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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 June 30, 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 July 29, 1997, 4,321,860 of the registrant's Common Stock, par value $.03,
were outstanding.
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QUAD SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1997 (Unaudited)
and September 30, 1996...........................................3
Condensed Consolidated Statements of Income (Unaudited)
for the three and nine months ended June 30, 1997 and 1996......4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three and nine months ended June 30, 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 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
June 30, September 30,
1997 1996
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents .......................... $ 1,895 $ 2,636
Accounts receivable, net ........................... 18,081 15,076
Inventory .......................................... 21,181 16,312
Deferred income taxes .............................. 2,313 2,450
Other .............................................. 907 825
-------- --------
Total current assets ..................... 44,377 37,299
Equipment and leasehold improvements
at cost, less accumulated depreciation of $3,527
at June 30, 1997 and $4,865 at September 30, 1996 .. 3,129 2,487
Deferred income taxes .................................... 826 673
Goodwill, net ............................................ 3,028 3,115
Other assets ............................................. 271 249
-------- --------
$ 51,631 $ 43,823
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ..................................... $ 5,925 $ --
Accounts payable ................................... 4,638 4,770
Accrued expenses ................................... 5,524 6,029
Customer deposits .................................. 274 1,301
Current portion of long-term debt .................. 620 700
Deferred service revenue ........................... 1,151 732
Income taxes payable ............................... 520 450
-------- --------
Total current liabilities ................ 18,652 13,982
Long-term debt, less current portion ..................... 2,480 1,750
Stockholders' equity:
Preferred Stock, par value $.01 per share;
authorized shares: 1,000,000; no shares issued at
June 30, 1997 and September 30, 1996 ............ -- --
Common Stock, par value $.03 per share; authorized
shares: 15,000,000; shares issued: 4,335,768 at
June 30, 1997 and 4,255,022 at September 30, 1996 130 128
Additional paid-in-capital ......................... 24,234 23,713
Retained earnings .................................. 5,997 4,458
Foreign currency translation ....................... 314 (32)
Less treasury stock, at cost, 13,908 shares at
June 30, 1997 and September 30, 1996 ............ (176) (176)
-------- --------
Total stockholders' equity .............. 30,499 28,091
-------- --------
$ 51,631 $ 43,823
======== ========
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales ......................... $ 16,975 $ 18,382 $ 60,652 $ 51,100
Cost of products sold ............. 10,213 11,054 37,985 31,412
---------- ---------- ---------- ----------
Gross profit ............ 6,762 7,328 22,667 19,688
Operating expenses:
Engineering, research and
development ............. 1,651 1,565 5,117 4,508
Selling and marketing ........ 3,383 3,102 10,502 8,766
Administrative and general ... 1,420 1,365 4,448 3,811
---------- ---------- ---------- ----------
6,454 6,032 20,067 17,085
---------- ---------- ---------- ----------
Income from operations .. 308 1,296 2,600 2,603
Interest expense, net ............. 113 24 233 177
Settlement of securities litigation -- 1,137 -- 1,287
---------- ---------- ---------- ----------
Income before income taxes ........ 195 135 2,367 1,139
Income tax expense ................ 68 51 828 433
---------- ---------- ---------- ----------
Net income ........................ $ 127 $ 84 $ 1,539 $ 706
========== ========== ========== ==========
Net income per share .............. $ 0.03 $ 0.02 $ 0.34 $ 0.16
========== ========== ========== ==========
Weighted average common and
common equivalent shares ..... 4,462,393 4,327,578 4,478,404 4,309,619
========== ========== ========== ==========
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
------------------
June 30,
1997 1996
------- -------
Operating Activities
Net income ................................................. $ 1,539 $ 706
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................ 1,292 1,017
Provision (recovery) for losses on accounts receivable 23 (2)
Provision (benefit) for deferred income taxes ........ (16) 31
Stock option compensation ............................ 5 9
Changes in operating assets and liabilities, net:
Accounts receivable ............................. (3,028) 1,229
Inventory ....................................... (4,869) (2,509)
Other assets .................................... 38 (316)
Accounts payable ................................ (132) (242)
Accrued expenses ................................ (505) 1,842
Customer deposits ............................... (1,027) 573
Deferred service revenue ........................ 419 156
Income taxes payable ............................ 70 (353)
------- -------
Net cash provided by (used in) operating activities ........ (6,191) 2,141
Investing Activities
Net purchases of equipment and leasehold improvements ...... (1,643) (1,239)
------- -------
Net cash used in investing activities ...................... (1,643) (1,239)
Financing Activities
Proceeds from line of credit ............................... 5,925 --
