SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 1996.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
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Commission file number 1-9348
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 No.)
One Magnum Pass, Mobile, Alabama 36618
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (334) 633-4300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $.01
par value per share New York Stock Exchange
Rights to purchase shares of Series A New York Stock Exchange
Participating Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
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 XX No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. XX
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AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF NOVEMBER 25, 1996; APPROXIMATELY $57,382,965.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 25, 1996:
10,695,665
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD JANUARY 21, 1997 ARE INCORPORATED BY REFERENCE INTO
PART III.
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PART I
ITEM 1. BUSINESS.
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General
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The Registrant designs and manufactures intelligent controllers which
enhance the graphics capabilities and performance of computer printing and
imaging systems. The Registrant incorporates its controllers, which consist
of software implemented on printed circuit boards, into computer printing and
imaging systems which it markets, sells, and supports. The Registrant also
markets its controllers separately for incorporation into products marketed
by others and offers service support for non-QMS manufactured products.
The Registrant was incorporated under the laws of the State of Alabama
in 1977 and reincorporated as a Delaware corporation in 1982. Its principal
executive offices are located at One Magnum Pass, Mobile, Alabama 36618,
(334)633-4300.
Products1
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The Registrant's principal products are intelligent, nonimpact print
systems consisting of purchased print engines, proprietary hardware and
software, proprietary intelligent printer-to-computer interfaces, and other
components. The Registrant also designs, markets, and supports intelligent
raster image processors implemented as either proprietary software or hardware;
proprietary intelligent printer-to-computer interfaces to enable printers
marketed by others to perform specialized publishing applications; intelligent
processors with proprietary hardware, software, and intelligent printer-to-
computer interfaces to enable impact printers marketed by others to produce
graphics such as labels and bar codes used in the automatic identification
market segment; and intelligent processors with proprietary hardware, software,
and intelligent interfaces to perform specialized office functions including
printing, copying, and scanning. The Registrant also offers integration
services utilizing products from several image partners that provide process
re-engineering, document storage, and document retrieval.
The majority of the Registrant's products support the functionality of
Adobe Systems Incorporated's PostScript(TM) page-description language and
Hewlett-Packard's PCL(R) page-description language. The Registrant offers
products with PostScript Level 1 from Adobe as well as products with
________________
1 The following trademarks and registered trademarks of the Registrant
are used herein: UltraScript(TM), QFORM(TM), CrownAdmin(TM), Crown(R),
QMS(R), CrownNet(TM), ImageServer(R), magicolor(R), and ColorScript(R).
PostScript(TM) is a trademark of Adobe Systems Incorporated, which may be
registered in certain jurisdictions. PCL(R) is a registered trademark of
Hewlett-Packard Company. MacIntosh(R) is a registered trademark of Apple
Computer, Inc. IBM(R) is a registered trademark of International Business
Machines Corporation. NetWare(R) is a registered trademark of Novell, Inc.
Xerox(R) is a registered trademark of Xerox Corporation. DEC(R) is a
registered trademark of Digital Equipment Corporation. NEC(R) is a
registered trademark of NEC Technologies. Windows(R) is a registered
trademark of Microsoft Corporation.
________________
UltraScript(TM), a QMS-developed PostScript interpreter that is compatible with
Adobe's PostScript Levels 1 and 2. All but a small number of products that
support UltraScript also support the QMS-developed PCL5 page-description
language.
The nonimpact printing products marketed by the Registrant address the
printing needs of customers in electronic publishing, general business,
automatic identification, scientific, and engineering environments. The
Registrant's nonimpact printing products include both color and monochrome
printer systems with a variety of speeds, paper-handling, and performance
characteristics.
The Registrant's intelligent processor products are used in impact printers
for interfacing and industrial graphics applications and in nonimpact printers
for electronic publishing and document-processing applications.
The Registrant also markets accessories, add-ons, and software for use with
its nonimpact printing systems and offers spare parts, fonts, consumables,
maintenance services, and other support for its products as well as for non-QMS
manufactured products.
During fiscal 1996, the Registrant enhanced its product line by releasing a
number of enabling products consisting of (but not limited to): QFORM(TM), a
software package that allows QMS(R) laser printers to replace line printers in
classic information systems forms-based operations, and an enhanced version of
CrownAdmin(TM), a software tool allowing management of networked QMS printers
from a central point and a high performance PostScript Level II printer driver
for both PC and MacIntosh(R) compatibility.
The majority of the Registrant's new product offerings during fiscal 1996
were based on the Registrant's Crown(R) advanced document-processing technology,
which provides a combination of high-performance capabilities. RISC (Reduced
Instruction Set Computing) processors, support for multiple page description
languages, simultaneously active computer and network interfaces (SIO), and the
ability to differentiate the resident languages supported by a product and
switch between them without user intervention (ESP) are among the features Crown
technology provides.
During fiscal 1996, the Registrant introduced a number of print systems
with capabilities to support simultaneous network connectivity to multiple
protocol stacks. This capability, called QMS CrownNet(TM), is a line of adapter
cards and software which enhances the entire Crown product line with additional
connectivity in the IBM(R) OS/2 marketplace and significantly enhances its
support in the Novell NetWare(R) arena. It also provides superior performance
to several other network options.
The Registrant also added third-party interface options to its already
significant connectivity capabilities. These interface options provide
additional connectivity for the Registrant's printers into IBM and Xerox(R)
proprietary environments. In addition, the Registrant released its own
interface specifically for DEC(R) proprietary environments, allowing it to
offer the broadest range of printers for that market.
During fiscal 1996, the Registrant extended its product line by releasing
several new products including (but not limited to) the QMS 2425 printer series,
top-level QMS ImageServer(R) printers, and new versions of its QMS magicolor(R)
color laser printer family.
With the introduction of the QMS 2425, the Registrant became the first
printer manufacturer to use a new ultra-fast processing chip from NEC(R). The
QMS 2425 printer series, a replacement line for the Registrant's 17 page-per-
minute ("ppm") printer, includes a model for basic office use and a full-
featured version for more intensive network demands. These models offer up to
1200 dots per inch ("dpi") resolution, extremely fast processing, and advanced
paper-handling options.
With the QMS magicolor WX introduction, the Registrant debuted the first of
a line of printer models aimed solely at the Windows(R) 95 market. The low-cost
QMS magicolor WX color laser printer is especially designed to leverage the
printing capabilities inherent to the Windows 95 operating system.
In addition to the QMS magicolor WX, the Registrant also released new
models for its next-generation QMS magicolor CX color laser printer line. The
new printers offer varying memory configurations targeting different market
segments and feature increased printing resolution (1200 dpi) capabilities.
The Registrant's most recent product offerings include the QMS 2060 printer
series and the QMS ColorScript(R) 460 and 480 dye sublimation color printers.
The 20 ppm QMS 2060 monochrome printer series (introduced in October 1996)
features five models, including a unit for the Windows 95 market and one with
ImageServer software resident. The QMS ColorScript 460 and 480 color printers
(introduced in November 1996) provide outstanding photorealistic image quality
and are targeted for the pre-press and graphic arts markets.
Most of the Registrant's products provide high-resolution (600x600,
1200x600, and 1200x1200 dpi), large format laser printing (monochrome and/or
color), advanced document-handling features, optional network connectivity, or a
combination of these features.
SALES AND MARKETING
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The market for the Registrant's products is related to the market for
computer systems generally. Current end users of the Registrant's products
include many Fortune 500 companies, governmental agencies, and educational
institutions. In the United States, the Registrant sells its products primarily
through its direct sales channel and through resellers including national and
regional distributors and computer dealers.
As of September 27, 1996, the Registrant operated direct sales offices in
21 cities in 18 states.
During fiscal 1996, a wholly owned subsidiary of the Registrant operated
in Canada. The Registrant, either directly or through its international
network, markets its products in approximately 18 countries outside of the
United States. The Registrant sold its subsidiaries in Europe and Australia,
and also sold the assets of its subsidiary in Japan, at the beginning of fiscal
1996. The Registrant signed master distributor agreements with the purchasers
so that the Registrant's products will continue to be marketed in these
countries.
The Registrant's 10 largest customers accounted for an aggregate of
approximately 17.6% of total net sales during fiscal 1996. Sales to QMS Europe
BV represented 13.4% of consolidated revenues for fiscal 1996.
The Registrant's products are advertised in the United States and
international markets and exhibited at industry trade shows in the United States
and internationally under the Registrant's name and under the names of its
wholly owned subsidiaries. The Registrant also provides field sales support,
including training for customers and resellers, trade show exhibits, sales
training, and assistance to sales representatives to facilitate sales. The
Registrant believes that this support has been well received by its customers
and sales organizations and has assisted the Registrant in the introduction of
new products.
INTERNATIONAL OPERATIONS
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In fiscal 1994, 1995, and 1996, international sales totaled $135,532,000,
$132,130,000, and $40,084,000, respectively, representing approximately 46%,
51%, and 27%, respectively, of the Registrant's net sales. The Registrant
derives its international sales primarily from Europe, Japan, and Canada. To a
lesser degree, international sales have been generated in various countries in
Central and South America. The Registrant generally invoices customers in their
local currency and, therefore, is exposed to currency translation risks.
In terms of the cost of goods sold of components used in the Registrant's
products, the Registrant purchases a substantial majority of such components
abroad, primarily from Japanese companies. Accordingly, the cost of such
components may increase as the value of the United States dollar depreciates
relative to the currency of the source country.
The financial statements of the Registrant's foreign subsidiary are
affected by foreign currency fluctuations. For financial information regarding
the Registrant's foreign and domestic operations and export sales, see Notes 1
and 15 of Notes to the Registrant's Consolidated Financial Statements under Item
8 (Financial Statements and Supplementary Data).
SERVICE, SUPPORT, AND WARRANTY
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The Registrant provides a high level of technical and software support and
maintenance service and support to its end users directly and through
distributors, resellers, and third-party service providers. A staff of
engineers and technicians provides systems applications support, field service
support, and customer training for the use and maintenance of the Registrant's
products. In the United States, the Registrant provides technical hardware and
software support and maintenance service from its home office in Mobile,
Alabama, and from field offices located in 53 cities in 33 states. Technical
support is provided via telephone and electronic bulletin boards while a
national service organization provides choices of return to depot or factory, on
site, and special contractual service. During fiscal 1996, the Registrant
provided international technical service in Canada through its direct service
organization as well as through certain authorized dealers.
The Registrant warrants its products for a period of 90 days to 2 years
from the date of shipment, depending on the product. The Registrant's annual
warranty costs have not been significant relative to the Registrant's net sales.
COMPETITION
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Competition in the computer printing industry is extremely intense, and a
number of the Registrant's competitors have far greater financial, technical,
marketing, and manufacturing resources than the Registrant. Management believes
that performance, reliability, versatility of features, product support, and
price are the primary bases of competition in this market. Further, in some of
its markets, the Registrant competes against noncomputerized means of labeling
products, such as offset printing. The Registrant would be adversely affected
if its competitors successfully marketed products that were technologically
superior or significantly lower in price.
The Registrant's intelligent print systems are positioned to compete in the
low- and medium-speed, nonimpact page printer markets. Nonimpact laser printing
competes with other technologies in the computer printer market, including
inkjet, dye sublimation, ion disposition, magnetic, thermal, and impact
printers. Companies whose nonimpact printers compete with the Registrant's
include: Apple Computer, Inc.; Canon, Inc.; Digital Equipment Corporation;
Hewlett-Packard Company; Lexmark International, Inc.; NEC Technologies, Inc.;
Seiko Epson Corp.; Tektronix, Inc.; and Xerox Corporation. Many of these
competitors are larger companies with greater financial resources than those of
the Registrant.
MANUFACTURING AND QUALITY CONTROL
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The Registrant assembles its intelligent processors by adding components to
printed circuit boards manufactured according to its designs and specifications.
Essentially, the Registrant manufactures its products by assembling components
and subassemblies manufactured by others. The intelligent processors, which
include electronic circuitry and software designed by the Registrant, are tested
to ensure quality and consistency of production and design.
Most of the parts, components, and subassemblies used in the Registrant's
products are available to the Registrant from a variety of sources. When
management determines that a particular supplier is sufficiently reliable,
however, the Registrant generally chooses to rely on a single source for its
requirements in order to ensure a sufficient supply to meet its needs. If the
Registrant were required to change its sources of certain of those materials
unexpectedly, the Registrant might be adversely affected during the time it
would take to negotiate new arrangements with another vendor and to integrate
those materials into its production process. See "Print Engines" below.
During fiscal 1996, the Registrant performed manufacturing and assembly
operations in Mobile, Alabama, and one of the Registrant's wholly owned
subsidiaries manufactures printed circuit boards for the Registrant and for sale
to third parties. This subsidiary has provided the Registrant with partial
vertical integration in the production of printed circuit boards.
ORDER BACKLOG
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Only firm purchase orders are included in the Registrant's backlog.
Backlog generally is deliverable within 12 months from the date of the purchase
orders. As of September 29, 1995 and September 27, 1996, the backlog was
$7,129,000 and $5,118,000, respectively. The Registrant expects to fill all of
the September 27, 1996 backlog during fiscal 1997.
The Registrant attempts to maintain adequate finished goods inventory to
ship goods off the shelf whenever possible. Because a substantial portion of
the sales in any given month historically has been derived from new orders
received during the month, backlog is not necessarily an accurate indicator of
future revenues. The Registrant does not believe that sales of its products are
subject to significant seasonal fluctuations.
PRINT ENGINES
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The Registrant purchases print engines for its products from third-party
manufacturers, including: Canon U.S.A., Inc.; Ricoh Company, Ltd.; Hitachi
America, Ltd.; Fujitsu America, Inc.; Minolta Co., Ltd.; Mitsubishi Electronics
America, Inc.; and Oce'-Nederland B.V. While other sources are available, the
Registrant currently relies on these suppliers' abilities to make print engines
available as needed by the Registrant. Some of these print engines are supplied
to the Registrant pursuant to the terms of contracts entered into which specify
prices to be paid for each print engine depending upon the annual volume of
print engines purchased from that manufacturer. Certain of the Registrant's
supply contracts with foreign manufacturing sources are subject to adjustment
for exchange rate fluctuations.
The Registrant believes that its requirements for print engines for fiscal
1997 will be adequately met under the terms of existing arrangements and those
expected to be entered into in fiscal 1997. The Registrant has some flexibility
to adjust delivery schedules and quantities as demand for specific print engines
changes as a result of changes in product mix and customer demand. Although
print engines are available from a variety of sources, most of the Registrant's
print engines will be supplied by: Fujitsu America, Inc.; Hitachi America,
Ltd.; Canon U.S.A., Inc.; and Minolta Co., Ltd. Consequently, disruption of the
Registrant's contracts with these suppliers would adversely affect the
Registrant during the time required to negotiate new arrangements with a
different print engine supplier or suppliers and to bring the new product to
market.
RESEARCH AND DEVELOPMENT
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The Registrant's research and development program examines new technologies
as they relate to current product offerings, develops new and improved
applications for the Registrant's products, and provides insights into new
directions for the Registrant's business.
The Registrant places significant emphasis on the addition of new features
for its nonimpact print systems and enhancement of these systems to satisfy new
applications. The Registrant solicits and receives continuing advice from its
end users and various resellers in identifying appropriate additions. To
augment in-house development efforts, the Registrant also contracts with third
parties to develop products to its specifications or to license applications and
other software. In addition, the Registrant assists certain software design
firms in adapting their existing software for use with the Registrant's
products.
As of September 27, 1996, approximately 19.9% of the Registrant's employees
were employed in its research and development department. During fiscal 1994,
1995, and 1996, the Registrant spent approximately $15,960,000, $16,932,000, and
$14,968,000, respectively, for research and development and software costs and
received no material customer-sponsored funding for research and development.
In fiscal years 1994, 1995, and 1996, approximately $7,056,000, $7,096,000, and
$6,766,000, respectively, of the software costs for those fiscal years were
capitalized in accordance with Financial Accounting Standards (FAS) Statement
No. 86.
PATENTS AND TRADEMARKS
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The Registrant currently holds United States patents on certain of its
products; however, most of the Registrant's revenue is derived from products for
which there is no patent protection. Because of rapid technological changes in
the computer industry in general, and in the electronic printing industry in
particular, the Registrant does not believe that patents offer a significant
degree of protection for most products and technological advances. The
Registrant's strategy for maintaining its competitive position is to continue to
emphasize product research and development, coupled with a high level of
customer support.
The Registrant has obtained registration of many of its trademarks, and has
applications pending on others, in the United States and other countries.
ENVIRONMENTAL MATTERS
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Management believes the Registrant is in compliance in all material
respects with applicable federal, state, and local statutes and ordinances
regulating the discharge of materials into the environment. Management does not
believe the Registrant will be required to expend any material amounts in order
to remain in compliance with these laws and regulations or that compliance will
materially affect its capital expenditures, earnings, or competitive position.
EMPLOYEES
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As of September 27, 1996, the Registrant employed 848 permanent employees
in the United States. During fiscal 1996, the Registrant had one foreign
operating subsidiary, QMS Canada, Inc., employing 38 permanent employees. QMS
Canada, Inc. has sales and support organizations in Calgary, Montreal, Ottawa,
Toronto, and Vancouver.
Management believes that much of its future success depends on its ability
to attract and retain skilled personnel. The Registrant has implemented a Cash
or Deferred Retirement Plan and an Employee Stock Purchase Plan and maintains
stock option plans for officers and key employees.
The Registrant's employees are not subject to collective bargaining
agreements, and there have been no work stoppages due to labor difficulties.
Management of the Registrant believes that its relations with its employees are
good.
ITEM 2. PROPERTIES.
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The Registrant's headquarters facilities cover an aggregate of 117,000
square feet, of which 50,000 square feet are used for product research and
development. The Registrant's primary manufacturing and warehousing facility
covers 152,000 square feet. Both of these facilities are located on 20 of the
77 acres owned by the Registrant in Mobile, Alabama.
In Fort Walton Beach, Florida, one of the Registrant's subsidiaries owns
and operates a 35,000 square foot facility on ten acres of land. During fiscal
1996, the Registrant and its other subsidiaries leased additional space in
United States cities in which the Registrant operated sales and/or service
offices, as well as in Canada. In San Jose, California, the Registrant conducts
sales and service operations in a 13,295 square foot leased facility.
The Registrant's properties are utilized approximately five and one-half
days per week, with no significant underutilization of facilities. The
Registrant believes that its owned and leased properties are sufficient for its
current and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
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The Registrant is a defendant in a case in the United States District Court
for the Southern District of Alabama involving a former employee alleging
violation of the plaintiff's civil rights and certain other acts of wrongful
conduct. The Registrant is in the process of investigating the allegations and
intends to file an answer denying all allegations of wrongful conduct in the
complaint. The Registrant cannot predict the ultimate outcome of this case;
however, it does not expect the resolution of this matter to materially affect
the Registrant's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is listed on the New York Stock Exchange under the
ticker symbol "AQM." The table below sets forth the per share quarterly high
and low closing prices of QMS common stock for the fiscal years ended September
27, 1996 and September 29, 1995. No cash dividends were declared in either of
the last two fiscal years, and the Board of Directors has no present intention
to pay cash dividends in the foreseeable future. The credit facility contains
provisions which may restrict the payment of dividends. There were 1,561 holders
of record of the Company's common stock at November 25, 1996.
1996 1995
Fiscal Quarter High Low High Low
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First $5 1/8 $3 1/4 $10 1/2 $7 7/8
Second 6 1/4 4 1/2 9 3/8 5 1/4
Third 6 3/4 4 7/8 6 3/8 5
Fourth 6 3/8 3 3/4 6 3/8 4
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ITEM 6. SELECTED FINANCIAL DATA.
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FIVE-YEAR SUMMARY - FINANCIAL AND OTHER DATA
For the fiscal years ended September 27, 1996, September 29, 1995,
September 30, 1994, October 1, 1993, and October 2, 1992
Dollars in thousands, except per share amounts 1996 1995 1994 1993 1992
C>
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Operating results
Net sales $ 147,174 $ 259,740 $ 292,688 $ 297,380 $ 260,691
Cost of sales 99,151 210,032 196,538 201,804 168,431
Marketing and selling expense 25,216 47,066 48,812 48,702 42,816
Research and development expense 8,202 9,836 8,904 9,018 10,885
General and administrative expense 8,941 29,308 31,156 39,246 37,983
Restructuring expense 0 8,364 0 0 0
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Operating income (loss) 5,664 (44,866) 7,278 (1,390) 576
Interest income 398 171 80 756 468
Interest expense (1,805) (4,113) (3,235) (3,342) (3,037)
Divestitures of businesses 0 3,675 0 0 0
Miscellaneous income (expense) (737) 847 (83) (946) (2,384)
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Income (loss) before income taxes 3,520 (44,286) 4,040 (4,922) (4,377)
Income tax provision (benefit) (733) 0 1,080 (1,526) (1,444)
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Net income (loss) $ 4,253 $ (44,286) $ 2,960 $ (3,396) $ (2,933)
=============================================================================
Earnings (loss) per common share
Primary and fully diluted $ 0.40 $ (4.15) $ 0.28 $ (0.31) $ (0.27)
Weighted average number of shares (in thousands)
used in computing earnings per share:
Primary 10,722 10,677 10,723 10,792 10,994
Fully diluted 10,755 10,677 10,761 10,821 10,994
Balance sheet
Total assets $ 91,718 $ 135,538 $ 182,023 $ 170,217 $ 168,007
Net working capital 17,735 35,511 79,390 78,359 73,961
Term debt and bank loans 13,695 36,404 38,348 44,543 33,026
Stockholders' equity 47,432 43,213 89,002 85,729 89,419
Other data
Current ratio 1.44 1.55 2.44 2.82 2.59
Gross profit margin 32.6% 19.1% 32.9% 32.1% 35.4%
Net profit (loss) margin 2.9% (17.1)% 1.0% (1.1)% (1.1)%
Return on average stockholders' equity 9.4% (67.0)% 3.3% (3.9)% (3.1)%
Persons employed at year end 886 1,194 1,382 1,425 1,584
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Fiscal Years 1996, 1995, and 1994 Compared
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GENERAL
Fiscal 1996 marked a significant change in the operations of QMS and represented
a turnaround year for the Company. Net income of $4.3 million on net sales of
$147.2 million was achieved for fiscal 1996 compared to a net loss of $44.3
million in fiscal 1995 and net income of $3.0 million in fiscal 1994 on net
sales of $259.7 million and $292.7 million, respectively. The fiscal 1996
results validated the effectiveness of business strategies implemented at the
beginning of the year and should position the Company for continued revenue and
earnings growth and improved stockholder value.
The first element of the Company's fiscal 1996 strategy was to refinance its
short- and long-term debt. During the first quarter, the Company completed the
transactions associated with the divestiture of its operations in Europe,
Australia, and Japan. The proceeds from the international restructuring were
used to reduce overall debt levels and allowed the Company to enter into an
agreement with Foothill Capital Corporation which provides the Company with up
to $30.0 million through a four-year credit facility. The proceeds from this
new credit facility were used to repay in full all amounts owed by the Company
under its previous revolving credit agreement and also to repay portions of
other long-term debt that existed at the end of fiscal 1995.
Although the divested subsidiary operations are no longer reflected in the
consolidated financial statements of the Company, QMS recognizes substantial
benefits from the ongoing relationships with the new owners of these operations.
Agreements are in place whereby the Company sells printer controllers and
components at cost to these international distributors and then receives a
commission from their sales of QMS products. As a result, the Company realizes
an income stream from these international operations without the burden of
carrying their fixed costs.
The second phase of the Company's strategy for fiscal 1996 was to reduce overall
costs and bring them in line with revenues. This was accomplished through
several avenues including divestitures, reductions in work force, restructuring
employee benefit programs, executive salary reductions, and aggressive cost
management. Total operating expenses for fiscal 1996 decreased to $42.4
million, or 28.8% of net sales, compared to $94.6 million, or 36.4% of net
sales, in fiscal 1995 ($86.2 million, or 33.2% of net sales, excluding
restructuring charges) and $88.9 million, or 30.4% of net sales, in fiscal 1994.
With this reduced cost structure in place, the Company was able to achieve
profitability based on significantly lower revenues in fiscal 1996 compared to
fiscal years 1995 and 1994.
The third part of the Company's strategy for fiscal 1996 was to return the
Company to sustainable revenue and earnings growth. Achievement of this goal
was demonstrated by the Company reporting net income during all four quarters of
fiscal 1996. In addition, the Company introduced several significant new
products during fiscal 1996, including the QMS(R) 2425 print system, a 24-page-
per-minute monochrome printer with an available copier option; the QMS
magicolor(R) WX, a color laser workgroup printer for Windows(R) 95 environments;
and the QMS magicolor CX/40, a color laser printer which delivers 1200 dpi
photographic quality images, document control, and network features. In October
1996, the Company introduced the QMS 2060 Hammerhead(R), a 20-page-per-minute
monochrome printer with graphic arts capabilities. These new products, combined
with a new sales and marketing management team which was brought on board
beginning in the fourth quarter of fiscal 1996, should allow the Company to
effectively compete in domestic and international markets.
With a lowered cost structure in place, adequate borrowing capacity available
under the Foothill credit facility, and the above new product introductions, as
well as the implementation of strategies for entering the graphic arts and
digital imaging markets, the Company's strategic plan for fiscal 1997 is to
continue innovative product introductions, concentrate on business fundamentals
(including further reductions of debt and operating expenses), focus on core
competencies, and enter into and grow new markets and businesses. The net
result of this plan is to improve stockholder value.
NET SALES
TABLE OF NET SALES COMPARISONS FOR KEY CHANNELS
YEAR-TO-YEAR
NET SALES INCREASES/(DECREASES)
----------------------------------------------- ------------------------------
IN THOUSANDS 1996 1995 1994 1996 1995
- ------------------------------------------------------------------------------- ------------------------------
- -----------------------------------------------------------------------------------------------------------------------
U.S. DIRECT $53,113 $73,047 $85,835 $(19,934) $(12,788)
U.S. SERVICE 33,126 31,564 28,393 1,562 3,171
U.S. RESELLER 15,171 15,162 33,374 9 (18,212)
EUROPE/AUSTRALIA 19,792 88,391 86,009 (68,599) 2,382
JAPAN 9,220 30,876 31,743 (21,656) (867)
QMS CANADA 8,734 12,860 18,187 (4,126) (5,327)
QMS CIRCUITS 3,289 3,851 3,438 (562) 413
ALL OTHER 4,729 3,989 5,709 740 (1,720)
---------------------------------------------- ------------------------------
TOTAL $147,174 $259,740 $292,688 $(112,566) $(32,948)
============================================== ==============================
Total sales declined by $112.6 million, or 43.3%, during fiscal 1996 compared to
a decline of $32.9 million, or 11.3%, during fiscal 1995. The primary reason
for the significant decline in total sales in fiscal 1996 is that sales of
$119.3 million during fiscal 1995 attributable to divested subsidiaries and
sales of $12.7 million during fiscal 1995 relating to the color thermal transfer
consumables business which was sold at the end of fiscal 1995 were no longer
available to the Company in fiscal 1996.
The U.S. direct sales channel sells the higher end of the Company's product
offerings and consumables to major corporate accounts. Generally, product gross
margins and the cost of distribution are higher in this channel than in the
reseller channel. During fiscal 1996, the U.S. direct sales operations resulted
in a net sales decrease of 27.3%, which compares to a net sales decrease of
14.9% during fiscal 1995. During fiscal 1995, $8.2 million, or 11.3%, of net
sales in this channel was attributable to sales of color thermal transfer
consumables which are no longer available to the Company. Excluding this
effect, the net sales decline during fiscal 1996 would have been 18.1%.
Turnover in sales and marketing personnel during fiscal 1995 and the first nine
months of fiscal 1996 contributed to the sales declines in both years. The
Company has addressed this issue with the addition of a new sales and marketing
management team which joined the Company beginning in the fourth quarter of
fiscal 1996. The principal members of this new management team have extensive
experience in the non-impact printing and digital imaging industry, several of
whom were previously employed by the Company and have rejoined QMS bringing
knowledge of QMS products, markets, and distribution channels. Revenue
improvements in the direct sales channel are anticipated with this new sales and
marketing team in place combined with an emphasis in introducing new high-end,
value-added products into this market, such as the QMS magicolor CX/40 and the
QMS 2425 EX print systems, which were introduced during fiscal 1996, and the
recent introduction of the QMS 2060 Hammerhead printer, which facilitates the
Company's penetration into the graphic arts market.
The U.S. service channel supports the sale of QMS products through a nationwide
field service organization. Service contracts are generally written for the
higher end of the Company's product offerings, which are sold through the U.S.
direct sales channel; however, in addition to QMS products, the service
organization services products sold by other manufacturers. The U.S. service
business realized a net sales gain of 4.9% in fiscal 1996 compared to a gain of
11.2% in fiscal 1995. This decrease in year-to-year improvement is directly
related to the sales decline in the U.S. direct sales channel from fiscal 1995
to 1996; however, the decline resulting from that channel was more than offset
by increases in service revenues from non-QMS manufactured products.
The U.S. reseller channel is responsible for attracting and qualifying resellers
of the lower end of the Company's product line. Generally, gross margins and
distribution costs are lower in this sales channel than in the direct sales
channel. The U.S. reseller channel net sales for fiscal 1996 increased only
slightly from fiscal 1995 and declined nearly 54.6% for fiscal 1995 from fiscal
1994. During fiscal 1995, $2.2 million, or 14.4%, of net sales in this channel
was attributable to sales of color thermal transfer consumables which are no
longer available to the Company. Excluding the effect of these revenues,
reseller sales would have increased during fiscal 1996 by 16.9%. During fiscal
1995, sales volumes in this channel declined because of the turnover in sales
and marketing management (as discussed above) and extreme competitive pressures.
QMS Europe BV and QMS Australia Pty Ltd. were sold to Jalak Investment BV,
effective the beginning of fiscal 1996. The Company continues to sell
controller boards and components to the new owner of these businesses at cost
and then realizes a commission on their sales of QMS products to third parties.
As a result of this change in business operations, net sales through these
channels are significantly lower in fiscal 1996, with sales to the new QMS
Europe BV of $19.8 million, compared to sales of $88.4 million and $86.0 million
by the wholly owned subsidiaries QMS Europe BV and QMS Australia Pty Ltd. in
fiscal years 1995 and 1994, respectively. Although the net third-party sales of
QMS Europe BV and QMS Australia Pty Ltd. are no longer included in the
consolidated financial statements, the entire operating expense structure of
these businesses has also been eliminated.
The assets of QMS Japan KK were divested at the beginning of fiscal 1996. The
Company continues to sell controller boards and components to the new owner of
the business at cost and then realizes a commission on their sales of QMS
products to third parties. For the same reasons described above for QMS
Europe/Australia, there are significantly lower net sales through this channel
in fiscal 1996, with sales to the new QMS Japan KK of $9.2 million, compared to
sales of $30.1 million and $31.7 million by the wholly owned subsidiary QMS
Japan in fiscal years 1995 and 1994, respectively.
QMS Canada, Inc., a wholly owned subsidiary with principal operations in Toronto
and Montreal, sells the entire line of Company products, including service and
accessories, directly to end users and through resellers. Net sales for QMS
Canada declined by 32.1% in fiscal 1996 and by 29.3% in fiscal 1995. During
fiscal 1996, $1.6 million, or 12.1%, of net sales for QMS Canada was
attributable to sales of color thermal transfer consumables which are no longer
available to the Company. Excluding the effect of these revenues, the net sales
decline in fiscal 1996 would have been 22.8%. Other reasons for the sales
declines in fiscal years 1996 and 1995 are the same as noted for the U.S. direct
channel, as discussed above.
QMS Circuits, Inc., a wholly owned subsidiary based in Fort Walton Beach,
Florida, manufactures and markets printed circuit boards for the Company and for
third-party sales. During fiscal years 1996, 1995, and 1994, the Company also
sold Magnum(R) controller boards, controller-level products to original
equipment manufacturers, and printer products into Latin America.
GROSS PROFIT
Gross profit dollars decreased by 3.4% in fiscal 1996, principally due to the
lower sales volumes as previously discussed; however, as a percentage of net
sales, gross profit increased to 32.6% in fiscal 1996 from 19.1% in fiscal 1995
(or 26.1% excluding the effect of special charges totaling $18.1 million).
Gross profit dollars in fiscal 1995 included $5.5 million attributable to the
color thermal transfer consumables business for which the revenues are no longer
available to the Company. Excluding the effect of these revenues, gross profit
dollars would have increased by 8.7% during fiscal 1996. This improvement
reflects a change in the product mix to an increased percentage of high-margin
service and consumables revenues and also the effects of manufacturing cost
improvements that were implemented in fiscal 1996. The significant decline in
gross profit dollars in fiscal 1995 is comprised of three main components: (1)
special charges totaling $18.1 million related to inventory obsolescence and
write-off of certain software costs, (2) significant volume declines in the U.S.
direct and U.S. reseller channels, and (3) volume decreases in QMS Japan and QMS
Canada.
OPERATING EXPENSES
Total operating expenses declined by $52.2 million, or 55.2%, in fiscal 1996
compared to fiscal 1995 ($43.9 million, or 50.9%, excluding restructuring
charges) and as a percentage of net sales declined to 28.8% from 36.4% (33.2%
excluding restructuring charges) for the same periods. These improvements are a
direct result of eliminating the operating expense structure of the divested
business operations and the effective cost reduction measures which were
implemented as part of the restructuring which began during fiscal 1995 and
continued throughout fiscal 1996. During fiscal 1995, operating expenses
increased $5.7 million, or 6.4%. Excluding restructuring charges, operating
expenses decreased by $2.7 million but, as a percentage of net sales, increased
from 30.4% in fiscal 1994 to 33.2% in fiscal 1995.
Research and development expenses decreased by 16.6% in fiscal 1996 compared to
an increase of 10.5% in fiscal 1995. The decrease in fiscal 1996 is the result
of aggressive expense management and cost controls. Capitalized software costs
totaled $6.8 million, $7.1 million, and $7.1 million in fiscal years 1996, 1995,
and 1994, respectively. Management believes that investment in product research
and development is critical to the Company's growth and competitive position in
the marketplace and is directly related to the continued timely development of
new, innovative, and value-added products.
OTHER INCOME (EXPENSE)
Interest expense decreased 56.1% in fiscal 1996 compared to a 27.1% increase in
fiscal 1995. The reduction in fiscal 1996 is directly related to the overall
reduction in short- and long-term debt of $22.8 million, or 61.3%, during fiscal
1996. The increase in fiscal 1995 was the result of higher borrowing needs
because of the operating losses that were experienced. Interest income
increased 132.7% in fiscal 1996 and is attributable to interest earned on the
notes receivable from QMS Europe BV and QMS Japan KK. In fiscal 1995, a net
gain of $3.7 million was recognized from the divestiture of businesses,
principally the result of the sale of a portion of the color thermal transfer
consumables business. Miscellaneous income (expense) for fiscal 1996 included a
net loss on foreign currency transactions of $0.1 million and for fiscal 1995
included a gain on the sale of the Company aircraft of approximately $0.5
million and a gain on foreign currency transactions of $0.4 million.
The Company did not enter into any material foreign exchange contracts during
fiscal years 1996, 1995, or 1994.
INCOME TAXES
For fiscal 1996, a benefit of 20.8% of pretax income was recognized. This
benefit resulted from the carryback of losses in Japan relating to the
divestiture of business operations in that country. No benefit or provision for
income taxes was recognized for fiscal 1995, and a provision of 26.7% of pretax
income was recognized for fiscal 1994.
At September 27, 1996, the Company had domestic operating loss carryovers and
general business credit carryovers of approximately $33.0 million and $1.7
million, respectively, which expire in periods ranging from 2002 to 2011. (See
Note 14.)
Recent audits by tax authorities in Japan, the Netherlands, Canada, and the
United States were all resolved with no adverse tax consequences. Fiscal years
1993 and forward are still subject to review.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company's products include components (primarily microprocessors and dynamic
random-access memory devices) which, from time to time, are sensitive to market
conditions that may result in limited availability and/or price fluctuations.
An interruption in the supply of or significant changes in price for these
components could have an adverse effect on the Company's operating results. The
Company purchases print engine mechanisms and consumables from 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.
Because the Company competes in an industry of rapid technological advancement,
it is important that the Company be able to develop innovative new technologies
and leading edge print systems in a timely, cost-effective manner. The Company
has invested significantly in its Crown(R) advanced document processing
technology which, in addition to providing significantly improved functionality,
is intended to reduce the time it takes to develop products. The Company has
also invested significantly in digital imaging technology which manifests itself
in the CrownImage(TM) products, a suite of document imaging and document
software which complements the QMS line of monochrome and color laser printers.
New product introduction delays could, however, have an adverse impact on
operating results.
These factors, including increasingly competitive pressures in the Company's
markets, along with others that may affect operating results, mean that past
financial performance may not be a reliable indicator of future performance.
Investors should not use historical trends to anticipate results or trends in
future periods. In addition, the Company participates in a highly dynamic
industry, which can result in significant volatility of the Company's common
stock price.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $0.2 million at September 27, 1996 compared to
$7.4 million and $5.0 million at the end of fiscal years 1995 and 1994,
respectively. The decrease in fiscal 1996 is a result of the cash management
process with Foothill, which includes direct application of cash receipts to pay
down outstanding borrowings and a simple method of reborrowing cash to meet
working capital requirements. Cash flow from operations was $14.9 million for
fiscal 1996 compared to $12.4 million and $23.2 million for fiscal years 1995
and 1994, respectively. The Company's financing for fiscal years 1996, 1995,
and 1994 came principally from cash flows from operations and borrowings under
revolving credit agreements. In addition, during fiscal 1996, cash flows of
$9.3 million came from the divestiture of the business operations in Europe and
Japan. During fiscal 1995, cash flows of $5.7 million came from the sale of the
color thermal transfer consumables business and $7.8 million from short-term
bank borrowings.
The Company's working capital was $17.7 million at September 27, 1996, down from
$35.5 million and $79.4 million at the end of fiscal years 1995 and 1994,
respectively. The reduction of $17.8 million during fiscal 1996 is principally
the result of $7.2 million less cash and cash equivalents due to the reasons
described above, reductions in trade receivables of $13.6 million, and
reductions in inventories of $19.1 million. These reductions in current assets
along with the increase in current liabilities (principally the result of the
reclassification of the revolving credit agreement and the senior secured notes
payable, which totaled $24.5 million at September 29, 1995) from long-term debt
to short-term debt caused the decrease in working capital for fiscal 1996.
These reclassifications were made to comply with Issue No. 95-22 "Balance Sheet
Classifications of Borrowings Outstanding Under Revolving Credit Agreements that
Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement" which
was issued by the FASB Emerging Issues Task Force in November 1995.
During fiscal 1996, the Company reduced its borrowings under revolving credit
agreements and senior secured notes payable by $14.9 million. These reductions
were directly related to using the cash proceeds received from the divestiture
of business operations in Europe and Japan combined with the direct flow of cash
receipts to Foothill to pay down amounts outstanding under the revolving credit
agreement. Total liabilities were reduced from $92.3 million at the end of
fiscal 1995 to $44.3 million at the end of fiscal 1996, representing a reduction
of $48.0 million, or 52%.
At September 27, 1996, the Company was not in compliance with certain covenants
contained in the 6.15% senior secured notes payable. Although the Company has
not received a waiver of the non-compliance, the holder of these notes has not
taken steps to accelerate repayment of this debt and it is management's belief
that the status of this debt is unlikely to change. The Company has adequate
borrowing capacity under the Foothill credit facility (under the second term
loan) to repay the senior secured notes in the unlikely event that repayment of
the notes is accelerated. The availability of this second term loan will expire
on December 31, 1996 and, if not extended, management believes that adequate
borrowing capacity will be available under the Foothill credit facility to repay
the amount outstanding under the senior secured notes payable.
Management believes that the Company's fiscal 1997 working capital and capital
expenditure needs, as well as funding for research and development, will be met
by cash flow from operations and by the Foothill credit facility.
RECENTLY ISSUED ACCOUNTING STANDARDS
As discussed in Note 1 to the Consolidated Financial Statements, the Company
will be required to adopt Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets To Be Disposed Of," for which management does not expect a material
impact on the Company's results of operations in the near future, and SFAS No.
123 "Accounting for Stock-Based Compensation," for which the only impact will
be expanded disclosure requirements in fiscal 1997.
INFLATION
Inflationary factors have not had a significant effect on the Company's
operations in the past three years. A significant increase in inflation would
adversely affect the Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
- ----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the fiscal years ended September 27, 1996, September 29, 1995, and September 30, 1994
Dollars in thousands, except per share amounts 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales
Printers and supplies $ 114,048 $ 228,176 $ 264,295
U.S. service 33,126 31,564 28,393
------------------------------------------------------
Total net sales 147,174 259,740 292,688
------------------------------------------------------
Cost of sales
Printers and supplies 79,613 191,010 180,397
U.S. service 19,538 19,022 16,141
------------------------------------------------------
Total cost of sales 99,151 210,032 196,538
------------------------------------------------------
Gross profit
Printers and supplies 34,435 37,166 83,898
U.S. service 13,588 12,542 12,252
------------------------------------------------------
Total gross profit 48,023 49,708 96,150
------------------------------------------------------
Operating expenses
Marketing and selling 25,216 47,066 48,812
Research and development 8,202 9,836 8,904
General and administrative 8,941 29,308 31,156
------------------------------------------------------
Total 42,359 86,210 88,872
Restructuring expenses 0 8,364 0
------------------------------------------------------
Total operating expenses 42,359 94,574 88,872
------------------------------------------------------
Operating income (loss) 5,664 (44,866) 7,278
------------------------------------------------------
Other income (expense)
Interest income 398 171 80
Interest expense (1,805) (4,113) (3,235)
Divestitures of businesses 0 3,675 0
Miscellaneous income (expense) (737) 847 (83)
-------------------------------------------------------
Total other income (expense), net (2,144) 580 (3,238)
-------------------------------------------------------
Income (loss) before income taxes 3,520 (44,286) 4,040
Income tax provision (benefit) (733) 0 1,080
------------------------------------------------------
Net income (loss) $ 4,253 $ (44,286) $ 2,960
======================================================
Earnings (loss) per common share
Primary and fully diluted $ 0.40 $ (4.15) $ 0.28
Weighted average number of shares (in thousands)
used in computing earnings (loss) per common share
Primary 10,722 10,677 10,723
Fully diluted 10,755 10,677 10,761
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the fiscal years ended September 30, 1994,
September 29, 1995, and September 27, 1996
COMMON STOCK TREASURY STOCK
------------------------ ----------------------
ADDITIONAL FOREIGN
SHARES PAID-IN RETAINED NUMBER OF CURRENCY
DOLLARS IN THOUSANDS ISSUED AMOUNT CAPITAL EARNINGS SHARES AMOUNT TRANSLATION
Balance October 1, 1993 11,832,806 $ 118 $ 39,989 $59,941 1,127,293 $ (13,119) $ (1,200)
Stock options exercised 1 (8,602) 66
Purchase of treasury shares 40,700 (287)
Translation adjustment 533
Net income 2,960
-------------------------------------------------------------------------------------------
Balance September 30, 1994 11,832,806 118 39,990 62,901 1,159,391 (13,340) (667)
Stock options exercised 4 (3,400) 26
Translation adjustment (1,533)
Net loss (44,286)
-------------------------------------------------------------------------------------------
Balance September 29, 1995 11,832,806 118 39,994 18,615 1,155,991 (13,314) (2,200)
Warrant issued 175
Stock options exercised (13) (4,650) 35
Translation adjustment (231)
Net income 4,253
-------------------------------------------------------------------------------------------
Balance September 27, 1996 11,832,806 $ 118 $ 40,156 $22,868 1,151,341 $ (13,279) $ (2,431)
===========================================================================================
- --------
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
At September 27, 1996
and September 29, 1995
Dollars in thousands 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 190 $ 7,431
Trade receivables (less allowance for doubtful accounts
of $383 in 1996 and $546 in 1995) 24,145 37,721
Notes receivable 2,667 0
Inventories, net 28,366 47,482
Other current assets 2,908 7,066
--------------------------------
Total current assets 58,276 99,700
Property, plant, and equipment, net 20,282 26,721
Notes receivable (less reserve of $900) 2,267 0
Other assets, net 10,893 9,117
--------------------------------
Total assets $ 91,718 $ 135,538
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,463 $ 16,586
Short-term bank loans 0 7,764
Revolving credit loan and short-term debt 13,695 4,129
Current maturities of capital lease obligations 737 861
Other current liabilities 18,646 34,849
--------------------------------
Total current liabilities 40,541 64,189
Long-term debt 0 24,511
Capital lease obligations 531 1,119
Other liabilities 3,214 2,506
--------------------------------
Total liabilities 44,286 92,325
--------------------------------
Stockholders' equity
Preferred stock-authorized, 500,000 shares of no par value; none issued
Common stock-authorized, 50,000,000 shares of $.01 par value; issued,
11,832,806 shares in 1996 and 1995 118 118
Additional paid-in capital 40,156 39,994
Retained earnings 22,868 18,615
Treasury stock, at cost (1,151,341 shares in 1996 and
1,155,991 shares in 1995) (13,279) (13,314)
Foreign currency translation (2,431) (2,200)
---------------------------------
Total stockholders' equity 47,432 43,213
--------------------------------
Total liabilities and stockholders' equity $ 91,718 $ 135,538
================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal years ended September 27, 1996,
September 29, 1995, and September 30, 1994
Dollars in thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,253 $ (44,286) $ 2,960
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property, plant, and equipment 5,368 8,406 9,496
Amortization and write-off of capitalized and
deferred software and other 4,429 15,925 8,147
(Gain) loss from disposal of property, plant, and equipment (3) (521) 161
Provision for losses on accounts receivable 328 282 228
Provision for losses on inventory 2,123 19,132 5,388
Provision for restructuring expense 0 8,364 0
Gains from divestitures of businesses, net 0 (3,675) 0
Foreign currency transactions 0 47 (165)
Other 175 0 0
Changes in assets and liabilities which provided (used) cash:
Trade receivables 13,248 13,484 (11,301)
Inventories 16,993 3,149 (4,381)
Other current assets 2,351 1,269 (1,409)
Other assets 4,354 (504) 373
Accounts payable (9,123) (4,205) 9,725
Income taxes payable (46) (641) 805
Other current liabilities (32,061) (4,117) 935
Other liabilities 2,514 305 2,201
-------------------------------------------------------
Total adjustments 10,650 56,700 20,203
-------------------------------------------------------
Net cash provided by operating activities 14,903 12,414 23,163
-------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 1,666 0 0
Additions to property, plant, and equipment (2,255) (5,107) (6,115)
Additions to capitalized software costs (6,766) (7,096) (7,056)
Additions to deferred software costs (624) (768) (836)
Proceeds from disposal of property, plant, and equipment 161 1,262 198
Proceeds from divestitures of business 9,300 5,675 0
-------------------------------------------------------
Net cash provided by (used) in investing activities 1,482 (6,034) (13,809)
--------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term debt and capital lease obligations 13,116 723 0
Payments of term debt, including current maturities (27,672) (9,708) (6,195)
Payments of capital lease obligations, including current maturities (1,097) (1,181) (1,004)
Proceeds from bank loans 0 7,764 0
Payments of bank loans (7,764) 0 0
Proceeds from stock options exercised 22 30 67
Purchase of treasury stock 0 0 (287)
--------------------------------------------------------
Net cash used in financing activities (23,395) (2,372) (7,419)
--------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (231) (1,533) (561)
--------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,241) 2,475 1,374
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,431 4,956 3,582
-------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 190 $ 7,431 $ 4,956
=======================================================
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - QMS, Inc. designs and manufactures intelligent
controllers which enhance the graphics capabilities and performance of computer
printing and imaging systems. The Company incorporates its controllers, which
consist of software implemented on printed circuit boards, into computer
printing and imaging systems which it markets, sells, and supports domestically
and internationally. The market for these products is related to the market for
computer systems generally. Current end users of the Company's products include
many Fortune 500 companies, governmental agencies, and educational institutions.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of QMS, Inc. and its wholly owned subsidiaries. All
material intercompany items have been eliminated.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
FISCAL YEAR - The Company's fiscal year ends on the Friday closest to September
30. Fiscal 1996, 1995, and 1994 included 52 weeks.
CASH EQUIVALENTS - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost,
which includes materials, labor, and production and material overhead, is
determined on the first-in, first-out basis. Market is based on replacement
cost or net realizable value, as appropriate.
PROPERTY, PLANT, AND EQUIPMENT - Expenditures for property, plant, and
equipment, major renewals, and betterments are capitalized at cost. Certain
assets are financed under lease contracts which have been capitalized.
Aggregate lease payments, discounted at appropriate rates, have been recorded as
long-term debt, the related leased assets have been capitalized, and the
amortization of such assets is included in depreciation expense. Depreciation
is computed on the straight-line method over the estimated useful lives of the
assets, or the lease term, whichever is shorter.
Expenditures for maintenance, repairs, and minor renewals are charged to
expense. When items are disposed of, the cost and accumulated depreciation are
eliminated from the respective accounts, and the resulting gain or loss is
included in the statement of operations.
REVENUE RECOGNITION - Sales of printers and supplies are recorded upon shipments
of products to customers provided that no significant vendor obligations remain
and collectibility of the resulting receivables is probable. Service revenue is
recognized at the time the services are provided or upon completion of certain
obligations under deferred service contracts.
WARRANTY POLICY - The Company warrants its products for a period of 90 days to
two years from the date of shipment, depending on the product.
DEFERRED SERVICE REVENUES - Amounts billed for service contracts are credited to
deferred service revenue and reflected in revenues over the terms of the
contracts, which range up to five years.
DEFERRED SOFTWARE COSTS - Purchased computer software costs are amortized based
on current and future revenue for each product with an annual minimum
amortization equal to straight-line amortization over the remaining estimated
economic life of the product.
CAPITALIZED SOFTWARE COSTS - The Company capitalizes the qualifying costs of
developing proprietary software included in its products. Capitalization of
costs requires that technological feasibility has been established. Upon
completion of projects, amortization is determined based on the larger of the
amounts computed using (a) the ratio that current gross revenue for each product
bears to the total of current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product. Amortization adjustments are made to reflect net
realizable value and any changes in the determination of the economic lives.
Capitalized software costs for fiscal 1996, 1995, and 1994 totaled $6,766,000,
$7,096,000, and $7,056,000, respectively. For fiscal 1996, 1995, and 1994,
$3,705,000, $13,853,000, and $7,345,000, respectively, were charged as
amortization expense on completed projects and were included in cost of goods
sold. Amortization expense included net realizable value adjustments of
$497,000 and $4,639,000 for fiscal years 1996 and 1995, respectively. During
the fourth quarter of fiscal 1996, the Company extended the amortization periods
of certain of its projects to more closely correspond with the estimated
economic life of the related products. The effect of this change in estimate
was to decrease amortization expense by $164,000.
RESEARCH AND DEVELOPMENT - The Company expenses research and development costs,
including expenditures related to development of the Company's software products
that do not qualify for capitalization.
INCOME TAXES - The Company complies with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," under which
deferred tax liabilities and assets are determined based on the difference
between financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. (See Note 14.)
RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets To Be Disposed Of." This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, with any impairment losses being
reported in the period in which the recognition criteria are first applied based
on the fair value of the asset. Long-lived assets and certain intangibles to be
disposed of are required to be reported at the lower of carrying amount or fair
value less cost to sell. The Company will adopt SFAS No. 121 in the first
quarter of fiscal 1997 and management does not expect the adoption of this
Statement to have a material impact on the Company's results of operations in
the near future.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued. The adoption of the new recognition provisions for stock-based
compensation expense included in SFAS No. 123 is optional; however, the pro
forma effects on net income and net earnings per share had the new recognition
provisions been elected is required in financial statements. The Company will
continue to follow the requirements of Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," in its accounting for employee
stock options; therefore, no impact on the Company's financial position and
results of operations is expected. The Company will adopt the new disclosure
requirements under SFAS No. 123 in fiscal 1997.
EARNINGS (LOSSES) PER COMMON SHARE - Earnings (losses) per common share are
computed based on the weighted average number of common and common equivalent
shares outstanding, as appropriate. Common equivalent shares result from the
assumed exercise of outstanding stock options that have a dilutive effect when
applying the treasury stock method.
FOREIGN CURRENCY TRANSLATION - The financial position and results of operations
of the Company's Canadian subsidiary are measured using local currency as the
functional currency. During fiscal years 1995 and 1994, the Company also had
foreign subsidiaries in Europe (for which the functional currency was the U.S.
dollar) and in Japan, Australia, and New Zealand (for which the functional
currencies were the local currencies). Assets and liabilities of these
subsidiaries are translated using current exchange rates with revenues and
expenses translated at rates approximating the actual rates on the dates of the
transactions. Translation adjustments are included as a separate component of
stockholders' equity except for QMS Japan, for which a gain of approximately
$2.3 million was included in restructuring charges in fiscal 1995 as a component
of the write-down of the Company's investment in QMS Japan. (See Note 19.)
Foreign currency transaction gains (losses) are included as a component of
miscellaneous income (expense). (See Note 15.)
RECLASSIFICATIONS - Certain reclassifications have been made to fiscal 1995 and
1994 amounts to conform to the fiscal 1996 presentation.
2. INVENTORIES
Inventories at September 27, 1996 and September 29, 1995 are summarized as
follows (in thousands):
1996 1995
- -------------------------------------------------------------
Raw materials $ 6,164 $ 11,709
Work in process 1,426 3,152
Finished goods 25,953 43,453
Inventory reserves (5,177) (10,832)
------------------------------
$ 28,366 $ 47,482
=============================
Inventory reserves are calculated based on specific identification of items that
are potentially excess or obsolete. Reserves are also recorded on a routine
basis due to rapid obsolescence of certain inventory items.
3. OTHER ASSETS
Other assets at September 27, 1996 and September 29, 1995 are summarized as
follows (in thousands):
1996 1995
- ------------------------------------------------------------------------
Capitalized software costs, net $ 9,016 $ 5,955
Deferred software costs, net 512 659
Other 1,365 2,503
-----------------------------
$ 10,893 $ 9,117
============================
/TABLE>
Accumulated amortization of capitalized software costs was $6,701,000 and
$30,002,000 at September 27, 1996 and September 29, 1995, respectively.
Accumulated amortization of deferred software costs was $1,711,000 and
$3,143,000 at September 27, 1996 and September 29, 1995, respectively.
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 27, 1996 and September 29, 1995 are
summarized as follows (in thousands):
1996 1995
- ------------------------------------------------------------------------
Land $ 1,408 $ 1,408
Buildings and improvements 17,461 17,977
Leasehold and land improvements 2,580 2,894
Machinery and equipment 34,919 38,853
Office furniture and equipment 6,166 8,073
-----------------------------
62,534 69,205
Less accumulated depreciation 42,252 42,484
-----------------------------
$ 20,282 $ 26,721
=============================
- -------
5. NOTES RECEIVABLE
Notes receivable at September 27, 1996 are summarized as follows (in thousands):
1996
- ------------------------------------------------------
QMS Europe BV - payable in
quarterly installments of $1,000,000
each (interest at 12%) $ 3,000
QMS Japan KK - payable over 54
months (interest at 8%) 2,834
-----------
5,834
Less valuation reserve 900
-----------
4,934
Less current portion 2,667
-----------
$ 2,267
===========
These notes were received as part of the proceeds from the divestiture
of businesses. (See Note 19.) The note from QMS Europe BV is secured
by all of the common stock of QMS Europe BV and QMS Australia Pty Ltd.
The note from QMS Japan KK is secured by all of its inventory. The
fair value of these notes is estimated based on the effective yield of
similar transactions and credit risks and amounted to $3,202,000 and
$2,612,000 for QMS Europe BV and QMS Japan KK, respectively.
6. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings at September 29, 1995 were as follows (in
thousands):
1995
- -------------------------------------------------------------------
Unsecured demand note with Credit
Lyonnais Bank, Nederland
(interest at 1-1/2% above prime) $ 5,307
Unsecured demand note with Sanwa Bank
Limited, Hong Kong
(interest at 3/4% above Euro-rate) 802
Unsecured demand notes with Dai-Ichi
Kangyo Bank Ltd., Japan
(interest at 3.0%) 1,655
----------
$ 7,764
==========
In fiscal 1995, proceeds from the above loans were used for working
capital and were repaid in fiscal 1996 as part of the divestiture of
the Company's European and Japanese subsidiary operations. (See Note
19.)
7. OTHER CURRENT LIABILITIES
Other current liabilities at September 27, 1996 and September 29, 1995 are
summarized as follows (in thousands):
1996 1995
- ------------------------------------------------------------------------
Employment costs $ 3,714 $ 7,106
Deferred service revenue 10,362 10,330
Accrued royalties 175 487
Accrued warranty 617 1,138
Accrued interest 96 636
Sales and use tax payable 187 502
Reserves for restructuring charges
and divestitures of businesses 466 10,149
Other 3,029 4,501
-----------------------------
$ 18,646 $ 34,849
=============================
8. TERM DEBT
Term debt at September 27, 1996 and September 29, 1995 is summarized
as follows (in thousands):
1996 1995
- ----------------------------------------------------------------------------
Indebtedness under secured
revolving credit agreement
(9.75% at September 27, 1996) $ 9,841 $ 17,776
10.13% senior secured notes (repaid
in fiscal 1996) 0 4,987
6.15% senior secured notes payable in
monthly installments of $194,026
including interest through 1998 3,854 5,877
----------------------------
Total term debt 13,695 28,640
Less long-term portion of term debt 0 24,511
----------------------------
Current portion of term debt $ 13,695 $ 4,129
============================
On November 7, 1995, the Company entered into an agreement with Foothill Capital
Corporation ("Foothill") which allowed the Company to retire the existing
secured revolving credit agreement and the 10.13% senior secured notes payable.
This credit facility provides for a four-year revolving line of credit with
maximum availability of $30.0 million, secured by the Company's domestic and
Canadian accounts receivable, inventory, and machinery and equipment. The stated
rate of interest for any borrowings under the agreement is one and one-half
percent over prime (9.75% at September 27, 1996). Additional provisions of the
credit facility provide for a term loan of $1.2 million secured by machinery and
equipment and the availability of a second term loan of $5.0 million, expiring
December 31, 1996. The $1.2 million term loan requires minimum annual principal
payments of approximately $300,000. As part of the credit agreement, Foothill
was granted a warrant to purchase 100,000 shares of the Company's common stock,
at a price of $5 a share, which was valued at $175,000 and is exercisable
through October 30, 1999.
The Foothill credit facility includes requirements for a minimum current ratio,
a maximum total liabilities to equity ratio, and minimum levels of tangible net
worth and working capital. At September 27, 1996, the Company was in compliance
with these requirements.
The 6.15% senior secured note is secured by a first priority lien on portions of
the Company's land and buildings located in Mobile, Alabama. The Company was
not in compliance with certain covenants contained in the note agreement
existing at year end and has not obtained a waiver of non-compliance from the
lender. Accordingly, this note is classified as short-term debt; however, the
Company's existing borrowing arrangements provide the Company with the capacity
to pay off the 6.15% senior secured note.
In compliance with the Emerging Issues Task Force Issue No. 95-22, "Balance
Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement,"
the revolving credit loan is classified as short-term debt in the financial
statements.
The fair value of the Company's term debt is estimated based on the quoted
prices for the same or similar issues. The fair value, as of September 27, 1996
and September 29, 1995, has been estimated as follows (in thousands):
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------
Secured revolving credit facility $ 9,841 $ 9,841 $ 17,776 $ 17,776
10.13% senior secured notes 0 0 4,987 5,025
6.15% senior secured notes 3,854 3,733 5,877 5,559
(See Note 5 for fair values of notes receivable.)
9. LEASES
The Company has capital leases that expire through fiscal 2001. The Company is
obligated under operating leases principally for certain sales and service
office space which expire through fiscal 2003. Future minimum lease payments
under capital and operating leases with noncancelable terms in excess of one
year as of September 27, 1996 were as follows (in thousands):
Capital
Lease Operating
Fiscal Year Obligations Leases
- ----------------------------------------------------------------------------
1997 $ 812 $ 2,444
1998 345 1,787
1999 129 1,307
2000 82 790
2001 22 470
Thereafter 0 729
--------------------------
Total minimum payments 1,390 $ 7,527
=========
Less amounts representing interest 122
---------
Present value of minimum payments 1,268
Less current maturities under
capital lease obligations 737
---------
$ 531
=========
Rent expense under operating leases for fiscal 1996, 1995, and 1994 was
$3,323,000, $6,120,000, and $7,233,000, respectively.
Assets recorded under capital leases (included in property, plant, and equipment
in the accompanying consolidated balance sheets) at September 27, 1996 and
September 29, 1995 are summarized as follows (in thousands):
1996 1995
- ----------------------------------------------------------------------
Machinery and equipment $ 2,440 $ 2,256
Office furniture and equipment 2,816 1,652
---------------------------
5,256 3,908
Less accumulated depreciation 3,784 2,840
---------------------------
$ 1,472 $ 1,068
===========================
10. EMPLOYEE BENEFIT PLANS
The Company has a Cash or Deferred Retirement Plan which covers substantially
all employees and is a qualified plan under Section 401(k) of the Internal
Revenue Code. Employees may make a pretax contribution of up to 10% of their
annual salaries and are provided several investment choices. The Company may
match employee contributions at varying rates up to a maximum of 3.5% of annual
salary, and Company contributions are made on an annual basis. The plan is a
calendar year plan. Employees at the end of the plan year are fully vested in
applicable Company contributions. The Company elected to match employee
contributions in calendar years 1995 and 1994, but did not do so for calendar
year 1996. In fiscal 1996, 1995, and 1994, the Company contributed $680,807,
$1,010,244, and $1,046,137 to the plan, respectively, with such contributions
being applicable to the immediately preceding calendar year.
In January 1996, the Board of Directors and stockholders of the Company adopted
the Employee Stock Purchase Plan and reserved 500,000 shares for issuance. The
plan covers substantially all employees and is a qualified plan under Section
423 of the Internal Revenue Code. Under the plan, employees may elect to
contribute between 2% and 10% of their annual salaries to purchase shares of the
Company's common stock at a price per share that is 85% of the fair market
value. The remaining 15% and all related fees and expenses of administering the
plan are paid by the Company. Shares purchased and compensation expense
recorded during fiscal 1996 were immaterial.
11. STOCK OPTION PLANS
The Company's stock option plans allow incentive or non-qualified stock options
to be granted to employees and directors providing the right, when exercisable,
to purchase up to an aggregate of 1,826,688 shares of the Company's common
stock. In the case of incentive stock options, the option price is not less
than the fair market value at date of grant. A non-qualified optionee may
receive the right to be paid cash upon the exercise of a non-qualified option in
an amount intended to approximate 100% of the amount of the federal, state, and
local income tax payable by that optionee upon exercise of the option.
For employees with less than one year of service with the Company, one-fourth of
the granted options may be exercised one year after the date of grant, with an
additional one-fourth exercisable each year thereafter, although other exercise
provisions are allowed. For employees with greater than one year of service,
one-fifth of the granted options may be exercised on the date of grant, with an
additional one-fifth exercisable each year thereafter, although other exercise
provisions are allowed. Options that expire or are canceled prior to exercise
are restored to the shares available for future grants. At September 27, 1996,
the Company had reserved 453,218 shares for the future grant of options under
these plans.
The Company's stock option plans also provide that, in the event of a change of
control (as defined in each of the plans), all options then outstanding would
become exercisable immediately either in full or in part.
Under the Company's 1987 plan, no more than 500,000 shares may be issued to
directors, whether or not they are also key employees. Stock options under the
plan expire not later than ten years from the date of grant. The Company's 1984
plan expired during fiscal 1994, and no additional options can be granted under
the plan. Outstanding stock options under the plan were not affected by the
plan's expiration.
During fiscal 1995, the Company repriced certain stock option grants under the
1987 Stock Option Plan. Stock option grants of 158,360 shares that were
previously issued at option prices greater than the current fair market value
were forfeited and replaced with stock option grants for 79,180 shares (a rate
of one new share for two previous shares) at the fair market value on the date
of grant. The grant of these repriced options was restricted to non-executive
officer employees.
During fiscal 1994, the Company adopted the Stock Option Plan for Directors
whereby non-employee directors receive non-qualified stock option grants
annually, and may make an irrevocable election annually to receive stock options
at a below-market exercise price in lieu of cash directors' fees. Compensation
expense under this plan for fiscal 1996, 1995, and 1994 was $85,488, $77,244,
and $39,750, respectively.
A summary of stock option activity is as follows:
Option
Number Price per
of Shares Share Total
- -----------------------------------------------------------------------------------------
Outstanding,
October 1, 1993 1,117,770 $6.75 to $24.12 $ 14,105,713
Granted 238,571 4.38 to 10.50 2,011,273
Exercised (8,602) 7.50 to 14.00 (66,848)
Terminated (142,188) 7.50 to 24.12 (1,762,637)
------------ --------------
Outstanding,
September 30, 1994 1,205,551 4.38 to 24.12 14,287,501
Granted 705,529 4.44 to 10.00 4,495,941
Exercised (3,400) 8.25 to 9.00 (29,863)
Terminated (390,130) 4.63 to 24.12 (4,974,800)
------------ --------------
Outstanding,
September 29, 1995 1,517,550 4.38 to 22.50 13,778,779
Granted 487,880 2.81 to 5.63 2,610,178
Exercised (4,650) 4.63 to 5.50 (22,506)
Terminated (627,310) 4.63 to 22.50 (5,442,654)
------------ --------------
Outstanding,
September 27, 1996 1,373,470 $2.81 to $22.50 $ 10,923,797
=========== ==============
Exercisable,
September 27, 1996 748,950
===========
12. SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENTS
The Company has agreements with three executive officers of the Company, under
which each participant is entitled to a monthly benefit upon either the
participant's leaving the Company's employment, retirement, or departure
following a change in control of the Company, to be paid over a ten-year benefit
period. In fiscal years 1996, 1995, and 1994, the Company expensed $190,476,
$366,396, and $291,806, respectively, related to these benefits. During fiscal
1995, one of the participants retired and the Company paid benefits of $111,325
and $27,831 in fiscal years 1996 and 1995, respectively, under the agreement.
13. STOCKHOLDER RIGHTS PLAN
In November 1988, the Company adopted a Stockholder Rights Plan and pursuant to
the plan declared a dividend on its common stock of one right (a "Right") for
each share of common stock then outstanding and for each share of common stock
issued thereafter and prior to the time the Rights expire or become exercisable.
Upon the occurrence of certain events, each Right becomes exercisable to
purchase one one-hundredth of a share of Series A Participating Preferred Stock
at a price of $40. The Rights expire on November 30, 1998 and, prior to the
occurrence of certain events, may be redeemed at a price of $.01 per Right. Of
the Company's 500,000 authorized shares of preferred stock, no par value, the
Board of Directors has designated 250,000 shares as Series A Participating
Preferred Stock.
14. INCOME TAXES
The components of income (loss) before income taxes and the provision (benefit)
for income taxes (both domestic and foreign) for fiscal years 1996, 1995, and
1994 are summarized as follows (in thousands):
1996 1995 1994
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $ 5,265 $ (41,709) $ 6,527
Foreign (1,745) (2,577) (2,487)
--------------------------------------------
$ 3,520 $ (44,286) $ 4,040
===========================================
Provision (benefit) for income taxes:
Current:
Federal $ 0 $ 0 $ 436
Foreign (733) (247) 452
State (15) 0 439
-------------------------------------------
(748) (247) 1,327
-------------------------------------------
Deferred:
Federal 0 0 0
Foreign 0 247 (247)
State 0 0 0
-------------------------------------------
0 247 (247)
--------------------------------------------
$ (748) $ 0 $ 1,080
===========================================
At September 27, 1996, the Company had domestic operating loss carryovers of
approximately $33.0 million which will expire in fiscal years 2010 and 2011, and
general business credit carryovers of approximately $1.7 million which will
expire during fiscal years 2002 through 2007. Foreign tax credit carryforwards
of approximately $70,000 existed at September 27, 1996 and will expire in fiscal
1998.
There were no undistributed earnings in the Company's Canadian subsidiary at
fiscal 1996 year end. Undistributed earnings of the Company's other foreign
subsidiaries which were divested will not result in any material taxes payable
by the Company.
During fiscal 1994, the Company settled outstanding issues with tax authorities
in Japan, the Netherlands, Canada, and the United States without adverse
results.
A reconciliation of the statutory federal income tax rate to the effective rate
for fiscal years 1996, 1995, and 1994 is as follows (in thousands):
1996 1995 1994
- -----------------------------------------------------------------------------------------
Tax at federal statutory rate $ 1,232 $ (15,500) $ 1,415
State income taxes, net of
federal benefit (15) 0 283
Operating losses generating
no tax benefit 0 15,618 0
Utilization of carryovers (1,232) 0 (1,465)
Foreign sales corporation benefit 0 0 (423)
Tax effect of international
operations, net (733) 0 1,075
Other, net 0 (118) 195
-------------------------------------------
$ (748) $ 0 $ 1,080
===========================================
Deferred tax assets and liabilities that arise as a result of temporary
differences at September 27, 1996 and September 29, 1995 are summarized as
follows (in thousands):
1996 1995
- ---------------------------------------------------------------------------------
Deferred tax assets:
Inventory reserves $ 1,863 $ 3,187
Restructuring reserves 516 1,275
Foreign tax credits 70 1,700
General business credit carryforwards 1,696 1,742
Net operating loss carryforwards 12,521 13,455
Deferred income 698 746
Other 1,794 791
--------- ---------
Total gross deferred tax assets 19,158 22,896
Deferred tax asset valuation allowance (14,614) (19,294)
---------- ----------
Total deferred tax assets 4,544 3,602
Deferred tax liabilities:
Depreciation (690) (1,159)
Capitalized software costs (3,663) (2,221)
Deferred software costs (191) (222)
---------- ----------
Total deferred tax liabilities (4,544) (3,602)
---------- ----------
Net deferred tax assets $ 0 $ 0
========== ==========
The valuation allowance was established based on certain assumptions about
levels of future pretax income that are consistent with historical results. As
the Company had losses in fiscal 1995, the deferred tax asset valuation
allowance reflects an evaluation which recognizes uncertainties related to the
future utilization of certain carryovers. The valuation allowance for deferred
tax assets decreased by approximately $4.7 million during fiscal 1996. The
Company did not recognize tax benefits for fiscal 1995 losses due to
restrictions on the carryback of the losses and there is no assurance that the
benefits may be realized in the future.
15. BUSINESS SEGMENT AND FOREIGN OPERATIONS
The Company's operations are primarily the manufacture and sale of network
printing solutions. Accordingly, such operations are classified as one business
segment. Financial information by geographic area is presented below:
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers from:
United States $ 138,440 $ 127,610 $ 157,156
Europe 0 81,917 78,572
Canada 8,734 12,859 18,186
Australia/New Zealand 0 6,476 8,573
Japan 0 30,878 30,201
Net transfer between geographic areas 6,047 52,151 60,984
Adjustments and eliminations (6,047) (52,151) (60,984)
-----------------------------------------------
Consolidated net sales $ 147,174 $ 259,740 $ 292,688
===============================================
Operating income (loss):
United States $ 14,404 $ (29,100) $ 22,056
Europe 0 4,810 2,136
Canada (733) (1,122) (262)
Australia/New Zealand 0 (600) 469
Japan 0 1,193 2,012
Adjustments and eliminations 220 533 (552)
-----------------------------------------------
Consolidated operating profit 13,891 (24,286) 25,859
General corporate expenses (8,227) (20,580) (18,581)
Interest income 398 171 80
Interest expense (1,805) (4,113) (3,235)
Divestitures of businesses 0 3,675 0
Miscellaneous income (expense) * (737) 847 (83)
-----------------------------------------------
Consolidated income (loss) before income taxes $ 3,520 $ (44,286) $ 4,040
===============================================
* Foreign currency transaction gains (losses) included in
miscellaneous income (expense):
United States $ (110) $ (305) $ (346)
Europe 0 542 518
Australia/New Zealand 0 (37) 25
Japan 0 200 1
-----------------------------------------------
$ (110) $ 400 $ 198
===============================================
Identifiable assets:
United States $ 86,450 $ 88,164 $ 131,179
Europe 0 19,933 23,009
Canada 3,537 4,632 6,711
Australia/New Zealand 0 2,996 3,568
Japan 0 10,466 13,077
Adjustments and eliminations (132) (1,231) (2,180)
-----------------------------------------------
89,855 124,960 175,364
Corporate assets 1,863 10,578 6,659
-----------------------------------------------
Total assets $ 91,718 $ 135,538 $ 182,023
===============================================
Sales to indicated foreign geographic areas:
Europe $ 19,792 $ 77,309 $ 74,305
Canada 8,734 12,875 18,198
Far East & Pacific Rim 9,220 37,368 39,187
Other 2,338 6,683 6,654
-----------------------------------------------
$ 40,084 $ 134,235 $ 138,344
===============================================
- --------
U.S. export sales included in the Company's sales to indicated foreign
geographic areas for fiscal years 1996, 1995, and 1994 were $31,350,000,
$2,171,260, and $2,802,489, respectively. The increase in fiscal 1996 is due to
sales to Europe and Japan as third-party export sales compared to prior years
when those business operations were wholly owned subsidiaries.
Sales to QMS Europe BV represented 13.4% of fiscal 1996 consolidated revenues
and the related accounts receivable balance amounted to $2.9 million. No
customer accounted for 10% or more of consolidated net sales for fiscal years
1995 and 1994.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for fiscal years 1996, 1995, and 1994 is
as follows (in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------------
Interest $ 2,326 $ 4,113 $ 3,235
Income taxes 53 2,688 1,193
Additions to capital lease assets and related obligations were $302,200,
$823,000, and $1,705,000 in fiscal years 1996, 1995, and 1994, respectively, as
a result of the Company entering into equipment leases. The Company also had
additions to notes receivable in the amount of $7,500,000 in fiscal 1996 as a
result of the divestitures of foreign subsidiaries.
17. COMMITMENTS AND CONTINGENCIES
At September 27, 1996, the Company had a commitment of approximately $13.0
million under contracts to purchase print engines and related components.
The Company was contingently liable for approximately $287,000 as of September
27, 1996, principally the result of written letters of credit, with various
expiration dates, issued in the normal course of business for the purchase of
inventory. These letters are not collateralized by the Company.
The Company is a defendant in various litigation and claims in the normal course
of business. Based on consultation with various counsel in these matters,
management is of the opinion that the ultimate resolution of such litigation and
claims will not materially affect the Company's financial position or results of
operations.
18. RESTRUCTURING CHARGES
During fiscal 1995, the Company recognized restructuring charges totaling
approximately $8.4 million. These costs included $3.7 million associated with
salary continuation and outplacement services for a group of 175 employees from
all levels and functional areas of the Company, and also included the write-off
of certain fixed assets and facility lease obligations and the reorganization of
its international business operations. As of September 29, 1995, the Company
had reserves for restructuring and divestitures of businesses totaling
$10,149,000.
During fiscal 1996, the following amounts were charged against these reserves
(in thousands):
Salary continuation and outplacement $ 2,002
Write-off of facility lease obligations 212
Divestiture of QMS Japan and QMS Europe 6,531
Reorganization of QMS Canada 938
-------
Total $ 9,683
=======
- --------
At September 27, 1996, there was $466,000 in restructuring reserves which are
for the continuing write-off of facility lease obligations over their remaining
lease periods.
19. DIVESTITURES OF BUSINESSES
In September 1995, the Company completed a cash sale of a portion of its color
thermal transfer consumables business to International Imaging Materials, Inc.,
resulting in a gain of $5.7 million.
In October 1995, the Company sold all of the common shares of QMS Europe BV and
QMS Australia Pty Ltd. This transaction resulted in a loss of approximately
$2.0 million which was recorded as of September 29, 1995. The proceeds from
this transaction were received in the form of cash of $7.9 million and a $4.0
million note receivable. During fiscal 1996, payments of $1.0 million were
received on the note receivable, leaving a balance at September 27, 1996 of $3.0
million. (See Note 5.)
In December 1995, the Company sold the majority of the assets of QMS Japan KK
with the purchaser acquiring most of the assets and assuming most of the
liabilities. A loss of $2.3 million was recorded on this transaction as of
September 29, 1995. The proceeds from this transaction were received in the
form of cash of $1.0 million and a $3.0 million note receivable, payable over 54
months with interest at 8%. During fiscal 1996, payments of $666,667 were
received against the note receivable, leaving a balance at September 27, 1996 of
$2,833,333. (See Note 5.) The only business activity of QMS Japan KK during
fiscal 1996 consisted of liquidating the net assets of the company.
Proceeds from the above transactions were used to pay down outstanding debt
under the revolving credit agreements and for working capital purposes.
The Company continues to sell controller boards and components to the new owners
of these divested entities under master distributor agreements, and then
realizes a commission on their sales of QMS products to third parties.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of QMS, Inc. is responsible for the preparation, integrity, and
objectivity of the consolidated financial statements and all other sections of
this annual report. The financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management made informed estimates and judgments of the
expected effects of events and transactions based upon currently available facts
and circumstances.
Management maintains a system of internal accounting controls which it believes
is adequate to provide reasonable assurance that assets are safeguarded,
transactions are executed in accordance with management authorization, and the
financial records are reliable for preparing the consolidated financial
statements. The concept of reasonable assurance recognizes that the cost of a
system of internal accounting controls should not exceed the benefits derived
and that there are inherent limitations in the effectiveness of any system of
internal accounting controls.
The Company's independent auditors, Deloitte & Touche LLP, have audited the
Company's consolidated financial statements and expressed an opinion that such
statements present fairly, in all material respects, the Company's financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. Their audit was conducted in accordance with
generally accepted auditing standards and included such procedures believed by
them to be sufficient to provide reasonable assurance that the consolidated
financial statements are free of material misstatement.
The Board of Directors, acting through its Audit Committee, oversees
management's responsibilities in the preparation of the consolidated financial
statements. In performing this function, the Audit Committee, which is composed
of directors who are not employees of the Company, meets periodically with
management and the independent auditors to review the work of each. Deloitte &
Touche LLP has free access to the Audit Committee and to the Board of Directors,
without management present, to discuss internal accounting control, auditing,
and financial reporting matters.
We believe these policies and procedures provide reasonable assurance that our
operations are conducted with a high standard of business conduct and that the
financial statements reflect fairly the financial position, results of
operations, and cash flows of the Company.
/s/James L. Busby
President and Chief Executive Officer
/s/Gerald G. Roenker
Chief Operating Officer
and Chief Financial Officer
QUARTERLY DATA
Unaudited quarterly data for the fiscal years
ended September 27, 1996 and September 29, 1995.
1996
First Second Third Fourth
Dollars in thousands, except per share amounts Quarter Quarter Quarter Quarter
Net sales $ 37,345 $ 37,403 $ 38,218 $ 34,208
Gross profit 12,417 12,440 12,616 10,550
Net income 620 1,056 1,621 956
Earnings per common share:
Primary and fully diluted $ 0.06 $ 0.10 $ 0.15 $ 0.09
1995
First Second Third Fourth
Dollars in thousands, except per share amounts Quarter Quarter(a) Quarter Quarter(b)
Net sales $ 70,520 $ 66,651 $ 62,698 $ 59,871
Gross profit 22,674 10,353 13,588 3,093
Net income (loss) 72 (14,511)(c) (9,478)(c) (20,369)(c)
Earnings (loss) per common share:
Primary and fully diluted $ 0.01 $ (1.36) $ (0.89) $ (1.91)
(a) Includes special charges of $6.8 million principally associated with
inventory revaluation charged to cost of sales and $2.7 million for
restructuring charges.
(b) Includes special charges of $11.3 million related to inventory revaluations
and the write-down of certain software development costs charged to cost
of sales and $5.7 million for restructuring charges.
(c) The net loss amounts in the second, third, and fourth quarters of fiscal
1995 do not include the recognition of any income tax benefits.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of QMS, Inc.:
We have audited the accompanying consolidated balance sheets of QMS, Inc. and
subsidiaries as of September 27, 1996 and September 29, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the three fiscal years in the period ended September 27,
1996. Our audits also included the financial statement schedule listed in the
index at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of QMS, Inc. and subsidiaries as of
September 27, 1996 and September 29, 1995, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
September 27, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Birmingham, Alabama
October 25, 1996
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
The information required by this item is incorporated by reference to
information under the captions "Proposal 1 - Election of Directors - Directors
and Director Nominees" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" on pages 2-4 of the Proxy Statement and "Executive
Officers" on pages 4-5 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
The information required by this item is incorporated by reference to
information under the captions "Proposal 1 - Election of Directors - Director
Compensation" on pages 2-3, "Executive Compensation Tables" on pages 6-8, "Stock
Performance Graph" on page 9, "Executive Agreements" on pages 9-10, and "Report
of the Compensation Committee of the Board of Directors of QMS, Inc." on pages
10-12 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The information required by this item is incorporated by reference to
information under the caption "Beneficial Ownership of Common Stock" on page 5
of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information required by this item is incorporated by reference to
information under the caption "Compensation Committee Interlocks and Insider
Participation" on page 12 of the Proxy Statement.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements are included in Item 8 of Part
II:
. Consolidated Statements of Operations for the Fiscal Years Ended
September 27, 1996, September 29, 1995, and September 30, 1994.
. Consolidated Statements of Changes in Stockholders' Equity for
the Fiscal Years Ended September 27, 1996, September 29, 1995,
and September 30, 1994.
. Consolidated Balance Sheets at September 27, 1996 and September
29, 1995.
. Consolidated Statements of Cash Flows for the Fiscal Years Ended
September 27, 1996, September 29, 1995, and September 30, 1994.
. Notes to Consolidated Financial Statements for the Fiscal Years
September 27, 1996, September 29, 1995, and September 30, 1994.
2. Financial Statement Schedules
The schedule listed below is included herein immediately after
the signature pages hereto. Schedules not listed below have been
omitted because they are not applicable or the required
information is included in the financial statements or notes
thereto.
Schedule
Number Description
------ -----------
VIII Valuation and Qualifying Accounts and Reserves for the Three Fiscal Years Ended September 27, 1996.
The Registrant's independent auditors' report on the financial statements and financial statement schedule listed above is
located at Item 8 of Part II.
3. Exhibits:
Exhibit
Number Description
------ -----------
3(a) Restated Certificate of Incorporation, as amended as of February 17, 1987 1/ and Certificate of Amendment
thereto filed with the Secretary of State of Delaware as of January 31, 1991.2/
3(b) Bylaws of Registrant.1/
4(a) The rights of security holders are defined in Articles 4, 9 and 10 of the Restated Certificate of
Incorporation of the Registrant, Articles II, VI and VII of the Bylaws of the Registrant and the Rights
Agreement. [Incorporated herein by reference to Exhibits 3(a), 3(b) and 4(b), respectively.]
4(b) Rights Agreement dated November 30, 1988.3/
10(a)(i) Cash or Deferred Retirement Plan, as amended and restated as of December 17, 1993. 4/*
10(a)(ii) Trust Agreement dated November 1, 1993 relating to the Cash or Deferred Retirement Plan as amended by an
Amendment to the Trust Agreement dated December 28, 1993. 4/
10(c)(i) Form of 1987 Stock Option Plan, as amended and restated as of December 13, 1990.2/*
10(c)(ii) Form of First Amendment to the 1987 Stock Option Plan effective November 7, 1991.2/*
10(d) Supplemental Executive Retirement Plan Agreements dated September 30, 1991. 4/*
10(e)(i) Worldwide Master Purchase Agreement 90-01 among Canon U.S.A., Inc., Canon Europa, N.V. and QMS, Inc. dated
October 1, 1990.5/
10(e)(ii) SX/TX/LX Worldwide Master Purchase Agreement 90-02 among Canon U.S.A., Inc., Canon Europa, N.V. and QMS,
Inc. dated October 1, 1990.5/
10(e)(iii) LBP-20 Purchase Agreement 90-03-LBP-20 between Canon U.S.A., Inc. and QMS, Inc. dated October 1, 1990.5/
10(h) Form of Executive Agreement entered into with: James L. Busby, Donald L. Parker, Ph.D., Charles D. Daley
and James K. Doan. 10/*
10(l)(i) Note Agreement dated June 30, 1993 ("1993 Note Agreement") between QMS, Inc. and Connecticut General Life
Insurance Company for $10,000,000 in aggregate principal amount of QMS, Inc.'s 6.15% Senior Secured Notes
due June 15, 1998.7/
10(l)(ii) Mortgage, Trust and Security Agreement dated June 30, 1993 between QMS, Inc. and First Alabama Bank of
Mobile, as Trustee, for QMS, Inc. $10,000,000 aggregate principal amount of 6.15% Senior Secured Notes due
June 15, 1998.7/
10(l)(iii) Senior Secured Notes, each dated July 1, 1993, with CIG & CO. ($3,500,000) and ($3,500,000) and ZANDE & Co.
($3,000,000).7/
10(l)(iv) Waiver Agreement dated November 23, 1993 waiving certain provisions of the 1993 Note Agreement. 4/
10(l)(v) Waiver Agreement dated as of February 25, 1994 waiving certain provisions of the 1993 Note Agreement. 8/
10(l)(vi) Waiver Agreement dated as of May 3, 1994 waiving certain provisions of the 1993 Note Agreement. 9/
10(l)(vii) Waiver Agreement dated as of August 12, 1994 waiving certain provisions of the 1993 Note Agreement. 13/
10(l)(viii) Waiver Agreement dated as of November 30, 1994 waiving certain provisions of the 1993 Note Agreement. 13/
10(m) QMS, Inc. Employee Stock Purchase Plan. 18/
10(o) Stock Option Plan, dated July 30, 1984,11/* together with First Amendment thereto effective as of January
1, 1987,1/* Second Amendment thereto effective as of November 10, 1987,1/* Third Amendment thereto
effective as of April 6, 1989,10/* Fourth Amendment thereto effective as of January 1, 1990,6/* and Fifth
Amendment thereto effective as of November 7, 1991.2/*
10(p) Stock Option Plan for Directors. 12/*
10(q)(i) Share Purchase Agreement dated October 12, 1995 between Jalak Investments B.V. and QMS, Inc. 14/
10(q)(ii) Promissory Note dated October 16, 1995 in the original principal amount of U.S. $4,000,000 from QMS Europe
B.V. and QMS Australia PTY Ltd. in favor of QMS, Inc. 14/
10(q)(iii) Pledge and Security Agreement and Pledging of Shares, each dated October 16, 1995 by Jalak Investments,
B.V. in favor of QMS, Inc. 14/
10(q)(iv) Deed of Subordination and Pledge dated October 16, 1995 by and among QMS, Inc., QMS Europe B.V. and Credit
Lyonnais Bank Nederland N.V. 14/
10(q)(v) Master Distributor Agreement dated October 16, 1995 among the Registrant, QMS Europe B.V. and QMS
Australia PTY Ltd. 14/
10(q)(vi) Trademark and Trade Name License Agreement dated October 16, 1995 between QMS Europe B.V. and QMS, Inc. 14/
10(r) Loan and Security Agreement dated November 7, 1995 by and between QMS, Inc. and Foothill Capital
Corporation. 15/
10(r)(i) Stock Pledge Agreement dated November 7, 1995 by and between QMS, Inc. and Foothill Capital Corporation.
15/
10(r)(ii) Term Note A dated November 7, 1995 in the original principal amount of $1,750,000 from QMS, Inc. in favor
of Foothill Capital Corporation. 15/
10(r)(iii) Term Note B dated November 7, 1995 in the original principal amount of $5,000,000 from QMS, Inc. in favor
of Foothill Capital Corporation. 15/
10(r)(iv) Trademark Security Agreement dated November 7, 1995 made by QMS, Inc. in favor of Foothill Capital
Corporation. 15/
10(r)(v) QMS, Inc. Warrant to Purchase 100,000 shares of Common Stock, dated November 7, 1995. 15/
10(r)(vi) General Security Agreement dated November 7, 1995 by and between QMS Canada Inc. in favor of Foothill
Capital Corporation. 15/
10(r)(vii) General Continuing Guaranty dated November 7, 1995 by QMS Canada Inc. in favor of Foothill Capital
Corporation. 15/
10(r)(viii) Security Agreement dated November 7, 1995 by and between Foothill Capital Corporation and QMS Canada Inc.
15/
10(r)(ix) General Continuing Guaranty dated November 7, 1995 by QMS Circuits, Inc. in favor of Foothill Capital
Corporation. 15/
10(r)(x) Security Agreement dated November 7, 1995 between Foothill Capital Corporation and QMS Circuits, Inc. 15/
10(r)(xi) Amendment Number One dated December 4, 1995 to the Loan and Security Agreement dated November 7, 1995. 17/
10(r)(xii) Amendment Number Two dated February 7, 1996 to the Loan and Security Agreement dated November 7, 1995. 17/
10(r)(xiii) Amendment Number Three dated July 31, 1996 to the Loan and Security Agreement dated November 7, 1995. 17/
10(s)(i) Asset Purchase Agreement dated September 30, 1995 between QMS Japan Kabushiki Kaisha ("QMS Japan KK") and
QMS, Inc. 16/
10(s)(ii) Assumption of Liabilities dated September 30, 1995 by QMS Japan, KK. 16/
10(s)(iii) Inventory Johto-Tampo Agreement dated September 30, 1995 between QMS Japan, KK and QMS, Inc. 16/
10(s)(iv) Master Distributor Agreement dated September 30, 1995 between QMS Japan, KK and QMS, Inc. 16/
10(s)(v) Promissory Note dated September 30, 1995 in the original principal amount of U.S. $3,000,000 from Yoji
Kawai in favor of QMS Japan, KK. 16/
10(s)(vi) Promissory Note dated September 30, 1995 in the original principal amount of U.S. $500,000 from Yoji Kawai
in favor of QMS Japan, KK. 16/
10(s)(vii) Trademark and Trade Name License Agreement dated December 7, 1995 between QMS Japan, KK and QMS, Inc. 16/
10(s)(viii) Assumption Agreement dated December 7, 1995 between QMS Japan, KK and QMS, Inc. 16/
11 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of the Registrant.
27 Financial Data Schedules
* Indicates a management contract or compensatory plan or arrangement.
1/ 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, 1987 (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 September 27, 1991 (Commission File No. 1-9348).
3/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 30, 1988 (Commission File No. 1-9348).
4/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended October 1, 1993 (Commission File No. 1-9348).
5/ 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).
6/ 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).
7/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended July 2, 1993 (Commission File No. 1-9348).
8/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended April 1, 1994 (Commission File No. 1-9348).
9/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended July 1, 1994 (Commission File No. 1-9348).
10/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 29, 1989 (Commission File No. 1-9348).
11/ Incorporated herein by reference to exhibit of same number in Registrant's Registration Statement on Form S-1, filed
September 19, 1984 (Registration No. 2-93329).
12/ Incorporated herein by reference to Appendix B to the Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on January 25, 1994 (Commission File No. 1-9348).
13/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 30, 1994 (Commission File No. 1-9348).
14/ Incorporated herein by reference to exhibits in Registrant's Form 8-K filed on October 16, 1995 (Commision File No. 1-
9348).
15/ Incorporated herein by reference to exhibits in Registrant's Form 8-K filed on November 21, 1995 (Commision File No. 1-
9348).
16/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 29, 1995 (Commission File No. 1-9348).
17/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended June 28, 1996 (Commission File No. 1-9348).
18/ Incorporated herein by reference to Appendix A to the Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on January 23, 1996 (Commission File No. 1-9348).
(b) Reports on Forms 8-K: None.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QMS, Inc.
Date: December 20, 1996 By: /s/James L. Busby
--------------------------------------------------------------
James L. Busby
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: December 20, 1996 /s/James L. Busby
--------------------------------------------------------------
James L. Busby
President and Director (Principal Executive
Officer)
Date: December 20, 1996 /s/Charles D. Daley
--------------------------------------------------------------
Charles D. Daley
Director
Date: December 20, 1996 /s/Donald L. Parker, Ph.D.
--------------------------------------------------------------
Donald L. Parker, Ph.D.
Director
Date: December 20, 1996 /s/Lucius E. Burch, III
--------------------------------------------------------------
Lucius E. Burch, III
Director
Date: December 20, 1996 /s/Michael C. Dow
--------------------------------------------------------------
Michael C. Dow
Director
Date: December 20, 1996 /s/S. Felton Mitchell, Jr.
--------------------------------------------------------------
S. Felton Mitchell, Jr.
Director
Date: December 20, 1996 /s/Jack Edwards
--------------------------------------------------------------
Jack Edwards
Director
Date: December 20, 1996 /s/Rigdon Currie
--------------------------------------------------------------
Rigdon Currie
Director
SCHEDULE VIII
QMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1996
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions (a) End of Year
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts--deducted from receivables
in the balance sheet
YEAR ENDED SEPTEMBER 30, 1994....................... $ 580,000 $ 228,000 $ 304,000 $ 504,000
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 29, 1995....................... $ 504,000 $ 282,000 $ 240,000 $ 546,000
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 27, 1996....................... $ 546,000 $ 328,000 $ 491,000 $ 383,000
=========== =========== =========== ===========
Balance at Additions
Beginning Charged to Balance at
Description of Year Other Accounts(b) Deductions End of Year
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for notes receivable--deducted from notes
receivable in the balance sheet
YEAR ENDED SEPTEMBER 30, 1994....................... $ 0 $ 0 $ 0 $ 0
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 29, 1995....................... $ 0 $ 0 $ 0 $ 0
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 27, 1996....................... $ 0 $ 900,000 $ 0 $ 900,000
=========== =========== ============ ===========
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions (c) End of Year
- ---------------------------------------------------------------------------------------------------------------------------------
Inventory reserves--deducted from gross inventories
in the balance sheet
YEAR ENDED SEPTEMBER 30, 1994....................... $ 6,304,000 $ 5,388,000 $ 4,884,000 $ 6,808,000
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 29, 1995....................... $ 6,808,000 $19,132,000 $15,108,000 $10,832,000
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 27, 1996....................... $10,832,000 $ 2,123,000 $ 7,778,000 $ 5,177,000
=========== =========== =========== ===========
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions(d) End of Year
- ----------------------------------------------------------------------------------------------------------------------------------
Reserves for restructuring charges and
divestitures of businesses
YEAR ENDED SEPTEMBER 30, 1994....................... $ 0 $ 0 $ 0 $ 0
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 29, 1995....................... $ 0 $10,149,000 $ 0 $10,149,000
=========== =========== =========== ===========
YEAR ENDED SEPTEMBER 27, 1996....................... $10,149,000 $ 0 $ 9,683,000 $ 466,000
=========== =========== =========== ===========
- --------
(a) Uncollectible accounts written off
(b) Reclassification from restructuring reserve
(c) Disposal of inventory
(d) Includes salary continuation and outplacement, divestitures of businesses,
and other write-offs. See Note 18 to the Registrant's Consolidated
Financial Statement under Item 8.
INDEX
3. Exhibits:
Exhibit Page
Number Description Number
- --------- -------------------------------------------------------- ------
3(a) Restated Certificate of Incorporation, as amended as
of February 17, 1987 1/ and Certificate of Amendment
thereto filed with the Secretary of State of Delaware
as of January 31, 1991.2/
3(b) Bylaws of Registrant.1/
4(a) The rights of security holders are defined in Articles 4,
9 and 10 of the Restated Certificate of Incorporation of
the Registrant, Articles II, VI and VII of the Bylaws of
the Registrant and the Rights Agreement. [Incorporated
herein by reference to Exhibits 3(a), 3(b) and 4(b),
respectively.]
4(b) Rights Agreement dated November 30, 1988.3/
10(a)(i) Cash or Deferred Retirement Plan, as amended and
restated as of December 17, 1993. 4/*
10(a)(ii) Trust Agreement dated November 1, 1993 relating to
the Cash or Deferred Retirement Plan as amended by
an Amendment to the Trust Agreement dated December
28, 1993. 4/
10(c)(i) Form of 1987 Stock Option Plan, as amended and restated
as of December 13, 1990.2/*
10(c)(ii) Form of First Amendment to the 1987 Stock Option
Plan effective November 7, 1991.2/*
10(d) Supplemental Executive Retirement Plan Agreements
dated September 30, 1991. 4/*
10(e)(i) Worldwide Master Purchase Agreement 90-01 among
Canon U.S.A., Inc., Canon Europa, N.V. and QMS, Inc.
dated October 1, 1990.5/
10(e)(ii) SX/TX/LX Worldwide Master Purchase Agreement
90-02 among Canon U.S.A., Inc., Canon Europa,
N.V. and QMS, Inc. dated October 1, 1990.5/
10(e)(iii) LBP-20 Purchase Agreement 90-03-LBP-20 between
Canon U.S.A., Inc. and QMS, Inc. dated October 1, 1990.5/
10(h) Form of Executive Agreement entered into with: James L.
Busby, Donald L. Parker, Ph.D., Charles D. Daley and
James K. Doan. 10/*
10(l)(i) Note Agreement dated June 30, 1993 ("1993 Note
Agreement") between QMS, Inc. and Connecticut
General Life Insurance Company for $10,000,000
in aggregate principal amount of QMS, Inc.'s 6.15%
Senior Secured Notes due June 15, 1998.7/
10(l)(ii) Mortgage, Trust and Security Agreement dated
June 30, 1993 between QMS, Inc. and First Alabama
Bank of Mobile, as Trustee, for QMS, Inc. $10,000,000
aggregate principal amount of 6.15% Senior Secured
Notes due June 15, 1998.7/
10(l)(iii) Senior Secured Notes, each dated July 1, 1993,
with CIG & CO. ($3,500,000) and ($3,500,000)
and ZANDE & Co. ($3,000,000).7/
10(l)(iv) Waiver Agreement dated November 23, 1993 waiving
certain provisions of the 1993 Note Agreement. 4/
10(l)(v) Waiver Agreement dated as of February 25, 1994
waiving certain provisions of the 1993 Note Agreement. 8/
10(l)(vi) Waiver Agreement dated as of May 3, 1994 waiving
certain provisions of the 1993 Note Agreement. 9/
10(l)(vii) Waiver Agreement dated as of August 12, 1994
waiving certain provisions of the 1993 Note Agreement. 13/
10(l)(viii) Waiver Agreement dated as of November 30, 1994
waiving certain provisions of the 1993 Note Agreement. 13/
10(m) QMS, Inc. Employee Stock Purchase Plan. 18/
10(o) Stock Option Plan, dated July 30, 1984,11/* together
with First Amendment thereto effective as of January 1,
1987,1/* Second Amendment thereto effective as of
November 10, 1987,1/* Third Amendment thereto
effective as of April 6, 1989,10/* Fourth Amendment
thereto effective as of January 1, 1990,6/* and Fifth
Amendment thereto effective as of November 7, 1991.2/*
10(p) Stock Option Plan for Directors. 12/*
10(q)(i) Share Purchase Agreement dated October 12, 1995
between Jalak Investments B.V. and QMS, Inc. 14/
10(q)(ii) Promissory Note dated October 16, 1995 in the original
principal amount of U.S. $4,000,000 from QMS Europe
B.V. and QMS Australia PTY Ltd. in favor of QMS, Inc. 14/
10(q)(iii) Pledge and Security Agreement and Pledging of Shares,
each dated October 16, 1995 by Jalak Investments, B.V.
in favor of QMS, Inc. 14/
10(q)(iv) Deed of Subordination and Pledge dated October 16,
1995 by and among QMS, Inc., QMS Europe B.V.
and Credit Lyonnais Bank Nederland N.V. 14/
10(q)(v) Master Distributor Agreement dated October 16,
1995 among the Registrant, QMS Europe, B.V.
and QMS Australia PTY Ltd. 14/
10(q)(vi) Trademark and Trade Name License Agreement
dated October 16, 1995 between QMS Europe B.V.
and QMS, Inc. 14/
10(r) Loan and Security Agreement dated November 7, 1995
by and between QMS, Inc. and Foothill Capital
Corporation. 15/
10(r)(i) Stock Pledge Agreement dated November 7, 1995
by and between QMS, Inc. and Foothill Capital
Corporation. 15/
10(r)(ii) Term Note A dated November 7, 1995 in the original
principal amount of $1,750,000 from QMS, Inc. in favor
of Foothill Capital Corporation. 15/
10(r)(iii) Term Note B dated November 7, 1995 in the original
principal amount of $5,000,000 from QMS, Inc. in favor
of Foothill Capital Corporation. 15/
10(r)(iv) Trademark Security Agreement dated November 7,
1995 made by QMS, Inc. in favor of Foothill Capital
Corporation. 15/
10(r)(v) QMS, Inc. Warrant to Purchase 100,000 shares of
Common Stock, dated November 7, 1995. 15/
10(r)(vi) General Security Agreement dated November 7,
1995 by and between QMS Canada Inc. in
favor of Foothill Capital Corporation. 15/
10(r)(vii) General Continuing Guaranty dated November 7,
1995 by QMS Canada Inc. in favor of Foothill Capital
Corporation. 15/
10(r)(viii) Security Agreement dated November 7, 1995 by
and between Foothill Capital Corporation and QMS
Canada Inc. 15/
10(r)(ix) General Continuing Guaranty dated November 7,
1995 by QMS Circuits, Inc. in favor of Foothill Capital
Corporation. 15/
10(r)(x) Security Agreement dated November 7, 1995
between Foothill Capital Corporation and QMS
Circuits, Inc. 15/
10(r)(xi) Amendment Number One dated December 4, 1995 to
the Loan and Security Agreement dated November 7,
1995. 17/
10(r)(xii) Amendment Number Two dated February 7, 1996 to
the Loan and Security Agreement dated November 7,
1995. 17/
10(r)(xiii) Amendment Number Three dated July 31, 1996 to
the Loan and Security Agreement dated November 7,
1995. 17/
10(s)(i) Asset Purchase Agreement dated September 30,
1995 between QMS Japan Kabushiki Kaisha
("QMS Japan KK") and QMS, Inc. 16/
10(s)(ii) Assumption of Liabilities dated September 30,
1995 by QMS Japan, KK. 16/
10(s)(iii) Inventory Johto-Tampo Agreement dated September 30,
1995 between QMS Japan, KK and QMS, Inc. 16/
10(s)(iv) Master Distributor Agreement dated September 30,
1995 between QMS Japan, KK and QMS, Inc. 16/
10(s)(v) Promissory Note dated September 30, 1995 in the
original principal amount of U.S. $3,000,000 from
Yoji Kawai in favor of QMS Japan, KK. 16/
10(s)(vi) Promissory Note dated September 30, 1995 in
the original principal amount of U.S. $500,000
from Yoji Kawai in favor of QMS Japan, KK. 16/
10(s)(vii) Trademark and Trade Name License Agreement
dated December 7, 1995 between QMS Japan, KK
and QMS, Inc. 16/
10(s)(viii) Assumption Agreement dated December 7, 1995
between QMS Japan, KK and QMS, Inc. 16/
11 Statement Regarding Computation of Earnings Per
Share.
21 Subsidiaries of the Registrant.
27 Financial Data Schedules
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* Indicates a management contract or compensatory plan or arrangement.
1/ 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, 1987 (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 September 27, 1991 (Commission File No. 1-9348).
3/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 30, 1988 (Commission File No. 1-9348).
4/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended October 1, 1993 (Commission File No. 1-9348).
5/ 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).
6/ 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).
7/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended July 2, 1993 (Commission File No. 1-9348).
8/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended April 1, 1994 (Commission File No. 1-9348).
9/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended July 1, 1994 (Commission File No. 1-9348).
10/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 29, 1989 (Commission File No. 1-9348).
11/ Incorporated herein by reference to exhibit of same number in Registrant's Registration Statement on Form S-1, filed
September 19, 1984 (Registration No. 2-93329).
12/ Incorporated herein by reference to Appendix B to the Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on January 25, 1994 (Commission File No. 1-9348).
13/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 30, 1994 (Commission File No. 1-9348).
14/ Incorporated herein by reference to exhibits in Registrant's Form 8-K filed on October 16, 1995 (Commision File No. 1-
9348).
15/ Incorporated herein by reference to exhibits in Registrant's Form 8-K filed on November 21, 1995 (Commision File No. 1-
9348).
16/ Incorporated herein by reference to exhibit of same number in Registrant's annual report on Form 10-K for the fiscal year
ended September 29, 1995 (Commission File No. 1-9348).
17/ Incorporated herein by reference to exhibit of same number in Registrant's quarterly report on Form 10-Q for the fiscal
quarter ended June 28, 1996 (Commission File No. 1-9348).
18/ Incorporated herein by reference to Appendix A to the Registrant's Proxy Statement for the Annual Meeting of Stockholders
held on January 23, 1996 (Commission File No. 1-9348).
(b) Reports on Forms 8-K: None.