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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, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From to
Commission file number 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 practical date.
At August 10, 1998, 4,384,798 of the registrant's Common Stock $.03 par value
were outstanding.
QUAD SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998 (Unaudited)
and September 30, 1997...........................................3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and nine months ended June 30, 1998 and 1997.......4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three and nine months ended June 30, 1998 and 1997.......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,
1998 1997
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents ............................................. $ 1,755 $ 1,981
Accounts receivable, net .............................................. 19,055 20,234
Inventory ............................................................. 21,148 17,097
Deferred income taxes ................................................. 3,130 2,593
Other ................................................................. 1,172 983
Income taxes receivable ............................................... 643 --
-------- --------
Total current assets ........................................ 46,903 42,888
Equipment and leasehold improvements
at cost, less accumulated depreciation of $4,860
at June 30, 1998 and $3,937 at September 30, 1997 ..................... 3,626 3,205
Deferred income taxes ....................................................... 445 699
Goodwill, net ............................................................... 2,637 2,831
Other assets ................................................................ 564 414
-------- --------
$ 54,175 $ 50,037
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ........................................................ $ 8,200 $ 4,920
Accounts payable ...................................................... 7,330 3,908
Accrued expenses ...................................................... 5,660 5,526
Customer deposits ..................................................... 477 696
Current portion of long-term debt ..................................... 634 620
Deferred service revenue .............................................. 1,290 1,035
Income taxes payable .................................................. -- 229
-------- --------
Total current liabilities ................................... 23,591 16,934
Long-term debt, less current portion ........................................ 1,920 2,325
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at June 30, 1998 and September 30, 1997 -- --
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,398,706 at June 30, 1998
and 4,337,467 at September 30, 1997 ............................... 132 130
Additional paid-in-capital ............................................ 24,609 24,345
Retained earnings ..................................................... 3,851 6,445
Foreign currency translation .......................................... 248 34
Less treasury stock, at cost, 13,908 shares at June 30, 1998
and September 30, 1997 .......................................... (176) (176)
-------- --------
Total stockholders' equity ................................. 28,664 30,778
-------- --------
$ 54,175 $ 50,037
======== ========
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,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales .................................... $ 17,606 $ 16,975 $ 59,164 $ 60,652
Cost of products sold ........................ 12,617 10,213 40,260 37,985
----------- ----------- ----------- -----------
Gross profit ....................... 4,989 6,762 18,904 22,667
Operating expenses:
Engineering, research and
development ........................ 1,830 1,651 5,572 5,117
Selling and marketing ................... 3,614 3,383 11,159 10,502
Administrative and general .............. 1,292 1,420 5,260 4,448
----------- ----------- ----------- -----------
6,736 6,454 21,991 20,067
----------- ----------- ----------- -----------
Income (loss) from operations ...... (1,747) 308 (3,087) 2,600
Interest expense, net ........................ 159 113 491 233
----------- ----------- ----------- -----------
Income (loss) before income taxes ............ (1,906) 195 (3,578) 2,367
Income tax expense (benefit) ................. (511) 68 (984) 828
----------- ----------- ----------- -----------
Net income (loss) ............................ $ (1,395) $ 127 $ (2,594) $ 1,539
=========== =========== =========== ===========
Net income (loss) per share:
Basic ................................... $ (0.32) $ 0.03 $ (0.60) $ 0.36
Diluted ................................. $ (0.32) $ 0.03 $ (0.60) $ 0.34
Weighted average number of shares outstanding:
Basic ................................... 4,364,706 4,299,348 4,357,856 4,278,524
Diluted ................................. 4,364,706 4,462,393 4,357,856 4,478,404
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
------------------
June 30,
1998 1997
------- -------
Operating Activities
Net income (loss) ..................................... $(2,594) $ 1,539
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization ................... 1,042 1,292
Provision for losses on accounts receivable ..... 171 23
Deferred income tax benefit ..................... (283) (16)
Stock option compensation ....................... -- 5
Changes in operating assets and liabilities, net:
Accounts receivable ........................ 1,008 (3,028)
Inventory .................................. (4,051) (4,869)
Other assets ............................... (221) 38
Income taxes receivable ..................... (643) --
Accounts payable ........................... 3,422 (132)
Accrued expenses ........................... 134 (505)
Customer deposits .......................... (219) (1,027)
Deferred service revenue ................... 255 419
Income taxes payable ....................... (229) 70
------- -------
Net cash used in operating activities ................. (2,208) (6,191)
Investing Activities
Purchases of equipment and leasehold improvements ..... (1,093) (1,643)
------- -------
Net cash used in investing activities ................. (1,093) (1,643)
Financing Activities
Proceeds from line of credit .......................... 3,280 5,925
Common Stock issued under employee benefit plans ...... 266 518
Procceeds from term loan .............................. -- 3,100
Principal payments on long-term debt .................. (471) (2,450)
------- -------
Net cash provided by financing activities ............. 3,075 7,093
------- -------
Net decrease in cash and cash equivalents ............. (226) (741)
Cash and cash equivalents at beginning of period ...... 1,981 2,636
------- -------
Cash and cash equivalents at end of period ............ $ 1,755 $ 1,895
======= =======
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 three and nine months ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 1998.
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,
1997, together with notes thereto, be read in conjunction with this document.
Note 2 Inventory
The components of inventory consist of the following (in thousands):
June 30, September 30,
1998 1997
------- -------
Raw materials ... $ 9,841 $ 8,478
Work in process . 3,134 2,017
Finished products 8,173 6,602
------- -------
$21,148 $17,097
======= =======
Note 3 Line of Credit
The Company has a revolving line of credit agreement which permits borrowing up
to a maximum of $10,000,000. During the first quarter of fiscal 1998, the
Company had obtained an increase to its existing line of credit, whereby an
additional $2,500,000 was available, expiring on April 30, 1998. During April
1998, the Company obtained an extension, whereby the $2,500,000 available funds
expire on October 31, 1998.
Note 4 Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to fully
diluted earnings per share. All earnings (loss) per share amounts for all
periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended Nine Months Ended
------------------------ ------------------------
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Numerator:
Net income (loss) ..................... $ (1,395) $ 127 $ (2,594) $ 1,539
========= ========== ========= ==========
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares . 4,364,706 4,299,348 4,357,856 4,278,524
Effect of dilutive securities:
Employee stock options ............ -- 162,367 -- 199,202
Employee stock purchase plan ...... -- 678 -- 678
--------- ---------- --------- ----------
Dilutive potential Common Stock ....... -- 163,045 -- 199,880
Denominator for diluted earnings (loss)
per share-weighted average shares . 4,364,706 4,462,393 4,357,856 4,478,404
========= ========== ========= ==========
Basic earnings (loss) per share ....... $ (0.32) $ 0.03 $ (0.60) $ 0.36
========= ========== ========= ==========
Diluted earnings (loss) per share ..... $ (0.32) $ 0.03 $ (0.60) $ 0.34
========= ========== ========= ==========
Weighted average options to purchase 745,046 and 817,189 shares of Common Stock
for the three and nine months ended June 30, 1998, respectively, were not
included in the computation of diluted earnings (loss) per share because they
were antidilutive. Weighted average options to purchase 246,864 and 148,891
shares of Common Stock for the three and nine months ended June 30, 1997,
respectively, were not included in the computation of diluted earnings (loss)
per share because they were antidilutive.
Note 5 Supplemental Disclosures to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows (in
thousands):
June 30,
1998 1997
------ ------
Schedule of noncash activity:
Equipment acquired under capital lease $ 80 $ --
====== ======
Cash paid during the period for:
Interest ............................. $ 518 $ 299
====== ======
Income taxes ......................... $ 166 $ 952
====== ======
Note 6 License Agreement
In March 1998, the Company reached an agreement with MPM Corporation ("MPM") to
provide the Company with a paid-up, non-exclusive, non-transferable, perpetual
license for inventions covered by certain patents and other intellectual
property held by MPM. These inventions are currently used in certain of the
Company's screen printers. The Company agreed to pay to MPM a one-time license
fee of $1,000,000 for the right to use those inventions. The Company has
recognized the entire amount of this fee in the second quarter of fiscal 1998.
