United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 23, 1996.
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 0-21504
QUAD SYSTEMS CORPORATION
DELAWARE 23-2180139
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO ELECTRONIC DRIVE, HORSHAM, PA 19044
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(Address of principal executive offices)
(215) 657-6202
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(Registrant's telephone number, including area code)
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 | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of August 6, 1996, 4,240,848 shares of the registrant's Common Stock, $.03
par value, were outstanding.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 23, 1996 (Unaudited)
and September 24, 1995........................................3
Condensed Consolidated Statements of Income (Unaudited) for the
three- and nine-month periods ended June 23, 1996
and June 25, 1995............................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
nine-month periods ended June 23, 1996
and June 25, 1995............................................5
Notes to Condensed Consolidated Financial Statements.................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...............................11
SIGNATURES..............................................................12
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
ASSETS
Jun. 23, Sept.24,
1996 1995
------- -------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents ............................ $ 2,088 $ 1,454
Accounts receivable, net ............................. 16,055 17,330
Inventories .......................................... 15,411 12,950
Deferred income taxes ................................ 2,213 2,230
Other ................................................ 950 610
------- -------
Total current assets ....................... 36,717 34,574
Equipment and leasehold improvements
at cost, less accumulated depreciation of $4,386
at June 23, 1996 and $3,661 at September 24, 1995 .... 2,671 2,181
Deferred income taxes ...................................... 716 730
Goodwill, net .............................................. 3,157 3,537
Other assets ............................................... 150 153
------- -------
$43,411 $41,175
======= =======
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 4,904 $ 5,146
Accrued expenses ................................. 1,797 1,730
Accrued warranty and product installation costs .. 1,372 1,133
Accrued commissions .............................. 1,052 1,142
Employee compensation and related taxes .......... 1,391 1,118
Securities litigation settlement payable ......... 1,353 --
Customer deposits ................................ 1,060 487
Current portion of long-term debt ................ 700 700
Deferred service revenue ......................... 433 277
Income taxes payable ............................. 259 612
-------- --------
Total current liabilities .............. 14,321 12,345
Long-term debt, less current portion ................... 1,925 2,450
Common stockholders' equity:
Common Stock, par value $.03 per share;
authorized shares: 15,000,000;
shares issued: 4,254,423 at June 23, 1996
and 4,210,858 at September 24, 1995 ......... 127 126
Additional paid-in-capital ....................... 23,700 23,435
Retained earnings ................................ 3,672 2,966
Foreign currency translation ..................... (158) 29
Less treasury stock, at cost, 13,908 shares
at June 23, 1996 and September 24, 1995 .... (176) (176)
-------- --------
Total common stockholders' equity ...... 27,165 26,380
-------- --------
$ 43,411 $ 41,175
======== ========
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three-Month Period Ended Nine-Month Period Ended
----------------------- -----------------------
Jun. 23, Jun. 25, Jun. 23, Jun. 25,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net sales ......................... $ 18,382 $ 16,734 $ 51,100 $ 45,465
Cost of products sold ............. 11,054 10,450 31,412 28,374
---------- ---------- ---------- ----------
Gross profit ............ 7,328 6,284 19,688 17,091
Operating expenses:
Engineering, research and
development ............. 1,565 1,430 4,508 3,413
Selling and marketing ........ 3,102 2,921 8,766 7,650
Administrative and general ... 1,365 1,082 3,811 2,917
---------- ---------- ---------- ----------
6,032 5,433 17,085 13,980
---------- ---------- ---------- ----------
Income from operations ............ 1,296 851 2,603 3,111
Interest expense, net ............ 24 49 177 70
Settlement of securities litigation 1,137 40 1,287 40
---------- ---------- ---------- ----------
Income before income taxes ........ 135 762 1,139 3,001
Income tax expense ................ 51 198 433 780
---------- ---------- ---------- ----------
Net income ........................ $ 84 $ 564 $ 706 $ 2,221
========== ========== ========== ==========
Net income per share .............. $ 0.02 $ 0.13 $ 0.16 $ 0.51
========== ========== ========== ==========
Weighted average common and
common equivalent shares ..... 4,327,578 4,334,345 4,309,619 4,316,749
========== ========== ========== ==========
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine-Month Period Ended
------------------
Jun.23, Jun.25,
1996 1995
------- -------
Operating Activities
Net income ............................................ $ 706 $ 2,221
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................... 1,017 775
Provision for losses on accounts receivable ..... (2) 159
Provision for deferred income taxes ............. 31 (488)
Stock option compensation ....................... 9 16
Changes in operating assets and liabilities, net:
Accounts receivable ....................... 1,229 (811)
Inventories ............................... (2,509) (2,083)
Prepaid expenses and other assets ......... (337) (151)
Accounts payable .......................... (242) 1,184
Accrued expenses and litigation settlement 1,569 (530)
Employee compensation and related taxes ... 273 (75)
Customer deposits ......................... 573 (26)
Deferred service revenue .................. 156 75
Income taxes payable ...................... (353) (57)
------- -------
Net cash provided by operating activities ............. 2,120 209
Investing Activities
Net purchases of equipment and leasehold improvements . (1,239) (974)
Purchase of SMTech Limited, net of cash acquired ...... -- (3,308)
------- -------
Net cash used by investing activities ................. (1,239) (4,282)
Financing Activities
Common Stock issued under employee benefit plans ...... 257 188
Proceeds from issuance of debt ........................ -- 3,500
Principal payments on long-term debt .................. (525) (175)
------- -------
Net cash provided (used) by financing activities ...... (268) 3,513
Effect of exchange rate changes on cash ............... 21 (33)
------- -------
Net increase (decrease) in cash and cash equivalents .. 634 (593)
Cash and cash equivalents at beginning of period ...... 1,454 2,592
------- -------
Cash and cash equivalents at end of period ............ $ 2,088 $ 1,999
======= =======
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 Basis of Presentation
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Quad Systems Corporation and
its wholly-owned subsidiaries (the "Company") as of the dates and for the
periods indicated. All material intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is suggested that the Company's Annual Report on Form
10-K containing the Management's Discussion and Analysis of Financial Condition
and results of operations and the financial statements and notes thereto for the
fiscal year ended September 24, 1995 be read in conjunction with this current
document.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary to present fairly the consolidated financial
position as of June 23, 1996, the consolidated results of operations for the
three- and nine-month periods ended June 23, 1996 and June 25, 1995 and the
consolidated cash flows for the nine-month periods ended June 23, 1996 and June
25, 1995 have been made.
Note 2 Inventories
The components of inventory consist of the following (in thousands):
Jun.23, Sept.24,
1996 1995
------- -------
Raw materials ............................ $ 7,937 $ 7,404
Work in process .......................... 3,563 1,510
Finished products ........................ 3,911 4,036
------- -------
$15,411 $12,950
======= =======
Note 3 Supplemental Disclosures to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows (in
thousands):
Jun.23, Jun.25,
1996 1995
------ ------
Schedule of noncash activity:
Common Stock issued in purchase of SMTech Limited ......... $-- $ 567
===== ======
Restricted common stock issued upon conversion
of notes- 83,333 shares ............................... $-- $ 500
===== ======
Cash paid during the year:
Interest paid ............................................. $ 247 89
===== ======
Income taxes paid ......................................... $ 646 $1,328
===== ======
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Note 4 Litigation
The Company has reached an agreement and executed final settlement documents
with the plaintiffs in the securities litigation against the Company and certain
other defendants pending in the U.S. District Court for the Eastern District of
Pennsylvania. Under this agreement, the Company, together with its directors and
officers liability insurer, will pay a $2,450,000 settlement. The agreement is
subject to final court approval. Total cost (including legal fees) to the
Company, net of the amount to be paid by such insurer, will be $1.5 million, of
which $.2 million was expensed in fiscal year 1995. For the three- and
nine-month periods ended June 1996, the Company recorded a provision of
$1,137,000 ($.16 per share, net of tax) and $1,287,000 ($.19 per share, net of
tax), respectively.
The Company has been named a defendant in a patent infringement lawsuit filed in
Munich, Germany. The complaint alleges that the Company infringed on the
plaintiff's patents relating to pick and place assemblers. The Company has
responded with an action against the plaintiff in Munich, Germany seeking to
have such plaintiff's patents invalidated. The Company believes the lawsuit to
be without merit or that the Company has meritorious defenses and intends to
defend itself against the lawsuit vigorously.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated:
Three-Month Period Nine-Month Period
Ended Ended
Jun.23, Jun.25, Jun.23, Jun.25,
1996 1995 1996 1995
------ ------ ------ ------
Net sales .......................... 100.0% 100.0% 100.0% 100.0%
Gross margin ....................... 39.9 37.6 38.5 37.6
Engineering, research and
development ........................ 8.5 8.5 8.8 7.5
Selling and marketing .............. 16.9 17.5 17.2 16.8
Administrative and general ......... 7.4 6.7 7.5 6.5
Income from operations ............. 7.1 4.8 5.1 6.8
Settlement of securities
litigation ......................... 6.2 0.2 2.5 0.1
Income before income taxes ......... 0.7 4.6 2.2 6.6
Net income ......................... 0.5 3.4 1.4 4.9
Net sales for the three- and nine-month periods ended June 1996 increased 9.8%
and 12.4% as compared to the same periods of the prior year. Sales of the "Q"
Series of products represented approximately 31.4% and 21.0% of net sales for
the three-month periods ended June 1996 and 1995, respectively, and 32.4% and
16.4% of net sales for the nine-month periods ended June 1996 and 1995,
respectively. Sales of the "C" Series of products represented approximately
33.0% and 42.1% of net sales for the three-month periods ended June 1996 and
1995, respectively, and 31.3% and 44.8% of net sales for the nine-month periods
ended June 1996 and 1995, respectively. The Company believes that sales of the
"C" Series declined due to increased sales of "Q" series products, combined with
an overall decrease in the Company's market share for such products as the
performance of competitors' products has improved. International sales
represented approximately 46.9% and 40.9% for the three- and nine-month periods
ended June 1996, respectively and approximately 45.1% and 36.0% for the three-
and nine-month periods ended June 1995, respectively.
Gross margins for the three-and nine-month periods ended June 1996 increased to
39.9% from 37.6% and to 38.5% from 37.6%, respectively, as compared to the same
periods of the prior year. The improvement in gross margins was due to higher
margins in the sale of peripherals and spare parts and in the printer and oven
product lines, offset somewhat by a decrease in gross margins of the "Q" Series
as a result of expanded sales to contract manufacturers which in turn has
resulted in lower average configured selling prices. The Company anticipates
that gross margins may decrease in the next fiscal quarter due to higher unit
costs associated with anticipated shipments of new products and pricing
pressures that could result from softening market conditions in the electronics
industry.
Engineering, research and development expenses increased $135,000 or 9.4% and
$1,095,000 or 32.1% for the three- and nine-month periods ended June 1996 over
the comparable periods of the prior year. Expenses as a percentage of sales in
the third quarter of fiscal 1996 remained constant at 8.5% as compared to the
same period of the prior year. The overall increase in engineering, research and
development expenses for the first nine months of fiscal 1996 reflects increased
spending to support product development activities related to an expanded "Q"
Series product line, the AVX 400 screen printer and the new "Profile" Series of
reflow ovens. Engineering, research and development expenses are expected to
decrease moderately in the three-month period ended September 1996.
Selling and marketing expenses increased $181,000 or 6.2% and $1,116,000 or
14.6% for the three- and nine-month periods ended June 1996 over the comparable
periods of the prior year. Expenses as a percentage of sales in the third
quarter of fiscal 1996 decreased to 16.9% from 17.5% as compared to the same
period of the prior year. This decrease is largely due to decreased customer
service costs related to supporting the "Q" Series during the product
transition. The increases in selling and marketing expenses for the nine-month
period ended June 1996 were primarily due to higher sales volume, higher
advertising and trade show costs, a change in the Company's sales management
structure and expenses incurred by the Company's subsidiary SMTech Ltd., which
was acquired in January 1995. Commission rates are expected to increase in the
next quarter as sales force personnel approach higher sales quota levels.
Administrative and general expenses increased $283,000 or 26.2% and $894,000 or
30.6% for the three- and nine-month periods ended June 1996 as compared to the
same periods last year. Administrative and general expenses reflect overall
expense increases associated with higher sales levels and increased expenses
incurred by SMTech. The Company anticipates a moderate increase in spending for
administrative and general expenses in the fourth quarter of fiscal 1996.
Income taxes of $51,000 and $433,000 amounted to an effective tax rate of 38.0%
for the three- and nine-month periods ended June 1996 as compared to an
effective tax rate of 26.0% in the same periods of the prior year. Income tax
expense differs from the amount that would result from applying the Federal
statutory tax rate to pretax income primarily due to the effect of state income
taxes. The effective tax rates in the prior periods reflect the benefit of
reductions in the valuation allowance associated with net operating loss and tax
credit carryforwards.
Backlog
As of June 23, 1996, the Company's backlog of orders, based on purchase orders
received and accepted by the Company, was $11.3 million compared to $8.4 million
as of September 24, 1995 and $11.7 million as of June 25, 1995. Included in the
June 25, 1995 backlog was approximately $1.7 million of orders from Samsung
Aerospace Industries Ltd. which was not expected to repeat. It has been the
Company's experience that purchasers of capital equipment have not issued
purchase orders calling for delivery of products over an extended period of time
and, therefore, backlog may not necessarily be indicative of future sales.
Settlement of Securities Litigation
The Company has reached an agreement and executed final settlement documents
with the plaintiffs in the securities litigation against the Company and certain
other defendants pending in the U.S. District Court for the Eastern District of
Pennsylvania. Under this agreement, the Company, together with its directors and
officers liability insurer, will pay an aggregate of $2,450,000 in settlement of
all claims. The agreement is subject to final court approval of the fairness of
the settlement terms. Total cost (including legal fees) to the Company, net of
the amount to be paid by such insurer, will be $1.5 million, of which $.2
million was expensed in fiscal year 1995. For the three- and nine-month periods
ended June 1996, the Company recorded a provision of $1,137,000 ($.16 per share,
net of tax) and $1,287,000 ($.19 per share, net of tax), respectively.
Liquidity and Capital Resources
The Company's working capital as of June 23, 1996 was approximately $22.4
million, including cash balances of $2.1 million. At September 24, 1995, the
Company had working capital of $22.2 million, including cash balances of $1.5
million. During the nine-month period ended June 1996, net cash provided by
operations amounted to $2.1 million, principally due to revenues generated as
part of net income, a decrease in accounts receivable and an increase in accrued
expenses including the accrual for the litigation settlement payable, partially
offset by an increase in inventories.
The Company has an unsecured revolving line of credit which permits borrowing up
to a maximum of $8,000,000 and bears interest at the bank's base rate of
interest or at LIBOR plus 1.40% when the outstanding balance is greater than
$1,000,000. The Company pays a fee on the unused portion of the line of credit.
This line of credit, which expires in February 1998, requires compliance with
various customary operating and reporting covenants and the maintenance of
certain financial ratios. As of June 23, 1996, there were no borrowings
outstanding under this line of credit.
Samsung Agreement
Near the end of the third fiscal quarter, the Company reached an agreement with
Samsung Aerospace Industries, Ltd. ("Samsung"). Under the terms of this
agreement, Samsung has been licensed to become the sole supplier of component
tape feeders, which are currently used on all of the Company's placement
systems. The contract covers a six year period and requires Quad to purchase a
minimum of 40,000 component tape feeders with the value of at least $6.8 million
during the first two years of the contract. The number of tape feeders to be
purchased during the remainder of the contract is to be negotiated. Samsung is
to pay to Quad a total of $300,000 representing a combination of licensing fees
and a reimbursement for expenses incurred in transferring technology to Samsung
for use in production of the component tape feeders.
Patent Infringement Lawsuit
The Company has been informed that The Zevatech Group ("Zevatech") has filed a
patent infringement lawsuit against the Company with the District Court of
Munich, Germany. The complaint alleges infringement of German patents of
Zevatech concerning pick and place assemblers made by the Company. The Company
has responded with an action against Zevatech in the District Court in Munich,
Germany, seeking to have such Zevatech patents invalidated. The Company believes
the Zevatech's lawsuit to be without merit or that the Company has meritorious
defenses and intends to defend itself against the lawsuit vigorously.
Forward Looking Statements
The discussions above includes certain forward looking statements regarding the
Company's expectations of future sales, gross margins, operating expenses,
product introductions and the settlement of securities litigation. As such,
actual results may vary materially from such expectations. Among the meaningful
factors that may affect realization of such expectations are variations in the
level of order bookings which can be affected by general economic conditions and
growth rates in the SMT circuit manufacturing industry, difficulties or delays
in development or improvement of software functionality and performance, the
timing of future software releases, product development delays, failure to
respond adequately either to changes in technology or to customer preferences,
risks of nonpayment of accounts receivable and inability to obtain court
approval of the securities litigation settlement.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.1Agreement dated June 20, 1996 between the Registrant and Samsung
Aerospace Industries, Ltd.
b. The Company did not file any reports on Form 8-K during the
three-month period ended June 23, 1996.
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.
QUAD SYSTEMS CORPORATION
Date: August 6, 1996 By: \s\ Anthony R. Drury
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Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer