UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MARCH 31, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From __________________ to __________________
Commission file number 0-21504
QUAD SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2180139
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 MARYLAND ROAD, WILLOW GROVE, PA 19090
----------------------------------------------------
(Address of principal executive offices)
(215) 657-6202
----------------------------------------------------
(Registrant's telephone number, including area code)
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 periods 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At May 10, 1999, 4,414,091 of the registrant's Common Stock $.03 par value were
outstanding.
<PAGE>
QUAD SYSTEMS CORPORATION
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999 (Unaudited)
and September 30, 1998..............................................3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and six months ended March 31, 1999 and 1998..........4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three and six months ended March 31, 1999 and 1998..........5
Notes to Condensed Consolidated Financial Statements...................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders...............13
ITEM 6. Exhibits and Reports on Form 8-K..................................13
Signature..................................................................14
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,572 $ 2,116
Accounts receivable, net 10,415 15,003
Inventory 18,560 20,518
Deferred income taxes 0 3,886
Other 1,870 2,343
-------- --------
Total current assets 36,417 43,866
Equipment and leasehold improvements
at cost, less accumulated depreciation of $3,346
at March 31, 1999 and $4,960 at September 30, 1998 2,435 3,498
Deferred income taxes 0 653
Goodwill, net 0 2,594
Other assets 40 365
-------- --------
$ 38,892 $ 50,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 125 $ 8,795
Accounts payable 3,568 4,937
Accrued expenses 6,198 6,908
Customer deposits 198 509
Current portion of long-term debt 635 634
Deferred service revenue 1,259 1,220
Income taxes payable 1,358 0
-------- --------
Total current liabilities 13,341 23,003
Long-term debt, less current portion 1,444 1,761
-------- --------
Total liabilities 14,785 24,764
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at March 31, 1999 and September 30, 1998 0 0
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,427,999 at March 31, 1999
and 4,398,706 at September 30, 1998 133 132
Additional paid-in capital 24,784 24,719
Retained earnings (accumulated deficit) (763) 1,395
Accumulated other comprehensive income 129 142
Less treasury stock, at cost, 13,908 shares at March 31, 1999
and September 30, 1998 (176) (176)
-------- --------
Total stockholders' equity 24,107 26,212
-------- --------
$ 38,892 $ 50,976
======== ========
</TABLE>
3
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 9,388 $ 21,909 $ 23,130 $ 41,558
Cost of products sold 7,504 15,038 17,517 27,643
--------- --------- --------- ---------
Gross profit 1,884 6,871 5,613 13,915
Operating expenses:
Engineering, research and development 1,354 1,850 2,435 3,742
Selling and marketing 2,275 4,015 4,881 7,545
Administrative and general 1,403 2,636 2,243 3,968
--------- --------- --------- ---------
5,032 8,501 9,559 15,255
--------- --------- --------- ---------
Loss from operations (3,148) (1,630) (3,946) (1,340)
Gain on sale of SMTech, Ltd. 0 0 8,375 --
Interest income (expense), net 36 (179) 51 (332)
--------- --------- --------- ---------
Income (loss) before income taxes (3,112) (1,809) 4,480 (1,672)
Income tax expense (benefit) 3,688 (525) 6,638 (473)
--------- --------- --------- ---------
Net loss ($ 6,800) ($ 1,284) ($ 2,158) ($ 1,199)
========= ========= ========= =========
Net loss per share:
Basic ($ 1.54) ($ 0.29) ($ 0.49) ($ 0.28)
Diluted ($ 1.54) ($ 0.29) ($ 0.49) ($ 0.28)
Weighted average number of shares outstanding:
Basic 4,414,091 4,354,794 4,403,790 4,344,518
Diluted 4,414,091 4,354,794 4,403,790 4,344,518
</TABLE>
4
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 2,158) ($ 1,199)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 916 862
Provision for (recovery from) losses on accounts receivable (173) 153
Provision for (benefit from) deferred income taxes 4,539 (413)
Gain on sale of SMTech, Ltd. (5,127) 0
Loss on sale of equipment 23 0
Changes in operating assets and liabilities, net:
Accounts receivable 3,819 (863)
Inventory (287) (2,864)
Other assets 720 (412)
Accounts payable (362) 3,034
Accrued expenses (1,285) 1,054
Customer deposits (311) (171)
Deferred service revenue 39 212
Income taxes payable (1,891) (188)
-------- --------
Net cash used in operating activities (1,538) (795)
INVESTING ACTIVITIES
Proceeds from the sale of SMTech, Ltd. 14,050 0
Proceeds from the sale of equipment 93 0
Purchases of equipment and leasehold improvements (229) (761)
-------- --------
Net cash provided by (used in) investing activities 13,914 (761)
FINANCING ACTIVITIES
Repayments on line of credit (8,670) 0
Proceeds from line of credit 0 1,980
Common Stock issued under employee benefit plans 66 166
Principal payments on long-term debt (316) (312)
-------- --------
Net cash provided by (used in) financing activities (8,920) 1,834
-------- --------
Net increase in cash and cash equivalents 3,456 278
Cash and cash equivalents at beginning of period 2,116 1,981
-------- --------
Cash and cash equivalents at end of period $ 5,572 $ 2,259
======== ========
</TABLE>
5
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying condensed financial statements present the consolidated
financial position, results of operations and cash flows of Quad Systems
Corporation and its wholly-owned subsidiaries (the "Company") as of the dates
and for the periods indicated. All material intercompany accounts and
transactions have been eliminated in consolidation.
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September, whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above-indicated reporting dates.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending September 30, 1999.
This quarterly report should be read in conjunction with the Company's Annual
Report on Form 10-K containing Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial statements for the fiscal
year ended September 30, 1998, together with notes thereto.
NOTE 2 INVENTORY
The components of inventory consist of the following (in thousands):
MARCH 31, SEPTEMBER 30,
1999 1998
------- -------
Raw materials
$ 9,289 $ 9,429
Work in process 3,612 2,917
Finished products 5,659 8,172
------- -------
$18,560 $20,518
======= =======
NOTE 3 COMPREHENSIVE INCOME
The components of comprehensive income consist of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ----------------------
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ($6,800) ($1,284) ($2,158) ($1,199)
Foreign currency translation adjustment 132 56 (13) 402
------- ------- ------- -------
Comprehensive income ($6,668) ($1,228) ($2,171) ($ 797)
======= ======= ======= =======
</TABLE>
6
<PAGE>
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
NOTE 4 LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net loss ($ 6,800) ($ 1,284) ($ 2,158) ($ 1,199)
=========== =========== =========== ===========
Denominator:
Denominator for basic loss
per share-weighted average shares 4,414,091 4,354,794 4,403,790 4,344,518
Effect of dilutive securities:
Employee stock options 0 0 0 0
Employee stock purchase plan 0 0 0 0
----------- ----------- ----------- -----------
Dilutive potential Common Stock 0 0 0 0
Denominator for diluted loss
per share-weighted average shares 4,414,091 4,354,794 4,403,790 4,344,518
=========== =========== =========== ===========
Basic earnings loss per share ($ 1.54) ($ 0.29) ($ 0.49) ($ 0.28)
=========== =========== =========== ===========
Diluted earnings loss per share ($ 1.54) ($ 0.29) ($ 0.49) ($ 0.28)
=========== =========== =========== ===========
</TABLE>
The effect of dilutive securities for the periods indicated above were not
included in the computation of diluted loss per share because they were
antidilutive.
NOTE 5 SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the statements of cash flows
(in thousands):
MARCH 31,
------------------------
1999 1998
---- ----
Schedule of noncash activity:
Equipment acquired under capital lease $ 0 $ 80
==== ====
Cash paid during the period for:
Interest $140 $337
==== ====
Income taxes $ 0 $144
==== ====
7
<PAGE>
QUAD SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above-indicated reporting dates. The following table sets
forth certain financial data as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross margin 20.1 31.4 24.3 33.5
Engineering, research and 14.4 8.4 10.5 9.0
development
Selling and marketing 24.2 18.3 21.1 18.2
Administrative and general 14.9 12.0 9.7 9.5
Loss from operations (33.5) (7.4) (17.1) (3.2)
Gain on sale of SMTech, Ltd. -- -- 36.2 --
Income (loss) before (33.1) (8.3) 19.4 (4.0)
income taxes
Net loss (72.4) (5.9) (9.3) (2.9)
</TABLE>
Net sales of $9,388,000 and $23,130,000 for the second quarter and first six
months of fiscal 1999 decreased $12,521,000 and $18,428,000, or 57.2% and 44.3%,
compared to the second quarter and first six months of fiscal 1998,
respectively. The following table sets forth certain product lines sales for the
periods indicated (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Assemblers $ 4,786 $13,656 $15,693 $25,177
Screen printers 1,183 3,123 2,649 6,411
Reflow ovens 864 1,075 1,636 2,399
</TABLE>
The Company believes that the decrease in sales reflects the continuing economic
slump in the global surface mount technology ("SMT") industry. The company
believes that demand for the Company's SMT assembly equipment has decreased as a
result of severe market downturns in the electronics industry, resulting in
increased price competition and decreased margins. The sale of SMTech Limited
("SMTech") at the beginning of fiscal 1999 has also had a significant adverse
impact on sales of screen printers, although the company realized a substantial
gain on the sale.
International sales represented approximately 38.3% and 34.3% of net sales for
the second quarter of fiscal 1999 and 1998, respectively, and 40.5% and 35.3% of
net sales for the first six months of fiscal 1999 and 1998, respectively. Sales
into Europe decreased significantly, further contributing to the overall sales
decrease. Previously, throughout the SMT industry slowdown, sales in Europe had
remained stable.
The Company had an agreement with Samsung Aerospace Industries, Ltd. for the
sale and distribution of the QSA-30 Series of assemblers, which terminated in
March 1999. For the Company to be able to continue to sell and distribute
products similar to the QSA-30 Series, the Company, in May 1999, signed a
non-binding letter of intent with Mirae Corporation ("Mirae") to become the
exclusive private label distributor of Mirae SMT assemblers throughout North
America and Europe. The Company intends to continue to service its QSA-30 Series
customer base. The Company expects to conduct negotiations with Mirae during the
third quarter of
8
<PAGE>
QUAD SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
fiscal 1999. There can be no assurance, however, that the Company will
successfully negotiate a definitive agreement acceptable to the Company.
Gross margin for the second quarter of fiscal 1999 decreased to 20.1% from 31.4%
and to 24.3 % from 33.5% when comparing the three and six months periods ended
March 31, 1999 to March 31, 1998. Gross margin was adversely affected by
inventory reserves for product obsolescence totaling $550,000 in the second
quarter of fiscal 1999. Excluding special inventory reserve charges, gross
margin for the second quarter and first six months of fiscal 1999 was 25.9% and
28.2%, respectively. Gross margin for the second quarter and first six months of
fiscal 1998 was approximately 35.9%, excluding a $1.0 million inventory reserve
charge. The Company believes that gross margins continue to be adversely
impacted by the downturn in the electronics industry.
Engineering, research and development expenses decreased $496,000 or 26.8% and
$1,307,000 or 34.9% for the second quarter and first six months of fiscal 1999,
respectively, compared to the same periods of the prior fiscal year. The
decreases reflect a combination of workforce reductions and deferral of certain
development efforts, as well as the absence of engineering, research and
development expenses from SMTech. The Company sold SMTech in the beginning of
fiscal 1999. Engineering, research and development expenses increased $273,000
or 25.3% for the second quarter compared to the first quarter of fiscal 1999 as
the Company continues to fund the development of key products. The Company
expects that engineering, research and development expenses will increase in the
third and fourth quarters of fiscal 1999 as the Company increases funding for
the further development of key products.
Selling and marketing expenses decreased $1,740,000 or 43.1% and $2,664,000 or
35.3% for the second quarter and first six months of fiscal 1999, respectively,
compared to the same periods last year, primarily as a result of a sales volume
decreases of 57.2% and 44.3%, respectively and from the absence of selling and
marketing expenses from SMTech.
Administrative and general expenses decreased $1,233,000 or 46.8% and $1,725,000
or 43.5% for the second quarter and first six months of fiscal 1999,
respectively, compared to the same periods last year. The decrease is mostly due
to the absence of one-time costs incurred in fiscal 1998, including $1.0 million
for a paid-up license of patented technology from MPM Corporation and severance
costs of $322,000 related to the departure of the Company's former president in
March 1998 and other reductions in the workforce. During the second quarter of
fiscal 1999, the Company wrote off goodwill of $411,000, as management believes
the carrying value of this asset is not recoverable. The decrease in expenses
also reflects the absence of administrative and general expenses from SMTech.
Income tax expense of $3,688,000 and $6,638,000 for the second quarter and first
six months of fiscal 1999 includes a valuation allowance of $4,095,000 recorded
against the Company's deferred income tax assets. Realization of these assets
have become uncertain due to losses incurred in fiscal 1999. This expense was
offset by an income tax benefit representing the maximum amount of carry back
allowed under Federal tax laws. Any carry forward of net operating losses will
not be recorded until the Company believes that it is more likely than not that
the deferred tax asset will be realized. As a result, the Company does not
expect to incur any additional tax expense or benefit for the remainder of the
fiscal year.
10
<PAGE>
QUAD SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
BACKLOG
As of March 31, 1999, the Company's backlog of orders was $6,173,000, compared
to $8,784,000 as of September 30, 1998 and $10,894,000 as of March 31, 1998.
Bookings for the second quarter of fiscal 1999 were $8,682,000, as compared to
bookings of $11,837,000 in the first quarter of fiscal 1999 and $17,561,000 in
the fourth quarter of fiscal 1998. The Company continues to experience soft
bookings as a result of the SMT industry downturn. The following table sets
forth certain backlog information by product line for the periods indicated (in
thousands):
March 31,
1999 1998
---- ----
Assemblers $3,205 $4,737
Screen printers 605 2,254
Reflow ovens 389 657
The sale of SMTech at the beginning of fiscal 1999 has had a significant impact
on booking and backlog of screen printers. The remainder of backlog consists of
other products such as assembler options, spare parts and QuadCare, a service
and support program covering all of the Company's products. 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.
Backlog therefore may not necessarily be indicative of future sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of March 31, 1999 was $23,076,000, including
cash balances of approximately $5,572,000. At September 30, 1998, the Company
had working capital of $20,863,000, including cash balances of $2,116,000.
During the first six months of fiscal 1999, net cash used in operations amounted
to $1,538,000. The cash used in operations was mostly financed by the proceeds
from the sale of SMTech. Proceeds to date from the sale has amounted to
$14,050,000. The Company used part of these proceeds to repay its outstanding
line of credit, which totaled $8,795,000 at the end of September 1998.
The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 and bears interest at the bank's base rate of
interest 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 by a pledge by the Company's English holding company, Quad Systems
Holdings Limited, of 65% of the outstanding shares of its two wholly-owned
English subsidiaries. One of these subsidiaries, since the sale of SMTech, no
longer represents a significant asset. The Company pays a fee on the unused
portion of the line of credit. This credit agreement expires in April 2000. This
line of credit also contains various customary operating and reporting covenants
and requires maintenance of certain financial ratios. As of March 31, 1999,
borrowings under this line of credit were $125,000. During the third quarter of
fiscal 1999, the Company intends to renegotiate with the bank its current
revolving line of credit agreement. The Company anticipates that all borrowings
under the line of credit will be secured by all or certain assets of the
Company.
Although the Company believes that it may continue to incur losses in future
quarters, as a result of the industry downturn, which will negatively impact its
liquidity position, the Company believes that existing cash balances and
borrowing capacity should be sufficient to provide adequate financing for the
next year.
11
<PAGE>
QUAD SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SALE OF SMTECH LIMITED
During the first quarter of fiscal 1999, the Company sold substantially all of
the assets and liabilities of one of its English subsidiaries, SMTech Limited
("SMTech") to Speedline Technologies, Inc. ("Speedline") for $14,800,000 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 recorded an after-tax net gain of $5,127,000. In
connection with the sale, the Company and Speedline's MPM Corporation division
("MPM") entered into an agreement whereby MPM has agreed to supply the Company
on an OEM basis with the former SMTech screen printer product line. This
agreement provides, among other things, that the Company will purchase a minimum
of $7,400,000 of AVX 500 screen printers by December 31, 2000. This agreement,
however, is subject to certain provisions that could reduce the minimum
commitment required.
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.
In January 1999, the Company successfully replaced its existing business and
accounting system in the Willow Grove manufacturing facility 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
are being expensed as incurred. 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. 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.
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.
12
<PAGE>
QUAD SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
The discussions above regarding the Company's expectations of future sales and
bookings, gross margins, operating expenses, finalizing a distributorship
agreement with Mirae, renegotiations of the current revolving line of credit
agreement, 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 and APT industries and the intensity of competition,
the continuing effects of the Asian and South American economic crisis, the
ability to achieve cost reductions in an effort to bring spending in-line with
current levels of business activity, product development delays or performance
problems or difficulties in penetrating the 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, failure to complete negotiations with Mirae or negotiating
terms not as favorable to the Company as currently expected, product development
delays or performance problems of Mirae SMT assemblers, failure to negotiate a
renewal of the revolving line of credit agreement or negotiate terms not as
favorable to the Company as currently expected, the timely resolution of the
Year 2000 issue by the Company and its customers and suppliers, failure to
successfully defend itself against the patent infringement litigation, foreign
exchange rate fluctuations, conversion to the single European currency, risks of
nonpayment of accounts receivable or changes in forecasted costs, including
unexpected required additional engineering costs.
13
<PAGE>
QUAD SYSTEMS CORPORATION
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On March 9, 1999, the Company held its Annual Meeting of Stockholders.
At the meeting, the stockholders voted upon the following matter:
1. Election of four directors.
In the election of directors, the holders of Common Stock voted as
follows:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
Vahram V. Erdekian 4,171,270 141,417
Robert P. Pinkas 4,187,835 124,852
Lorin J. Randall 4,175,770 136,917
David H. Young 4,192,335 120,352
2. Proposed increase in the number of shares issuable under the Company's
Employee Stock Purchase Plan.
In the proposed increase in shares, the holders of Common Stock voted
as follows:
FOR AGAINST WITHHELD AUTHORITY
--- ------- ------------------
4,051,795 220,517 40,375
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the period
covered by this report.
14
<PAGE>
QUAD SYSTEMS CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAD SYSTEMS CORPORATION
Date: May 12, 1999 By: /s/ ANTHONY R. DRURY
----------------------------------
Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer
15
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<NAME> QUAD SYSTEMS CORPORATION
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