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 July 2, 1999
----------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
incorporation or organization) Number)
ONE MAGNUM PASS, MOBILE, AL 36618
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(Address of principal executive offices) (Zip Code)
(334) 633-4300
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
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APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of the issuer's common stock, as of the latest practicable date
13,235,161 at July 30, 1999.
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QMS, INC. AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of July 2, 1999, and
January 1, 1999 3 - 4
Condensed Consolidated Statements of Operations
(unaudited) for the three and six months ended
July 2, 1999, and July 3, 1998 5
Condensed Consolidated Statements of Comprehensive
Income (unaudited) for the three and six months ended
July 2, 1999, and July 3, 1998 6
Condensed Consolidated Statements of Cash Flows
(unaudited) for the six months ended
July 2, 1999, and July 3, 1998 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 8 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II - OTHER INFORMATION 18
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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 19
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QMS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
as of July 2, 1999, and January 1, 1999
(Unaudited)
<S>
<C> <C>
July 2, January 1,
in thousands 1999 1999
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 4,075 $ 1,707
Trade Receivables (less allowance for doubtful
accounts of $512 at July 2, 1999, and $484
at January 1, 1999) 47,241 22,747
Note Receivable, Net 239 146
Inventories:
Raw Materials 15,694 6,419
Work in Process 2,766 2,132
Finished Goods 39,654 20,767
Inventory Reserves (10,571) (3,629)
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Total Inventories, Net 47,543 25,689
Other Current Assets 6,888 2,944
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Total Current Assets 105,986 53,233
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PROPERTY, PLANT, AND EQUIPMENT 43,753 35,990
Less Accumulated Depreciation 36,189 31,255
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Total Property, Plant, and Equipment, Net 7,564 4,735
CAPITALIZED AND DEFERRED SOFTWARE, NET 10,737 10,155
PREPAID RENT (Note 6) 1,300 1,300
GOODWILL, NET (Note 7) 21,736 0
OTHER ASSETS, NET 1,722 871
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TOTAL ASSETS $149,045 $ 70,294
========= =========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of July 2, 1999, and January 1, 1999
(Unaudited)
<S> <C> <C>
July 2, January 1,
in thousands 1999 1999
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 34,414 $ 14,363
Revolving Credit Loan 24,338 7,306
Short-Term Debt (Note 8) 6,235 0
Current maturities of capital lease obligations 425 218
Employment Costs 4,500 3,851
Deferred Service Revenue 7,317 7,453
Other Current Liabilities:
Warranty Accrual 1,591 1,298
Accrued Management Transition Expenses 644 644
Income Tax Payable 3,012 0
Other 4,887 3,708
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Total Other Current Liabilities 10,134 5,650
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Total Current Liabilities 87,363 38,841
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LONG-TERM DEBT (Note 9) 12,800 0
DEFERRED REVENUE (Note 7) 5,000 0
CAPITAL LEASE OBLIGATIONS 1,316 326
OTHER LIABILITIES:
Deferred Service Revenue 629 839
Deferred Compensation 2,487 2,638
Accrued Management Transition Expenses 398 421
Other Liabilities 1,680 790
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Total Other Liabilities 5,194 4,688
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STOCKHOLDERS' EQUITY 37,372 26,439
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 149,045 $ 70,294
============== ==============
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See Notes to Condensed Consolidated Financial Statements
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QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended July 2, 1999, and July 3, 1998
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------------------------
July 2, July 3, July 2, July 3,
in thousands, except per share amounts 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
NET SALES
Printers and Supplies $ 43,277 $ 26,421 $ 79,104 $ 51,392
U.S. Service 7,656 8,942 15,195 18,592
----------- ----------- ----------- -----------
Total Net Sales 50,933 35,363 94,299 69,984
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COST OF GOODS SOLD
Printers and Supplies 34,163 19,047 62,697 37,322
U.S. Service 4,884 5,665 9,675 11,909
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Total Cost of Goods Sold 39,047 24,712 72,372 49,231
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GROSS PROFIT
Printers and Supplies 9,114 7,374 16,407 14,070
U.S. Service 2,772 3,277 5,520 6,683
----------- ----------- ----------- -----------
Total Gross Profit 11,886 10,651 21,927 20,753
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OPERATING EXPENSES 12,854 10,068 23,494 19,580
GOODWILL AMORTIZATION 165 0 165 0
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OPERATING INCOME (LOSS) (1,133) 583 (1,732) 1,173
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OTHER INCOME (EXPENSE)
Interest Income 25 113 51 203
Interest Expense (407) (167) (654) (280)
Miscellaneous Income (Expense) 327 (92) 290 (131)
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Total Other Expense, Net (55) (146) (313) (208)
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INCOME (LOSS) BEFORE INCOME TAXES (1,188) 437 (2,045) 965
INCOME TAX PROVISION 231 16 265 67
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (1,419) $ 421 $ (2,310) $ 898
=========== =========== =========== ===========
EARNINGS (LOSS) PER
COMMON SHARE (Note 2)
Basic and Diluted $ (0.12) $ 0.04 $ (0.21) $ 0.08
SHARES USED IN PER SHARE
COMPUTATION (Note 2)
Basic 11,410 10,697 11,055 10,697
Diluted 11,410 11,040 11,055 11,040
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Six Months Ended July 2, 1999, and July 3, 1998
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
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July 2, July 3, July 2, July 3,
in thousands 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (1,419) $ 421 $ (2,310) $ 898
Other Comprehensive Income (Loss), Net of Tax:
European Currency Translation
Adjustments 147 0 147 0
Japanese Currency Translation
Adjustments (43) 0 (321) 0
Canadian Currency Translation
Adjustments 146 (231) 284 (254)
----------- ----------- ----------- -----------
Total Other Comprehensive Income (Loss) 250 (231) 110 (254)
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Comprehensive Income (Loss) $ (1,169) $ 190 $ (2,200) $ 644
=========== ============ =========== ===========
See Notes to Condensed Consolidated Financial Statements
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QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended July 2, 1999, and July 3, 1998
(Unaudited)
July 2, July 3,
in thousands 1999 1998
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Cash Flows from Operating Activities:
Net Income (Loss) $ (2,310) $ 898
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation of Property, Plant and Equipment 1,245 1,104
Amortization of Capitalized and Deferred Software 4,555 4,138
Provision for Losses on Inventory 6,076 1,717
Other (26) (108)
Net Change in Assets and Liabilities that Provided (Used) Cash:
Trade Receivables (23,487) (2,283)
Inventories, Net (2,288) (3,203)
Accounts Payable (2,361) 219
Other 5,575 1,112
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Net Cash Provided by (Used in) Operating Activities (13,021) 3,594
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Cash Flows from Investing Activities:
Purchase of Europe and Australian Subsidiaries (20,500) 0
Collections of Notes Receivable 270 221
Purchase of Property, Plant and Equipment (3,121) (1,445)
Proceeds from Disposal of Property, Plant and Equipment 850 20
Additions to Capitalized and Deferred Software Costs (5,137) (3,420)
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Net Cash Used in Investing Activities (27,638) (4,624)
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Cash Flows from Financing Activities:
Proceeds from Short-Term Debt and Revolving Credit Facility 17,033 2,571
Proceeds from Long-Term Debt 12,800 0
Payments of Debt and Capital Lease Obligations (186) (866)
Proceeds from Issuance of Common Stock 12,248 0
Other 1,132 44
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Net Cash Provided by Financing Activities 43,027 1,749
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Net Increase in Cash and Cash Equivalents 2,368 719
Cash and Cash Equivalents at Beginning of Period 1,707 697
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Cash and Cash Equivalents at End of Period $ 4,075 $ 1,416
=========== =============
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 July 2, 1999, the results of operations and changes in cash
flows for the six months ended July 2, 1999, and July 3, 1998. The results
of operations for the six months ended July 2, 1999, are not necessarily
indicative of the results to be expected for the fiscal year ending December
31, 1999. Certain reclassifications have been made to 1998 amounts to
conform to the 1999 presentation.
2.FISCAL YEAR CHANGE AND TRANSITION PERIOD
On October 28, 1998, the Company's Board of Directors modified its accounting
periods effective in 1999, from a fiscal year ending on the Friday closest to
September 30 to a fiscal year ending on the Friday closest to December 31.
In connection with this fiscal year change, the Company will include audited
financial statements for the three-month transition period ended January 1,
1999, in its Annual Report on Form 10-K for its new fiscal year ended
December 31, 1999.
3.EARNINGS (LOSS) PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." Basic and diluted earnings
(loss) per share computations are based on the weighted average number of
common shares outstanding during the period and diluted earnings (loss) per
share also includes the dilutive effect of the assumed exercise of stock
options.
4.COMPREHENSIVE INCOME (LOSS)
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which establishes new rules for the reporting of
comprehensive income (loss) and its components. Comprehensive income (loss)
consists of net income (loss) and foreign currency translation adjustments
and is reflected in the Condensed Consolidated Statements of Comprehensive
Income (Loss). Due to the Company's available operating loss carryforwards,
there was no income tax expense related to the components of other
comprehensive income (loss) for the three months ended July 2, 1999.
5.RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which will be effective for the Company's annual 1999 financial
statements. Management has not yet determined the effect of SFAS No. 131 on
its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective, as amended by
SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," for
the Company in fiscal 2001. Management has not yet determined the effect of
SFAS No. 133 on its financial statements.
6.PREPAID RENT
At October 3, 1997, and October 2, 1998, the Company was not in compliance
with the Net Worth covenant contained in the 1997 sale-leaseback transaction
for the Mobile headquarters. On December 8, 1997, the Company obtained a one-
year waiver of non-compliance through October 5, 1998, from the lessor in
exchange for $1.3 million in prepaid rent and an amendment to a related
warrant agreement. On November 17, 1998, the Company obtained a continuation
of the waiver of non-compliance from the lessor through December 31, 2002, in
exchange for continuing the $1.3 million in prepaid rent.
At the end of the waiver period, the Company may be out of compliance with
one or more covenants contained in the lease agreement. Among the remedies
available to the landlord are the acceleration of all rent for the initial
lease term, cancellation of the lease, or all other remedies available at
law. Management believes over the next year through further negotiations
another extension of the waiver or a permanent revision of the covenant will
be obtained.
7.ACQUISITION
On June 7, 1999, the Company reacquired its European and Australian
subsidiaries ("QMS B.V.") for a total purchase price of $24.7 million and
$2.7 million, respectively, plus direct acquisition costs of $2.5 million.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the acquisition
date. The estimated fair value of assets acquired, net of liabilities
assumed, of $8.0 million was considered to be the best estimates as of the
acquisition date and may be adjusted as more information is obtained.
Goodwill of $21.9 million was recognized on the acquisition equal to the
excess of the price paid over the estimated fair value of the net assets
acquired. The consolidated statements of operations include the results of
Europe and Australia operations from their acquisition date forward. During
the second quarter of 1999, the Company recognized four weeks of amortization
expense of $165,000 related to goodwill. Goodwill is being amortized over
ten years.
To complete this acquisition, the Company raised $30.0 million through a
$12.8 million loan and $5.0 million advance on future Company production from
Minolta Co., Ltd. ("Minolta"), an offset to the Company's receivables due
from seller of $3.2 million, and a $12.2 million sale of 2,130,000 shares of
common stock to Minolta Investments Company. In addition, the Company
financed $6.2 million of the purchase price through a note payable with Alto
Imaging Group, N.V., (the former parent of QMS B.V.) that is expected to
mature in November, 1999, if new financing is obtained by November 18, 1999,
or to be changed into a five-year note with quarterly payments of $312,000
plus interest if financing is not obtained. The interest on this note is
paid monthly at 6.5%. Surplus financing was used to reduce revolving lines
of credit.
The estimated fair value of assets acquired and liabilities assumed in the
acquisition is summarized as follows (in thousands):
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Fair value of assets acquired $ 49,789
Less liabilities assumed 41,779
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$ 8,010
=========
Consideration consisted of:
Cash $ 20,500
Note to Seller 6,234
Portion offset by payable due to QMS, Inc. 3,176
---------
Total purchase price $ 29,910
=========
</TABLE>
The following unaudited pro forma consolidated results of operations for the
six months ended July 2, 1999, and July 3, 1998, have been prepared as though
the acquisition occurred as of the beginning of the periods presented:
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July 2, July 3,
1999 1998
- --------------------------------------------------------------------------------
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Net sales $ 95,541 $ 117,111
Net income (loss) (555) 3,252
Basic and diluted net income (loss) per share (0.05) 0.30
The unaudited pro forma consolidated results of operations have been prepared
for comparative purposes only and do not purport to be indicative of the
actual results that would have been achieved had the acquisition taken place
as of January 1, 1997, or in the future.
</TABLE>
8.SHORT-TERM DEBT
On June 7, 1999, the Company signed a promissory note to pay Alto Imaging
Group, N.V., (the former parent of QMS Europe B.V.) $6.2 million that is
expected to mature in November 1999. The interest is paid monthly and the
applicable interest rate for this note is an adjustable rate per year equal
to five-tenths of one percent in excess of the London Interbank Offered Rate.
At July 2, 1999, the Company had cash on hand of $4.1 million and borrowings
of $3.6 million and $20.7 million under the revolving credit facility with
Foothill Capital Corporation ("Foothill") and Heller National Bank ("HNB"),
respectively. Total borrowing capacity under the credit facilities is a
function of eligible accounts receivable and inventory. At July 2, 1999,
total availability was $35.8 million consisting of $11.9 million with
Foothill and $23.0 million with HNB.
At July 2, 1999, the Company was out of compliance with certain Tangible Net
Worth covenants of the Foothill revolving credit agreement. The Company is
evaluating new U.S. credit facilities that will replace the current Foothill
credit facility and provide for working capital requirements.
9.LONG-TERM DEBT
Long-term debt at July 2, 1999, of $12.8 million represents a promissory note
to Minolta. The note matures in May 2003, payable in thirty-six equal
monthly installments of $356,000 beginning in July 2000. The interest rate
is determined monthly by the lender based upon two and one-half percent over
London Interbank Offered Rate and shall not exceed the maximum rate permitted
by applicable law. There was no long-term debt at July 3, 1998.
10. COMMITMENTS AND CONTINGENCIES
As of July 2, 1999, the Company had a commitment of approximately $14.2
million under contracts to purchase print engines and related components and
approximately $8.1 million under contracts to purchase spares and
consumables.
The Company is a defendant in various litigation and claims in the normal
course of business. Based on consultation with various counsel in these
matters, management is of the opinion that the ultimate resolution of such
litigation and claims will not materially affect the Company's financial
position, results of operations, or cash flows.
QMS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Purchase of QMS B.V. and the Change of Control to Minolta Corporation
- ---------------------------------------------------------------------
On June 7, 1999, the Company reacquired the stock of its former subsidiaries,
QMS Europe B.V. and QMS Australia PTY, Ltd. (collectively referred to as "QMS
B.V."), for purchase prices of $24.7 million and $2.7 million, respectively,
plus direct acquisition costs of $2.5 million. The Company paid $20.5 million
of the purchase price in cash, received a $3.2 million offset to receivables,
and gave its promissory note to the seller (Alto Imaging Group, N.V., the former
parent of QMS B.V.) for the remaining $6.2 million. The note is expected to
mature in November, 1999, if new financing is obtained and otherwise will
convert into a five-year note with quarterly payments of $312,000 plus accrued
interest. The remainder of the purchase was funded out of a $12.8 million loan
and a $5.0 million advance on future Company production from Minolta Co., Ltd.
and the sale of 2,130,000 shares of the Company's common stock to Minolta
Investments Company, a subsidiary of Minolta Co., Ltd., ("Minolta") for a total
purchase price of $12.2 million.
In addition to the purchase from the Company of 2,130,000 shares of common
stock, on June 7, Minolta acquired 5,440,000 shares of the company's common
stock through a tender offer consummated on July 19, 1999. As a result, Minolta
is now the holder of 7,570,000 shares, or 57.4%, of the Company's outstanding
common stock.
Results of Operations
- ---------------------
Net loss for the second quarter of fiscal 1999 was $1.4 million ($0.12 per
share) on net sales of $50.9 million. For the six months ended July 2, 1999,
net loss was $2.3 million ($0.21 per share) on net sales of $94.3 million.
These 1999 results compare to net income of $421,000 ($0.04 per share) on net
sales of $35.4 million for the second quarter of fiscal 1998 and net income of
$898,000 ($0.08 per share) on net sales of $70.0 million for the six months
ended July 3, 1998.
<TABLE>
Table 1 - Net Sales Comparisons for Key Product Groups
<CAPTION>
Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------------
July 2, July 3, July 2, July 3,
(000's) 1999 1998 Difference 1999 1998 Difference
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<C>
Hardware $ 8,059 $ 11,993 $ (3,934) $ 16,955 $ 21,922 $ (4,967)
Consumables 7,513 7,551 (38) 15,868 15,837 31
Service 7,656 8,942 (1,286) 15,195 18,592 (3,397)
Europe/Australia 22,515 6,492 16,023 31,580 11,877 19,703
Japan 4,816 217 4,599 14,262 1,204 13,058
All Other 374 168 206 439 552 (113)
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Total Net Sales $ 50,933 $ 35,364 $ 15,570 $ 94,299 $ 69,984 $ 24,315
======================================== ======================================
Table 2 - Hardware and International Sales Comparisons
Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------------------------
July 2, July 3, July 2, July 3,
(000's) 1999 1998 Difference 1999 1998 Difference
- -------------------------------------------------------------------------------------------------------------------
Hardware Sales
- -----------------
U.S./Canada - Direct $ 1,233 $ 2,439 $ (1,206) $ 1,776 $ 6,053 $ (4,277)
U.S./Canada - Reseller 5,412 7,768 (2,356) 12,447 12,772 (325)
Latin America & Other 456 445 11 768 962 (194)
OEM 958 1,341 (383) 1,964 2,135 (171)
---------------------------------------- -------------------------------------
Total Hardware $ 8,059 $ 11,993 $ (3,934) $ 16,955 $ 21,922 $ (4,967)
======================================== ======================================
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------------------------------------------
July 2, July 3, July 2, July 3,
(000's) 1999 1998 Difference 1999 1998 Difference
- -------------------------------------------------------------------------------------------------------------------
Europe Sales
- -----------------
Controller Boards $ 3,098 $ 3,873 $ (775) $ 8,341 $ 6,998 $ 1,343
Commissions 2,314 2,619 (305) 6,136 4,879 1,257
QMS BV Sales 17,103 0 17,103 17,103 0 17,103
---------------------------------------- ------------------------------------
Total Europe $ 22,515 $ 6,492 $ 16,023 $ 31,580 $ 11,877 $ 19,703
======================================== ====================================
</TABLE>
Net sales for the three months ended July 2, 1999, increased 44.0% from net
sales for the three months ended July 3, 1998. While hardware and service
revenues were down by $3.9 million (32.8%) and $1.3 million (14.4%),
respectively, revenues in Europe and Japan increased $16.0 million (246.8%) and
$4.6 million (2,119.4%), respectively.
The decline in hardware revenue is due to continued competition in the printer
industry, especially for monochrome hardware sales. The Company's monochrome
hardware sales were down $3.0 million (51.0%) and $5.0 million (45.0%) for the
three-month and six-month periods, respectively. Part of the decrease in
monochrome sales has been caused by the delay in the introduction of the
Company's 25 page-per-minute printer which is scheduled for release in August
1999. In color hardware sales, the Company's new 11 x 17 inch color product has
been well received by the market and has offset the decline in other color
products.
The decline in service revenue is due to lower sales of spare parts and fewer
service contracts, as well as abnormally large spare parts sales in early fiscal
1998 due to new Original Equipment Manufacturers ("OEMs") and distributors
building up spare parts inventories for servicing their customers. The decline
in service revenue reflects the decreasing cost of new printers and the tendency
to replace rather than repair or maintain printers.
Until the reacquisition of the Company's former European and Australian
subsidiaries, European revenue included only sales to the Company's European
distributor, QMS B.V., of controller board sales at cost and commissions earned
on QMS B.V. product sales. After June 7, 1999, revenues include sales to third-
party customers and board sales and commission revenue between QMS and QMS B.V.
The revenues between QMS and QMS B.V. are eliminated in consolidation as
intercompany sales.
During the second quarter of fiscal 1999, controller board sales and commissions
for Europe decreased 20.0% and 11.6%, respectively, compared to the second
quarter of 1998. This decrease is due to the elimination of sales to QMS B.V.
after June 7, 1999. For the six-month comparison, board sales and commissions
increased 19.2% and 25.8%, respectively, due to the high board and commission
sales in the first three months of 1999.
During the six months ended July 3, 1998, Japanese revenue included product and
commission revenue for Japan, Korea, and other Pacific Rim countries. This
revenue was generated through an independent company, QMS Japan KK, which, until
September 1998, had exclusive rights to distribute QMS products throughout these
countries. In September 1998, the Company reestablished its wholly owned
subsidiary in Japan. Sales that had occurred through a master distributor in
Japan are now being made through the Company's Japanese subsidiary, thereby
eliminating the receipt of commissions on distributor sales.
Hardware sales for the three months ended July 2, 1999, were $8.1 million, a
decrease of 32.8% over the same period ending July 3, 1998. The direct market
net sales were down $1.2 million (49.5%) for the three months ended July 2,
1999, compared to the three months ended July 3, 1998, while the reseller net
sales decreased by $2.4 million (30.3%), for the same period. The decrease in
hardware sales reflects increased competition for the magicolor 2 product.
Overall, the Company's gross profit increased $1.2 million, from $10.7 million
for the three months ended July 3, 1998, to $11.9 million for the three months
ended July 2, 1999, and from $20.8 million to $21.9 million for the six-month
comparison, due to higher sales. While the gross profit increased, the gross
profit margin decreased from 30.1% to 23.3% of sales for the three-month
period and from 30.0% to 23.3% for the six-month period. Hardware margins in
particular were down from 37.8% to 20.0% of sales due to price competition for
color product.
Operating expenses increased approximately $3.0 million (from $10.1 million to
$13.0 million for the three months ended July 3, 1998, and July 2, 1999,
respectively) but decreased as a percentage of sales from 28.5% to 25.6%.
For the six-month comparison, operating expenses increased from $19.6 million
in 1998 to $23.5 million in 1999, but decreased as a percentage of sales from
28.0% to 24.9%. Of the $3.0 million increase in operating expenses for the
second quarter, $2.4 million represents the addition of European, Australian
and Japanese operating expenses. The decrease in spending as a percentage of
sales is primarily due to the additional European, Australian and Japanese sales
but also reflects management's continued focus on controlling costs while
growing revenue. Operating expenses for the quarter include $165,000 in
amortization expense for Goodwill related to the reacquisition of QMS B.V.
Total other income and expense for the three months ended July 2, 1999, was a
net expense of $55,000. This net expense includes a $387,000 gain on the sale
of QMS Circuits, Inc.' s ("QCI") land and building. The QCI property has been
for sale since the plant was closed in 1997. Excluding the gain on the QCI
property, other income and expense would have been a net expense of $442,000 for
the three months ending July 2, 1999, compared to a net expense of $146,000 for
the three months ended July 3, 1998. The increase is the result of higher debt
levels in the United States, adding financing from Minolta and the seller for
the acquisition of QMS B.V., and interest from the added QMS B.V. operations.
In the six-month comparison, net other expense in fiscal 1999 was $313,000,
an increase of $105,000 over the prior year. This increase reflects greater
interest expense due to higher debt levels.
Income taxes reflect estimated foreign income taxes of QMS foreign subsidiaries
and U.S. tax liabilities for foreign commissions earned.
Financial Condition
- -------------------
The revolving credit balance with Foothill Capital Corporation ("Foothill")
decreased from $10.8 million to $3.6 million during the quarter. The Company's
decision to use seller financing for a portion of the QMS B.V. purchase allowed
application of a portion of Minolta financing to the Company's revolving credit
balance.
Accounts receivable, accounts payable and inventory grew by $24.5 million, $20.1
million and $21.9 million, respectively, due to the addition of QMS B.V. on June
7, 1999. In addition, the Company has increased its U.S. inventory and accounts
payable due to a volume purchase agreement of magicolor 2 materials at a reduced
price and extended payment terms. At July 2, 1999, the Company had $11.1
million in U.S. magicolor 2 inventory and a $3.9 million payable balance with
its magicolor 2 supplier. The accounts payable balance should be paid during
the coming three months, while inventory is expected to decrease over the next
twelve months.
The Company expects its assets and liabilities to remain at higher levels due to
higher sales and production volumes caused by acquisitions.
Liquidity and Capital Resources
- -------------------------------
During the three months ended July 2, 1999, the Company's working capital and
capital expenditure requirements came principally from operations. The
Company's net working capital as of July 2, 1999, was $18.6 million compared to
$14.4 million at January 1, 1999.
At July 2, 1999, the Company had cash on hand of $4.1 million and borrowings of
$3.6 million and $20.7 million under the revolving credit facility with Foothill
Capital Corporation ("Foothill") and Heller National Bank ("HNB"), respectively.
Total borrowing capacity under the credit facilities is a function of eligible
accounts receivable and inventory. At July 2, 1999, total availability was
$35.8 million, consisting of $11.9 million with Foothill and $23.0 million with
HNB. The Company believes its current working capital availability, including
the effect of the acquisition, is adequate for its operating needs.
At July 2, 1999, the Company was out of compliance with certain Tangible Net
Worth covenants of the Foothill revolving credit agreement. The Company is
evaluating new U.S. credit facilities that will replace the current Foothill
credit facility and provide for working capital requirements.
Sale-Leaseback Agreement
- ------------------------
At July 2, 1999, the Company was out of compliance with the Debt to Equity
covenant contained in the 1997 sale-leaseback agreement for the Mobile
headquarters. The Company has obtained a waiver of non-compliance through
December 31, 2002, in exchange for $1.3 million in prepaid rent.
QMS and Minolta have also developed integration teams to evaluate how to best
combine Minolta's printer business with QMS, Inc. QMS anticipates restructuring
and other special charges of $6.0 million to $8.0 million as redundant expenses
are eliminated. The Company anticipates that this charge will cause the Company
to be out of compliance with several sale-leaseback covenants.
Among the remedies available to the landlord is the acceleration of all rent for
the initial lease term, cancellation of the lease, or all other remedies
available at law. Management believes that during the next quarter it will
successfully negotiate additional waivers or a permanent revision to the
covenants.
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 may attempt to mitigate some
negative impacts through yen-sharing arrangements with suppliers; however,
material price increases resulting from unfavorable exchange rate fluctuations
could adversely affect operating results.
The effect of yen fluctuations on material prices is also offset in part by yen-
based Japanese sales. Roughly 20% of all Company sales are in Japanese yen,
which causes sales and profit margins to increase when yen values increase.
Year 2000 Compliance
- --------------------
State of Readiness - In March 1997, the Company developed and began implementing
plans to review its purchased and developed software for Year 2000 compliance.
The plan addresses the major areas listed below.
1. IT Systems and Applications
The Company has identified 218 internal systems and applications
components; of these, 52 were identified as critical. As of July 2,
1999, all but two of these critical systems have been verified as
Year 2000 compliant. The remaining two systems should be compliant
by the end of September 1999.
The Company has contacted all critical IT (information technology)
systems and applications vendors and has received letters of
compliance from them and system upgrades as required. The Year 2000
review for IT systems and applications was completed in November
1998. The last of the upgrades should be complete by September
1999. The Company has performed basic component testing following
the guidelines defined by the BSI Year 2000 compliance definition.
Because of the testing results to date, the Company does not
currently foresee the need for additional contingency plans for
these IT components.
2. Critical Non-IT Suppliers and Vendors
The Company has sent Year 2000 compliance questionnaires to all
critical non-IT suppliers and vendors. The Company is not aware of
any anticipated Year 2000 non-compliance issues by its vendors or
customers that could materially affect its business operations;
however, the Company does not control the systems of other companies
and cannot assure that such systems will be converted in a timely
fashion and, if not converted, would not have an adverse effect on
the Company's business operations.
The Company is dependent upon a variety of local suppliers and
vendors for such items as electrical power, telephone service,
water, banking services and other necessary commodities. The
Company is not currently aware of any non-compliance by these
vendors that will materially affect its business operations;
however, the Company does not control these systems and cannot
assure that they will be converted in a timely fashion and, if not
converted, would not have an adverse effect on the Company's
business operations.
3. QMS Products
The design of the Company's products precludes the possibility of
Year 2000 errors. Date and time information is passed to the QMS
printer by the host computer in real time. The real-time clock used
to apply the time stamp to the accounting files stores the year as
four digits and is designed to correctly handle leap year
calculations, including the Year 2000. All QMS hardware and
software are designed to function properly at the turn of the
century and beyond without any interruption in business.
Costs -The Company has concluded all necessary purchases and has spent
approximately $145,000 to date. Additional external expenditures of $5,000 are
projected in connection with the Year 2000 remediation.
Risks and Reasonably Likely Worst Case Scenarios - Although the Company has not
identified any specific areas of risk, general market Year 2000 problems outside
of the Company's control could have an adverse effect on the Company's operating
results.
Contingency and Business Continuation Plan - The Company will evaluate the need
for a formal Year 2000 contingency plan by September 1999.
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which will be effective for the Company's annual 1999 financial statements.
Management has not yet determined the effect of SFAS No. 131 on its financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective, as amended by SFAS
No. 137, "Deferral of the Effective Date of FASB Statement No. 133," for the
Company in fiscal 2001. Management has not yet determined the effect of SFAS
No. 133 on its financial statements.
QMS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk primarily from changes in foreign currency
exchange rates and to a lesser extent interest rates. The following describes
the nature of the risks and demonstrates that, in general, such market risk is
not material to the Company.
Foreign Currency Exchange Risk
- ------------------------------
At October 2, 1998, the Company had sales in over 28 countries worldwide. These
sales outside the United States accounted for approximately 25 percent of
worldwide sales. In 1999, the Company expects this percentage to increase due
to foreign acquisitions, primarily in Europe and Japan. Over ninety-five
percent of foreign sales are denominated in currencies of the local country. As
such, the Company's reported profits and cash flows are exposed to changing
exchange rates.
To date, management has not deemed it cost-effective to engage in a formula-
based program of hedging the profits and cash flows of foreign operations using
derivative financial instruments. Because the Company's foreign subsidiaries
purchase significant quantities of inventory payable in U.S. dollars, managing
the level of inventory and related payables and the rate of inventory turnover
provides a level of protection against adverse changes in exchange rates.
In addition, at any point in time the Company's foreign subsidiaries hold
financial assets and liabilities that are denominated in currencies other than
U.S. dollars. These financial assets and liabilities consist primarily of
short-term, third-party receivables and payables. Changes in exchange rates
affect these financial assets and liabilities. For the most part, however,
these gains or losses arise from translation and, as such, do not significantly
affect net income.
Prior to 1998, the Company on occasion has used derivatives to hedge specific
risk situations involving foreign currency exposures. No such derivatives were
held at July 2, 1999.
Interest Rate Risk
- ------------------
The financial liabilities of the Company that are exposed to changes in interest
rates are limited to short-term borrowings. The stated rate of interest for
borrowings under the Foothill and HNB revolving credit agreements are one and
one-half percent over prime and London Interbank Offered Rate, respectively.
Management believes interest rate risk for the Company is not significant; a one
percent annual increase in prime or London Interbank Offered Rate would result
in approximately $430,000 additional interest expense.
QMS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
The Company is a defendant in various litigation and claims in the normal course
of business. Based on consultation with various counsel in these matters,
management is of the opinion that the ultimate resolution of such litigation and
claims will not materially affect the Company's financial position, results of
operations, or cash flows.
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>
27 Financial Data Schedule
</TABLE>
(b) Reports:
o Form 8-K dated June 7, 1999, announcing the Company's reacquisition of its
former subsidiaries, QMS Europe B.V. and QMS Australia PTY Ltd.
o Form 8-K dated August 6, 1999, announcing the resignation of James A.
Wallace as Chief Financial Officer and Director
0 Form 8-K/A dated June 7, 1999, and signed August 11, 1999, related to the
Company's reacquisition of its former subsidiaries, QMS Europe B.V. and QMS
Australia PTY Ltd.
QMS, INC. AND SUBSIDIARIES
<TABLE>
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.
<S> <C>
QMS, INC.
(Registrant)
Date: August 13, 1999 /s/ Edward E. Lucente
--------------- ---------------------
Edward E. Lucente
President and Chief
Executive Officer
Date: August 13, 1999 /s/ Albert A. Butler
--------------- ---------------------
Albert A. Butler
Chief Financial
Officer
</TABLE>
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