SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 27, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9348 QMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0737870 State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) ONE MAGNUM PASS, MOBILE, AL 36618 (Address of principal executive offices) (Zip Code) (334) 633-4300 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer's common stock, as of the latest practicable date 10,697,065 at July 25, 1997. QMS, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) as of June 27, 1997 and September 27, 1996 3 - 4 Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended June 27, 1997 and June 28, 1996 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 27, 1997 and June 28, 1996 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 PART II - OTHER INFORMATION 13 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. (a) Exhibits (b) Reports on Form 8-K SIGNATURES 14 QMS, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS as of June 27, 1997 and September 27, 1996 (Unaudited) June 27, September 27, in thousands 1997 1996 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 670 $ 190 Trade Receivables (less allowance for doubtful accounts of $364 at June 1997 and $383 at September 1996) 21,173 24,145 Note Receivable 277 667 Inventories, Net (Note 3) 24,600 28,366 Other Current Assets 3,258 2,908 ------------- ------------- Total Current Assets 49,978 56,276 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT 43,056 62,534 Less Accumulated Depreciation 37,278 42,252 ------------- ------------- Property, Plant and Equipment, Net 5,778 20,282 NOTES RECEIVABLE, NET 3,600 4,267 CAPITALIZED AND DEFERRED SOFTWARE 11,072 9,528 OTHER ASSETS, NET 2,004 1,365 ------------- ------------- TOTAL ASSETS $ 72,432 $ 91,718 ============= ============= See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of June 27, 1997 and September 27, 1996 (Unaudited) June 27, September 27, in thousands 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable $ 7,811 $ 7,463 Revolving Credit Loan and Short-Term Debt (Note 4) 2,311 14,432 Other Current Liabilities (Note 5) 17,099 17,146 ------------- ------------- Total Current Liabilities 27,221 39,041 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 469 531 OTHER LIABILITIES (Note 6) 6,533 4,714 STOCKHOLDERS' EQUITY 38,209 47,432 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,432 $ 91,718 ============= ============= See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Nine Months Ended June 27, 1997 and June 28, 1996 (Unaudited) Three Months Ended Nine Months Ended June 27, June 28, June 27, June 28, in thousands, except per share amounts 1997 1996 1997 1996 NET SALES Printers and Supplies $ 23,968 $ 29,663 $ 69,570 $ 88,320 U.S. Service 8,415 8,555 25,168 24,645 ----------- ----------- ----------- --------- Total Net Sales 32,383 38,218 94,738 112,965 ----------- ----------- ----------- --------- COST OF GOODS SOLD Printers and Supplies 18,930 20,377 53,520 60,650 U.S. Service 5,591 5,225 16,307 14,843 ----------- ----------- ----------- --------- Total Cost of Goods Sold 24,521 25,602 69,827 75,493 ----------- ----------- ----------- --------- GROSS PROFIT Printers and Supplies 5,038 9,286 16,050 27,670 U.S. Service 2,824 3,330 8,861 9,802 ----------- ----------- ----------- --------- Total Gross Profit 7,862 12,616 24,911 37,472 ----------- ----------- ----------- --------- OPERATING EXPENSES Selling, General and Administrative Expenses 11,042 11,041 31,731 32,895 Management Transition Expense (Note 8) 2,168 0 2,168 0 ----------- ----------- ----------- --------- Total Operating Expenses 13,210 11,041 33,899 32,895 ----------- ----------- ----------- --------- OPERATING INCOME (LOSS) (5,348) 1,575 (8,988) 4,577 ----------- ----------- ----------- --------- OTHER INCOME (EXPENSE) Interest Income 85 91 273 261 Interest Expense (72) (410) (620) (1,435) Miscellaneous Expense (117) (123) (441) (594) ----------- ----------- ----------- --------- Total Other Expense (104) (442) (788) (1,768) ----------- ----------- ----------- --------- INCOME (LOSS) BEFORE INCOME TAXES (5,452) 1,133 (9,776) 2,809 INCOME TAX BENEFIT 0 (488) 0 (488) ----------- ----------- ----------- --------- NET INCOME (LOSS) $ (5,452) $ 1,621 $ (9,776) $ 3,297 =========== =========== =========== ========= EARNINGS (LOSS) PER COMMON SHARE (Note 2) Primary and Fully Diluted $ (0.51) $ 0.15 $ (0. 91) $ 0.31 SHARES USED IN PER SHARE COMPUTATION (Note 2) Primary 10,697 10,759 10,696 10,719 Fully Diluted 10,697 10,759 10,696 10,758 See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended June 27, 1997 and June 28, 1996 (Unaudited) June 27, June 28, in thousands 1997 1996 Cash Flows from Operating Activities: Net Income (Loss) $ (9,776) $ 3,297 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation of Property, Plant and Equipment 3,577 4,051 Amortization of Capitalized and Deferred Software 4,898 3,237 Provision for Losses on Inventory 2,974 6,872 Decrease in Accounts Receivable 2,833 11,870 Increase in Inventory 795 8,579 Decrease in Other Current Liabilities (1,519) (23,438) Increase in Other Long-Term Liabilities 3,319 1,227 Net Change in Other Assets and Liabilities that Provided Cash (917) 1,386 ------------ ------- Net Cash Provided by Operating Activities 6,184 17,081 ------------ ------- Cash Flows from Investing Activities: Additions to Notes Receivable 0 (7,500) Collections of Notes Receivable 1,057 1,500 Purchase of Property, Plant and Equipment (1,281) (1,562) Proceeds from Disposal of Property, Plant and Equipment 12,592 0 Additions to Capitalized and Deferred Software Costs (6,442) (5,173) Proceeds from Divestiture of Businesses 0 9,300 Other 0 310 ------------ ------- Net Cash Provided by (Used in) Investing Activities 5,926 (3,125) ------------ ------- Cash Flows from Financing Activities: Proceeds from Debt and Capital Lease Obligations 318 12,955 Payments of Debt and Capital Lease Obligations (12,501) (23,974) Payments of Bank Loans 0 (7,764) Other 559 172 ------------ ------- Net Cash Used in Financing Activities (11,624) (18,611) ------------ ------- Effect of Exchange Rate Changes on Cash (6) (216) ------------ ------- Net Change in Cash and Cash Equivalents 480 (4,871) Cash and Cash Equivalents at Beginning of Period 190 7,431 ------------ ------- Cash and Cash Equivalents at End of Period $ 670 $ 2,560 ============ ======= See Notes to Condensed Consolidated Financial Statements QMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. MANAGEMENT OPINION In the opinion of management, the condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position of the Company as of June 27, 1997, the results of operations for the three and nine months ended June 27, 1997, and June 28, 1996, and changes in cash flows for the nine months ended June 27, 1997, and June 28, 1996. All adjustments included in the condensed consolidated financial statements are of a normal recurring nature except amounts related to the management transition expense (see Note 8). The results of operations for the nine months ended June 27, 1997, are not necessarily indicative of the results to be expected for the fiscal year ending October 3, 1997. Certain reclassifications have been made to fiscal 1996 amounts to conform to the fiscal 1997 presentation. 2. PER COMMON SHARE COMPUTATIONS Per share computations are based on the weighted average number of common shares outstanding during the period and the dilutive effect of the assumed exercise of stock options. This effect was not material for the three- and nine-month periods ending June 27, 1997, and June 28, 1996, and did not change the amounts of the primary and fully diluted earnings (loss) per common share. 3. INVENTORIES Inventories at June 27, 1997, and September 27, 1996, are summarized as follows (in thousands): June 27, SEPTEMBER 27, 1997 1996 Raw materials $ 4,855 $ 6,164 Work in process 1,169 1,426 Finished goods 23,199 25,953 Inventory reserves (4,623) (5,177) -------- -------- Total $ 24,600 $ 28,366 ======== ======== 4. CLASSIFICATION OF REVOLVING CREDIT LOAN The Company's revolving credit loan is classified as short-term debt in the financial statements in compliance with FASB Emerging Issues Task Force Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Arrangements That Include a Subjective Acceleration Clause and a Lock-Box Arrangement." This revolving credit agreement expires in November 1999. The Company was in compliance with these covenants at June 27, 1997. 5. OTHER CURRENT LIABILITIES Other current liabilities at June 27, 1997, and September 27, 1996, are summarized as follows (in thousands): June 27, September 27, 1997 1996 Employment costs $ 3,407 $ 3,714 Accrued management transition expense 1,120 0 Deferred service revenue 10,153 10,362 Accrued expenses 1,181 1,075 Restructuring reserves 233 466 Other 1,005 1,529 -------- -------- Total $ 17,099 $ 17,146 ======== ======== 6. OTHER LONG-TERM LIABILITIES Other long-term liabilities at June 27, 1997, and September 27, 1996, are summarized as follows (in thousands): June 27, September 27, 1997 1996 Deferred service revenue $ 1,060 $ 1,088 Deferred compensation 2,185 1,417 Accrued management transition expense 612 0 Deferred gain on sale-leaseback 467 0 Other 2,209 2,209 -------- -------- Total $ 6,533 $ 4,714 ======== ======== 7. COMMITMENTS AND CONTINGENCIES As of June 27, 1997, the Company had a commitment of approximately $16.6 million under contracts to purchase print engines and related components. The Company was contingently liable for approximately $461,000 as of June 27, 1997, the result of letters of credit issued in the normal course of business for the purchase of inventory. 8. MANAGEMENT TRANSITION Management transition expense of $2,168,000 recorded in the quarter ending June 27, 1997 relates to the resignation and severance of the Company's president and chief executive officer. This expense is the net present value of expenditures totaling $3,782,000 over a twelve-year period discounted at 10%. 9. SALE-LEASEBACK In February 1997, the Company completed the sale and leaseback of land and buildings at its Mobile, Alabama headquarters and operations. The initial term of the operating lease is fifteen years with renewal options for five additional five-year periods. Rent of approximately $0.4 million is payable quarterly in advance, subject after three years to adjustment for increases in the Consumer Price Index. Net proceeds of the sale were approximately $12.5 million and resulted in a gain of approximately $0.5 million. The net proceeds were used to retire the existing term loan and to substantially reduce the balance of the Company's revolving credit loan. The gain will be recognized over the initial fifteen- year term of the lease. 10. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and provides guidance on other computational changes. The Company will adopt SFAS 128 in the first quarter of fiscal 1998 and management does not expect the adoption of this Statement to have a material impact on the Company's earnings per share in the near future. QMS, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - ---------------------- The net loss for the third quarter of fiscal 1997 was $5.5 million on net sales of $32.4 million and for the nine months ended June 27, 1997, was a net loss of $9.8 million on net sales of $94.7 million. These 1997 results compare to net income of $1.6 million on net sales of $38.2 million for the third quarter of fiscal 1996 and $3.3 million net income on net sales of $113.0 million for the nine months ended June 28, 1996. The loss in the third quarter of fiscal 1997 includes a $2.2 million management transition charge for expenses related to the resignation and severance of the Company's president and chief executive officer discounted at 10% interest over the 12-year agreement. Table of Net Sales Comparisons for Key Channels of Distribution Three Months Ended Nine Months Ended June 27, June 28, June 27, June 28, (000's) 1997 1996 Difference 1997 1996 Difference U.S. Direct $ 11,614 $ 13,545 $ (1,931) $ 35,142 $ 35,397 $ (255) U.S. Service 8,415 8,555 (140) 25,168 24,645 523 U.S. Reseller 3,402 4,847 (1,445) 8,660 16,324 (7,664) Europe 3,475 4,478 (1,003) 9,181 15,704 (6,523) Japan 1,475 2,496 (1,021) 4,803 7,796 (2,993) Canada 1,710 1,909 (199) 5,758 7,333 (1,575) QMS Circuits 438 800 (362) 1,433 2,646 (1,213) All Other 1,854 1,588 266 4,593 3,120 1,473 ----------- ---------- ---------- ----------- ---------- --------- Total Net Sales $ 32,383 $ 38,218 $ (5,835) $ 94,738 $ 112,965 $ (18,227) =========== ========== ========== =========== ========== ========= Net sales for the third quarter of fiscal 1997 declined by 15.3% from net sales for the third quarter of fiscal 1996 and by 16.1% in the nine-month comparison. Lower revenues in the U.S. Direct, U.S. Reseller, Japan and Europe channels caused 92.5% ($5.4 million) and 95.7% ($17.4 million) of the decline in net sales for the third quarter and nine-month comparisons from fiscal 1996 to fiscal 1997, respectively. The U.S. Direct market net sales were down 14.3% for the third quarter of 1997 compared to the third quarter of fiscal 1996 while being down only 0.7% in the nine-month comparison. Direct sales are subject to sales volatility caused by new product offerings and the number of sales representatives. The Company introduced a new 24 page-per-minute printer that resulted in $2.7 million in sales for the third quarter of fiscal 1996. While the Company introduced new products and features in 1997, they have not had the impact of the 24 page-per- minute printer introduced in 1996. In addition, the Company has operated with fewer sales representatives due to higher than normal turnover this year compared to last. The U.S. reseller channel decline in net sales was primarily due to a change in philosophy emphasizing the graphic arts market. The Company has now refocused its efforts on traditional as well as niche distributors. In the third quarter of fiscal 1997, the Company has seen an increase in quarterly reseller revenue after quarterly declines for the previous six quarters. The decrease in Europe and Japan revenue was caused primarily by the fiscal 1996 end-of-life sales of the 16 page-per-minute product. This resulted in higher fiscal 1996 sales. Overall, the Company's gross profit as a percentage of sales decreased from 33.0% to 24.3% in the three-month comparison and from 33.2% to 26.3% in the nine-month comparison. The principal reasons for the decrease in gross profit are lower margins in the Company's service and printed circuit board divisions, unfavorable manufacturing volume variances due to lower sales volumes, and increased internally developed software amortization. The selling, general, and administrative expenses ("SG&A") remain unchanged at $11.0 million in comparing the third quarters of fiscal 1996 and 1997 and decreased 3.5% (from $32.9 million in fiscal 1996 to $31.7 million in fiscal 1997) in the nine-month comparison. Reductions in third quarter SG&A expenses are offset by increases in additional rent expense from the February 1997 sale- leaseback of the Mobile headquarters and production facilities. Additional rental expense was $0.4 million in the fourth quarter and $0.6 million for the nine-month period of 1997. The three- and nine-month operating expenses include a $2.2 million ($0.20 per share) charge for management transition expense. This expense consists primarily of revaluation of the Company's liability for deferred executive compensation related to a retirement plan approved by the Board of Directors in September 1991 and continued compensation during an interim period. Total other expense for the first nine months of fiscal 1997 was $0.8 million compared to $1.8 million in the comparable period of fiscal 1996. This reduction of $1.0 million was caused primarily by lower interest expense resulting from sale-leaseback proceeds being applied to Company debt. Interest- bearing debt has been reduced from $19.6 million at June 28, 1996, to $2.8 million at June 27, 1997. The Company has not provided for any income tax expense during fiscal 1996 or 1997 due to current losses and available operating loss carryforwards and income tax credits. Liquidity and Capital Resources - ------------------------------- During the third quarter and first nine months of fiscal 1997, the Company's working capital and capital expenditure requirements came principally from operations and proceeds from the sale and leaseback of land and buildings in Mobile, Alabama. The Company's net working capital as of June 27, 1997, was $22.8 million compared to $17.2 million at September 27, 1996. This increase is principally due to the retirement of the senior secured notes payable and the reduction of the balance of the revolving credit loan. In February 1997, the Company completed the sale and leaseback of land and buildings at its Mobile, Alabama headquarters and operations. Net proceeds of the sale were approximately $12.5 million and resulted in a gain of approximately $0.5 million. The net proceeds were used to retire the existing term loan and to substantially reduce the balance of the Company's revolving credit loan. The gain will be recognized over the initial fifteen-year term of the lease. Current and long-term notes receivable decreased from September 27, 1996, by approximately $0.4 million and $0.7 million, respectfully, reflecting the continued paydown of the debt associated with the sale of the Company's foreign subsidiaries. Accounts receivable decreased $3.0 million during the first three quarters of fiscal 1997 due to lower sales and increased collection effort. At June 27, 1997, borrowings under the revolving credit facility were $1.9 million. Total borrowing capacity under this credit facility is $30.0 million. Availability at any given point in time is a function of eligible accounts receivable and inventory levels. At June 27, 1997, total availability was $11.8 million. Foreign Currency Exchange Rates - ------------------------------- The Company purchases print engine mechanisms and memory components from several Japanese suppliers. Fluctuations in Japanese yen currency exchange rates will affect the prices of these products. The Company attempts to mitigate possible negative impacts through yen-sharing arrangements with suppliers and price negotiations; however, material price increases resulting from exchange rate fluctuations could develop which would adversely affect operating results. Sale-Leaseback Agreement - ------------------------ The sale-leaseback agreement entered into in February 1997 requires the Company to comply with various restrictive financial covenants. At June 27, 1997, the Company was not in compliance with a Fixed Charge Coverage Covenant due to continuing losses. The Company expects to resolve the Fixed Charge Coverage issue during a six-month cure period provided in the agreement. QMS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company 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 Company has filed an answer denying all allegations of wrongful conduct in the complaint. The Company cannot predict the ultimate outcome of this case; however, it does not expect the resolution of this matter to materially affect the Company's financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES - None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None. ITEM 5. OTHER INFORMATION - None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Number Description 10(r)(xv) Amendment Number Five to Loan and Security Agreement dated June 23, 1997. 27 Financial Data Schedule (b) Reports: The following report was filed on Form 8-K during the third quarter of fiscal 1997. O Form 8-K dated July 7, 1997, reporting Item 5. Other Events QMS, INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QMS, INC. (Registrant) Date: July 28, 1997 /s/ Richard A. Wiggins ---------------------- RICHARD A. WIGGINS Senior Vice President and Chief Financial Officer (Mr. Wiggins is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant.) Exhibit 10(r)(xv) AMENDMENT NUMBER FIVE TO LOAN AND SECURITY AGREEMENT QMS, INC. This AMENDMENT NUMBER FIVE TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of June 23, 1997, by and between Foothill Capital Corporation, a California corporation ("Foothill"), on the one hand, and QMS, Inc., a Delaware corporation ("Borrower"), with reference to the following facts: A. Foothill and Borrower heretofore have entered into that certain Loan and Security Agreement, dated as of November 7, 1995 as amended by that certain Amendment Number One to Loan and Security Agreement, dated as of December 4, 1995, as further amended by that certain Amendment Number Two to Loan and Security Agreement, dated as of February 7, 1996, as further amended by that certain Amendment Number Three to Loan and Security Agreement, dated as of July 31, 1996, and as further amended by that certain Amendment Number Four to Loan and Security Agreement, dated as of January 22, 1997 (as so amended and otherwise modified from time to time, the "Agreement"); B. Borrower has requested Foothill to amend the Agreement to reduce the Tangible Net Worth, as set forth in this Amendment; C. Foothill is willing to so amend the Agreement in accordance with the terms and conditions hereof; and D. All capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Agreement, as amended hereby. NOW, THEREFORE, in consideration of the above recitals and the mutual premises contained herein, Foothill and Borrower agree as follows: 1. Amendment to the Agreement. a. Section 6.13(c) of the Agreement hereby is deleted in its entirety and the following hereby is substituted in lieu thereof: "(c) Tangible Net Worth. Tangible Net Worth of at least (i) Twenty Seven Million Dollars ($27,000,000), measured on a fiscal quarter-end or (ii) Twenty Two Million Dollars ($22,000,000) measured on a fiscal quarter-end, upon the financial recognition of the Agreement between Borrower and James L. Busby ("Busby") which provided, inter alia, for the resignation of Busby as Chief Executive Officer; and". 2. Fee. Foothill shall charge Borrower's loan account a fee in the amount of Twenty Thousand Five Hundred Dollars ($20,500.00). Said fee shall be fully- earned, non-refundable, and due and payable on the date Borrower's loan account is charged. 3. Representations and Warranties. Borrower hereby represents and warrants to Foothill that (a) the execution, delivery, and performance of this Amendment and of the Agreement, as amended by this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, and (b) this Amendment and the Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms. 4. Conditions Precedent to Amendment. The satisfaction of each of the following on or before, unless otherwise specified below, shall constitute conditions precedent to the effectiveness of this Amendment: a. Foothill shall have received the reaffirmation and consent of the Guarantors attached hereto as Exhibit A, dully executed and delivered by the respective authorized officials thereof; b. Foothill shall have received all required consents of Foothill's participants in the Obligations to Foothill's execution, delivery, and performance of this Amendment; c. The representations and warranties in this Amendment, the Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties related solely to an earlier date); d. No Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein; e. No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrower, Foothill, or any of their Affiliates; f. The Collateral shall not have declined materially in value from the values set forth in the most recent appraisals of field examinations previously done by Foothill; g. All other documents and legal matters in connections with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Foothill and its counsel. 5. Effect on Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. The execution, delivery, and performance of this Amendment shall not operate as a waiver of or, except as expressly set forth herein, as an amendment, of any right, power, or remedy of Foothill under the Agreement, as in effect prior to the date hereof. 6. Further Assurances. Borrower shall, and shall cause Guarantor to, execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Foothill, and take all actions as Foothill may reasonably request from time to time, to perfect and maintain the perfection and priority of Foothill's security interests in the Collateral, the collateral in which Guarantor has granted or is required to grant security interest in favor of Foothill, and the Real Property, and to fully consummate the transactions contemplated under this Amendment and the Agreement, as amended by this Amendment. 7. Miscellaneous. a. Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. b. Upon the effectiveness of this Amendment, each reference in the Loan Documents of the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. c. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. FOOTHILL CAPITAL CORPORATION, A California corporation By: /s/ Lisa M. Gonzales ------------------------ Lisa M. Gonzales Title: Assistant Vice President QMS, Inc., a Delaware Corporation By: /s/ R. A. Wiggins --------------------- Richard Wiggins Title: Vice President and Controller EXHIBIT A Reaffirmation and Consent All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in that certain Amendment Number Five to Loan and Security Agreement, dated as of June 23, 1997 (the "Amendment"). Each of the undersigned hereby (a) represents and warrants to Foothill that the execution, delivery, and performance of this Reaffirmation and Consent are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the amendment of the Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing to Foothill under its Guaranty and each of the other Loan Documents to which it is party; and (d) agrees that each of the Guaranty and the other Loan Documents to which it is a party is and shall remain in full force and effect. Although each of the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that Foothill has no obligation to inform it of such matters in the future or to seek its acknowledgment or agreement to future amendments, and nothing herein shall create such a duty. QMS CIRCUITS, INC., a Delaware Corporation By: /s/ R. A. Wiggins ----------------------- Richard Wiggins Title: Secretary and Treasurer QMS CANADA, INC., a corporation incorporated under the laws of Canada By: /s/ R. A. Wiggins ------------------------- Richard Wiggins Title: Secretary and Treasurer