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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 March 31, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From to
Commission file number 0-21504
QUAD SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2180139
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 MARYLAND ROAD, WILLOW GROVE, PA 19090
(Address of principal executive offices)
(215) 657-6202
(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 practicable date.
At May 5, 1997, 4,290,052 of the registrant's Common Stock $.03 par value were
outstanding.
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INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1997 (Unaudited)
and September 30, 1996...........................................3
Condensed Consolidated Statements of Income (Unaudited)
for the three and six months ended March 31, 1997 and 1996......4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three and six months ended March 31, 1997 and 1996......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 4. Submission of Matters to a Vote of Security Holders................12
ITEM 6. Exhibits and Reports on Form 8-K...................................12
Signature.............................................................. ....13
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
ASSETS
March 31,September 30,
1997 1996
------- -------
(Unaudited)
Current assets:
Cash and cash equivalents ........................ $ 1,599 $ 2,636
Accounts receivable, net ......................... 19,050 15,076
Inventory ........................................ 18,770 16,312
Deferred income taxes ............................ 2,308 2,450
Other ............................................ 719 825
------- -------
Total current assets ................... 42,446 37,299
Equipment and leasehold improvements
at cost, less accumulated depreciation of $3,164
at March 31, 1997 and $4,865 at September 30, 1996 3,205 2,487
Deferred income taxes .................................. 824 673
Goodwill, net .......................................... 3,062 3,115
Other assets ........................................... 246 249
------- -------
$49,783 $43,823
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ................................... $ 2,300 $ --
Accounts payable ................................. 7,018 4,770
Accrued expenses ................................. 6,320 6,029
Customer deposits ................................ 390 1,301
Current portion of long-term debt ................ 700 700
Deferred service revenue ......................... 967 732
Income taxes payable ............................. 593 450
------- -------
Total current liabilities .............. 18,288 13,982
Long-term debt, less current portion ................... 1,400 1,750
Stockholders' equity:
Preferred Stock, par value $.01 per share;
authorized shares: 1,000,000; no shares issued at
March 31, 1997 and September 30, 1996 ............ -- --
Common Stock, par value $.03 per share; authorized
shares: 15,000,000; shares issued: 4,303,960 at
March 31, 1997 and 4,255,022 at September 30, 1996 129 128
Additional paid-in-capital ....................... 24,018 23,713
Retained earnings ................................ 5,870 4,458
Foreign currency translation ..................... 254 (32)
Less treasury stock, at cost, 13,908 shares at
March 31, 1997 and September 30, 1996 ............ (176) (176)
------- -------
Total stockholders' equity ............ 30,095 28,091
------- -------
$49,783 $43,823
======= =======
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------- ----------------------
March 31, March 31,
1997 1996 1997 1996
---------- --------- --------- ----------
Net sales ......................... $ 21,712 $ 15,834 $ 43,677 $ 32,718
Cost of products sold ............. 13,807 9,362 27,772 20,358
---------- ---------- ---------- ----------
Gross profit ............ 7,905 6,472 15,905 12,360
Operating expenses:
Engineering, research and
development ............. 1,905 1,528 3,466 2,943
Selling and marketing ........ 3,426 2,930 7,119 5,664
Administrative and general ... 1,409 1,283 3,028 2,446
---------- ---------- ---------- ----------
6,740 5,741 13,613 11,053
---------- ---------- ---------- ----------
Income from operations .. 1,165 731 2,292 1,307
Interest expense, net ............. 77 84 120 153
Settlement of securities litigation -- 75 -- 150
---------- ---------- ---------- ----------
Income before income taxes ........ 1,088 572 2,172 1,004
Income tax expense ................ 381 218 760 382
---------- ---------- ---------- ----------
Net income ........................ $ 707 $ 354 $ 1,412 $ 622
========== ========== ========== ==========
Net income per share .............. $ 0.16 $ 0.08 $ 0.31 $ 0.14
========== ========== ========== ==========
Weighted average common and
common equivalent shares ..... 4,519,611 4,288,587 4,484,188 4,296,285
========== ========== ========== ==========
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
------------------
March 31,
1997 1996
------- -------
Operating Activities
Net income ................................................. $ 1,412 $ 622
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization ........................ 809 645
Provision (recovery) for losses on accounts receivable 50 (30)
Provision (benefit) for deferred income taxes ........ (9) 39
Stock option compensation ............................ 5 6
Changes in operating assets and liabilities, net:
Accounts receivable .............................. (4,024) 2,173
Inventory ........................................ (2,458) (2,423)
Other assets ..................................... 199 20
Accounts payable ................................. 2,248 (652)
Accrued expenses ................................. 291 273
Customer deposits ................................ (911) (283)
Deferred service revenue ......................... 235 301
Income taxes payable ............................. 143 (321)
------- -------
Net cash provided by (used in) operating activities ........ (2,010) 370
Investing Activities
Net purchases of equipment and leasehold improvements ...... (1,278) (813)
------- -------
Net cash used in investing activities ...................... (1,278) (813)
Financing Activities
Proceeds from line of credit ............................... 2,300 70
Common Stock issued under employee benefit plans ........... 301 129
Principal payments on long-term debt ....................... (350) (350)
------- -------
Net cash provided by (used in) financing activities ........ 2,251 (151)
Net decrease in cash and cash equivalents .................. (1,037) (594)
Cash and cash equivalents at beginning of period ........... 2,636 1,454
------- -------
Cash and cash equivalents at end of period ................. $ 1,599 $ 860
======= =======
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 Basis of Presentation
The accompanying condensed 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 six months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
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 Inventory
The components of inventory consist of the following (in thousands):
March 31, September 30,
1997 1996
------- -------
Raw materials ... $ 9,927 $ 7,951
Work in process . 3,353 3,400
Finished products 5,490 4,961
======= =======
$18,770 $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 March 31, 1997,
borrowings under this line of credit were $2,300,000.
In April 1997, the Company renegotiated the above credit agreement and obtained
an unsecured revolving lineof credit which permits borrowing up to a maximum of
$10,000,000 with similar terms as in the $8,000,000 credit agreement. In
addition, the Company also obtained a $3.1 million term loan. The proceeds were
used to refinance the old $3.5 million term loan incurred in the acquisition of
SMTech Ltd., which had an
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
outstanding balance of $2.1 million, and to finance furniture and fixtures
purchased in connection with the Company's move to new headquarters in January
1997.
Note 4 Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the three and six months periods ended March
31, 1997 by $.01. There is no impact in earnings per share for the three and six
months periods ended March 31, 1996. The impact of Statement 128 on the
calculation of fully diluted earnings per share for these quarters is not
expected to be material.
Note 5 Supplemental Disclosures to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows (in
thousands):
March 31,
1997 1996
------- -------
Cash paid during the period for:
Interest ....................... $ 154 $ 189
======= =======
Income taxes ................... $ 654 $ 607
======= =======
QUAD SYSTEMS CORPORATION
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 Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
----- ----- ----- -----
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Gross margin ........................ 36.4 40.9 36.4 37.8
Engineering, research and development 8.8 9.7 7.9 9.0
Selling and marketing ............... 15.8 18.5 16.3 17.3
Administrative and general .......... 6.5 8.1 6.9 7.5
Income from operations .............. 5.4 4.6 5.2 4.0
Income before income taxes .......... 5.0 3.6 5.0 3.1
Net income .......................... 3.3 2.2 3.2 1.9
Net sales for the second quarter of fiscal 1997 increased by $5,878,000, an
increase of 37.1% compared to the second quarter of fiscal 1996. For the first
six months of fiscal 1997, net sales increased $10,959,000 or 33.5% compared to
the first six months of fiscal 1996. The following table sets forth certain
product lines sales as a percentage of sales for the periods indicated:
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
------- ------- ------- -------
Assemblers .... $13,864 $11,525 $27,973 $22,130
Screen printers 2,981 1,406 6,445 3,261
Reflow ovens .. 1,000 759 2,173 1,516
The increase in sales of assemblers is a result of increased market penetration
resulting from the sales of new "Q" Series products, the QSX-1 and the QSV-1.
Sales of screen printers have increased as a result of increased market
penetration of the AVX 400 screen printer, which has a higher average selling
price than other screen printer products produced by the Company and as sales of
screen printers under Company's "QuadLine" program have increased. QuadLine is
the Company's marketing program offering the major elements of turnkey SMT
production lines, including screen printers, assemblers and reflow ovens.
International sales represented approximately 36.1% and 34.1% of net sales for
the second quarter of fiscal 1997 and 1996, and 38.7% and 35.4% of net sales for
the first six months of fiscal 1997 and 1996, respectively.
Gross margin for the second quarter of 1997 decreased to 36.4% from 40.9% and to
36.4% from 37.8% when comparing the three and six months ended March 31, 1997 to
March 31,1996. Gross margin for the second and first quarter of fiscal 1997
remained unchanged at 36.4%. Gross margin for the second quarter of fiscal 1997
was negatively affected by lower margins in all major product lines and
increased inventory reserve provisions when compared to the same quarter last
year. Gross margin in the second quarter of fiscal 1996 reflected strong
performance by the "C" Series, which did not repeat in the second quarter of
fiscal 1997. The Company believes that gross margin will improve during the
remainder of fiscal 1997, if the Company is able to achieve expected further
cost reductions on the "Q" Series and a reduction in inventory reserve
provisions.
QUAD SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Engineering, research and development expenses increased $377,000 or 24.7% for
the second quarter of fiscal 1997 over the second quarter of the prior year and
increased $523,000 or 17.8% for the first six months of fiscal 1997 when
compared to the first six months of fiscal 1996. Such expenses, however, as a
percentage of net sales decreased .9% and 1.1% when compared to the second
quarter and first six months of fiscal 1996. R&D expenses include costs
associated with a recently-formed semiconductor group to address newly emerging
packaging technologies and the accelerated spending on other projects. The
Company believes that engineering, research and development expenses will
decrease somewhat for the remainder of the fiscal year.
Selling and marketing expenses increased $496,000 or 16.9% for the second
quarter of fiscal 1997 over the second quarter of last year, in support of a
sales volume increase of 37.1%. For the first six months of fiscal 1997, selling
and marketing expenses increased $1,455,000 or 25.7% for the first six months of
fiscal 1997 when compared to the first six months of fiscal 1996, in support of
a sales volume increase of 33.5% and as a result of a higher overall commission
rate. The Company expects that for the third quarter of fiscal 1997 overall
selling and marketing expenses will remain relatively constant.
Administrative and general expenses increased $126,000 or 9.8% for the second
quarter of fiscal 1997 as compared to the same quarter last year. As a
percentage of sales, these expenses decreased 1.6%. For the first six months of
fiscal 1997, administrative and general expenses increased by $582,000 or 23.8%
compared to the first six months of fiscal 1996. The net increase in these
expenses was the result of increases or decreases in certain components of
expense, as follows: costs of approximately $136,000 associated with the
Company's relocation to new headquarters in January 1997; a $227,000 increase in
allowances for bad debts (associated with higher levels of accounts receivable)
and accounts receivable discounts; a $74,000 increase associated with
professional services; a $61,000 decrease in investor relations costs; and
overall expense increases associated with higher sales levels. The Company
expects that administrative and general expenses will continue at approximately
the same quarterly spending levels as incurred in the second quarter for the
remainder of the fiscal year.
