UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
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 0-21504
QUAD SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2180139
- --------------------------------- -----------------------------------------
(State or other jurisdiction (I. R. S. Employer Identification Number)
of incorporation or organization)
2405 MARYLAND ROAD, WILLOW GROVE, PENNSYLVANIA 19090
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 657-6202
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.03 PAR VALUE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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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____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 22, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $8,738,454.*
As of December 22, 1998, 4,414,091 shares of common stock, $.03 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1999 Annual Meeting of Stockholders, to be filed no later
than 120 days after the end the Registrant's fiscal year covered by this report.
- ----------
* Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the Registrant, without
conceding that all such persons are "affiliates" of the Registrant for
purposes of the federal securities laws.
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PART I
ITEM 1. BUSINESS
GENERAL
The principal business of Quad Systems Corporation (the "Company" or "Quad") is
the design, manufacture, marketing and support of surface mount technology
("SMT") equipment used in the assembly of printed wiring boards. Quad sells its
SMT assembly equipment primarily in low to medium volume production
environments. The Company's SMT assembly equipment conveys and positions printed
wiring boards in preparation for the precision placement of a broad range of
electronic components. In conjunction with the Company's SMT assembly equipment,
the Company also offers certain other peripherals such as component feeders,
matrix tray handlers and machine vision systems. In addition, the Company sells
turnkey systems incorporating the major elements of a SMT production line:
namely, a screen printer, an assembly system, a reflow oven and material
handling conveyors. The Company designs and manufactures its own assembly
systems and reflow ovens, while supplying screen printers and material handling
conveyors purchased from third party sources. The Company previously
manufactured its own screen printers, until October 1, 1998, when it sold this
capability to Speedline Technologies, Inc., as described below. The Company also
supplies assembly systems, the QSA-30 Series, and component tape feeders
manufactured by Samsung Aerospace Industries, Ltd. ("Samsung"), under a
long-term agreement. From time to time, the Company examines the products it
manufactures and those produced by third parties to determine whether the mix of
products to be offered by the Company and those to be purchased from third party
sources should be changed.
Under SMT, printed circuit or wiring boards ("PWBs") are prepared by
screen-printing solder paste onto numerous contact pads at the termination of
each PWB trace. Components are added to the PWB by an assembly system that picks
a component and places it precisely on trace terminations that have been
appropriately prepared with solder paste. Leads from each component, of which
there may be as few as two or as many as several hundred, must be aligned with
the contact pads to assure proper electrical connections. After the components
are placed, the entire PWB is heated to a temperature just above the melting
point of the solder in the solder paste. The resulting reflow of the solder
provides a permanent physical and electrical bond between each lead of each
component and the pads and traces of the PWB.
In addition to its SMT business, the Company designs, manufactures, markets and
supports advanced packaging technology ("APT") equipment used in processes such
as "chip on board", "flip chip" and "chip scale package" assembly. The Company
has recently entered into the APT market segment and it is not yet a significant
portion of the Company's business and there can be no assurance that the Company
will ever be able to generate substantial APT sales. APT combines semiconductor
assembly processes and SMT assembly processes with a wide range of substrate
materials to produce products that are significantly smaller, faster and
lighter. APT is an enabling technology that the Company believes is becoming
increasingly more cost-effective. The Company also believes that the APT
marketplace is evolving and customer requirements are not fully defined. While
the APT processes described above are not exhaustive, they include those the
Company believes are some of the most commercially feasible processes currently
being utilized. The Company's current APT product offering meets certain of the
APT market's application requirements. The Company's products do not seek to
address all currently identified needs for the APT marketplace. The Company is
continuing to develop and market additional features for its APS-1 assembler, to
meet targeted needs of this evolving market. There can be no assurance that the
Company will be successful in doing so. Additionally, new technologies and
competitive models may be introduced in the future which might cause the
Company's current APT product offerings to become obsolete.
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Subsequent to fiscal year-end, the Company sold substantially all of the assets
and liabilities of one of its European subsidiaries, SMTech Limited ("SMTech"),
to Speedline Technologies, Inc. ("Speedline") for $14.8 million in cash paid at
closing, subject to a holdback of $750,000. The Company is liable for various
representations and warranties provided to Speedline under this agreement. In
connection with the sale, Quad and Speedline's MPM Corporation division ("MPM")
entered into an agreement under which MPM will supply Quad on an OEM basis with
the former SMTech screen printer product line. See Note 11 to the Consolidated
Financial Statements for further information relating to the sale of the net
assets of SMTech.
The Company was incorporated in Pennsylvania in 1980 and changed its state of
incorporation to Delaware in 1987.
PRODUCTS AND SERVICES
The Company offers a line of SMT and APT process equipment and related services
for the electronics manufacturing market. The products offered by the Company
are sold as part of a turnkey system marketed by the Company under the
"QuadLine(TM)" name or are sold separately. Most of the Company's currently
marketed SMT and APT equipment is compatible with the Company's software and
component handling subsystems and the Company attempts to provide suitable
upgrade paths for its products.
Primary Surface Mount Assembly Equipment
<TABLE>
<CAPTION>
FISCAL YEAR
PRODUCT CAPABILITIES MARKET FOCUS INTRODUCED
- ------- ------------ ------------ ----------
<S> <C> <C> <C>
QSP-2 (TM) (part of Full range of fine pitch capability Medium volume 1994
the "Q" Series) "QuadAlignTM" component centering SMT assembly
Placement rates of up to 14,000 market
components per hour (CPH)
QSV-1 (TM) (part of Full range fine pitch capability Medium volume 1997
the "Q" Series) "QuadAlign" component centering SMT assembly
Placement rates of up to 7,000 CPH market
QSA-30 (TM) Series Limited range of fine pitch capability Medium volume 1997
"QuadAlign" component centering SMT assembly
Placement rates of up to 13,300 CPH market
</TABLE>
"Q" SERIES OF PRODUCTS
The "Q" Series multi-functional SMT assemblers offer a range of throughput
rates, precision and capabilities. "Q" Series assemblers share several common
technologies, including Quad's patented QuadAlign technology, a component
processing alignment system that allows the assembler to process fine pitch
components "on-the-fly," the P4 (Pick-Pick-Place-Place) head and QSOFT(TM),
Quad's proprietary software for electronic assembly machine programming and
operation. QSOFT enables assemblers of the "Q" Series to be combined more
efficiently than otherwise would be the case, to form higher capacity production
lines. In addition, all standard Quad component feeder systems and accessories
are compatible with the "Q" Series assemblers and can be used in combination
with the Company's docking feeder carts. All "Q" Series models share Quad's
proprietary IQ (TM) feeder setup verification technology. This technology
increases machine utilization and yield. Approximately 36% of the Company's
fiscal 1998 net sales were attributable to sales of the "Q" Series, including
accessories.
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QSP-2
The QSP-2 is a medium-speed multi-functional "Q" Series SMT assembler with fine
pitch capabilities. The QSP-2 was introduced in February 1994 and was the first
"Q" Series production assembler to utilize QuadAlign. Its ability to place a
large range of components at high throughput rates provides flexibility in
production line balancing, allowing easier optimization of production. The QSP-2
is designed for applications with placement rates, depending upon customer
applications, of up to 14,000 components per hour.
QSV-1
The QSV-1 is a low to medium volume multi-functional "Q" Series SMT assembler
with fine pitch capabilities. The QSV-1 was introduced June 1996 and is designed
for applications with placement rates, depending upon customer application, of
up to 7,000 components per hour.
QSX-1 (TM)
The QSX-1 is a medium-speed "Q" Series SMT assembler that is capable of placing
ultra-fine-pitch components onto very large PWBs. This precision assembly system
combines an advanced mechanical platform and direct linear drive motor system
with the common QSOFT, QuadAlign and P4 head technologies. The QSX-1 is designed
to have optimal use in for full-production fine-pitch IC placement applications.
The Company began full production and shipments of the QSX-1 during the fourth
fiscal quarter of 1996.
APS-1 (TM)
The APS-1 (Advanced Packaging System) is a "Q" Series assembler designed to
address the evolving requirements of both the advanced SMT and APT markets. The
APS-1, introduced in fiscal 1997, is designed to place semiconductor die,
including flip chip on a variety of substrates, in addition to placing a broad
range of SMT components, at throughput rates of up to 5,000 components per hour,
depending upon customer applications. The APS-1 has been designed to be
flexible, with optional modular subsystems to meet a variety of customer
applications. Options currently available include Wafer Presentation Systems, a
Die Inverter, an Automatic Wafer Transfer System, a Dip Fluxer and a variety of
Waffle Pack Holders.
The Company's current APT products meet certain APT market application
requirements. The Company's products do not address the needs for all APT
processes in the marketplace. The Company is continuing to develop and market
additional features for its APS-1 assembler, to meet targeted needs the Company
has identified for this evolving market. There can be no assurance that the
Company will be successful in doing so. Additionally, new technologies and
competitive models may be introduced in the future which might cause the
Company's current APT product offerings to become obsolete. The Company
continually attempts to improve its products to expand and increase the
application of the product, although there can be no assurance the Company will
be successful.
QSA-30 Series
The QSA-30 Series are medium volume SMT assemblers, developed in partnership
with and purchased from Samsung. The QSA-30, QSA-30A and QSA-30V models utilize
QuadAlign, Quad tape feeders and docking feeder carts. The QSA-30 Series is
designed for applications with placement rates, depending upon customer
applications, of up to 13,300 components per hour, while placing components
ranging in size from very small passive components to fine pitch components.
A disruption of the supply of the QSA-30 Series from Samsung would adversely
affect the ability of the Company to meet its customer's needs and could have a
significant adverse impact on net sales.
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"C" SERIES OF PRODUCTS
The "C" Series are modular, low to mid-range assembly systems, which can be
configured with a wide variety of accessories designed to meet the specific
processing requirements of Quad's customers. The "C" Series also incorporates
QuadAlign. Components placed by the "C" Series range from very small passive
components, to multi-leaded, fine pitch component parts with lead spacing down
to 12 mils. All of the Company's standard accessories and QuadVu (TM) vision
systems are available as options for the "C" Series. Approximately 9% of the
Company's fiscal 1998 net sales were attributable to sales of the current "C"
Series and its predecessors, including accessories.
IVcMk2
The IVcMk2 is a high-accuracy assembler, providing a full range of fine pitch
capability, which incorporates QuadAlign. The IVcMk2 is designed to be
configured as a single unit, with placement rates of up to 3,600 components per
hour, or as a multiple headed system. The Company believes that the modular
design is attractive to many SMT customers, who prefer an initial high
capability system that can be upgraded as their production requirements change.
IIc
The IIc is an entry-level system, providing a limited range of fine pitch
capability. The IIc is based on the original IVc. The IIc includes a belt-driven
system for positioning of the X and Y-axes, while it maintains the precision
advantage of linear glass scale encoders for positional accuracy. The IIc offers
large board capacity that may be configured in a standard workholder, an in-line
board transport or a side shuttle configuration.
SCREEN PRINTERS
The Company sells screen printers manufactured by Speedline. The VMP (TM)
Series, AVX 400 (TM) and AVX 500 (TM) models are screen printers that offer high
precision and repeatable application of solder paste onto PWBs. The range of
models starts at bench-top, through fully automated in-line full-size 29" screen
printers.
Subsequent to fiscal year-end, the Company sold substantially all of the assets
and liabilities of subsidiary, SMTech, which previously supplied its screen
printers, to Speedline. In connection with the sale, Quad and Speedline's MPM
division entered into an agreement under which MPM will supply Quad on an OEM
basis with the former SMTech screen printer product line. See Note 11 to the
Consolidated Financial Statements for further information relating to the sale
of the net assets of SMTech.
Approximately 18% of the Company's fiscal 1998 net sales were attributable to
sales of screen printers. The Company will continue to market and service the
screen printer product line. As a result of the sale of SMTech, the Company
believes that sales of screen printers will represent significantly less than
10% of net sales in fiscal 1999. A disruption of the supply of screen printers
from MPM could adversely affect the ability of the Company to meet its
customer's needs. If MPM were to stop supplying Quad with screen printers, the
Company has the right to use alternative suppliers. The Company believes that
there are other suitable screen printer products that can be obtained from other
screen printer manufacturers.
REFLOW OVENS
The Company also sells convection dominant reflow ovens manufactured by its
wholly-owned subsidiary Quad Europe Limited ("QEL"), acquired in 1993 and
located in High Wycombe, England. Oven features include a passive pre-heat
section and an integrated thermal profiling system. Based on a modular frame
design, Quad's convection reflow ovens are available in several models.
Approximately 6% of the Company's fiscal 1998 net sales were attributable to
sales of reflow ovens.
Profile Series of Ovens
The Company's high performance Profile Series reflow ovens feature what the
Company believes is an advanced airflow and thermal dynamics technology that
supports high-production throughputs. The A.I.R.(TM) (Adaptive Intelligent
Reflow) option for the Profile Series utilizes a computerized thermal camera
inside the oven and an independent computer system to monitor and control the
temperature of each PWB processed.
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QCR Series Ovens
The QCR Series reflow ovens are designed for low to medium volume production
environments and for highly consistent reflow of assembled PWBs. QCR ovens are
available in two models, with four or eight independently controlled convection
zones, and belt, rail or combination transport systems.
MATERIAL HANDLING CONVEYORS
Quad sells material handling conveyors manufactured by third parties. Such
conveyors include wiring board loaders and unloaders, manual inspection stations
and other conveyor systems. Conveyor systems automate the material transfer
steps throughout the SMT assembly processing system.
QUADLINE
The Company provides its customers with the major elements of turnkey SMT
production lines, under the name "QuadLine," a service that integrates a full
line of assembly equipment. The Company believes that offering the major
elements of a turnkey production line system complements the Company's primary
business of selling surface mount assemblers. The Company also believes that
QuadLine enhances the Company's overall market position by providing customers a
sole source of responsibility and service for, and increased compatibility
among, the equipment in customers' assembly production lines. During fiscal
1998, sales of such systems accounted for approximately 33% of net sales.
PERIPHERALS AND SERVICE
Component Feeders and Accessories
The Company sells a variety of tape, vibratory and waffle tray feeders. Under a
long-term supply agreement with Quad, Samsung is the Company's sole supplier of
component tape feeders. The contract is to run for a six-year period and
deliveries under the contract commenced in fiscal 1998. The Company's electronic
tape feeders are available in 8mm, 12mm, 16mm, 24mm, 32mm, 44mm and 56mm formats
and are compatible with all Quad assembly systems. In addition, the Company
offers docking feeder carts that can be loaded with tape feeders off-line and
rapidly rolled into place to prepare the assembler to produce a new PWB. This
feature can greatly reduce the time involved in changing over the assembler from
assembling one PWB to another.
A disruption of the supply of component tape feeders could adversely affect the
ability of the Company to meet its customer's needs. If Samsung were to stop
supplying Quad with component tape feeders, Quad has the right to resume
manufacturing or use alternative suppliers. Quad maintains an inventory of
component tape feeders that it believes will sustain the business during such a
transition, if any.
The Company's waffle tray handler can present up to twenty different waffle
trays to the assembler and is compatible with most of the Company's assemblers.
The Company's vibratory feeders are compatible with all of its assembly systems.
QuadCare (SM)
QuadCare is the Company's integrated service and support program, offering
complete coverage for preventive and unscheduled maintenance, including parts
and labor, software and firmware upgrades, telephone consultations, application
engineering support and periodic retraining. The provision of software and
firmware upgrades under QuadCare permits existing customers to benefit from the
Company's development activities both to improve the operation of their
assemblers and to provide support for additional peripheral equipment and
modular enhancements. The Company views this line of business as supporting the
marketing of the Company's assembly equipment and not as a substantial
additional line of business.
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MANUFACTURING
The Company's current principal manufacturing activities consist of
sub-assembly, final assembly and testing of the Company's SMT and APT assembly
products in Willow Grove, Pennsylvania and of reflow ovens in High Wycombe,
England. Virtually all of the Company's PWBs, machine parts, component tape
feeders and some of the Company's sub-assemblies are manufactured by third
parties. Logistical and sourcing assistance, technical training for testing and
debugging and quality assurance coordination is provided to the Company's
subcontractors on an ongoing basis to ensure quality and low-cost production.
The Company believes it is advantageous to use multiple sources for PWBs,
fabricated parts and other essential components and generally attempts to
maintain more than one qualified vendor for the manufacture of each fabricated
part used in production of the Company's products. Certain parts, however,
currently are available from or have been subcontracted out to only one source.
The Company purchases components from suppliers pursuant to standard purchase
orders. Should the Company experience interruptions in any of these supplies, or
increases in costs of essential components, production delays or cost increases
could result, which might have a materially adverse effect on the Company's
business. On occasion, the Company has experienced delays due to supply
shortages, but such delays have not had a material adverse effect on the
Company.
The Company provides its customers with a one-year warranty on parts and labor
on all products.
SALES AND MARKETING
The Company markets its products and services through a combination of a direct
sales force, regional sales managers and manufacturers' representatives in North
America. At the end of fiscal 1998, the Company employed 28 people in sales and
marketing, including 8 in direct sales and 19 manufacturers' representative
firms in North America. In addition to the sales and service personnel located
at the Company's headquarters in Willow Grove, Pennsylvania, the Company has
sales or service personnel at 33 other locations in North America.
Outside of North America, the Company has a direct sales force in the United
Kingdom and has sales representative arrangements with firms located in
Australia, Brazil, China, Egypt, Hong Kong, India, Indonesia, Israel, Japan,
Korea, Mexico, New Zealand, Philippines, Singapore (also covering Malaysia and
Thailand), Taiwan, and Turkey and in several Western European countries.
Sales to customers outside of the United States represented approximately 39%,
44% and 43% of net sales in fiscal 1998, 1997 and 1996, respectively. Through
the end of fiscal 1998, the Company derived its international sales from two
wholly-owned foreign subsidiaries in the United Kingdom that both manufacture
and sell product, as well as from international sales shipped from its U.S.
operations. Subsequent to year-end, the Company sold substantially all of the
assets and liabilities of one of its European subsidiaries, SMTech, to
Speedline. As a result of the sale of SMTech, the Company believes that
international sales will decrease as a percentage of net sales in fiscal 1999.
The decrease in international sales is primarily the result of decreased orders
from Asia and South America. The Company believes that the Asian crisis is
causing severe global SMT PWB assembly plant over-capacity. As the industry
reorganizes and becomes more efficient, used assembly equipment is currently
depressing demand for new SMT assemblers sold by the Company. The Company
believes that after the existing PWB assembly plant capacity is absorbed, demand
for new SMT assembly equipment will strengthen. For financial information on the
Company's foreign operations and the sale of the net assets of SMTech, see Notes
9 and 11 to the Consolidated Financial Statements included herein.
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BACKLOG
Backlog of orders as of September 30, 1998, totaled $8.8 million compared to
$11.3 million as of September 30, 1997. The following table sets forth certain
backlog information by product line for the periods indicated (in thousands):
YEAR ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Assemblers $5,519 $6,679
Screen printers 1,103 1,546
Reflow ovens 240 816
The remainder of backlog consists of other products. The Company expects to ship
all backlog orders outstanding at September 30, 1998 during fiscal 1999. It has
been the Company's experience that purchasers of capital equipment have not
issued purchase orders calling for delivery of products over an extended period.
Therefore, backlog may not necessarily be indicative of future sales.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company's product development activities focus on developing new equipment
and on improving current system features, including accuracy, reliability and
flexibility, while increasing placement rates and yield. These efforts include
seeking to improve manufacturing techniques and further enhancing and developing
software used in the Company's products. In addition, the Company seeks to
develop process systems that support advances in component packaging and device
design technologies. These efforts produced IQ(TM) Feeder Setup Verification
System, a component handling platform that presents SMT components to the
assembler while monitoring inventory status in the component feeders; QuadAlign,
a component processing alignment system used in many of the Company's products;
new products such as the APS-1 and the QSV-1; enhanced software functionality in
"Q" Series products and third party product integration software. These efforts
from time to time may include obtaining additional research and development
support from third parties.
Engineering, research and development is currently conducted at the Company's
headquarters in Willow Grove, Pennsylvania, at QEL's headquarters in High
Wycombe, England and previously, at SMTech's headquarters in Dorchester,
England. Engineering, research and development expenses for fiscal 1998, 1997
and 1996 were approximately $7.5 million, $6.8 million and $6.2 million,
respectively. This represented approximately 10.0%, 8.3% and 8.6% of net sales,
for fiscal 1998, 1997 and 1996, respectively.
COMPETITION
The markets in which the Company competes are characterized by intense
competition, rapid technological and product changes, changing market
requirements and significant expenditures for product and market development.
The Company has a number of present and potential competitors in its markets,
many of whom have more diverse product lines and greater financial, marketing
and other resources than the Company. The Company's principal domestic
competitors are Amistar Corp., BTU International, Inc., Conceptronic, Inc.,
Contact Systems, Inc., Heller Industries, Kulicke & Soffa Industries, Inc., MPM
Corporation, MRSI, Palomar Products, Inc., Universal Instruments, Inc. and
Vitronics Corp. The Company's principal foreign competitors are DeK Printing
Machines, Inc., Fuji Heavy Machinery Company, Hitachi, Ltd., Mydata Automation,
Inc., Panasonic Factory Automation Division of Matsushita Electric Corporation
of America, Phillips SMD Technology, Inc., Sanyo High Technology Co., Ltd.,
Shinkawa Ltd., Siemens Factory Automation Inc., The Zevatech Group and Toshiba
Corp.
The Company believes that the principal competitive factors in the segments of
the SMT and APT assembly markets in which it competes are accuracy,
reliability, ease of use, service and support, throughput, price, flexibility,
enabling technology and the ability to meet demand in a timely manner. The
Company believes that it addresses these issues through its emphasis on quality
control and investments in product development and production capacity.
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PATENTS AND LICENSES
The Company holds two United States patents and expects to apply for additional
patents for protection of technology under development by the Company, although
there can be no assurance that any such patents will be issued or will be
sufficient to protect the Company's competitive position. One of the Company's
patents, which was granted in 1996, covers the Company's non-contact component
alignment subsystems (known as Quadalign), such as that used in most of the "C"
Series and all of the "Q" Series products. Although the Quadalign patent and any
other patents that may be obtained are considered valuable intellectual
property, the Company believes that they are not determinative of any success
the Company enjoys, which the Company believes depends principally upon
engineering, marketing, service and manufacturing skills.
The Company enters into technology licensing arrangements with others when it
believes it is appropriate to do so. The Company has an agreement with MPM to
supply Quad on an OEM basis with the former SMTech screen printer product line.
This agreement provides, among other things, that Quad will purchase a minimum
of $7.4 million of AVX 500 screen printers by December 31, 2000. This agreement,
however, is subject to certain provisions that could reduce the minimum
commitment required.
The Company has an agreement with Samsung for the sale and distribution of the
QSA-30 Series, which terminates in March 1999. Under the terms of the agreement,
the Company has an exclusive right to distribute and sell the QSA-30 Series in
North America, Europe and South America and a non-exclusive right to sell in
Asia, except in Korea. The contract covers a term of two years and is subject to
extension. The number of assemblers to be purchased and their purchase price is
negotiated at the beginning of each contract year. Nonrenewal of this agreement
or disruption of supply under this agreement would adversely affect the ability
of the Company to meet its customer's needs and could have a significant adverse
impact on net sales.
In 1996, the Company granted an exclusive license to Samsung for Samsung to be
the Company's sole supplier of component tape feeders, which are currently used
on all of the Company's assembly systems. The contract is to run for a six-year
period and requires Quad to purchase a minimum quantity of component tape
feeders with a value of at least $6.8 million during the first two years of the
contract. Samsung's remedy if Quad fails to meet the target is to terminate the
agreement. The number of tape feeders to be purchased during the remainder of
the contract term is to be negotiated. Samsung is required to pay to Quad a
total of $300,000, representing a combination of licensing fees and a
reimbursement for expenses incurred in transferring technology to Samsung for
use in production of the component tape feeders. Samsung began to supply
component tape feeders to the Company during fiscal 1998.
The Company believes that much of its important technology resides in its
proprietary software (much of which has not received federal copyright
registration or is not patented) and trade secrets. Insofar as the Company
relies on trade secrets and unpatented knowledge to maintain its competitive
position, there is no assurance that others may not independently develop
similar technologies. In addition, although the Company executes non-disclosure
agreements with its employees, selected vendors and others, there can be no
assurance that secrecy obligations will not be breached. Any loss of such
know-how or breach of such agreements could have a material adverse effect on
the Company.
The Company owns a registered trademark for the name "Quad" in both the United
States and Canada for use with electronic assembly equipment.
EMPLOYEES
At the end of fiscal 1998, the Company employed 327 persons on a full-time basis
of which 219 were domestic and 108 were foreign based. None of the Company's
employees are represented by a labor union, and the Company has experienced no
labor actions, although the Company has had a significant number of layoffs in
the workforce during fiscal 1998. Management considers its relations with its
employees to be good.
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ITEM 2. PROPERTIES
The Company maintains its headquarters and principal manufacturing facility in a
leased 106,000 square foot facility in Willow Grove, Pennsylvania. The facility
is leased for a term ending December 2006, and the monthly rental for the space
is approximately $68,000 plus taxes, insurance, maintenance and utilities.
QEL occupies a 9,600 square foot facility in High Wycombe, England, for a term
of 25 years ending in December 2018 with a current monthly rental of
approximately $8,000 (at current exchange rates), plus taxes, insurance,
maintenance and utilities. SMTech occupied a 19,000 square foot facility in
Dorchester, England, for a term of 15 years ending in April 2011 with a current
monthly rental of approximately $9,000 (at current exchange rates), plus taxes,
insurance, maintenance and utilities (see discussion below). Both the QEL and
SMTech facilities have clauses that would permit the tenant to vacate at no cost
after ten and five years, respectively, from the beginning of their leases. The
Company believes that its existing facilities are adequate to meet its current
needs.
Subsequent to fiscal year-end, the Company sold substantially all of the assets
and liabilities of SMTech to Speedline. Speedline is currently subletting the
SMTech facility from the Company. The sublease agreement is for a maximum period
of six months after the sale. Speedline also has an option for early termination
of the sublease agreement.
ITEM 3. LEGAL PROCEEDINGS
In 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in Munich, Germany. The complaint alleges that the
Company infringed on the plaintiff's German patents relating to pick and place
assemblers. The Company has responded with an action against the plaintiff in
Munich, Germany seeking to have such plaintiff's patents invalidated. Management
believes the lawsuit to be without merit and is vigorously defending itself
against the lawsuit. Accordingly, no provision for this lawsuit has been
recorded since its inception.
During fiscal 1996, the Company settled a securities litigation, which had begun
during fiscal 1995, to avoid the uncertainties of litigation and without
admitting any wrongdoing with respect to any of the claims alleged in the
complaint. Total cost (including legal fees) to the Company, net of the amount
paid by the Company's directors and officers liability insurer, was $1,467,000.
During the year ended September 30, 1996, the Company recorded $1,287,000 of
expenses relating to the settlement of this securities litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
EXECUTIVE OFFICERS, OTHER OFFICERS AND DIRECTORS
The executive officers, other officers and directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Theodore J. Shoneck 41 President and Chief Operating Officer
Anthony R. Drury 56 Senior Vice President, Finance and Chief Financial Officer
Craig C. Ramsey 45 Senior Vice President, Marketing
John D. Dreibelbis 44 Vice President and Chief Technology Officer
Terry D. Ellis 38 Vice President, North American Sales & Customer Support
Vahram V. Erdekian 50 Director
Robert P. Pinkas 45 Director
Lorin J. Randall 55 Director
David H. Young 51 Director
</TABLE>
Directors hold office until the next annual meeting of the stockholders, or
until their successors are duly elected and qualified. Officers are elected by
and serve at the pleasure of the Board of Directors.
Mr. Shoneck has been President and Chief Operating Officer of the Company since
April 1998. From December 1997 until April 1998, he was the Company's Chief
Operating Officer. From May 1996 until December 1997, he was the Chief Operating
Officer of Cutting Edge Technologies, Inc. From April 1994 until May 1996, he
was the Vice President and General Manager of KMI Surgical Products, Inc. Prior
to April 1994, Mr. Shoneck was the Manager of Operations Services for Alcon
Laboratories, Inc.
Mr. Drury has been Senior Vice President, Finance of the Company since December
1993. Mr. Drury has also been Chief Financial Officer of the Company since
January 1990.
Mr. Ramsey has been Senior Vice President, Marketing since November 1998. From
January 1996 until November 1998, he was the Company's Vice President, Product
Assurance and Marketing. From November 1994 until January 1996, Mr. Ramsey was
the Company's Vice President, Product Assurance. Prior to November 1994, he was
the Company's Vice President, Engineering.
Mr. Dreibelbis has been Vice President and Chief Technology Officer of the
Company since March 1997. From September 1995 until March 1997, he was an
engineering fellow at Kulicke & Soffa Industries, Inc. and from January 1989 to
September 1995 he was founder and President of Blue Ridge Technologies.
Mr. Ellis has been Vice President, North American Sales and Customer Support
since June 1997. From February 1997 until June 1997 he was Vice President,
Customer Service Support. From June 1996 to February 1997, he served as the
Company's Director of Customer Support. From April 1995 to June 1996, Mr. Ellis
was the acting Director of Customer Support for MPM Corporation, a manufacturer
of screen printers used in the SMT industry and a competitor of the Company.
From February 1994 to April 1995, he was the manager of a regional MPM Technical
Support Center. From July 1991 to February 1994, he was Manager, Customer
Service Automation Support Center for Advanced Technology Laboratories, Inc.
Mr. Erdekian has served on the Board of Directors of the Company since July
1996. Since October 1998, he has been the Vice President, Strategic Account
Management of Solectron Corporation. From January 1998 until October 1998, Mr.
Erdekian was the Vice President, Mergers and Acquisitions of Bay Networks, Inc.
("Bay Networks"). From October 1996 until January 1998, he was Vice President,
Worldwide Manufacturing Operations of Bay Networks. From October 1994 until
October 1996, he was Vice President, Manufacturing Product Operations of Bay
Networks. From September 1993 until October 1994, Mr. Erdekian was the Vice
President, Manufacturing Operations of Wellfleet Communications, which merged
with Synoptics Corporation to form Bay Networks in August 1994. Prior to
September 1993, he was an operations consultant to private and public
corporations.
10
<PAGE>
Mr. Pinkas has served on the Board of Directors of the Company since 1982. Mr.
Pinkas has been a general partner of Brantley Venture Partners, L.P. a venture
capital firm, for more than ten years. Since August 1996, Mr. Pinkas has also
been a general partner of Brantley Venture Management, L.P. Mr. Pinkas is also a
director of Gliatech, Inc., Pediatric Services of America, Inc., Medirisk, Inc.
and Waterlink, Inc. Since November 1996, Mr. Pinkas has also been the Chairman
of the Board, Chief Executive Officer, Treasurer and Director of Brantley
Capital Corporation. Mr. Pinkas was the Company's Treasurer from March 1982
until October 1987.
Mr. Randall has served on the Board of Directors of the Company since January
1988. Since January 1995, he has been the Vice President, Finance and Chief
Financial Officer of CFM Technologies, Inc. From May 1994 until June 1995, Mr.
Randall was the President and Chief Executive Officer of Greenwich
Pharmaceuticals Incorporated ("GPI") (now known as Boston Life Sciences, Inc.).
From September 1991 until May 1994, he was the Chief Financial Officer and Vice
President of GPI. Mr. Randall was Quad's President and Chief Executive Officer
from August 1988 until January 1990 and was the Company's Vice President,
Operations and Chief Financial Officer from May 1985 until July 1988.
Mr. Young is the founder of the Company and has served on the Company's Board of
Directors since its inception. In March 1998, Mr. Young was elected Chairman of
the Board. Mr. Young has been the President of Two Technologies, Inc., a company
that manufactures hand-held computers, for more than five years. Mr. Young
served as the Company's President from its inception until October 1985.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on The Nasdaq Stock Market Inc. under the
symbol "QSYS". The quarterly range of high and low bid quotations for 1998 and
1997 are set forth below. Such high and low bid quotations reflect inter-dealer
prices without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
YEAR ENDED SEPTEMBER 30, 1998 HIGH LOW
- ----------------------------- ---- ---
First Quarter $8.38 $5.00
Second Quarter $5.56 $3.56
Third Quarter $5.50 $2.44
Fourth Quarter $2.81 $1.06
YEAR ENDED SEPTEMBER 30, 1997 HIGH LOW
- ----------------------------- ---- ---
First Quarter $12.25 $9.00
Second Quarter $14.50 $9.63
Third Quarter $10.63 $7.00
Fourth Quarter $10.38 $7.38
NUMBER OF HOLDERS OF COMMON STOCK
At November 23, 1998, there were approximately 104 stockholders of record of the
Company's Common Stock. Based on information obtained from the Company's
transfer agent, the Company believes that the number of beneficial owners of its
Common Stock is approximately 1,800.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings for use in its business and, therefore,
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. Payment of dividends is restricted under terms of the Company's credit
agreement.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended September 30, (1)
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 74,859 $ 81,723 $ 71,591 $ 62,591 $ 50,776
Cost of products sold 52,128 51,417 43,912 39,537 29,721
-------- -------- -------- -------- --------
Gross profit 22,731 30,306 27,679 23,054 21,055
Operating expenses:
Engineering, research and development 7,515 6,759 6,153 4,844 4,300
Selling and marketing 14,542 14,197 12,076 10,276 8,313
Administrative and general 6,955 5,912 5,561 3,997 3,026
-------- -------- -------- -------- --------
Total operating expenses 29,012 26,868 23,790 19,117 15,639
-------- -------- -------- -------- --------
Income (loss) from operations (6,281) 3,438 3,889 3,937 5,416
Interest expense (income), net 684 381 195 124 (103)
Settlement of securities litigation -- -- 1,287 180 --
-------- -------- -------- -------- --------
Income (loss) before income taxes (6,965) 3,057 2,407 3,633 5,519
Income tax expense (benefit) (1,915) 1,070 915 945 1,336
-------- -------- -------- -------- --------
Net income (loss) $ (5,050) $ 1,987 $ 1,492 $ 2,688 $ 4,183
======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ (1.16) $ 0.46 $ 0.35 $ 0.65 $ 1.05
Diluted $ (1.16) $ 0.45 $ 0.35 $ 0.62 $ 0.98
Weighted average number of shares outstanding:
Basic 4,359 4,287 4,222 4,130 3,980
Diluted 4,359 4,464 4,321 4,329 4,269
BALANCE SHEET DATA:
Working capital $ 20,863 $ 25,954 $ 23,317 $ 22,229 $ 19,074
Total assets 50,976 50,037 43,823 41,175 29,919
Line of credit and current portion
of long-term debt 9,429 5,540 700 700 200
Long-term debt 1,761 2,325 1,750 2,450 300
Stockholders' equity 26,212 30,778 28,091 26,380 22,171
</TABLE>
- ----------
(1) For ease of presentation, the Company has indicated its fiscal year as
ending on September 30; whereas, in fact, the Company reports on a 52-53
week fiscal year ending on the last Sunday in September. Fiscal 1998, which
ended on September 27, 1998, and fiscal 1997, 1995 and 1994 which ended on
September 28, 1997, September 24, 1995, and September 25, 1994,
respectively, each included 52 weeks. Fiscal 1996, which ended on September
29, 1996, included 53 weeks.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For ease of presentation, the Company has indicated its fiscal year as ending on
September 30; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September. Fiscal 1998, which ended on September
27, 1998, and fiscal 1997, which ended on September 28, 1997, each included 52
weeks. Fiscal 1996, which ended on September 29, 1996, included 53 weeks.
The following table sets forth certain financial data as a percentage of net
sales for the years indicated:
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross margin 30.4 37.1 38.7
Engineering, research and development 10.0 8.3 8.6
Selling and marketing 19.4 17.4 16.9
Administrative and general 9.3 7.2 7.8
Income (loss) from operations (8.4) 4.2 5.4
Income (loss) before income taxes (9.3) 3.7 3.4
Net income (loss) (6.7) 2.4 2.1
Net Sales. The Company derives net sales from the sale of its assembly products
and peripherals, screen printers, reflow ovens, the resale of products
manufactured by third parties and services. Sales are recorded upon shipment of
products configured to meet customer application requirements. Net sales
decreased $6,864,000 or 8.4% in 1998 over net sales in 1997. The following table
sets forth sales of certain product lines for the periods indicated (in
thousands):
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
---- ---- ----
Assemblers $42,199 $49,175 $48,375
Screen printers 13,570 13,748 8,232
Reflow ovens 4,130 4,129 3,490
The decrease in sales of the Company's assemblers reflects severe market
downturns in the electronics and semiconductor industries, resulting in
increased price competition and decreased margins. Although net sales of screen
printers and reflow ovens remained constant compared to 1997, the total units
sold of both screen printers and reflow ovens decreased reflecting a shift in
product mix to sales of newer, higher-priced units.
International sales represented approximately 38.9%, 43.7% and 42.8% of net
sales for the years 1998, 1997 and 1996, respectively. The Company derives
international sales from two wholly owned foreign subsidiaries in the United
Kingdom that both manufacture and sell product, as well as from international
sales shipped from its U.S. operations. The decrease in international sales is
primarily the result of decreased orders from Asia and South America. The Asian
crisis is causing severe global SMT PWB assembly plant over-capacity. As the
industry reorganizes and becomes more efficient, used assembly equipment is
currently depressing demand for new SMT assemblers sold by the Company.
Therefore, there is still uncertainty regarding the outlook for the Company's
markets in fiscal 1999.
14
<PAGE>
In 1997, net sales increased $10,132,000 or 14.2% over net sales in the
preceding year. The increase in net sales in 1997 was primarily attributable to
commencement of sales of newly introduced products and to increased sales of
recently introduced products. Net sales for 1997 included $16,200,000 of sales
for the QSV-1 assembler, the QSA-30 assembler and the APS-1 assembler, for which
no sales were recognized during the prior year. Additionally, net sales of
products first introduced in 1996 contributed an incremental $7,700,000 to net
sales in 1997.
Gross Margin. Gross margin (gross profit as a percentage of net sales) decreased
to 30.4% in 1998 from 37.1% in 1997. During fiscal 1998, the Company recorded a
total of $2.1 million of inventory reserve charges for discontinued products and
slow moving inventory. Excluding the $2.1 million special inventory reserve
charges, gross margin for 1998 was 33.2%. The decrease in gross margin reflects
the severe downturn in the electronics and semiconductor industries. The Company
believes that gross margins for the immediate future will continue to remain
under pressure until such time as the Company's markets improve. However, the
Company believes it could realize higher gross margins in subsequent periods if
market conditions in the electronics and semiconductor industries improve and
cost reduction programs, which the Company is currently working on, are
successfully implemented.
In 1997, gross margin decreased to 37.1% from 38.7% in 1996. Gross profit was
negatively affected by lower margins in all major product lines as a result of
competitive pricing pressures and from commencement of sales of the QSA-30,
which contributed lower margins as a result of the QSA-30 being manufactured by
a third party. Gross margin for 1997 was also adversely impacted by a continuing
shift in product mix from the "C" series to the "Q" series.
Engineering, Research and Development Expenses. Engineering, research and
development expenses increased $756,000 or 11.2% in 1998 over 1997 reflecting
the addition of personnel to the engineering, research and development
departments as the Company increased product development activities associated
with various products such as the APS-1 assembler, new SMT assembly equipment
and other option features for the "Q" Series. The Company continues to develop
additional features for the APS-1 assembler, seeking to further expand market
penetration and increase the functionality of this product.
During 1997, engineering, research and development expenses increased $606,000
or 9.8% in 1997 over 1996 due to increased spending to support product
development activities related to the APS-1 assembler, a new screen printer
introduced in 1998 and due to cost of continuing enhancements to the "Profile"
series of reflow ovens.
Selling and Marketing Expenses. Selling and marketing expenses increased
$345,000 or 2.4% in 1998 as compared to the prior year. This increase was due to
higher overall commission rates. Excluding the increase in commission rates,
selling and marketing expenses decreased $478,000 or 3.4% which is the result of
decreased net sales in 1998 compared to net sales in 1997.
During 1997, selling and marketing expenses increased $2,121,000 or 17.6% as
compared to the prior year. This increase was primarily due to expenses
associated with higher sales volume, higher commission rates, increased
promotion and trade show costs and higher field service customer support costs.
Administrative and General Expenses. Administrative expenses increased
$1,043,000 or 17.6% in 1998 over the prior year. The increase is mostly due to
one-time costs incurred in 1998, including $1.0 million to obtain a paid-up
license of patented technology from MPM Corporation (see discussion below) and
severance costs of $451,000 related to the resignation of the Company's former
president and other reductions in the workforce. Excluding these costs,
administrative and general expenses decreased approximately $408,000 or 6.9% in
1998 compared to last year.
15
<PAGE>
In 1997, administrative and general expenses increased $351,000 or 6.3% over the
prior year, largely reflecting an increased provision for doubtful accounts
associated with a higher accounts receivable balance at the end of the year.
Income Tax Expense. The Company's effective income tax rate was 27.5%, amounting
to a tax benefit of $1,915,000 in 1998, 35.0% in 1997, amounting to income tax
expense of $1,070,000 and 38.0% in 1996, amounting to income tax expense of
$915,000. Income tax expense (benefit) differs from the amount that would result
from applying the Federal statutory tax rate to pretax income (loss) primarily
due to permanent differences in taxable income (loss) versus book income (loss).
Income tax expense for 1997 and 1996 was also partially offset by tax benefits
realized from the Company's foreign sales corporation. The Company expects an
effective tax rate in the 37%-38% range for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to $20.9 million as of September 30,
1998, including cash balances of $2.1 million, compared to working capital of
$26.0 million as of September 30, 1997, including cash balances of $2.0 million.
Net cash used in operations amounted to $2.0 million, principally due to the net
loss of $5.1 million. Purchases of equipment and cash used in operations was
mostly financed by $3.9 million of incremental borrowings under the Company's
revolving line of credit.
The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 (increased during the first quarter of fiscal year
1998 to $12,500,000 through October 31, 1998) and bears interest at the bank's
base rate of interest (6.78% as of September 30, 1998) or at the Company's
option, the bank's prime rate or LIBOR plus 1.30% when the outstanding balance
is greater than $500,000. This line of credit is secured only by a pledge by the
Company's United Kingdom holding company, Quad Systems Holdings Limited, of 65%
of the outstanding shares of its two wholly-owned United Kingdom operating
subsidiaries. In connection with the SMTech sale (Note 11), the bank released
the pledge on the SMTech pledged shares. The Company pays a fee of .25% on the
unused portion of the line of credit. This credit agreement expires in April
2000. The line of credit agreement restricts the payment or declaration of any
dividends on an annual basis in excess of 50% of such year's pre-tax income.
This line of credit agreement also contains various operating and reporting
covenants and requires maintenance of certain financial ratios. As of September
30, 1998 and 1997, total borrowings under this line of credit were $8,795,000
and $4,920,000, respectively.
As described below, subsequent to year-end, the Company sold substantially all
of the assets and liabilities of SMTech Limited ("SMTech") to Speedline for
$14.8 million in cash paid at closing, subject to a holdback of $750,000. This
sale has greatly improved the Company's liquidity. Proceeds from the sale
enabled the Company to repay its outstanding line of credit subsequent to the
Company's fiscal year end. The sale also improved working capital to
approximately $28.8 million.
The Company invested $1,384,000 in equipment and leasehold improvements in 1998
as compared to $2,099,000 in 1997 and $1,559,000 in 1996. Capital spending for
1997 included significant costs associated with site preparation and internal
furnishings for the corporate headquarters and U.S. manufacturing facility into
which the Company moved in January 1997.
The Company believes that existing cash balances and borrowing capacity will be
sufficient for the Company to meet its working capital needs through fiscal
1999.
16
<PAGE>
BACKLOG
Backlog of orders as of September 30, 1998, totaled $8.8 million compared to
$11.3 million as of September 30, 1997. The following table sets forth certain
backlog information by product line for the periods indicated (in thousands):
YEAR ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
Assemblers $5,519 $6,679
Screen printers 1,103 1,546
Reflow ovens 240 816
The remainder of backlog consists of other products. The Company expects to ship
all backlog orders outstanding at September 30, 1998 during fiscal 1999. It has
been the Company's experience that purchasers of capital equipment have not
issued purchase orders calling for delivery of products over an extended period.
Therefore, backlog may not necessarily be indicative of future sales.
LICENSE AGREEMENT
In March 1998, the Company reached an agreement with MPM Corporation to provide
the Company with a paid-up, non-exclusive, non-transferable, perpetual license
for inventions covered by certain patents and other intellectual property held
by MPM. These inventions had been used and being currently used in certain of
the Company's screen printers. The Company agreed to pay to MPM a one-time
license fee of $1,000,000 for the right to use those inventions covering all
past, present and future usage. Accordingly, the Company expensed the entire
amount of this fee during fiscal 1998.
COMMITMENTS
As of September 30, 1998, the Company had entered into various purchase order
agreements with vendors whereby the Company has committed to acquire inventory
for approximately $23,147,000. Such commitments are anticipated for delivery and
payment in the next twenty-four months. This total includes approximately
$8,044,000 of purchase orders with Samsung in accordance with various agreements
for the purchase of QSA-30 assemblers (see below) and electronic tape feeders
used in the Company's assemblers.
In July 1997, the Company reached an agreement with Samsung for the sale and
distribution of the QSA-30 Series of assemblers, which terminates in March 1999.
Under the terms of the agreement, the Company has an exclusive right to
distribute and sell the QSA-30 Series in North America, Europe and South America
and a non-exclusive right to sell in Asia, except in Korea. The contract covers
a term of two years and is subject to extension. The number of assemblers to be
purchased and their purchase price is negotiated at the beginning of each
contract year. Nonrenewal of this agreement or disruption of supply under this
agreement would adversely affect the ability of the Company to meet its
customer's needs and could have a significant adverse impact on net sales.
In June 1996, the Company reached an agreement with Samsung for the supply of
component tape feeders. Under the terms of this agreement, the Company granted
an exclusive license (subject to certain exceptions in favor of the Company) to
Samsung for Samsung to become the Company's sole supplier of component tape
feeders, which are currently used on all of the Company's assembly systems. The
contract is to run for a six-year period and requires Quad to purchase a minimum
quantity of component tape feeders with a value of at least $6.8 million during
the first two years of the contract. Samsung's remedy if Quad fails to meet the
target is to terminate the agreement. The number of component tape feeders to be
purchased during the remainder of the contract term is to be negotiated. Samsung
is required to pay to Quad a total of $300,000, representing a combination of
licensing fees and a reimbursement for expenses incurred in transferring
technology to Samsung for use in production of the component tape feeders.
Samsung began to supply component tape feeders to the Company during fiscal
1998. A disruption of the supply of component tape feeders could adversely
affect the ability of the Company to meet its customer's needs. If Samsung were
to stop supplying Quad with component tape feeders, Quad has the right to resume
manufacturing or use alternative suppliers. Quad maintains an inventory of
component tape feeders that it believes will sustain the business during such a
transition, if any.
17
<PAGE>
PATENT INFRINGEMENT LITIGATION
In 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in Munich, Germany. The complaint alleges that the
Company infringed on the plaintiff's German patents relating to pick and place
assemblers. The Company has responded with an action against the plaintiff in
Munich, Germany seeking to have such plaintiff's patents invalidated. Management
believes the lawsuit to be without merit and is vigorously defending itself
against the lawsuit. Accordingly, no provision for this lawsuit has been
recorded since its inception.
SUBSEQUENT EVENT
Subsequent to year end, the Company sold substantially all of the assets and
liabilities of SMTech to Speedline for $14.8 million in cash paid at closing,
subject to a holdback of $750,000. The Company is liable for various
representations and warranties provided to Speedline under this agreement. The
Company anticipates recording an after-tax net gain of approximately $5.1
million in the first quarter of fiscal 1999. In connection with the sale, Quad
and Speedline's MPM division entered into an agreement whereby MPM will supply
Quad on an OEM basis with the former SMTech screen printer product line. See
Note 11 to the Consolidated Financial Statements for further information
relating to the sale of the net assets of SMTech.
YEAR 2000
The Company has developed plans to address the possible exposures related to the
impact on its computer systems of the Year 2000. Key financial, information and
operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and detailed plans are in place for the required
systems modifications or replacements. Progress against these plans is monitored
and reported to management and to the Audit Committee of the Board of Directors
on a periodic basis.
The Company is in the process of replacing its existing business and accounting
system with an enterprise-wide business system that is certified by the supplier
to be Year 2000 compliant. Year to date spending on this management information
system upgrade has totaled approximately $145,000. Internal staffing costs and
re-engineering costs, if any, associated with this system implementation project
is expensed as incurred. The Company currently anticipates converting to the new
enterprise system in the Willow Grove manufacturing facility in the second
quarter of fiscal 1999. Additional Year 2000 expenditures for business and
accounting systems replacement are not expected to exceed $150,000. Required
Year 2000 readiness changes to business and accounting systems are anticipated
to be completed by June 1999.
The Company's key suppliers are being queried as to their Year 2000
preparedness. Approximately 90% of key suppliers have answered affirmatively as
to Year 2000 readiness. Risk assessment for each of the remaining suppliers is
ongoing.
In addition, the Company has conducted an evaluation of the operating software
used in the Company's products for possible Year 2000 issues. In the single case
where this evaluation discovered a Year 2000 deficiency, a project was started
to address this deficiency. The cost of this project is not expected to exceed
$5,000 and is ongoing. The Company does not believe that the operation of
recently manufactured equipment sold to customers will be affected by the
transition to the Year 2000.
18
<PAGE>
Accordingly, the Company does not currently anticipate any material disruption
in its business operations as a consequence of the Year 2000 issue.
The Company's risk management program includes emergency backup and recovery
procedures to be followed in the event of failure of a business-critical system.
These procedures will be expanded to include specific procedures for potential
Year 2000 issues. Contingency plans to protect the business from Year
2000-related interruptions are being developed. These plans are anticipated to
be completed by June 1999 and will include, for example, development of backup
procedures, identification of alternate suppliers and possible increases in
safety inventory levels.
FORWARD-LOOKING STATEMENTS
The discussions above regarding the Company's expectations of future sales,
gross margins, operating expenses, scheduling of new product introductions,
order bookings, expected shipment dates, Year 2000 compliance and the outlook
for the SMT and APT industries include certain forward-looking statements on
these subjects. As such, actual results may vary materially from such
expectations. Among the meaningful factors that may affect the realization of
such expectations are variations in the level of order bookings, which can be
affected by general economic conditions and growth rates for the SMT market and
the intensity of competition, the continuing effects of the Asian and South
American economic crisis, product development delays or performance problems or
difficulties in penetrating APT market, difficulties or delays in software
functionality and performance, the timing of future software releases, failure
to respond adequately either to changes in technology or to customer
preferences, the timely resolution of the Year 2000 issue by the Company and its
customers and suppliers, risks of disclosure of the Company's trade secrets and
unpatented development or independent development of similar technologies,
foreign exchange rate fluctuations, conversion to the single European currency,
failures in the source of supply for tape feeders, assemblers or screen printers
manufactured by a third party, risks of nonpayment of accounts receivable or
changes in forecasted costs, including unexpected required additional
engineering costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors and consolidated financial statements and
financial statement schedule of the Company required by this item are filed as
exhibits hereto, are listed under Item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is contained in the Company's definitive
Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year, and is incorporated herein by
reference thereto.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.
Consolidated Balance Sheets as of September 30, 1998 and 1997.
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or the Notes thereto.
21
<PAGE>
3. LISTING OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Certificate of Incorporation of the Registrant, as amended -
Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (No.
33-60588) filed with the Securities and Exchange Commission on
May 7, 1993.
4.1 Shareholder's Rights Agreement dated November 12, 1997 -
Incorporated by reference to Exhibit 1 and 2 to the Registrant's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on February 2, 1998.
3.2 By-laws of the Registrant, as amended - Incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-60588) filed with the Securities
and Exchange Commission on April 5, 1993.
*10.1 1986 Stock Option Plan, as amended - Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8 (No. 33-71590) filed with the Securities and Exchange
Commission on November 12, 1993.
*10.2 1993 Stock Option Plan, as amended - Incorporated by reference
to Exhibit 10.2 filed under Form 10-Q for the period ended March
31, 1998.
o*10.3 Quad Systems Corporation Employee Stock Purchase Plan, as
amended.
*10.4 401(k) Salary Reduction Plan and Trust dated October 1, 1989, as
amended - Incorporated by reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1 (No. 33-60588)
filed with the Securities and Exchange Commission on April 5,
1993.
*10.5 Executive Severance Pay Plan - Incorporated by reference to
Exhibit 10.3 filed under Form 10-Q for the period ended June 30,
1998.
*10.6 Employment memorandum dated April 27, 1998, between the Company
and Theodore J. Shoneck Incorporated by reference to Exhibit
10.4 filed under Form 10-Q for the period ended June 30, 1998.
*10.7 Employment memorandum dated April 27, 1998, between the Company
and Anthony R. Drury Incorporated by reference to Exhibit 10.5
filed under Form 10-Q for the period ended June 30, 1998.
10.8 Lease dated August 27, 1996, between the Registrant and Marave
Associates, L.P. - Incorporated by reference to Exhibit 10.5.2
filed under the Company's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996.
10.9.1 Credit Agreement dated April 11, 1997, between the Company and
CoreStates Bank, NA - Incorporated by reference to Exhibit
10.7.1 filed under the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997.
10.9.2 First Amendment to Credit Agreement dated September 11, 1997,
between the Company and CoreStates Bank, NA - Incorporated by
reference to Exhibit 10.7.2 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1997.
10.10.1 Agreement dated November 1, 1993, between the Registrant and
Samsung Aerospace Industries, Ltd. Incorporated herein by
reference to Exhibit 10.9 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 26, 1993
(portions redacted pursuant to SEC order granting confidential
treatment to certain provisions).
10.10.2 Agreement dated June 20, 1996 between the Registrant and Samsung
Aerospace Industries, Ltd.-Incorporated herein by reference to
Exhibit 10.1 filed under Form 10-Q for the period ended June 23,
1996 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
22
<PAGE>
10.10.3 Agreement dated March 19, 1997, between the Registrant and
Samsung Aerospace Industries, Ltd. Incorporated by reference to
Exhibit 10.11 filed under the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 (portions
redacted pursuant to SEC order granting confidential treatment
to certain provisions).
10.11 OEM and Distributorship Agreement dated December 2, 1997 between
the Registrant and Kaijo Corporation for the distribution of the
Registrant's APS-1 product - Incorporated by reference to
Exhibit 10.1 filed under Form 10-Q for the period ended December
31, 1997 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
*10.12 Severance Agreement dated March 30, 1998, as further amended on
April 7, 1998, between the Company and David W. Smith -
Incorporated by reference to Exhibit 10.1 filed under Form 10-Q
for the period ended June 30, 1998.
*10.13 Severance Agreement dated April 6, 1998, between the Company and
Joseph L. Gasper - Incorporated by reference to Exhibit 10.2
filed under Form 10-Q for the period ended June 30, 1998.
10.14.1 Agreement relating to the sale and purchase of the business and
assets of SMTech Limited, dated September 30, 1998, between the
Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.1 filed under Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 14, 1998.
10.14.2 Agreement relating to the goodwill and intellectual property
assignment of SMTech Limited, dated September 30, 1998, between
the Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.2 filed under Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 14, 1998.
10.15 Supply agreement dated September 30, 1998 between the Registrant
and Speedline Technologies, Inc. for the resale of SMTech
stencil printers - Incorporated by reference to Exhibit 2.3
filed under Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 14, 1998 (portions redacted
pursuant to SEC order granting confidential treatment to certain
provisions).
o21 Subsidiaries of the registrant.
o23 Consent of Ernst & Young LLP.
o27 Financial Data Schedule.
(b) Reports on Form 8-K.
1. Report on Form 8-K was filed on October 14, 1998 reporting as
to Item 2., Disposition of Assets. The report announced the sale
of substantially all of the assets and liabilities of SMTech
Limited.
2. Report on Form 8-K/A was filed on December 10, 1998 reporting
as to Item 7., Pro Forma Financial Statements. The report
incorporated the pro forma consolidated financial statements
reflecting the sale as originally filed on October 14, 1998.
- ----------
* Constitutes compensatory plan or arrangement required to be filed as an
exhibit to this form.
o Filed herewith
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on December
28, 1998 on its behalf by the undersigned, thereunto duly authorized.
QUAD SYSTEMS CORPORATION
By: /s/ THEODORE J. SHONECK
-------------------------------
Theodore J. Shoneck, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/S/ THEODORE J. SHONECK Principal Executive December 28, 1998
- ----------------------- Officer
Theodore J. Shoneck
/S/ ANTHONY R. DRURY Principal Financial December 28, 1998
- ------------------------- and Accounting Officer
Anthony R. Drury
/S/ VAHRAM V. ERDEKIAN Director December 28, 1998
- -------------------------
Vahram V. Erdekian
/S/ ROBERT P. PINKAS Director December 28, 1998
- -------------------------
Robert P. Pinkas
/S/ LORIN J. RANDALL Director December 28, 1998
- -------------------------
Lorin J. Randall
/S/ DAVID H. YOUNG Director December 28, 1998
- -------------------------
David H. Young
24
<PAGE>
QUAD SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets as of September 30,
1998 and 1997...........................................................F-3
Consolidated Statements of Operations for the
Years Ended September 30, 1998, 1997 and 1996...........................F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended
September 30, 1998, 1997 and 1996.......................................F-5
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1998, 1997 and 1996...........................F-6
Notes to Consolidated Financial Statements................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Quad Systems Corporation
We have audited the accompanying consolidated balance sheets of Quad Systems
Corporation as of September 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quad
Systems Corporation at September 30, 1998 and 1997, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 6, 1998
F-2
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,116 $ 1,981
Accounts receivable, net of allowance for doubtful accounts-
$1,196 and $788 at September 30, 1998 and 1997, respectively 15,003 20,234
Inventory:
Raw materials 9,429 8,478
Work in process 2,917 2,017
Finished goods 8,172 6,602
-------- --------
20,518 17,097
Deferred income taxes 3,886 2,593
Income taxes receivable 1,088 --
Prepaid expenses and other current assets 1,255 983
-------- --------
Total current assets 43,866 42,888
Equipment and leasehold improvements:
Machinery, equipment, and software 6,393 5,365
Furniture and fixtures 1,141 1,099
Leasehold improvements 843 678
Equipment under capital lease 81 --
-------- --------
8,458 7,142
Less accumulated depreciation and amortization (4,960) (3,937)
-------- --------
3,498 3,205
Deferred income taxes 653 699
Goodwill, net of accumulated amortization 2,594 2,831
Other assets 365 414
-------- --------
Total assets $ 50,976 $ 50,037
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 8,795 $ 4,920
Accounts payable 4,937 3,908
Accrued expenses 6,908 5,526
Deferred service revenue 1,220 1,035
Customer deposits 509 696
Current portion of long-term debt 634 620
Income taxes payable -- 229
-------- --------
Total current liabilities 23,003 16,934
Long-term debt, less current portion 1,761 2,325
-------- --------
Total liabilities 24,764 19,259
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at September 30, 1998 and 1997 -- --
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,398,706 and 4,337,467 at
September 30, 1998 and 1997, respectively 132 130
Additional paid-in capital 24,719 24,345
Retained earnings 1,395 6,445
Foreign currency translation 142 34
Less treasury stock, at cost, 13,908 shares at September 30, 1998
and 1997 (176) (176)
-------- --------
Total stockholders' equity 26,212 30,778
-------- --------
Total liabilities and stockholders' equity $ 50,976 $ 50,037
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $74,859 $81,723 $71,591
Cost of products sold 52,128 51,417 43,912
------- ------- -------
Gross profit 22,731 30,306 27,679
Operating expenses:
Engineering, research and
development 7,515 6,759 6,153
Selling and marketing 14,542 14,197 12,076
Administrative and general 6,955 5,912 5,561
------- ------- -------
29,012 26,868 23,790
------- ------- -------
Income (loss) from operations (6,281) 3,438 3,889
Interest expense 722 484 304
Interest income (38) (103) (109)
Settlement of securities litigation -- -- 1,287
------- ------- -------
Income (loss) before income taxes (6,965) 3,057 2,407
Income tax expense (benefit) (1,915) 1,070 915
------- ------- -------
Net income (loss) $(5,050) $ 1,987 $ 1,492
======= ======= =======
Net income (loss) per share:
Basic $(1.16) $0.46 $0.35
Diluted $(1.16) $0.45 $0.35
Weighted average number of shares outstanding:
Basic 4,359,494 4,286,556 4,221,888
Diluted 4,359,494 4,463,813 4,321,177
</TABLE>
See accompanying notes.
F-4
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL FOREIGN
SHARES PAID-IN RETAINED CURRENCY TREASURY STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS TRANSLATION STOCK EQUITY
----------- ------ ------- -------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 4,196,950 $126 $23,435 $2,966 $ 29 $(176) $26,380
Net income -- -- -- 1,492 -- -- 1,492
Compensation related to the issuance
of stock options -- -- 11 -- -- -- 11
Common Stock issued under
employee benefit plans 44,164 2 259 -- -- -- 261
Tax benefit related to stock
options exercised -- -- 8 -- -- -- 8
Foreign currency translation adjustment -- -- -- -- (61) -- (61)
--------- ---- ------- ------ ---- ----- -------
Balance at September 30, 1996 4,241,114 128 23,713 4,458 (32) (176) 28,091
Net income -- -- -- 1,987 -- -- 1,987
Compensation related to the issuance
of stock options -- -- 5 -- -- -- 5
Common Stock issued under
employee benefit plans 82,445 2 528 -- -- -- 530
Tax benefit related to stock
options exercised -- -- 99 -- -- -- 99
Foreign currency translation adjustment -- -- -- -- 66 -- 66
--------- ---- ------- ------ ---- ----- -------
Balance at September 30, 1997 4,323,559 130 24,345 6,445 34 (176) 30,778
Net loss -- -- -- (5,050) -- -- (5,050)
Compensation related to the issuance
of stock options -- -- 100 -- -- -- 100
Common Stock issued under
employee benefit plans 61,239 2 264 -- -- -- 266
Tax benefit related to stock
options exercised -- -- 10 -- -- -- 10
Foreign currency translation adjustment -- -- -- -- 108 -- 108
--------- ---- ------- ------ ---- ----- -------
Balance at September 30, 1998 4,384,798 $132 $24,719 $1,395 $142 $(176) $26,212
========= ==== ======= ====== ==== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
QUAD SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(5,050) $ 1,987 $ 1,492
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,218 1,421 1,253
Amortization 383 379 390
Provision (recovery) for losses on accounts receivable 420 204 (153)
Provision for deferred income taxes (1,246) (169) (163)
Stock option compensation 100 5 11
Changes in operating assets and liabilities, net:
Accounts receivable 4,811 (5,362) 2,419
Inventory (3,421) (785) (3,350)
Income taxes receivable (1,088) -- --
Other assets (309) (392) (364)
Accounts payable 1,029 (862) (376)
Accrued expenses 1,633 215 163
Employee compensation and related taxes (251) (718) 743
Deferred service revenue 185 303 455
Customer deposits (187) (605) 814
Income taxes payable (219) (122) (154)
------- ------- -------
Net cash provided by (used in) operating activities (1,992) (4,501) 3,180
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (1,384) (2,099) (1,559)
------- ------- -------
Net cash used in investing activities (1,384) (2,099) (1,559)
FINANCING ACTIVITIES
Proceeds from line of credit 3,875 4,920 --
Proceeds from term loan -- 3,100 --
Principal payments on long-term debt (630) (2,605) (700)
Common Stock issued under employee benefit plans 266 530 261
------- ------- -------
Net cash provided by (used in) financing activities 3,511 5,945 (439)
Net increase (decrease) in cash and cash equivalents 135 (655) 1,182
Cash and cash equivalents at beginning of year 1,981 2,636 1,454
------- ------- -------
Cash and cash equivalents at end of year $ 2,116 $ 1,981 $ 2,636
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
1. DESCRIPTION OF THE BUSINESS
The Company designs, manufactures, markets and supports flexible,
high-performance surface mount technology ("SMT") and advanced packaging
technology ("APT") equipment used in the assembly of SMT printed wiring boards,
advanced packages and other semiconductor assembly processes.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Quad Systems
Corporation and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 1997 and 1996 financial statements to
conform with the 1998 presentation.
FISCAL YEAR
For ease of presentation, the Company has indicated its fiscal year as ending on
September 30; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September. Fiscal 1998, which ended on September
27, 1998, and fiscal 1997, which ended on September 28, 1997, each included 52
weeks. Fiscal 1996, which ended on September 29, 1996, included 53 weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist of primarily of cash equivalents and trade receivables. The Company
sells primarily to customers in the Surface Mount Technology industry in the
United States and abroad. The Company performs ongoing credit evaluations of
customers and generally does not require collateral. Allowances are maintained
for potential credit losses and such losses have been within management's
expectations.
CASH FLOWS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
F-7
<PAGE>
Supplemental disclosure of cash flow information (in thousands):
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997 1996
--------- --------- ---------
Schedule of noncash activity:
Equipment acquired under capital lease $ 81 $ -- $ --
===== ======= =======
Tax benefit related
to employee stock benefit plans $ 10 $ 99 $ 8
===== ======= =======
Cash paid during the year for:
Interest $ 730 $ 483 $ 316
===== ======= =======
Income taxes $ 157 $ 1,678 $ 1,183
===== ======= =======
INVENTORY
The Company values its inventory at the lower of cost (first-in, first-out
method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation on assets
is provided using the straight-line method over the estimated useful lives of
the related assets.
LONG-LIVED ASSETS
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", the Company reviews its long lived
assets, including intangible assets, for impairment whenever events or
circumstances indicate that the carrying value of the asset may not be
recoverable. If this review indicates that the asset will not be recoverable
based on the expected undiscounted net cash flows of the related asset, the
asset's carrying value is reduced. Intangible assets consist primarily of
goodwill which arose from the excess of the cost of purchased businesses over
the fair value of the underlying net assets and is being amortized by the
straight line method over ten years. Accumulated amortization at September 30,
1998 and 1997 was $1,590,000 and $1,207,000, respectively.
Subsequent to year-end, the Company sold substantially all of the assets and
liabilities of one of its European subsidiaries, SMTech Limited (Note 11). As a
result of the sale, the Company wrote off goodwill of $2,152,000 associated with
the business. The write off of goodwill will be netted against the gain on sale
of the net assets of SMTech Limited.
PRODUCT WARRANTY
The consolidated financial statements reflect estimated accruals for potential
product warranty claims based on the Company's claim experience. Such costs are
accrued at the time sales are recognized. The Company's actual product warranty
costs have not differed materially from accrued estimated amounts.
REVENUE RECOGNITION
Revenue from the sale of products is generally recognized upon shipment. Service
and support revenues are recognized over the life of the relevant contract on a
straight-line basis. Such revenues were $1,853,000, $1,522,000 and $1,276,000
for the years ended September 30, 1998, 1997 and 1996, respectively.
F-8
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board ("FASB") Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties. Cash, accounts receivable, other
current assets, accounts payable, accrued expenses and the line of credit
reported in the consolidated balance sheets equal or approximate fair value due
to their short maturities. For long-term debt, including current maturities, the
fair value of the Company's long-term debt approximates historically recorded
cost since interest rates approximate market.
INCOME TAXES
The Company accounts for income taxes under the liability method, whereby,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse. No provision is made for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's United Kingdom subsidiaries are
translated into U. S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Net assets are translated at the exchange rate at the end of the
fiscal year. Income and expense items are translated at the average exchange
rate during the year. The resulting translation adjustments are recorded
directly into a separate component of stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in the statement of
operations. Net foreign currency transaction gains or losses are not material in
any of the years presented.
NET INCOME (LOSS) PER SHARE
In February 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", which was adopted by the Company during
the quarter ending December 31, 1997. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share. Basic earnings per share is
calculated by dividing net income (loss) by the weighted average common shares
outstanding for the period. Diluted earnings per share is calculated by dividing
net income (loss) by the weighted average common shares outstanding for the
period plus the dilutive effect of stock options and other dilutive securities.
F-9
<PAGE>
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (5,050) $ 1,987 $ 1,492
========== ========== ==========
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares 4,359,494 4,286,556 4,221,888
Effect of dilutive securities:
Employee stock options -- 177,154 97,432
Employee stock purchase plan -- 103 1,857
---------- ---------- ----------
Dilutive potential Common Stock -- 177,257 99,289
---------- ---------- ----------
Denominator for diluted earnings (loss)
per share-weighted average shares 4,359,494 4,463,813 4,321,177
========== ========== ==========
Basic earnings (loss) per share $(1.16) $0.46 $0.35
========== ========== ==========
Diluted earnings (loss) per share $(1.16) $0.45 $0.35
========== ========== ==========
</TABLE>
The effect of dilutive securities for the year ended September 30, 1998 were not
included in the computation of diluted earnings (loss) per share because they
were antidilutive.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The Company is in the process of determining its preferred format. The
adoption of SFAS No. 130 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographical areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Management has not completed its review
of SFAS No. 131, but does not anticipate that the adoption of this statement
will have a significant effect on the Company's financial statement disclosures.
F-10
<PAGE>
3. ACCRUED EXPENSES
Accrued expenses consists of the following (in thousands):
SEPTEMBER 30,
---------------------
1998 1997
---- ----
Accrued commissions $1,776 $1,885
Accrued warranty 932 1,355
Employee compensation and related taxes 892 1,141
Reserve for losses on firm purchase commmitments 992 --
Other 2,316 1,145
====== ======
$6,908 $5,526
====== ======
4. Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Term loan, requiring quarterly principal payments of $155,
bearing interest at 7.95% per annum and maturing in
April 2002. The term loan contains various
covenants and requires maintenance of certain ratios
as defined in the loan agreement. $2,325 $2,945
Capital lease which requires monthly payments of $2,
including interest at 8.59% per annum. This lease expires
January 2003. 70 --
------ ------
2,395 2,945
Less current portion 634 620
------ ------
$1,761 $2,325
====== ======
</TABLE>
Maturities of long-term debt outstanding at September 30, 1998 are as follows:
$634,000-1999; $636,000-2000; $637,000-2001; $484,000-2002; $4,000-2003.
The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 (increased during the first quarter of fiscal year
1998 to $12,500,000 through October 31, 1998) and bears interest at the bank's
base rate of interest (6.78% as of September 30, 1998) or at the Company's
option, the bank's prime rate or LIBOR plus 1.30% when the outstanding balance
is greater than $500,000. This line of credit is secured only by a pledge by the
Company's United Kingdom holding company, Quad Systems Holdings Limited, of 65%
of the outstanding shares of its two wholly-owned United Kingdom operating
subsidiaries. In connection with the SMTech sale (Note 11), the bank released
the pledge on the SMTech pledged shares. The Company pays a fee of .25% on the
unused portion of the line of credit. This credit agreement expires in April
2000. The line of credit agreement restricts the payment or declaration of any
dividends on an annual basis in excess of 50% of such year's pre-tax income.
This line of credit agreement also contains various operating and reporting
covenants and requires maintenance of certain financial ratios.
As of September 30, 1998 and 1997, total borrowings under this line of credit
were $8,795,000 and $4,920,000, respectively. The weighted average interest
rates on short-term borrowings for the years ended September 30, 1998 and 1997
were 7.11% and 7.47%, respectively. Subsequent to year end, the Company repaid
the outstanding borrowings under the line of credit with the proceeds from the
sale of SMTech Limited (Note 11).
F-11
<PAGE>
5. COMMITMENTS
As of September 30, 1998, the Company had entered into various purchase order
agreements with vendors whereby the Company has committed to acquire inventory
for approximately $23,147,000. Such commitments are anticipated for delivery and
payment in the next twenty-four months. This total includes approximately
$8,044,000 of purchase orders with Samsung Aerospace Industries, Ltd.
("Samsung") in accordance with various agreements for the purchase of QSA-30
assemblers (see below) and electronic tape feeders used in the Company's
assemblers. At September 30, 1998, the Company had recorded reserves of
approximately $992,000 for losses on firm purchase commitments.
As of September 30, 1998, the Company has the following commitments for future
minimum lease payments under various operating leases for real estate and
equipment (in thousands):
1999 $1,041
2000 1,020
2001 996
2002 953
2003 and thereafter 4,033
Rent expense was $1,156,000, $980,000 and $692,000 for the years ended September
30, 1998, 1997 and 1996, respectively.
The Company has an agreement with Samsung for the sale and distribution of the
QSA-30 Series assemblers. Under the terms of the agreement, the Company has an
exclusive right to distribute and sell the QSA-30 Series in North America,
Europe and South America and a non-exclusive right to sell in Asia, except in
Korea. The contract covers a term of two years, subject to extension. The number
of assemblers to be purchased and their purchase price is negotiated at the
beginning of each contract year.
In March 1998, the Company reached an agreement with MPM Corporation ("MPM") to
provide the Company with a paid-up, non-exclusive, non-transferable, perpetual
license for inventions covered by certain patents and other intellectual
property held by MPM. These inventions had been used and are being currently
used in certain of the Company's screen printers. The Company agreed to pay to
MPM a one-time license fee of $1,000,000 for the right to use those inventions
covering all past, present, and future usage. Accordingly, the Company expensed
the entire amount of this fee in the second quarter of fiscal 1998 and is
reflected in administrative and general expenses in the accompanying
consolidated statement of operations.
F-12
<PAGE>
6. INCOME TAXES
For financial reporting purposes, income (loss) before income taxes includes the
following components (in thousands):
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1998 1997 1996
---- ---- ----
Pretax income (loss):
United States $ (3,143) $ 2,942 $ 2,279
Foreign (3,822) 115 128
-------- ------- -------
$ (6,965) $ 3,057 $ 2,407
======== ======= =======
Income tax expense (benefit) for the fiscal years ended September 30, 1998, 1997
and 1996 consists of (in thousands):
YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal $ (657) $ 887 $ 688
State 3 19 --
Foreign (15) 333 358
------- ------- -------
(669) 1,239 1,046
Deferred:
Federal (237) (73) (57)
State (42) (47) 19
Foreign (967) (49) (93)
------- ------- -------
(1,246) (169) (131)
------- ------- -------
Income tax expense (benefit) $(1,915) $ 1,070 $ 915
======= ======= =======
A reconciliation of the Company's effective income tax rate to the federal
statutory rate is as follows:
YEAR ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
---- ---- ----
Federal statutory rate (34.0%) 34.0% 34.0%
Lapse of state net operating
loss carryforward 0.7% -- 2.1%
State taxes, net of federal benefit (0.6%) -- (1.0%)
Permanent - goodwill 1.7% 4.0% 5.5%
Permanent - other 1.0% 1.5% 2.0%
Foreign sales corporation benefit -- (3.9%) (5.8%)
Research and development tax credit -- (6.7%) (2.1%)
Other 3.7% 6.1% 3.3%
------ ------ ------
Effective tax rate - expense (benefit) (27.5%) 35.0% 38.0%
====== ====== ======
F-13
<PAGE>
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
SEPTEMBER 30,
-------------------
1998 1997
---- ----
Deferred tax assets:
Research and development tax credit carryforwards $ 552 $ 552
Foreign net operating loss carryforwards 979 50
Tax credit carryforwards 151 84
Inventory and accounts receivable reserves 2,011 1,553
Warranty and other accruals 138 301
Deferred service and other unearned revenue 580 542
Deferred compensation 137 96
Other 88 220
------- -------
Total deferred tax assets 4,636 3,398
Valuation allowance for deferred tax assets (50) (50)
------- -------
Deferred tax assets, net 4,586 3,348
Deferred tax liability:
Prepaid expenses 47 56
======= =======
Net deferred tax assets $ 4,539 $ 3,292
======= =======
At September 30, 1998, the Company has the following net operating loss and tax
credit carryforwards (in thousands):
AMOUNT EXPIRATION DATE
------ ---------------
Foreign net operating loss carryforwards $3,158 indefinite
Research and development tax credit 552 2002 to 2005
Alternative minimum tax credit 96 indefinite
Investment tax credit 55 1998 to 2001
7. STOCKHOLDERS' EQUITY
Under the Company's Certificate of Incorporation, the Board of Directors, at its
discretion, may issue up to 1,000,000 shares of preferred stock and establish
the voting, dividend, liquidation, and other rights, designations and
preferences of the preferred shares. At September 30, 1998, no shares of
preferred stock were outstanding.
During November 1997, the Company adopted a Stockholder Rights Plan (the "Plan")
designed to protect the Company's stockholders in the event of an attempt to
acquire control of the Company on terms which do not deal fairly with all of the
Company's stockholders. Under the Plan, the Company distributed one right per
Common Stock on the stated record date, which becomes exercisable in certain
events involving the acquisition of 15% or more of the Company's Common Stock.
Upon the occurrence of such an event, each right entitles its holder to purchase
one one-hundredth of a share of a new series of preferred stock at a price of
$45.00. In addition, upon the occurrence of certain events, holders of the
rights will be entitled to purchase either the Company's stock or shares in an
"acquiring entity" at half of market value.
F-14
<PAGE>
8. STOCK PLANS AND EMPLOYEE BENEFITS
Stock Option Plans
The Company has adopted stock option plans, as amended (the "Plans"), under
which incentive stock options and non-incentive stock options may be granted to
employees and other qualified individuals. The Plans provide that the option
price shall not be less than the fair market value of the shares on the date of
grant and that no portion of the option may be exercised beyond ten years from
that date. Options vest as determined by the Stock Option and Compensation
Committee of the Board of Directors (the "Committee"). The Plans provide for
full vesting of the option in the event there is a Change of Control (as defined
in the Plans). The Committee has the authority to determine the number, terms
and type of stock options to be granted. No additional options may be granted
under the 1986 Stock Option Plan. The 1993 Stock Option Plan provides for the
issuance of up to 900,000 shares of Common Stock pursuant to the exercise of
options.
Changes in the number of outstanding options and number of available shares for
grant under the Plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
WEIGHTED
AVERAGE
UNDER EXERCISE
AVAILABLE OPTION PRICE
--------- ------ -----
<S> <C> <C> <C>
Outstanding, September 30, 1995 148,643 644,547 $ 7.94
Additional shares reserved for issuance 300,000 -- --
Granted (232,000) 232,000 7.94
Exercised -- (11,064) 3.05
Canceled 81,213 (81,213) 9.79
Shares expired from 1986 plan (32,331) -- --
------- ------- --------
Outstanding, September 30, 1996 265,525 784,270 $ 7.81
Granted (243,400) 243,400 9.77
Exercised -- (54,797) 5.72
Canceled 129,821 (129,821) 9.17
Shares expired from 1986 plan (5,638) -- --
------- ------- --------
Outstanding, September 30, 1997 146,308 843,052 $ 8.31
Granted (471,396) 471,396 4.28
Exercised -- (1,301) 3.00
Canceled 603,175 (603,175) 8.52
Shares expired from 1986 plan (19,970) -- --
------- ------- --------
Outstanding, September 30, 1998 258,117 709,972 $ 5.46
======= ======= ========
</TABLE>
During fiscal year 1998, the Company's Board of Directors authorized a stock
option repricing program whereby all holders (except Company executive officers
and Board of Directors) of stock options granted under the Company's 1993 Stock
Option Plan were offered an opportunity to cancel their current outstanding
stock options for new options. As a result of this repricing program, 361,225
stock options were canceled and 258,446 stock options were granted at the market
price of the underlying Common Stock on the date of grant. Accordingly, no
compensation expense was recognized.
At September 30, 1998, options to purchase 308,340 at prices ranging from $1.75
to $13.75 per share were exercisable.
F-15
<PAGE>
The following table summarizes information about options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted Avg. Remaining Weighted
Range of Options Avg. Exercise Contractual Life Options Avg. Exercise
Exercise Prices Outstanding Price (Years) Exercisable Price
--------------- ----------- ----- ------- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.75 - $3.00 105,207 $2.85 4.71 90,206 $3.00
$3.88 - $3.88 204,581 3.88 9.48 -- --
$4.37 - $7.00 296,934 6.01 6.63 196,934 6.68
$7.25 - $13.75 103,250 9.68 7.75 21,200 9.45
------- ----- ----- ------- -----
709,972 $5.46 7.33 308,340 $5.80
======= ===== ===== ======= =====
</TABLE>
Employee Stock Purchase Plan
The Company has adopted an employee stock purchase plan under which the sale of
150,000 shares of its Common Stock has been authorized. The stock purchase plan
is based on six-month offering periods and no more than 30,000 shares of Common
Stock are available for purchase during each offering period. Shares are
purchased at the end of each offering period at 85% of the fair market value of
the shares on the first or last day of the offering period, whichever is lower.
Eligible employees may authorize payroll deductions not to exceed the lesser of
25% of their compensation or $6,250 during each six-month offering period. Under
the plan, 59,938 and 27,648 shares were issued at an average price of $4.38 and
$7.86 during the years ended September 30, 1998 and 1997, respectively. Shares
available for future grant were approximately 29,314 and 89,252 shares at
September 30, 1998 and 1997.
The Company has elected to follow APB 25 for these plans. Under APB 25, because
the exercise price of the Company's stock options equals the market price of the
underlying Common Stock on the date of grant, no compensation cost is
recognized. For the purposes of the required disclosure and pro forma
information required under SFAS 123, "Accounting for Stock-Based Compensation",
the estimated fair value of the Company's options is amortized to expense over
the options' vesting period. The Company's pro forma information follows (in
thousands, except earnings (loss) per share):
Year Ended September 30,
------------------------
1998 1997 1996
---- ---- ----
Net income (loss)
As reported $(5,050) $1,987 $1,492
Pro forma $(5,356) $1,577 $1,256
Diluted earnings (loss) per share
As reported $(1.16) $0.45 $0.35
Pro forma $(1.23) $0.35 $0.29
F-16
<PAGE>
Pro forma compensation costs were estimated using the Black-Scholes option
valuation model using the following weighted average assumptions for grants in
1998, 1997and 1996, respectively: a dividend yield rate of zero for each year;
expected lives of 4.3, 5.2 and 5.4 years; expected volatility of 111.06%, 60.93%
and 73.29%; and risk free interest rates of 5.57%, 6.22% and 6.13%. The
Black-Scholes valuation model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of trade options, and because changes in subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of fair
value of the Company's stock options. The effects of applying SFAS 123 to
provide the disclosures above are not likely to be representative of the effects
on reported net income (loss) for future years.
The weighted average fair value of options granted during fiscal 1998 and 1997
was $3.28 and $5.63, respectively. The weighted average fair value of options
associated with the Company's Employee Stock Purchase Plan for fiscal 1998 and
1997 was $2.70 and $3.13, respectively.
Savings Plan
The Company sponsors an employee savings plan that provides for eligible
employees to make pre-tax contributions up to 15% of eligible compensation,
subject to certain limitations imposed by Section 401(k) of the Internal Revenue
Code. The Company matches 50% of the first 4% of the employee's compensation, up
to a maximum of $1,000 per year. The Company made discretionary contributions
representing 2% of net income to the plan in fiscal years ending September 30,
1997 and 1996 and none during the fiscal year ending September 30, 1998. The
Company's total contributions were approximately $139,000, $189,000, and
$184,000 for the years ending September 30, 1998, 1997 and 1996 respectively.
F-17
<PAGE>
9. SEGMENT REPORTING
The Company, operating in a single industry segment, designs, manufactures,
markets and supports SMT and APT assembly equipment and related peripherals. The
Company's operations by geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ELIMINATIONS CONSOLIDATED
------ ------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended September 30, 1998
Total net sales:
Unaffiliated customers $ 53,185 $ 21,674 $ -- $ 74,859
Interarea transfers 10,890 10,356 (21,246) --
-------- -------- -------- --------
Total $ 64,075 $ 32,030 $(21,246) $ 74,859
======== ======== ======== ========
Loss from operations $ (3,199) $ (2,815) $ (267) $ (6,281)
======== ======== ======== ========
Total assets $ 54,108 $ 10,215 $(13,347) $ 50,976
======== ======== ======== ========
Year ended September 30, 1997
Total net sales:
Unaffiliated customers $ 56,435 $ 25,288 $ -- $ 81,723
Interarea transfers 14,154 8,940 (23,094) --
-------- -------- -------- --------
Total $ 70,589 $ 34,228 $(23,094) $ 81,723
======== ======== ======== ========
Income from operations $ 2,874 $ 487 $ 77 $ 3,438
======== ======== ======== ========
Total assets $ 51,265 $ 11,846 $(13,074) $ 50,037
======== ======== ======== ========
Year ended September 30, 1996:
Total net sales:
Unaffiliated customers $ 50,448 $ 21,143 $ -- $ 71,591
Interarea transfers 12,541 5,780 (18,321) --
-------- -------- -------- --------
Total $ 62,989 $ 26,923 $(18,321) $ 71,591
======== ======== ======== ========
Income from operations $ 5,048 $ 329 $ (1,488) $ 3,889
======== ======== ======== ========
Total assets $ 44,925 $ 10,355 $(11,457) $ 43,823
======== ======== ======== ========
</TABLE>
Interarea transfers primarily represent sales to and from the Company's United
Kingdom subsidiaries. These transfers are made at prices to recover cost, plus
an appropriate markup for profit, and have been eliminated from consolidated net
sales.
Sales by geographic area made by the Company's United States operations are as
follows (in thousands):
YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1997 1996
---- ---- ----
United States $45,748 $45,981 $40,944
Pacific 4,890 7,034 5,644
Canada and Latin America 2,065 3,420 3,860
Other 482 -- --
======= ======= =======
$53,185 $56,435 $50,448
======= ======= =======
F-18
<PAGE>
10. LITIGATION
In 1996, the Company was named a defendant in a patent infringement lawsuit
filed by The Zevatech Group in Munich, Germany. The complaint alleges that the
Company infringed on the plaintiff's German patents relating to pick and place
assemblers. The Company has responded with an action against the plaintiff in
Munich, Germany seeking to have such plaintiff's patents invalidated. Management
believes the lawsuit to be without merit and is vigorously defending itself
against the lawsuit. Accordingly, no provision for this lawsuit has been
recorded since its inception.
During fiscal 1996, the Company settled a securities litigation, which had begun
during fiscal 1995, to avoid the uncertainties of litigation and without
admitting any wrongdoing with respect to of any of the claims alleged in the
complaint. Total cost (including legal fees) to the Company, net of the amount
paid by the Company's directors and officers liability insurer, was $1,467,000.
During the year ended September 30, 1996, the Company recorded $1,287,000 of
expenses, respectively, relating to the settlement of this securities
litigation.
11. SUBSEQUENT EVENT
Subsequent to year end, the Company sold substantially all of the assets and
liabilities of SMTech Limited to Speedline Technologies, Inc. ("Speedline") for
$14.8 million in cash paid at closing, subject to a holdback of $750,000. The
Company is liable for various representations and warranties provided to
Speedline under this agreement. The Company anticipates recording an after-tax
net gain of approximately $5.1 million in the first quarter of fiscal 1999. In
connection with the sale, the Company and Speedline's MPM division entered into
an agreement whereby MPM will supply the Company on an OEM basis with the former
SMTech screen printer product line. This agreement provides, among other things,
that Quad will purchase a minimum of $7.4 million of AVX 500 screen printers by
December 31, 2000. This agreement, however, is subject to certain provisions
that could reduce the minimum commitment required.
The following unaudited pro forma results of operations for the fiscal years
ended September 30, 1998 and 1997 assumes that SMTech was disposed of on October
1, 1996 and the Company repaid its outstanding line of credit balance with a
portion of the sale proceeds on October 1, 1996:
SEPTEMBER 30,
-------------
1998 1997
---- ----
Net sales $ 68,239 $ 75,449
Net income (loss) (4,192) 1,421
Diluted net income (loss) per share $ (0.96) $ 0.32
F-19
<PAGE>
QUAD SYSTEMS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
--------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES -DESCRIBE DESCRIBE PERIOD
- ----------- --------- -------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 818,000 $ (153,000) $ -- $ 32,000 (1) $ 633,000
Reserves for inventory 2,316,000 1,104,000 -- 886,000 (2) 2,534,000
----------- ----------- ------- ----------- -----------
Total $ 3,134,000 $ 951,000 $ -- $ 918,000 $ 3,167,000
=========== =========== ======= =========== ===========
Product Warranty Liability $ 1,133,000 $ 2,866,000 $ -- $ 2,511,000 (3) $ 1,488,000
=========== =========== ======= =========== ===========
Reserve for product returns and
allowances $ 763,000 $ (288,000) $ -- $ -- $ 475,000
=========== =========== ======= =========== ===========
Year ended September 30, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 633,000 $ 204,000 $ -- $ 49,000 (1) $ 788,000
Reserves for inventory 2,534,000 898,000 -- 764,000 (2) 2,668,000
----------- ----------- ------- ----------- -----------
Total $ 3,167,000 $ 1,102,000 $ -- $ 813,000 $ 3,456,000
=========== =========== ======= =========== ===========
Product Warranty Liability $ 1,488,000 $ 2,123,000 $ -- $ 2,256,000 (3) $ 1,355,000
=========== =========== ======= =========== ===========
Reserve for product returns and
allowances $ 475,000 $ (288,000) $ -- $ -- $ 187,000
=========== =========== ======= =========== ===========
Year ended September 30, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 788,000 $ 420,000 $ 12,000 (1) $ 1,196,000
Reserves for inventory 2,668,000 2,354,000 -- 799,000 (2) 4,223,000
----------- ----------- ------- ----------- -----------
Total $ 3,456,000 $ 2,774,000 $ -- $ 811,000 $ 5,419,000
=========== =========== ======= =========== ===========
Product Warranty Liability $ 1,355,000 $ 3,085,000 $ -- $ 3,508,000 (3) $ 932,000
=========== =========== ======= =========== ===========
Reserve for product returns and
allowances $ 187,000 $ 190,000 $ -- $ -- $ 377,000
=========== =========== ======= =========== ===========
</TABLE>
- ----------
(1) Uncollectible accounts written off, net of recoveries.
(2) Disposals of obsolete inventory.
(3) Warranty costs paid during the year.
S-1
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
3.1 Certificate of Incorporation of the Registrant, as amended -
Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (No.
33-60588) filed with the Securities and Exchange Commission on
May 7, 1993.
4.1 Shareholder's Rights Agreement dated November 12, 1997 -
Incorporated by reference to Exhibit 1 and 2 to the Registrant's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on February 2, 1998.
3.2 By-laws of the Registrant, as amended - Incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (No. 33-60588) filed with the Securities
and Exchange Commission on April 5, 1993.
*10.1 1986 Stock Option Plan, as amended - Incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-8 (No. 33-71590) filed with the Securities and Exchange
Commission on November 12, 1993.
*10.2 1993 Stock Option Plan, as amended - Incorporated by reference
to Exhibit 10.2 filed under Form 10-Q for the period ended March
31, 1998.
o*10.3 Quad Systems Corporation Employee Stock Purchase Plan, as
amended.
*10.4 401(k) Salary Reduction Plan and Trust dated October 1, 1989, as
amended - Incorporated by reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1 (No. 33-60588)
filed with the Securities and Exchange Commission on April 5,
1993.
*10.5 Executive Severance Pay Plan - Incorporated by reference to
Exhibit 10.3 filed under Form 10-Q for the period ended June 30,
1998.
*10.6 Employment memorandum dated April 27, 1998, between the Company
and Theodore J. Shoneck Incorporated by reference to Exhibit
10.4 filed under Form 10-Q for the period ended June 30, 1998.
*10.7 Employment memorandum dated April 27, 1998, between the Company
and Anthony R. Drury Incorporated by reference to Exhibit 10.5
filed under Form 10-Q for the period ended June 30, 1998.
10.8 Lease dated August 27, 1996, between the Registrant and Marave
Associates, L.P. - Incorporated by reference to Exhibit 10.5.2
filed under the Company's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996.
10.9.1 Credit Agreement dated April 11, 1997, between the Company and
CoreStates Bank, NA - Incorporated by reference to Exhibit
10.7.1 filed under the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997.
10.9.2 First Amendment to Credit Agreement dated September 11, 1997,
between the Company and CoreStates Bank, NA - Incorporated by
reference to Exhibit 10.7.2 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1997.
10.10.1 Agreement dated November 1, 1993, between the Registrant and
Samsung Aerospace Industries, Ltd. Incorporated herein by
reference to Exhibit 10.9 filed under the Company's Annual
Report on Form 10-K for the fiscal year ended September 26, 1993
(portions redacted pursuant to SEC order granting confidential
treatment to certain provisions).
10.10.2 Agreement dated June 20, 1996 between the Registrant and Samsung
Aerospace Industries, Ltd.-Incorporated herein by reference to
Exhibit 10.1 filed under Form 10-Q for the period ended June 23,
1996 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
10.10.3 Agreement dated March 19, 1997, between the Registrant and
Samsung Aerospace Industries, Ltd. Incorporated by reference to
Exhibit 10.11 filed under the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 (portions
redacted pursuant to SEC order granting confidential treatment
to certain provisions).
10.11 OEM and Distributorship Agreement dated December 2, 1997 between
the Registrant and Kaijo Corporation for the distribution of the
Registrant's APS-1 product - Incorporated by reference to
Exhibit 10.1 filed under Form 10-Q for the period ended December
31, 1997 (portions redacted pursuant to SEC order granting
confidential treatment to certain provisions).
*10.12 Severance Agreement dated March 30, 1998, as further amended on
April 7, 1998, between the Company and David W. Smith -
Incorporated by reference to Exhibit 10.1 filed under Form 10-Q
for the period ended June 30, 1998.
*10.13 Severance Agreement dated April 6, 1998, between the Company and
Joseph L. Gasper - Incorporated by reference to Exhibit 10.2
filed under Form 10-Q for the period ended June 30, 1998.
10.14.1 Agreement relating to the sale and purchase of the business and
assets of SMTech Limited, dated September 30, 1998, between the
Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.1 filed under Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 14, 1998.
10.14.2 Agreement relating to the goodwill and intellectual property
assignment of SMTech Limited, dated September 30, 1998, between
the Registrant, SMTech Limited and Speedline Technologies, Inc.
Incorporated by reference to Exhibit 2.2 filed under Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 14, 1998.
10.15 Supply agreement dated September 30, 1998 between the Registrant
and Speedline Technologies, Inc. for the resale of SMTech
stencil printers - Incorporated by reference to Exhibit 2.3
filed under Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 14, 1998 (portions redacted
pursuant to SEC order granting confidential treatment to certain
provisions).
o21 Subsidiaries of the registrant.
o23 Consent of Ernst & Young LLP.
o27 Financial Data Schedule.
- ----------
* Constitutes compensatory plan or arrangement required to be filed as an
exhibit to this form.
o Filed herewith
EXHIBIT 10.3
QUAD SYSTEMS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE.
The purpose of the Quad Systems Corporation Employee Stock Purchase Plan
(the "Plan") is to assist Quad Systems Corporation, a Delaware corporation (the
"Company"), and its Subsidiaries in retaining the employment of employees by
offering them a greater stake in the Company's success and a closer identity
with it, and to aid in obtaining the services of individuals whose employment
would be helpful to the Company and would contribute to its success. This is to
be accomplished by providing employees a continuing opportunity to purchase
Shares (as hereinafter defined) from the Company through periodic offerings.
The Plan is intended to comply with the provisions of section 423 of the
Code (as hereinafter defined), and the Plan shall be administered, interpreted
and construed accordingly. In addition, the Plan is adopted by the Company
effective June 1, 1995, subject to the approval of the Plan by the Company's
stockholders at the next regularly scheduled stockholders' meeting in accordance
with all applicable provisions of the corporate charter, bylaws and applicable
State law prescribing the method and degree of stockholder approval required for
the issuance of corporate stock or options. If no such applicable State law
exists, the approval must be by vote of a majority of the votes cast at such
meeting provided that a quorum representing a majority of all outstanding voting
stock of the Company is, either in person or by proxy, present and voting on the
approval of the Plan. In the alternative, the Plan will be effective commencing
June 1, 1995 if the approval of the Plan by the Company's stockholders is
obtained by any other method prior to June 1, 1995 provided such approval is in
a degree that would be treated as adequate under applicable State law in the
case of an action requiring stockholder approval.
2. DEFINITIONS. For purposes of the Plan:
"ACCOUNT" means the non-interest bearing account which the Company (or the
Subsidiary which employs the Participant) shall establish for Participants, to
which Participants' payroll deductions pursuant to the Plan shall be credited.
"AGENT" means the person or persons appointed by the Board in accordance
with Paragraph 3(d).
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee described in Paragraph 3(a).
"COMPANY" means Quad Systems Corporation.
"COMPENSATION" means the total amount of compensation for services paid to
a Participant for an Offering Period by the Company and the Subsidiaries
including, but not limited to, salary, wages, overtime pay, bonuses and
commissions.
"ELIGIBLE EMPLOYEE" means an employee of the Company or Subsidiary who is
described in Paragraph 4.
"EMPLOYER" means the Company or Subsidiary for whom an Eligible Employee is
performing services at the time the Eligible Employee becomes a Participant.
"FAIR MARKET VALUE" on any date means the closing bid for Shares as
reported on the Nasdaq National Market on such date, or if there is no closing
bid reported, then Fair Market Value of a Share shall mean the average between
the closing bid and asked quotations for Shares on such date as reported. If
there are no sales reports or bid or asked quotations, as the case may be, for a
given date, the closest preceding date on which there were sales reports or a
bid or asked quotations shall be used. If Shares are not publicly traded, the
Fair Market Value of a Share shall be determined by the Committee.
1
<PAGE>
"INVESTMENT ACCOUNT" means the account established for a Participant
pursuant to Paragraph 9(a) to hold Shares acquired for a Participant pursuant to
the Plan.
"NASDAQ" means the National Association of Security Dealers, Inc. Automated
Quotations System.
"OFFERING PERIOD" means each six-month period beginning on June 1 and
December 1 of each year. The first Offering Period shall commence on June 1,
1995.
"PARTICIPANT" means an Eligible Employee who makes an election to
participate in the Plan in accordance with Paragraph 5.
"PLAN" means the Quad Systems Corporation Employee Stock Purchase Plan as
set forth in this document, and as may be amended from time to time.
"PLAN YEAR" means the 12 month period commencing each June 1 and ending on
the subsequent May 31. The first Plan Year shall be the 12 month period
commencing June 1, 1995.
"PURCHASE DATE" means the last business day of each Offering Period on
which the Employer is conducting business.
"PURCHASE PRICE" means the lesser of 85% of the Fair Market Value of a
Share on (i) the first business day of the Offering Period or (ii) the Purchase
Date.
"SHARE" or "SHARES" means a share or shares of Common Stock, $0.03 par
value, of the Company.
"SUBSCRIPTION AGREEMENT" means the agreement between the Participant and
the Employer pursuant to which the Participant authorizes payroll deductions to
the Account.
"SUBSIDIARY" means any corporation that, at the time in question, is a
subsidiary corporation of the Company, within the meaning of section 424(f) of
the Code.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors or by a
committee (hereafter, the Committee), which shall be a committee of the Board
consisting of at least three members designated by the Board. No member of the
Board of Directors who is eligible to participate in the Plan may vote on any
matter affecting the administration of the Plan. If a Committee is established,
no member of the Board of Directors who is also eligible to participate in the
Plan may be a member of the Committee. If, at any time, there are fewer than
three members of the Committee eligible to serve in such capacity for purposes
of administration of the Plan, the Board of Directors shall appoint one or more
members of the Board of Directors, who shall qualify hereunder, to serve as
members of the Committee solely for purposes of administration. All Committee
members shall serve, and may be removed, at the pleasure of the Board of
Directors.
(b) For purposes of administration of the Plan, a majority of the members
of the Committee (but not less than two) eligible to serve as such shall
constitute a quorum, and any action taken by a majority of such members of the
Committee present at any meeting at which a quorum is present, or acts approved
in writing by all members of the Committee, shall be the acts of the Committee.
(c) Subject to the express provisions of the Plan, the Committee shall have
full discretionary authority to interpret the Plan, to issue rules for
administering the Plan, to change, alter, amend or rescind such rules, and to
make all other determinations necessary or appropriate for the administration of
the Plan. All determinations, interpretations and constructions made by the
Committee with respect to the Plan shall be final and conclusive. No member of
the Board of Directors or the Committee shall be liable for any action,
determination or omission taken or made in good faith with respect to the Plan
or any right granted hereunder.
(d) The Committee may engage an Agent to purchase Shares on each Purchase
Date and to perform custodial and record keeping functions for the Plan, such as
holding record title to the Participants' Share certificates, maintaining an
individual Investment Account for each such Participant and providing periodic
account status reports to such Participants.
(e) The Committee shall have full discretionary authority to delegate
ministerial functions to management of the Company.
2
<PAGE>
4. ELIGIBILITY. All employees of the Company, and of such of its
Subsidiaries as may be designated for such purpose from time to time by the
Committee, shall be eligible to participate in the Plan as of the first day of
an Offering Period, provided each of such employees:
(a) has been employed by the Company or any of its Subsidiaries for at
least six months;
(b) is customarily employed for more than 20 hours per week;
(c) is customarily employed more than five months per calendar year; and
(d) does not own stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or a Subsidiary. In
determining stock ownership for purposes of the preceding sentence, the rules of
section 424(d) of the Code shall apply and stock which the employee may purchase
under outstanding options, including rights to purchase stock under the Plan,
shall be treated as stock owned by the employee.
For purposes of this Paragraph 4, the term "employment" shall be
interpreted in accordance with the provisions of section 1.421-7(h) of the
Treasury Regulations (or any successor regulations).
5. ELECTION TO PARTICIPATE.
(a) INITIAL SUBSCRIPTION AGREEMENTS. Each Eligible Employee may become a
Participant by filing a Subscription Agreement authorizing specified regular
payroll deductions. A Subscription Agreement authorizing specified regular
payroll deductions must specify the date on which such deduction is to commence,
which may not be retroactive. Payroll deductions may be in any amount not less
than one percent (1%) and not in excess of ten percent (25%) of an Eligible
Employee's Compensation; provided however, that payroll deductions during any
single Offering Period may not exceed twelve thousand five hundred dollars
($12,500) for any Participant. All payroll deductions shall be recorded in the
Accounts. All funds recorded in Accounts may be used by the Company and
Subsidiaries for any corporate purpose, subject to the Participant's right to
withdraw at any time an amount equal to the balance accumulated in his or her
Account as described in Paragraph 8 below. Funds credited to Accounts shall not
be required to be segregated from the general funds of the Company or any
Subsidiary.
(b) SUBSEQUENT SUBSCRIPTION AGREEMENTS. Any Participant may file a
Subscription Agreement subsequent to his or her filing an initial Subscription
Agreement changing the terms of his or her participation in accordance with
Section 6 of the Plan.
6. SUBSEQUENT SUBSCRIPTION AGREEMENTS AND DEDUCTION CHANGES. A Participant
may at any time decrease his or her payroll deduction by filing a new
Subscription Agreement with the Committee during an Offering Period which will
supersede any prior Subscription Agreement effective no later than thirty (30)
days after receipt of such new Subscription Agreement by the Committee. If
administratively practicable, and at the Committee's discretion, such decrease
in a Participant's payroll deduction shall be effective as of the first day of
the payroll period following the receipt by the Committee of the new
Subscription Agreement or as of such other date no later than thirty (30) days
after receipt of the new Subscription Agreement as the Committee determines.
Other than as provided in the case of a termination of participation under
Paragraph 8 below, such change in the rate of regular payroll deductions may not
be made more than once during each Offering Period. During the two week period
immediately preceding each new Offering Period, a Participant may increase or
decrease his or her payroll deduction effective as of the next Offering Period
by filing a new Subscription Agreement with the Committee. If a Participant does
not file a new Subscription Agreement with the Committee, the terms of the
previously submitted Subscription Agreement shall remain in effect for each
subsequent Offering Period. Notwithstanding anything contained herein to the
contrary, a Participant may file a new Subscription Agreement at any time for
the sole purpose of changing his or her designation of beneficiary.
3
<PAGE>
7. STATUTORY LIMIT ON PURCHASE OF SHARES.
(a) No employee may be granted a right to purchase Shares under the Plan if
immediately following such grant, such employee would have rights to purchase
equity securities under all plans of the Company and Subsidiaries that are
intended to meet the requirements of section 423 of the Code, that accrue at a
rate which exceeds $25,000 of Fair Market Value (determined at the time the
rights are granted) for each calendar year in which such rights to purchase
Shares are outstanding at any time. For purposes of this Paragraph 7:
(i) The right to purchase Shares accrues when the right (or any
portion thereof) first becomes exercisable during the calendar year;
(ii) Subject to the limitations under Paragraph 10, each Participant
accrues the right to purchase up to a number of Shares for each Offering
Period equal to $12,500 divided by the Fair Market Value of the Shares,
determined on the first day of the Offering Period, but in no case may such
accrual of rights to purchase Shares exceed $25,000 of Fair Market Value,
determined on the first day of each Offering Period, for any calendar year;
(iii) A right to purchase Shares which has accrued under one grant of
rights under the Plan may not be carried over to any other grant of rights;
and
(iv) The limits of this Paragraph 7 shall be interpreted by the
Committee in accordance with applicable rules and regulations issued under
section 423 of the Code.
(b) No employee may be granted a right to purchase Shares under the Plan
if, immediately following such grant, such employee would own stock possessing
5% or more of the total combined voting power or value of all classes of stock
of the Company or a Subsidiary. In determining stock ownership for purposes of
the preceding sentence, the rules of section 424(d) of the Code shall apply and
stock which the employee may purchase under outstanding options, including
rights to purchase stock under the Plan, shall be treated as stock owned by the
employee.
8. TERMINATION OF PARTICIPATION AND WITHDRAWAL OF FUNDS. A Participant may
at any time and for any reason, withdraw from participation in the Plan for an
Offering Period by filing a notice of withdrawal form with the Committee prior
to the last day of such Offering Period, in which case the entire balance
accumulated in his or her Account shall be paid to such Participant as soon as
practicable thereafter and no further payroll deductions shall be made pursuant
to the Plan. Partial withdrawals shall not be permitted. A Participant may
recommence participation in the Plan by submitting a new Subscription Agreement
to the Committee, which will be effective as of the next Offering Period which
commences after the date on which the Committee receives such Subscription
Agreement.
9. METHOD OF PURCHASE AND INVESTMENT ACCOUNTS.
(a) EXERCISE OF OPTION FOR SHARES. Each Participant having funds credited
to an Account on a Purchase Date shall be deemed, without any further action, to
have exercised on such Purchase Date, the option to purchase the number of whole
Shares which the funds in such Account would purchase at the Purchase Price,
subject to the limit:
(i) on the aggregate number of Shares that may be made available for
purchase to all Participants under the Plan during each Offering Period and
for the term of the Plan, as set forth in Paragraph 10; and
(ii) on the number of Shares that may be made available for purchase
to any individual Participant, as set forth in Paragraph 7.
4
<PAGE>
Such option shall be deemed exercised if the Participant does not withdraw such
funds before the Purchase Date. All Shares so purchased shall be credited to a
separate Investment Account established by the Agent for each Participant. The
Agent shall hold in its name or the name of its nominee all certificates for
Shares purchased until such Shares are withdrawn by a Participant pursuant to
Paragraph 11. No purchases of fractional Shares shall be made pursuant to the
Plan. Any funds left in a Participant's Account following a Purchase Date shall
be applied to the purchase of Shares on the next Purchase Date, along with any
additional funds added to such Participant's Account as a result of subsequent
payroll deductions, subject to Participants' withdrawal rights against Accounts
and the other limits of the Plan.
(b) DIVIDENDS ON SHARES HELD IN INVESTMENT ACCOUNTS. All cash dividends
paid with respect to the Shares credited to a Participant's Investment Account
shall, unless otherwise directed by the Committee, be credited to his or her
Account and used, in the same manner as other funds credited to Accounts, to
purchase additional Shares under the Plan on the next Purchase Date, subject to
Participants' withdrawal rights against Accounts and the other limits of the
Plan.
(c) ADJUSTMENT OF SHARES ON APPLICATION OF AGGREGATE LIMITS. If the total
number of Shares that would be purchased pursuant to Paragraph 9(a) but for the
limits described in Paragraph 9(a)(i) exceeds the number of Shares available for
purchase under the Plan, then the number of available Shares shall be allocated
among the Investment Accounts of Participants in the ratio that the amount
credited to a Participant's Account as of the Purchase Date bears to the total
amount credited to all Participants' Accounts as of the Purchase Date. The cash
balance not applied to the purchase of Shares shall be held in Participants'
Accounts subject to the terms and conditions of the Plan.
10. SHARES SUBJECT TO PLAN. The aggregate maximum number of Shares that may
be issued pursuant to the Plan is one hundred fifty thousand (150,000), subject
to adjustment as provided in Paragraph 18 of the Plan. In addition, the
aggregate maximum number of Shares that may be issued pursuant to the Plan
during any single Offering Period is thirty thousand (30,000), subject to
adjustment as provided in Paragraph 18 of the Plan. The Shares delivered
pursuant to the Plan may, at the option of the Company, be Shares purchased
specifically for purposes of the Plan, shares otherwise held in treasury or
Shares originally issued by the Company for such purpose.
11. WITHDRAWAL OF CERTIFICATES. A Participant shall have the right at any
time to withdraw a certificate or certificates for all or a portion of the
Shares credited to his or her Investment Account by giving written notice to the
Company.
12. REGISTRATION OF CERTIFICATES. Each certificate withdrawn by a
Participating Employee may be registered only in the name of the Participant,
or, if the Participant so indicated on the Participant's Account, in the
Participant's name jointly with a member of the Participant's family, with right
of survivorship. A Participant who is a resident of a jurisdiction which does
not recognize such a joint tenancy may have certificates registered in the
Participant's name as tenant in common or as community property with a member of
the Participant's family without right of survivorship.
13. VOTING. The Agent shall vote all Shares held in an Investment Account
in accordance with the Participant's instructions.
14. RIGHTS ON RETIREMENT, DEATH OR OTHER TERMINATION OF EMPLOYMENT. In the
event of a Participant's retirement, death or other termination of employment,
or in the event that a Participant otherwise ceases to be an Eligible Employee,
(a) no payroll deduction shall be taken from any pay due and owing to the
Participant thereafter, and the balance in the Participant's Account shall be
paid to the Participant or, in the event of the Participant's death, to the
person or persons designated as the Participant's beneficiary on Participant's
most recently filed Subscription Agreement, or if no beneficiary has been
designated, to the person to whom the Participant's rights shall have passed
under the laws of descent and distribution, and (b) a certificate for the Shares
credited to the Participant's Investment Account will be forwarded to the
Participant (or, in the event of the Participant's death, to the person or
persons designated as the Participant's beneficiary on Participant's most
recently filed Subscription Agreement, or if no beneficiary has been designated,
to the person to whom the Participant's rights shall have passed under the laws
of descent and distribution).
5
<PAGE>
15. RIGHTS NOT TRANSFERABLE. Except as permitted by Paragraph 14, rights
under the Plan are not transferable by a Participant and are exercisable during
the employee's lifetime only by the employee.
16. NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any right
granted under the Plan shall confer upon any Participant any right to
continuance of employment with the Company or any Subsidiary, or interfere in
any way with the right of the Company or Subsidiary to terminate the employment
of such Participant.
17. APPLICATION OF FUNDS. All funds received or held by the Company under
this Plan may be used for any corporate purpose.
18. ADJUSTMENTS IN CASE OF CHANGES AFFECTING SHARES. In the event of a
subdivision of outstanding Shares, or the payment of a stock dividend, the Share
limit set forth in Paragraph 10 shall be adjusted proportionately, and such
other adjustments shall be made as may be deemed equitable by the Committee. In
the event of any other change affecting Shares (including any event described in
section 424(a) of the Code), such adjustment, if any, shall be made as may be
deemed equitable by the Committee to give proper effect to such event, subject
to the limitations of section 424 of the Code.
19. AMENDMENT OF THE PLAN. The Board of Directors of the Company may at any
time, or from time to time, amend the Plan in such manner as it may deem
advisable. Nevertheless, the Board of Directors of the Company may not (i)
increase the maximum number of shares that may be issued pursuant to the Plan
(ii) materially increase the benefits accruing to Participants under the Plan,
or (iii) modify the requirements as to eligibility for participation in the Plan
without obtaining approval, within twelve months before or after such action, of
the stockholders in accordance with all applicable provisions of the corporate
charter, bylaws and applicable State law prescribing the method and degree of
stockholder approval required for the issuance of corporate stock or options,
provided, that if no such applicable State law exists, the approval must be by
vote of a majority of the votes cast at a duly held meeting of the stockholders
at which a quorum representing a majority of all outstanding voting stock of the
Company is, either in person or by proxy, present and voting on the matter or by
a method and in a degree that would be treated as adequate under applicable
State law in the case of an action requiring stockholder approval.
20. TERMINATION OF THE PLAN. The Plan and all rights of employees under any
offering hereunder shall terminate on the earliest of:
(a) any time at the discretion of the Board of Directors; or
(b) May 31, 2000.
Upon termination of this Plan, (i) all amounts in the Accounts of Participants
shall be carried forward into the Participant's Account under a successor plan,
if any, or promptly refunded, and (ii) all certificates for the Shares credited
to a Participant's Investment Account shall be forwarded to him or her.
21. GOVERNMENTAL REGULATIONS.
(a) Anything contained in this Plan to the contrary notwithstanding, the
Company shall not be obligated to sell or deliver any Shares certificates under
this Plan unless and until the Company is satisfied that such sale or delivery
complies with (i) all applicable requirements of the governing body of the
principal market in which such Shares are traded, (ii) all applicable provisions
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations thereunder and (iii) all other laws or regulations by which the
Company is bound or to which the Company is subject.
(b) The Company (or a Subsidiary) may make such provisions as it may deem
appropriate for the withholding of any taxes or payment of any taxes which it
determines it may be required to withhold or pay in connection with any Shares.
The obligation of the Company to deliver certificates under this Plan is
conditioned upon the satisfaction of the provisions set forth in the preceding
sentence.
22. SECTION 16 RESTRICTIONS FOR OFFICERS AND DIRECTORS. Notwithstanding any
other provision of the Plan, each officer (for purposes of Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), and director
of the Company shall be subject to such restrictions as are required so that
transactions under the Plan by such officer or director shall be exempt from
Section 16(b) of the Exchange Act.
23. REPURCHASE OF SHARES. The Company shall not be required to repurchase
from any Participant any Shares which such Participant acquires under the Plan.
6
EXHIBIT 21
QUAD SYSTEMS CORPORATION
SUBSIDIARIES OF THE REGISTRANT
1. Quad Europe Limited, an English company
2. Quad Systems Limited, an English company
3. HiTech Finance Company, a Delaware corporation
4. TriMark Investment Corp., a Delaware corporation
5. Quad Foreign Sales Corporation, a Barbados company
6. Quad Systems Holdings Limited, an English company
7. Quad Leasing Corporation, a Delaware corporation
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
pertaining to the Quad Systems Corporation 1986 Stock Option Plan and Quad
Systems Corporation 1993 Stock Option Plan (Form S-8 No. 333-04755) and the Quad
Systems Corporation Employee Stock Purchase Plan (Form S-8 No. 33-93436) of our
report dated November 6, 1998, with respect to the consolidated financial
statements and schedule of Quad Systems Corporation included in the Annual
Report (Form 10-K) for the year ended September 30, 1998.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 28, 1998
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<CASH> 2,116
<SECURITIES> 0
<RECEIVABLES> 15,003
<ALLOWANCES> 1,196
<INVENTORY> 20,518
<CURRENT-ASSETS> 43,866
<PP&E> 3,498
<DEPRECIATION> 4,960
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<CURRENT-LIABILITIES> 23,003
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,976
<SALES> 74,859
<TOTAL-REVENUES> 74,859
<CGS> 52,128
<TOTAL-COSTS> 52,128
<OTHER-EXPENSES> 29,012
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 722
<INCOME-PRETAX> (6,965)
<INCOME-TAX> (1,915)
<INCOME-CONTINUING> (6,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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