Common Stock issued under employee benefit plans ........... 518 257
Proceeds from term loan ................................... 3,100 --
Principal payments on long-term debt ....................... (2,450) (525)
------- -------
Net cash provided by (used in) financing activities ........ 7,093 (268)
------- -------
Net increase (decrease) in cash and cash equivalents ....... (741) 634
Cash and cash equivalents at beginning of period ........... 2,636 1,454
------- -------
Cash and cash equivalents at end of period ................. $ 1,895 $ 2,088
======= =======
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 stated that its quarterly financial
reporting periods end 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 stated 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 nine months ended June 30, 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, Sept. 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
Prior to April 1997, the Company had an unsecured revolving line of credit that
permitted draws up to a maximum of $8,000,000 and bore interest at the bank's
base rate of interest or, at the Company's option, LIBOR plus 1.40% when the
outstanding loan balance was greater than $1,000,000. The Company paid a fee on
the unused portion of the line of credit. This line of credit also contained
various customary operating and reporting covenants and required maintenance of
certain financial ratios. In April 1997, the Company renegotiated the above
credit agreement and obtained an unsecured revolving line of credit that permits
draws up to a maximum of $10,000,000 and otherwise on similar terms as in the
$8,000,000 credit agreement. As of June 30, 1997, total borrowings under this
line of credit were $5,925,000.
In addition, the Company also obtained a $3.1 million term loan. The proceeds of
the term loan were used to refinance an existing $3.5 million term loan incurred
in the acquisition of SMTech Ltd., which at the time of refinancing 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.
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
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 in the period ending
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. There is no expected
impact on earnings per share for the three month period ended June 30, 1997. The
impact for the nine months period ended June 30, 1997 is expected to result in
an increase in primary earnings per share by $.01. The impact for the three and
nine months periods ended June 30, 1996 is expected to result in an increase in
primary earnings per share by $.02. 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 Company's 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 states 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 stated reporting dates. The following table sets forth certain financial
data as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
------ ------ ------ ------
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Gross margin ........................ 39.8 39.9 37.4 38.5
Engineering, research and development 9.7 8.5 8.4 8.8
Selling and marketing ............... 19.9 16.9 17.3 17.2
Administrative and general .......... 8.4 7.4 7.3 7.5
Income from operations .............. 1.8 7.1 4.3 5.1
Settlement of securities litigation . -- 6.2 -- 2.5
Income before income taxes .......... 1.1 0.7 3.9 2.2
Net income .......................... 0.7 0.5 2.5 1.4
Net sales for the third quarter of fiscal 1997 decreased by $1,407,000, a
decrease of 7.7% compared to the third quarter of fiscal 1996. For the first
nine months of fiscal 1997, net sales increased $9,552,000 or 18.7% compared to
the first nine months of fiscal 1996. The following table sets forth certain
product lines sales for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
------- ------- ------- -------
Assemblers ............. $ 8,930 $12,490 $36,902 $34,688
Screen printers ........ 3,787 2,337 10,232 5,597
Reflow ovens ........... 961 722 3,134 2,238
The decrease in net sales in the third quarter of fiscal 1997 is a result of
below plan bookings and the fact that some of the bookings for the quarter were
not available for delivery until future periods. Assembler sales for the third
quarter of fiscal 1997, when compared to the same quarter of last year, included
sales of new products: the QSX-1, QSV-1, APS-1 and the recently introduced
QSA-30. The QSA-30 is a relatively low-priced, high throughput assembler
providing customers with a low cost per placement machine. 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. International sales represented
approximately 49.7% and 46.9% of net sales for the third quarter of fiscal 1997
and 1996, and 41.8% and 40.9% of net sales for the first nine months of fiscal
1997 and 1996, respectively.
Gross margin for the third quarter of fiscal 1997 was 39.8% compared to 39.9% in
the third quarter of fiscal 1996. Gross margin for the first nine months of
fiscal 1997 decreased to 37.4% from 38.5% when compared to same period last
year. This decrease was primarily attributable to a continuing shift in product
mix from the "C" Series to the "Q" Series. Gross margin for the third quarter of
fiscal 1997 improved by 3.4% from the 36.4% gross margin of last quarter. This
improvement was primarily due to reductions in estimated inventory reserve
provisions. The Company believes that gross margin for the fourth quarter will
decrease from the third quarter of fiscal 1997 due to expected increased sales
of the QSA-30, which contributes lower margins as it is manufactured by a third
party. Additionally, the Company expects to ship some orders which for strategic
reasons will carry lower margins.
QUAD SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Engineering, research and development expenses increased $86,000 or 5.5% for the
third quarter of fiscal 1997 over the third quarter of the prior year and
increased $609,000 or 13.5% for the first nine months of fiscal 1997 when
compared to the same period last year. The increase in R&D expenses for the
first nine months of fiscal 1997 includes costs associated with a
recently-formed semiconductor group the Company established to pursue
opportunities in newly emerging packaging technologies, spending on other
specific projects and relocation costs. The Company believes that engineering,
research and development expenses will increase somewhat in the fourth quarter
of fiscal 1997 over the third quarter of fiscal 1997.
Selling and marketing expenses increased $281,000 or 9.1% for the third quarter
of fiscal 1997 over the third quarter of last year due to increased spending in
the field service department. For the first nine months of fiscal 1997, selling
and marketing expenses increased $1,736,000 or 19.8% when compared to the first
nine months of fiscal 1996, in support of a sales volume increase of 18.7%. The
Company expects that for the fourth quarter of fiscal 1997 overall selling and
marketing expenses, excluding commissions, will remain relatively constant.
Administrative and general expenses increased $55,000 or 4.0% for the third
quarter of fiscal 1997 as compared to the same quarter last year. For the first
nine months of fiscal 1997, administrative and general expenses increased by
$637,000 or 16.7% compared to the first nine months of fiscal 1996. The net
increase in these expenses was the result of increases or decreases in certain
components of expense, as follows: a $251,000 increase in allowances for bad
debts (associated with higher levels of accounts receivable) and discounts on
early payments of accounts receivable; costs of approximately $147,000
associated with the Company's relocation to new headquarters; severance costs of
approximately $100,000 for a reduction in workforce in June; an $89,000 increase
associated with professional services; a $70,000 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 level as incurred in the third quarter
for the fourth quarter of the fiscal year.
Income taxes of $68,000 and $828,000 represented an effective tax rate of 35.0%
for the third quarter and first nine 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 June 30, 1997, the Company's backlog of orders was $12.6 million, compared
to $12.5 million as of September 30, 1996 and $11.3 million as of June 30, 1996.
Overall bookings for the third quarter of fiscal 1997 were $20.4 million as
compared to bookings of $19.7 million in the second quarter of fiscal 1997,
which is net of a $1.3 million canceled order booked in the prior quarter, and
bookings of $20.7 million in the first quarter of fiscal 1997. The following
table sets forth certain backlog information by product line for the periods
indicated (in millions):
June 30,
1997 1996
---- ----
Assemblers $7.2 $7.4
Screen printers 1.9 1.1
Reflow ovens .7 .9
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 June 30, 1997 was approximately $25.7
million, including cash balances of $1.9 million. At September 30, 1996, the
Company had working capital of $23.3 million, including cash balances of $2.6
million. During the first nine months of fiscal 1997, net cash used in
operations amounted to $6.2 million, principally due to increased inventory of
approximately $4.9 million and accounts receivable of approximately $3.0
million. The build up of inventory was partially the result of below plan sales
for the third quarter. The increase in accounts receivable was primarily due to
a combination of increased sales with extended payment terms and timing of sales
within the quarter. During the third quarter of fiscal 1997, over 50% of net
sales occurred in the third month of the quarter compared to 32% in the third
month of the fourth quarter of fiscal 1996.
Since April 1997, the Company has had an unsecured revolving line of credit that
permits borrowing up to a maximum of $10,000,000 and bears interest at the
bank's base rate of interest or, at the Company's option, LIBOR plus 1.30%. The
Company pays a fee on the unused portion of the line of credit. This credit
agreement expires in April 2000. This line of credit also contains various
customary operating and reporting covenants and requires maintenance of certain
financial ratios. As of June 30, 1997, borrowings under this line of credit were
$5,925,000.
In April 1997, the Company also obtained a $3.1 million term loan. The proceeds
were used to refinance an existing $3.5 million term loan incurred in the
acquisition of SMTech Ltd., which at the time of refinancing 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 June 30, 1997, the Company's account receivable from Centennial in an
aggregate amount of approximately $297,000 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 June 30, 1997 financial statements.
Forward Looking Statements
The discussions above regarding the Company's expectations of future sales,
gross margin, operating expenses, results of operations, 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 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: August 4, 1997 By: \s\ Anthony R. Drury
------------------------
Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer