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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934. [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934. [NO FEE REQUIRED]
For the transition period from to .
Commission file number 1-9348
QMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0737870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Magnum Pass, Mobile, Alabama 36618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (334) 633-4300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01
par value per share New York Stock Exchange
Rights to purchase shares of Series A
Participating Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 21, 2000: approximately $20,815,064.
Number of shares of Common Stock outstanding as of March 21, 2000:
13,258,421
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held April 24, 2000, are incorporated by
reference into Part III.
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PART I
Item 1. Business.
General
The Company designs and manufactures intelligent controllers which enhance
the graphics capabilities and performance of computer printing and imaging
systems. The Company incorporates its controllers, which consist of software
implemented on printed circuit boards, into computer printing and imaging
systems which it markets, sells, and supports. The Company also markets its
controllers separately for incorporation into products marketed by others.
The Company was incorporated under the laws of the State of Alabama in 1977
and reincorporated as a Delaware corporation in 1982. Its principal executive
offices are located at One Magnum Pass, Mobile, Alabama 36618. The Company's
telephone number is (334) 633-4300.
In October 1998, the Company changed its accounting periods from a fiscal
year ending on the Friday closest to September 30 to a fiscal year ending on
the Friday closest to December 31. In order to implement this change, the
Company had a 13-week transition period beginning on October 3, 1998, and
ending on January 1, 1999 (the "transition period"). In this Form 10-K, fiscal
1999 refers to the year ended December 31, 1999, fiscal 1998 refers to the year
ended October 2, 1998, and fiscal 1997 refers to the year ended October 3,
1997.
On June 7, 1999, Minolta Investments Company, a subsidiary of Minolta Co.,
Ltd., (collectively "Minolta") purchased 2,130,000 shares of common stock for a
total price of approximately $12.2 million. On July 12, 1999, Minolta acquired
an additional 5,440,000 shares of the Company's common stock through a cash
tender offer bringing its holdings to 7,570,000 shares, or 57.1% of the
Company's outstanding common stock.
On June 7, 1999, the Company reacquired the stock of its former
subsidiaries, QMS Europe B.V. and QMS Australia PTY, Ltd., (collectively
referred to as "QMS B.V.") for purchase prices of $24.7 million and $2.7
million, respectively, plus direct acquisition costs of $2.5 million. The
Company paid $20.5 million of the purchase price in cash, received a $3.2
million offset to receivables, and gave its promissory note to the seller (Alto
Imaging Group, N.V., the former parent of QMS B.V.) for the remaining $6.2
million. This note was converted to a term loan with twenty quarterly payments
of $311,746 beginning January 15, 2000, and ending on October 15, 2004. The
remainder of the purchase was funded by a $12.8 million loan and $5.0 million
advance on future Company production from Minolta Co., Ltd. and the sale of
2,130,000 shares of the Company's common stock to Minolta, as mentioned above.
The Minolta alliance, along with the reacquisition of the Company's European
master distributor, is designed to position the Company as a new organization
that can more effectively compete in the global digital printing marketplace.
The alliance brings together the resources of each entity, combining engine and
controller technologies, coordinating joint sales and marketing efforts,
expanding entry into key markets, and integrating logistical operations. In the
United States, the convergence of these resources was completed in November
1999. Convergence of European operations, which began in 1999, is expected to
reach completion by April 2000.
Products/1/
The Company's principal products are intelligent networked and stand-alone
print systems consisting of purchased print engines, proprietary hardware and
software, proprietary intelligent printer-to-computer interfaces, and other
components.
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/1/ The following trademarks and registered trademarks of the Registrant are
used herein: QMS, Crown, CrownNet, and magicolor. All other trademarks and
registered trademarks are the property of their respective companies.
2
The printing products marketed by the Company address the printing needs of
customers in electronic publishing, general business, graphic arts, scientific,
and engineering environments. The Company's products include both color and
monochrome print systems with a variety of speeds, paper handling, and
performance characteristics. The Company also markets accessories, add-ons, and
software for use with its printing systems and offers spare parts, fonts, and
consumables.
The Company's development efforts include a continuing program of upgrading
its two core printing architectures, Crown(R) and DeskLaser, to incorporate new
features consistent with industry trends. The Company's Crown printing
architecture is an open document processing technology that provides advanced
multitasking and networking capabilities across a range of the Company's print
systems. In August 1999, the Crown architecture incorporated a number of
advancements, including networking enhancements, host software modifications,
and productivity improvements. In conjunction with the Crown enhancements, the
Company updated its CrownNet(R) for Ethernet(R) interface to support both
traditional and Fast Ethernet networks. The addition of these features was
driven by technology trends and aims to improve printer management, document
processing performance, network throughput, and ease of use.
The DeskLaser printing architecture enables the Company to manufacture low-
cost, network printing solutions for workgroups standardized on the Windows(R)
operating system. By utilizing the power of the Windows operating system in
processing and printing files, the requirements of the printer's controller are
fewer, and the Company is therefore able to reduce costs in the development of
these products. In 1999, the printer driver for the magicolor(R) 2 DeskLaser, a
product based on the DeskLaser printing architecture, received a new user
interface and performance improvements. As a result, it was presented the "Best
Buy" award from PC World magazine.
In addition to enhancing its printing architecture, the Company extended its
color laser product line in 1999, releasing several new printers. In developing
these new color products, the Company focused on reducing costs and enhancing
performance and paper handling to be more in line with monochrome-only
printers.
The magicolor 2 DeskLaser Duplex, introduced in June, is designed as a low-
cost color laser printer for business workgroups using the Windows operating
system. It was the first magicolor model to offer automatic duplexing (two-
sided printing) and is positioned as an affordable, high-performance laser
printer alternative to ink jet technology.
In August, the magicolor 2+ color laser printer series further expanded the
Company's color laser printer line. Consisting of three models, the magicolor
2+ was the first product to receive the expanded Crown feature set and
continues the Company's trend of developing performance color printers that are
easy to use.
The magicolor 6100, introduced in November 1999, brings affordable, large-
format color laser printing to mainstream business. It prints 6-12 color pages
per minute and up to 24 black-and-white pages per minute and supports automatic
duplexing and print media as large as 13" X 19". In comparison to leading
competitive offerings, the magicolor 6100 is positioned favorably in product
feature set and price and offers the added benefit of the Crown printing
architecture to end-users.
To increase the functionality of the Company's color laser printers and
provide more of the document handling characteristics associated with
monochrome printers and copiers, the Company introduced the SC-200 digital
copier/scanner. This device attaches to any QMS color laser printer allowing
users to make full color copies on the printer. It can also operate as a
scanner by attaching to a PC.
The Company's monochrome product line also received new additions in 1999.
The first, occurring in February, was the 4032 Print System. At the time of
announcement, it was the lowest-priced 40 page-per-minute printer on the
market. The 4032 is modeled after the 3260 Print System, based on the same
print
3
engine, controller, and processor, and shares common document finishing
options. The 4032 offers extra speed and a duty cycle of up to 200,000 pages
per month. Combined with its aggressive price point, the Company believes the
4032 Print System is currently positioned as the price/performance leader in
the midrange production printing market.
The 25 page-per-minute 2560 network printer family, announced in August,
introduced several new document finishing features to the Company's monochrome
printer line, including mailbox units, a stacker/stapler/hole punch finisher,
and a mailbox finisher. These document handling and finishing options position
the 2560 Print System as an adaptable resource that can grow with a business.
Upon completion of the Company's convergence with Minolta within the United
States, the Company integrated the recently co-branded PageWorks 18 printer
family into its monochrome product line. Management believes that the PageWorks
18 positions the Company to penetrate new markets and utilize alternative
distribution channels, including e-tail and catalog sales, due to its low price
point and markets served.
Sales and Marketing
The market for the Company's products is related to the market for computer
systems generally. Current end users of the Company's products include many
Fortune 500 companies, governmental agencies, and educational institutions. In
the United States and internationally, the Company sells its products primarily
through resellers, including national and regional distributors and computer
dealers, as well as directly through its Original Equipment Manufacturer
("OEM") partners.
As of December 31, 1999, the Company operated sales offices in 27 cities in
18 states in the United States. The Company, either directly or through its
international network and distributors, markets its products in 91 countries
outside of the United States.
As a result of the Minolta convergence, the Company's U.S. sales and
marketing strategy has been restructured to broaden product distribution
channels, refocus end-user awareness, and realign its internal support
structure to be more globally focused. Outlets for distribution now include
additional national and value-add reseller partners, retail outlets, catalog
providers, BTA (Business Technology Association) dealers, and the Minolta
direct sales force. The Company's marketing strategy also includes the e-tail
or e-commerce Internet distribution model, a fast-growing method for product
disbursement that is expected to allow the Company to realize higher-volume
distribution.
The Company's ten largest customers accounted for an aggregate of
approximately 41.5% of total net sales during fiscal 1999. Sales to Ingram
Micro, Inc. represented 10.8% of consolidated revenues for fiscal 1999.
The Company's products are advertised in the United States and international
markets and exhibited at industry trade shows under the co-branded name
"Minolta - QMS." This step was taken in an effort to refocus customer awareness
on the Company and capitalize on Minolta's brand equity.
The Company also provides field sales support, including training for
customers and resellers, trade show exhibits, sales training, and sales
assistance to sales representatives. The Company believes that this support has
been well received by its customers and sales organizations and has assisted
the Company in the introduction of new products.
In addition to Minolta - QMS co-branded products, several of the Company's
printer lines were sold in the United States and abroad under private label
through OEM partners. The Company has a long-standing history of OEM
relationships because of its competitive product line as well as its agility
and experience in this area. Private-label sales through OEM resources increase
coverage of the Company's products across an untapped customer base.
4
International Operations
In fiscal 1997 and 1998, the transition period and fiscal 1999,
international sales totaled $27.8 million, $34.0 million, $17.5 million, and
$133.5 million, respectively, representing approximately 22%, 25%, 45% and 60%,
respectively, of the Company's net sales. The 1999 increase reflects the
inclusion of sales of the Company's reacquired European subsidiary. The Company
derives its international sales from Europe, the Middle East, the Far East,
Japan, Canada, and Central and South America.
With the reacquisition of the Company's Japanese operations in 1998 and its
European and Australian operations in 1999, and with the Minolta convergence in
place, the Company expects its international operations, like its U.S.
operations, to achieve increased lines of distribution, additional product
offerings, and increased resource availability. The convergence activities
related to the Minolta alliance began in 1999 and are expected to reach
completion for the Company's international organization by April 2000.
The components used in the Company's products are purchased abroad,
primarily from Japanese companies, including Minolta. Accordingly, the cost of
such components may increase if the value of the U.S. dollar declines relative
to the currency of the source country.
For financial information regarding the Company's foreign and domestic
operations and export sales, see Notes 1 and 16 of Notes to the Company's
Consolidated Financial Statements under Item 8 (Financial Statements and
Supplementary Data).
Service, Support, and Warranty
In 1999, the Company continued to provide technical and software support as
well as maintenance service and support to its end users directly and through
distributors, resellers, and third-party service providers. A staff of
engineers and technicians provided systems applications support, field service
support, and customer training for the use and maintenance of the Company's
products. In the United States, the Company provided technical hardware and
software support and maintenance service from its home office in Mobile,
Alabama, and from field offices located in 55 cities in 34 states. Technical
support was provided via telephone and the World Wide Web while a national
service organization provided alternative repair choices of return to depot or
factory, on site, and special contractual service. In the European market, the
Company provided technical hardware and software support and maintenance
service from its home office in Maarssen, The Netherlands. Service support was
also partially outsourced in Europe to specialized service and maintenance
providers who have been trained by the QMS European Training Center on new
products and technologies. During fiscal 1999, the Company provided
international technical service in Canada through its direct service
organization as well as through certain authorized dealers.
The Company warrants its products for a period of 90 days to 1 year from the
date of shipment, depending on the product. The Company's annual warranty costs
have not been significant relative to the Company's net sales.
Major efforts began in 1999 to transition the Company's service business and
portions of its support structure to IBM Printing Systems ("IBM"). This
strategic agreement, which was finalized in January 2000, names IBM as the
global service provider for the Company's printers. Under the terms of the
agreement IBM will provide warranty and service support for the Company's
printers under existing service contracts and will service new contracts as
they are written. The Company will continue qualifying resellers as authorized
service providers for the Company's products and will continue to provide
telephone-based and on-line technical hardware and software support through
IBM.
Competition
The digital printing market is in a state of great transition as
demonstrated by the number of key competitors participating in corporate
mergers and acquisitions. Through the convergence with Minolta,
5
management believes the Company is well-positioned for several reasons. The
Company is building a worldwide distribution network that is expected to allow
for improved global sales coverage and customer support. Furthermore, the
convergence of technical expertise between the Company, as a controller
manufacturer, and Minolta, as a print engine developer, should encourage more
effective product development.
Incorporating products from Minolta allows the Company to compete in broader
printer markets, from single-user SOHO ("small office home office")
environments to departmental, multi-user settings. Laser printing competes with
other technologies in the computer printer market, including inkjet, dye
sublimation, ion deposition, magnetic, thermal, and impact printers. Other
manufacturers whose printers compete with the Company's include: Canon, Inc.;
Hewlett-Packard Company; IBM; Lexmark International, Inc.; NEC Technologies,
Inc.; Seiko Epson Corp.; and Xerox Corporation (Tektronix, Inc.). Many of these
competitors are larger companies with greater financial resources than those of
the Company. The alliance with Minolta, however, will increase resources
available to the Company to compete successfully with the above mentioned
competitors.
Manufacturing and Quality Control
The Company assembles its intelligent processors by adding components to
printed circuit boards manufactured according to its designs and
specifications. Essentially, the Company manufactures its products by
assembling components and subassemblies manufactured by others and adding
software enhancements. The intelligent processors, which include electronic
circuitry and software designed by the Company, are tested to ensure quality
and consistency of production and design.
Most of the parts, components, and subassemblies used in the Company's
products are available to the Company from a variety of sources. When
management determines, however, that a particular supplier is sufficiently
reliable, the Company generally chooses to rely on that single source for its
requirements. If the Company were required to change its sources of these
materials unexpectedly, the Company might be adversely affected during the
transitional time of negotiating new arrangements with another vendor and
integrating those materials into its production process. The Company, however,
is attempting to move away from its reliance upon single-source suppliers of
its requirements.
During fiscal 1999, the Company performed manufacturing and assembly
operations in Mobile, Alabama, and in Utrecht, The Netherlands.
Order Backlog
The Company's backlog consists of firm purchase orders that the Company
expects to fill during fiscal 2000. As of October 2, 1998, and December 31,
1999, the backlog was $9.5 million and $11.3 million, respectively.
As a result of transitioning from a direct sales force to distributors, the
Company has reduced its finished goods response time significantly for shipping
goods off the shelf. Because a substantial portion of the monthly sales has
historically been derived from new orders received during the month, backlog is
not necessarily an accurate indicator of future revenues. The Company does not
believe that sales of its products are subject to significant seasonal
fluctuations.
Print Engines
The Company purchases print engines for its products from third-party
manufacturers, including: Fuji Xerox Co., Ltd.; Fujitsu Computer Products of
America, Inc.; Hitachi America, Ltd.; Minolta Co., Ltd.; and Xerox
International Partners, Inc. While other sources are available, the Company
currently relies on these suppliers' abilities to make print engines available
as needed by the Company. Some of these print engines are supplied to the
Company pursuant to the terms of written contracts. These contracts specify
prices to be paid
6
for each print engine, and these prices are sometimes dependent upon the annual
volume of print engines purchased from that manufacturer. Certain of the
Company's supply contracts with foreign manufacturing sources are subject to
adjustment for exchange rate fluctuations.
In certain cases, the Company applies its expertise in imaging technology to
influence the design and feature content of print engines that are planned to
be incorporated in its future products.
The Company believes that its requirements for print engines for fiscal 2000
will be adequately met under the terms of existing arrangements and those
expected to be entered into in fiscal 2000. The Company has some flexibility to
adjust delivery schedules and quantities as the demand for specific print
engines change as a result of changes in product mix and customer demand.
Although the Company will continue to source print engines from a variety of
suppliers, during fiscal 2000 Hitachi America, Ltd. will supply most of the
Company's color print engines, and Minolta will be the primary supplier for
monochrome print engines. Consequently, disruption of the Company's contracts
with these suppliers would adversely affect the Company during the time
required to negotiate new arrangements with different print engine suppliers
and to bring the new products to market.
Research and Development
The Company's research and development program examines new technologies,
develops new and improved applications for the Company's products, and provides
insights into new directions for the Company's business. During fiscal 1999,
the Company implemented a plan to revitalize its Crown technology and
introduced a number of new features, including a Portable Document Format
("PDF") emulation and additional typefaces, aimed at improving printer
performance and ease of use. These advances are expected to increase the
competitiveness of its controllers in future years.
The Company places significant emphasis on the addition of new features for
its print systems and enhancement of these systems to satisfy new applications.
The Company solicits and receives continuing advice from its end users and
various resellers in identifying appropriate additions. To augment in-house
development efforts, the Company contracts with third parties to develop
products to its specifications. The Company also licenses applications and
other software from third-party entities. In addition, the Company assists
certain software design firms in adapting their existing software for use with
the Company's products.
As of December 31, 1999, approximately 18.3% of the Company's employees were
employed in its research and development department. During fiscal 1997 and
1998, the transition period and fiscal 1999, the Company spent approximately
$13.5 million, $11.3 million, $3.5 million and $14.0 million, respectively, for
research and development and software costs and received no material customer-
sponsored funding for research and development. In fiscal 1997 and 1998, the
transition period and fiscal 1999, approximately $8.2 million, $7.7 million,
$2.8 million and $9.7 million, respectively, of the software costs for those
fiscal periods were capitalized in accordance with Financial Accounting
Standards ("FAS") Statement No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed."
Patents and Trademarks
The Company currently holds United States patents on certain of its
products; however, most of the Company's revenue is derived from products for
which there is no patent protection. Because of rapid technological changes in
the computer and electronic printing industries, the Company does not believe
that patents offer a significant degree of protection for most of its product
and technology advances. The Company's strategy for maintaining its competitive
position is to continue to emphasize product research and development, coupled
with a high level of customer support.
The Company has obtained registration of many of its trademarks, and has
applications pending on others, in the United States and other countries.
7
Environmental Matters
Management believes the Company is in compliance in all material respects
with applicable federal, state, and local statutes and ordinances regulating
the discharge of materials into the environment. Management does not believe
the Company will be required to expend any material amounts in order to remain
in compliance with these laws and regulations or that compliance will
materially affect its capital expenditures, earnings, or competitive position.
Employees
As of December 31, 1999, the Company employed 575 permanent employees in the
United States. During fiscal 1999, the Company had four foreign operating
subsidiaries, employing a total of 216 permanent employees. QMS Europe B.V.
(including QMS Australia PTY, Ltd.), employing 199 permanent employees, has
sales and support organizations in the Netherlands and in offices in Germany,
France, the United Kingdom, Sweden and Australia. QMS Canada, Inc., employing
17 permanent employees, has sales and support organizations in Montreal,
Ottawa, Toronto, and Vancouver. QMS K.K., employing no permanent employees, has
a vendor that provides sales and support organizations in Tokyo.
Management believes that much of its future success depends on its ability
to attract and retain skilled personnel. The Company has implemented a Cash or
Deferred Retirement Plan and an Employee Stock Purchase Plan and maintains
stock option plans for officers and key employees.
The Company's employees are not subject to collective bargaining agreements,
and there have been no work stoppages due to labor difficulties. Management of
the Company believes that its relations with its employees are good.
Item 2. Properties.
The facilities of the Company's headquarters cover an aggregate of 117,000
square feet, of which 50,000 square feet are used for product research and
development. The Company's primary manufacturing and warehousing facility
covers 152,000 square feet. Both of these facilities are leased by the Company
and located in Mobile, Alabama. In Fort Walton Beach, Florida, a subsidiary of
the Company owned a 35,000 square foot facility on three acres of land.
Effective August 1997, this subsidiary ceased operations and, in June of 1999,
the property was sold for $925,000.
During fiscal 1999, the Company leased additional office space in the United
States, Europe, Australia, Canada, and Japan.
The Company's properties are utilized approximately five and one-half days
per week, with no significant under-utilization of facilities. The Company
believes that its owned and leased properties are sufficient for its current
and foreseeable needs.
Item 3. Legal Proceedings.
The Company is a defendant in various litigation and claims in the normal
course of business. Based on consultation with various counsel in these
matters, management is of the opinion that the ultimate resolution of such
litigation and claims will not materially affect the Company's financial
position, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Price and Dividend Information
The Company's common stock is listed on the New York Stock Exchange under
the ticker symbol "AQM." The table below sets forth the per share quarterly
high and low closing prices of QMS common stock for the fiscal years ended
December 31, 1999, and October 2, 1998, and the transition period. In June
1999, the Company sold 2,130,000 shares of its common stock to Minolta for a
total price of $12.2 million. The proceeds from this sale were used in the
reacquisition of the Company's former European and Australian subsidiaries. No
cash dividends were declared in either of the last two fiscal years or the
transition period, and the Board of Directors has no present intention to pay
cash dividends in the foreseeable future. Payment of cash dividends is
prohibited by one of the Company's primary lenders and the lessor of its
corporate headquarters. There were 1,319 holders of record of the Company's
common stock at March 21, 2000.
1999 1998
----------------- ----------------
Fiscal Quarter High Low High Low
- -------------- -------- -------- ------- --------
First........................................ $4 $2 5/8 $3 3/16 $2 1/4
Second....................................... 5 11/16 2 7/8 5 2 11/16
Third........................................ 5 5/8 3 3/8 5 3 3/8
Fourth....................................... 3 5/8 2 11/16 4 9/16 2 3/4
Transition Period............................ 4 1/8 3
9
Item 6. Selected Financial Data.
Five-Year Summary--Financial and Other Data
For the fiscal year ended December 31, 1999, the transition period ended
January 1, 1999, and the fiscal years ended October 2, 1998, October 3, 1997,
September 27, 1996, and September 29, 1995
Transition
1999 Period 1998 1997 1996 1995
-------- ---------- -------- -------- -------- --------
Dollars in thousands, except per share amounts
Operating results
Net sales.............. $221,286 $39,338 $133,491 $124,589 $147,174 $259,740
Cost of sales.......... 177,005 29,326 94,071 98,557 99,151 210,032
Marketing and selling
expense............... 19,801 4,464 18,896 22,026 25,331 47,066
Research and
development expense... 4,236 619 3,672 5,294 4,567 6,282
General and
administrative
expense............... 35,399 4,694 14,771 15,900 12,461 32,862
Restructuring charges.. 5,646 0 0 8,029 0 8,364
Goodwill amortization.. 1,956 0 0 0 0 0
-------- ------- -------- -------- -------- --------
Operating income
(loss)................ (22,757) 235 2,081 (25,217) 5,664 (44,866)
Interest income........ 56 51 381 373 398 171
Interest expense....... (3,014) (193) (485) (721) (1,805) (4,113)
Gain on divestitures of
businesses............ 0 0 0 0 0 3,675
Miscellaneous income
(expense)............. (1,913) 23 (117) (557) (737) 847
-------- ------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss.... (27,628) 116 1,860 (26,122) 3,520 (44,286)
Income tax provision
(benefit)............. (621) 4 35 0 (733) 0
-------- ------- -------- -------- -------- --------
Income (loss) before
extraordinary loss.... (27,007) 112 1,825 (26,122) 4,253 (44,286)
Extraordinary loss on
early extinguishment
of debt............... (393) 0 0 0 0 0
-------- ------- -------- -------- -------- --------
Net income (loss) ..... $(27,400) $ 112 $ 1,825 $(26,122) $ 4,253 $(44,286)
======== ======= ======== ======== ======== ========
Income (loss) per common
share
Basic and diluted
before extraordinary
loss................... $ (2.22) $ 0.01 $ 0.17 $ (2.44) $ 0.40 $ (4.15)
Extraordinary loss..... (0.03) 0.00 0.00 0.00 0.00 0.00
-------- ------- -------- -------- -------- --------
Net income (loss) basic
and diluted .......... $ (2.25) $ 0.01 $ 0.17 $ (2.44) $ 0.40 $ (4.15)
======== ======= ======== ======== ======== ========
Weighted average number
of shares (in
thousands) used in
computing net income
(loss) per share:
Basic.................. 12,152 10,697 10,697 10,696 10,681 10,677
Diluted................ 12,152 10,876 10,887 10,696 10,722 10,677
Balance sheet
Total assets........... $151,206 $70,294 $ 69,355 $ 58,589 $ 91,718 $135,538
Net working capital.... $ 14,421 $14,392 $ 14,980 $ 12,287 $ 19,235 $ 35,511
Term debt and bank
loans................. $ 69,604 $ 7,306 $ 5,981 $ 447 $ 13,695 $ 36,404
Stockholders' equity... $ 13,130 $26,439 $ 26,038 $ 24,324 $ 47,432 $ 43,213
Other data
Current ratio.......... 1.15 1.37 1.39 1.46 1.49 1.55
Gross profit margin.... 20.0% 25.5% 29.5% 20.9% 32.6% 19.1%
Net profit (loss)
margin................ (12.4)% 0.3% 1.4% (21.0)% 2.9% (17.1)%
Return on average
stockholders' equity.. (139.9)% 0.4% 7.2% (72.8)% 9.4% (67.0)%
Persons employed at
period end............ 791 688 698 705 886 1,194
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Fiscal Years 1999, 1998, and 1997 Compared
General
The year ended December 31, 1999, ("Fiscal 1999") was a year of transition
as the Company has gone through a change of control, a reacquisition of its
former European and Australian subsidiaries and completion of its plan to begin
outsourcing its service support on printers in early fiscal 2000. All of these
changes were critical to the Company's goals of returning to industry
prominence and positioning itself favorably in the global printer market.
In 1998, the Company modified its accounting period from a fiscal year
ending on the Friday closest to September 30 to a fiscal year ending on the
Friday closest to December 31. Accordingly, the Company has a 13-week
transition period beginning on October 3, 1998, and ending on January 1, 1999
(the "transition period"). During this transition period no unusual items
occurred that would affect the trends of operations discussed below for the
applicable years. The Company again modified its accounting period to align
with that of the Minolta Group. Accordingly, there will be another 13-week
transitional period ending March 31, 2000. The fiscal year 2000 will then begin
on April 1, 2000, and end on March 30, 2001 ("Fiscal 2000"). The Company enters
this transitional period, and will enter fiscal 2000, with a renewed focus on
its core business of laser print systems and consumables. With the continuing
evolution of the Company's sales channel structure, adequate borrowing
capacities, and new product introductions, management believes the Company is
positioned for renewed profitability and improved stockholder value.
Change of Control to Minolta Investments Company and the Purchase of QMS B.V.
As the Company entered 1999, it faced some serious financial issues that
limited its ability to compete worldwide. In February 1999, the Company began
discussions of forming an alliance with Minolta Co., Ltd., which wanted to
strengthen its position in the growing laser printer market and recognized the
Company's technical expertise and complementary strengths.
On June 7, 1999, Minolta Investments Company, a subsidiary of Minolta Co.,
Ltd., ("Minolta") purchased 2,130,000 shares of common stock for a total price
of approximately $12.2 million. On July 12, 1999, Minolta acquired 5,440,000
shares of the Company's common stock through a cash tender offer bringing its
holdings to 7,570,000 shares, or 57.1% of the Company's outstanding stock.
On June 7, 1999, the Company reacquired the stock of its former
subsidiaries, QMS Europe B.V. and QMS Australia PTY, Ltd., (collectively
referred to as "QMS B.V.") for purchase prices of $24.7 million and $2.7
million, respectively, plus direct acquisition costs of $2.5 million. The
Company paid $20.5 million of the purchase price in cash, received a $3.2
million offset to receivables, and gave its promissory note to the seller (Alto
Imaging Group, N.V., the former parent of QMS B.V.) for the remaining $6.2
million. This note was converted to a term loan with twenty quarterly payments
of $311,746 beginning January 15, 2000, and ending on October 15, 2004. The
remainder of the purchase was funded by a $12.8 million loan and $5.0 million
advance on future Company production from Minolta Co., Ltd. and the sale of
2,130,000 shares of the Company's common stock to Minolta, as mentioned above.
The Company recognized restructuring charges of $3.3 million related to its
1999 Minolta convergence activities in North America (see Results of
Operations). Similar convergence-related restructuring charges are anticipated
for the Company's European and Japanese operations during fiscal 2000.
Activities related to this convergence are expected to be completed by April
2000. No material effect on future operating results or cash flows is
anticipated.
11
IBM Global Service Support for QMS Printers
In December 1999, the Company entered into an agreement with IBM Printing
Systems ("IBM"), which will become the global service provider for the
Company's printers. The Company's customers will look to IBM, and its worldwide
infrastructure, for their printer service and parts needs as the Company
expands its newly integrated product line globally. This is the latest step in
the Company's strategy of focusing on its channel distribution and technology
development, and is part of the Company's overall restructuring and convergence
with Minolta.
In December 1999, the Company recognized restructuring charges of $2.3
million associated with the transfer of the service business to IBM, which
consisted of $1.6 million in salary continuation for approximately 109
employees from all levels and functional areas of the Company's service
business, $0.6 million for activities associated with field service office
closings, and $0.1 million in loss on disposal of the leased service van fleet.
These costs will be paid in fiscal 2000 and are expected to be funded primarily
from cash flows from operations.
Results of Operations
In fiscal 1999, the Company had a net loss of $27.4 million on net sales of
$221.3 million compared to net income of $1.8 million in the twelve months
ended October 2, 1998 ("fiscal 1998") and a net loss of $26.1 million in the
twelve months ended October 3, 1997, ("fiscal 1997") on net sales of $133.5
million and $124.6 million in fiscal 1998 and 1997, respectively. Of the $27.4
million loss in fiscal 1999, $5.6 million was from restructuring charges, $2.5
million was from special cost of sales charges, $2.3 million was for
convergence-related expenses and $0.4 million was for the early extinguishment
of debt. Of the $26.1 million loss in fiscal 1997, $8.0 million was from
restructuring charges and $7.0 million was from special cost of sales charges.
Net Sales
Table 1--Table of Net Sales Comparisons for Key Geographic Locations
Year-to-Year
Net Sales Increases/(Decreases)
-------------------------- -----------------------
1999 1998 1997 1999 1998
-------- -------- -------- ----------- ----------
In thousands
U.S./Canada............ $ 91,496 $104,377 $102,248 $(12,881) $ 2,129
Europe................. 96,927 20,617 12,070 76,310 8,547
Japan.................. 28,537 4,224 5,617 24,313 (1,393)
Latin America.......... 2,836 3,214 2,902 (378) 312
Other.................. 1,490 1,059 1,752 431 (693)
-------- -------- -------- ----------- ----------
Total................. $221,286 $133,491 $124,589 $ 87,795 $ 8,902
======== ======== ======== =========== ==========
Total sales increased by $87.8 million (65.8%) during fiscal 1999 compared
to an increase of $8.9 million (7.1%) during fiscal 1998. The increase relates
primarily to the reacquisition of the Company's former European and Australian
subsidiaries and the inclusion of the Company's Japanese subsidiary for the
entire year of fiscal 1999.
Total U.S. and Canadian sales decreased 12.3% for fiscal 1999 compared to
fiscal 1998. This decrease reflects the extended implementation of moving the
direct sales force model to sales by distributors and value-added resellers
("VARs"), in addition to flat sales in the United States. Management expects to
complete the implementation of the sales channel structure in early fiscal 2000
and sales to increase based on this renewed sales channel structure.
12
Until the reacquisition of the Company's former European and Australian
subsidiaries, European revenue included only sales of controller boards at cost
and commissions earned on product sales to the Company's European distributor.
After June 7, 1999, revenues included sales to third-party customers by the
Company's reacquired subsidiary and board sales to its former European
distributor. Net sales for Europe increased $76.3 million (370.1%) for fiscal
1999 compared to fiscal 1998 and increased $8.5 million (70.8%) in fiscal 1998
compared to fiscal 1997. The increase in revenue for fiscal 1999 was mainly due
to third-party sales through the Company's reestablished subsidiary. The
increase in European revenue for fiscal 1998 was primarily from sales of the
magicolor 2 product.
During the year ended October 2, 1998, Japanese revenue included product and
commission revenue for Japan, Korea, and other Pacific Rim countries. This
revenue was generated through an independent company, QMS Japan KK, which,
until September 1998, had exclusive rights to distribute the Company's products
throughout these countries. In September 1998, the Company reestablished its
wholly owned subsidiary in Japan. Sales that had occurred through a master
distributor in Japan are now being made through the Company's Japanese
subsidiary, thereby eliminating the receipt of commissions on distributor
sales. Net sales for Japan increased $24.3 million (575.6%) in fiscal 1999
compared to fiscal 1998 and decreased $1.4 million (24.8%) in fiscal 1998
compared to fiscal 1997. The 1999 increase in revenue was due entirely to
third-party sales through the Company's Japanese subsidiary.
Gross Profit and Special Charges
Gross profit increased $4.9 million (12.3%) from $39.4 million in fiscal
1998 to $44.3 million in fiscal 1999. This increase for 1999 was due entirely
to the increase in sales volume. Gross profit as a percentage of sales
decreased from 29.5% in fiscal 1998 to 20.0% in fiscal 1999. The reasons for
this decrease include the evolution from a direct sales force model to sales by
distributors and VARs taking longer than expected and thus eroding gross
margin, a decrease in price on new products in order to increase placement in
the market, unfavorable purchase price variance caused by higher yen values,
and special charges incurred in fiscal 1999 as described below.
Gross profit increased $13.4 million (51.4%) from $26.0 million in fiscal
1997 to $39.4 million in fiscal 1998. Gross profit as a percentage of sales
increased from 20.9% in fiscal 1997 to 29.5% in fiscal 1998. The principal
reasons for this increase include the introduction of magicolor 2 in the first
quarter of fiscal 1998, favorable manufacturing volume variances, favorable
purchase price variances caused by lower yen values, lower excess and obsolete
inventory reserve requirements, and special charges incurred in fiscal 1997 as
described below.
Special charges of $2.5 million were included in cost of sales for fiscal
1999 and consist of a $790,000 write-off of spare parts inventory for a third-
party service inventory that will no longer be utilized due to the Minolta
convergence, $770,000 in write-downs of color laser printers for price
promotions to reflect net realizable value, and $967,000 in write-downs for
capitalized software related to product base redundancy as a result of the
Minolta convergence.
Special cost of sales charges for fiscal 1997 included fourth quarter excess
and obsolete valuation charges of $4.2 million related to reduced values for
surplus inventory and repaired parts. Additionally, a $2.6 million fourth
quarter charge was taken to reduce the balance of capitalized software
development costs to estimated net realizable value.
Operating Expenses
Operating expenses for fiscal 1999 increased $29.7 million (79.5%) compared
to fiscal 1998. Operating expenses for fiscal 1999 included $5.6 million in
restructuring expenses and $2.0 million in goodwill amortization. Excluding the
restructuring charges and goodwill amortization, operating expenses for fiscal
1999
13
increased $22.1 million (59.2%) compared to fiscal 1998. This increase reflects
the addition of the European and Australian subsidiaries and includes
approximately $2.3 million for convergence-related expenses for key executives
due to Minolta's investment and related change of control. As a percentage of
net sales, operating expenses for fiscal 1999 (excluding restructuring charges
and goodwill amortization) decreased from 28.0% in fiscal 1998 to 26.9% in
fiscal 1999.
Operating expenses for fiscal 1998 decreased $13.9 million (27.1%) compared
to fiscal 1997. Operating expenses for fiscal 1997 included $8.0 million in
restructuring expenses. Excluding these restructuring charges, operating
expenses for fiscal 1998 decreased $5.9 million (13.6%) compared to fiscal
1997. This decrease reflects the cost reduction efforts begun in the fourth
quarter of fiscal 1997. Specifically, most of the benefit of the reductions in
work force that occurred primarily in August of 1997 were recognized in fiscal
1998. The combined reduction in salaries from reductions in work force and
divestiture of businesses totaled $3.5 million.
The Company's strategy for the 13-week transitional period ending March 31,
2000, and fiscal 2000 is to continue to bring operating expenses in line with
revenues.
Special, Restructuring and Extraordinary Charges
The Company recognized special, restructuring, and extraordinary charges
totaling approximately $6.2 million in the third quarter of fiscal 1999,
essentially all related to the Minolta convergence in North America. Special
charges of $2.5 million were included in cost of sales, as described above.
Restructuring charges of $3.3 million consisted of $2.3 million in charges for
workforce reduction, $0.9 million for asset impairment loss related to the
cancellation of the planned implementation of an enterprise business software
project that will be replaced with systems consistent with those of Minolta,
and $0.1 million in other related expenses. The charges for workforce reduction
will be paid in fiscal 2000 and are expected to be funded primarily from cash
flows from operations. The charge for asset impairment was paid in a prior
year. In the fourth quarter of fiscal 1999, the Company recognized
restructuring charges of $2.3 million related to the outsourcing of service
support to IBM, as previously described. An extraordinary loss of approximately
$393,000 was recognized in 1999 for the early extinguishment of debt.
There were no restructuring charges for fiscal 1998. Restructuring charges
in fiscal 1997 totaled $8.0 million from reductions in force and divestiture of
businesses.
In the fourth quarter of fiscal 1997, the Company ceased operations of its
subsidiary QMS Circuits, Inc. ("QCI") and divested the Imaging Services
Business Unit ("IMS"). A charge of $800,000 was incurred to cover the
severance, asset and inventory writedowns, and other closing expenses
associated with QCI. In fiscal 1997, IMS lost $543,000 on sales of $123,000. In
divesting IMS, the Company incurred charges of $247,000.
During fiscal 1997, the Company's work force decreased nearly 20% to
approximately 700 employees due primarily to the closing and divestiture of
businesses and a corporate-wide reduction in work force. Severance and
outplacement expense recorded in fiscal 1997 totaled $1.6 million.
The Company entered into agreements during fiscal 1997 specifying the
retirement of two executives; the President and Chief Executive Officer, and
the Executive Vice President and Chief Technical Officer. These agreements
caused an additional $2.6 million in fiscal 1997 charges related to accelerated
retirement benefits and other management transition expenses.
Moreover, the Company recognized in the fiscal 1997 income statement
cumulative foreign currency translation losses of $2.4 million in connection
with its Canadian operations. These translation losses had previously been
recognized as a reduction of stockholders' equity.
14
Other Income (Expense)
Net other expense increased $4.7, from $0.2 million in fiscal 1998 to $4.9
million in fiscal 1999. This increase in net other expense includes $2.5
million for foreign currency transaction losses related to the Company's
European subsidiary. In addition, interest expense increased $2.5 million, from
$0.5 million in fiscal 1998 to $3.0 million in fiscal 1999, after decreasing
$0.2 million, from $0.7 million in fiscal 1997 to $0.5 million in fiscal 1998.
The increase in interest expense reflects the new short-term and long-term debt
incurred in connection with the Minolta convergence and the reacquisition of
the Company's former European subsidiary.
The Company did not enter into any material foreign exchange contracts
during fiscal 1999, 1998, or 1997 and had no foreign exchange contracts at
December 31, 1999.
Income Taxes
In fiscal 1999, an income tax provision of $700,000 was recognized for state
income taxes relating to the audit of the Company's state tax returns for 1990
and 1991. In fiscal 1999, deferred tax benefits of $1.4 million were recognized
by the Company's European subsidiary. Of this amount, $828,000 represented an
income tax receivable, while the remaining $537,000 was a deferred tax benefit
for future years. In addition, the Company paid $42,000 in foreign tax withheld
on interest income received from its Japanese subsidiary.
For fiscal 1998, an income tax provision of $35,000 was recognized
reflecting estimated alternative minimum taxes on current period income after
application of available carryovers of net operating losses and general
business credits. No benefit or provision for income taxes was recognized for
fiscal 1997.
At December 31, 1999, the Company had domestic operating loss carryovers and
general business credit carryovers of approximately $56.2 million and $1.7
million, respectively, which expire in periods ranging from 2002 to 2019. (See
Note 15 of Notes to Consolidated Financial Statements.)
Factors Which May Affect Future Results
The Company's products include components (primarily microprocessors and
dynamic random-access memory devices) which, from time to time, are sensitive
to market conditions that may result in limited availability and/or price
fluctuations. An interruption in the supply of or significant changes in prices
for these components could have an adverse effect on the Company's operating
results. The Company purchases print engine mechanisms and consumables from
Japanese suppliers. Fluctuations in foreign currency exchange rates will affect
the prices of these products. The Company may attempt to mitigate possible
negative impacts through yen-sharing arrangements with suppliers, foreign
exchange contracts, and price negotiations; however, material price increases
resulting from exchange rate fluctuations could develop which would adversely
affect operating results.
Because the Company competes in an industry of rapid technological
advancement, it is important that the Company be able to develop innovative new
technologies and leading-edge print systems in a timely, cost-effective manner.
The Company has invested significantly in Crown advanced document processing
technology which, in addition to providing significantly improved
functionality, is intended to reduce the time it takes to develop products. New
product introduction delays could, however, have an adverse impact on operating
results.
These factors, including increasingly competitive pressures in the Company's
markets, along with others that may affect operating results, mean that past
financial performance may not be a reliable indicator of future performance.
Investors should not use historical trends to anticipate results or trends in
future periods. In addition, the Company participates in a highly dynamic
industry, which can result in significant volatility of the Company's common
stock price.
15
Liquidity and Capital Resources
Cash and cash equivalents were $3.5 million at December 31, 1999, compared
to $2.8 million and $0.6 million at the end of fiscal 1998 and 1997,
respectively. Cash flow from operations was ($19.3) million for fiscal 1999
compared to $7.5 million and $9.8 million for fiscal 1998 and 1997,
respectively. The Company's financing for fiscal 1999 came from borrowings from
Minolta and borrowings under revolving credit agreements, along with the
issuance of the Company's common stock to Minolta. The Company's financing for
fiscal 1998 and 1997 came principally from cash flows from operations and
borrowings under revolving credit agreements. In addition, the divestiture of
businesses and disposal of property, plant and equipment provided cash flows of
$0.9 million, $0.4 million and $13.5 million in fiscal 1999, 1998 and 1997,
respectively.
The Company's working capital was $14.4 million at December 31, 1999, down
from $15.0 million at the end of fiscal 1998. This decrease is primarily due to
increased levels of short-term borrowing that reflects the inclusion of the
Company's European subsidiary.
During 1999, the Company had credit relationships with Foothill Capital
Corporation ("Foothill") and Harris Trust and Savings Bank ("Harris") in the
United States, and ING Bank N.V., ING Mezzanine Fonds B.V. and NMB Heller N.V.
(collectively "Heller") in Europe.
On August 19, 1999, the Company entered into a new financing arrangement
with Harris which allowed the Company to retire amounts due to Foothill and
terminate the existing secured revolving credit agreement. This new credit
facility provides for a revolving line of credit through August 2002 with
maximum availability of $20.0 million, secured by the Company's domestic and
Canadian accounts receivable and inventory. The stated rate of interest for any
borrowings under the agreement is one-quarter of one percent (0.25) over prime
or London Interbank Offered Rate ("LIBOR") plus three percent. The effective
rate at December 31, 1999, was 8.75%. The Harris credit facility prohibits the
payment of dividends, limits the amount of unamortized capital software
development costs and capital expenditures, and requires minimum levels of
tangible net worth and fixed charge coverage.
Total borrowing capacity under the Heller agreement which expires in
February 2001 is based on a percentage of eligible trade receivables and
inventory and is secured by these assets. The terms of this agreement require
lender approval for payment of dividends from QMS, B.V. to QMS, Inc.
Accordingly, QMS B.V.'s restricted net assets total approximately $6.0 million
as of December 31, 1999. The stated rate of interest for any borrowings under
this agreement is Amsterdam Interbank Offered Rate ("AIBOR") plus 1.25% with a
minimum of 4% per annum (4% at December 31, 1999).
Total borrowing capacity under the credit facilities is a function of
eligible accounts receivable and inventory. At December 31, 1999, total
availability was $38.1 million, consisting of $17.5 million with Harris and
$20.6 million with Heller. Of this total availability, at December 31, 1999,
the Company had borrowings of $9.1 million under the revolving credit facility
with Harris and $17.7 million under the revolving credit facility with Heller,
as well as cash on hand of $3.5 million.
At December 31, 1999, the Company was not in compliance with certain of the
Harris financial covenants or the Heller required minimum stockholders' equity
covenant. The Company obtained a waiver of non-compliance from Harris on March
2, 2000, and on February 11, 2000, received a waiver of non-compliance from
Heller. In February 2000, the Company used certain of the Minolta loans
described below to provide subordinated debt of $4.0 million to its European
subsidiary as a form of equity as defined under the Heller agreement.
At October 3, 1997, and October 2, 1998, the Company was not in compliance
with the Net Worth covenant contained in the 1997 sale-leaseback transaction
for the Mobile headquarters. On December 8, 1997, the Company obtained a one-
year waiver of non-compliance through October 5, 1998, from the lessor in
exchange for $1.3 million in prepaid rent and an amendment to a related warrant
agreement. On November 17, 1998, the Company obtained a continuation of the
waiver of non-compliance from the lessor through December 31, 1999, in exchange
for continuing the $1.3 million in prepaid rent. On June 7, 1999, the
16
Company obtained a waiver agreement and lease amendment for the transactions
related to the Minolta convergence and reacquisition of the European and
Australian subsidiaries. At that time the $1.3 million in prepaid rent was
converted to a security deposit.
At December 31, 1999, the Company was in violation of several financial
covenants contained in the operating lease agreement and is not projected to
remedy these conditions of non-compliance upon expiration of a cure period on
March 31, 2000. Among the remedies available to the landlord is the
acceleration of all remaining base rent on a discounted basis for the initial
lease term (approximately $13.2 million), cancellation of the lease, or all
other remedies available by law. The violations of the financial covenants in
the lease agreement beyond the cure period will also constitute an event of
default under the Harris revolving credit agreement.
On March 10, 2000, the Company received a letter of intent from its landlord
indicating its willingness to sell the leased property for the greater of $14.0
million or an appraised value, based upon a mutually agreed to process,
provided such sale is consummated by April 28, 2000. Management believes it is
probable that negotiations to complete the purchase of the property and cancel
the operating lease agreement will be successful, and Minolta has agreed to
provide the funding necessary to consummate such purchase. In addition, on
March 20, 2000, the Company obtained a waiver of the cross covenant contained
in the Harris revolving credit agreement.
On November 10, 1999, December 22, 1999, and February 4, 2000, the Company
received $15 million, $5 million, and $10 million loans from Minolta,
respectively. These loans are payable over four years and have stated interest
rates of LIBOR plus 2.5% payable monthly in arrears. Proceeds of these loans
were used to repay the $5.0 million unsecured advance from Minolta, to fund
loans to the Company's European subsidiary for its working capital purposes,
and to provide for corporate working capital purposes.
Management believes the Company's fiscal 2000 working capital and capital
expenditure needs, as well as funding for research and development, will be met
by cash flows from operations and by the Harris and Heller credit facilities
(see Note 8 of Notes to Consolidated Financial Statements).
Year 2000 Compliance
In March 1997, the Company developed and began implementing a plan to review
its overall Year 2000 compliance. The plan encompassed the Company's critical
information technology ("IT") systems, its critical non-IT suppliers and
vendors, and its products.
The Company has experienced no computer-related problems as a result of the
Year 2000 issue in any of the areas referred to above. In addition, the Company
is not currently aware of any circumstances that would indicate a likely Year
2000-related problem in the future; however, the Company will continue to
monitor its Year 2000 compliance.
The Company has spent approximately $150,000 in connection with Year 2000
remediation; no significant additional expenditures are anticipated.
Inflation
Inflationary factors have not had a significant effect on the Company's
operations in the past three years. A significant increase in inflation would
adversely affect the Company's operations.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which will be effective (as
amended) for the Company in fiscal 2002. This Statement requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. The Company's management has not yet determined the
effect SFAS No. 133 will have on its consolidated financial statements.
17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk primarily from changes in foreign
currency exchange rates and to a lesser extent interest rates. The following
describes the nature of these risks.
Foreign Currency Exchange Risk
At December 31, 1999, the Company had sales in over 90 countries worldwide.
These sales outside the United States accounted for approximately 60 percent of
worldwide sales. Virtually all of these sales were denominated in currencies of
the local country. As such, the Company's reported profits and cash flows are
exposed to changing exchange rates.
To date, management has not deemed it cost-effective to engage in a formula-
based program of hedging the profits and cash flows of foreign operations using
derivative financial instruments. The Company's U.S. operations purchase
significant quantities of inventory from Japanese suppliers. Payments are made
to these suppliers in U.S. dollars linked to the yen. In the OEM agreements
with these suppliers, a currency payment model is negotiated that describes how
fluctuations in exchange rates will be shared over the term of the agreement.
In June 1999, the Company reacquired its former European subsidiary which also
purchases significant quantities of inventory from Japanese suppliers in yen.
The Company is currently negotiating with its European subsidiary's suppliers
to adjust for fluctuations in exchange rates.
In addition, at any point in time the Company's foreign subsidiaries hold
financial assets and liabilities that are denominated in currencies other than
U.S. dollars. These financial assets and liabilities consist primarily of
short-term, third-party receivables and payables. Changes in exchange rates
affect these financial assets and liabilities.
Prior to 1999, the Company on occasion has used derivatives to hedge
specific risk situations involving foreign currency exposures. No such
derivatives were held at December 31, 1999.
Interest Rate Risk
The financial liabilities of the Company that are exposed to changes in
interest rates include short-term borrowings and long-term debt. The stated
rate of interest for borrowings under the Harris revolving credit agreement is
one-quarter of one percent (0.25) over prime or LIBOR plus three percent, and
the stated rate of interest for borrowings under the Heller revolving credit
agreement is one and one-quarter percent (1.25) over AIBOR. Long-term
borrowings with Minolta and Alto Imaging Group N.V. have stated interest rates
of LIBOR plus 2.5% payable monthly in arrears and LIBOR plus 0.5% (but not to
be less than 6.50%), respectively. Long-term borrowings of the Company's
European subsidiary bear interest at 6% and 10%. A one percent annual increase
in the stated interest rates would have resulted in approximately $400,000 of
additional annual interest expense in 1999.
18
Item 8. Financial Statements and Supplemental Data.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the fiscal year ended December 31, 1999, the transition period ended
January 1, 1999,
and the fiscal years ended October 2, 1998, and October 3, 1997
Transition
1999 Period 1998 1997
-------- ---------- -------- --------
Dollars in thousands, except per
share amounts
Net sales
Printers and supplies............... $190,493 $31,525 $ 96,757 $ 91,002
Service............................. 30,793 7,813 36,734 33,587
-------- ------- -------- --------
Total net sales.................... 221,286 39,338 133,491 124,589
-------- ------- -------- --------
Cost of sales
Printers and supplies............... 156,551 24,451 70,775 74,842
Service............................. 20,454 4,875 23,296 23,715
-------- ------- -------- --------
Total cost of sales................ 177,005 29,326 94,071 98,557
-------- ------- -------- --------
Gross profit
Printers and supplies............... 33,942 7,074 25,982 16,160
Service............................. 10,339 2,938 13,438 9,872
-------- ------- -------- --------
Total gross profit................. 44,281 10,012 39,420 26,032
-------- ------- -------- --------
Operating expenses
Marketing and selling............... 19,801 4,464 18,896 22,026
Research and development............ 4,236 619 3,672 5,294
General and administrative.......... 35,399 4,694 14,771 15,900
Restructuring charges............... 5,646 0 0 8,029
Goodwill amortization............... 1,956 0 0 0
-------- ------- -------- --------
Total operating expenses........... 67,038 9,777 37,339 51,249
-------- ------- -------- --------
Operating income (loss).............. (22,757) 235 2,081 (25,217)
-------- ------- -------- --------
Other income (expense)
Interest income..................... 56 51 381 373
Interest expense.................... (3,014) (193) (485) (721)
Miscellaneous income (expense),
net................................ (1,913) 23 (117) (557)
-------- ------- -------- --------
Total other expense, net........... (4,871) (119) (221) (905)
-------- ------- -------- --------
Income (loss) before income taxes and
extraordinary loss.................. (27,628) 116 1,860 (26,122)
Income tax provision (benefit)....... (621) 4 35 0
-------- ------- -------- --------
Income (loss) before extraordinary
loss................................ (27,007) 112 1,825 (26,122)
Extraordinary loss on early
extinguishment of debt.............. (393) 0 0 0
-------- ------- -------- --------
Net income (loss).................... $(27,400) $ 112 $ 1,825 $(26,122)
======== ======= ======== ========
Income (loss) per common share
Basic and diluted before
extraordinary loss................. $ (2.22) $ 0.01 $ 0.17 $ (2.44)
Extraordinary loss.................. (0.03) .00 .00 .00
-------- ------- -------- --------
Net income (loss) basic and
diluted............................ $ (2.25) $ 0.01 $ 0.17 $ (2.44)
======== ======= ======== ========
Weighted average number of shares (in
thousands) used in computing net
income (loss) per common share
Basic............................... 12,152 10,697 10,697 10,696
Diluted............................. 12,152 10,876 10,887 10,696
See Notes to Consolidated Financial Statements.
19
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the fiscal year ended December 31, 1999, the transition period ended
January 1, 1999,
and the fiscal years ended October 2, 1998, and October 3, 1997
Transition
1999 Period 1998 1997
-------- ---------- ------ -------- ---
Dollars in thousands
Net income (loss).................... $(27,400) $112 $1,825 $(26,122)
Other comprehensive income (loss) (no
income tax effect):
Foreign currency translation
adjustments........................ 457 288 (243) 2,431
Reclassification adjustment for
accumulated translation losses
included in net loss............... 0 0 0 (2,431)
-------- ---- ------ --------
Total other comprehensive income
(loss)............................. 457 288 (243) 0
-------- ---- ------ --------
Comprehensive income (loss).......... $(26,943) $400 $1,582 $(26,122)
======== ==== ====== ========
See Notes to Consolidated Financial Statements.
20
CONSOLIDATED BALANCE SHEETS
At December 31, 1999
and October 2, 1998
1999 1998
------------ ------------
Dollars in thousands,
except per share amounts
Assets
Current assets
Cash and cash equivalents......................... $ 3,505 $ 2,754
Trade receivables (less allowance for doubtful
accounts of $666 in 1999
and $512 in 1998)................................ 39,926 21,636
Notes receivable (less reserve of $242 in 1999 and
$0 in 1998)...................................... 239 3,239
Inventories, net.................................. 56,987 23,090
Deferred income taxes............................. 3,202 680
Other current assets.............................. 5,946 1,568
------------ ------------
Total current assets............................. 109,805 52,967
Property, plant, and equipment, net................ 6,468 4,949
Notes receivable (less reserve of $343 in 1999 and
$1,150 in 1998)................................... 0 0
Capitalized and deferred software, net............. 9,481 9,271
Goodwill, net...................................... 21,773 0
Other assets, net.................................. 3,679 2,168
------------ ------------
Total assets..................................... $ 151,206 $ 69,355
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable.................................. $ 37,678 $ 12,999
Revolving credit loans............................ 26,840 5,981
Current maturities of long-term debt.............. 5,616 0
Current maturities of capital lease obligations... 568 330
Employment costs.................................. 5,003 3,713
Deferred service revenue.......................... 5,156 7,761
Other current liabilities......................... 14,523 7,203
------------ ------------
Total current liabilities........................ 95,384 37,987
Long-term debt..................................... 37,148 0
Capital lease obligations.......................... 1,385 383
Other liabilities.................................. 4,159 4,947
------------ ------------
Total liabilities................................ 138,076 43,317
------------ ------------
Commitments and contingencies (Note 18)
Stockholders' equity
Preferred stock-authorized, 500,000 shares of no
par value; none issued
Common stock-authorized, 25,000,000 shares of
$0.01 par value; issued,13,962,806 shares in 1999
and 11,832,806 shares in 1998.................... 140 118
Additional paid-in capital........................ 49,262 40,750
Accumulated deficit............................... (28,717) (1,429)
Treasury stock, at cost (707,695 shares in 1999
and 1,135,686 shares in 1998).................... (8,057) (13,158)
Accumulated other comprehensive income (loss)..... 502 (243)
------------ ------------
Total stockholders' equity....................... 13,130 26,038
------------ ------------
Total liabilities and stockholders' equity....... $ 151,206 $ 69,355
============ ============
See Notes to Consolidated Financial Statements.
21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the fiscal years ended October 3, 1997, and October 2, 1998, the transition
period
ended January 1, 1999, and the fiscal year ended December 31, 1999
Common Stock Treasury Stock
----------------- -------------------
Retained Accumulated
Additional Earnings Other
Shares Paid-In (Accumulated Number of Comprehensive
Issued Amount Capital Deficit) Shares Amount Income/(Loss)
---------- ------ ---------- ------------ --------- -------- -------------
Dollars in thousands
Balance September 27, 1996.. 11,832,806 $118 $40,156 $ 22,868 1,151,341 $(13,279) $(2,431)
Warrant issued............. 208
Stock options exercised.... (42) (15,600) 121
Foreign currency
translation............... 2,431
Other...................... 296
Net loss................... (26,122)
---------- ---- ------- -------- --------- -------- -------
Balance October 3, 1997..... 11,832,806 118 40,618 (3,254) 1,135,741 (13,158) 0
* Stock options--
compensation.............. 96
Stock options exercised.... (55)
Foreign currency
translation............... (243)
Other...................... 36
Net income................. 1,825
---------- ---- ------- -------- --------- -------- -------
Balance October 2, 1998..... 11,832,806 118 40,750 (1,429) 1,135,686 (13,158) (243)
Stock options exercised.... (1) (250) 2
Foreign currency
translation............... 288
Net income................. 112
---------- ---- ------- -------- --------- -------- -------
Balance January 1, 1999..... 11,832,806 118 40,749 (1,317) 1,135,436 (13,156) 45
Issuance of stock.......... 2,130,000 22 12,226
Stock options exercised.... (3,713) (427,741) 5,099
Foreign currency
translation............... 457
Net loss................... (27,400)
---------- ---- ------- -------- --------- -------- -------
Balance December 31, 1999... 13,962,806 $140 $49,262 $(28,717) 707,695 $ (8,057) $ 502
========== ==== ======= ======== ========= ======== =======
- --------
* Expense related to issuance of stock options
See Notes to Consolidated Financial Statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal year ended December 31, 1999, the transition period ended
January 1, 1999,
and the fiscal years ended October 2, 1998, and October 3, 1997
Transition
1999 Period 1998 1997
-------- ---------- ------- --------
Dollars in thousands
Operating activities:
Net income (loss)..................... $(27,400) $ 112 $ 1,825 $(26,122)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Extraordinary loss................... 393 0 0 0
Depreciation of property, plant, and
equipment........................... 2,835 576 2,245 4,392
Amortization of goodwill............. 1,956 0 0 0
Amortization and write-off of
capitalized and deferred software... 10,924 1,968 7,816 9,409
Provision (recovery) for losses on
accounts and notes receivable....... (384) (28) 233 146
Provision for losses on inventory.... 4,998 795 2,953 7,416
Deferred income tax benefit.......... (621) 0 0 0
Non-cash restructuring charges....... 931 0 0 4,178
Other................................ (393) 0 (226) 151
Changes in assets and liabilities
which provided (used) cash, net of
effects of acquisition in 1999:
Trade receivables.................... 2,484 (1,083) (4,084) 6,464
Inventories, net..................... (14,425) (3,394) (7,919) 2,826
Accounts payable..................... 1,151 1,364 6,437 (901)
Other assets and liabilities......... (1,309) (785) (1,813) 1,849
-------- ------- ------- --------
Total adjustments................... 8,540 (587) 5,642 35,930
-------- ------- ------- --------
Net cash provided by (used in)
operating activities............... (18,860) (475) 7,467 9,808
-------- ------- ------- --------
Investing activities:
Purchase of Europe and Australian
subsidiaries......................... (20,500) 0 0 0
Collections of notes receivable....... 473 1,593 387 1,057
Additions to property, plant, and
equipment............................ (2,546) (410) (2,115) (2,672)
Additions to capitalized software
costs................................ (9,719) (2,887) (7,439) (8,167)
Additions to deferred software costs.. (531) (25) (523) (611)
Proceeds from disposal of property,
plant, and equipment................. 880 0 428 13,548
-------- ------- ------- --------
Net cash provided by (used in)
investing activities............... (31,943) (1,729) (9,262) 3,155
-------- ------- ------- --------
Financing activities:
Proceeds from revolving credit lines,
net.................................. 4,304 1,325 5,534 (11,862)
Proceeds from long-term debt.......... 35,531 0 0 0
Payments of debt issuance costs, net.. (453) 0 0 0
Payments of capital lease obligations,
including current maturities......... (415) (168) (1,443) (757)
Proceeds from issuance of common
stock................................ 12,248 0 0 0
Proceeds from exercise of stock
options.............................. 1,386 0 0 0
Other................................. 0 0 (154) 78
-------- ------- ------- --------
Net cash provided by (used in)
financing activities............... 52,601 1,157 3,937 (12,541)
-------- ------- ------- --------
Net change in cash and cash
equivalents.......................... 1,798 (1,047) 2,142 422
Cash and cash equivalents, beginning
of period............................ 1,707 2,754 612 190
-------- ------- ------- --------
Cash and cash equivalents, end of
period............................... $ 3,505 $ 1,707 $ 2,754 $ 612
======== ======= ======= ========
See Notes to Consolidated Financial Statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business--QMS, Inc. designs and manufactures intelligent
controllers which enhance the graphics capabilities and performance of computer
printing and imaging systems. The Company incorporates its controllers, which
consist of software implemented on printed circuit boards, into computer
printing and imaging systems which it markets, sells, and supports in the
United States, Europe, Japan, Canada, and Central and South America. The market
for these products is related to the market for computer systems generally.
Current end users of the Company's products include many Fortune 500 companies,
governmental agencies, and educational institutions. Sales to the Company's ten
largest customers, both foreign and domestic, accounted for 41.5%, 45.1%,
47.1%, and 27.4% in fiscal 1999, the transition period beginning on October 3,
1998, and ending on January 1, 1999, and fiscal 1998 and 1997, respectively.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of QMS, Inc. and its wholly owned subsidiaries.
All material intercompany items have been eliminated.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
Fiscal Year--On October 28, 1998, the Company's Board of Directors modified
the Company's accounting period effective in 1999, from a fiscal year ending on
the Friday closest to September 30 to a fiscal year ending on the Friday
closest to December 31. In connection with this fiscal year change, the Company
includes audited financial statements for the 13-week transition period
beginning on October 3, 1998, and ending on January 1, 1999, ("the transition
period") in this Annual Report on Form 10-K for its new fiscal year ended
December 31, 1999. Fiscal 1997 (the year ended October 3, 1997) included 53
weeks. Fiscal 1999 and 1998 (the year ended October 2, 1998) included 52 weeks.
On October 8, 1999, the Company's Board of Directors again modified the
Company's accounting period effective in 2000, from a fiscal year ending on the
Friday closest to December 31 to a fiscal year ending on the Friday closest to
March 31.
24
Comparable Transition Period Financial Data--In connection with the
Company's change in fiscal year, presented below is the financial data for the
comparable unaudited three months ended January 2, 1998 (amounts in thousands):
Net sales........................................................... $28,578
Cost of sales....................................................... 19,505
-------
Gross profit........................................................ 9,073
Operating expenses.................................................. 8,844
-------
Operating income.................................................... 229
Other income........................................................ 176
-------
Income before income taxes.......................................... 405
Income tax provision................................................ 4
-------
Net income.......................................................... $ 401
=======
Basic and diluted net income per share.............................. $ 0.04
=======
Cash Equivalents--The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Inventories--Inventories are stated at the lower of cost or market. Cost,
which includes materials, labor, and production and material overhead, is
determined on the first-in, first-out basis. Market is based on replacement
cost or net realizable value, as appropriate.
Property, Plant, and Equipment--Expenditures for property, plant, and
equipment, major renewals, and betterments are capitalized at cost. Certain
assets are financed under lease contracts which have been capitalized.
Aggregate lease payments, discounted at appropriate rates, have been recorded
as long-term debt, the related leased assets have been capitalized, and the
amortization of such assets is included in depreciation expense. Depreciation
is computed on the straight-line method over the estimated useful lives of the
assets, or the lease term, whichever is shorter.
Expenditures for maintenance, repairs, and minor renewals are charged to
expense. When items are disposed of, the cost and accumulated depreciation are
eliminated from the respective accounts, and the resulting gain or loss is
included in the statement of operations.
Goodwill--Goodwill is being amortized over seven years on a straight-line
basis.
Revenue Recognition--Sales of printers and supplies are recorded upon
shipments of products to customers provided that pervasive evidence of an
arrangement exists, the selling price is fixed and determinable, and
collectibility of the resulting receivables is probable. Service revenue is
recognized ratably over the term of the service contract.
The American Institute of Certified Public Accountants Statement of Position
No. 97-2, "Software Revenue Recognition," was effective for the Company
beginning in the transition period. This Statement did not have a material
impact on the Company's consolidated financial statements.
Warranty Policy--The Company warrants its products for a period of 90 days
to 1 year from the date of shipment, depending on the product.
Deferred Service Revenues--Amounts billed for service contracts are credited
to deferred service revenue and reflected in revenues over the terms of the
contracts, which range up to five years.
25
Deferred Software Costs--Purchased computer software costs are amortized
based on current and future revenue for each product with an annual minimum
amortization equal to straight-line amortization over the remaining estimated
economic life of the product.
Capitalized Software Costs--The Company capitalizes the qualifying costs of
developing proprietary software included in its products. Capitalization of
costs requires that technological feasibility has been established. Upon
completion of projects, amortization is determined based on the larger of the
amounts computed using (a) the ratio that current gross revenue for each
product bears to the total of current and anticipated future gross revenues for
that product or (b) the straight-line method over the remaining estimated
economic life of the product. Actual estimated economic lives range from one to
two years. Amortization adjustments are made to reflect net realizable value
and any changes in the determination of the economic lives.
Capitalized software costs expended solely in the United States for fiscal
1999, the transition period, and fiscal 1998 and 1997 totaled $9.7 million,
$2.8 million, $7.7 million, and $8.2 million, respectively. For fiscal 1999,
the transition period, and fiscal 1998 and 1997, $8.5 million, $1.8 million,
$7.4 million and $6.0 million, respectively, were charged as amortization
expense on completed projects and were included in cost of goods sold.
Amortization expense included no write-offs or net realizable value adjustments
for the transition period or fiscal 1998, but included $1.8 million and $2.9
million of such adjustments for fiscal 1999 and 1997, respectively.
Research and Development--The Company expenses research and development
costs as incurred, including expenditures related to development of the
Company's software products that do not qualify for capitalization.
Income Taxes--The Company complies with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," under which deferred
tax liabilities and assets are determined based on the difference between
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse
(see Note 15).
Segment Information--The Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" in fiscal 1999. This
Statement establishes standards for the reporting of information about
operating segments in annual and interim financial statements. Operating
segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker(s) in deciding how to allocate resources and in
assessing performance. SFAS No. 131 also requires disclosures about products
and services, geographic areas and major customers. The adoption of SFAS No.
131 did not affect results of operations or financial position but did affect
the disclosure of segment information, as presented in Note 16.
Fair Value of Financial Instruments--SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," requires certain disclosures for financial
instruments for which it is practicable to estimate the fair value. The
Company's financial instruments consist of cash and cash equivalents, trade and
notes receivables, trade payables, accrued expenses, and interest-bearing debt.
The fair value of the Company's financial instruments approximates the carrying
value reflected in the accompanying consolidated balance sheets at December 31,
1999, and October 2, 1998, primarily because of the short-term nature of these
instruments (excluding notes receivable and certain interest-bearing debt).
Fair value disclosure for the Company's notes receivable is presented in Note 6
and for interest-bearing debt is presented in Notes 8 and 9.
Recently Issued Accounting Standards--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective (as amended) for
the Company in fiscal 2002. This Statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of
SFAS No. 133. The Company's management has not yet determined the effect SFAS
No. 133 will have on its consolidated financial statements.
26
Net Income (Loss) per Common Share--In computing net income (loss) per
common share, weighted average common shares outstanding (diluted), includes
the dilutive effect of stock options as follows (in thousands):
Transition
1999 Period 1998 1997
------ ---------- ------ ------
Weighted average common shares outstanding
(basic)................................... 12,152 10,697 10,697 10,697
Dilutive effect of stock options........... 0 179 190 0
------ ------ ------ ------
Weighted average common shares outstanding
(diluted)................................. 12,152 10,876 10,887 10,697
====== ====== ====== ======
Options and warrants to purchase 807,497, 1,214,762, 998,808, and 1,626,478
shares of common stock for the year ended December 31, 1999, the transition
period, and the years ended October 2, 1998, and October 3, 1997, respectively,
were excluded from the computation of weighted average shares as such options
and warrants would have been anti-dilutive.
Comprehensive Income (Loss)--The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," during the transition period. This Statement requires
the Company to report comprehensive income (loss) and its components, which
consist of net income (loss) and foreign currency translation adjustments, in
its consolidated statement of comprehensive income (loss). Due to the Company's
available operating loss carryforwards, there was no income tax effect related
to the components of other comprehensive income (loss) for any of the periods
presented.
Foreign Currency Translation--The financial position and results of
operations of the Company's European, Australian, Canadian and Japanese
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries have been translated at year-end
exchange rates, and income and expenses have been translated using weighted
average-for-the-year exchange rates.
During fiscal 1997, the Company recognized in the statement of operations
cumulative foreign currency translation losses of $2.4 million in connection
with its Canadian operations. Foreign currency transaction gains (losses) are
included as a component of miscellaneous income (expense) and were not material
to the Company's consolidated financial statements for the transition period,
and fiscal 1998 and 1997. For fiscal 1999, foreign currency transaction losses
were $1.6 million and included $2.5 million for transaction losses related to
the Company's European subsidiary.
Reclassifications--Certain reclassifications have been made to fiscal 1998
and 1997 amounts to conform to the fiscal 1999 presentation.
2. Acquisition and Minolta Investment
On June 7, 1999, the Company reacquired its former European and Australian
subsidiaries ("QMS B.V.") for purchase prices of $24.7 million and $2.7
million, respectively, plus direct acquisition costs of $2.5 million. The
Company paid $20.5 million of the purchase price in cash, received a $3.2
million offset to receivables, and gave its promissory note to the seller (Alto
Imaging Group, N.V., the former parent of QMS B.V.) for the remaining $6.2
million. This note was converted to a term loan with twenty quarterly payments
of $311,746 beginning January 15, 2000, and ending on October 15, 2004. The
remainder of the purchase was funded by a $12.8 million loan and $5.0 million
advance on future Company production from Minolta Co., Ltd. and a $12.2 million
sale of 2,130,000 shares of the Company's common stock to Minolta Investments
Company ("Minolta"). Surplus financing was used to reduce revolving lines of
credit.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the acquisition
date. Goodwill of $23.7 million was recognized on the acquisition equal to the
excess of the price paid over the estimated fair value of the net assets
acquired. Goodwill may be reduced as further information is obtained regarding
the fair value of QMS B.V.'s intangible assets. However, the Company does not
expect any material effect on its consolidated results of operations as a
result of this adjustment. The consolidated
27
statements of operations include the results of European and Australian
operations from their acquisition date forward.
The estimated fair value of assets acquired and liabilities assumed in the
acquisition is summarized as follows (in thousands):
Fair value of assets acquired...................................... $ 50,408
Goodwill........................................................... 23,737
Liabilities assumed................................................ (44,235)
--------
$ 29,910
========
Consideration consisted of:
Cash.............................................................. $ 20,500
Note to seller.................................................... 6,234
Portion offset by payable due to QMS, Inc......................... 3,176
--------
Total purchase price............................................. $ 29,910
========
The following unaudited pro forma consolidated results of operations for the
year ended December 31, 1999, and October 2, 1998, have been prepared as though
the acquisition occurred as of the beginning of the periods presented (in
thousands):
1999 1998
-------- --------
Net sales............................................... $291,714 $213,361
Income (loss) before extraordinary loss................. (28,753) 2,845
Net income (loss)....................................... (29,146) 2,845
Basic and diluted income (loss) per share before
extraordinary loss..................................... (2.01) 0.22
Basic and diluted net income (loss) per share........... (2.04) 0.22
The unaudited pro forma consolidated results of operations have been
prepared for comparative purposes only and do not purport to be indicative of
the actual results that would have been achieved had the acquisition taken
place as indicated above or in the future.
QMS Europe B.V. and QMS Australia Pty. Ltd. were sold to Jalak Investment
B.V., effective the beginning of fiscal 1996. The Company continued to sell
controller boards and components to these businesses at cost and then realized
a commission on their sales of QMS products to third parties until the
reacquisition of QMS B.V. in June 1999. Commissions and royalties earned from
QMS B.V. totaled $9.5 million, $2.9 million, $8.4 million, and $9.0 million for
fiscal 1999 (prior to the date of acquisition), the transition period, and
fiscal 1998 and 1997, respectively.
3. Inventories
Inventories at December 31, 1999, and October 2, 1998, are summarized as
follows (in thousands):
1999 1998
------- -------
Raw materials.............................................. $13,705 $ 5,962
Work in process............................................ 16,191 2,158
Finished goods............................................. 35,718 18,643
Inventory reserves......................................... (8,627) (3,673)
------- -------
$56,987 $23,090
======= =======
Inventory reserves consist primarily of excess and obsolete reserves, net
realizable value reserves, and spare part valuation reserves. Excess and
obsolete reserves are calculated based on specific identification of items that
are potentially excess or obsolete and are recorded on a routine basis due to
rapid obsolescence of certain inventory items. Net realizable value reserves
reflect differences in either future purchase commitments or standard product
cost compared to net realizable value. Spare part valuation reserves reflect
the reduced value of repaired parts from the historical cost of the parts'
original purchase price.
28
During fiscal 1999, the Company purchased $5.7 million in printer engines
and related products from Minolta.
4. Capitalized and Deferred Software
Capitalized and deferred software at December 31, 1999, and October 2,
1998, are summarized as follows (in thousands):
1999 1998
------ ------
Capitalized software costs, net............................... $8,973 $8,542
Deferred software costs, net.................................. 508 729
------ ------
$9,481 $9,271
====== ======
Accumulated amortization of capitalized software costs was $15.2 million
and $13.2 million at December 31, 1999, and October 2, 1998, respectively.
Accumulated amortization of deferred software costs was $1.7 million and $0.9
million at December 31, 1999, and October 2, 1998, respectively.
5. Property, Plant, and Equipment
Property, plant, and equipment at December 31, 1999, and October 2, 1998,
are summarized as follows (in thousands):
1999 1998
------- -------
Land........................................................ $ 0 $ 39
Buildings and improvements.................................. 0 1,233
Leasehold and land improvements............................. 1,017 255
Machinery and equipment..................................... 33,018 28,929
Office furniture and equipment.............................. 6,176 5,425
------- -------
40,211 35,881
Less accumulated depreciation............................... 33,743 30,932
------- -------
$ 6,468 $ 4,949
======= =======
6. Notes Receivable
Notes receivable at December 31, 1999, and October 2, 1998, are summarized
as follows (in thousands):
1999 1998
---- ------
QMS Europe B.V.--payable as described below (interest at
12%)......................................................... $ 0 $3,000
QMS Japan KK--payable over 24 months (interest at 8%),
less reserves of $585 in 1999 and $1,150 in 1998............. 239 239
---- ------
239 3,239
Less current portion.......................................... 239 3,239
---- ------
$ 0 $ 0
==== ======
In November 1998, QMS Europe B.V. paid the note receivable in full. The
note from QMS Japan KK is currently unsecured but the Company has the option
to purchase all of the assets of QMS Japan KK. Because the majority of the
note balance is reserved, the fair value, as of December 31, 1999, and October
2, 1998, has been estimated to approximate carrying value.
In addition to the notes receivable balances, the Company has net trade
receivables balances from QMS Europe B.V. and QMS Japan KK of approximately
$2,742,000 and $9,000, respectively, as of October 2, 1998. There were no
outstanding trade receivables due from QMS Japan KK as of December 31, 1999.
29
7. Other Current Liabilities
Other current liabilities at December 31, 1999, and October 2, 1998, are
summarized as follows (in thousands):
1999 1998
------- ------
Warranty accrual............................................. $ 2,979 $1,208
Management transition--current............................... 1,809 697
Reserves for restructuring charges (Note 19)................. 3,980 343
Deferred income taxes........................................ 680 680
Other........................................................ 5,075 4,275
------- ------
$14,523 $7,203
======= ======
8. Revolving Credit Agreement
Amounts borrowed at December 31, 1999, and October 2, 1998, consist of $26.8
million and $6.0 million, respectively, under secured revolving credit
agreements.
On August 19, 1999, the Company entered into an agreement with Harris Trust
and Savings Bank ("Harris") which allowed the Company to retire the existing
secured revolving credit agreement with Foothill Capital Corporation
("Foothill"). This new credit facility provides for a revolving line of credit
through August 2002 with maximum availability of $20.0 million, secured by the
Company's domestic and Canadian accounts receivable and inventory. At December
31, 1999, total availability was $17.5 million and $9.1 million was
outstanding. The stated rate of interest for any borrowings under the agreement
is one-quarter of one percent (0.25) over prime or London Interbank Offered
Rate ("LIBOR") plus three percent. The effective rate at December 31, 1999, was
8.75%.
At October 2, 1998, the Company had $6.0 million outstanding under a
revolving line of credit with Foothill at a stated interest rate of one and
one-half percent over prime (9.75% at October 2, 1998). In 1999, the Company
recognized an extraordinary loss of approximately $393,000 on the early
extinguishment of this debt.
In compliance with Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force Issue No. 95-22, "Balance Sheet Classification of Borrowings
Outstanding Under Revolving Credit Arrangements That Include a Subjective
Acceleration Clause and a Lock-Box Arrangement," the Harris and Foothill credit
facilities are classified as short-term debt in the financial statements.
The Harris credit facility prohibits payment of dividends, limits amounts of
unamortized capital software development costs and capital expenditures, and
requires minimum levels of tangible net worth and fixed charge coverage. The
Company was not in compliance with certain of these financial covenants at
December 31, 1999. A waiver of non-compliance was received from the lender. An
event of default under the Harris agreement is projected at March 31, 2000, as
a result of the Company's conditions of non-compliance with an operating lease
agreement. Under the terms of a letter of intent from the landlord, the Company
is presently negotiating the purchase of the leased property and cancellation
of the operating lease agreement (see Note 20). Accordingly, on March 20, 2000,
the Company obtained a waiver of this cross covenant from Harris.
At December 31, 1999, the Company's wholly owned subsidiary, QMS B.V., had
borrowings of $17.8 million under the revolving credit facilities with ING Bank
N.V., ING Mezzanine Fonds B.V. and NMB Heller N.V. (collectively "Heller")
through February 2001. Total borrowing capacity under this agreement is based
on a percentage of eligible accounts receivable and inventory and is secured by
these assets. At December 31, 1999, total availability was $20.6 million. The
stated rate of interest for any borrowings under this agreement is Amsterdam
Interbank Offered Rate ("AIBOR") plus 1.25% with a minimum of 4% per annum (4%
at December 31, 1999). The Company was not in compliance with the Heller
required minimum
30
stockholders' equity covenant at December 31, 1999. A waiver of non-compliance
was received from the lender. The Heller credit facility requires lender
approval for payment of dividends from QMS, B.V. to QMS, Inc. Accordingly, QMS,
B.V.'s restricted net assets total approximately $6.0 million as of December
31, 1999.
The fair value of the Company's revolving credit loans, based on the
variable nature of the associated interest rates has been estimated to
approximate carrying value.
9. Term Debt
Term debt at December 31, 1999, is summarized as follows (in thousands):
1999
-------
Minolta......................................................... $32,800
Alto Imaging Group, N.V......................................... 6,234
Jalak Investments B.V........................................... 1,000
Heller.......................................................... 2,730
-------
42,764
Less current portion of term debt............................... 5,616
-------
$37,148
=======
Term debt outstanding at December 31, 1999, matures as follows: $5.6 million
in 2000, $13.1 million in 2001, $12.2 million in 2002, $9.6 million in 2003,
$1.3 million in 2004 and $1.0 million thereafter.
At December 31, 1999, the indebtedness to Minolta consisted of
$12.8 million, $15.0 million, and $5.0 million in loans payable in aggregate
monthly principal installments, beginning on the first anniversary of each
loan, of approximately $911,000 through June 2003, $556,000 through November
2003, and $139,000 through December 2003. The stated interest rate for these
loans is LIBOR plus 2.5% payable monthly in arrears (7.94% at December 31,
1999). These loans are secured by the common stock of QMS B.V. Total interest
expense incurred on the Minolta loans was $0.6 million in fiscal 1999.
The Company received an additional loan from Minolta of $10.0 million on
February 4, 2000. This loan is payable in thirty-six principal installments of
approximately $277,800 with a stated interest rate of LIBOR plus 2.5% payable
monthly in arrears.
In the reacquisition of the Company's former European and Australian
subsidiaries, the Company financed $6.2 million of the purchase price through a
note payable with Alto Imaging Group, N.V. ("Alto"). This note was converted to
a term loan in the fourth quarter of 1999. This loan will be repaid in twenty
quarterly payments of $311,746 starting January 15, 2000, and ending on
October 15, 2004. The stated rate of interest for this loan is LIBOR plus 0.5%,
but not less than 6.50% (6.62% at December 31, 1999).
In addition, the Company's European subsidiary has term debt outstanding of
$3.7 million, consisting of a $1.0 million loan from Jalak Investments B.V.
("Jalak"), the parent company of Alto, with a stated interest rate of 6%, and
$2.7 million in loans from Heller with a stated interest rate of 10%. The Jalak
loan is subordinated to the credit facility and there is no repayment schedule.
The Heller loans are being repaid in quarterly payments of $454,857 until
fiscal 2001.
The difference between the fair value and carrying value of the Company's
term debt is not considered significant based on the variable nature of the
interest rates or, for borrowings at a fixed rate of interest, a discounted
cash flow analysis using a borrowing rate currently available to the Company
for loans with similar terms and maturities.
31
10.Leases
The Company has capital leases for office and computer equipment that expire
through fiscal 2004. The Company is obligated under operating leases
principally for office and manufacturing space which expire through fiscal
2012. Future minimum lease payments under capital and operating leases with
noncancelable terms in excess of one year as of December 31, 1999, were as
follows (in thousands):
Capital
Lease Operating
Fiscal Year Obligations Leases
----------- ----------- ---------
2000................................................. $ 703 $ 2,925
2001................................................. 582 2,697
2002................................................. 507 2,449
2003................................................. 321 1,901
2004................................................. 128 1,784
Thereafter........................................... 0 12,112
------ -------
Total minimum payments............................... 2,241 $23,868
=======
Less amounts representing interest................... 288
------
Present value of minimum payments.................... 1,953
Less current maturities under capital lease
obligations......................................... 568
------
$1,385
======
Rent expense under operating leases for fiscal 1999, the transition period,
and fiscal 1998 and 1997 was $5.2 million, $1.1 million, $4.4 million, and $4.2
million, respectively.
Assets recorded under capital leases (included in property, plant, and
equipment in the accompanying consolidated balance sheets) at December 31,
1999, and October 2, 1998, are summarized as follows (in thousands):
1999 1998
------ ------
Machinery and equipment....................................... $4,259 $3,635
Office furniture and equipment................................ 1,681 1,612
------ ------
5,940 5,247
Less accumulated depreciation................................. 4,559 3,892
------ ------
$1,381 $1,355
====== ======
11.Employee Benefit Plans
The Company has a Cash or Deferred Retirement Plan which covers
substantially all employees and is a qualified plan under Section 401(k) of the
Internal Revenue Code. Employees may make a pretax contribution of up to 10% of
their annual salaries and are provided several investment choices. The Company
may match employee contributions at varying rates up to a maximum of 3.5% of
annual salary, and Company contributions are made on an annual basis. The plan
is a calendar year plan. Employees at the end of the plan year are fully vested
in applicable Company contributions. The Company elected to match employee
contributions in calendar years 1999, 1998 and 1997. In fiscal 1999 and 1998,
the Company contributed $420,032 and $378,307 to the plan, respectively, with
such contributions being applicable to the immediately preceding calendar year.
In fiscal 1997 and the transition period, the Company contributed no amounts to
the Plan.
In January 1996, the Board of Directors and stockholders of the Company
adopted the Employee Stock Purchase Plan and reserved 500,000 shares for
issuance. The plan covers substantially all employees and is a qualified plan
under Section 423 of the Internal Revenue Code. Under the plan, employees may
elect to
32
contribute between 2% and 10% of their annual salaries to purchase shares of
the Company's common stock at a price per share that is 85% of the fair market
value. The remaining 15% and all related fees and expenses of administering the
plan are paid by the Company. Shares purchased and expense recorded during
fiscal 1999, the transition period, and fiscal 1998 and 1997 were immaterial.
12. Stock Option Plans
The Company's stock option plans allow incentive or non-qualified stock
options to be granted to employees and directors providing the right, when
exercisable, to purchase up to an aggregate of 1,686,754 shares of the
Company's common stock. In the case of incentive stock options, the option
price is not less than the fair market value at date of grant. A non-qualified
optionee may receive the right to be paid cash upon the exercise of a non-
qualified option in an amount intended to approximate 100% of the amount of the
federal, state, and local income tax payable by that optionee upon exercise of
the option.
For employees with less than one year of service with the Company, one-
fourth of the granted options may be exercised one year after the date of
grant, with an additional one-fourth exercisable each year thereafter, although
other exercise provisions are allowed. For employees with greater than one year
of service, one-fifth of the granted options may be exercised on the date of
grant, with an additional one-fifth exercisable each year thereafter, although
other exercise provisions are allowed. Options that expire or are canceled
prior to exercise are restored to the shares available for future grants. At
December 31, 1999, the Company had reserved 397,526 shares for the future grant
of options under these plans.
The Company's stock option plans also provide that, in the event of a change
of control (as defined in each of the plans), all options then outstanding
could become exercisable immediately either in full or in part.
Under the Company's 1997 Stock Incentive Plan, stock options expire not
later than ten years from the date of grant. The Company's 1987 stock option
plan expired in fiscal 1997 upon the adoption of the Company's 1997 plan and
its 1984 plan expired during fiscal 1994. No additional options can be granted
under the expired plans. Outstanding stock options under these plans were not
affected by their expiration. Compensation expense under the 1997 plan was
$50,000 for fiscal year 1998. No compensation expense was recognized under this
plan for fiscal 1999, the transition period, and fiscal 1997.
In fiscal 1998, the Company repriced certain stock option grants under the
1987 Stock Option Plan. Stock option grants of 376,950 shares that were
previously issued under the 1987 plan at option prices greater than the current
fair market value were forfeited and replaced with stock option grants under
the 1997 Stock Incentive Plan for 188,475 shares (a rate of one new share for
two previous shares) at the fair market value on the date of grant. The grant
of these repriced options was restricted to non-executive officer employees.
During fiscal 1994, the Company adopted the Stock Option Plan for Directors
whereby non-employee directors receive non-qualified stock option grants
annually, and may make an irrevocable election annually to receive stock
options at a below-market exercise price in lieu of cash directors' fees.
Compensation expense under this plan for fiscal 1998 and 1997 was $45,996 and
$93,990, respectively. No such compensation expense was recognized in fiscal
1999 or the transition period. Stock options granted under this plan expire not
later than twenty years from the date of grant.
33
A summary of stock option activity is as follows:
Weighted
Average
Weighted Fair
Average Value of
Number of Option Price Exercise Options
Shares per Share Price Granted
--------- --------------- -------- --------
Outstanding,
September 27, 1996................. 1,383,470 $2.81 to $22.50 7.95
Granted at market value........... 376,750 2.69 to 5.63 5.15 2.29
Granted at above market value..... 3,750 5.63 to 5.63 5.63 1.39
Granted at below market value..... 32,708 2.81 to 2.81 2.81 3.18
Exercised......................... (15,600) 4.63 to 5.63 5.02
Terminated........................ (498,954) 2.81 to 22.50 10.14
---------
Outstanding,
October 3, 1997.................... 1,282,124 2.69 to 15.00 6.18
Granted at market value........... 825,525 2.69 to 4.44 3.30 1.54
Granted at below market value..... 400,000 2.44 to 2.44 2.44 1.70
Exercised......................... (55) 3.88 to 3.88 3.06
Terminated........................ (761,320) 2.69 to 8.88 5.84
---------
Outstanding,
October 2, 1998.................... 1,746,274 2.44 to 15.00 4.11
Granted at market value........... 288,500 3.75 to 3.81 3.75 2.08
Exercised......................... (250) 3.88 to 3.88 2.81
Terminated........................ (322,975) 2.44 to 11.25 4.35
---------
Outstanding,
January 1, 1999.................... 1,711,549 2.69 to 15.00 4.01
Granted at market value........... 295,400 3.00 to 3.88 3.20 1.84
Exercised......................... (427,741) 3.19 to 5.63 3.24
Terminated........................ (289,980) 2.81 to 15.00 5.08
========= =============== ======
Outstanding,
December 31, 1999.................. 1,289,228 $2.44 to $15.00 $ 3.84
=========
Exercisable
October 3, 1997................... 743,397 $2.69 to $15.00 $ 6.47
October 2, 1998................... 487,959 $2.81 to $15.00 $ 6.32
January 1, 1999................... 615,674 $2.44 to $15.00 $ 4.85
December 31, 1999................. 504,960 $2.44 to $15.00 $ 4.65
A summary of outstanding and exercisable shares by price range as of
December 31, 1999, is as follows:
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$ 2.44 - $ 2.69 199,999 8.01 $ 2.52 0 $0.00
2.81 - 3.00 278,984 11.20 2.90 140,834 2.84
3.06 - 3.43 174,680 9.00 3.17 22,166 3.07
3.69 - 3.69 32,180 8.58 3.69 21,545 3.69
3.75 - 3.75 270,000 8.86 3.75 108,000 3.75
3.88 - 4.63 163,785 10.88 4.35 73,105 4.52
5.13 - 8.88 164,600 12.21 7.08 134,310 7.38
15.00 - 15.00 5,000 2.06 15.00 5,000 15.00
--------- -------
2.44 - 15.00 1,289,228 9.90 3.84 504,960 4.65
========= =======
34
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value method of accounting for stock-based
compensation. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to the new
standard, companies are encouraged, but are not required, to adopt the fair
value method of accounting for employee stock-based transactions. Companies
also are permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), but are required to disclose in a note to the financial
statements pro forma information as if the Company had applied the new method
of accounting. The Company has elected to continue to follow APB 25, and the
required pro forma disclosures are presented below.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for options was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 7.0% for fiscal 1999 and the transition
period, 5.0% for fiscal 1998 and 6.0% for fiscal 1997; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock
of 0.6904% for fiscal 1999, 0.6535% for the transition period, 0.6384% for
fiscal 1998 and 0.5285% for fiscal 1997; and a weighted-average expected life
of the option of 3.79 years for fiscal 1999, 3.97 for the transition period,
and 1.54 years for fiscal years 1998 and 1997.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects
of applying SFAS 123 on a pro forma basis for fiscal 1999, the transition
period, and fiscal 1998 and 1997, would have approximated the following amounts
(in thousands, except per share amounts):
Transition
1999 Period 1998 1997
-------- ---------- ------ --------
Net income (loss):
Reported............................. $(27,400) $ 112 $1,825 $(26,122)
Basic and diluted per share......... (2.25) 0.01 0.17 (2.44)
Pro forma............................ (28,099) (64) 1,614 (26,652)
Basic and diluted per share......... (2.31) (0.01) 0.15 (2.49)
13. Supplemental Executive Retirement and Certain Other Related Party Payments
The Company has supplemental executive retirement agreements with three of
its former officers (including the Company's former Chairman and Chief
Executive Officer) under which each is entitled to a monthly benefit upon
leaving the Company's employment. In fiscal 1997, the Company expensed $1.8
million related to these benefits. During fiscal 1997, the Company recognized
the expense associated with entering into agreements that accelerated the
retirement benefits for two officers. (See Note 19.)
The Company paid cash benefits of $548,824, $43,554, $174,216, and $92,771
in fiscal 1999, the transition period, and fiscal 1998 and 1997, respectively,
under these agreements.
The Company paid fees of $628,000, $156,000, $516,000 and $501,000 in fiscal
1999, the transition period, and fiscal 1998 and 1997, respectively, to a
professional services firm, a member of which served on the Company's Board of
Directors during these fiscal years.
35
14. Stockholder Rights Plan
In March 1999, the Company adopted a Stockholder Rights Plan and pursuant to
the plan declared a dividend on its common stock of one right (a "Right") for
each share of common stock then outstanding and for each share of common stock
issued thereafter and prior to the time the Rights expire or become
exercisable. Upon the occurrence of certain events, each Right becomes
exercisable to purchase one one-hundredth of a share of Series A Participating
Preferred Stock at a price of $17.19. The Rights expire on February 28, 2009,
and, prior to the occurrence of certain events, may be redeemed at a price of
$.01 per Right. Of the Company's 500,000 authorized shares of preferred stock,
no par value, the Board of Directors has designated 250,000 shares as Series A
Participating Preferred Stock.
15. Income Taxes
The components of income (loss) before income taxes and the provision
(benefit) for income taxes (both domestic and foreign) for fiscal 1999, the
transition period, and fiscal 1998 and 1997 are summarized as follows (in
thousands):
Transition
1999 Period 1998 1997
-------- ---------- ------- --------
Income (loss) before income taxes:
Domestic.............................. $(21,174) $ 65 $ 3,030 $(23,800)
Foreign............................... (6,454) 51 (1,170) (2,322)
-------- ---- ------- --------
$(27,628) $116 $ 1,860 $(26,122)
======== ==== ======= ========
Provision (benefit) for income taxes:
Current:
Federal............................... $ 42 $ 3 $ 35 $ 0
Foreign............................... 0 1 0 0
State................................. 700 0 0 0
-------- ---- ------- --------
742 4 35 0
======== ==== ======= ========
Deferred:
Federal............................... 0 0 0 0
Foreign............................... (1,363) 0 0 0
State................................. 0 0 0 0
-------- ---- ------- --------
(1,363) 0 0 0
-------- ---- ------- --------
$ (621) $ 4 $ 35 $ 0
======== ==== ======= ========
At December 31, 1999, the Company had domestic operating loss carryovers of
approximately $56.2 million of which $1.8 million will expire in 2007, $0.5
million in 2009, $20.5 million in 2010, $6.4 million in 2011, $11.7 million in
2012, $1.9 million in 2018 and $13.4 million in 2019. Foreign operating loss
carryovers of $5.4 million have an indefinite carryover period. In addition,
the Company had general business credit carryovers of approximately $1.7
million which will expire during fiscal years 2002 through 2007. Foreign tax
credit carryforwards of approximately $102,000 existed at December 31, 1999,
and will expire $17,000 in fiscal 2002, $43,000 in fiscal 2003, and $42,000 in
fiscal 2004.
36
A reconciliation of the statutory federal income tax rate to the effective
rate for fiscal 1999, the transition period, and fiscal 1998 and 1997 is as
follows (in thousands):
Transition
1998 Period 1997 1996
------- ---------- ----- -------
Tax at federal statutory rate.......... $(9,352) $ 42 $ 633 $(8,881)
State income taxes..................... 700 0 0 0
Operating losses generating no tax
benefit............................... 9,394 (39) 0 8,881
Utilization of carryovers.............. 0 0 (598) 0
Tax effect of international operations,
net................................... (1,363) 1 0 0
Other, net............................. 0 0
------- ---- ----- -------
$ (621) $ 4 $ 35 $ 0
======= ==== ===== =======
Deferred tax assets and liabilities that arise as a result of temporary
differences at December 31, 1999, and October 2, 1998, are summarized as
follows (in thousands):
1999 1998
-------- --------
Deferred tax assets:
Inventory reserves.................................. $ 1,494 $ 1,179
Restructuring reserves.............................. 2,111 190
Foreign tax credits................................. 102 60
General business credit carryforwards............... 1,696 1,696
Net operating loss carryforwards.................... 23,234 15,160
Deferred income..................................... 454 584
Other............................................... 3,306 3,909
-------- --------
Total gross deferred tax assets.................... 32,397 22,778
Deferred tax asset valuation allowance.............. (26,148) (19,013)
-------- --------
Total deferred tax assets.......................... 6,249 3,765
-------- --------
Deferred tax liabilities:
Depreciation........................................ (190) (307)
Capitalized software costs.......................... (3,347) (3,186)
Deferred software costs............................. (190) (272)
Other............................................... 0 0
-------- --------
Total deferred tax liabilities..................... (3,727) (3,765)
-------- --------
Net deferred taxes................................ $ 2,522 $ 0
======== ======== ===
The valuation allowance was established based on certain assumptions about
levels of future pretax income that are consistent with historical results. In
fiscal 1999, the deferred tax asset valuation allowance reflects an evaluation
which recognizes uncertainties related to the future utilization of carryovers.
The valuation allowance for deferred tax assets increased by approximately $7.1
million and $6.1 million during fiscal 1999 and 1997, respectively, and
decreased by approximately $1.2 million and $1.7 million during the transition
period and fiscal 1998, respectively.
16. Segment Information
The Company has three geographic reportable segments: United
States/Canada/Latin America; Japan; and Europe/Australia. Each segment's
operations consist primarily of the manufacture and sale of network printing
solutions and related servicing activities. The accounting policies of the
segments are the same as those described in Note 1. The Company evaluates
segment performance based on operating profit (loss). Sales for each segment
are based on the location of the third-party customer. All intercompany
transactions between
37
segments have been eliminated. Segment results for fiscal 1999, the transition
period, and fiscal 1998 and 1997 are as follows:
Transition
1999 Period 1998 1997
-------- ---------- -------- --------
(In thousands)
Net sales:
United States/Canada/Latin America.. $110,299 $30,378 $132,107 $124,589
Japan............................... 28,537 8,960 1,384 0
Europe/Australia.................... 82,450 0 0 0
Net transfer between geographic
areas................................ 24,159 2,063 3,251 3,592
Adjustments and eliminations.......... (24,159) (2,063) (3,251) (3,592)
-------- ------- -------- --------
Consolidated net sales............... $221,286 $39,338 $133,491 $124,589
======== ======= ======== ========
Operating income (loss):
United States/Canada/Latin America.. $ (8,738) $ 3,111 $ 11,451 $(14,797)
Japan............................... (1,295) (38) (52) 0
Europe/Australia.................... 2,574 0 0 0
Adjustments and eliminations.......... 0 0 0 (1,455)
-------- ------- -------- --------
Segment operating income (loss)....... (7,459) 3,073 11,399 (16,252)
General corporate expenses............ (15,298) (2,838) (9,318) (8,965)
Interest income....................... 56 51 381 373
Interest expense...................... (3,014) (193) (485) (721)
Miscellaneous income (expense)........ (1,913) 23 (117) (557)
-------- ------- -------- --------
Consolidated income (loss) before
income taxes and extraordinary
loss................................ $(27,628) $ 116 $ 1,860 $(26,122)
======== ======= ======== ========
Depreciation and amortization expense:
United States/Canada/Latin America.. $ 11,166 $ 2,405 $ 9,811 $ 10,755
Japan............................... 17 0 0 0
Europe/Australia.................... 2,203 0 0 0
-------- ------- -------- --------
Total depreciation and amortization
expense............................ $ 13,386 $ 2,405 $ 9,811 $ 10,755
======== ======= ======== ========
Segment assets:
United States/Canada/Latin America.. $ 59,763 $59,900 $ 60,424 $ 56,425
Japan............................... 9,138 6,247 3,167 0
Europe/Australia.................... 76,433 0 0 0
-------- ------- -------- --------
145,334 66,147 63,591 56,425
Corporate assets...................... 5,872 4,147 5,764 2,164
-------- ------- -------- --------
Total assets........................ $151,206 $70,294 $ 69,355 $ 58,589
======== ======= ======== ========
Capital expenditures:
United States/Canada/Latin America.. $ 1,314 $ 410 $ 2,115 $ 2,672
Japan............................... 213 0 0 0
Europe/Australia.................... 1,019 0 0 0
-------- ------- -------- --------
Total capital expenditures.......... $ 2,546 $ 410 $ 2,115 $ 2,672
======== ======= ======== ========
38
Sales to customers in the United States were $87.8 million, $21.8 million,
$99.5 million and $96.8 million in fiscal 1999, the transition period, and
fiscal 1998 and 1997, respectively.
Net sales by product for fiscal 1999, the transition period, and fiscal 1998
and 1997 are as follows:
Transition
1999 Period 1998 1997
--------- ---------- -------- --------
(In thousands)
Net sales:
Print Systems........................ $ 90,987 $15,908 $ 54,334 $ 43,362
Consumables.......................... 80,675 10,122 30,732 32,612
Service.............................. 30,793 7,813 36,734 33,587
Other................................ 18,831 5,495 11,691 15,028
--------- ------- -------- --------
$ 221,286 $39,338 $133,491 $124,589
========= ======= ======== ========
Third-party U.S. export sales for fiscal year 1999, the transition period,
and fiscal 1998 and 1997 were $17.3 million, $6.9 million, $26.7 million, and
$20.6 million, respectively.
Consolidated sales to Ingram Micro, Inc. represented 10.8%, 12.0%, and 12.1%
of consolidated net sales for fiscal 1999, the transition period, and fiscal
1998, respectively. Sales to QMS Europe B.V. represented 15.3% and 15.4% of
consolidated net sales for the transition period and fiscal 1998, respectively,
and the related accounts receivable balances amounted to $1.3 million and $1.4
million, respectively, as of the end of those periods. No customer accounted
for 10% or more of consolidated net sales for fiscal 1997.
17. Supplemental Cash Flow Information
Cash paid for interest and income taxes for fiscal 1999, the transition
period, and fiscal 1998 and 1997 is as follows (in thousands):
Transition
1999 Period 1998 1997
------ ---------- ---- ----
Interest......................................... $2,801 $244 $703 $830
Income taxes..................................... 42 3 43 0
Additions to capital lease assets and related obligations were $1.8 million,
$0.3 million, and $1.5 million in fiscal 1999, 1998 and 1997, respectively, as
a result of the Company entering into equipment leases. There were no additions
to capital lease assets during the transition period.
18. Commitments and Contingencies
At December 31, 1999, the Company and its subsidiaries had a commitment of
approximately $43.8 million under contracts to purchase print engines and
related components and approximately $25.3 million under contracts to purchase
spares and consumables.
39
The Company is a defendant in various litigation and claims in the normal
course of business. Based on consultation with various counsel in these
matters, management is of the opinion that the ultimate resolution of such
litigation and claims will not materially affect the Company's financial
position, results of operations or cash flows.
19. Restructuring Charges
During the third quarter of 1999, the Company completed a restructuring and
recognized related charges totaling approximately $3.3 million as actions were
taken to reduce redundant expenses and head count as a result of the Minolta
convergence. These costs included $2.3 million in salary continuation and out-
placement costs for 66 employees from all levels and functional areas of the
Company, $0.9 million in the write-off of assets related to a pending
implementation of an enterprise business software project, and $0.1 million in
other related expenses. The fair value of the impaired assets was determined to
be zero given that the implementation project was cancelled, and existing
systems will be replaced with those consistent with Minolta. Use of this
restructuring reserve for fiscal 1999 consisted of $0.9 million in salary
continuation and out-placement and approximately $50,000 in other exit
activities, resulting in $1.4 million in the reserve for restructuring charges
related to the Minolta convergence as of December 31, 1999.
During the fourth quarter of 1999, the Company recognized $2.3 million in
restructuring charges related to the outsourcing of its service business to a
third-party provider. These costs included $1.6 million in severance for
approximately 109 employees from all levels and functional areas of the
Company's service business, $0.6 million in activities associated with field
service office closings, and $0.1 million in loss on disposal of the service
van fleet. Activities associated with this restructuring were completed in
early 2000. There were no uses of this restructuring reserve during fiscal 1999
and thus the reserve for restructuring charges totaled $2.3 million as of
December 31, 1999.
During fiscal 1997, the Company recognized restructuring charges totaling
approximately $8.0 million. These costs included $1.6 million in severance and
out-placement costs for 119 employees from all levels and functional areas of
the Company, $2.6 million for retirement benefits and management transition
expenses, $2.4 million related to foreign translation adjustments in connection
with the substantial reduction of foreign operations, $0.6 million related to
the write-off of certain fixed assets, $0.4 million in the write-off of office
lease obligations, and $0.3 million in other expenses. Uses of the 1997
restructuring reserve in fiscal 1999, the transition period, and fiscal 1998
and 1997 are summarized as follows (in thousands):
Transition
1999 Period 1998 1997
---- ---------- ------ ------
(In thousands)
Salary continuation and out-placement......... $ 0 $ 0 $ 977 $ 731
Payment of facility lease obiligations........ 22 25 204 281
Other exit activities......................... 0 0 223 649
--- --- ------ ------
$22 $25 $1,404 $1,661
=== === ====== ======
The reserve for restructuring charges related to the fiscal 1997
restructuring totaled $0.3 million as of December 31, 1999.
There were no restructuring charges for fiscal 1998.
The retirement benefits and management transition reserve balance was an
additional $3.4 million and $3.8 million at December 31, 1999, and October 2,
1998, respectively.
20. Sale/Leaseback
In February 1997, the Company completed the sale and leaseback of land and
buildings at its Mobile, Alabama headquarters and operations. The initial term
of the operating lease is fifteen years with renewal options for five
additional five-year periods. Quarterly rent of approximately $0.4 million is
payable in advance, subject after three years to adjustment for increases in
the Consumer Price Index.
40
Net proceeds of the sale were approximately $12.5 million which resulted in
no material gain or loss on the sale. The net proceeds were used to retire the
existing term loan and to substantially reduce the balance of the Company's
revolving credit loan.
The operating lease agreement contains various covenants and a provision
which requires the lessor's approval of the Company's payment of cash
dividends. At October 3, 1997, and October 2, 1998, the Company was not in
compliance with the minimum Net Worth covenant contained in the lease
agreement. On December 8, 1997, the Company obtained a one-year waiver of non-
compliance from the lessor through October 5, 1998, in exchange for $1.3
million in prepaid rent and an amendment to a related warrant agreement to
purchase 100,000 shares of the Company's common stock at $4 per share. Warrants
granted under this agreement are exercisable through December 31, 2001. On
November 17, 1998, the Company obtained a continuation of the waiver of non-
compliance from the lessor through December 31, 1999, in exchange for
continuing the $1.3 million in prepaid rent. On June 7, 1999, the Company
obtained a waiver agreement and lease amendment for the transactions related to
the Minolta convergence and reacquisition of the European and Australian
subsidiaries.
At December 31, 1999, the Company was in violation of several financial
covenants contained in the operating lease agreement and is not projected to
remedy these conditions of non-compliance upon expiration of a cure period on
March 31, 2000. Among the remedies available to the landlord is the
acceleration of all remaining base rent on a discounted basis for the initial
lease term (approximately $13.2 million), cancellation of the lease, or all
other remedies available by law. The violations of the financial covenants in
the lease agreement beyond the cure period will also constitute an event of
default under the Harris revolving credit agreement (see Note 8).
On March 10, 2000, the Company received a letter of intent from its landlord
indicating its willingness to sell the leased property for the greater of $14.0
million or an appraised value, based upon a mutually agreed to process,
provided such sale is consummated by April 28, 2000. Management believes it is
probable that negotiations to complete the purchase of the property and cancel
the operating lease agreement will be successful, and Minolta has agreed to
provide the funding necessary to consummate such purchase. In addition, on
March 20, 2000, the Company obtained a waiver of the cross covenant contained
in the Harris revolving credit agreement.
21. Reactivation of Japanese Subsidiary
In September 1998, the Company reactivated its Japanese subsidiary under the
name QMS K.K. This subsidiary was closed in fiscal 1995 when the assets were
sold to an independent Master Distributor, QMS Japan KK.
In September 1998, the Master Distributor, QMS Japan KK, agreed to terminate
its Master Distributor Agreement with the Company, and it transferred inventory
and cash to reduce its accounts payable balance to the Company. The Company
then entered into a servicing agreement with QMS Japan KK to provide sales,
general, and administrative services to the reactivated subsidiary, QMS K.K. In
exchange for QMS Japan KK's services, the Company has agreed to pay the
reasonable expenses of QMS Japan KK and an additional management fee.
As of December 31, 1999, the Company had a note receivable due from QMS
Japan KK in the amount of $823,466 and has reserved $584,577 against the note
balance. The Company has also obtained a four-year option to purchase all of
the assets of QMS Japan KK.
41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of QMS, Inc.:
We have audited the accompanying consolidated balance sheets of QMS, Inc.
and subsidiaries (a majority-owned subsidiary of Minolta Investments Company)
as of December 31, 1999 and October 2, 1998, and the related consolidated
statements of operations, comprehensive income, changes in stockholders'
equity, and cash flows for the fiscal year ended December 31, 1999, the period
from October 3, 1998 to January 1, 1999, and the fiscal years ended October 2,
1998, and October 3, 1997. Our audits also included the financial statement
schedules listed in the index at Item 14. These financial statements and the
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of QMS, Inc. and subsidiaries as
of December 31, 1999 and October 2, 1998, and the results of their operations
and their cash flows for the fiscal year ended December 31, 1999, the period
from October 3, 1998 to January 1, 1999, and the fiscal years ended October 2,
1998, and October 3, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
- ---------------------
DELOITTE & TOUCHE LLP
Birmingham, Alabama
March 2, 2000 (March 20, 2000 as to the fifth paragraphs of Note 8 and Note 20)
42
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of QMS, Inc. is responsible for the preparation, integrity,
and objectivity of the consolidated financial statements and all other sections
of this annual report. The financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management made informed estimates and
judgments of the expected effects of events and transactions based upon
currently available facts and circumstances.
Management maintains a system of internal accounting controls which it
believes is adequate to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with management
authorization, and the financial records are reliable for preparing the
consolidated financial statements. The concept of reasonable assurance
recognizes that the cost of a system of internal accounting controls should not
exceed the benefits derived and that there are inherent limitations in the
effectiveness of any system of internal accounting controls.
The Company's independent auditors, Deloitte & Touche LLP, have audited the
Company's consolidated financial statements and expressed an opinion that such
statements present fairly, in all material respects, the Company's financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. Their audit was conducted in accordance with
generally accepted auditing standards and included such procedures believed by
them to be sufficient to provide reasonable assurance that the consolidated
financial statements are free of material misstatement.
The Board of Directors, acting through its Audit Committee, oversees
management's responsibilities in the preparation of the consolidated financial
statements. The Audit Committee is responsible for reviewing and making
recommendations regarding the Company's employment of independent auditors, the
annual audit of the Company's financial statements and the Company's internal
accounting practices and policies. In performing this function, the Audit
Committee, which is composed of directors who are not employees of the Company,
meets periodically with management and the independent auditors to review the
work of each. Deloitte & Touche LLP has free access to the Audit Committee and
to the Board of Directors, without management present, to discuss internal
accounting control, auditing, and financial reporting matters.
We believe these policies and procedures provide reasonable assurance that
our operations are conducted with a high standard of business conduct and that
the financial statements reflect fairly the financial position, results of
operations, and cash flows of the Company.
/s/ Edward E. Lucente
_____________________________________
President and Chief Executive
Officer
/s/ Albert A. Butler
_____________________________________
Chief Financial Officer and
Vice President
43
QUARTERLY DATA
Unaudited quarterly data for the fiscal years ended December 31, 1999, and
October 2, 1998.
1999
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter(a) Quarter(b)
------- ------- ---------- ----------
Dollars in thousands, except per
share amounts
Net sales............................... $43,366 $50,933 $ 62,730 $64,257
Gross profit............................ 10,041 11,886 9,866 12,488
Net loss................................ (891) (1,419) (16,290) (8,800)
Net loss per common share
Basic and diluted...................... $ (0.07) $ (0.12) $ (1.23) $ (0.66)
1998
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ---------- ----------
Dollars in thousands, except per
share amounts
Net sales............................... $28,578 $34,621 $ 35,363 $34,929
Gross profit............................ 9,073 10,102 10,651 9,594
Net income.............................. 401 477 421 526
Net income per common share
Basic and diluted...................... $ 0.04 $ 0.04 $ 0.04 $ 0.05
- --------
(a) Includes special charges of $4.8 million principally associated with the
Minolta convergence and $3.3 million for restructuring charges.
(b) Includes $2.3 million for restructuring charges.
44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference to
information under the captions "Proposal 1--Election of Directors--Directors
and Director Nominees" and "Section 16(a) Beneficial Ownership Reporting
Compliance" on pages 2-5 of the Proxy Statement and "Executive Officers" on
page 5 of the Proxy Statement.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to
information under the captions "Proposal 1--Election of Directors--Director
Compensation" on pages 4-5, "Executive Compensation Tables" on pages 6-9,
"Stock Performance Graph" on page 10, "Executive Agreements" on page 11 and
"Report of the Compensation Committee of the Board of Directors of QMS, Inc."
on pages 12-13 of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
information under the caption "Beneficial Ownership of Common Stock" on pages
5-6 of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The other information required by this item is incorporated by reference to
information under the caption "Compensation Committee Interlocks and Insider
Participation" on pages 13-14 and "Certain Transactions and Matters" and
"Interests of Certain Persons in Matters to be Acted Upon" on page 21 of the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements are included in Item 8 of Part II:
. Consolidated Statements of Operations for the Fiscal Year Ended
December 31, 1999, the transition period ended January 1, 1999,
and the fiscal years ended October 2, 1998, and October 3, 1997.
. Consolidated Statements of Comprehensive Income (Loss) for the
Fiscal Year Ended December 31, 1999, the transition period ended
January 1, 1999, and the fiscal years ended October 2, 1998, and
October 3, 1997.
. Consolidated Balance Sheets at December 31, 1999, and October 2,
1998.
. Consolidated Statements of Changes in Stockholders' Equity for the
Fiscal Year Ended December 31, 1999, the transition period ended
January 1, 1999, and the fiscal years ended October 2, 1998, and
October 3, 1997.
. Consolidated Statements of Cash Flows for the Fiscal Year Ended
December 31, 1999, the transition period ended January 1, 1999,
and the fiscal years ended October 2, 1998, and October 3, 1997.
45
. Notes to Consolidated Financial Statements for the Fiscal Year
Ended December 31, 1999, the transition period ended January 1,
1999, and the fiscal years ended October 2, 1998, and October 3,
1997.
2. Financial Statement Schedules
The schedules listed below are included herein immediately after the
signature pages hereto. Schedules not listed below have been omitted
because they are not applicable or the required information is
included in the financial statements or notes thereto.
Schedule
Number Description
------ -----------
I Condensed Financial Information of Registrant (Parent Company
Only) for the Fiscal Year Ended December 31, 1999
II Valuation and Qualifying Accounts and Reserves for the Fiscal
Year Ended December 31, 1999, the transition period ended
January 1, 1999, and the Fiscal Years Ended October 2, 1998,
and October 3, 1997
The Registrant's independent auditors' report on the financial statements
and financial statement schedule listed above is located at Item 8 of Part II.
3. Exhibits:
Exhibit
Number Description
---------- -----------
3(a) Restated Certificate of Incorporation, as amended as of
February 17, 1987,(/1/) Certificate of Amendment thereto
filed with the Secretary of State of Delaware as of January
31, 1991,(/2/) and Certificate of Amendment thereto filed
with the Secretary of State of Delaware as of January 27,
1999.(/24/)
3(b) Bylaws of Registrant.(/1/)
4(a) The rights of security holders are defined in Articles 4, 9
and 10 of the Restated Certificate of Incorporation of the
Registrant, Articles II, VI and VII of the Bylaws of the
Registrant and the Rights Agreement. [Incorporated herein by
reference to Exhibits 3(a), 3(b) and 4(b), respectively.]
4(b) Copy of Rights Agreement between QMS, Inc. and Rights Agent
dated March 8, 1999.(/26/)
10(a)(i) Cash or Deferred Retirement Plan, as amended and restated as
of December 17, 1993.(/4/)*
10(a)(ii) Trust Agreement dated November 1, 1993, relating to the Cash
or Deferred Retirement Plan as amended by an Amendment to the
Trust Agreement dated December 28, 1993.(/4/)
10(c)(i) Form of 1987 Stock Option Plan, as amended and restated as of
December 13, 1990.(/2/)*
10(c)(ii) Form of First Amendment to the 1987 Stock Option Plan
effective November 7, 1991.(/2/)*
10(d) Supplemental Executive Retirement Plan Agreements dated
September 30, 1991.(/4/)*
10(f) Executive Services Agreement dated August 1, 1999, between
QMS, Inc. and Edward E. Lucente.(/22/)
10(f)(i) Amendment to the Executive Services Agreement between QMS,
Inc. and Edward E. Lucente dated October 25, 1999.(/22/)
46
Exhibit
Number Description
---------- -----------
10(f)(ii) Agreement between QMS, Inc. and Edward E. Lucente dated
October 25, 1999, in which QMS, Inc. adopts a nonqualified
compensation agreement.(/22/)
10(f)(iii) Amendment to Trust Agreement between QMS, Inc. and South
Alabama Trust Company, Inc. dated October 25, 1999.(/22/)
10(g) 1997 Stock Incentive Plan, dated October 23, 1996,(/27/)*
together with First Amendment thereto effective as of October
15, 1997.(/28/)*
10(h) Form of Executive Agreement entered into with: James L.
Busby, Donald L. Parker, Ph.D., Charles D. Daley and James K.
Doan.(/7/)*
10(h)(i) Form of Executive Agreement entered into with Edward E.
Lucente on January 5, 1998.(/25/)*
10(h)(ii) Form of Executive Services Agreement entered into with Edward
E. Lucente on January 5, 1998.(/25/)*
10(i) International Technical Support Agreement dated January 5,
2000, between International Business Machines and QMS, Inc.
10(j) Credit Agreement dated August 19, 1999, by and between QMS,
Inc. and Harris Trust and Savings Bank.(/22/)
10(j)(i) Waiver dated March 2, 2000, by and between QMS, Inc. and
Harris Trust and Savings Bank.
10(j)(ii) Waiver dated March 20, 2000, by and between QMS, Inc. and
Harris Trust and Savings Bank.
10(m) QMS, Inc. Employee Stock Purchase Plan.(/14/)
10(o) Stock Option Plan, dated July 30, 1984,(/8/)* together with
First Amendment thereto effective as of January 1,
1987,(/1/)* Second Amendment thereto effective as of
November 10, 1987,(/1/)* Third Amendment thereto effective as
of April 6, 1989,(/7/)* Fourth Amendment thereto effective as
of January 1, 1990,(/6/)* and Fifth Amendment thereto
effective as of November 7, 1991.(/2/)*
10(p) Stock Option Plan for Directors.(/9/)*
10(q)(i) Share Purchase Agreement dated October 12, 1995, between
Jalak Investments B.V. and QMS, Inc.(/10/)
10(q)(ii) Promissory Note dated October 16, 1995, in the original
principal amount of U.S. $4,000,000 from QMS Europe B.V. and
QMS Australia PTY Ltd. in favor of QMS, Inc.(/10/)
10(q)(iii) Pledge and Security Agreement and Pledging of Shares, each
dated October 16, 1995, by Jalak Investments, B.V. in favor
of QMS, Inc.(/10/)
10(q)(iv) Deed of Subordination and Pledge dated October 16, 1995, by
and among QMS, Inc., QMS Europe B.V. and Credit Lyonnais Bank
Nederland N.V.(/10/)
10(q)(v) Master Distributor Agreement dated October 16, 1995, among
the Registrant, QMS Europe, B.V. and QMS Australia PTY
Ltd.(/10/)
10(q)(vi) Trademark and Trade Name License Agreement dated October 16,
1995, between QMS Europe B.V. and QMS, Inc.(/10/)
10(r) Loan and Security Agreement dated November 7, 1995, by and
between QMS, Inc. and Foothill Capital Corporation.(/11/)
47
Exhibit
Number Description
------------ -----------
10(r)(i) Stock Pledge Agreement dated November 7, 1995, by and
between QMS, Inc. and Foothill Capital Corporation.(/11/)
10(r)(ii) Term Note A dated November 7, 1995, in the original
principal amount of $1,750,000 from QMS, Inc. in favor of
Foothill Capital Corporation.(/11/)
10(r)(iii) Term Note B dated November 7, 1995, in the original
principal amount of $5,000,000 from QMS, Inc. in favor of
Foothill Capital Corporation.(/11/)
10(r)(iv) Trademark Security Agreement dated November 7, 1995, made
by QMS, Inc. in favor of Foothill Capital
Corporation.(/11/)
10(r)(v) QMS, Inc. Warrant to Purchase 100,000 shares of Common
Stock, dated November 7, 1995.(/11/)
10(r)(vi) General Security Agreement dated November 7, 1995, by and
between QMS Canada Inc. in favor of Foothill Capital
Corporation.(/11/)
10(r)(vii) General Continuing Guaranty dated November 7, 1995, by QMS
Canada Inc. in favor of Foothill Capital Corporation.(/11/)
10(r)(viii) Security Agreement dated November 7, 1995, by and between
Foothill Capital Corporation and QMS Canada Inc.(/11/)
10(r)(ix) General Continuing Guaranty dated November 7, 1995, by QMS
Circuits, Inc. in favor of Foothill Capital
Corporation.(/11/)
10(r)(x) Security Agreement dated November 7, 1995, between Foothill
Capital Corporation and QMS Circuits, Inc.(/11/)
10(r)(xi) Amendment Number One dated December 4, 1995, to the Loan
and Security Agreement dated November 7, 1995.(/13/)
10(r)(xii) Amendment Number Two dated February 7, 1996, to the Loan
and Security Agreement dated November 7, 1995.(/13/)
10(r)(xiii) Amendment Number Three dated July 31, 1996, to the Loan and
Security Agreement dated November 7, 1995.(/13/)
10(r)(xiv) Waiver Agreement dated May 5, 1997, waiving certain
provisions of the Loan and Security Agreement.(/15/)
10(r)(xv) Amendment Number Five dated June 3, 1997, to the Loan and
Security Agreement.(/16/)
10(r)(xvi) Amendment Number Four dated January 22, 1997, to the Loan
and Security Agreement.(/20/)
10(r)(xvii) Amendment Number Six dated October 8, 1997, to the Loan and
Security Agreement.(/20/)
10(r)(xviii) Amendment Number Seven dated September 23, 1998, to the
Loan and Security Agreement.(/20/)
10(r)(xix) Amendment Number Eight dated November 17, 1998, to the Loan
and Security Agreement.(/20/)
10(r)(xx) Amendment Number Nine dated April 30, 1999, to the Loan and
Security Agreement.(/21/)
10(s)(i) Asset Purchase Agreement dated September 30, 1995, between
QMS Japan Kabushiki Kaisha ("QMS Japan KK") and QMS,
Inc.(/12/)
48
Exhibit
Number Description
----------- -----------
10(s)(ii) Assumption of Liabilities dated September 30, 1995, by QMS
Japan KK.(/12/)
10(s)(iii) Inventory Johto-Tampo Agreement dated September 30, 1995,
between QMS Japan KK and QMS, Inc.(/12/)
10(s)(iv) Master Distributor Agreement dated September 30, 1995,
between QMS Japan KK and QMS, Inc.(/12/)
10(s)(v) Promissory Note dated September 30, 1995, in the original
principal amount of U.S. $3,000,000 from Yoji Kawai in favor
of QMS Japan KK.(/12/)
10(s)(vi) Promissory Note dated September 30, 1995, in the original
principal amount of U.S. $500,000 from Yoji Kawai in favor
of QMS Japan KK.(/12/)
10(s)(vii) Trademark and Trade Name License Agreement dated December 7,
1995, between QMS Japan KK and QMS, Inc.(/12/)
10(s)(viii) Assumption Agreement dated December 7, 1995, between QMS
Japan KK and QMS, Inc.(/12/)
10(t) Sale-Leaseback Agreement between QMS, Inc. and Ink (AL) QRS
12-21, Inc. dated February 18, 1997.(/17/)
10(t)(i) Waiver agreement between Ink (AL) QRS 12-21, Inc. and QMS,
Inc. dated December 8, 1997.(/19/)
10(t)(ii) Amendment to Warrant dated December 8, 1997, to the Sale-
Leaseback Agreement.(/19/)
10(t)(iii) Waiver agreement between Ink (AL) QRS 12-21, Inc. and QMS,
Inc. dated November 17, 1998.(/20/)
10(t)(iv) Waiver agreement and Lease Amendment dated June 7, 1999,
between Ink (AL) QRS 12-21, Inc. and QMS, Inc.(/22/)
10(u) Agreement dated July 7, 1997, between QMS, Inc. and James L.
Busby.(/18/)
10(v) Agreement dated August 7, 1997, between QMS, Inc. and Donald
L. Parker.(/19/)
10(w) QMS, Inc.--Genicom Corporation Strategic Partner
Agreement.(/19/)
10(x) Share Purchase Agreement between QMS, Inc. and Alto Imaging
Group, N.V. dated May 17, 1999.(/23/)
10(x)(i) Promissory Note between QMS, Inc. and Alto Imaging Group,
N.V.(/23/)
10(x)(ii) Loan Agreement between QMS, Inc. and Minolta Co., Ltd. dated
June 7, 1999.(/23/)
10(x)(iii) Stock Purchase Agreement between QMS, Inc., Minolta
Investments Company, and Minolta Co., Ltd. dated June 7,
1999.(/23/)
10(x)(iv) First Amendment to Rights Agreement dated June 7, 1999,
between QMS, Inc. and South Alabama Trust Company,
Inc.(/23/)
10(x)(v) Promissory Note between QMS, Inc. and Minolta Co., Ltd. for
$15,000,000 dated November 10, 1999.(/22/)
10(x)(vi) Promissory Note between QMS, Inc. and QMS Europe B.V. for
$4,000,000 dated November 10, 1999.(/22/)
49
Exhibit
Number Description
----------- -----------
10(x)(vii) Promissory Note between QMS, Inc. and Minolta Co., Ltd. for
$5,000,000 dated December 22, 1999.
10(x)(viii) Promissory Note between QMS, Inc. and Minolta Co., Ltd. for
$10,000,000 dated February 4, 2000.
10(x)(ix) Promissory Note between QMS, Inc. and QMS Europe B.V. for
$4,000,000 dated February 8, 2000.
10(x)(x) Waiver Agreement between QMS Europe B.V. and ING Bank N.V.,
ING Mezzanine Fonds B.V. and NMB Heller N.V. dated February
11, 2000.
11 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent
27 Financial Data Schedules
- --------
* Indicates a management contract or compensatory plan or arrangement.
(/1/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended October
2, 1987 (Commission File No. 1-9348).
(/2/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended
September 27, 1991 (Commission File No. 1-9348).
(/3/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended
September 30, 1988 (Commission File No. 1-9348).
(/4/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended October
1, 1993 (Commission File No. 1-9348).
(/5/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended October
2, 1992 (Commission File No. 1-9348).
(/6/) Incorporated herein by reference to exhibit of same number in
Registrant's quarterly report on Form 10-Q for the quarter ended April 1,
1988 (Commission File No. 1-9348).
(/7/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended
September 29, 1989 (Commission File No. 1-9348).
(/8/) Incorporated herein by reference to exhibit of same number in
Registrant's Registration Statement on Form S-1, filed September 19, 1984
(Registration No. 2-93329).
(/9/) Incorporated herein by reference to Appendix B to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 25, 1994
(Commission File No. 1-9348).
(/10/) Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on October 16, 1995 (Commission File No. 1-9348).
(/11/) Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on November 21, 1995 (Commission File No. 1-9348).
(/12/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended
September 29, 1995 (Commission File No. 1-9348).
(/13/) Incorporated herein by reference to exhibit of same number in
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
June 28, 1996 (Commission File No. 1-9348).
(/14/) Incorporated herein by reference to Appendix A to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 23,
1996 (Commission File No. 1-9348).
(/15/) Incorporated herein by reference to exhibit of same number in
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
March 28, 1997 (Commission File No. 1-9348).
(/16/) Incorporated herein by reference to exhibit of same number in
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
June 27, 1997 (Commission File No. 1-9348).
50
(/17/) Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on February 18, 1997 (Commission File No. 1-9348).
(/18/) Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on July 7, 1997 (Commission File No. 1-9348).
(/19/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended
October 3, 1997 (Commission File No. 1-9348).
(/20/) Incorporated herein by reference to exhibit of same number in
Registrant's annual report on Form 10-K for the fiscal year ended
October 2, 1998 (Commission File No. 1-9348).
(/21/) Incorporated herein by reference to exhibit of same number in
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
April 2, 1999 (Commission File No. 1-9348).
(/22/) Incorporated herein by reference to exhibit of same number in
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
October 1, 1999 (Commission File No. 1-9348).
(/23/) Incorporated herein by reference to exhibit of same number in
Registrant's Form 8-K filed on June 7, 1999 (Commission File No. 1-
9348).
(/24/) Incorporated herein by reference to Appendix A of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 27,
1999 (Commission File No. 1-9348).
(/25/) Incorporated herein by reference to exhibit of same number in
Registrant's quarterly report on Form 10-Q for the fiscal quarter ended
January 2, 1998 (Commission File No. 1-9348).
(/26/) Incorporated herein by reference to Exhibit 1 in Registrant's Form 8-A
filed on March 18, 1999 (Commission File No. 1-9348).
(/27/) Incorporated herein by reference to Appendix B of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 21,
1997 (Commission File No. 1-9348).
(/28/) Incorporated herein by reference to Appendix A of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 20,
1998 (Commission File No. 1-9348).
(b) Reports on Forms 8-K: The following reports were filed on Forms 8-K during
fiscal 1999.
. Form 8-K dated February 22, 1999, announcing the Company's intent to
exercise its option to reacquire its former subsidiaries, QMS Europe B.V.
and QMS Australia PTY Ltd.
. Form 8-K dated June 7, 1999, announcing the Company's reacquisition of
its former subsidiaries, QMS Europe B.V. and QMS Australia PTY Ltd.
. Form 8-K dated August 6, 1999, announcing the resignation of James A.
Wallace as Chief Financial Officer and Director
. Form 8-K/A dated June 7, 1999, and signed August 11, 1999, related to the
Company's reacquisition of its former subsidiaries, QMS Europe B.V. and
QMS Australia PTY Ltd.
. Form 8-K dated October 8, 1999, reporting the change in fiscal year end.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
QMS, Inc.
/s/ Edward E. Lucente
Date: March 23, 2000 By: _____________________________________
Edward E. Lucente
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 23, 2000 /s/ Edward E. Lucente
-------------------------------------
Edward E. Lucente
President and Director (Principal
Executive Officer)
Date: March 23, 2000 /s/ Albert A. Butler
-------------------------------------
Albert A. Butler
Chief Financial Officer and Director
(Principal Financial and Accounting
Officer)
Date: March 23, 2000 /s/ William R. Bowles
-------------------------------------
William R. Bowles
Director
Date: March 23, 2000 /s/ F. Rigdon Currie
-------------------------------------
F. Rigdon Currie
Director
Date: March 23, 2000 /s/ Michael C. Dow
-------------------------------------
Michael C. Dow
Director
Date: March 23, 2000 /s/ Hiroshi Fujii
-------------------------------------
Hiroshi Fujii
Director
Date: March 23, 2000 /s/ Allen A. Hans
-------------------------------------
Allen A. Hans
Director
Date: March 23, 2000 /s/ Ryusho Kutani
-------------------------------------
Ryusho Kutani
Director
Date: March 23, 2000 /s/ Robert J. Materna
-------------------------------------
Robert J. Materna
Director
52
SIGNATURES (continued)
Date: March 23, 2000 /s/ Yoshisuke Takekida
-------------------------------------
Yoshisuke Takekida
Director
Date: March 23, 2000 /s/ Shoei Yamana
-------------------------------------
Shoei Yamana
Vice President and Director
53
SCHEDULE I
QMS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
As discussed in Note 2 of the consolidated financial statements, QMS, Inc.
acquired 100% of the common stock of QMS B.V. on June 7, 1999. At December 31,
1999, QMS B.V. had borrowings outstanding under a revolving credit loan and
term debt agreement that restrict the payment of dividends to QMS, Inc. (see
Note 8). Accordingly, the following parent company only condensed financial
statements are presented because the distribution of the net assets of QMS B.V.
is restricted.
CONDENSED STATEMENT OF OPERATIONS
For the Fiscal Year Ended December 31, 1999
(Dollars in thousands, except per share amounts)
Net sales............................................................ $129,238
Cost of sales........................................................ 103,770
--------
Gross profit......................................................... 25,468
Operating expenses................................................... 45,026
--------
Operating loss....................................................... (19,558)
Other income (expense)
Interest income..................................................... 56
Interest expense.................................................... (2,022)
Miscellaneous income................................................ 258
--------
Total other expense, net........................................... (1,708)
Equity in net loss of subsidiaries................................... (4,999)
--------
Loss before income taxes and extraordinary loss...................... (26,265)
Income tax provision................................................. 742
--------
Loss before extraordinary loss....................................... (27,007)
Extraordinary loss on early extinguishment of debt................... 393
--------
Net loss............................................................. $(27,400)
--------
Loss per common share
Basic and diluted before extraordinary loss......................... $ (2.22)
Extraordinary loss.................................................. (0.03)
--------
Net loss basic and diluted.......................................... $ (2.25)
========
Shares used in basic and diluted per share computation............... 12,152
========
54
CONDENSED BALANCE SHEET
As of December 31, 1999
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents............................................ $ 925
Trade receivables (less allowance for doubtful accounts of $378)..... 36,345
Notes receivable (less allowance of $242)............................ 239
--------
Inventories:
Raw materials....................................................... 11,353
Work in process..................................................... 1,784
Finished goods...................................................... 16,925
Inventory reserves.................................................. (4,004)
--------
Total inventories, net............................................. 26,058
--------
Intercompany receivable.............................................. 5,101
Other current assets................................................. 2,138
--------
Total current assets............................................... 70,806
Property, plant, and equipment, net................................... 4,555
Investment in subsidiaries............................................ 16,522
Capitalized and deferred software, net................................ 9,481
Other assets, net..................................................... 2,679
--------
Total.............................................................. $104,043
========
Liabilities and Stockholders' Equity
Current liabilities
Revolving credit loans............................................... $ 9,094
Current maturities of long-term debt................................. 2,427
Current maturities of capital lease obligations...................... 568
Accounts payable..................................................... 16,772
Employment costs..................................................... 4,185
Deferred revenue..................................................... 4,844
--------
Other current liabilities:
Warranty accrual.................................................... 1,662
Restructuring reserve............................................... 3,980
Accrued management transition expenses.............................. 1,809
Other............................................................... 3,420
--------
Total other current liabilities.................................... 10,871
--------
Total current liabilities.......................................... 48,761
Long-term debt........................................................ 36,608
Capital lease obligations............................................. 1,385
Other liabilities..................................................... 4,159
--------
Total liabilities.................................................. 90,913
--------
Stockholders' equity.................................................. 13,130
--------
Total.............................................................. $104,043
========
55
CONDENSED STATEMENT OF CASH FLOWS
For the Fiscal Year Ended December 31, 1999
(Dollars in thousands)
Operating activities:
Net loss............................................................... $(27,400)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Extraordinary loss.................................................... 393
Depreciation.......................................................... 2,090
Equity in net loss of subsidiaries.................................... 4,999
Amortization and write-off of capitalized and deferred software
costs................................................................ 10,924
Provision for losses on inventory..................................... 375
Recovery of losses on accounts and notes receivable................... (384)
Non-cash restructuring charges........................................ 931
Other................................................................. 28
Changes in assets and liabilities which provided (used) cash:
Trade receivables..................................................... (10,131)
Inventories, net...................................................... (3,063)
Accounts payable...................................................... 3,296
Other................................................................. 2,815
--------
Net cash used in operating activities................................ (15,127)
--------
Investing activities:
Purchase of European and Australian subsidiaries....................... (20,500)
Collections of notes receivable........................................ 473
Additions to property, plant and equipment............................. (1,853)
Additions to capitalized and deferred software costs................... (10,250)
--------
Net cash used in investing activities................................ (32,130)
--------
Financing activities:
Proceeds from revolving credit lines, net.............................. 1,788
Proceeds from long-term debt........................................... 32,800
Payments of debt issuance costs, net................................... (453)
Payments of capital lease obligations.................................. (415)
Proceeds from issuance of common stock................................. 12,248
Proceeds from exercise of stock options................................ 1,386
--------
Net cash provided by financing activities............................ 47,354
--------
Net change in cash and cash equivalents................................. 97
Cash and cash equivalents, beginning of year............................ 828
--------
Cash and cash equivalents, end of year.................................. $ 925
========
56
SCHEDULE II
QMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Fiscal Year Ended December 31, 1999, the transition period ended
January 1, 1999,
and the Fiscal Years Ended October 2, 1998, and October 3, 1997
Balance at Additions
Beginning Charged to Costs Balance at
Description of Year and Expenses Deductions(a) End of Year
- ----------- ---------- ---------------- ------------- -----------
Allowance for doubtful
accounts--deducted from
receivables in the
balance sheet
Year ended October 3,
1997.................. $ 383,000 $ 402,000 $ 256,000 $ 529,000
========== ========== ========== ==========
Year ended October 2,
1998.................. $ 529,000 $ 202,000 $ 219,000 $ 512,000
========== ========== ========== ==========
Transition Period...... $ 512,000 $ 0 $ 28,000 $ 484,000
========== ========== ========== ==========
Year ended December 31,
1999.................. $ 484,000 $ 396,000 $ 214,000 $ 666,000
========== ========== ========== ==========
Additions
Balance at Charged to
Beginning Expenses and Balance at
Description of Year Other Accounts Deductions End of Year
- ----------- ---------- ---------------- ------------- -----------
Allowance for notes
receivable--deducted
from notes receivable
in the balance sheet
Year ended October 3,
1997.................. $ 900,000 $ 0 $ 0 $ 900,000
========== ========== ========== ==========
Year ended October 2,
1998.................. $ 900,000 $ 250,000 $ 0 $1,150,000
========== ========== ========== ==========
Transition Period...... $1,150,000 $ 0 $ 0 $1,150,000
========== ========== ========== ==========
Year ended December 31,
1999.................. $1,150,000 $ 0 $ 565,000(b) $ 585,000
========== ========== ========== ==========
Balance at Additions
Beginning Charged to Costs Balance at
Description of Year and Expenses Deductions(c) End of Year
- ----------- ---------- ---------------- ------------- -----------
Inventory reserves--
deducted from gross
inventories in the
balance sheet
Year ended October 3,
1997.................. $5,177,000 $7,416,000 $5,615,000 $6,978,000
========== ========== ========== ==========
Year ended October 2,
1998.................. $6,978,000 $2,953,000 $6,258,000 $3,673,000
========== ========== ========== ==========
Transition Period...... $3,673,000 $ 795,000 $ 839,000 $3,629,000
========== ========== ========== ==========
Year ended December 31,
1999.................. $3,629,000 $8,326,000 $3,328,000 $8,627,000
========== ========== ========== ==========
Balance at Additions
Beginning Charged to Costs Balance at
Description of Year and Expenses Deductions(d) End of Year
- ----------- ---------- ---------------- ------------- -----------
Reserves for
restructuring charges
and divestitures
of businesses
Year ended October 3,
1997.................. $ 466,000 $2,942,000 $1,661,000 $1,747,000
========== ========== ========== ==========
Year ended October 2,
1998.................. $1,747,000 $ 0 $1,404,000 $ 343,000
========== ========== ========== ==========
Transition Period...... $ 343,000 $ 0 $ 25,000 $ 318,000
========== ========== ========== ==========
Year ended December 31,
1999.................. $ 318,000 $4,628,000 $ 966,000 $3,980,000
========== ========== ========== ==========
- --------
(a) Uncollectible accounts written off
(b) Recovery of amounts previously reserved
(c) Disposal of inventory
(d) Includes salary continuation and outplacement, divestitures of businesses,
and other write-offs. See Note 19 to the Company's Consolidated Financial
Statement under Item 8.
57
3. Exhibits:
Exhibit
Number Description
------ -----------
3(a) Restated Certificate of Incorporation, as amended as of
February 17, 1987,(/1/) Certificate of Amendment thereto
filed with the Secretary of State of Delaware as of January
31, 1991,(/2/) and Certificate of Amendment thereto filed
with the Secretary of State of Delaware as of January 27,
1999.(/24/)
3(b) Bylaws of Registrant.(/1/)
4(a) The rights of security holders are defined in Articles 4, 9
and 10 of the Restated Certificate of Incorporation of the
Registrant, Articles II, VI and VII of the Bylaws of the
Registrant and the Rights Agreement. [Incorporated herein by
reference to Exhibits 3(a), 3(b) and 4(b), respectively.]
4(b) Copy of Rights Agreement between QMS, Inc. and Rights Agent
dated March 8, 1999.(/26/)
10(a)(i) Cash or Deferred Retirement Plan, as amended and restated as
of December 17, 1993.(/4/)*
10(a)(ii) Trust Agreement dated November 1, 1993, relating to the Cash
or Deferred Retirement Plan as amended by an Amendment to the
Trust Agreement dated December 28, 1993.(/4/)
10(c)(i) Form of 1987 Stock Option Plan, as amended and restated as of
December 13, 1990.(/2/)*
10(c)(ii) Form of First Amendment to the 1987 Stock Option Plan
effective November 7, 1991.(/2/)*
10(d) Supplemental Executive Retirement Plan Agreements dated
September 30, 1991.(/4/)*
10(f) Executive Services Agreement dated August 1, 1999, between
QMS, Inc. and Edward E. Lucente.(/22/)
10(f)(i) Amendment to the Executive Services Agreement between QMS,
Inc. and Edward E. Lucente dated October 25, 1999.(/22/)
10(f)(ii) Agreement between QMS, Inc. and Edward E. Lucente dated
October 25, 1999, in which QMS, Inc. adopts a nonqualified
compensation agreement.(/22/)
10(f)(iii) Amendment to Trust Agreement between QMS, Inc. and South
Alabama Trust Company, Inc. dated October 25, 1999.(/22/)
10(g) 1997 Stock Incentive Plan, dated October 23, 1996,(/27/)*
together with First Amendment thereto effective as of October
15, 1997.(/28/)*
1
10(h) Form of Executive Agreement entered into with: James L.
Busby, Donald L. Parker, Ph.D., Charles D. Daley and James K.
Doan.(/7/)*
10(h)(i) Form of Executive Agreement entered into with Edward E.
Lucente on January 5, 1998.(/25/)*
10(h)(ii) Form of Executive Services Agreement entered into with Edward
E. Lucente on January 5, 1998.(/25/)*
10(i) International Technical Support Agreement dated January 5,
2000, between International Business Machines and QMS, Inc.
10(j) Credit Agreement dated August 19, 1999, by and between QMS,
Inc. and Harris Trust and Savings Bank.(/22/)
10(j)(i) Waiver dated March 2, 2000, by and between QMS, Inc. and
Harris Trust and Savings Bank.
10(j)(ii) Waiver dated March 20, 2000, by and between QMS, Inc. and
Harris Trust and Savings Bank.
10(m) QMS, Inc. Employee Stock Purchase Plan.(/14/)
10(o) Stock Option Plan, dated July 30, 1984,(/8/)* together with
First Amendment thereto effective as of January 1,
1987,(/1/)* Second Amendment thereto effective as of
November 10, 1987,(/1/)* Third Amendment thereto effective as
of April 6, 1989,(/7/)* Fourth Amendment thereto effective as
of January 1, 1990,(/6/)* and Fifth Amendment thereto
effective as of November 7, 1991.(/2/)*
10(p) Stock Option Plan for Directors.(/9/)*
10(q)(i) Share Purchase Agreement dated October 12, 1995, between
Jalak Investments B.V. and QMS, Inc.(/10/)
10(q)(ii) Promissory Note dated October 16, 1995, in the original
principal amount of U.S. $4,000,000 from QMS Europe B.V. and
QMS Australia PTY Ltd. in favor of QMS, Inc.(/10/)
10(q)(iii) Pledge and Security Agreement and Pledging of Shares, each
dated October 16, 1995, by Jalak Investments, B.V. in favor
of QMS, Inc.(/10/)
10(q)(iv) Deed of Subordination and Pledge dated October 16, 1995, by
and among QMS, Inc., QMS Europe B.V. and Credit Lyonnais Bank
Nederland N.V.(/10/)
10(q)(v) Master Distributor Agreement dated October 16, 1995, among
the Registrant, QMS Europe, B.V. and QMS Australia PTY
Ltd.(/10/)
10(q)(vi) Trademark and Trade Name License Agreement dated October 16,
1995, between QMS Europe B.V. and QMS, Inc.(/10/)
10(r) Loan and Security Agreement dated November 7, 1995, by and
between QMS, Inc. and Foothill Capital Corporation.(/11/)
10(r)(i) Stock Pledge Agreement dated November 7, 1995, by and
between QMS, Inc. and Foothill Capital Corporation.(/11/)
2
10(r)(ii) Term Note A dated November 7, 1995, in the original
principal amount of $1,750,000 from QMS, Inc. in favor of
Foothill Capital Corporation.(/11/)
10(r)(iii) Term Note B dated November 7, 1995, in the original
principal amount of $5,000,000 from QMS, Inc. in favor of
Foothill Capital Corporation.(/11/)
10(r)(iv) Trademark Security Agreement dated November 7, 1995, made
by QMS, Inc. in favor of Foothill Capital
Corporation.(/11/)
10(r)(v) QMS, Inc. Warrant to Purchase 100,000 shares of Common
Stock, dated November 7, 1995.(/11/)
10(r)(vi) General Security Agreement dated November 7, 1995, by and
between QMS Canada Inc. in favor of Foothill Capital
Corporation.(/11/)
10(r)(vii) General Continuing Guaranty dated November 7, 1995, by QMS
Canada Inc. in favor of Foothill Capital Corporation.(/11/)
10(r)(viii) Security Agreement dated November 7, 1995, by and between
Foothill Capital Corporation and QMS Canada Inc.(/11/)
10(r)(ix) General Continuing Guaranty dated November 7, 1995, by QMS
Circuits, Inc. in favor of Foothill Capital
Corporation.(/11/)
10(r)(x) Security Agreement dated November 7, 1995, between Foothill
Capital Corporation and QMS Circuits, Inc.(/11/)
10(r)(xi) Amendment Number One dated December 4, 1995, to the Loan
and Security Agreement dated November 7, 1995.(/13/)
10(r)(xii) Amendment Number Two dated February 7, 1996, to the Loan
and Security Agreement dated November 7, 1995.(/13/)
10(r)(xiii) Amendment Number Three dated July 31, 1996, to the Loan and
Security Agreement dated November 7, 1995.(/13/)
10(r)(xiv) Waiver Agreement dated May 5, 1997, waiving certain
provisions of the Loan and Security Agreement.(/15/)
10(r)(xv) Amendment Number Five dated June 3, 1997, to the Loan and
Security Agreement.(/16/)
10(r)(xvi) Amendment Number Four dated January 22, 1997, to the Loan
and Security Agreement.(/20/)
10(r)(xvii) Amendment Number Six dated October 8, 1997, to the Loan and
Security Agreement.(/20/)
10(r)(xviii) Amendment Number Seven dated September 23, 1998, to the
Loan and Security Agreement.(/20/)
10(r)(xix) Amendment Number Eight dated November 17, 1998, to the Loan
and Security Agreement.(/20/)
3
10(r)(xx) Amendment Number Nine dated April 30, 1999, to the Loan and
Security Agreement.(/21/)
10(s)(i) Asset Purchase Agreement dated September 30, 1995, between
QMS Japan Kabushiki Kaisha ("QMS Japan KK") and QMS,
Inc.(/12/)
10(s)(ii) Assumption of Liabilities dated September 30, 1995, by QMS
Japan KK.(/12/)
10(s)(iii) Inventory Johto-Tampo Agreement dated September 30, 1995,
between QMS Japan KK and QMS, Inc.(/12/)
10(s)(iv) Master Distributor Agreement dated September 30, 1995,
between QMS Japan KK and QMS, Inc.(/12/)
10(s)(v) Promissory Note dated September 30, 1995, in the original
principal amount of U.S. $3,000,000 from Yoji Kawai in favor
of QMS Japan KK.(/12/)
10(s)(vi) Promissory Note dated September 30, 1995, in the original
principal amount of U.S. $500,000 from Yoji Kawai in favor
of QMS Japan KK.(/12/)
10(s)(vii) Trademark and Trade Name License Agreement dated December 7,
1995, between QMS Japan KK and QMS, Inc.(/12/)
10(s)(viii) Assumption Agreement dated December 7, 1995, between QMS
Japan KK and QMS, Inc.(/12/)
10(t) Sale-Leaseback Agreement between QMS, Inc. and Ink (AL) QRS
12-21, Inc. dated February 18, 1997.(/17/)
10(t)(i) Waiver agreement between Ink (AL) QRS 12-21, Inc. and QMS,
Inc. dated December 8, 1997.(/19/)
10(t)(ii) Amendment to Warrant dated December 8, 1997, to the Sale-
Leaseback Agreement.(/19/)
10(t)(iii) Waiver agreement between Ink (AL) QRS 12-21, Inc. and QMS,
Inc. dated November 17, 1998.(/20/)
10(t)(iv) Waiver agreement and Lease Amendment dated June 7, 1999,
between Ink (AL) QRS 12-21, Inc. and QMS, Inc.(/22/)
10(u) Agreement dated July 7, 1997, between QMS, Inc. and James L.
Busby.(/18/)
10(v) Agreement dated August 7, 1997, between QMS, Inc. and Donald
L. Parker.(/19/)
10(w) QMS, Inc.--Genicom Corporation Strategic Partner
Agreement.(/19/)
4
10(x) Share Purchase Agreement between QMS, Inc. and Alto Imaging
Group, N.V. dated May 17, 1999.(/23/)
10(x)(i) Promissory Note between QMS, Inc. and Alto Imaging Group,
N.V.(/23/)
10(x)(ii) Loan Agreement between QMS, Inc. and Minolta Co., Ltd. dated
June 7, 1999.(/23/)
10(x)(iii) Stock Purchase Agreement between QMS, Inc., Minolta
Investments Company, and Minolta Co., Ltd. dated June 7,
1999.(/23/)
10(x)(iv) First Amendment to Rights Agreement dated June 7, 1999,
between QMS, Inc. and South Alabama Trust Company,
Inc.(/23/)
10(x)(v) Promissory Note between QMS, Inc. and Minolta Co., Ltd. for
$15,000,000 dated November 10, 1999.(/22/)
10(x)(vi) Promissory Note between QMS, Inc. and QMS Europe B.V. for
$4,000,000 dated November 10, 1999.(/22/)
10(x)(vii) Promissory Note between QMS, Inc. and Minolta Co., Ltd. for
$5,000,000 dated December 22, 1999.
10(x)(viii) Promissory Note between QMS, Inc. and Minolta Co., Ltd. for
$10,000,000 dated February 4, 2000.
10(x)(ix) Promissory Note between QMS, Inc. and QMS Europe B.V. for
$4,000,000 dated February 8, 2000.
10(x)(x) Waiver Agreement between QMS Europe B.V. and ING Bank N.V.,
ING Mezzanine Fonds B.V. and NMB Heller N.V. dated February
11, 2000.
11 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent
27 Financial Data Schedules
_________________
* Indicates a management contract or compensatory plan or arrangement.
(/1/) Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended October 2, 1987
(Commission File No. 1-9348).
(/2/) Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended September 27, 1991
(Commission File No. 1-9348).
(/3/) Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended September 30, 1988
(Commission File No. 1-9348).
(/4/) Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended October 1, 1993
(Commission File No. 1-9348).
5
(/5/) Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended October 2, 1992
(Commission File No. 1-9348).
(/6/) Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the quarter ended April 1, 1988
(Commission File No. 1-9348).
(/7/) Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended September 29, 1989
(Commission File No. 1-9348).
(/8/) Incorporated herein by reference to exhibit of same number in Registrant's
Registration Statement on Form S-1, filed September 19, 1984 (Registration
No. 2-93329).
(/9/) Incorporated)herein by reference to Appendix B to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 25, 1994
(Commission File No. 1-9348).
(/10/)Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on October 16, 1995 (Commission File No. 1-9348).
(/11/)Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on November 21, 1995 (Commission File No. 1-9348).
(/12/)Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended September 29, 1995
(Commission File No. 1-9348).
(/13/)Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended June 28, 1996
(Commission File No. 1-9348).
(/14/)Incorporated herein by reference to Appendix A to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 23, 1996
(Commission File No. 1-9348).
(/15/)Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended March 28, 1997
(Commission File No. 1-9348).
(/16/)Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended June 27, 1997
(Commission File No. 1-9348).
(/17/)Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on February 18, 1997 (Commission File No. 1-9348).
(/18/)Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on July 7, 1997 (Commission File No. 1-9348).
(/19/)Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended October 3, 1997
(Commission File No. 1-9348).
(/20/)Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended October 2, 1998
(Commission File No. 1-9348).
(/21/)Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended April 2, 1999
(Commission File No. 1-9348).
6
(/17/)Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on February 18, 1997 (Commission File No. 1-9348).
(/18/)Incorporated herein by reference to exhibits in Registrant's Form 8-K
filed on July 7, 1997 (Commission File No. 1-9348).
(/19/)Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended October 3, 1997
(Commission File No. 1-9348).
(/20/)Incorporated herein by reference to exhibit of same number in Registrant's
annual report on Form 10-K for the fiscal year ended October 2, 1998
(Commission File No. 1-9348).
(/21/)Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended April 2, 1999
(Commission File No. 1-9348).
(/22/)Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended October 1, 1999
(Commission File No. 1-9348).
(/23/)Incorporated herein by reference to exhibit of same number in Registrant's
Form 8-K filed on June 7, 1999 (Commission File No. 1-9348).
(/24/)Incorporated herein by reference to Appendix A of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 27, 1999
(Commission File No. 1-9348).
(/25/)Incorporated herein by reference to exhibit of same number in Registrant's
quarterly report on Form 10-Q for the fiscal quarter ended January 2, 1998
(Commission File No. 1-9348).
(/26/)Incorporated herein by reference to Exhibit 1 in Registrant's Form 8-A
filed on March 18, 1999 (Commission File No. 1-9348).
(/27/)Incorporated herein by reference to Appendix B of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 21, 1997
(Commission File No. 1-9348).
(/28/)Incorporated herein by reference to Appendix A of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on January 20, 1998
(Commission File No. 1-9348).
(b) Reports on Forms 8-K: The following reports were filed on Forms 8-K during
fiscal 1999.
. Form 8-K dated February 22, 1999, announcing the Company's intent to
exercise its option to reacquire its former subsidiaries, QMS Europe B.V.
and QMS Australia PTY Ltd.
. Form 8-K dated June 7, 1999, announcing the Company's reacquisition of
its former subsidiaries, QMS Europe B.V. and QMS Australia PTY Ltd.
. Form 8-K dated August 6, 1999, announcing the resignation of James A.
Wallace as Chief Financial Officer and Director
. Form 8-K/A dated June 7, 1999, and signed August 11, 1999, related to the
Company's reacquisition of its former subsidiaries, QMS Europe B.V. and
QMS Australia PTY Ltd.
. Form 8-K dated October 8, 1999, reporting the change in fiscal year end.
7