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ENCAD Reports 3Q Results, Sales Increase by 8%

Press release from the issuing company

SAN DIEGO, Oct. 24 -- ENCAD, Inc. today reported sales of $19,724,000 in the third quarter of 2001, an increase of 8% over sales of $18,285,000 in the third quarter of 2000. Net loss for the quarter ended September 30, 2001 was $3,656,000 or $.31 per share, compared to a net loss of $10,613,000 or $.90 per share in the same quarter last year. Third quarter 2001 sales reflected the continued market acceptance of ENCAD's NovaJet 850 printer and initial sales of the NovaJet 736 graphics printer. Overall dealer sales for the quarter were roughly equivalent to the same period last year with decreased sales in Asia and Europe offset by increased sales in the Americas. OEM sales increased by 61% over the third quarter of 2000 and stood at 23% of sales as compared to 15% for the third quarter 2000. Sales continued to be impacted by softness in worldwide economies and continuing competitive pressures, resulting in lower average selling prices and lower gross margins. Third quarter supplies sales of $10,155,000 increased by 13% over the $8,966,000 of sales recorded in the third quarter of last year due primarily to growth in ink revenue. International sales accounted for 61% of total sales in the third quarter 2001, versus 60% in the comparable period of 2000. As a percentage of sales, Asia and Europe were 12% and 38%, respectively, versus 20% and 31%, respectively, in the comparable period of 2000. Gross profit as a percent of sales for the third quarter of 2001 was 27% as compared to 32% in the third quarter 2000. The percentage decrease in the 2001 period as compared to 2000 was due primarily to the lower average selling prices for printers, an increase in inventory reserves, and an increase in the supplies warranty reserve. The following year-to-year comparisons can be made relative to operating expenses, excluding one-time severance and litigation settlement charges of approximately $2,978,000 recorded in operating expenses in the third quarter 2000: * Operating expenses for the third quarter 2001 decreased by approximately 24% from the comparable quarter in 2000; * Marketing and selling expenses declined 16% from the same period in 2000 due to reduced expenses for labor and benefits, travel, advertising, and promotions; * Research and development expenses declined by 21% compared to third quarter 2000 amounts (which included the abandonment of a project) due to reduced expenses for labor and benefits, offset by an increase in prototype costs related to a new product; * General and administrative expenses were below third quarter 2000 amounts by 43% due primarily to reduced expenses for labor and benefits, lower legal expenses, and decreased spending for consulting and professional services. At September 30, 2001, ENCAD's cash and cash equivalents decreased to $9,273,000 from $17,123,000 at December 31, 2000 and $10,984,000 at June 30, 2001. The decrease resulted from an increase in inventories, a reduction of accrued expenses, and the net loss. Collections continue to be strong as accounts receivable declined to $14,448,000 at September 30, 2001 from $16,738,000 at December 31, 2000 and $15,645,000 at June 30, 2001. Days sales outstanding (the average number of days required to collect a receivable) were at 70 days at the end of the third quarter of 2001 versus 92 days for the comparable quarter of 2000 and 63 days at June 30, 2001. Inventories at September 30, 2001 totaled $15,868,000 compared to $14,608,000 at December 31, 2000 and $17,572,000 at June 30, 2001. The increase over year-end balances was due primarily to an increase in printer and accessories inventory to support sales for the remainder of the year. Inventory turnover for the third quarter of 2001 was 3.4 times per year as compared to 3.4 turns for the third quarter of 2000 and 3.8 turns for the second quarter 2001. Staffing currently stands at 316 employees versus 331 at June 30, 2001, and 378 at September 30, 2000, a reduction of 5% and 16%, respectively. Commenting on the Company's performance, Terry Vandewarker, President and Chief Executive Officer, stated, "The third quarter has traditionally been ENCAD's slowest sales quarter and 2001 proved to be no exception. Although our sales performance exceeded that of the third quarter of 2000, it was below our expectations. There is no doubt that deteriorating global economic conditions and continuing competitive pressures have impacted our sales and profitability. We are, nevertheless, very encouraged by the continued improvement in sales of our Quality Imaging Supplies. We are also pleased with the results of the actions we took to control our expenses. Our operating expenses of $8.9 million for the third quarter are significantly below prior quarter amounts and were in line with our expectations.'' Vandewarker continued, "In the past three months we have announced two exciting new printers -- the NovaJet 736 graphics printer and the NovaJet 880 ''flatbed" printer. The NovaJet 736 enables us to address the market segment that requires a smaller and lower-priced printer. The NovaJet 880, announced in late September, establishes a new paradigm for wide-format printing. Users printing on flexible or rigid media will experience immediate workflow and cost savings with the elimination of media mounting costs. Examples of flexible media that can be used include heavy art papers, thick canvas, and fabric banner materials. Rigid substrates such as foam board, art board, poster board, card stock and inkjet coated aluminum can also be used. "Although we believe that the global economy will continue to be weak for the next several quarters, we also believe that with our expanded product lines and the lowering of our cost structure, we will be able to effectively compete in this difficult environment. We will continue to take decisive steps to align our cost structure to the changing requirements of the market,'' added Vandewarker.

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