAD's principal product focus -- 50'' to 60" printers -- grew compared to the same quarter of last year and compared to first quarter of this year. This group of printers represents our highest gross margin products and generates the largest amount of supply sales. There was, however, softness in revenues from smaller and older platforms. The Company will address the market segments for these smaller and lower-priced products with a lower cost product -- the NovaJet 736 -- (which was announced today). We believe that our broad, competitive product offering, strong channel partners, outstanding OEM relationships, experienced and committed employee workforce, and this significant lowering of our cost structure will enable us to compete in the current economic and competitive environment and to return to profitability in the future.''




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