SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 1, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ---------------- to -------------------- Commission file number 1-9348 QMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0737870 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) ONE MAGNUM PASS, MOBILE, AL 36618 (Address of principal executive offices) (Zip Code) (205) 633-4300 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No ( ) APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date 10,667,055 at July 29, 1994. QMS, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) as of July 1, 1994 and October 1, 1993 3 - 4 Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended July 1, 1994 and July 2, 1993 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended July 1, 1994 and July 2, 1993 6 Notes to Condensed Consolidated Financial Statements (unaudited) for the nine months ended July 1, 1994 and July 2, 1993 7 Computation of Earnings Per Common Share 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 10 PART II - OTHER INFORMATION 11 Item 1.Legal Proceedings Item 2.Changes in Securities Item 3.Defaults upon Securities Item 4.Submission of Matters to a Vote of Security Holders Item 5.Other Information Item 6.(a) Exhibits (b) Reports on Form 8 - K SIGNATURES 12 QMS, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS as of July 1, 1994 and October 1, 1993 (Unaudited) July 1, October 1, in thousands 1994 1993 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 4,768 $ 3,582 Trade Receivables (less allowance for doubtful accounts of $523 at July 1994 and $580 at October 1993) 48,096 39,471 Inventories, Net (Note 3) 63,085 70,461 Other Current Assets 6,277 7,806 -------- ------- Total Current Assets 122,226 121,320 -------- -------- PROPERTY, PLANT AND EQUIPMENT 70,914 66,440 Less Accumulated Depreciation 40,377 33,774 -------- -------- Property, Plant and Equipment, Net 30,537 32,666 -------- -------- OTHER ASSETS 17,006 16,231 -------- -------- TOTAL ASSETS $169,769 $170,217 ======== ======== See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of July 1, 1994 and October 1, 1993 (Unaudited) July 1, October 1, in thousands 1994 1993 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts and Notes Payable $ 16,776 $ 11,060 Other 33,326 31,901 -------- ------- Total Current Liabilities 50,102 42,961 -------- -------- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 32,207 41,527 STOCKHOLDERS' EQUITY 87,460 85,729 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $169,769 $170,217 ======== ======== See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 1, 1994 AND JULY 2, 1993 (Unaudited) Three Months Ended Nine Months Ended July 1, July 2, July 1, July 2, in thousands, except 1994 1993 1994 1993 per share amounts NET SALES $ 73,538 $ 70,455 $215,474 $ 230,219 COST OF GOODS SOLD 49,790 47,725 144,624 153,639 -------- -------- -------- -------- GROSS PROFIT 23,748 22,730 70,850 76,580 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 21,617 22,953 66,025 70,288 OPERATING INCOME (LOSS) 2,131 (223) 4,825 6,292 OTHER INCOME (EXPENSE) Interest Income 19 79 52 401 Interest Expense (780) (824) (2,489) (2,450) Miscellaneous 376 (951) (374) (1,341) -------- -------- -------- -------- Total Other Expense (385) (1,696) (2,811) (3,390) INCOME (LOSS) BEFORE INCOME TAXES 1,746 (1,919) 2,014 2,902 INCOME TAX PROVISION (BENEFIT) 541 (682) 624 812 -------- -------- -------- -------- NET INCOME (LOSS) $ 1,205 ($1,237) $ 1,390 $ 2,090 ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE (Note 2) Primary $0.11 ($0.11) $0.13 $0.19 Fully Diluted $0.11 ($0.11) $0.13 $0.19 SHARES USED IN PER SHARE COMPUTATION (Note 2) Primary 10,721 10,851 10,739 10,815 Fully Diluted 10,721 10,851 10,739 10,850 See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 1, 1994 AND JULY 2, 1993 (Unaudited) July 1, July 2, in thousands 1994 1993 Cash Flows from Operating Activities: Net Income $ 1,389 $ 2,090 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Depreciation of Property, Plant and Equipment 7,123 6,791 Amortization of Capitalized and Deferred Software 8,736 5,663 Provision for Losses on Inventory 4,309 (1,876) Other 236 328 Changes in Assets and Liabilities that provided (used) cash: Trade Receivables (8,749) 3,016 Inventories 3,067 (12,954) Accounts Payable 5,716 2,091 Income Tax Payable 849 (1,017) Other (1,391) (1,286) -------- -------- Net Cash Provided by Operating Activities 21,285 2,846 Cash Flows from Investing Activities: Purchase of Property, Plant and Equipment (5,242) (5,622) Additions to Capitalized and Deferred Software Costs (6,216) (7,726) Other 135 0 -------- -------- Net Cash Used in Investing Activities (11,323) (13,348) Cash Flows from Financing Activities: Proceeds from Long-Term Debt and Capital Leases 825 14,441 Payments of Long-Term Debt and Capital Leases, including Current Maturities (9,945) (8,236) Purchase of Treasury Stock 0 (307) Proceeds from Stock Options Exercised 19 545 Other 0 (661) -------- -------- Net Cash Used in Financing Activities (9,101) (5,782) Effect of Exchange Rate Changes on Cash 325 (436) -------- -------- Net Change in Cash and Cash Equivalents 1,186 (5,156) Cash and Cash Equivalents at Beginning of Period 3,582 8,086 -------- -------- Cash and Cash Equivalents at End of Period $ 4,768 $ 2,930 ======== ========= See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 1, 1994 AND JULY 2, 1993 (Unaudited) 1. MANAGEMENT OPINION In the opinion of management, the condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position of the Company as of July 1, 1994 and October 1, 1993, the results of operations for the three-month and nine-month periods ended July 1, 1994 and July 2, 1993 and changes in cash flows for the nine months ended July 1, 1994 and July 2, 1993. The results of operations for the nine months ended July 1, 1994 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 1994. 2. PER COMMON SHARE COMPUTATIONS Per share computations are based on the weighted average number of common shares outstanding during the period and the dilutive effect of the assumed exercise of stock options. 3. INVENTORIES Inventories at July 1, 1994 and October 1, 1993 are summarized as follows (in thousands): July 1, October 1, 1994 1993 Raw materials $ 21,286 $ 26,104 Work in process 4,024 4,052 Finished goods 44,038 46,609 Inventory reserve (6,263) (6,304) -------- -------- TOTAl $ 63,085 $ 70,461 ======== ======== 4. COMMITMENTS AND CONTINGENCIES At October 1, 1993, the Company had a commitment of approximately $31 million under contracts to purchase print engines. As of July 1, 1994 the Company had a commitment of approximately $22.9 million to purchase print engines under purchase contracts. The Company was contingently liable for approximately $3.8 million as of July 1, 1994. This was principally the result of letters of credit issued in the normal course of business for the purchase of inventory. QMS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (Unaudited) Three Months Ended Nine Months Ended July 1, July 2, July 1, July 2, in thousands, except 1994 1993 1994 1993 per share amounts Net Income $ 1,205 ($ 1,237) $ 1,390 $ 2,090 ======== ======== ======== ======== Shares used in this computation: Weighted average common shares outstanding 10,708 10,709 10,707 10,688 Shares applicable to stock options, net of shares assumed to be purchased from proceeds at average market 13 142 32 127 -------- -------- -------- -------- Total shares for earnings per common share computation (primary) 10,721 10,851 10,739 10,815 Shares applicable to stock options in addition to those used in primary computation due to the use of period-end market price when higher than average 0 0 0 35 -------- -------- -------- -------- Total fully diluted shares 10,721 10,851 10,739 10,850 ======== ======== ======== ======== Earnings per common share- primary $0.11 ($0.11) $0.13 $0.19 ======== ======== ======== ======== Earnings per common share- fully diluted $0.11 ($0.11) $0.13 $0.19 ======== ======== ======== ======== See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Table 1: Net Sales Comparisons for Key Channels of Distribution Quarter ended July 1, 1994 (000) 1994 1993 Difference U.S. Direct $ 14,481 $ 6,790 $ 7,691 U.S. Reseller 6,281 14,472 (8,191) QMS Europe 19,659 18,050 1,609 QMS Japan 8,951 6,691 2,260 All Other 24,166 24,452 (286) ------- -------- -------- Total $ 73,538 $ 70,455 $ 3,083 Nine months ended July 1, 1994 (000) 1994 1993 Difference U.S. Direct $ 35,457 $ 24,526 $ 10,931 U.S. Reseller 25,838 50,278 (24,440) QMS Europe 58,489 67,371 (8,882) QMS Japan 21,673 12,743 8,930 All Other 74,017 75,301 (1,284) ------- -------- -------- Total $215,474 $230,219 $(14,745) Net sales for the third quarter of 1994 increased 4.4% from the net sales of the corresponding fiscal quarter of 1993. The significant sales by key distribution channels in the third quarter of fiscal 1994 (the three months ended July 1, 1994) compared to the third quarter of fiscal 1993 (the three months ended July 2, 1993) and the nine-month periods ending on the same dates, respectively, are shown in Table 1 above. In both comparisons, fiscal 1994 sales through the United States reseller channel are significantly below the fiscal 1993 net sales achievement. The United States reseller channel is the Company's primary method of distribution for four page-per-minute and eight page-per-minute monochrome laser printers and color printers. As was experienced in the first and second quarters of fiscal 1994, new competition in these product classes is the primary cause of the lower net sales. In QMS Europe, net sales for the third quarter of fiscal 1994 increased 8.9% over the third quarter sales of 1993; however, sales for the nine-month period in 1994 decreased by 13.2% compared to the same period in 1993. Net sales are principally generated in Europe from the lower end of the Company's monochrome product offerings and color laser and thermal transfer printer products which are sold through distributors. Although competitive pressures and poor economic conditions continue to affect the Company's sales in the European market, the increase in net sales for the third quarter of 1994 compared to the third quarter of 1993 is directly related to sales of the magicolor (TM) color laser printer, which was introduced to this market at the end of the quarter. The United States direct channel is the Company's primary method of distribution for the higher end of the Company's product offerings to major corporate accounts and governmental agencies. The net sales improvements in the United States direct sales channels for the third quarter and nine-month period of 1994 compared to 1993 can be attributed to sales of products recently introduced into the channel which include the QMS 4525, ColorScript Laser 1000 and magicolor (TM) color laser printer, in addition to increased sales of the QMS 3225, QMS 2025 and QMS 1725; all of these are higher end products sold through the channel. Net sales in QMS Japan increased 33.8% for the third quarter of 1994 compared to the third quarter of 1993 and 70.1% for the nine-month period of 1994 compared to the nine-month period in 1993. The increased QMS Japan net sales came from significant improvements in the sales of the QMS 860, an eight page-per- minute monochrome printer which supports the Japanese language requirements. In addition, QMS Japan has realized notable sales gains in the ColorScript Laser 1000, QMS 1725, QMS 3225, and in the aftermarket supplies business. Overall, the Company's gross profit as a percentage of sales remained the same at 32.3% in the three-month comparison and declined slightly from 33.3% to 32.9% in the nine-month comparison. This decline is primarily due to lower overall sales volumes which reduced the Company's ability to absorb fixed manufacturing costs and because of increased competition principally in the United States reseller channel and in Europe which resulted in the need to reduce some sales prices. The Company has undertaken a number of actions to reduce the total costs associated with product procurement and conversion to finished goods; however these costs reductions, to date, have not been sufficient to offset the impact of lower net sales. The Company purchases print engine mechanisms and memory components from Japanese suppliers. Fluctuations in foreign currency exchange rates will affect the prices of these products. Negative impacts can be mitigated through yen-sharing arrangements with suppliers, foreign exchange contracts, price negotiations and the natural hedge provided by sales denominated in the yen; however, severe price increases resulting from exchange rate fluctuations could develop which would adversely affect operating results. Selling, general and administrative expenses were managed down in the third quarter comparison by 5.8% and in the nine-month comparison by 6.1%. These improvements are a direct result of the cost reduction measures that the Company initiated during the fourth quarter of fiscal 1993 and continued emphasis of expense containment. The third quarter of fiscal 1994 is the third consecutive quarter in which total selling, general and administrative expenses have been reduced. Total other expense decreased by $1.3 million in the three-month comparison and $.6 million in the nine-month comparison. These differences result primarily from changes in the translation of balance sheet elements that were denominated in foreign currencies. The Company's effective tax rate was 31% for the third quarter of fiscal 1994 and for the nine-month period of fiscal 1994. The effective tax rate for the entire fiscal year 1993 was 31%. Liquidity and Capital Resources During the third quarter of fiscal 1994 the Company's financing came principally from operations and capital leases. The Company's net working capital was $72.1 million at July 1, 1994 compared to $78.4 million at October 1, 1993. The Company has reduced long-term debt levels for the fourth consecutive quarter and has also reduced inventory levels for the fourth consecutive quarter. These achievements have resulted in improved cash flow which was positive for the third consecutive quarter. Bank borrowings under the Company's secured revolving credit agreement have been reduced to $18.7 million at July 1, 1994 compared to $25.5 million at October 1, 1993. At July 1, 1994, borrowing capacity under the credit agreement totaled $30 million. At the end of the third quarter of 1994 the company decided that the supplemental line of credit of $7.5 million was no longer required and it was not renewed. The Company was not in compliance with certain of its revolving credit agreement covenants at the end of the third quarter of fiscal 1994, but has received a waiver of the non-compliance. Management believes that the Company's continuing working capital and capital expenditure needs will be met by cash flow from operations and by the secured revolving credit agreement. Although management believes that the Company's relationship with its lenders is good, future waivers from the lenders, if necessary, will depend on the Company's performance. QMS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS - None. ITEM 2 - CHANGES IN SECURITIES - None. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None. ITEM 5 - OTHER INFORMATION - None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit Number Description 10(f)(xii) Waiver Agreement dated as of May 3, 1994 waiving certain provisions of the Note Agreement dated March 15, 1988.1 10(g)(xvi) Waiver Agreement dated as of May 3, 1994 waiving certain provisions of the Note Agreement dated October 2, 1992.2 10(l)(vi) Waiver Agreement dated as of May 3, 1994 waiving certain provisions of the Note Agreement dated June 30, 1993.3 b) Reports - None. QMS, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QMS, INC. (Registrant) Date:August 12, 1994 /s/ Charles D. Daley CHARLES D. DALEY Executive Vice President - Finance and Administration, Chief Financial Officer (Mr. Daley is the Principal Financial Officer and has been duly authorized to sign on behalf of the registrant.) _______________________________ 1 Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the quarter ended April 1, 1988 (Commission File No. 1-9348). 2 Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year ended October 2, 1992 (Commission File No. 1-9348). 3 Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the quarter ended July 2, 1993 (Commission File No. 1-9348).