SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
(Mark One)
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended ___________________________________________
OR
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from January 1, 2000 to March 31, 2000
--------------- --------------
Commission file number 1-9348
------
MINOLTA - QMS, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 63-0737870
______________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
ONE MAGNUM PASS, MOBILE, AL 36618
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(334) 633-4300
________________________________________________________________________________
(Registrant's telephone number, including area code)
QMS, INC.
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
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
---------- ------------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of the issuer's common stock, as of the latest practicable date
13,266,131 at April 28, 2000.
- -----------------------------
1
MINOLTA - QMS, INC. AND SUBSIDIARIES
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INDEX
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PART I - FINANCIAL INFORMATION PAGE NUMBER
--------------------- -----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
as of March 31, 2000, and December 31, 1999 3-4
Condensed Consolidated Statements of Operations
(unaudited) for the three months ended
March 31, 2000, and April 2, 1999 5
Condensed Consolidated Statements of Comprehensive
Loss (unaudited) for the three months ended
March 31, 2000, and April 2, 1999 6
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended
March 31, 2000, and April 2, 1999 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II - OTHER INFORMATION 17
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. (a) Exhibits
(b) Reports on Form 8 - K
SIGNATURES 18
2
MINOLTA - QMS, INC. AND SUBSIDIARIES
====================================
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 2000, and December 31, 1999
(Unaudited)
March 31, December 31,
in thousands 2000 1999
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 3,922 $ 3,505
Trade Receivables (less allowance for doubtful
accounts of $1,292 at March 31, 2000, and $666
at December 31, 1999) 52,254 39,926
Note Receivable, Net 239 239
Inventories, Net (Note 5) 45,861 56,987
Deferred income taxes 3,975 3,202
Other Current Assets 4,431 5,946
-------- --------
Total Current Assets 110,682 109,805
-------- --------
PROPERTY, PLANT, AND EQUIPMENT 41,245 40,211
Less Accumulated Depreciation 33,318 33,743
-------- --------
Total Property, Plant, and Equipment, Net 7,927 6,468
CAPITALIZED AND DEFERRED SOFTWARE, NET 9,484 9,481
GOODWILL, NET 20,926 21,773
OTHER ASSETS, NET 4,486 3,679
-------- --------
TOTAL ASSETS $153,505 $151,206
======== ========
See Notes to Condensed Consolidated Financial Statements
3
MINOLTA - QMS, INC. AND SUBSIDIARIES
====================================
CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 2000, and December 31, 1999
(Unaudited)
March 31, December 31,
in thousands 2000 1999
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 30,692 $ 37,678
Revolving Credit Loans (Note 8) 33,745 26,840
Current Maturities of Long-Term Debt 8,203 5,616
Current Maturities of Capital Lease Obligations 698 568
Employment Costs 4,732 5,003
Deferred Service Revenue 3,193 5,156
Other Current Liabilities (Note 6) 11,930 14,523
-------- --------
Total Current Liabilities 93,193 95,384
LONG-TERM DEBT 43,674 37,148
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,337 1,385
OTHER LIABILITIES 3,938 4,159
COMMITMENTS AND CONTINGENCIES (Note 11) -- --
-------- --------
STOCKHOLDERS' EQUITY (Notes 7 and 8) 11,363 13,130
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $153,505 $151,206
======== ========
See Notes to Condensed Consolidated Financial Statements
4
MINOLTA - QMS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000, and April 2, 1999
(Unaudited)
Three Months Ended
------------------
March 31, April 2,
in thousands, except per share amounts 2000 1999
- ------------------------------------------------------------------------------
NET SALES $78,991 $43,366
COST OF SALES 58,664 33,325
------- -------
GROSS PROFIT 20,327 10,041
