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, 2000.
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 4, 2000, 4,475,160 of the registrant's Common Stock $.03 par value were
outstanding.
1
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ----------------------------- -----------
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 (Unaudited)
and September 30, 1999..........................................3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and six months ended March 31, 2000 and 1999......4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended March 31, 2000 and 1999................5
Notes to Condensed Consolidated Financial Statements....................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................8
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk .............14
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders................15
ITEM 6. Exhibits and Reports on Form 8-K...................................15
Signature...................................................................16
2
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- -------------
(UNAUDITED)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,209 $ 2,890
Accounts receivable, net 7,501 9,695
Inventory 18,885 16,446
Other 2,397 2,252
-------- --------
Total current assets 29,992 31,283
Property and equipment at cost,
less accumulated depreciation of $4,310
at March 31, 2000 and $3,801 at September 30, 1999 2,176 2,497
-------- --------
$ 32,168 $ 33,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 2,948 $ 1,318
Accounts payable 6,352 3,887
Accrued expenses 4,934 5,790
Deferred service revenue 1,325 986
Customer deposits 406 271
Current portion of long-term debt 636 636
-------- --------
Total current liabilities 16,601 12,888
Long-term debt, less current portion 412 1,126
-------- --------
Total liabilities 17,013 14,014
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at March 31, 2000 and September 30, 1999 -- --
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued and outstanding: 4,475,160 at March 31, 2000
and 4,444,072 at September 30, 1999 134 133
Additional paid-in capital 24,693 24,657
Accumulated deficit (9,219) (4,906)
Accumulated other comprehensive income (loss) (453) (118)
-------- --------
Total stockholders' equity 15,155 19,766
-------- --------
$ 32,168 $ 33,780
======== ========
</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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 11,148 $ 9,388 $ 21,748 $ 23,130
Cost of products sold 7,787 7,504 15,083 17,517
----------- ----------- ----------- -----------
Gross profit 3,361 1,884 6,665 5,613
Operating expenses:
Engineering, research and development 1,419 1,354 2,733 2,435
Selling and marketing 3,007 2,275 5,768 4,881
Administrative and general 1,132 1,403 2,433 2,243
----------- ----------- ----------- -----------
5,558 5,032 10,934 9,559
----------- ----------- ----------- -----------
Loss from operations (2,197) (3,148) (4,269) (3,946)
Gain on sale of SMTech, Ltd. -- -- -- 8,375
Interest income (expense), net (41) 36 (44) 51
----------- ----------- ----------- -----------
Income (loss) before income taxes (2,238) (3,112) (4,313) 4,480
Income tax expense -- 3,688 -- 6,638
----------- ----------- ----------- -----------
Net loss $ (2,238) $ (6,800) $ (4,313) $ (2,158)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted $ (0.50) $ (1.54) $ (0.97) $ (0.49)
Weighted average number of shares outstanding:
Basic and diluted 4,474,229 4,414,091 4,463,684 4,403,790
</TABLE>
4
<PAGE>
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
MARCH 31,
2000 1999
------------- -------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (4,313) $ (2,158)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 510 916
Recovery from losses on accounts receivable (36) (173)
Provision for deferred income taxes -- 4,539
Gain on sale of SMTech, Ltd. -- (5,127)
Loss on sale of equipment -- 23
Changes in operating assets and liabilities, net:
Accounts receivable 2,230 3,819
Inventory (2,439) (287)
Other current assets (480) 720
Accounts payable 2,465 (362)
Accrued expenses (856) (1,285)
Customer deposits 135 (311)
Deferred service revenue 339 39
Income taxes payable -- (1,891)
-------- --------
Net cash used in operating activities (2,445) (1,538)
INVESTING ACTIVITIES
Proceeds from the sale of SMTech, Ltd. -- 14,050
Proceeds from the sale of equipment -- 93
Purchases of property and equipment (189) (229)
-------- --------
Net cash provided by (used in) investing activities (189) 13,914
FINANCING ACTIVITIES
Net proceeds (repayments) on line of credit 1,630 (8,670)
Common Stock issued under employee benefit plans 37 66
Principal payments on long-term debt (714) (316)
-------- --------
Net cash provided by (used in) financing activities 953 (8,920)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,681) 3,456
Cash and cash equivalents at beginning of period 2,890 2,116
-------- --------
Cash and cash equivalents at end of period $ 1,209 $ 5,572
======== ========
</TABLE>
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying 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 for the
three and six months ended March 31, 2000 and 1999 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 month periods ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2000.
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 along with the financial statements for the
fiscal year ended September 30, 1999, together with notes thereto.
NOTE 2 INVENTORY
The components of inventory consist of the following (in thousands):
MARCH 31, SEPTEMBER 30,
2000 1999
------- -------
Raw materials 6,829 $ 6,597
Work in process 4,048 1,926
Finished products 8,008 7,923
------- -------
$18,885 $16,446
======= =======
NOTE 3 COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 establishes standards for reporting and display of comprehensive
income (loss) and its components. SFAS No. 130 requires foreign currency
translation adjustments to be included in other comprehensive income (loss). The
components of comprehensive income (loss) consist of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(2,238) $(6,800) $(4,313) $(2,158)
Foreign currency translation adjustment (234) 132 (335) (13)
------- ------- ------- -------
Comprehensive income (loss) $(2,472) $(6,668) $(4,648) $(2,171)
======= ======= ======= =======
</TABLE>
6
<PAGE>
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,
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net loss $(2,238) $(6,800) $(4,313) $(2,158)
======= ======= ======= =======
Denominator:
Denominator for basic loss
per share-weighted average shares 4,474,229 4,414,091 4,463,684 4,403,790
--------- --------- --------- ---------
Basic and diluted earnings loss per share $ (0.50) $ (1.54) $ (0.97) $ (0.49)
======= ======= ======= =======
</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,
-------------------
2000 1999
---- ----
Cash paid during the period for:
Interest $101 $140
==== ====
7
<PAGE>
ITEM 2. 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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross margin 30.1 20.1 30.6 24.3
Engineering, research and
development 12.7 14.4 12.6 10.5
Selling and marketing 27.0 24.2 26.5 21.1
Administrative and general 10.2 14.9 11.2 9.7
Loss from operations (19.7) (33.5) (19.6) (17.1)
Gain on sale of SMTech, Ltd. -- -- -- 36.2
Income (loss) before
income taxes (20.1) (33.1) (19.8) 19.4
Net loss (20.1) (72.4) (19.8) (9.3)
</TABLE>
Net sales of $11,148,000 and $21,748,000 for the three and six months ended
March 31, 2000 increased $1,760,000 and decreased $1,382,000, or 18.7% and 6.0%,
compared to the second quarter and first six months of fiscal 1999,
respectively. The following table sets forth certain product lines sales for the
periods indicated (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
Assemblers $ 5,996 $ 4,786 $10,584 $15,693
Screen printers 743 1,183 1,448 2,649
Reflow ovens 432 864 894 1,636
The Company believes that its limited assembler product offerings capable of
servicing medium to high volume manufacturing environments where low cost
throughput (i.e. cost per placement sensitivity) is a primary concern has
significantly impacted sales for the first six months of fiscal 2000. The
Company's QSA-30 assembler, which had addressed a small portion of this cost per
placement sensitive sector, was discontinued in 1999. To meet this sector's
requirements and to address competitive product offerings, the Company entered
into a distribution agreement with Mirae Corporation that resulted in the
Meridian Series of products. The Company began recording bookings, backlog and
sales on selected Meridian products in the second quarter of fiscal 2000.
European sales were lower than expected due to the absence of CE compliant
Meridian products. CE certification is a European market requirement for
products to achieve certain electrical, emissions, and safety compliance levels.
European customers equipment purchase criteria is geared more toward
price/performance and until the Meridian products became CE compliant in late
March 2000, the Company had no products to compete in this category of
equipment. The Company anticipates bookings and revenue recognition on the
remaining Meridian products during the second half of fiscal 2000; however,
there can be no assurance that the Company's revenue recognition policies will
be met with respect to these remaining Meridian products.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Regarding decreased sales of screen printers, the sale of SMTech Limited
("SMTech") at the beginning of fiscal year 1999 has had a significant adverse
impact on sales of screen printers, as the Company no longer manufactured and
sold screen printers through this former subsidiary, although the Company
realized a substantial gain on the sale. Sales of screen printers were also
adversely affected as discussed in the Distribution Agreements section below.
International sales represented approximately 20.1% and 38.3% of net sales for
the second quarter of fiscal 2000 and 1999, respectively, and 28.2% and 40.5% of
net sales for the first six months of fiscal 2000 and 1999, respectively. The
Company derives international sales from one wholly-owned UK foreign subsidiary
that both manufactures and sells product, as well as from its US operation. The
Company also derives a small level of sales from certain non-UK wholly-owned
foreign subsidiaries. Sales into Europe decreased significantly due to the
factors previously discussed.
Gross margin for the second quarter of fiscal 2000 increased to 30.1% from 20.1%
and to 30.6 % from 24.3% when comparing the three and six months periods ended
March 31, 2000 to March 31, 1999. In the second quarter of fiscal 1999, gross
margins were affected by inventory provisions for product obsolescence totaling
$400,000. Excluding these inventory provisions, gross margin for the second
quarter and first six months of fiscal 1999 was 25.9% and 28.2%, respectively.
The Company believes ongoing efforts to improve product quality, as discussed in
previous public filings, has led to improved margins. The Company also believes
that its gross margins for the third fiscal quarter could be lower than the
second fiscal quarter because of continued introductory pricing on Meridian
products as well as a shift in sales mix as sales of higher margin spare parts
and accessories may represent a smaller portion of net sales.
Engineering, research and development expenses increased $65,000 or 4.8% and
$298,000 or 12.2% for the second quarter and first six months of fiscal 2000,
respectively, compared to the same periods of the prior year. These increases
were the result of increased personnel, which affects salaries and fringe
benefits, as well as research and development expense related to key product
development and enhancements. Engineering, research and development expenses
increased $105,000 or 8.0% for the second quarter compared to the first quarter
of fiscal 2000 as the Company continued its funding of key product development
and enhancements.
Selling and marketing expenses increased $732,000 or 32.2% and $887,000 or 18.2%
for the second quarter and first six months of fiscal 2000, respectively,
compared to the same periods last year, primarily as a result of an increase in
sales and service personnel in anticipation of increased sales of Meridian
products. Additionally, sales commissions for the second quarter of fiscal 2000
were higher due to increased sales coupled with higher adjusted commission
rates. The Company expects that selling and marketing expenses could increase in
the third and fourth quarter of fiscal 2000, due to higher sales projections.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Administrative and general expenses decreased $271,000 or 19.3% for the second
quarter of fiscal 2000 but increased $190,000 or 8.5% for the first six months
of fiscal 2000, compared to the same periods last year. The decrease in the
second fiscal quarter primarily relates to a reduction in bad debt provisions
attributable to a reduction of accounts receivable and to the absence this year
of a one time cost amounting to $411,000 for the write off of goodwill, as
management believed the carrying value of this asset was not recoverable.
The Company did not record an income tax benefit in the three and six month
periods ended March 31, 2000, since the deferred tax asset from the current
periods net operating loss was fully offset by a valuation allowance, as the
Company believes that the realization of the deferred tax asset is uncertain.
The Company does not expect to incur any tax expense or benefit for the
remainder of the fiscal year.
BACKLOG
As of March 31, 2000, the Company's backlog of orders was $7.2 million, compared
to $7.1 million as of December 31, 1999 and $6.2 million as of March 31, 1999.
Bookings for the second quarter of fiscal 2000 were $11.3 million, as compared
to bookings of $8.7 million in the second quarter of fiscal 1999. The following
table sets forth certain backlog information by product line for the periods
indicated (in thousands):
March 31,
------------------------
2000 1999
---- ----
Assemblers $3,867 $3,205
Screen printers 67 605
Reflow ovens 73 389
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, not
delineated above, 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, 2000 was $13.4 million, including
cash balances of approximately $1.2 million. At September 30, 1999, the Company
had working capital of $18.4 million, including cash balances of $2.9 million.
During the first six months of fiscal 2000, net cash used in operations amounted
to $2.4 million. The cash used in operations was partially financed by the
Company's current asset-based line of credit. As of March 31, 2000, the
outstanding line of credit balance totaled $2.9 million.
On October 27, 1999, the Company obtained a new secured revolving line of credit
agreement. This new agreement permitted maximum borrowings up to $8 million and
was to expire on February 29, 2000. The maximum borrowings under this line of
credit were based on a percentage of eligible accounts receivable and inventory.
Interest was payable at LIBOR plus 2.50%. The agreement also contained various
operating and reporting covenants and required the maintenance of certain
financial ratios.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
On January 7, 2000, the Company entered into a revolving asset based line of
credit agreement, which permits borrowings up to a maximum of $12 million, based
on a percentage of eligible accounts receivable and inventory. This revolving
asset based line of credit expires on January 6, 2003. This agreement replaced
the October 27, 1999 revolving line of credit agreement. The Company's
obligations under the new line of credit are secured by a lien on all of the
assets of the Company and its wholly-owned subsidiaries. The Company also
pledged the outstanding shares of stock of and guarantees of the Company's
wholly-owned subsidiaries. Interest costs are payable at either 0.25% above the
bank's published prime rate or under selected circumstances LIBOR plus 2.75%.
The interest rate will be reduced 0.25% provided no event of default has
occurred and the Company meets a certain net income level for fiscal 2000. The
agreement also contains various operating and reporting covenants and requires
maintenance of a net tangible worth financial ratio.
The Company believes that its existing cash balances, cash flow from operations
and its borrowing capacity from the new secured asset based line of credit will
be sufficient for the Company to meet its working capital needs for the
remainder of the fiscal year.
PENDING ACCOUNTING CHANGES
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, (SAB 101), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB 101 requires
companies to meet certain customer acceptance provisions prior to revenue being
recognized. SAB 101 is effective no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999, which is the Company's December
31, 2000 fiscal quarter. The Company intends to adopt the bulletin, however, the
Company has not yet determined its effect on the financial statements.
DISTRIBUTION AGREEMENTS
Under a long-term supply agreement with the Company executed in June 1996 (the
"Feeder Supply Agreement"), Samsung Techwin Corporation, Ltd. (formerly known as
Samsung Aerospace Industries Ltd.) ("Samsung") is the Company's sole supplier of
electronic component tape feeders, which are used in conjunction with the
Company's SMT assembler products and are sold on a stand-alone basis. The Feeder
Supply Agreement carries a six-year term with minimum purchase requirements and
provides for revised product pricing every two years during the term of the
Feeder Supply Agreement. Deliveries under the agreement commenced in fiscal year
1997, with the first two years of the six year supply period ending in June
2000. The Company's electronic tape feeders are available in 8mm, 12mm, 16mm,
24mm, 32mm, 44mm and other special formats and are compatible with all Quad
assembly systems, although certain of the Meridian Series of products work at
their optimal performance level in conjunction with a modified tape feeder
product currently manufactured and supplied by Samsung. 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 populate a new Printed
Wiring Board ("PWB"). This feature can greatly reduce the time involved in
changing over the assembler from assembling one PWB to another.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During the spring of 1999, the Company notified Samsung of Samsung's
non-compliance with certain quantity and quality requirements in its supply of
tape feeders under the Feeder Supply Agreement. As required under the terms of
the Feeder Supply Agreement, the Company supplied Samsung in late summer 1999
with its good faith requirements of the tape feeders for years three and four of
the six year supply term. In late November 1999, Samsung notified the Company of
Samsung's disagreement with the Company's good faith purchase requirements and
threatened to terminate the Feeder Supply Agreement and declare the Company in
breach. The Company and Samsung have been attempting to resolve the disputes
described above and are negotiating the terms under which Samsung will continue
to supply tape feeders to the Company. On April 20, 2000, however, the Company
received a letter from Samsung advising the Company that it was in breach of the
Feeder Supply Agreement and notifying the Company that Samsung would terminate
the Feeder Supply Agreement if the Company did not provide a forecast of its
requirements for tape feeders for the second year of the second supply term
within 30 days. Although the Company believes that it has fully complied with
the requirements of the Feeder Supply Agreement, it intends to provide the
requested forecast within the thirty-day period. The Company disputes Samsung's
claims of non-compliance with the Feeder Supply Agreement and believes it has
adequate defenses to such claims.
A disruption of the supply of component tape feeders, whether through a
termination of the Feeder Supply Agreement or otherwise, could adversely affect
the ability of the Company to meet its customers' needs and therefore, could
adversely affect the Company's revenues and earnings. If Samsung were to stop
supplying the Company with component tape feeders, the Company has the right
under the tape feeder supply agreement to resume manufacturing or use
alternative suppliers. The Company believes it has sufficient access to
alternative sources of component tape feeders to meet its needs should any
disruption in supply from Samsung occur, although there can be no assurance that
such alternate sources will be available or will be sufficient to meet the
Company's requirements.
In April 2000, Samsung delivered a Request for Arbitration and Statement of
Claim (the "Request for Arbitration") to the Company with respect to a dispute
regarding a proposed September 1997 joint development with Samsung of a high
speed, high volume SMT assembler, designated as the QSA-60 (the "Development
Agreement"). The Request for Arbitration arises out of the parties' previously
disclosed disagreements with respect to several issues relating to the
Development Agreement, including the parties' respective obligations relating to
development funding of the QSA-60 and any future distribution of the developed
product. Each of the parties had previously asserted that the other had breached
its obligations under the Development Agreement and, in late November 1999 and
in early January 2000, Samsung had made claims of substantial damages and had
threatened litigation with respect thereto, as disclosed in the Company's annual
10-K filing for its 1999 fiscal year-end.
The Company believes it has meritorious defenses and counterclaims and intends
to vigorously defend itself during the arbitration; therefore, no provision for
this matter has been recorded to date, although no assurance of an outcome
favorable to the Company can be made. The Request for Arbitration does not
involve any current or previously distributed Company products. The Company
currently maintains other business arrangements with Samsung that are not
affected by this action.
In conjunction with the sale of substantially all of the assets and business of
its U.K. subsidiary, SMTech, to Speedline Technologies, Inc. ("Speedline") in
October 1998, the Company entered into a supply agreement dated September 30,
1998 with Speedline for the purchase and resale of the former SMTech line of
screen printers (the "Printer Supply Agreement"). The terms of the Printer
Supply Agreement includes minimum purchase requirements for one specific
printer, the AVX 500, and fixed pricing for all products, subject to periodic
renegotiations by the parties.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Within the first six months of commencement of the Printer Supply Agreement,
Speedline adjusted its selling prices on the Speedline equivalent of the AVX 500
to its customers to levels approximately equal to the fixed pricing paid for the
printer by the Company under the Printer Supply Agreement. This action forced
the Company to lower its selling prices of the AVX 500 to levels that resulted
in marginal income and occasional losses to the Company in order to compete with
Speedline. As a result, during the first supply term ending November 1999, the
Company purchased only 17 units of the minimum purchase requirement of 40 units.
Approximately 7% of the Company's net sales in the first six months of fiscal
year 2000 and 10% of the Company's fiscal year 1999 net sales were attributable
to sales of screen printers. Consequently, a disruption of the supply of screen
printers from Speedline could adversely affect the ability of the Company to
meet its customers' needs and could adversely affect the sale of the Company's
other products. If Speedline were to stop supplying the Company 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.
MARKET AND OTHER RISKS
Quad's primary development and manufacturing activities are located in the
United States. Sales of its products into international markets make Quad
vulnerable to such factors as foreign currency exchange rates or weak economic
conditions in such markets. Quad's operating results are exposed to changes in
exchange rates especially between the U.S. dollar and the U.K. Pound Sterling
and Euro, and to a lesser extent other currencies in Western Europe, South
America and Asia-Pacific. To a certain extent, foreign currency exchange rate
movements affect Quad's competitive position, as exchange rate changes may
influence business practices and/or pricing strategies of non-U.S. based
competitors. In addition, transactions between the U.S. parent company and its
international subsidiaries, which are generally denominated in U.S. dollars, are
subject to gains or losses in the consolidated financial statements. Quad does
not typically hedge these transactions but attempts to limit exposure to these
situations by timely settlement of the U.S. dollar liabilities in the subsidiary
locations.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $145,000 through March 31, 2000 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
13
<PAGE>
ITEM 2. 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, success of the distribution
arrangement with Mirae for the Meridian Series, the outcome of the Arbitration,
Year 2000 compliance, the outlook for the SMT industry and sufficiency of
working capital needs 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, marketplace acceptance of and
response to the Meridian Series, product development delays or performance
problems from the Meridian Series, failure to comply with the requirements of
the Loan and Security Agreement, the exact findings or rulings yet to be
rendered by an independent arbitrator, 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, foreign exchange rate fluctuations, risks of nonpayment of
accounts receivable or changes in forecasted costs, including unexpected
required additional engineering costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
Disclosure about market risk is contained under "Market and Other Risks" in Item
2 above.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 8, 2000, 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
---- --------- --------------
Roger E. Gower 4,249,058 11,046
Robert P. Pinkas 4,171,058 89,046
Theodore J. Shoneck 4,249,258 10,846
David H. Young 4,171,258 88,846
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. (27) Financial Data Schedule for Quarter Ended March 31,
2000.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the period covered
by this report.
15
<PAGE>
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 9, 2000 By: /s/ ANTHONY R. DRURY
--------------------------------
Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer
16
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