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 Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
----- ----- ----- -----
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Gross margin ........................ 28.3 39.8 32.0 37.4
Engineering, research and development 10.4 9.7 9.4 8.4
Selling and marketing ............... 20.5 19.9 18.9 17.3
Administrative and general .......... 7.3 8.4 8.8 7.3
Income (loss) from operations ....... (9.9) 1.8 (5.2) 4.3
Income (loss) before income taxes ... (10.8) 1.1 (6.0) 3.9
Net income (loss) ................... (7.9) 0.7 (4.4) 2.5
Net sales of $17.6 million for the third quarter of fiscal 1998 increased
slightly compared to the third quarter of fiscal 1997, while for the nine months
of fiscal 1998, net sales decreased $1,488,000 or 2.5% compared to the first
nine months of fiscal 1997. The following table sets forth sales of certain
product lines for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
Assemblers ....... $ 9,358 $ 8,930 $34,535 $36,902
Screen printers .. 4,019 3,787 10,430 10,232
Reflow ovens ..... 1,036 961 3,435 3,134
Sales were flat in the third quarter as compared to the same quarter last year
but decreased $4,403,000 or 19.6% compared to the second quarter of fiscal 1998.
Although sales were flat in the third quarter as compared to the same quarter of
last year, the Company reported a net loss in the third quarter of 1998 of $1.4
million, or $0.32 loss per diluted share, compared to net income of $127,000, or
$.03 gain per diluted share, for the same period in the prior year. The net loss
is principally due to severe market downturns in the electronics industry,
resulting in increased price competition and decreased margins.
International sales represented approximately 42.8% and 49.7% of net sales for
the third quarter of fiscal 1998 and 1997, respectively, and 37.5% and 41.8% of
net sales for the first nine months of fiscal 1998 and 1997, respectively. The
decease in international sales is primarily the result of decreased orders in
Asia and in South America. The Asian crisis is resulting in a severe
overcapacity and an oversupply of leftover low-cost component inventory in the
electronics industry during the short term. The industry softness has affected
the Company's domestic sales as well, which were down due to cutbacks in
computers and peripherals, plus uncertainty in other segments. The Company
expects that the slowdown in industry activity will continue for at least the
remainder of calendar 1998.
Gross margin decreased to 28.3% from 39.8% and to 32.0% from 37.4%, compared to
the third quarter and nine months of fiscal 1998 to 1997, respectively. The
decrease in gross margin reflects the severe downturn in the electronics
industry and affected all of the Company's major products. The Company expects
that competitive pricing pressures will continue for some time.
Responding to the industry instability, the Company has plans to enact programs
designed to cut costs in an effort to bring them in line with current levels of
business activity. These programs will include workforce reductions of
approximately 15%, realignment of operating priorities and deferral of selected
operational programs. There can be no assurance, however, that the Company will
be successful in these cost savings efforts or that such efforts will
successfully reduce costs and expenses or reduce costs and expenses to levels
adequate to offset the effects of industry weakness.
QUAD SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Engineering, research and development expenses increased $179,000 or 10.8% and
$455,000 or 8.9% for the third quarter and first nine months of fiscal 1998,
respectively, compared to the same periods of the prior fiscal year. The
increase in the first nine months of fiscal 1998, primarily reflects the
addition of personnel to the engineering, research and development departments
as the Company has increased the research and development efforts associated
with various products such as the APS-1 assembler, the QSA-120DL assembler and
other option features for the "Q" Series. The Company continues to develop
additional features for the APS-1 assembler to expand and increase the
functionality of this product.
Selling and marketing expenses increased $231,000 or 6.8% and $699,000 or 6.7%
for the third quarter and first nine months of fiscal 1998, respectively,
compared to the same periods last year. The increase is mostly a result of
higher overall commission rates.
Administrative and general expenses decreased $128,000 or 9.0% for the third
quarter of fiscal 1998 over the third quarter of the prior year but increased
$770,000 or 17.3% for first nine months of fiscal 1998 when compared to the same
period last year. The increase is mostly due to one-time costs incurred in
fiscal 1998, including $1.0 million to obtain a paid-up license of patented
technology from MPM Corporation (see below for a detailed explanation) and
severance costs of $322,000 related to the resignation of the Company's former
president and other reductions in the workforce. Excluding these costs,
administrative and general expenses decreased approximately $552,000 or 12.4%
for first nine months of fiscal 1998 compared to the same period last year. The
Company believes that operating expenses for the next several quarters will
decrease as the cost-cutting programs noted above are implemented. However,
there can be no assurance that implementing the programs will result in
decreased operating expenses.
Income tax benefit of $511,000 and $984,000 represented an effective tax rate of
26.8% and 27.5% for the third quarter of fiscal 1998 and first nine months of
fiscal 1998, respectively, as compared to an effective tax rate for income tax
expense of 38.0% in the same periods of the prior year. Income tax for fiscal
1998 differs from the amount that would result from applying the Federal
statutory tax rate to the results from operations primarily due to permanent
differences in taxable income versus financial income. The Company expects its
effective tax rate to remain at approximately 27.5% for the remainder of the
fiscal year.
Backlog
As of June 30, 1998, the Company's backlog of orders was $7.3 million, compared
to $11.3 million as of September 30, 1997 and $12.6 million as of June 30, 1997.
Bookings for the third quarter of fiscal 1998 were $14.1 million as compared to
bookings of $19.4 million in the second quarter of fiscal 1998 and $19.7 million
in the fourth quarter of fiscal 1997. The following table sets forth certain
backlog information by product line for the periods indicated (in millions):
June 30,
1998 1997
---- ----
Assemblers $3.5 $7.2
Screen printers 1.3 1.9
Reflow ovens .2 .7
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.
QUAD SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources
The Company's working capital as of June 30, 1998 was approximately $23.3
million, including cash balances of approximately $1.8 million. At September 30,
1997, the Company had working capital of approximately $26.0 million, including
cash balances of approximately $2.0 million. During the first nine months of
fiscal 1998, net cash used in operations amounted to $2.2 million, principally
due to the net loss of $1.9 million. Purchases of equipment and cash used in
operations was mostly financed by $3.3 million of incremental borrowings under
the Company's revolving line of credit.
The Company has a revolving line of credit agreement which permits borrowings 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, the bank's prime rate or LIBOR plus 1.30%,
when the outstanding balance is greater than $500,000. This line of credit is
secured by a pledge by the Company's English holding company, Quad Systems
Holdings Limited, of 65% of the outstanding shares of its two wholly-owned
English operating subsidiaries. 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, 1998,
borrowings under this line of credit were $8,200,000.
During the first quarter of fiscal 1998, the Company obtained an increase to its
existing line of credit whereby the bank made available under the terms of the
existing line of credit an additional $2,500,000. This increase, which
originally was to expire on April 30, 1998, was extended to October 31, 1998.
The Company believes that existing cash balances and borrowing capacity will
provide adequate financing for the next year.
License Agreement
In March 1998, the Company reached an agreement with MPM Corporation ("MPM") to
provide the Company with a paid-up, non-exclusive, non-transferable, perpetual
license for inventions covered by certain patents and other intellectual
property held by MPM. These inventions are currently used in certain of the
Company's screen printers. The Company agreed to pay to MPM a one-time license
fee of $1,000,000 for the right to use those inventions. The Company recognized
the entire amount of this fee in the second quarter of fiscal 1998.
Forward Looking Statements
The discussions above regarding the Company's expectations of future sales,
gross margins, operating expenses, scheduling of new product introductions and
expected shipment dates and the outlook for the SMT industry and advanced
packaging markets 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, domestic and international and growth rates in the SMT
manufacturing industry and advanced packaging markets and the intensity of
competition, ability to achieve cost reductions in an effort to bring spending
in-line with current levels of business activity, product development delays or
performance problems, difficulties or delays in software functionality and
performance, the timing of future product releases, failure to respond
adequately either to changes in technology or to customer preferences and risks
of nonpayment of accounts receivable.
QUAD SYSTEMS CORPORATION
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Severance Agreement dated March 30, 1998, as further amended on
April 7, 1998, between the Company and David W. Smith.
10.2 Severance Agreement dated April 6, 1998, between the Company and
Joseph L. Gasper.
10.3 Executive Severance Pay Plan.
10.4 Employment memorandum dated April 27, 1998, between the Company
and Theodore J. Shoneck.
10.5 Employment memorandum dated April 27, 1998, between the Company
and Anthony R Drury.
(b) Reports on Form 8-K
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 12, 1998 By: \s\ Anthony R. Drury
------------------------
Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer