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 December 29, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 MARYLAND ROAD, WILLOW GROVE, PA 19090
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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 periods 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.
At January 28, 1997, 4,261,603 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 December 31, 1996 (Unaudited)
and September 30, 1996.............................................3
Condensed Consolidated Statements of Income (Unaudited)
for the three months ended December 31, 1996 and 1995..............4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended December 31, 1996 and 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
Signature..................................................................12
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
ASSETS
December 31, September 30,
1996 1996
--------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents ............................................. $ 722 $ 2,636
Accounts receivable, net .............................................. 18,402 15,076
Inventories ........................................................... 16,664 16,312
Deferred income taxes ................................................. 2,304 2,450
Other ................................................................. 957 825
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Total current assets ........................................ 39,049 37,299
Equipment and leasehold improvements
at cost, less accumulated depreciation of $4,551
at December 31, 1996 and $4,865 at September 30, 1996 ................. 3,059 2,487
Deferred income taxes ....................................................... 823 673
Goodwill, net ............................................................... 3,279 3,115
Other assets ................................................................ 285 249
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$46,495 $43,823
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ........................................................ $ 2,000 $ --
Accounts payable ...................................................... 5,090 4,770
Accrued expenses ...................................................... 5,694 6,029
Customer deposits ..................................................... 593 1,301
Current portion of long-term debt ..................................... 700 700
Deferred service revenue .............................................. 642 732
Income taxes payable .................................................. 637 450
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Total current liabilities ................................... 15,356 13,982
Long-term debt, less current portion ........................................ 1,575 1,750
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at December 31, 1996 and September 30, 1996 -- --
Common stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,271,652 at December 31, 1996
and 4,255,022 at September 30, 1996 .............................. 128 128
Additional paid-in-capital ............................................ 23,836 23,713
Retained earnings ..................................................... 5,163 4,458
Foreign currency translation .......................................... 613 (32)
Less treasury stock, at cost, 13,908 shares at December 31, 1996
and September 30, 1996 .......................................... (176) (176)
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Total stockholders' equity ................................. 29,564 28,091
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$46,495 $43,823
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended
-----------------------
December 31,
1996 1995
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Net sales ......................... $ 21,965 $ 16,884
Cost of products sold ............. 13,965 10,996
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Gross profit ............ 8,000 5,888
Operating expenses:
Engineering, research and
development ............. 1,561 1,415
Selling and marketing ........ 3,693 2,734
Administrative and general ... 1,619 1,163
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6,873 5,312
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Income from operations ............ 1,127 576
Interest expense, net ............. 43 69
Settlement of securities litigation -- 75
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Income before income taxes ........ 1,084 432
Income tax expense ................ 379 164
---------- ----------
Net income ........................ $ 705 $ 268
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Net income per share .............. $ 0.16 $ 0.06
========== ==========
Weighted average common and
common equivalent shares ..... 4,446,422 4,310,467
========== ==========
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
-------------------
December 31,
1996 1995
-------- --------
Operating Activities
Net income ................................................. $ 705 $ 268
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization ........................ 391 297
Provision (recovery) for losses on accounts receivable 58 (35)
Provision (benefit) for deferred income taxes ........ (4) 16
Stock option compensation ............................ 5 3
Changes in operating assets and liabilities, net:
Accounts receivable .............................. (3,346) 686
Inventories ...................................... (352) (1,641)
Other assets ..................................... 94 (117)
Accounts payable ................................. 320 (441)
Accrued expenses ................................. 615 150
Employee compensation and related taxes .......... (950) (422)
Customer deposits ................................ (708) (46)
Deferred service revenue ......................... (90) 194
Income taxes payable ............................. 187 (292)
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Net cash used by operating activities ...................... (3,075) (1,380)
Investing Activities
Net purchases of equipment and leasehold improvements ...... (782) (362)
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Net cash used by investing activities ...................... (782) (362)
Financing Activities
Proceeds from line of credit ............................... 2,000 1,120
Common Stock issued under employee benefit plans ........... 118 126
Principal payments on long-term debt ....................... (175) (350)
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Net cash provided by financing activities .................. 1,943 896
Net decrease in cash and cash equivalents .................. (1,914) (846)
Cash and cash equivalents at beginning of period ........... 2,636 1,454
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Cash and cash equivalents at end of period ................. $ 722 $ 608
======= =======
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.
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above indicated reporting dates.
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. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month periods ended December 31,
1996 are not necessarily indicative of the results that may be expected for the
year ended September 30, 1997.
It is suggested that the Company's Annual Report on Form 10-K containing
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial statements for the fiscal year ended September 30,
1996, together with notes thereto, be read in conjunction with this document.
Note 2 Inventories
The components of inventory consist of the following (in thousands):
December 31, September 30,
1996 1996
------------- --------------
Raw materials $ 8,823 $ 7,951
Work in process 2,939 3,400
Finished products 4,902 4,961
============= ==============
$ 16,664 $ 16,312
============= ==============
Note 3 Line of Credit
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 the Company's option, 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 credit agreement expires in February 1998. This line
of credit also contains various customary operating and reporting covenants and
requires maintenance of certain financial ratios. As of December 31, 1996,
borrowings under this line of credit were $2,000,000.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
Note 4 Supplemental Disclosures to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows
(in thousands):
December 31, September 30,
1996 1995
------------- -------------
Cash paid during the period:
Interest paid .............................. $ 63 $ 97
============= =============
Income taxes paid .......................... $ 242 $ 420
============= =============
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above indicated reporting dates. The following table sets
forth certain financial data as a percentage of net sales for the periods
indicated:
Three-Month Period Ended
December 31,
1996 1995
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Net sales 100.0% 100.0%
Gross margin 36.4 34.9
Engineering, research and development 7.1 8.4
Selling and marketing 16.8 16.2
Administrative and general 7.4 6.9
Income from operations 5.1 3.4
Income before income taxes 4.9 2.6
Net income 3.2 1.6
Net sales for the first quarter of fiscal 1997 increased 30.1% as compared to
the same quarter of the prior year. Sales of the "Q" Series of products
represented approximately 45.9% and 28.1% of net sales for the first quarter of
fiscal 1997 and 1996, respectively. Sales of the "C" Series of products
represented approximately 18.8% and 33.1% of net sales for the first quarter of
fiscal 1997 and 1996, respectively. The increase in sales of the "Q" Series is a
result of increased market penetration, as well as shipments of new "Q" Series
products, the QSX-1 and the QSV-1. The Company believes that the sales of the
"C" Series have decreased as a result of the introduction of the "Q" Series,
combined with an overall decrease in the Company's market share for such
products as the performance of competitors' products have improved. The Company
expects further decreases in sales of the "C" Series as market penetration of
the QSV-1 increases. Sales of screen printers increased to 15.8% of net sales
for the first quarter of fiscal 1997 from 11.0% of net sales during the same
quarter of the prior year. Sales of screen printers have increased as sales
under the Company's marketing program "QuadLine" have expanded from
approximately 27% in the first quarter of 1996 to approximately 45% in the first
quarter of 1997 and as a result of the introduction of the AVX 400 screen
printer, which has a higher average selling price than other screen printer
products produced by the Company. QuadLine is the Company's marketing program
offering the major elements of turnkey Surface Mount Technology ("SMT")
production lines, including screen printers, assemblers and reflow ovens.
International sales represented approximately 41.2% and 40.6% of net sales for
the first quarter of fiscal 1997 and 1996, respectively.
Gross margin for the first quarter of 1997 increased to 36.4% from 34.9% as
compared to the same quarter of the prior year, although gross margin decreased
from 39.0%, in the fourth quarter of fiscal 1996. Gross margin improved over the
first quarter of fiscal 1996 primarily from the absence of sales of component
delivery systems to Samsung Aerospace Industries Ltd. at lower margins compared
to other product sales in prior periods. Gross margin compared to the fourth
quarter of 1996, however, was negatively affected by a softening of market
conditions and lower margins on sales of the recently introduced QSX-1 and
QSV-1. The Company has historically experienced low margins on new product
introductions, pending establishment of initial market penetration and
attainment of production levels to achieve economies of scale. However, the
Company believes gross margin may begin to improve during the second quarter of
fiscal 1997 as a result anticipated cost reductions on the "Q" Series associated
with forecasted higher productions levels on these newer products. The Company's
expectations may vary materially from actual results. See "Forward Looking
Statements" below.
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Engineering, research and development expenses increased $146,000 or 10.3% for
the first quarter of fiscal 1997 over the first quarter of the prior year. Such
expenses, however, as a percentage of net sales decreased 1.3% when compared to
the first quarter of fiscal 1996. R&D expenses include a recently formed
internal semiconductor marketing and engineering group to address newly emerging
packaging technologies. The Company believes that costs associated with this
group, coupled with accelerated spending on other projects, will result in a
second quarter R&D spending increase of 20% to 30% over the first quarter of
fiscal 1997.
Selling and marketing expenses increased $959,000 or 35.1% for the first quarter
of fiscal 1997 over the first quarter of last year in support of a sales volume
increase of 30.1% and as a result of a higher overall commission rate associated
with international sales. The Company expects that for the second quarter of
fiscal 1997 overall selling and marketing expenses will remain relatively
constant.
Administrative and general expenses increased $456,000 or 39.2% for the first
quarter of fiscal 1997 as compared to the same quarter last year. The increase
is mostly due to costs incurred in connection with the Company's relocation and
consolidation to a new operating and manufacturing facility, legal costs
associated with the patent litigation discussed below, increased reserves for
bad debts as a result of increased accounts receivable in the first quarter of
fiscal 1997 when compared to the first quarter of fiscal 1996 and other costs
not expected to repeat. The Company believes that administrative expenses will
decrease in the second quarter of fiscal 1997 due to the absence of relocation
and consolidation costs and other costs not expected to repeat.
Income taxes of $379,000 amounted to an effective tax rate of 35.0% for the
first quarter of fiscal 1997 as compared to an effective tax rate of 38.0% in
the same quarter of the prior year. Income tax expense for the first quarter of
fiscal 1997 differs from the amount that would result from applying the Federal
statutory tax rate to pretax income primarily due to permanent differences in
taxable income versus book income, partially offset by benefits realized from
the Company's foreign sales corporation and from research and development tax
credits. The Company expects the effective tax rate to remain at approximately
35% for the remainder of the fiscal year.
Backlog
As of December 31, 1996, the Company's backlog of orders was $11.2 million,
compared to $12.5 million as of September 30, 1996 and $8.7 million as of
December 31, 1995. Backlog includes $5.8 million and $2.0 million of "Q" Series
and "C" Series orders, respectively, as of December 31, 1996 and $5.8 million
and $3.2 million of "Q" Series and "C" Series orders, respectively, as of
September 30, 1996. The remainder of backlog consists of other products. 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.
Backlog therefore may not necessarily be indicative of future sales.
Liquidity and Capital Resources
The Company's working capital as of December 31, 1996 was approximately $23.7
million, including cash balances of $700 thousand. At September 30, 1996, the
Company had working capital of $23.3 million, including cash balances of $2.6
million. During the first quarter of fiscal 1997, net cash used in operations
amounted to $3.1 million, principally due to increased accounts receivable of
approximately $3.3 million. The increase in accounts receivable was primarily a
result of timing of sales within the quarter. During the first quarter of fiscal
1997, 45% of net sales occurred in the third month of the quarter compared to
32% in the third month of last quarter .
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 the Company's option, 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 credit agreement expires in February 1998. This line
of credit also contains various customary operating and reporting covenants and
requires maintenance of certain financial ratios. As of December 31, 1996,
borrowings under this line of credit were $2,000,000.
The Company believes that cash flows from operations, access to its line of
credit and other current resources will provide adequate financing for the next
year.
Litigation- German Patent Infringement Claim
In July 1996, the Company was named a defendant in a patent infringement action
filed by The Zevatech Group ("Zevatech") in Munich, Germany. The complaint
alleges that products manufactured by the Company infringed on Zevatech's German
patents relating to pick and place assemblers. The Company has responded with an
action against Zevatech in Munich, Germany seeking to have such Zevatech's
patents invalidated. Management believes the claim of Zevatech to be without
merit or that the Company has meritorious defenses and the Company intends to
vigorously defend itself against the claim. Accordingly, no provision for this
lawsuit was recorded through December 31, 1996.
Forward Looking Statements
The discussions above regarding the Company's expectations of future sales,
gross margins, operating expenses, product introductions and the outlook for the
patent infringement litigation include certain forward-looking statements on
these subjects. As such, actual results may vary materially from such
expectations. Among the meaningful factors that may affect the 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
manufacturing industry, difficulties or delays in software functionality and
performance, the timing of future software releases, product development delays
or performance problems, failure to respond adequately either to changes in
technology or to customer preferences, risks of nonpayment of accounts
receivable, changes in forecasted costs or uncertainties inherent in the outcome
of the patent infringement litigation, including the possibility of liability
thereunder.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit 27- Financial Data Schedule
b. The Company did not file any reports on Form 8-K during the period
covered by this report.
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.
QUAD SYSTEMS CORPORATION
Date: January 30, 1997 By: \s\ Anthony R. Drury
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Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer