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 quarterly period ended June 27, 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 1-9348
QMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0737870
State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
ONE MAGNUM PASS, MOBILE, AL 36618
(Address of principal executive offices) (Zip Code)
(334) 633-4300
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of the issuer's common stock, as of the latest practicable date
10,697,065 at July 25, 1997.
<TABLE>
<CAPTION>
QMS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of June 27, 1997 and
September 27, 1996 3 - 4
Condensed Consolidated Statements of Operations
(unaudited) for the three and nine months ended
June 27, 1997 and June 28, 1996 5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
June 27, 1997 and June 28, 1996 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 12
PART II - OTHER INFORMATION 13
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. (a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 14
</TABLE>
<TABLE>
<CAPTION>
QMS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 27, 1997 and September 27, 1996
(Unaudited)
June 27, September 27,
in thousands 1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 670 $ 190
Trade Receivables (less allowance for doubtful
accounts of $364 at June 1997 and $383
at September 1996) 21,173 24,145
Note Receivable 277 667
Inventories, Net (Note 3) 24,600 28,366
Other Current Assets 3,258 2,908
------------- -------------
Total Current Assets 49,978 56,276
------------- -------------
PROPERTY, PLANT AND EQUIPMENT 43,056 62,534
Less Accumulated Depreciation 37,278 42,252
------------- -------------
Property, Plant and Equipment, Net 5,778 20,282
NOTES RECEIVABLE, NET 3,600 4,267
CAPITALIZED AND DEFERRED SOFTWARE 11,072 9,528
OTHER ASSETS, NET 2,004 1,365
------------- -------------
TOTAL ASSETS $ 72,432 $ 91,718
============= =============
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 27, 1997 and September 27, 1996
(Unaudited)
<S> <C> <C>
June 27, September 27,
in thousands 1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 7,811 $ 7,463
Revolving Credit Loan and Short-Term Debt (Note 4) 2,311 14,432
Other Current Liabilities (Note 5) 17,099 17,146
------------- -------------
Total Current Liabilities 27,221 39,041
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 469 531
OTHER LIABILITIES (Note 6) 6,533 4,714
STOCKHOLDERS' EQUITY 38,209 47,432
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,432 $ 91,718
============= =============
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 27, 1997 and June 28, 1996
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
in thousands, except per share amounts 1997 1996 1997 1996
NET SALES
Printers and Supplies $ 23,968 $ 29,663 $ 69,570 $ 88,320
U.S. Service 8,415 8,555 25,168 24,645
----------- ----------- ----------- ---------
Total Net Sales 32,383 38,218 94,738 112,965
----------- ----------- ----------- ---------
COST OF GOODS SOLD
Printers and Supplies 18,930 20,377 53,520 60,650
U.S. Service 5,591 5,225 16,307 14,843
----------- ----------- ----------- ---------
Total Cost of Goods Sold 24,521 25,602 69,827 75,493
----------- ----------- ----------- ---------
GROSS PROFIT
Printers and Supplies 5,038 9,286 16,050 27,670
U.S. Service 2,824 3,330 8,861 9,802
----------- ----------- ----------- ---------
Total Gross Profit 7,862 12,616 24,911 37,472
----------- ----------- ----------- ---------
OPERATING EXPENSES
Selling, General and Administrative
Expenses 11,042 11,041 31,731 32,895
Management Transition Expense (Note 8) 2,168 0 2,168 0
----------- ----------- ----------- ---------
Total Operating Expenses 13,210 11,041 33,899 32,895
----------- ----------- ----------- ---------
OPERATING INCOME (LOSS) (5,348) 1,575 (8,988) 4,577
----------- ----------- ----------- ---------
OTHER INCOME (EXPENSE)
Interest Income 85 91 273 261
Interest Expense (72) (410) (620) (1,435)
Miscellaneous Expense (117) (123) (441) (594)
----------- ----------- ----------- ---------
Total Other Expense (104) (442) (788) (1,768)
----------- ----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (5,452) 1,133 (9,776) 2,809
INCOME TAX BENEFIT 0 (488) 0 (488)
----------- ----------- ----------- ---------
NET INCOME (LOSS) $ (5,452) $ 1,621 $ (9,776) $ 3,297
=========== =========== =========== =========
EARNINGS (LOSS) PER
COMMON SHARE (Note 2)
Primary and Fully Diluted $ (0.51) $ 0.15 $ (0. 91) $ 0.31
SHARES USED IN PER SHARE
COMPUTATION (Note 2)
Primary 10,697 10,759 10,696 10,719
Fully Diluted 10,697 10,759 10,696 10,758
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 27, 1997 and June 28, 1996
(Unaudited)
June 27, June 28,
in thousands 1997 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ (9,776) $ 3,297
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation of Property, Plant and Equipment 3,577 4,051
Amortization of Capitalized and Deferred Software 4,898 3,237
Provision for Losses on Inventory 2,974 6,872
Decrease in Accounts Receivable 2,833 11,870
Increase in Inventory 795 8,579
Decrease in Other Current Liabilities (1,519) (23,438)
Increase in Other Long-Term Liabilities 3,319 1,227
Net Change in Other Assets and Liabilities that Provided Cash (917) 1,386
------------ -------
Net Cash Provided by Operating Activities 6,184 17,081
------------ -------
Cash Flows from Investing Activities:
Additions to Notes Receivable 0 (7,500)
Collections of Notes Receivable 1,057 1,500
Purchase of Property, Plant and Equipment (1,281) (1,562)
Proceeds from Disposal of Property, Plant and Equipment 12,592 0
Additions to Capitalized and Deferred Software Costs (6,442) (5,173)
Proceeds from Divestiture of Businesses 0 9,300
Other 0 310
------------ -------
Net Cash Provided by (Used in) Investing Activities 5,926 (3,125)
------------ -------
Cash Flows from Financing Activities:
Proceeds from Debt and Capital Lease Obligations 318 12,955
Payments of Debt and Capital Lease Obligations (12,501) (23,974)
Payments of Bank Loans 0 (7,764)
Other 559 172
------------ -------
Net Cash Used in Financing Activities (11,624) (18,611)
------------ -------
Effect of Exchange Rate Changes on Cash (6) (216)
------------ -------
Net Change in Cash and Cash Equivalents 480 (4,871)
Cash and Cash Equivalents at Beginning of Period 190 7,431
------------ -------
Cash and Cash Equivalents at End of Period $ 670 $ 2,560
============ =======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
QMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. MANAGEMENT OPINION
In the opinion of management, the condensed consolidated financial statements
reflect all adjustments necessary to present fairly the financial position of
the Company as of June 27, 1997, the results of operations for the three and
nine months ended June 27, 1997, and June 28, 1996, and changes in cash flows
for the nine months ended June 27, 1997, and June 28, 1996. All adjustments
included in the condensed consolidated financial statements are of a normal
recurring nature except amounts related to the management transition expense
(see Note 8). The results of operations for the nine months ended June 27,
1997, are not necessarily indicative of the results to be expected for the
fiscal year ending October 3, 1997. Certain reclassifications have been made
to fiscal 1996 amounts to conform to the fiscal 1997 presentation.
2. PER COMMON SHARE COMPUTATIONS
Per share computations are based on the weighted average number of common
shares outstanding during the period and the dilutive effect of the assumed
exercise of stock options. This effect was not material for the three- and
nine-month periods ending June 27, 1997, and June 28, 1996, and did not
change the amounts of the primary and fully diluted earnings (loss) per
common share.
3. INVENTORIES
Inventories at June 27, 1997, and September 27, 1996, are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 27, SEPTEMBER 27,
1997 1996
<S> <C> <C>
Raw materials $ 4,855 $ 6,164
Work in process 1,169 1,426
Finished goods 23,199 25,953
Inventory reserves (4,623) (5,177)
-------- --------
Total $ 24,600 $ 28,366
======== ========
</TABLE>
4. CLASSIFICATION OF REVOLVING CREDIT LOAN
The Company's revolving credit loan is classified as short-term debt in the
financial statements in compliance with FASB Emerging Issues Task Force Issue
No. 95-22, "Balance Sheet Classification of Borrowings Outstanding Under
Revolving Credit Arrangements That Include a Subjective Acceleration Clause
and a Lock-Box Arrangement." This revolving credit agreement expires in
November 1999. The Company was in compliance with these covenants at June
27, 1997.
5. OTHER CURRENT LIABILITIES
Other current liabilities at June 27, 1997, and September 27, 1996, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 27, September 27,
1997 1996
<S> <C> <C>
Employment costs $ 3,407 $ 3,714
Accrued management transition expense 1,120 0
Deferred service revenue 10,153 10,362
Accrued expenses 1,181 1,075
Restructuring reserves 233 466
Other 1,005 1,529
-------- --------
Total $ 17,099 $ 17,146
======== ========
</TABLE>
6. OTHER LONG-TERM LIABILITIES
Other long-term liabilities at June 27, 1997, and September 27, 1996, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 27, September 27,
1997 1996
<S> <C> <C>
Deferred service revenue $ 1,060 $ 1,088
Deferred compensation 2,185 1,417
Accrued management transition expense 612 0
Deferred gain on sale-leaseback 467 0
Other 2,209 2,209
-------- --------
Total $ 6,533 $ 4,714
======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
As of June 27, 1997, the Company had a commitment of approximately $16.6
million under contracts to purchase print engines and related components.
The Company was contingently liable for approximately $461,000 as of June 27,
1997, the result of letters of credit issued in the normal course of business
for the purchase of inventory.
8. MANAGEMENT TRANSITION
Management transition expense of $2,168,000 recorded in the quarter ending
June 27, 1997 relates to the resignation and severance of the Company's
president and chief executive officer. This expense is the net present value
of expenditures totaling $3,782,000 over a twelve-year period discounted at
10%.
9. SALE-LEASEBACK
In February 1997, the Company completed the sale and leaseback of land and
buildings at its Mobile, Alabama headquarters and operations. The initial
term of the operating lease is fifteen years with renewal options for five
additional five-year periods. Rent of approximately $0.4 million is payable
quarterly in advance, subject after three years to adjustment for increases
in the Consumer Price Index.
Net proceeds of the sale were approximately $12.5 million and resulted in a
gain of approximately $0.5 million. The net proceeds were used to retire the
existing term loan and to substantially reduce the balance of the Company's
revolving credit loan. The gain will be recognized over the initial fifteen-
year term of the lease.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
replaces the presentation of primary earnings per share with a presentation
of basic earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all
entities with complex capital structures and provides guidance on other
computational changes. The Company will adopt SFAS 128 in the first quarter
of fiscal 1998 and management does not expect the adoption of this Statement
to have a material impact on the Company's earnings per share in the near
future.
QMS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ----------------------
The net loss for the third quarter of fiscal 1997 was $5.5 million on net sales
of $32.4 million and for the nine months ended June 27, 1997, was a net loss of
$9.8 million on net sales of $94.7 million. These 1997 results compare to net
income of $1.6 million on net sales of $38.2 million for the third quarter of
fiscal 1996 and $3.3 million net income on net sales of $113.0 million for the
nine months ended June 28, 1996. The loss in the third quarter of fiscal 1997
includes a $2.2 million management transition charge for expenses related to
the resignation and severance of the Company's president and chief executive
officer discounted at 10% interest over the 12-year agreement.
<TABLE>
Table of Net Sales Comparisons for Key Channels of Distribution
<CAPTION>
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
(000's) 1997 1996 Difference 1997 1996 Difference
<S> <C> <C> <C> <C> <C> <C>
U.S. Direct $ 11,614 $ 13,545 $ (1,931) $ 35,142 $ 35,397 $ (255)
U.S. Service 8,415 8,555 (140) 25,168 24,645 523
U.S. Reseller 3,402 4,847 (1,445) 8,660 16,324 (7,664)
Europe 3,475 4,478 (1,003) 9,181 15,704 (6,523)
Japan 1,475 2,496 (1,021) 4,803 7,796 (2,993)
Canada 1,710 1,909 (199) 5,758 7,333 (1,575)
QMS Circuits 438 800 (362) 1,433 2,646 (1,213)
All Other 1,854 1,588 266 4,593 3,120 1,473
----------- ---------- ---------- ----------- ---------- ---------
Total Net Sales $ 32,383 $ 38,218 $ (5,835) $ 94,738 $ 112,965 $ (18,227)
=========== ========== ========== =========== ========== =========
</TABLE>
Net sales for the third quarter of fiscal 1997 declined by 15.3% from net sales
for the third quarter of fiscal 1996 and by 16.1% in the nine-month comparison.
Lower revenues in the U.S. Direct, U.S. Reseller, Japan and Europe channels
caused 92.5% ($5.4 million) and 95.7% ($17.4 million) of the decline in net
sales for the third quarter and nine-month comparisons from fiscal 1996 to
fiscal 1997, respectively.
The U.S. Direct market net sales were down 14.3% for the third quarter of 1997
compared to the third quarter of fiscal 1996 while being down only 0.7% in the
nine-month comparison. Direct sales are subject to sales volatility caused by
new product offerings and the number of sales representatives. The Company
introduced a new 24 page-per-minute printer that resulted in $2.7 million in
sales for the third quarter of fiscal 1996. While the Company introduced new
products and features in 1997, they have not had the impact of the 24 page-per-
minute printer introduced in 1996. In addition, the Company has operated with
fewer sales representatives due to higher than normal turnover this year
compared to last.
The U.S. reseller channel decline in net sales was primarily due to a change in
philosophy emphasizing the graphic arts market. The Company has now refocused
its efforts on traditional as well as niche distributors. In the third quarter
of fiscal 1997, the Company has seen an increase in quarterly reseller revenue
after quarterly declines for the previous six quarters.
The decrease in Europe and Japan revenue was caused primarily by the fiscal 1996
end-of-life sales of the 16 page-per-minute product. This resulted in higher
fiscal 1996 sales.
Overall, the Company's gross profit as a percentage of sales decreased from
33.0% to 24.3% in the three-month comparison and from 33.2% to 26.3% in the
nine-month comparison. The principal reasons for the decrease in gross profit
are lower margins in the Company's service and printed circuit board divisions,
unfavorable manufacturing volume variances due to lower sales volumes, and
increased internally developed software amortization.
The selling, general, and administrative expenses ("SG&A") remain unchanged at
$11.0 million in comparing the third quarters of fiscal 1996 and 1997 and
decreased 3.5% (from $32.9 million in fiscal 1996 to $31.7 million in fiscal
1997) in the nine-month comparison. Reductions in third quarter SG&A expenses
are offset by increases in additional rent expense from the February 1997 sale-
leaseback of the Mobile headquarters and production facilities. Additional
rental expense was $0.4 million in the fourth quarter and $0.6 million for the
nine-month period of 1997.
The three- and nine-month operating expenses include a $2.2 million ($0.20 per
share) charge for management transition expense. This expense consists
primarily of revaluation of the Company's liability for deferred executive
compensation related to a retirement plan approved by the Board of Directors in
September 1991 and continued compensation during an interim period.
Total other expense for the first nine months of fiscal 1997 was $0.8 million
compared to $1.8 million in the comparable period of fiscal 1996. This
reduction of $1.0 million was caused primarily by lower interest expense
resulting from sale-leaseback proceeds being applied to Company debt. Interest-
bearing debt has been reduced from $19.6 million at June 28, 1996, to $2.8
million at June 27, 1997.
The Company has not provided for any income tax expense during fiscal 1996 or
1997 due to current losses and available operating loss carryforwards and income
tax credits.
Liquidity and Capital Resources
- -------------------------------
During the third quarter and first nine months of fiscal 1997, the Company's
working capital and capital expenditure requirements came principally from
operations and proceeds from the sale and leaseback of land and buildings in
Mobile, Alabama. The Company's net working capital as of June 27, 1997, was
$22.8 million compared to $17.2 million at September 27, 1996. This increase is
principally due to the retirement of the senior secured notes payable and the
reduction of the balance of the revolving credit loan.
In February 1997, the Company completed the sale and leaseback of land and
buildings at its Mobile, Alabama headquarters and operations. Net proceeds of
the sale were approximately $12.5 million and resulted in a gain of
approximately $0.5 million. The net proceeds were used to retire the existing
term loan and to substantially reduce the balance of the Company's revolving
credit loan. The gain will be recognized over the initial fifteen-year term of
the lease.
Current and long-term notes receivable decreased from September 27, 1996, by
approximately $0.4 million and $0.7 million, respectfully, reflecting the
continued paydown of the debt associated with the sale of the Company's foreign
subsidiaries. Accounts receivable decreased $3.0 million during the first three
quarters of fiscal 1997 due to lower sales and increased collection effort.
At June 27, 1997, borrowings under the revolving credit facility were $1.9
million. Total borrowing capacity under this credit facility is $30.0 million.
Availability at any given point in time is a function of eligible accounts
receivable and inventory levels. At June 27, 1997, total availability was $11.8
million.
Foreign Currency Exchange Rates
- -------------------------------
The Company purchases print engine mechanisms and memory components from several
Japanese suppliers. Fluctuations in Japanese yen currency exchange rates will
affect the prices of these products. The Company attempts to mitigate possible
negative impacts through yen-sharing arrangements with suppliers and price
negotiations; however, material price increases resulting from exchange rate
fluctuations could develop which would adversely affect operating results.
Sale-Leaseback Agreement
- ------------------------
The sale-leaseback agreement entered into in February 1997 requires the Company
to comply with various restrictive financial covenants. At June 27, 1997, the
Company was not in compliance with a Fixed Charge Coverage Covenant due to
continuing losses. The Company expects to resolve the Fixed Charge Coverage
issue during a six-month cure period provided in the agreement.
QMS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a case in the United States District Court for the
Southern District of Alabama involving a former employee alleging violation of
the plaintiff's civil rights and certain other acts of wrongful conduct. The
Company has filed an answer denying all allegations of wrongful conduct in the
complaint. The Company cannot predict the ultimate outcome of this case;
however, it does not expect the resolution of this matter to materially affect
the Company's financial condition or results of operations.
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:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
10(r)(xv) Amendment Number Five to Loan and Security
Agreement dated June 23, 1997.
27 Financial Data Schedule
</TABLE>
(b) Reports: The following report was filed on Form 8-K during the third
quarter of fiscal 1997.
O Form 8-K dated July 7, 1997, reporting Item 5. Other Events
QMS, INC. AND SUBSIDIARIES
SIGNATURE
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.
<TABLE>
<CAPTION>
<S> <C>
QMS, INC.
(Registrant)
Date: July 28, 1997 /s/ Richard A. Wiggins
----------------------
RICHARD A. WIGGINS
Senior Vice President and Chief
Financial Officer
(Mr. Wiggins is the Principal
Financial Officer and has been
duly authorized to sign on behalf
of the Registrant.)
</TABLE>
Exhibit 10(r)(xv)
AMENDMENT NUMBER FIVE TO
LOAN AND SECURITY AGREEMENT
QMS, INC.
This AMENDMENT NUMBER FIVE TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is entered into as of June 23, 1997, by and between Foothill
Capital Corporation, a California corporation ("Foothill"), on the one hand, and
QMS, Inc., a Delaware corporation ("Borrower"), with reference to the following
facts:
A. Foothill and Borrower heretofore have entered into that certain Loan
and Security Agreement, dated as of November 7, 1995 as amended by that certain
Amendment Number One to Loan and Security Agreement, dated as of December 4,
1995, as further amended by that certain Amendment Number Two to Loan and
Security Agreement, dated as of February 7, 1996, as further amended by that
certain Amendment Number Three to Loan and Security Agreement, dated as of July
31, 1996, and as further amended by that certain Amendment Number Four to Loan
and Security Agreement, dated as of January 22, 1997 (as so amended and
otherwise modified from time to time, the "Agreement");
B. Borrower has requested Foothill to amend the Agreement to reduce the
Tangible Net Worth, as set forth in this Amendment;
C. Foothill is willing to so amend the Agreement in accordance with the
terms and conditions hereof; and
D. All capitalized terms used herein and not defined herein shall have
the meanings ascribed to them in the Agreement, as amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill and Borrower agree as follows:
1. Amendment to the Agreement.
a. Section 6.13(c) of the Agreement hereby is deleted in its entirety
and the following hereby is substituted in lieu thereof:
"(c) Tangible Net Worth. Tangible Net Worth of at least (i) Twenty Seven
Million Dollars ($27,000,000), measured on a fiscal quarter-end or (ii) Twenty
Two Million Dollars ($22,000,000) measured on a fiscal quarter-end, upon the
financial recognition of the Agreement between Borrower and James L. Busby
("Busby") which provided, inter alia, for the resignation of Busby as Chief
Executive Officer; and".
2. Fee. Foothill shall charge Borrower's loan account a fee in the amount of
Twenty Thousand Five Hundred Dollars ($20,500.00). Said fee shall be fully-
earned, non-refundable, and due and payable on the date Borrower's loan account
is charged.
3. Representations and Warranties. Borrower hereby represents and warrants to
Foothill that (a) the execution, delivery, and performance of this Amendment and
of the Agreement, as amended by this Amendment, are within its corporate powers,
have been duly authorized by all necessary corporate action, and are not in
contravention of any law, rule, or regulation, or any order, judgment,
decree, writ, injunction, or award of any arbitrator, court, or governmental
authority, or of the terms of its charter or bylaws, or of any contract or
undertaking to which it is a party or by which any of its properties may be
bound or affected, and (b) this Amendment and the Agreement, as amended by this
Amendment, constitute Borrower's legal, valid, and binding obligation,
enforceable against Borrower in accordance with its terms.
4. Conditions Precedent to Amendment. The satisfaction of each of the
following on or before, unless otherwise specified below, shall constitute
conditions precedent to the effectiveness of this Amendment:
a. Foothill shall have received the reaffirmation and consent of the
Guarantors attached hereto as Exhibit A, dully executed and delivered by the
respective authorized officials thereof;
b. Foothill shall have received all required consents of Foothill's
participants in the Obligations to Foothill's execution, delivery, and
performance of this Amendment;
c. The representations and warranties in this Amendment, the Agreement
as amended by this Amendment, and the other Loan Documents shall be true and
correct in all respects on and as of the date hereof, as though made on such
date (except to the extent that such representations and warranties related
solely to an earlier date);
d. No Event of Default or event which with the giving of notice or
passage of time would constitute an Event of Default shall have occurred and be
continuing on the date hereof, nor shall result from the consummation of the
transactions contemplated herein;
e. No injunction, writ, restraining order, or other order of any nature
prohibiting, directly or indirectly, the consummation of the transactions
contemplated herein shall have been issued and remain in force by any
governmental authority against Borrower, Foothill, or any of their Affiliates;
f. The Collateral shall not have declined materially in value from the
values set forth in the most recent appraisals of field examinations previously
done by Foothill;
g. All other documents and legal matters in connections with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance satisfactory to Foothill
and its counsel.
5. Effect on Agreement. The Agreement, as amended hereby, shall be and
remain in full force and effect in accordance with its respective terms and
hereby is ratified and confirmed in all respects. The execution, delivery, and
performance of this Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment, of any right, power, or remedy of
Foothill under the Agreement, as in effect prior to the date hereof.
6. Further Assurances. Borrower shall, and shall cause Guarantor to, execute
and deliver all agreements, documents, and instruments, in form and substance
satisfactory to Foothill, and take all actions as Foothill may reasonably
request from time to time, to perfect and maintain the perfection and priority
of Foothill's security interests in the Collateral, the collateral in which
Guarantor has granted or is required to grant security interest in favor of
Foothill, and the Real Property, and to fully consummate the transactions
contemplated under this Amendment and the Agreement, as amended by this
Amendment.
7. Miscellaneous.
a. Upon the effectiveness of this Amendment, each reference in the
Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like
import referring to the Agreement shall mean and refer to the Agreement as
amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in the Loan
Documents of the "Loan Agreement", "thereunder", "therein", "thereof" or words
of like import referring to the Agreement shall mean and refer to the Agreement
as amended by this Amendment.
c. This Amendment may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument and any of the
parties hereto may execute this Amendment by signing any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
FOOTHILL CAPITAL CORPORATION,
A California corporation
By: /s/ Lisa M. Gonzales
------------------------
Lisa M. Gonzales
Title: Assistant Vice President
QMS, Inc.,
a Delaware Corporation
By: /s/ R. A. Wiggins
---------------------
Richard Wiggins
Title: Vice President and Controller
EXHIBIT A
Reaffirmation and Consent
All capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in that certain Amendment Number Five
to Loan and Security Agreement, dated as of June 23, 1997 (the "Amendment").
Each of the undersigned hereby (a) represents and warrants to Foothill that the
execution, delivery, and performance of this Reaffirmation and Consent are
within its corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court, or governmental authority, or of the terms of its charter or bylaws, or
of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected; (b) consents to the amendment of the
Agreement by the Amendment; (c) acknowledges and reaffirms its obligations
owing to Foothill under its Guaranty and each of the other Loan Documents to
which it is party; and (d) agrees that each of the Guaranty and the other Loan
Documents to which it is a party is and shall remain in full force and effect.
Although each of the undersigned has been informed of the matters set forth
herein and has acknowledged and agreed to same, it understands that Foothill has
no obligation to inform it of such matters in the future or to seek its
acknowledgment or agreement to future amendments, and nothing herein shall
create such a duty.
QMS CIRCUITS, INC., a Delaware Corporation
By: /s/ R. A. Wiggins
-----------------------
Richard Wiggins
Title: Secretary and Treasurer
QMS CANADA, INC., a corporation incorporated under
the laws of Canada
By: /s/ R. A. Wiggins
-------------------------
Richard Wiggins
Title: Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1997
<PERIOD-END> JUN-27-1997
<CASH> 670
<SECURITIES> 0
<RECEIVABLES> 21537
<ALLOWANCES> 364
<INVENTORY> 24600
<CURRENT-ASSETS> 49978
<PP&E> 43056
<DEPRECIATION> 37278
<TOTAL-ASSETS> 72432
<CURRENT-LIABILITIES> 27221
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 38091
<TOTAL-LIABILITY-AND-EQUITY> 72432
<SALES> 94738
<TOTAL-REVENUES> 94738
<CGS> 69827
<TOTAL-COSTS> 69827
<OTHER-EXPENSES> 33899
<LOSS-PROVISION> 2974
<INTEREST-EXPENSE> 620
<INCOME-PRETAX> (9776)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9776)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