OPERATING EXPENSES 18,712 10,640
------- -------
OPERATING INCOME (LOSS) 1,615 (599)
OTHER INCOME (EXPENSE)
Interest Income 0 26
Interest Expense (1,703) (247)
Miscellaneous Expense (605) (37)
------- -------
Total Other Expense, net (2,308) (258)
------- -------
LOSS BEFORE INCOME TAXES (693) (857)
INCOME TAX PROVISION 246 34
------- -------
NET LOSS $ (939) $ (891)
======= =======
NET LOSS PER COMMON SHARE (Note 3)
Basic and Diluted $ (0.07) $ (0.08)
======= =======
SHARES USED IN PER SHARE COMPUTATION (Note 3)
Basic and Diluted 13,260 10,700
See Notes to Condensed Consolidated Financial Statements
5
MINOLTA - QMS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2000, and April 2, 1999
(Unaudited)
Three Months Ended
---------------------
March 31, April 2,
in thousands 2000 1999
- -------------------------------------------------------------------------
Net Loss $ (939) $ (891)
Other Comprehensive Loss (no income
tax effect):
Foreign Currency Translation Adjustments (859) (242)
Unrealized Gain on Securities 31 0
------- -------
Total Other Comprehensive Loss (828) (242)
------- -------
Comprehensive Loss $(1,767) $(1,133)
======= =======
See Notes to Condensed Consolidated Financial Statements
6
MINOLTA - QMS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000, and April 2, 1999
(Unaudited)
Three Months Ended
--------------------
March 31, April 2,
in thousands 2000 1999
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Loss $ (939) $ (891)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation of Property, Plant and Equipment 798 596
Amortization of Goodwill 847 0
Amortization of Capitalized and Deferred Software 2,319 2,288
Provision for Losses on Accounts and Notes Receivable 522 50
Provision (Recovery) for Losses on Inventory (2,752) 717
Other 144 (12)
Net Change in Assets and Liabilities that Provided
(Used) Cash:
Trade Receivables (12,954) (5,050)
Inventories, Net 13,878 (4,930)
Accounts Payable (6,986) 7,794
Other (5,789) (1,705)
-------- -------
Net Cash Used in Operating Activities (10,912) (1,143)
-------- -------
Cash Flows from Investing Activities:
Collections of Notes Receivable 104 172
Purchase of Property, Plant and Equipment (2,257) (601)
Proceeds from Disposal of Property, Plant and Equipment 0 29
Additions to Capitalized and Deferred Software Costs (2,322) (2,610)
-------- -------
Net Cash Used in Investing Activities (4,475) (3,010)
-------- -------
Cash Flows from Financing Activities:
Net Proceeds from Revolving Credit Loans 6,905 3,531
Proceeds from Long-Term Debt 10,000 0
Payments of Long-Term Debt and Capital Lease Obligations (1,036) (78)
Other (65) (2)
-------- -------
Net Cash Provided by Financing Activities 15,804 3,451
-------- -------
Net Change in Cash and Cash Equivalents 417 (702)
Cash and Cash Equivalents at Beginning of Period 3,505 1,707
-------- -------
Cash and Cash Equivalents at End of Period $ 3,922 $ 1,005
======== =======
See Notes to Condensed Consolidated Financial Statements
7
MINOLTA - QMS, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. MANAGEMENT OPINION
In the opinion of management, the condensed consolidated financial statements
reflect all adjustments necessary to present fairly the financial position of
the Company as of March 31, 2000, the results of operations and changes in
cash flows for the three months ended March 31, 2000, and April 2, 1999. The
results of operations for the three months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the fiscal year
ending March 30, 2001. Certain reclassifications have been made to fiscal
1999 amounts to conform to the transitional period ending March 31, 2000,
presentation.
2. FISCAL YEAR AND NAME CHANGE AND TRANSITION PERIOD
On October 8, 1999, the Company's Board of Directors modified its accounting
periods effective in fiscal 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. Accordingly, this Form 10-Q is for the three-month transition period
ended on March 31, 2000. In connection with this fiscal year change, the
Company will include audited financial statements for this three-month
transition period ended March 31, 2000, in its annual report on Form 10-K for
its new fiscal year ending March 30, 2001.
On April 24, 2000 the Company's Shareholders approved changing the Company's
name to Minolta-QMS, Inc.
