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 April 3, 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 Identification
incorporation or organization) 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 May 1, 1998.
QMS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ ------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of April 3, 1998, and
October 3, 1997 3 - 4
Condensed Consolidated Statements of Operations
(unaudited) for the three and six months ended
April 3, 1998, and March 28, 1997 5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the six months ended
April 3, 1998, and March 28, 1997 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
- ---------------------------
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 13
QMS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
as of April 3, 1998, and October 3, 1997
(Unaudited)
April 3, October 3,
in thousands 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 1,051 $ 612
Trade Receivables (less allowance for doubtful
accounts of $578 at April 3, 1998 and $529
at October 3, 1997) 22,762 17,535
Note Receivable 722 443
Inventories:
Raw Materials 6,478 5,614
Work in Process 1,777 1,237
Finished Goods 15,152 18,251
Inventory Reserves (see Note 3) (3,967) (6,978)
-------- --------
Total Inventories, Net 19,440 18,124
Other Current Assets 2,872 2,257
-------- --------
Total Current Assets 46,847 38,971
-------- --------
PROPERTY, PLANT, AND EQUIPMENT 36,889 38,290
Less Accumulated Depreciation 31,665 32,933
-------- --------
Total Property, Plant, and Equipment, Net 5,224 5,357
CAPITALIZED AND DEFERRED SOFTWARE 8,211 8,897
NOTES RECEIVABLE, NET 3,100 3,433
PREPAID RENT (Note 4) 761 0
OTHER ASSETS, NET 2,342 1,931
-------- --------
TOTAL ASSETS $ 66,485 $ 58,589
======== ========
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of April 3, 1998, and October 3, 1997
(Unaudited)
April 3, October 3,
in thousands 1998 1997
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 13,763 $ 6,562
Revolving Credit Loan and Short-Term Debt (Note 5) 2,493 447
Current maturities of capital lease obligations 776 988
Other Current Liabilities:
Employment Costs 3,476 3,931
Deferred Service Revenue 9,217 9,536
Restructuring Reserves 634 1,747
Accrued Management Transition Expenses 1,030 621
Other 3,133 2,852
------- --------
Total Other Current Liabilities 17,490 18,687
------- --------
Total Current Liabilities 34,522 26,684
------- --------
CAPITAL LEASE OBLIGATIONS 279 898
OTHER LIABILITIES:
Deferred Service Revenue 949 1,033
Deferred Compensation 2,849 2,969
Accrued Management Transition Expenses 421 472
Other Liabilities 2,208 2,209
------- --------
Total Other Liabilities 6,427 6,683
------- --------
STOCKHOLDERS' EQUITY 25,257 24,324
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,485 $ 58,589
======= ========
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended April 3, 1998, and March 28, 1997
(Unaudited)
Three Months Ended Six Months Ended
--------------------- ------------------------------
April 3, March 28, April 3, March 28,
in thousands, except per share amounts 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES
Printers and Supplies $ 24,971 $ 22,487 $ 44,710 $ 45,602
U.S. Service 9,650 8,400 18,488 16,753
---------- --------- --------- ----------
Total Net Sales 34,621 30,887 63,198 62,355
---------- --------- --------- ----------
COST OF GOODS SOLD
Printers and Supplies 18,275 18,087 32,527 34,938
U.S. Service 6,244 5,472 11,496 10,368
---------- --------- --------- ----------
Total Cost of Goods Sold 24,519 23,559 44,023 45,306
---------- --------- --------- ----------
GROSS PROFIT
Printers and Supplies 6,696 4,400 12,183 10,664
U.S. Service 3,406 2,928 6,992 6,385
---------- --------- --------- ----------
Total Gross Profit 10,102 7,328 19,175 17,049
---------- --------- --------- ----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 9,512 11,416 18,357 20,689
---------- --------- --------- ---------
OPERATING INCOME (LOSS) 590 (4,088) 818 (3,640)
---------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest Income 90 88 188 188
Interest Expense (113) (223) (193) (548)
Miscellaneous Income (Expense) (39) (169) 119 (324)
---------- --------- --------- ---------
Total Other Income (Expense) (62) (304) 114 (684)
---------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 528 (4,392) 932 (4,324)
INCOME TAX PROVISION (BENEFIT) 51 (6) 54 0
---------- --------- --------- ---------
NET INCOME (LOSS) $ 477 $ (4,386) $ 878 $ (4,324)
========== ========= ========= =========
EARNINGS (LOSS) PER
COMMON SHARE (Note 2)
Basic and Diluted $ 0.04 $ (0.41) $ 0.08 $ (0.40)
SHARES USED IN PER SHARE
COMPUTATION (Note 2)
Basic 10,697 10,697 10,697 10,695
Diluted 10,768 10,697 10,768 10,695
See Notes to Condensed Consolidated Financial Statements
QMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended April 3, 1998, and March 28, 1997
(Unaudited)
April 3, March 28,
in thousands 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income (Loss) $ 878 $ (4,324)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation of Property, Plant and Equipment 1,043 2,536
Amortization of Capitalized and Deferred Software 3,996 3,235
Provision for Losses on Inventory 1,593 2,020
Other (126) 50
Net Change in Assets and Liabilities that Provided (Used) Cash (4,309) 711
--------- ---------
Net Cash Provided by Operating Activities 3,075 4,228
--------- ---------
Cash Flows from Investing Activities:
Collections of Notes Receivable 54 1,057
Purchase of Property, Plant and Equipment (1,077) (1,079)
Proceeds from Disposal of Property, Plant and Equipment 414 12,585
Additions to Capitalized and Deferred Software Costs (3,309) (4,233)
--------- ---------
Net Cash Provided by (Used in) Investing Activities (3,918) 8,330
--------- ---------
Cash Flows from Financing Activities:
Proceeds from Debt and Capital Lease Obligations 2,046 318
Payments of Debt and Capital Lease Obligations (841) (13,146)
Other 77 333
--------- ---------
Net Cash Provided by (Used in) Financing Activities 1,282 (12,495)
--------- ---------
Net Change in Cash and Cash Equivalents 439 63
Cash and Cash Equivalents at Beginning of Period 612 190
--------- ---------
Cash and Cash Equivalents at End of Period $ 1,051 $ 253
========= =========
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 April 3, 1998, the results of operations for the three and
six months ended April 3, 1998, and March 28, 1997, and changes in cash flows
for the six months ended April 3, 1998, and March 28, 1997. The results of
operations for the six months ended April 3, 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 for
basic and diluted earnings per share, respectively.
3. INVENTORY RESERVES
Inventory reserves at April 3, 1998, and October 3, 1997, are summarized as
follows (in thousands):
April 3, October 3,
1998 1997
- -------------------------------------------------------------
Standards revisions $ 914 $ 1,635
Excess and obsolete reserves 2,303 4,555
Spare parts valuation reserves 750 788
-------- ---------
TOTAL $ 3,967 $ 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 April 3, 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 two
quarters of fiscal 1998, the Company disposed of $3.6 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
transaction for the Mobile headquarters. On December 8, 1997, 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 are the acceleration
of all rent for the initial lease term, cancellation of the lease, or all
other remedies available at law. Management believes that prior to the
issuance of year-end financial statements an additional extension of the
waiver or a permanent revision of the covenant will be obtained through
further negotiations.
The $1.3 million prepaid rent covers the period from December 1, 1998, to
September 7, 1999. In addition, the Company pays rent quarterly in advance.
At April 3, 1998, the Company had $804,000 in prepaid Mobile rent included in
other current assets and $761,000 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 April 3, 1998.
6. COMMITMENTS AND CONTINGENCIES
As of April 3, 1998, the Company had a commitment of approximately $15.5
million under contracts to purchase print engines and related components.
The Company was contingently liable for approximately $268,000 as of April 3,
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 and second quarters of fiscal 1998 a total of
$1,113,000 was paid leaving a balance of $634,000 at April 3, 1998.
In addition, the Company had reserves totaling $4,174,000 at October 3, 1997,
for management transition and retirement benefit expenses for three former
executives. The reserve balance is based on the net present value of
projected benefits. In the first two quarters of fiscal 1998, the Company
incurred $160,000 in net expense related to this reserve and paid $272,000 in
management transition and retirement benefits leaving a balance of $4,061,000
at April 3, 1998. Payments for management transition and retirement benefits
will continue until the year 2009.
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 second quarter of fiscal 1998 was $477,000 on net sales of
$34,621,000. For the six months ended April 3, 1998, net income was $878,000 on
net sales of $63,198,000. These 1998 results compare to a net loss of
$4,386,000 on net sales of $30,887,000 for the second quarter of fiscal 1997 and
a net loss of $4,324,000 on net sales of $62,355,000 for the six months ended
March 28, 1997.
In the first two quarters of 1998 the gain in net income was achieved primarily
through additional sales and higher profit margins. An additional factor was
cost reduction efforts begun by management in the fourth quarter of fiscal 1997.
The loss in the second quarter of fiscal 1997 includes an increase in the
reserves for excess and obsolete inventory of approximately $0.8 million ($0.08
per share) for end-of-life products, primarily in color printer equipment. In
addition, unusual expenses of approximately $0.4 million ($0.04 per share) were
recorded for expenses related to the sale-leaseback of the corporate facility
and the write-off of various non-operating accounts receivable.
Table of Net Sales Comparisons for Key Product Groups
------------------------------------------------------
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------------
April 3, March 28, April 3, March 28,
(000's) 1998 1997 Difference 1998 1997 Difference
------------------------------------ ------------------------------------------
Hardware $ 9,929 $ 6,906 $ 3,023 $ 18,609 $ 16,168 $ 2,441
Consumables 8,286 8,388 (102) 15,266 16,582 (1,316)
Service 9,650 8,986 664 18,488 17,873 615
Europe 5,385 2,939 2,446 8,023 5,706 2,317
Japan 987 2,150 (1,163) 2,129 3,328 (1,199)
All Other 384 1,518 (1,134) 683 2,698 (2,015)
------------------------------------ ------------------------------------------
Total Net Sales $ 34,621 $ 30,887 $ 3,734 $ 63,198 $ 62,355 $ 843
==================================== ==========================================
Net sales for the second quarter of fiscal 1998 increased by 12.1% from net
sales for the second quarter of fiscal 1997 and by 1.4% in the six-month
comparison. Hardware sales are up because of the magicolor 2(R) product.
Consumable sales were down primarily as a result of management's decision in the
second quarter of fiscal 1997 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.
Europe and Japan sales include both controller board sales at cost and
commissions earned on product sales. The increase in Europe revenue is
primarily from sales of the magicolor 2 product. European demand for magicolor
2 product is expected to remain strong through the end of this fiscal year, with
a seasonal drop in sales in the fourth quarter due to European holidays.
Japan revenue includes product and commission revenue for Japan, Korea and other
Pacific Rim countries. This revenue is generated through an independent
company, QMS Japan KK, which has exclusive rights to distribute QMS products
throughout these countries. QMS is currently evaluating how to improve Asian
revenue and profit. Alternatives include renegotiating the current exclusive
distribution agreement to allow QMS greater direct access to these markets in
exchange for reductions in minimum commission requirements. Japan revenue is
currently less than 3% of Company revenue and is expected to continue at a
depressed level for at least the next two quarters due primarily to the
depressed Asian economy. At April 3, 1998, the Company had accounts receivable
from QMS Japan KK of $1.9 million and a short- and long-term note receivable of
$0.7 million and $1.0 million, respectively.
Overall, the Company's gross profit as a percentage of sales increased from
23.7% to 29.2% in the three-month comparison of fiscal 1997 and 1998 and from
27.3% to 30.3% in the six-month comparison. The principal reasons for this
increase include the introduction of magicolor 2 in the first quarter of fiscal
1998, higher factory unit volumes resulting in improved manufacturing ratios,
and lower excess and obsolete inventory reserve requirements.
The selling, general, and administrative expenses ("SG&A") decreased $1,904,000
(16.7%) in the three-month comparison and decreased $2,332,000 (11.3%) in the
six-month comparison. Lower SG&A expenses resulted in SG&A as a percentage of
sales decreasing from 37.0% to 27.5% for the three-month comparison of fiscal
1997 and 1998 and decreasing from 33.2% to 29.0% for the six-month comparison.
The SG&A decreases reflect the cost reduction efforts begun in the fourth
quarter of fiscal 1997. During 1997, QMS reduced its headcount by 20% to
approximately 700 employees and closed its QMS Circuits, Inc. subsidiary.
Total other income less other expense was a net income of $114,000 for the first
six months of fiscal 1998 compared to a net expense of $684,000 in the first six
months of fiscal 1997. This $798,000 increase to net profit was due primarily
to a $355,000 reduction in net interest expense from $360,000 in fiscal 1997 to
$5,000 in fiscal 1998. Lower net interest expense is the result of the February
1997 sale-leaseback proceeds and cash flow from improved inventory controls
being applied to Company debt.
Income taxes reflect estimated foreign and domestic income taxes required by
foreign tax treaties and federal alternative minimum taxes. The Company has
available operating loss carryforwards and income tax credits which reduce the
effective alternative-minimum tax rate to 2%.
Financial Condition
- -------------------
Current and long-term notes receivable decreased by approximately $54,000,
reflecting the continued reduction of debt associated with the 1995 sale of the
Company's foreign subsidiaries. Accounts receivable increased $5.2 million and
accounts payable increased $7.2 million due to the introduction of magicolor
2 in the first quarter of fiscal 1998. Sales have increased dramatically to
Europe where payment terms are extended to 90 days. The accounts payable
increase reflects the additional production volumes related to magicolor 2.
The company expects accounts receivable to remain at a higher level than the
October 3, 1997, balance because of anticipated sales for magicolor 2.
Liquidity and Capital Resources
- -------------------------------
During the first two quarters of fiscal 1998, the Company's working capital and
capital expenditure requirements came principally from operations. The
Company's net working capital as of April 3, 1998, was $12.3 million, unchanged
from October 3, 1997.
At April 3, 1998, the Company had borrowings of $2,493,000 under the revolving
credit facility and cash on hand totaled $1,051,000. 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 April 3, 1998, total availability was $13.0 million.
The Company's current and long-term lease liability has decreased from
$1,886,000 at October 3, 1997, to $1,055,000 at April 3, 1998, due to the
expiration of capital leases and management's decision to fund new capital
acquisitions from operational cash flow.
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.
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 transaction for the
Mobile headquarters. On December 8, 1997, the Company obtained a one-year
waiver of non-compliance from the lessor through October 5, 1998, 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 that prior to the issuance of year-end financial
statements an additional extension of the waiver or a permanent revision of the
covenant will be obtained through further negotiations.
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.
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 results of votes on matters submitted to a vote at the Company's Annual
Meeting of Stockholders, held on January 20, 1998, is included in the Company's
Quarterly Report on Form 10-Q for the quarter ended January 2, 1998.
ITEM 5. OTHER INFORMATION - None.
- --------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit
Number Description
- -----------------------------
- -----------------------------------------
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: May 11, 1998 /s/ Edward E. Lucente
---------------------------- -----------------------
Edward E. Lucente
President and Chief Executive Officer
Date: May 11, 1998 /s/ Richard A. Wiggins
---------------------------- ------------------------
Richard A. Wiggins
Vice President and Chief
Financial Officer