Income taxes of $381,000 and $760,000 represented an effective tax rate of 35.0%
for the second quarter and first six months of fiscal 1997 as compared to an
effective tax rate of 38.0% in the same periods of the prior year. Income tax
expense for 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 its effective tax rate to remain at
approximately 35.0% for the remainder of the fiscal year.
Backlog
As of March 31, 1997, the Company's backlog of orders was $9.2 million, compared
to $12.5 million as of September 30, 1996 and $8.9 million as of March 31, 1996.
Overall bookings for the second quarter of fiscal 1997 was $19.7 million, after
deducting a $1.3 million canceled order booked in the prior quarter, as compared
to bookings of $20.7 million in the first quarter of fiscal 1997 and $21.7
million in the fourth quarter of fiscal 1996. The Company believes that the SMT
industry continues to experience soft order bookings and accordingly, the
Company has experienced soft order bookings since the beginning of fiscal 1997.
The following table sets forth certain backlog information by product line for
the periods indicated (in millions):
March 31,
1997 1996
---- ----
Assemblers $5.4 $5.6
Screen printers .8 1.1
Reflow ovens .8 .8
QUAD SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 March 31, 1997 was approximately $24.2
million, including cash balances of $1.6 million. At September 30, 1996, the
Company had working capital of $23.3 million, including cash balances of $2.6
million. During the second quarter of fiscal 1997, net cash used in operations
amounted to $2.0 million, principally due to increased accounts receivable of
approximately $4.0 million. The increase in accounts receivable was primarily a
result of timing of sales within the quarter. During the second quarter of
fiscal 1997, over 50% of net sales occurred in the third month of the second
quarter of fiscal 1997 compared to 32% in the third month of the fourth quarter
of fiscal 1996 .
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 March 31, 1997,
borrowings under this line of credit were $2,300,000.
In April 1997, the Company renegotiated the above credit agreement and obtained
an unsecured revolving line of credit which permits borrowing up to a maximum of
$10,000,000 with similar terms as in the $8,000,000 credit agreement. In
addition, the Company also obtained a $3.1 million term loan. The proceeds were
used to refinance the old $3.5 million term loan incurred in the acquisition of
SMTech Ltd., which had an outstanding balance of $2.1 million, and to finance
furniture and fixtures purchased in connection with the Company's move to new
headquarters in January 1997.
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.
Account Receivable from Centennial
As of March 31, 1997, the Company's account receivable from Centennial in an
aggregate amount of approximately $350,000 remained unpaid. Quad believes, based
on information presented by Centennial, that the remaining outstanding balance
will be paid in full by Centennial and, therefore, no allowance for bad debt for
this receivable has been reserved in the March 31, 1997 financial statements.
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 answered the
complaint and also 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 March 31, 1997.
QUAD SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Forward Looking Statements
The discussions above regarding the Company's expectations of future sales,
gross margins, operating expenses, The discussions above regarding the Company's
expectations of future sales, gross margin, operating expenses, scheduling of
new product introductions and the ability of the Company to react to new market
opportunities constitute forward-looking statements. 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 or changes in forecasted costs.
QUAD SYSTEMS CORPORATION
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
On March 5, 1997, the Company held its Annual Meeting of Stockholders.
At the meeting, the stockholders voted upon the following matter:
1. Election of six directors.
In the election of directors, the holders of Common Stock voted as
follows:
Name Votes For Votes Withheld
David W. Smith 3,898,111 49,989
David H. Young 3,898,730 49,370
Lorin J. Randall 3,898,730 49,370
Robert P. Pinkas 3,898,730 49,370
James R. Bergman 3,898,730 49,370
Vahram V. Erdekian 3,898,710 49,390
Item 6. Exhibits and Reports on Form 8-K.
a. The Company did not file any reports on Form 8-K during the period
covered by this report.
QUAD SYSTEMS CORPORATION
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: May 7, 1997 By: \s\ Anthony R. Drury
------------------------
Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer