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 JUNE 28, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9348
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QMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 63-0737870
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE MAGNUM PASS, MOBILE, AL 36618
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(Address of principal executive offices) (Zip Code)
(334) 633-4300
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
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APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of the issuer's common stock, as of the latest practicable date
10,680,215 AT JULY 26, 1996.
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QMS, INC. AND SUBSIDIARIES
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INDEX
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PART I - FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of June 28, 1996 and
September 29, 1995 3 - 4
Condensed Consolidated Statements of Operations
(unaudited) for the three and nine months ended
June 28, 1996 and June 30, 1995 5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
June 28, 1996 and June 30, 1995 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 12
PART II - OTHER INFORMATION 13
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Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. (a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 14
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QMS, INC. AND SUBSIDIARIES
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 28, 1996 and September 29, 1995
(Unaudited)
June 28, September 29,
in thousands 1996 1995
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ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 2,560 $ 7,431
Trade Receivables (less allowance for doubtful
accounts of $377 at June 1996 and $546
at September 1995) 25,746 37,721
Notes Receivable 3,667 0
Inventories, Net (Note 3) 32,031 47,482
Other Current Assets 4,280 7,066
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Total Current Assets 68,284 99,700
PROPERTY, PLANT AND EQUIPMENT 61,802 69,205
Less Accumulated Depreciation 41,093 42,484
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Property, Plant and Equipment, Net 20,709 26,721
OTHER ASSETS
Note Receivable 2,333 0
Other, Net 9,885 9,117
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Total Other Assets 12,218 9,117
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TOTAL ASSETS $ 101,211 $ 135,538
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See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
==========================
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 28, 1996 and September 29, 1995
(Unaudited)
June 28, September 29,
in thousands 1996 1995
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 10,725 $ 16,586
Short-Term Bank Loans 0 7,764
Revolving Credit Loan and Short-Term Debt (Note 4) 19,050 4,990
Deferred Service Revenue - Current 10,576 10,330
Other 10,090 24,519
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Total Current Liabilities 50,441 64,189
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 551 25,630
DEFERRED INCOME TAXES 1,182 1,162
OTHER LIABILITIES 2,571 1,344
STOCKHOLDERS' EQUITY 46,466 43,213
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 101,211 $ 135,538
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See Notes to Condensed Consolidated Financial Statements
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QMS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 28, 1996 and June 30, 1995
(Unaudited)
Three Months Ended Nine Months Ended
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June 28, June 30, June 28, June 30,
in thousands, except per share amounts 1996 1995 1996 1995
NET SALES
Printers and Supplies $ 29,663 $ 54,660 $ 88,320 $ 176,322
U.S. Service 8,555 8,038 24,645 23,548
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Total Net Sales 38,218 62,698 112,965 199,870
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COST OF SALES
Printers and Supplies 20,377 44,339 60,650 138,955
U.S. Service 5,225 4,771 14,843 14,299
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Total Cost of Sales 25,602 49,110 75,493 153,254
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GROSS PROFIT
Printers and Supplies 9,286 10,321 27,670 37,367
U.S. Service 3,330 3,267 9,802 9,249
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Total Gross Profit 12,616 13,588 37,472 46,616
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OPERATING EXPENSES
Selling, General and Administrative
Expenses 11,041 21,597 32,895 64,886
Restructuring Expense 0 0 0 2,685
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Total Operating Expenses 11,041 21,597 32,895 67,571
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OPERATING INCOME (LOSS) 1,575 (8,009) 4,577 (20,955)
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OTHER INCOME (EXPENSE)
Interest Income 91 73 261 113
Interest Expense (410) (1,067) (1,435) (3,059)
Miscellaneous Expense (123) (503) (594) (16)
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Total Other Expense - Net (442) (1,497) (1,768) (2,962)
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INCOME (LOSS) BEFORE INCOME TAXES 1,133 (9,506) 2,809 (23,917)
INCOME TAX BENEFIT (488) (28) (488) 0
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NET INCOME (LOSS) $ 1,621 $ (9,478) $ 3,297 $ (23,917)
=========== ============ =========== ============
EARNINGS (LOSS) PER COMMON SHARE (Note 2)
Primary and Fully Diluted $ 0.15 $ (0.89) $ 0.31 $ (2.24)
SHARES USED IN PER SHARE COMPUTATION (Note 2)
Primary 10,759 10,677 10,719 10,676
Fully Diluted 10,759 10,677 10,758 10,676
See Notes to Condensed Consolidated Financial Statements
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QMS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 28, 1996 and June 30, 1995
(Unaudited)
June 28, June 30,
in thousands 1996 1995
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Cash Flows from Operating Activities:
Net Income (Loss) $ 3,297 $ (23,917)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation of Property, Plant and Equipment 4,051 6,388
Amortization of Capitalized and Deferred Software 3,237 7,821
Provision for Losses on Inventory 6,872 10,380
Provision for Restructuring Expense 0 2,685
Other 105 210
Net Change in Assets and Liabilities that Provided
(Used) Cash (481) 740
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Net Cash Provided by Operating Activities 17,081 4,307
Cash Flows from Investing Activities:
Purchase of Property, Plant and Equipment (1,562) (5,549)
Additions to Notes Receivable (7,500) 0
Proceeds from Notes Receivable 1,500 0
Additions to Capitalized and Deferred Software Costs (5,173) (6,597)
Proceeds from Divestiture of Businesses 9,300 0
Other 310 403
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Net Cash Used in Investing Activities (3,125) (11,743)
Cash Flows from Financing Activities:
Proceeds from Debt and Capital Lease Obligations 12,955 7,702
Payments of Debt and Capital Lease Obligations (23,974) (4,407)
Payments of Bank Loans (7,764) 0
Other 172 11
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Net Cash Provided by (Used in) Financing Activities (18,611) 3,306
Effect of Exchange Rate Changes on Cash (216) 2,252
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Net Change in Cash and Cash Equivalents (4,871) (1,878)
Cash and Cash Equivalents at Beginning of Period 7,431 4,956
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Cash and Cash Equivalents at End of Period $ 2,560 $ 3,078
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See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
==========================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. MANAGEMENT OPINION
In the opinion of management, the condensed consolidated financial statements
reflect all adjustments necessary to present fairly the financial position of
the Company as of June 28, 1996, the results of operations for the three and
nine months ended June 28, 1996 and June 30, 1995 and changes in cash flows
for the nine months ended June 28, 1996 and June 30, 1995. All adjustments
included in the condensed consolidated financial statements are of a normal
recurring nature except amounts related to the restructuring reserves (see
Note 6) and reclassification of the revolving credit loan and senior secured
notes payable from long-term to short-term debt (see Note 4). The results of
operations for the nine months ended June 28, 1996 are not necessarily
indicative of the results to be expected for the fiscal year ending September
27, 1996.
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. This effect was not material for the three- and
nine-month periods ending June 28, 1996 and June 30, 1995 and did not change
the amounts of the primary and fully diluted earnings (loss) per common
share.
3. INVENTORIES
Inventories at June 28, 1996 and September 29, 1995 are summarized as follows
(in thousands):
June 28, September 29,
1996 1995
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Raw materials $ 7,300 $11,709
Work in process 1,824 3,152
Finished goods 28,489 43,453
Inventory reserve (5,582) (10,832)
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Total $ 32,031 $47,482
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4. CLASSIFICATION OF REVOLVING CREDIT LOAN AND SENIOR SECURED NOTES PAYABLE
The Company reclassified its revolving credit loan and the senior secured
notes payable from long-term to short-term debt as of December 29, 1995 only
to comply with FASB Emerging Issues Task Force Issue No. 95-22, "Balance
Sheet Classification of Borrowings Outstanding Under Revolving Credit
Arrangements That Include a Subjective Acceleration Clause and a Lock-Box
Arrangement" which became effective in November 1995. The revolving credit
agreement is for a four-year period and the Company was in full compliance
with all the covenants of this agreement as of June 28, 1996.
5. COMMITMENTS AND CONTINGENCIES
As of June 28, 1996, the Company had a commitment of approximately $5.5
million to purchase print engines under purchase contracts.
The Company was contingently liable for approximately $1.2 million as of June
28, 1996, the result of letters of credit issued in the normal course of
business for the purchase of inventory.
6. RESTRUCTURING RESERVES
At September 29, 1995, the Company had reserves for restructuring charges and
business divestitures totaling $10.1 million. During fiscal 1996, total net
charges of $8.1 million were taken against these reserves leaving a balance
of $2 million at June 28, 1996.
7. RECLASSIFICATIONS
Certain reclassifications have been made to fiscal 1995 amounts to conform to
the fiscal 1996 presentation.
QMS, INC. AND SUBSIDIARIES
==========================
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
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Net income for the third quarter of fiscal 1996 was $1.6 million on net sales of
$38.2 million and for the nine months ended June 28, 1996 was $3.3 million on
net sales of $113 million. The 1996 results compare to a net loss of $9.5
million on net sales of $62.7 million for the third quarter of fiscal 1995 and a
net loss of $23.9 million on net sales of $200 million for the nine months ended
June 30, 1995.
Table of Net Sales Comparisons for Key Channels of Distribution
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Third Quarter Ended Nine Months Ended
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June 28, June 30, June 28, June 30,
(000's) 1996 1995 Difference 1996 1995 Difference
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U.S. Direct $ 14,968 $ 18,372 $ (3,404) $ 39,506 $ 56,359 $ (16,853)
U.S. Service 8,555 8,038 517 24,645 23,548 1,097
U.S. Reseller 3,503 2,596 907 12,567 10,241 2,326
Europe 4,478 21,487 (17,009) 15,704 68,938 (53,234)
Japan 2,496 8,046 (5,550) 7,796 24,160 (16,364)
Canada 1,909 2,446 (537) 7,333 10,820 (3,487)
QMS Circuits 800 988 (188) 2,646 2,973 (327)
All Other 1,509 725 784 2,768 2,831 (63)
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Total $ 38,218 $ 62,698 $ (24,480) $ 112,965 $ 199,870 $ (86,905)
======================================= =======================================
Net sales for the third quarter of fiscal 1996 declined by 39% from net sales
for the third quarter of fiscal 1995 and by 43.5% in the nine-month comparison.
The sales by key distribution channels in the third quarter of fiscal 1996 (the
three months ended June 28, 1996) compared to the third quarter of fiscal 1995
(the three months ended June 30, 1995) and the nine-month periods ending on the
same dates are shown in the table above. The principal reasons for the sales
declines are the change in the methods of doing business in Europe and Japan and
the sale of the color thermal transfer consumables business. The combined sales
decline in the Europe and Japan sales channels represents $22.6 million, or
92.2%, of the total decline for the third quarter comparison, and $69.6 million,
or 80.1%, of the total decline for the nine-month comparison. Sales of color
thermal transfer consumables included in the third quarter of fiscal 1995 were
$3.2 million and for the nine months ended June 30, 1995 were $10.3 million. As
reported in the Company's 10-Q filing for the first quarter of fiscal 1996, the
Company has completed the divestiture of its Europe and Japan business
operations to management buy-out groups and established exclusive master
distributor agreements with the new owners of these businesses to market QMS
products in their respective geographic territories. The Company recognizes
revenue on sales of components and controller boards to these master
distributors and, additionally, commissions are earned by the Company on sales
of QMS products by these master distributors. As a result, the amount of
revenue recognized through these sales channels in fiscal 1996 is significantly
lower than that recognized in fiscal 1995.
The U.S. 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. Net sales in the direct channel for the three- and nine-
month periods ending June 28, 1996 declined by 18.5% and 29.9%, respectively,
compared to the same periods in fiscal 1995. The principal reasons for the
sales declines are increased competition in this sales channel and the sale of
the color thermal transfer consumables business, as discussed above. Sales of
color thermal transfer consumables included in this channel were $2.1 million in
the third quarter of fiscal 1995, representing 11.5% of the total decline, and
for the nine months ended June 30, 1995 were $6.5 million, also representing
11.5% of the total decline. However, there was a 27% increase in the U.S.
direct sales channel in the third quarter of fiscal 1996 compared to the second
quarter of fiscal 1996. This increase reflects the impact of the introduction
of the QMS(R) 2425 Print System, a 24 page-per-minute monochrome printer, into
this channel at the end of the second quarter of fiscal 1996.
The Company introduced two new color laser print systems during the third
quarter of fiscal 1996. The first of these print systems is the QMS
magicolor(R) WX, which is a work group printer for Windows(R) 95 environments.
With a list price of $3,999, the magicolor WX was introduced as the least
expensive color laser printer available and is the only color laser printer to
offer direct Windows 95 support without the need to translate data into
PostScript(R), HP(R) PCL or HP-GL. The Company also introduced the QMS
magicolor CX/40, a print system which features 1200 dpi photographic quality
images, document control and network features. The introduction of these two
new print systems, combined with the recent introduction of the QMS 2425 Print
System as discussed above, should allow the Company to continue to compete
effectively in the mid- to high-end print system market.
Overall, the Company's gross profit as a percentage of sales increased from
21.7% to 33% in the three-month comparison and from 23.3% to 33.2% in the nine-
month comparison. The reasons for these improvements are a focus on higher
margin products in the sales mix, including service and consumables, and
reductions in manufacturing overhead costs that were achieved in fiscal 1996.
The Company purchases print engine mechanisms and memory components from several
Japanese suppliers. Fluctuations in foreign currency exchange rates will affect
the prices of these products. The Company attempts to mitigate possible
negative impacts through yen-sharing arrangements with suppliers, foreign
exchange contracts and price negotiations; however, material price increases
resulting from exchange rate fluctuations could develop which would adversely
affect operating results.
Selling, general and administrative expenses declined from $21.6 million in the
third quarter of fiscal 1995 to $11 million in the third quarter of fiscal 1996
and from $67.6 million to $32.9 million in the nine-month comparison. These
decreases of $10.6 million and $34.7 million in the three- and nine-month
comparisons, respectively, are due, in part, to the elimination of expenses
associated with the divested business operations in Europe and Japan, which were
$6.7 million in the third quarter of fiscal 1995 and $19.4 million for the nine
months ended June 30, 1995. The remainder of the decreases in selling, general
and administrative expenses from fiscal 1995 compared to fiscal 1996 result from
cost reductions and restructuring efforts implemented during the latter part of
fiscal 1995. Net operating expenses, excluding restructuring charges, as a
percentage of net sales decreased from 34.4% in the third quarter of fiscal 1995
to 28.9% in the third quarter of fiscal 1996 and also decreased from 32.5% to
29.1% in the nine-month comparison.
Total other expense for the third quarter of fiscal 1996 decreased 70.5%, from
$1.5 million in the third quarter of fiscal 1995 to $0.4 million in the third
quarter of fiscal 1996, and declined $1.2 million, or 40.3%, for the comparable
nine-month periods. Interest expense decreased by $0.6 million in the third
quarter of fiscal 1996 compared to the third quarter of fiscal 1995 and by $1.6
million in the nine-month comparison which was a direct result of the decrease
in total non-trade debt from $38.4 million at September 29, 1995 to $19.6
million at June 28, 1996.
During the third quarter of fiscal 1996, the Company recognized a tax benefit of
$488,000 from the carryback of its losses in Japan. This tax benefit resulted
from the loss on the sale of its Japanese operations which was finalized in
early fiscal 1996. Due to the availability of net operating loss carryforwards
and income tax credits, the Company does not anticipate providing for any income
tax expense during fiscal 1996.
FINANCIAL CONDITION
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The decrease in cash and cash equivalents from $7.4 million at September 29,
1995 to $2.6 million at June 28, 1996 results from revised cash management
processes that were implemented as part of the new credit facility with Foothill
Capital Corporation ("Foothill"). This credit facility provides for a direct
flow of the Company's cash receipts to Foothill and a simplified method of re-
borrowing funds from Foothill to meet working capital requirements.
The decreases in trade accounts receivable of $12 million, in inventories of
$15.5 million, in property, plant and equipment of $6 million, in trade accounts
payable of $5.9 million, in short-term bank loans of $7.8 million, and in other
current liabilities of $14.2 million at June 28, 1996 compared to September 29,
1995 are principally the result of the divestitures of the Company's European
and Japanese operations.
The increases in notes receivable (current) of $3.7 million and note receivable
(non-current) of $2.3 million at June 28, 1996 compared to September 29, 1995
represent balances of the notes due from the purchasers of the Company's
business operations in Europe ($4 million) and Japan ($3.5 million). These
notes are scheduled for repayment over periods of one and five years,
respectively, and all payments are current as of June 28, 1996.
LIQUIDITY AND CAPITAL RESOURCES
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During the third quarter and first nine months of fiscal 1996, the Company's
working capital and capital expenditure requirements came principally from
operations and borrowings under the new credit facility with Foothill. Proceeds
from the divestiture of the Company's business operations in Europe and Japan
were used to pay down the Company's short- and long-term debt obligations. The
Company's net working capital as of June 28, 1996 was $17.8 million compared to
$35.5 million at September 29, 1995. This reduction is principally due to the
disposition of the European and Japanese operations, the change in the Company's
cash management processes under the Foothill credit facility and the
reclassification of the revolving credit loan and senior secured notes payable
from long-term to short-term debt, as discussed below.
At June 28, 1996, borrowings under the Foothill credit facility were $13.8
million and borrowing capacity under this credit facility totaled $15.5 million,
plus the availability of a $5 million term loan. During the third quarter of
fiscal 1996, the Company amended the Foothill credit agreement to extend the
terms of the agreement from three years to four years. In addition, the
availability of the optional $5 million term loan was extended from May 15, 1996
to December 15, 1996. (See Item 6 for a copy of this amendment.) The Company
was in compliance with all of the Foothill debt covenants at June 28, 1996.
At June 28, 1996, the Company was not in compliance with certain covenants
contained in the 6.15% senior secured notes payable and, accordingly, this
obligation is classified as short-term debt. Although the Company has not
received a waiver of the non-compliance, the holder of the senior secured notes
has not taken steps to accelerate repayment of this debt and, in management's
opinion, the status of this debt is unlikely to change. The Company has
adequate borrowing capacity available as a term loan under the Foothill credit
facility to repay the senior secured notes in the unlikely event that repayment
of these notes is accelerated.
In November 1995, the FASB Emerging Issues Task Force released Issue No. 95-22,
"Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit
Arrangements That Include a Subjective Acceleration Clause and a Lock-Box
Arrangement" which required the Company to reclassify its revolving credit loan
from long-term to short-term debt.
Management believes that the Company's continuing working capital and capital
expenditure requirements will be met by cash flow from operations and borrowings
under the Foothill credit facility.
QMS, INC. AND SUBSIDIARIES
==========================
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
The Company is a defendant in several cases in the normal course of business.
Management is of the opinion that the ultimate resolution of these cases, either
individually or collectively, will not materially affect the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES - None.
- ------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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(a) At June 28, 1996, the Company was not in compliance with certain covenants
contained in the 6.15% senior secured notes payable. Covenant violations
include noncompliance with minimum net income requirements and interest
coverage. Although the Company has not received a waiver of the noncompliance,
the holder of the senior secured notes has not taken steps to accelerate
repayment of this debt and, in management's opinion, the status of this debt is
unlikely to change. The Company has adequate borrowing capacity available as a
term loan under the Foothill credit facility to repay the senior secured notes
in the unlikely event that repayment of these notes is accelerated. The
Foothill credit facility is a four-year agreement and the Company was in full
compliance with all of the covenants in this agreement as of June 28, 1996.
(b) None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
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ITEM 5. OTHER INFORMATION - None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
Exhibit
Number Description
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10(r)(xi) Amendment Number One dated December 4, 1995 to the Loan and
Security Agreement dated November 7, 1995(1)
10(r)(xii) Amendment Number Two dated February 7, 1996 to the Loan and
Security Agreement dated November 7, 1995(1)
10(r)(xiii) Amendment Number Three dated July 31, 1996 to the Loan and
Security Agreement dated November 7, 1995(1)
27 Financial Data Schedule
(b) Reports: None.
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(1) Incorporated herein by reference to exhibits in Registrant's
Form 8-K filed on November 21, 1995 (Commission File No. 1-9348).
QMS, INC. AND SUBSIDIARIES
==========================
SIGNATURES
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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 9, 1996 /s/ Gerald G. Roenker
----------------------------- ----------------------------------------------
GERALD G. ROENKER
Executive Vice President, Chief Operating
Officer and Acting Chief Financial Officer
(Mr. Roenker is the Principal Operating and
Financial Officer and has been duly authorized
to sign on behalf of the Registrant.)