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 April 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
Commission file number 1-9348
QMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 63-0737870
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification Number)
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
10,704,335 at April 30, 1999.
QMS, INC. AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of April 2, 1999, and
January 1, 1999 3 - 4
Condensed Consolidated Statements of Operations
(unaudited) for the three months ended
April 2, 1999, and April 3, 1998 5
Condensed Consolidated Statements of Comprehensive
Income (Loss) (unaudited) for the three months ended
April 2, 1999, and April 3, 1998 6
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended
April 2, 1999, and April 3, 1998 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 8 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II - OTHER INFORMATION 16
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 17
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QMS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
as of April 2, 1999, and January 1, 1999
(Unaudited)
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April 2, January 1,
in thousands 1999 1999
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 1,005 $ 1,707
Trade Receivables (less allowance for doubtful
accounts of $520 at April 2, 1999, and $484
at January 1, 1999) 27,747 22,747
Note Receivable, Net 239 146
Inventories:
Raw Materials 11,563 6,419
Work in Process 2,414 2,132
Finished Goods 21,116 20,767
Inventory Reserves (5,191) (3,629)
------- -------
Total Inventories, Net 29,902 25,689
Other Current Assets 3,186 2,944
------- -------
Total Current Assets 62,079 53,233
------- -------
PROPERTY, PLANT, AND EQUIPMENT 37,770 35,990
Less Accumulated Depreciation 31,635 31,255
------- -------
Total Property, Plant, and Equipment, Net 6,135 4,735
CAPITALIZED AND DEFERRED SOFTWARE 10,477 10,155
PREPAID RENT (Note 6) 1,300 1,300
OTHER ASSETS, NET 798 871
------ ------
TOTAL ASSETS $ 80,789 $ 70,294
====== ======
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of April 2, 1999, and January 1, 1999
(Unaudited)
April 2, January 1,
in thousands 1999 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 22,157 $ 14,363
Revolving Credit Loan and Short-Term Debt 10,837 7,306
Current Maturities of Capital Lease Obligations 422 218
Employment Costs 3,343 3,851
Deferred Service Revenue 7,817 7,453
Other Current Liabilities :
Warranty Accrual 1,341 1,298
Accrued Management Transition Expenses 644 644
Other 3,000 3,708
------ -----
Total Other Current Liabilities 4,985 5,650
------- ------
Total Current Liabilities 49,561 38,841
------- ------
CAPITAL LEASE OBLIGATIONS 1,429 326
OTHER LIABILITIES
Deferred Service Revenue 775 839
Deferred Compensation 2,613 2,638
Accrued Management Transition Expenses 405 421
Other Liabilities 680 790
------ -----
Total Other Liabilities 4,473 4,688
------ ------
STOCKHOLDERS' EQUITY 25,326 26,439
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,789 $ 70,294
====== ======
See Notes to Condensed Consolidated Financial Statements
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QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended April 2, 1999, and April 3, 1998
(Unaudited)
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Three Months Ended
April 2, April 3,
in thousands, except per share amounts 1999 1998
NET SALES
Printers and Supplies $ 35,827 $ 24,971
Service 7,539 9,650
------ ------
Total Net Sales 43,366 34,621
------ ------
COST OF GOODS SOLD
Printers and Supplies 28,534 18,275
Service 4,791 6,244
------ ------
Total Cost of Goods Sold 33,325 24,519
------ ------
GROSS PROFIT
Printers and Supplies 7,293 6,696
Service 2,748 3,406
------ ------
Total Gross Profit 10,041 10,102
------ ------
OPERATING EXPENSES 10,640 9,512
------ ------
OPERATING INCOME (LOSS) (599) 590
OTHER INCOME (EXPENSE)
Interest Income 26 90
Interest Expense (247) (113)
Miscellaneous Expense, Net (37) (39)
----- -----
Total Other Expense, Net (258) (62)
----- -----
INCOME (LOSS) BEFORE INCOME TAXES (857) 528
INCOME TAX PROVISION 34 51
----- -----
NET INCOME (LOSS) $ (891) $ 477
===== =====
EARNINGS (LOSS) PER COMMON SHARE (Note 3)
Basic and Diluted $ (0.08) $ 0.04
SHARES USED IN PER SHARE COMPUTATION (Note 3)
Basic 10,700 10,697
Diluted 10,700 10,768
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended April 2, 1999, and April 3, 1998
(Unaudited)
Three Months Ended
April 2, April 3,
in thousands 1999 1998
Net Income (Loss) $ (891) $ 477
Other Comprehensive Income (Loss), Net of Taxes:
Canadian Currency Translation Adjustments 137 (24)
Japanese Currency Translation Adjustments (277) 0
------- -----
Total Other Comprehensive Loss (140) (24)
------- -----
Comprehensive Income (Loss) $ (1,031) $ 453
======= =====
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended April 2, 1999, and April 3, 1999
(Unaudited)
Three Months Ended
April 2, April 3,
in thousands 1999 1998
Operating Activities:
Net Income (Loss) $ (891) $ 477
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities:
Depreciation of Property, Plant and Equipment 596 514
Amortization of Capitalized and Deferred Software 2,288 2,157
Provision for Losses on Inventory 717 920
Other 38 (1)
Net Change in Assets and Liabilities that Provided
(Used) Cash:
Trade Receivables (5,050) (2,836)
Inventories, Net (4,930) (2,718)
Accounts Payable 7,794 3,288
Other (1,705) (637)
------- -------
Net Cash Provided by (Used in) Operating Activities (1,143) 1,164
------- -------
Investing Activities:
Collections of Notes Receivable 172 54
Purchase of Property, Plant and Equipment (601) (982)
Proceeds from Disposal of Property, Plant and Equipment 29 15
Additions to Capitalized and Deferred Software Costs (2,610) (1,937)
------- -------
Net Cash Used in Investing Activities (3,010) (2,850)
------- -------
Financing Activities:
Proceeds from Debt 3,531 2,493
Payments of Debt and Capital Lease Obligations (78) (562)
Other (2) 109
------- -------
Net Cash Provided by Financing Activities 3,451 2,040
------- -------
Net Change in Cash and Cash Equivalents (702) 354
Cash and Cash Equivalents at Beginning of Period 1,707 697
------- -------
Cash and Cash Equivalents at End of Period $ 1,005 $ 1,051
======= =======
See Notes to Condensed Consolidated Financial Statements
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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 April 2, 1999, the results of operations and changes in
cash flows for the three months ended April 2, 1999, and April 3, 1998. The
results of operations for the three months ended April 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 fiscal 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 the 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. This Form 10-Q is for the first quarter in the
Company's new fiscal year.
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 the diluted earnings (loss)
per share also includes the dilutive effect of the assumed exercise of stock
options and warrants.
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 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 effect related to the components of other
comprehensive income (loss) for the three months ended April 2, 1999, and
April 3, 1998.
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 for the Company
in fiscal 2000. Management has not yet determined the effect of SFAS No. 133
on its financial statements.
6.PREPAID RENT
Since September 1997, the Company has been out of compliance with the Net
Worth covenant contained in the 1997 sale-leaseback agreement for the Mobile
headquarters. The Company has obtained a waiver of non-compliance thorough
December 31, 1999, in exchange for $1.3 million in prepaid rent and an
amendment to the sale-leaseback warrant agreement.
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 is 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 a
further extension of the waiver or a permanent revision of the covenant will
be obtained.
7.REVOLVING CREDIT AGREEMENT
The revolving credit agreement, entered into with Foothill Capital
Corporation ("Foothill") on November 17, 1995, includes requirements for a
minimum current ratio, a maximum total liabilities to equity ratio, and
minimum levels of tangible net worth and working capital. At April 2, 1999,
the Company was not in compliance with the maximum total liabilities to
equity ratio. On April 30, 1999, the Company's non-compliance was remedied
by a permanent revision of this requirement from Foothill.
8.COMMITMENTS AND CONTINGENCIES
As of April 2, 1999, the Company had a commitment of approximately $11.2
million under contracts to purchase print engines and related components and
approximately $8.2 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 the relevant 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
________________________________________________________________________________
Results of Operations
Net loss for the three months ended April 2, 1999, was $891,000 on net sales of
$43.4 million compared to net income of $477,000 for the three months ended
April 3, 1998, on net sales of $34.6 million. This reduction in net income is
due primarily to lower gross margin percentages and higher marketing expense.
Table 1 - Net Sales Comparisons for Key Product Groups
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Three months ended
April 2, April 3,
(000's) 1999 1998 Difference
- --------------------------------------------------------------------------------------------------------
Hardware $ 8,896 $ 9,929 $ (1,033)
Consumables 8,355 8,286 69
Service 7,539 9,650 (2,111)
Europe 9,065 5,385 3,680
Japan 9,446 987 8,459
All Other 65 384 (319)
- --------------------------------------------------------------------------------------------------------
Total $ 43,366 $ 34,621 $ 8,745
========================================================================================================
Table 2 - Hardware and International Sales Comparisons
Three months ended
April 2, April 3,
(000's) 1999 1998 Difference
Hardware Sales
- --------------------------------------------------------------------------------------------------------
U.S./Canada - Direct $ 543 $ 3,614 $ (3,071)
U.S./Canada - Reseller 7,035 5,004 2,031
Latin America & Other 312 517 (205)
OEM 1,006 794 212
- --------------------------------------------------------------------------------------------------------
Total Hardware -Western
Hemisphere $ 8,896 $ 9,929 $ (1,033)
=========================================================================================================
Europe Sales
Controller Boards $ 5,243 $ 3,125 $ 2,118
Commissions 3,822 2,260 1,562
- ---------------------------------------------------------------------------------------------------------
Total Europe $ 9,065 $ 5,385 $ 3,680
=========================================================================================================
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Net sales for the three months ended April 2, 1999, increased 25.3% from net
sales for the three months ended April 3, 1998. While service revenues were
down by $2.1 million (21.9%), revenues in Europe and Japan increased $3.7
million (68.3%) and $8.5 million (857.0%), respectively.
The decline in service revenue is due to lower sales of spare parts and fewer
service contracts. Spare parts sales for the three months ended April 2, 1999,
decreased $824,000 (50.7%) from $1,625,000 for the three months ended April 3,
1998, to $801,000 for the three months ended April 2, 1999. This decrease was
caused by abnormally large spare parts sales in the first calendar quarter of
1998 due to new OEMs and distributors building up spare parts inventories for
servicing their customers.
Excluding spare parts sales, service revenue decreased 16.0% from $8,025,000 to
$6,738,000. The decline in service revenue reflects the decreasing cost of new
printers and the tendency to replace rather than repair or maintain printers.
European revenue includes both controller board sales at cost and commissions
earned on product sales. Controller board sales and commissions for Europe
increased 67.8% and 69.1%, respectively. The increase in European revenue is
primarily from sales of color products. European demand for color products is
expected to remain strong throughout this year.
During the three months ended April 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. This change
enables the Company to pursue and expand OEM agreements with other Japanese
companies.
Hardware - Western Hemisphere sales for the three months ended April 2, 1999,
were $8.9 million, a decrease of 10.4% over the same period ending April 3,
1998. The direct market net sales were down $3.1 million (85.0%) for the three
months ended April 2, 1999, compared to the three months ended April 3, 1998,
while the reseller net sales increased by $2.0 million (40.6%), for the same
period. This shift reflects the change implemented in February 1998 to move
from a direct sales force to distributors and value-added resellers, combining
direct and reseller sales channels.
Overall, the Company's gross profit decreased $61,000, from $10,102,000 for the
three months ended April 2, 1999, to $10,041,000 for the three months ended
April 3, 1998, as a result of lower margins on print system hardware. While the
gross profit was virtually unchanged, the gross profit margin decreased from
29.2% to 23.2% of sales. Hardware margins in particular were down from 38.9%
to 20.0% of sales due to price competition for color product. In addition,
reestablishing the Japan subsidiary decreased profit margins as distributor
commissions were replaced with more typical sales margins.
The operating expenses increased $1,128,000 (from $9,512,000 to $10,640,000 for
the three months ended April 3, 1998, and April 2, 1999, respectively) but
decreased as a percentage of sales from 27.5% to 24.5%. Of the $1,128,000
increase in operating expenses, $833,000 was caused by the addition of Japanese
operating expenses. The decrease in spending as a percentage of sales is
primarily due to the additional Japanese sales but also reflects management's
continued focus on controlling costs while growing revenue.
Total other income and expense was a net expense of $258,000 for the three
months ended April 2, 1999, compared to a net expense of $62,000 for the three
months ended April 3, 1998. This increase in other expense is a result of a
$198,000 increase in net interest expense due to higher revolving credit
balances.
Income taxes reflect estimated foreign income taxes required by foreign tax
treaties.
Financial Condition
The revolving credit balance increased $3.5 million during the quarter due
primarily to an increase of $5.0 million in accounts receivable. The growth in
receivables was proportionate to the growth in sales for the quarter.
Accounts payable and inventory grew by $7.8 million and $4.2 million
respectively due to large inventory purchases during the quarter. The Company
purchased $8.3 million of inventory with one foreign supplier in exchange for
lower prices and 90 day terms. At April 2, 1999, the Company had a $5.8
million payable balance with this supplier which will be paid during the coming
three months. Inventory from the supplier will decrease over the remainder of
this year.
The Company expects accounts receivable and accounts payable to remain at higher
levels than the January 1, 1999, balances because of higher sales and production
volumes.
Liquidity and Capital Resources
During the three months ended April 2, 1999, the Company's working capital and
capital expenditure requirements came principally from operations. The
Company's net working capital as of April 2, 1999, was $12.5 million compared to
$14.4 million at January 1, 1999.
At April 2, 1999, the Company had borrowings of $10.8 million under the
revolving credit facility with Foothill Capital Corporation ("Foothill") and
cash on hand totaled $1.0 million. Total borrowing capacity under this credit
facility is a function of eligible accounts receivable and inventory. At April
2, 1999, total availability was $13.5 million. At April 2, 1999, the Company
was not in compliance with the maximum total liabilities to equity ratio
requirements. On April 30, 1999, the Company's non-compliance was remedied by a
permanent revision of this requirement from Foothill.
In February 1999, the Company announced its intention to purchase QMS Europe and
QMS Australia. The purchase will cost $27 million and is expected to occur
during the next quarter. The Company is evaluating new credit facilities that
will replace the current credit facility and provide the necessary funds for the
acquisition as well as for working capital requirements.
The Company projects that acquisition costs will be approximately $2.0 million
and has incurred $302,000 to date.
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.
Sale-Leaseback Agreement
Since September 1997, the Company has been out of compliance with the Net Worth
covenant contained in the 1997 sale-leaseback agreement for the Mobile
headquarters. The Company has obtained a waiver of non-compliance thorough
December 31, 1999, in exchange for $1.3 million in prepaid rent and an amendment
to the sale-leaseback warrant agreement.
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 is 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 a further
extension of the waiver or a permanent revision of the covenant will be
obtained.
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 April
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 May 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 May 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 June 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 for the Company in
fiscal 2000. 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
slightly with approximately 18% of sales being in Japanese yen. Over ninety
percent of these 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 April 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 revolving credit agreement is one and one-half percent over
prime. Management believes interest rate risk for the Company is not
significant due to the relatively low short-term debt balance.
<PAGE>
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
The Company's Annual Meeting of Stockholders (the "Meeting") was held on January
27, 1999. The results of the voting on the election of directors were as
follows:
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Nominee For Withheld Total Votes Cast
Michael C. Dow 9,839,743 149,495 9,989,238
S. Felton Mitchell, Jr. 9,824,252 164,986 9,989,238
Charles D. Daley 9,837,249 151,989 9,989,238
</TABLE>
Accordingly, all nominees for the Board of Directors were elected.
The results of the voting on the amendment to the Company's Restated Certificate
of Incorporation described in the Proxy Statement delivered in connection with
the Meeting were as follows:
<TABLE>
<S> <C> <C>
For Against Abstain
9,820,398 91,790 77,050
</TABLE>
Accordingly, the amendment to the Company's Restated Certificate of
Incorporation was adopted.
ITEM 5 - OTHER INFORMATION - None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C>
Exhibit
Number Description
27 Financial Data Schedule
10(r)(xx) Amendment Number Nine dated April 30, 1999, to the Loan and Security
Agreement.
</TABLE>
(b) Reports:
Form 8-K dated February 22, 1999, announcing the Company's intent to
exercise its option to reacquire its former subsidiaries, QMS Europe B.V.
and QMS Australia PTY Ltd. during 1999.
QMS, INC. AND SUBSIDIARIES
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.
QMS, INC.
(Registrant)
<TABLE>
<S> <C>
Date: May 6, 1999 /s/ Edward E. Lucente
Edward E. Lucente
President and Chief Executive Officer
Date: May 6, 1999 /s/ James A. Wallace
James A. Wallace
Chief Financial Officer
</TABLE>
<PAGE>
EXHIBIT 10(r)(xx)
AMENDMENT NUMBER NINE TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER NINE TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
entered into as of April 30, 1999, 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, as
further amended by that certain Amendment Number Four to Loan and
Security Agreement dated as of January 22, 1997, as further amended by
that certain Amendment Number Five to Loan and Security Agreement
dated as of June 23, 1997, as further amended by that certain
Amendment Number Six to Loan and Security Agreement dated as of
October 8, 1997, as further amended by that certain Amendment Number
Seven to Loan and Security Agreement dated as of September 23, 1998,
and as further amended by that certain Amendment Number Eight to Loan
and Security Agreement dated as of November 17, 1998 (as so amended,
restated, supplemented, and otherwise modified from time to time, the
"Agreement");
B. Borrower has requested Foothill to amend the Agreement to, among
other things, to amend the financial covenant regarding Total
Liabilities to Tangible Net Worth, as set forth in this Amendment, and
to waive the Events of Default that have occurred during the period
from and including January 1, 1999 through and including March 31,
1999 as a result of Borrower's failure to keep or observe the
financial covenant contained in Section 6.13(b) of the Agreement;
C. Foothill is willing to so amend the Agreement and grant such a
waiver 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 hereby agree as follows:
1. Amendments to the Agreement.
a. Section 6.13(b) of the Agreement hereby is deleted in its entirety and the
following hereby is substituted in lieu thereof:
(b) Total Liabilities to Tangible Net Worth Ratio. Effective as of March
31, 1999, a ratio of Borrower's total liabilities divided by Tangible Net
Worth of not more than five to one (5.0:1.0), measured on a fiscal
quarter-end basis;
2. Waiver. Foothill hereby agrees to waive any Default or Event of Default
that has occurred during the period from and including January 1, 1999, through
and including March 31, 1999, as a result of Borrower's failure to keep or
observe the financial covenant contained in Section 6.13(b) of the Agreement.
2. Fee. In connection with its entry into this Amendment, on the date hereof,
Foothill shall charge Borrower's loan account a fee in the amount of $100,000;
provided, however, that if the Agreement is automatically renewed pursuant to
Section 3.3 hereof, on the first Renewal Date occurring after the date hereof on
which date such renewal of the Agreement shall have occurred, Foothill shall
credit Borrower's loan account in an amount equal to $50,000. Said fee shall be
fully-earned, non-refundable, and due and payable on the date of this Agreement.
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, the First Amendment
Closing Date 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, duly executed and delivered by the
respective authorized officials thereof;
b. Foothill shall have received a certificate from the Secretary of each
Guarantor attesting to the incumbency and signatures of authorized officers of
that Guarantor and to the resolutions of that Guarantor's Board of Directors
authorizing its execution and delivery of the reaffirmation and consent of that
Guarantor attached hereto as Exhibit A, and authorizing specific officers of
that Guarantor to execute and deliver the same;
c. Foothill shall have received all required consents of Foothill's
participants in the Obligations to Foothill's execution, delivery, and
performance of this Amendment;
d. 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 relate
solely to an earlier date);
e. 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;
f. 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;
g. The Collateral shall not have declined materially in value from the values
set forth in the most recent appraisals or field examinations previously done by
Foothill; and
h. All other documents and legal matters in connection 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 interests 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 to 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.
[remainder of page intentionally left blank]
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/ Christoper Coutu
Title: VP
QMS, INC., a Delaware corporation
By /s/ James A. Wallace
Title: VP and CFO
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 Nine to Loan and
Security Agreement, dated as of April 30, 1999 (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 acknowledgement or
agreement to future amendments, and nothing herein shall create such a duty.
QMS CIRCUITS, INC., a Delaware corporation
By /s/ James A. Wallace
Title: Secretary and Treasurer
QMS CANADA INC., a corporation incorporated
under the laws of Canada
By /s/ James A. Wallace
Title: Secretary and Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-2-1999
<PERIOD-END> APR-2-1999
<CASH> 1005
<SECURITIES> 0
<RECEIVABLES> 28267
<ALLOWANCES> 520
<INVENTORY> 29902
<CURRENT-ASSETS> 62079
<PP&E> 37770
<DEPRECIATION> 31635
<TOTAL-ASSETS> 80789
<CURRENT-LIABILITIES> 49561
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 25208
<TOTAL-LIABILITY-AND-EQUITY> 80789
<SALES> 43366
<TOTAL-REVENUES> 43366
<CGS> 33325
<TOTAL-COSTS> 33325
<OTHER-EXPENSES> 10041
<LOSS-PROVISION> 717
<INTEREST-EXPENSE> 247
<INCOME-PRETAX> (857)
<INCOME-TAX> 34
<INCOME-CONTINUING> (891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (891)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
