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 JANUARY 2, 1998
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
incorporation or organization) Identification Number)
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 JANUARY 30, 1998.
QMS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of January 2, 1998 and
October 3, 1997 3 - 4
Condensed Consolidated Statements of Income
(unaudited) for the three months ended
January 2, 1998 and December 27, 1996 5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended
January 2, 1998 and December 27, 1996 6
Notes to Condensed Consolidated Financial Statements
(unaudited) 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 11
PART II - OTHER INFORMATION 12 - 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 January 2, 1998 and October 3, 1997
(Unaudited)
January 2, October 3,
in thousands 1998 1997
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 697 $ 612
Trade Receivables (less allowance for doubtful
accounts of $615 at January 2, 1998 and $529
at October 3, 1997) 19,932 17,535
Note Receivable 610 443
Inventories:
Raw Materials 5,621 5,614
Work in Process 1,415 1,237
Finished Goods 15,218 18,251
Inventory Reserves (see Note 3) (4,612) (6,978)
------------ --------------
Total Inventories, Net 17,642 18,124
Other Current Assets 2,726 2,257
------------ --------------
Total Current Assets 41,607 38,971
------------ --------------
PROPERTY, PLANT, AND EQUIPMENT 36,081 38,290
Less Accumulated Depreciation 31,316 32,933
------------ --------------
Total Property, Plant, and Equipment, Net 4,765 5,357
CAPITALIZED AND DEFERRED SOFTWARE 8,431 8,897
NOTES RECEIVABLE, NET 3,267 3,433
PREPAID RENT (Note 4) 1,151 0
OTHER ASSETS, NET 1,971 1,931
------------ --------------
TOTAL ASSETS $ 61,192 $ 58,589
============ ==============
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of January 2, 1998 and October 3, 1997
(Unaudited)
January 2, October 3,
in thousands 1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 10,475 $ 6,562
Revolving Credit Loan and Short-Term Debt (Note 5) 0 447
Current maturities of capital lease obligations 749 988
Other Current Liabilities :
Employment Costs 4,336 3,931
Deferred Service Revenue 9,400 9,536
Accrued Expenses 1,240 1,251
Restructuring Reserves 969 1,747
Accrued Management Transition Expenses 605 621
Other 1,288 1,601
------------ --------------
Total Other Current Liabilities 17,838 18,687
------------ --------------
Total Current Liabilities 29,062 26,684
------------ --------------
CAPITAL LEASE OBLIGATIONS 844 898
OTHER LIABILITIES:
Deferred Service Revenue 1,056 1,033
Deferred Compensation 2,896 2,969
Accrued Management Transition Expenses 394 472
Other Liabilities 2,209 2,209
------------ --------------
Total Other Liabilities 6,555 6,683
------------ --------------
STOCKHOLDERS' EQUITY 24,731 24,324
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,192 $ 58,589
============ ==============
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended January 2, 1998 and December 27, 1996
(Unaudited)
Three Months Ended
January 2, December 27,
in thousands, except per share amounts 1998 1996
NET SALES
Printers and Supplies $ 20,231 $ 23,115
U.S. Service 8,347 8,353
---------------- ---------------
Total Net Sales 28,578 31,468
---------------- ---------------
COST OF GOODS SOLD
Printers and Supplies 14,506 16,851
U.S. Service 4,999 4,896
---------------- ---------------
Total Cost of Goods Sold 19,505 21,747
---------------- ---------------
GROSS PROFIT
Printers and Supplies 5,725 6,264
U.S. Service 3,348 3,457
---------------- ---------------
Total Gross Profit 9,073 9,721
---------------- ---------------
OPERATING EXPENSES 8,844 9,273
---------------- ---------------
OPERATING INCOME 229 448
OTHER INCOME (EXPENSE)
Interest Income 98 100
Interest Expense (80) (325)
Miscellaneous Income (Expense) 158 (155)
---------------- ---------------
Total Other Income (Expense) 176 (380)
---------------- ---------------
INCOME BEFORE INCOME TAXES 405 68
INCOME TAX PROVISION 4 6
---------------- ---------------
NET INCOME $ 401 $ 62
================ ===============
EARNINGS PER COMMON SHARE (Note 2)
Basic & Diluted $ 0.04 $ 0.01
SHARES USED IN PER SHARE COMPUTATION (Note 2)
Basic 10,697 10,693
Diluted 10,701 10,757
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended January 2, 1998 and December 27, 1996
(Unaudited)
Three Months Ended
January 2, December 27,
in thousands 1998 1996
Cash Flows from Operating Activities:
Net Income $ 401 $ 62
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation of Property, Plant and Equipment 529 1,282
Amortization of Capitalized and Deferred Software 1,839 1,476
Provision for Losses on Inventory 673 618
Other (125) (5)
Net Change in Assets and Liabilities that provided (used) cash (1,430) 879
--------------- --------------
Net Cash Provided by Operating Activities 1,887 4,312
--------------- --------------
Cash Flows from Investing Activities:
Collections of Notes Receivable 0 167
Purchase of Property, Plant and Equipment (95) (492)
Additions to Capitalized and Deferred Software Costs (1,372) (2,094)
Other 399 39
--------------- --------------
Net Cash Used in Investing Activities (1,068) (2,380)
--------------- --------------
Cash Flows from Financing Activities:
Proceeds from Debt and Capital Lease Obligations 0 185
Payments of Debt and Capital Lease Obligations (447) (2,345)
Other (287) 95
--------------- --------------
Net Cash Used in Financing Activities (734) (2,065)
--------------- --------------
Net Change in Cash and Cash Equivalents 85 (133)
Cash and Cash Equivalents at Beginning of Period 612 190
--------------- --------------
Cash and Cash Equivalents at End of Period $ 697 $ 57
============== ==============
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 January 2, 1998, the results of operations and changes in
cash flows for the three months ended January 2, 1998, and December 27, 1996.
All adjustments included in the condensed consolidated financial statements
are of a normal recurring nature except amounts related to the restructuring
reserves (see Note 7). The results of operations for the three months ended
January 2, 1998, are not necessarily indicative of the results to be expected
for the fiscal year ending October 2, 1998. Certain reclassifications have
been made to fiscal 1997 amounts to conform to the fiscal 1998 presentation.
2. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Earnings 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-month periods ending January 2,
1998, and December 27, 1996, and did not change the amounts of the basic and
diluted earnings per common share.
3. INVENTORY RESERVES
Inventory reserves at January 2, 1998, and October 3, 1997, are summarized as
follows (in thousands):
January 2, October 3,
1998 1997
Standards revisions $ 513 $ 1,635
Excess and obsolete reserves 3,351 4,555
Valuation reserves 748 788
--------- ---------
TOTAL $ 4,612 $ 6,978
========= =========
The inventory reserves at October 3, 1997, included $1.6 million for
standards revisions that occurred in the first quarter of fiscal 1998.
Inventory reserves at January 2, 1998, consist primarily of excess and
obsolete reserves and spare part valuation reserves. Excess and obsolete
reserves are calculated based on specific identification of items. In the
first quarter of fiscal 1998, the Company disposed of $1.9 million in excess
and obsolete inventory. Spare part valuation reserves reflect the reduced
value of unrepaired parts from the value of the repaired part.
4. PREPAID RENT
At October 3, 1997, the Company was not in compliance with Fixed Charge
Coverage and Net Worth covenants contained in the 1997 sale-leaseback
agreement for the Mobile headquarters. On December 8, 1998, the Company
obtained a one-year waiver of non-compliance through October 5, 1998, from
the lessor in exchange for $1.3 million in prepaid rent and an amendment to a
related warrant agreement. At the end of the waiver period, the Company may
be out of compliance with one or more covenants contained in the lease
agreement. Among the remedies available to the landlord is the acceleration
of all rent for the initial lease term, cancellation of the lease, or all
other remedies available at law. Management believes over the next year
through further negotiations an additional extension of the waiver or a
permanent revision of the covenant will be obtained.
The prepaid rent covers the period from December 1, 1998, to September 9,
1999. $149,000 of prepaid Mobile rent was included in other current assets
and $1,151,000 was reported as a non-current asset.
5. 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 the covenants of this
agreement as of January 2, 1998.
6. COMMITMENTS AND CONTINGENCIES
As of January 2, 1998, the Company had a commitment of approximately $17.1
million under contracts to purchase print engines and related components.
The Company was contingently liable for approximately $410,000 as of January
2, 1998, as a result of letters of credit issued in the normal course of
business for the purchase of inventory.
7. RESTRUCTURING AND MANAGEMENT TRANSITION EXPENSES
At October 3, 1997, the Company had reserves for restructuring expenses of
$1,747,000. During the first quarter of fiscal 1998 a total of $778,000 was
paid leaving a balance of $969,000 at January 2, 1998.
In addition, the Company had reserves totaling $4,174,000 at October 3, 1997,
for management transition and retirement benefit expenses for three
executives. The reserve balances are based on the net present value of
projected benefits. In the first quarter of fiscal 1998, the Company
incurred $113,000 in interest expense related to this reserve and paid
$130,000 in management transition and retirement benefits leaving a balance
of $4,157,000 at January 2, 1998.
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
- ---------------------
Net income for the first quarter of fiscal 1998 was $401,000 on net sales of
$28.6 million compared to net income of $62,000 for the first quarter of fiscal
1997 on net sales of $31.5 million. The gain in the first quarter of fiscal
1998 was achieved because of cost reduction efforts begun by management in the
fourth quarter of fiscal 1997. Part of the cost reduction effort included
closing QMS Circuits, Inc. an electronic board manufacturer located in
Florida. The closing of QMS Circuits improved QMS profitability while reducing
sales.
Table of Net Sales Comparisons for Key Channels of Distribution
First Quarter ended
January 2, December 27,
(000's) 1998 1996 Difference
-------------- -------------- --------------
U.S. Direct $ 11,396 $ 12,486 $ (1,090)
U.S. Service 8,347 8,353 (6)
U.S. Reseller 2,469 2,918 (449)
Europe 2,638 2,767 (129)
Japan 1,142 1,178 (36)
Canada 1,278 2,033 (755)
QMS Circuits 0 514 (514)
All Other 1,308 1,219 89
------------- ------------ ------------
Total $ 28,578 $ 31,468 $ (2,890)
============= ============ ============
Net sales for the first quarter of fiscal 1998 declined by 9.2% from net sales
for the first quarter of fiscal 1997. Lower revenues from reduced operations in
Canada and the closing of the QMS Circuits facility in Florida caused 44% ($1.3
million) of the decline. U.S. direct and reseller sales were down $1.5 million
due to discontinuing bulk Canon toner cartridge sales and delays in the
introduction of magicolor 2(R). Magicolor 2 began customer shipments in mid-
December 1997.
The U.S. direct market net sales were down 8.7% for the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997. This decrease occurred
primarily as a result of management's decision to cease handling bulk Canon
toner cartridge sales due to low margins. Direct sales of Canon toner
cartridges decreased $774,000 (49%) from $1,565,000 in the first quarter of
fiscal 1997 to $791,000 in the first quarter of fiscal 1998.
The U.S. reseller channel decline in net sales was primarily due to a delay in
introducing the magicolor 2. With new competitive first generation color
printers offered on the market, QMS needed the magicolor 2 to keep its position
as a market innovator. The magicolor 2 was not available for sale until mid-
December. In the second and third quarters of fiscal 1998, QMS expects to bring
magicolor 2 production into full force and expects reseller sales to increase.
The Company also expects to expand its distribution network with the national
distribution and value added reseller channels to be the thrust of QMS marketing
effort in the future.
Overall, the Company's gross profit decreased $648,000 from $9,721,000 to
$9,073,000 due to lower sales, increased inbound freight and higher software
amortization. Inbound freight increased 61% or $141,000 in a quarter-to-quarter
comparison because of QMS's decision to air transport magicolor 2 engines and
other product consumables to meet customer demand. Software amortization was
also 32% higher in the first quarter of fiscal 1998 over the first quarter of
fiscal 1997 due to higher product development costs and shorter projected
product life spans. While the gross profit decreased the gross profit margin
increased from 30.9% to 31.7%. This is reflective of management's decision to
focus on higher margin core businesses.
The selling, general, and administrative expenses ("SG&A") decreased $429,000
from $9,723,000 in the first quarter of fiscal 1997 to $8,844,000 in the first
quarter of fiscal 1998. This decrease reflects the significant progress QMS has
made in reducing overhead costs resulting primarily from cost reduction efforts
begun in the fourth quarter of fiscal 1997.
Total other income less other expense was a positive $176,000 for the first
quarter of fiscal 1998 compared to a net expense of $380,000 in the first
quarter of fiscal 1997. This $556,000 increase to net profit was due to a
$193,000 gain on the sale of capital equipment and a $240,000 swing from net
interest expenses of $225,000 to net interest income of $15,000. This change in
net interest income was caused primarily from the sale-leaseback proceeds from
February 1997 being applied to Company debt and increased cash flow from
improved inventory controls. Short-term and long-term debt has been eliminated,
a zero balance at January 2, 1998, compared to $11.6 million at December 27,
1996.
The Company has not provided for any income tax expense during fiscal 1997 or
1998 due to current losses and available operating loss carryforwards and income
tax credits.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first quarter of fiscal 1998, the Company's working capital and
capital expenditure requirements came principally from operations. The
Company's net working capital as of January 2, 1998, was $12.5 million compared
to $12.3 million at December 27, 1996.
Accounts receivable increased $2.4 million due to slower payment by key
customers during the December 1997 holidays. The company expects accounts
receivable to remain at a higher level than the October 3, 1997, balance because
of anticipated sales for magicolor 2. Accounts payable increased $3.9 million
due to increases in outstanding checks and an increase in inventory in transit
at month end. Outstanding checks are included in accounts payable until cashed.
At January 2, 1998, there were no borrowings under the revolving credit facility
and cash on hand totaled $697,000. Total borrowing capacity under this credit
facility is $30.0 million although availability at any given point in time is a
function of eligible accounts receivable and inventory levels. At January 2,
1998, total availability was approximately $11.8 million.
Management expects that existing cash reserves and available credit under the
credit facility will be sufficient to meet cash flow requirements during the
coming year.
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; however,
material price increases resulting from exchange rate fluctuations could develop
which would adversely affect operating results. Decreasing Japanese yen values
against the U.S. dollar have resulted in favorable purchase price variances
during the first quarter which have been offset by reductions in inventory
value. As inventory is sold in the coming months, profit margins will increase
temporarily until competitive pressure reduces product pricing.
At January 2, 1998, QMS has Japanese accounts receivable of $1.5 million related
to normal ongoing business with the Company's Japanese distributor, and notes
receivable of $1.8 million due to the sale of the Company's Japanese operations
in 1995. The Company is currently renegotiating the Japanese note terms and
minimum commission agreements. The alternatives being considered include
potentially lowering monthly payments from Japan to the Company by extending the
terms of the agreement. The revised Japanese terms are not expected to have a
significant effect on Company liquidity.
SALE-LEASEBACK AGREEMENT
- ------------------------
At October 3, 1997, the Company was not in compliance with Fixed Charge Coverage
and Net Worth covenants contained in the 1997 sale-leaseback agreement for the
Mobile headquarters. On December 8, 1998, the Company obtained a one-year
waiver of non-compliance through October 5, 1998, from the lessor in exchange
for $1.3 million in prepaid rent and an amendment to a related warrant
agreement. At the end of the waiver period, the Company may be out of
compliance with one or more covenants contained in the lease agreement. Among
the remedies available to the landlord is the acceleration of all rent for the
initial lease term, cancellation of the lease, or all other remedies available
at law. Management believes over the next year through further negotiations an
additional extension of the waiver or a permanent revision of the covenant will
be obtained, if necessary.
Management believes that the Company's fiscal 1998 working capital and capital
expenditure needs, as well as funding for research and development, will be met
by existing cash balances, cash flow from operations and by the revolving credit
facility.
YEAR 2000 COMPLIANCE
- --------------------
The Company has developed and begun implementing plans to review its purchased
and developed software for Year 2000 compliance. Systems that require
modification or replacement have been identified and a plan for resolving Year
2000 issues has been established. Printer and print system products currently
sold by the Company are designed to preclude the possibility of Year 2000
errors.
QMS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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, results of
operations, or cash flows.
ITEM 2 - CHANGES IN SECURITIES - None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Meeting") was held on January
20, 1998. The results of the voting on the election of directors were as
follows:
Nominee For Withheld Total Votes Cast
James L. Busby 8,631,005 584,764 9,215,769
Lucius E. Burch, III 8,666,658 549,111 9,215,769
Jack Edwards 8,655,884 559,885 9,215,769
Accordingly, all nominees for the Board of Directors were elected.
The results of the voting on the amendment to the Company's 1997 Stock Incentive
Plan described in the Proxy Statement delivered in connection with the Meeting
were as follows:
For Against Abstain Non-Votes
3,209,981 1,324,006 91,028 4,590,754
Accordingly, the amendment to the Company's 1997 Stock Incentive Plan was
adopted.
The results of the voting on the amendment to the Stock Option Plan for
Directors described in the Proxy Statement delivered in connection with the
Meeting were as follows:
For Against Abstain Non-Votes
3,508,711 1,025,276 91,028 4,590,754
Accordingly, the amendment to the Stock Option Plan for Directors was approved.
ITEM 5 - OTHER INFORMATION - None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
10(h)(i) Form of Executive Agreement entered into with Edward E.
Lucente on January 5, 1998.
10(h)(ii) Form of Executive Services Agreement entered into with
Edward E. Lucente on January 5, 1998.
27 Financial Data Schedule
(b) Reports: None.
QMS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QMS, INC.
(Registrant)
Date: February 6, 1998 /s/ Edward E. Lucente
Edward E. Lucente
President and Chief Executive Officer
Date: February 6, 1998 /s/ Richard A. Wiggins
Richard A. Wiggins
Senior Vice President and Chief
Financial Officer