3. NET LOSS PER SHARE
Basic and diluted loss per share computations are based on the weighted
average number of common shares outstanding during the period. The diluted
loss per share does not included the effect of the assumed exercise of stock
options, as they are antidilutive.
4. COMPREHENSIVE LOSS
Comprehensive loss consists of net loss and foreign currency translation
adjustments and is reflected in the Condensed Consolidated Statements of
Comprehensive Loss. Due to the Company's available operating loss
carryforwards, there was no income tax effect related to the components of
other comprehensive loss for any of the periods presented.
8
5. INVENTORIES
Inventories at March 31, 2000, and December 31, 1999, are summarized as
follows (in thousands):
March 31, December 31,
2000 1999
----------- ----------
Raw materials $ 9,088 $ 13,705
Work in process 1,227 16,191
Finished goods 41,421 35,718
Inventory reserve (5,875) (8,627)
----------- ----------
TOTAL $45,861 $ 56,987
=========== ==========
6. OTHER CURRENT LIABILITIES
Other current liabilities at March 31, 2000, and December 31, 1999, are
summarized as follows (in thousands):
March 31, December 31,
2000 1999
---------- ----------
Warranty accrual $ 3,280 $ 2,979
Management transition expense 1,864 1,809
Reserves for restructuring charges 1,698 3,980
Other 5,088 5,755
---------- ----------
TOTAL $ 11,930 $14,523
========== ==========
The decrease in the reserves for restructuring charges at March 31, 2000
resulted from payments made during the period.
7. LEASE AGREEMENT
An 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 March 31, 2000, the Company was in violation of several financial
covenants contained in the operating lease agreement. 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 $13.0 million),
cancellation of the lease, or all other remedies available by law. The
violations of the financial covenants in the lease agreement will also
constitute an event of default under the Harris revolving credit agreement
(see note 8).
9
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 no later than May 31, 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
the Company's parent (Minolta Investments Company) 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.
8. FINANCING AGREEMENTS
Amounts borrowed at March 31, 2000 and December 31, 1999, consist of $33.7
million and $26.8 million, respectively, under secured revolving credit
agreements.
On August 19, 1999, the Company entered into an agreement with Harris Trust
and Savings Bank ("Harris"). This 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 March 31, 2000, total availability was $19.8 million and
$10.0 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
March 31, 2000, was 9.25%.
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 credit
facility is classified as short-term debt in the financial statements.
The Company was not in compliance with certain of the Harris financial
covenants at December 31, 1999. A waiver of non-compliance was received from
the lender on March 2, 2000 and is extended until an agreement is reached on
revised covenants. An event of default under the Harris agreement also
occurred at March 31, 2000, as a result of the Company's conditions of
continued non-compliance with an operating lease agreement. Under the terms
of the 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 7). Accordingly, on March 20, 2000, the
Company obtained a waiver of this cross covenant from Harris.
At March 31, 2000, the Company's wholly owned subsidiary, QMS B.V., had
borrowings of $23.7 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 March 31, 2000, total
availability was $27.1 million and $23.7 million was outstanding. 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
(5.75% at March 31, 2000). The Company was not in compliance with the Heller
required minimum stockholders' equity covenant at March 31, 2000. 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
Minolta-QMS, Inc.
On February 4, 2000, the Company received a $10 million loan from Minolta.
This loan is payable in thirty-six principal installments. The stated
interest rate is LIBOR plus 2.5% payable monthly in arrears. Proceeds of this
loan will be used for corporate working capital purposes.
9. SEGMENT REPORTING
10
The Company has three geographic reportable segments: United
States/Canada/Latin America; Japan; and Europe/Australia. Each segment's
operations consist of the manufacture and sale of network printing solutions
and related servicing activities, albeit at varying levels by segment. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's 1999 Annual
Report on Form 10-K. The Company evaluates segment performance based on
operating profit (loss). Sales for each segment are based on the locations
of the third-party customer. All intercompany transactions between segments
have been eliminated. Segment results for the three months ended March 31,
2000, and April 2, 1999, are as follows (in thousands):
March 31, April 2,
2000 1999
-------- -------
NET SALES
U.S./Canada/Latin America $ 28,773 $33,920
Japan 5,164 9,446
Europe/Australia 45,054 0
-------- -------
Total Net Sales $ 78,991 $43,366
======== =======
Operating Income (loss)
U.S./Canada/Latin America $ 1,504 $ (386)
Japan (1,025) (213)
Europe/Australia 1,136 0
-------- -------
Segment Operating Income (loss) 1,615 (599)
Other expense (2,308) (258)
-------- -------
Total Loss Before Income Taxes $ (693) $ (857)
======== =======
There was no material change in segment identifiable assets during the period.
10. 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.
11. COMMITMENTS AND CONTINGENCIES
11
As of March 31, 2000, the Company had commitments of approximately $57.7
million under contracts to purchase print engines and consumables and
approximately $16.7 million under contracts to purchase spares and related
components.
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.
12
MINOLTA - QMS, INC. AND SUBSIDIARIES
====================================
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
On April 24, 2000, the Company's shareholders approved changing the Company's
name to Minolta-QMS, Inc.
Results of Operations
- ---------------------
Net loss for the three months ended March 31, 2000 was $.9 million ($.07 per
share) on net sales of $79.0 million compared to a net loss of $.9 million ($.08
per share) for the three months ended April 2, 1999, on net sales of $43.4
million.
Net Sales Comparisons for Key Geographic Locations
Three months ended
----------------------------------
March 31, April 2,
(000's) 2000 1999 Difference
------- --------- --------- ----------
U.S./Canada $ 26,863 $ 24,224 $ 2,639
Europe/Australia 45,054 9,065 35,989
Japan 5,164 9,446 (4,282)
Latin America 792 566 226
All Other 1,118 65 1,053
----------------------------------
Total $ 78,991 $ 43,366 $ 35,625
==================================
Net sales for the three months ended March 31, 2000, increased 82.2% from net
sales for the three months ended April 2, 1999. The sales increase relates
primarily to the reacquisition of the Company's former European and Australian
subsidiaries, in June 1999.
During the three months ended March 31, 2000, total U.S. and Canadian sales
increased by 10.9% as compared to net sales for the three months ended
April 2, 1999. This was due mainly to the increased sales of color laser
printers and consumables in the U.S.
Japanese sales for the three months ended March 31, 2000, as compared to the
three months ended April 2, 1999, decrease by $4.3 million or 45.3%. This was
due primarily to the restructuring in Japan and a reduction in sales to certain
Asian markets.
The Company's gross profit for the three-month comparisons increased $10.3
million (from $10.0 million to $20.3 million), primarily as a result of higher
sales. Gross profit as a percentage of sales increased from 23.2% to 25.7%. This
was the result of improved margins on color laser printers.
The operating expenses including goodwill amortization increased by $8.1 million
for the three month comparisons. As a percentage of net sales, operating
expenses including goodwill amortization decreased from 24.5% to 23.7% for the
comparison. The increase in operating expenses including goodwill amortization
reflects additions of the European and Australian subsidiaries. The decrease in
operating expenses as a percentage of sales reflects the Company's continuing
strategy to align operating expenses with revenues.
Total other income and expense for the three months ended March 31, 2000, was a
net expense of $2.3 million. This was an increase of $2.0 million from the
three months ended April 2, 1999. The increase was primarily due to the
increase in interest expense and reflects the new short-term debt and long-term
debt incurred in connection with the Minolta convergence and the reacquisition
of the Company's former European subsidiary.
13
Income taxes reflect estimated foreign income taxes of Minolta - QMS, Inc.'s
foreign subsidiaries and U.S. tax liabilities for foreign commissions earned.
Financial Condition
- -------------------
Accounts receivable grew by $12.3 million during the three month period ended
March 31, 2000, due to the addition of the Company's reacquired European
subsidiary. Inventories and accounts payable decreased by $11.1 million and $7.0
million, respectively. The decrease in inventory was primarily due to increased
emphasis by the Company on global supply management as it relates to purchasing
and manufacturing. The decrease in accounts payable followed the reduction of
the Company's inventory.
The Company expects its assets and liabilities to remain at higher levels due to
higher sales and production volumes from acquisitions.
Liquidity and Capital Resources
- -------------------------------
The Company's net working capital as of March 31, 2000, was $17.5 million as
compared to $14.4 million at December 31, 1999 and $12.5 million at April 2,
1999.
At March 31, 2000, the Company had cash on hand of $3.9 million and borrowings
of $10.0 million and $23.7 million under the revolving credit facilities with
Harris Trust and Savings Bank ("Harris") and Heller National Bank ("HNB"),
respectively. Total borrowing capacity under the facilities is a function of
eligible accounts receivable and inventory. At March 31, 2000, total
availability was $46.9 million, consisting of $19.8 million with Harris and
$27.1 million with HNB. The Company believes its current working capital
availability, including the effect of the acquisition, is adequate for its
operating needs.
The Company was not in compliance with certain of the Harris financial covenants
at December 31, 1999. A waiver of non-compliance was received from the lender
on March 2, 2000 and is extended until an agreement is reached on revised
covenants. An event of default under the Harris agreement also occurred at March
31, 2000, as a result of the Company's conditions of continued non-compliance
with an operating lease agreement. Under the terms of the 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 7).
Accordingly, on March 20, 2000, the Company obtained a waiver of this cross
covenant from Harris.
On February 4, 2000, the Company received a $10 million loan from Minolta. This
loan is payable in thirty-six principal installments. The stated interest rate
is LIBOR plus 2.5% payable monthly in arrears. Proceeds of this loan will be
used for corporate working capital purposes.
Lease Agreement
- ---------------
An 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
14
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 March 31, 2000, the Company was in violation of several financial covenants
contained in the operating lease agreement. 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 $13.0 million), cancellation of the
lease, or all other remedies available by law. The violations of the financial
covenants in the lease agreement 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 appraised value, based upon a mutually agreed to process, provided
such sale is consummated no later than May 31, 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 the Company's parent
(Minolta Investments Company) 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.
Foreign Currency Exchange Rates
- -------------------------------
The Company purchases print engine mechanisms and memory components from several
Japanese suppliers. Fluctuations in Japanese yen currency exchange rates will
affect the prices of these products. The Company is attempting to mitigate
negative impacts through yen-sharing arrangements with suppliers; however,
material price increases resulting from unfavorable exchange rate fluctuations
could adversely affect operating results.
The effect of yen fluctuations on material prices are also offset in part by
yen-based Japanese sales. Roughly 6.5% of all Company sales are in Japanese
yen, which causes sales and profit margins to increase when yen values increase.
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.
15
MINOLTA - QMS, INC. AND SUBSIDIARIES
====================================
PART I - FINANCIAL INFORMATION
ITEM 3. 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 March 31, 2000, 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 2000, the Company on occasion has used derivatives to hedge specific
risk situations involving foreign currency exposures. No such derivatives were
held at March 31, 2000.
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 $195,000 of
additional interest expense for the three months ended March 31, 2000.
16
MINOLTA - QMS, INC. AND SUBSIDIARIES
====================================
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - 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 2 - CHANGES IN SECURITIES - None.
- ------------------------------
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
- ----------------------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
- ------------------------------------------------------------
ITEM 5 - OTHER INFORMATION - None.
- --------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit
Number Description
------ -----------
3(b) Amended and Restated By-Laws of Registrant
27 Financial Data Schedule
(b) Reports: None.
17
MINOLTA - QMS, INC. AND SUBSIDIARIES
====================================
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINOLTA - QMS, INC.
(Registrant)
Date: May 10, 2000 /s/ Edward E. Lucente
----------------- ---------------------------------
Edward E. Lucente
President and Chief Executive Officer
Date: May 10, 2000 /s/ Albert A. Butler
----------------- ----------------------
Albert A. Butler
Chief Financial Officer
18