SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1999
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9348
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QMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 63-0737870
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
ONE MAGNUM PASS, MOBILE, AL 36618
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(Address of principal executive offices) (Zip Code)
(334) 633-4300
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
13,255,111 at October 29, 1999.
- -------------------------------
QMS, INC. AND SUBSIDIARIES
==========================
INDEX
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PART I - FINANCIAL INFORMATION PAGE NUMBER
--------------------- -----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of October 1, 1999, and
January 1, 1999 3 - 4
Condensed Consolidated Statements of Operations
(unaudited) for the three and nine months ended
October 1, 1999, and October 2, 1998 5 - 6
Condensed Consolidated Statements of Comprehensive
Income (Loss) (unaudited) for the three and nine
months ended October 1, 1999, and October 2, 1998 7
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
October 1, 1999, and October 2, 1998 8
Notes to Condensed Consolidated Financial Statements
(unaudited) 9 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II - OTHER INFORMATION 21
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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 22
2
QMS, INC. AND SUBSIDIARIES
==========================
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
as of October 1, 1999, and January 1, 1999
(Unaudited)
October 1, January 1,
in thousands 1999 1999
- ----------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 5,189 $ 1,707
Trade Receivables (less allowance for doubtful
accounts of $641 at October 1, 1999, and $484
at January 1, 1999) 48,504 22,747
Note Receivable, Net 239 146
Inventories:
Raw Materials 11,955 6,419
Work in Process 1,849 2,132
Finished Goods 44,447 20,767
Inventory Reserves (9,825) (3,629)
-------- -------
Total Inventories, Net 48,426 25,689
Other Current Assets 8,080 2,944
-------- -------
Total Current Assets 110,438 53,233
-------- -------
PROPERTY, PLANT, AND EQUIPMENT 40,872 35,990
Less Accumulated Depreciation 34,900 31,255
-------- -------
Total Property, Plant, and Equipment, Net 5,972 4,735
CAPITALIZED AND DEFERRED SOFTWARE, NET 10,593 10,155
PREPAID RENT (Note 7) 1,300 1,300
GOODWILL, NET (Note 3) 21,034 0
OTHER ASSETS, NET 2,281 871
-------- -------
TOTAL ASSETS $151,618 $70,294
======== =======
See Notes to Condensed Consolidated Financial Statements
3
QMS, INC. AND SUBSIDIARIES
==========================
CONDENSED CONSOLIDATED BALANCE SHEETS
as of October 1, 1999, and January 1, 1999
(Unaudited)
October 1, January 1,
in thousands 1999 1999
- ---------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 36,235 $14,363
Revolving Credit Loans (Note 8) 34,627 7,306
Short-Term Debt (Note 9) 7,240 0
Current Maturities of Capital Lease Obligations 432 218
Employment Costs 4,161 3,851
Deferred Revenue 5,000 0
Deferred Service Revenue 6,115 7,453
Other Current Liabilities:
Warranty Accrual 2,197 1,298
Restructuring Reserve (Note 11) 2,349 0
Accrued Management Transition Expenses 2,778 798
Income Tax Payable 609 0
Other 5,448 3,554
-------- -------
Total Other Current Liabilities 13,381 5,650
-------- -------
Total Current Liabilities 107,191 38,841
-------- -------
LONG-TERM DEBT (Note 10) 16,377 0
CAPITAL LEASE OBLIGATIONS 1,203 326
OTHER LIABILITIES:
Deferred Service Revenue 797 839
Deferred Compensation 2,407 2,638
Accrued Management Transition Expenses 419 421
Other Liabilities 680 790
-------- -------
Total Other Liabilities 4,303 4,688
-------- -------
STOCKHOLDERS' EQUITY 22,544 26,439
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $151,618 $70,294
======== =======
See Notes to Condensed Consolidated Financial Statements
4
QMS, INC. AND SUBSIDIARIES
==========================
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended October 1, 1999, and October 2, 1998
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ ------------------------
October 1, October 2, October 1, October 2,
in thousands, except per share amounts 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
NET SALES
Printers and Supplies $ 53,768 $25,134 $132,872 $ 76,526
U.S. Service 8,962 9,795 24,157 28,387
-------- ------- -------- --------
Total Net Sales 62,730 34,929 157,029 104,913
-------- ------- -------- --------
COST OF GOODS SOLD
Printers and Supplies 46,740 18,947 109,437 56,269
U.S. Service 6,124 6,388 15,799 18,297
-------- ------- -------- --------
Total Cost of Goods Sold 52,864 25,335 125,236 74,566
-------- ------- -------- --------
GROSS PROFIT
Printers and Supplies 7,028 6,187 23,435 20,257
U.S. Service 2,838 3,407 8,358 10,090
-------- ------- -------- --------
Total Gross Profit 9,866 9,594 31,793 30,347
-------- ------- -------- --------
OPERATING EXPENSES 19,815 8,915 43,309 28,495
RESTRUCTURING EXPENSES 3,280 0 3,280 0
GOODWILL AMORTIZATION 546 0 711 0
-------- ------- -------- --------
OPERATING INCOME (LOSS) (13,775) 679 (15,507) 1,852
-------- ------- -------- --------
OTHER INCOME (EXPENSE)
Interest Income 24 80 74 283
Interest Expense (985) (125) (1,638) (405)
Miscellaneous Income (Expense) (1,111) (144) (821) (275)
-------- ------- -------- --------
Total Other Expense, Net (2,072) (189) (2,385) (397)
-------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS (15,847) 490 (17,892) 1,455
INCOME TAX PROVISION (BENEFIT)
(Note 12) 50 (36) 315 31
-------- ------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS (15,897) 526 (18,207) 1,424
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (Note 13) (393) 0 (393) 0
-------- ------- -------- --------
NET INCOME (LOSS) $(16,290) $ 526 $(18,600) $ 1,424
======== ======= ======== ========
5
QMS, INC. AND SUBSIDIARIES
==========================
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
For the Three and Nine Months Ended October 1, 1999, and October 2, 1998
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 1, October 2, October 1, October 2,
in thousands, except per share amounts 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER
COMMON SHARE (Note 5)
Basic and Diluted Before Extraordinary Loss $ (1.20) $ 0.05 $ (1.55) $ 0.13
Extraordinary Item (0.03) 0.00 (0.03) 0.00
------- ------- ------- -------
Basic and Diluted After Extraordinary Loss $ (1.23) $ 0.05 $ (1.58) $ 0.13
======= ======= ======= =======
SHARES USED IN PER SHARE
COMPUTATION (Note 5)
Basic 13,243 10,697 11,784 10,697
Diluted 13,243 10,887 11,784 10,887
See Notes to Condensed Consolidated Financial Statements
6
QMS, INC. AND SUBSIDIARIES
==========================
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended October 1, 1999, and October 2, 1998
(Unaudited)
Three Months Ended Nine Months Ended
---------------------- ----------------------
October 1, October 2, October 1, October 2,
in thousands 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(16,290) $ 526 $(18,600) $1,424
OTHER COMPREHENSIVE INCOME
(LOSS) (No income tax effect):
European Currency Translation
Adjustments (979) 0 (833) 0
Japanese Currency Translation
Adjustments 980 12 659 12
Canadian Currency Translation
Adjustments (36) (335) 248 (590)
-------- ----- -------- ------
Total Other Comprehensive Income (Loss) (35) (323) 74 (578)
-------- ----- -------- ------
COMPREHENSIVE INCOME (LOSS) $(16,325) $ 203 $(18,526) $ 846
======== ===== ======== ======
See Notes to Condensed Consolidated Financial Statements
7
QMS, INC. AND SUBSIDIARIES
==========================
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended October 1, 1999, and October 2, 1998
(Unaudited)
October 1, October 2,
in thousands 1999 1998
- --------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income (Loss) $(18,600) $ 1,424
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities:
Extraordinary Loss 393 0
Depreciation of Property, Plant and Equipment 2,026 1,716
Amortization of Goodwill 710 0
Amortization of Capitalized and Deferred Software 6,651 5,977
Provision for Losses on Inventory 8,206 2,280
Other (35) 101
Net Change in Assets and Liabilities that Provided (Used) Cash:
Trade Receivables (6,058) (1,779)
Inventories, Net (3,641) (7,728)
Accounts Payable (540) 2,524
Deferred Revenue 5,000 0
Other 5,254 875
-------- -------
Net Cash Provided by (Used in) Operating Activities (634) 5,390
-------- -------
Cash Flows from Investing Activities:
Purchase of Europe and Australian Subsidiaries (20,500) 0
Collections of Notes Receivable 404 387
Purchase of Property, Plant and Equipment (982) (2,020)
Proceeds from Disposal of Property, Plant and Equipment 842 29
Additions to Capitalized and Deferred Software Costs (8,057) (6,590)
-------- -------
Net Cash Used in Investing Activities (28,293) (8,194)
-------- -------
Cash Flows from Financing Activities:
Net Proceeds from Short-Term Debt and Revolving
Credit Facility 2,690 5,981
Proceeds from Long-Term Debt 16,377 0
Payments of Capital Lease Obligations (292) (1,164)
Proceeds from Issuance of Common Stock 12,248 0
Other 1,386 44
-------- -------
Net Cash Provided by Financing Activities 32,409 4,861
-------- -------
Net Increase in Cash and Cash Equivalents 3,482 2,057
Cash and Cash Equivalents at Beginning of Period 1,707 697
-------- -------
Cash and Cash Equivalents at End of Period $ 5,189 $ 2,754
======== =======
See Notes to Condensed Consolidated Financial Statements
8
QMS, INC. AND SUBSIDIARIES
==========================
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 October 1, 1999, the results of operations and
changes in cash flows for the nine months ended October 1, 1999, and October
2, 1998. The results of operations for the nine months ended October 1,
1999, are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 1999. Certain reclassifications have been
made to 1998 amounts to conform to the 1999 presentation.
2. FISCAL YEAR CHANGE AND TRANSITION PERIOD
On October 28, 1998, the Company's Board of Directors modified its
accounting periods 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 will
include audited financial statements for the three-month transition period
ended January 1, 1999, in its Annual Report on Form 10-K for its new fiscal
year ended December 31, 1999.
3. ACQUISITION AND MINOLTA CONVERGENCE
On June 7, 1999, the Company reacquired its 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
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. The estimated fair value of assets acquired, net of liabilities
assumed, of $8.0 million was considered to be the best estimate as of the
acquisition date and may be adjusted as more information is obtained.
Goodwill of $21.9 million was recognized on the acquisition equal to the
excess of the price paid over the estimated fair value of the net assets
acquired. The consolidated statements of operations include the results of
Europe and Australia operations from their acquisition date forward. During
the third quarter of 1999, the Company recognized amortization expense of
$546,000 related to goodwill. Goodwill is being amortized over ten years.
To complete this acquisition, the Company raised $30.0 million through a
$12.8 million loan and $5.0 million advance on future Company production
from Minolta Co., Ltd. ("Minolta"), an offset to the Company's receivables
due from seller of $3.2 million, and a $12.2 million sale of 2,130,000
shares of common stock to Minolta Investments Company. In addition, the
Company financed $6.2 million of the purchase price through a note payable
with Alto Imaging Group, N.V., (the former parent of QMS B.V.) that will be
converted to a term loan with twenty quarterly payments of $311,746 starting
January 15, 2000, and ending on October 15, 2004. Surplus financing was used
to reduce revolving lines of credit.
9
The estimated fair value of assets acquired and liabilities assumed in the
acquisition is summarized as follows (in thousands):
Fair value of assets acquired $49,789
Goodwill 21,900
Liabilities assumed (41,779)
-------
$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
nine months ended October 1, 1999, and October 2, 1998, have been prepared
as though the acquisition occurred as of the beginning of the periods
presented:
October 1, October 2,
1999 1998
----------- ----------
Net sales $158,271 $171,868
Net income (loss) before extraordinary loss (16,452) 4,311
Net income (loss) (16,845) 4,311
Basic and diluted net income (loss) per share
before extraordinary loss (1.28) 0.34
Basic and diluted net income (loss) per share (1.31) 0.32
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 of January 1, 1998, or in the future.
4. SUBSEQUENT EVENT
On November 10, 1999, the Company received a $15 million loan from Minolta.
This loan is payable over four years. The stated interest rate is LIBOR plus
2.5% payable monthly in arrears. Proceeds of this loan will be used to repay
the $5.0 million unsecured advance from Minolta, to fund a loan to QMS B.V.
for its working capital purposes, and the remainder will be used for
corporate working capital purposes.
5. EARNINGS (LOSS) PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." Basic and diluted earnings
(loss) per share computations are based on the weighted average number of
common shares outstanding during the period and diluted earnings (loss) per
share also includes any dilutive effect of the assumed exercise of stock
options.
10
6. COMPREHENSIVE INCOME (LOSS)
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which establishes new rules for the reporting of
comprehensive income (loss) and its components. Comprehensive income (loss)
consists of net income (loss) and foreign currency translation adjustments
and is reflected in the Condensed Consolidated Statements 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.
7. PREPAID RENT
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 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 October 1, 1999, the Company was not in compliance with several of the
sale-leaseback agreement covenants; however, the agreement provides for a
six-month cure period. The Company does not expect to achieve compliance
with the current covenants during the cure period. Among the remedies
available to the landlord are the acceleration of all remaining rent for the
initial lease term (approximately $21.1 million), cancellation of the lease,
or all other remedies available at law. Management believes waivers or
permanent revisions of the covenants may be obtained through further
negotiations over the next several months.
8. REVOLVING CREDIT AGREEMENT
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. This new credit facility provides for a
three-year revolving line of credit with maximum availability of $20.0
million, secured by the Company's domestic and Canadian accounts receivable,
inventory, and machinery and equipment. At October 1, 1999, total
availability was $19.1 million and $13.7 million was outstanding. The stated
rate of interest for any borrowings under the agreement is one-quarter of
one percent (0.25) over prime (8.5% at October 1, 1999) or London Interbank
Offered Rate ("LIBOR") plus three percent.
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 Harris credit facility includes limit requirements for unamortized
capital software development costs and capital expenditures, and minimum
levels of tangible net worth and fixed charge coverage. At October 1, 1999,
the Company was in compliance with these financial covenants; however, the
Company's non-compliance under the sale-leaseback agreement would constitute
a default of the credit facility if such non-compliance is not remedied
during the six-month cure period provided for in the sale-leaseback
agreement.
11
At October 1, 1999, the Company's wholly owned subsidiary, QMS B.V., had
borrowings of $20.9 million under the revolving credit facilities with
Heller National Bank ("HNB"). Total borrowing capacity under this agreement
is based on a percentage of eligible accounts receivable and inventory and
is secured by these assets. The stated rate of interest for any borrowings
under this agreement is prime plus 1.25%. At October 1, 1999, the Company
was out of compliance with the HNB required minimum stockholders' equity
covenant. Management has obtained an informal waiver from HNB for this non-
compliance. If necessary, the Company is prepared to provide additional
capital investment to QMS B.V. to remedy the non-compliance.
9. SHORT-TERM DEBT
On June 7, 1999, the Company signed a promissory note to pay Alto Imaging
Group, N.V., (the former parent of QMS Europe B.V.) $6.2 million. The
interest is paid monthly and the applicable interest rate for this note is
an adjustable rate per year equal to five-tenths of one percent in excess of
LIBOR through January 14, 2000. The principal amount due in November 1999
will be converted to a term loan with twenty quarterly payments of $311,746
starting January 15, 2000, and ending on October 15, 2004.
10. LONG-TERM DEBT
Long-term debt at October 1, 1999, of $11.8 million represents a promissory
note to Minolta. The note matures in May 2003, payable in thirty-six equal
monthly installments of $356,000 beginning in July 2000. The interest rate
is determined monthly by the lender based upon two and one-half percent over
LIBOR and shall not exceed the maximum rate permitted by applicable law. At
October 1, 1999, the interest rate was 7.9375%. There was no long-term debt
at October 2, 1998.
11. RESTRUCTURING CHARGES
During the third quarter of 1999, the Company recognized restructuring
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 associated with salary continuation and
outplacement services for a group of 63 employees from all levels and
functional areas of the Company and $931,000 for expenses related to the
cancellation of an enterprise business software project that will now be
replaced with systems consistent with those of Minolta. No amounts were
charged against the liability during the third quarter of 1999.
12. PROVISION FOR STATE INCOME TAX
In the three-month period ended October 1, 1999, the Company recorded a
$700,000 provision for state income tax related to audit assessments for
prior years. The assessments arose from the tax treatment of certain income,
which the Company has contested through the appeal process. On September 23,
1999, a preliminary ruling by the present level appeal officer indicated
that the Company might be liable on some of the disputed issues. The Company
is exploring continued appeal and settlement options with regard to the
final determination of this assessment.
12
13. EXTRAORDINARY LOSS
During the third quarter of 1999, the Company retired debt with a face value
of $7.3 million and incurred an extraordinary loss of $393,000. Due to the
Company's available operating loss carryforwards, the Company has not
recognized a related tax benefit.
14. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which will be effective for the
Company's annual 1999 financial statements. Management is presently
evaluating the effect of SFAS No. 131 on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective, as amended by
SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133,"
for the Company in fiscal 2001. Management has not yet determined the effect
of SFAS No. 133 on its financial statements.
15. COMMITMENTS AND CONTINGENCIES
As of October 1, 1999, the Company had a commitment of approximately $11.3
million under contracts to purchase print engines and related components and
approximately $7.4 million under contracts to purchase spares and
consumables.
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.
13
QMS, INC. AND SUBSIDIARIES
==========================
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Purchase of QMS B.V. and the Change of Control to Minolta Corporation
- ---------------------------------------------------------------------
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 will be converted
to a term loan with twenty quarterly payments of $311,746 starting January 15,
2000, and ending on October 15, 2004. The remainder of the purchase was funded
out of a $12.8 million loan and a $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 Investments Company, a subsidiary of Minolta
Co., Ltd., ("Minolta") for a total price of $12.2 million.
In addition to the purchase from the Company of 2,130,000 shares of common
stock, on June 7, Minolta acquired 5,440,000 shares of the company's common
stock through a tender offer consummated on July 19, 1999. As a result, Minolta
is now the holder of 7,570,000 shares, or 57.4%, of the Company's outstanding
common stock.
Results of Operations
- ---------------------
Net loss for the third quarter of fiscal 1999 was $16.3 million ($1.23 per
share) on net sales of $62.7 million. For the nine months ended October 1,
1999, net loss was $18.6 million ($1.58 per share) on net sales of $157.0
million. These 1999 results compare to net income of $526,000 ($0.05 per share)
on net sales of $34.9 million for the third quarter of calendar 1998 and net
income of $1.4 million ($0.13 per share) on net sales of $104.9 million for the
nine months ended October 2, 1998.
Table 1 - Net Sales Comparisons for Key Product Groups
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
October 1, October 2, October 1, October 2,
(000's) 1999 1998 Difference 1999 1998 Difference
- ------------------ ---------- ---------- ----------- ---------- ---------- -----------
Hardware $ 8,324 $ 9,523 $(1,199) $ 25,279 $ 31,445 $(6,166)
Consumables 6,697 7,915 (1,218) 22,565 23,752 (1,187)
Service 8,962 9,304 (342) 24,157 27,896 (3,739)
Europe/Australia 28,865 6,101 22,764 60,445 17,978 42,467
Japan 9,839 1,878 7,961 24,101 3,082 21,019
All Other 43 208 (165) 482 760 (278)
------- ------- ------- -------- -------- -------
Total Net Sales $62,730 $34,929 $27,801 $157,029 $104,913 $52,116
======= ======= ======= ======== ======== =======
14
Table 2 - Hardware and International Sales Comparisons
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
October 1, October 2, October 1, October 2,
(000's) 1999 1998 Difference 1999 1998 Difference
- ------- ---------- ---------- ----------- ---------- ---------- -----------
Hardware Sales
- --------------------------
U.S./Canada - Direct $ 694 $ 982 $ (288) $ 2,470 $ 7,035 $(4,565)
U.S./Canada - Reseller 6,297 6,458 (161) 18,744 19,230 (486)
Latin America & Other 369 260 109 1,137 1,222 (85)
OEM 964 1,823 (859) 2,928 3,958 (1,030)
------- ------ ------- ------- ------- -------
Total Hardware $ 8,324 $9,523 $(1,199) $25,279 $31,445 $(6,166)
======= ====== ======= ======= ======= =======
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
October 1, October 2, October 1, October 2,
(000's) 1999 1998 Difference 1999 1998 Difference
- ------- ---------- ---------- ----------- ---------- ---------- -----------
Europe Sales
- ------------------------
Controller Boards $ 0 $3,135 $(3,135) $ 8,341 $10,133 $(1,792)
Commissions 0 2,966 (2,966) 6,136 7,845 (1,709)
QMS BV Sales 28,865 0 28,865 45,968 0 45,968
------- ------ ------- ------- ------- -------
Total Europe $28,865 $6,101 $22,764 $60,445 $17,978 $42,467
======= ====== ======= ======= ======= =======
Net sales for the three months ended October 1, 1999, increased 79.6% from net
sales for the three months ended October 2, 1998. This increase in net sales
reflects the reacquisition of the Company's former European and Australian
subsidiaries. While hardware and consumables revenues were down by $1.2 million
(12.6%) and $1.2 million (15.4%), respectively, revenues in Europe and Japan
increased $22.8 million (373.1%) and $8.0 million (423.9%), respectively. For
the nine-month period ended October 1, 1999, net sales increased $52.1 million
(49.7%) from the comparable period of 1998, again reflecting the reacquisition
of the Company's former European and Australian subsidiaries.
For the nine-month period ended October 1, 1999, hardware revenue decreased $6.2
million (19.6%) from the comparable period in 1998. The direct market net sales
were down $288,000 (29.3%) for the three-month comparison to 1998 and down $4.6
million for the nine-month comparison. This decrease is due primarily to the
Company's decision to shift away from direct distribution using a direct sales
force and to a two-tiered reseller distribution system. The Original Equipment
Manufacturers ("OEM") net sales decreased by $859,000 and $1.0 million for the
three-month and nine-month periods, respectively. This decline is due primarily
to fewer placements of color and high-speed products with OEM customers.
Consumables revenue decreased $1.2 million (5.0%) for this nine-month comparison
due primarily to lower sales of consumables for end-of-life printer products.
Consumables revenues for current products increased by 15.0% for this same
period.
Service revenue also decreased, by $3.7 million (13.4%) during the nine-month
comparison. The decline in service revenue is due to the Company's decision to
discontinue the active pursuit of non-QMS product service contracts and the
overall tendency of users to forego the repair of printers by replacing older
equipment as new print system costs continue to decrease.
Until the reacquisition of the Company's former European and Australian
subsidiaries, European revenue included only sales of controller boards at cost
to the Company's European distributor, QMS B.V., and commissions earned on QMS
B.V. product sales. After June 7, 1999, revenues included sales to third-party
customers at QMS B.V. and board sales. Net sales for Europe increased $42.5
million for the nine-month period ended October 1, 1999, from the comparable
1998 period due to this reacquisition.
15
During the third quarter of fiscal 1999, controller board sales and commissions
for Europe decreased $3.1 million and $3.0 million, respectively, compared to
the third quarter of 1998. This decrease is due to the elimination of sales to
QMS B.V. after June 7, 1999. For the nine-month comparison, board sales and
commissions decreased 17.7% and 21.8%, respectively, due to the higher board and
commission sales in the first three months of 1999, prior to the reacquisition
of QMS B.V.
During the nine months 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 QMS 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.
The Company recognized special, restructuring, and extraordinary charges
totaling approximately $6.2 million in the third quarter of 1999, essentially
all related to North America. Special charges of $2.5 million were included in
cost of goods sold 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 on 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. Restructuring charges of $3.3 million consist of $2.3
million in charges for workforce reduction and $931,000 for expenses related to
the cancellation of an enterprise business software project that will be
replaced with systems consistent with those of Minolta.
The Company also had $700,000 in provisional income tax charges from certain
income tax assessments and an extraordinary item of approximately $393,000 for
the early extinguishment of debt.
The Company's gross profit increased approximately $272,000 and $1.4 million for
the three-month and nine-month comparisons, respectively, but decreased as a
percentage of net sales from 27.5% to 15.7% for the three-month period and from
28.9% to 20.2% for the nine-month comparison. Excluding special charges, the
Company's gross profit increased approximately $2.8 million and $4.0 million for
the three-month and nine-month comparisons, respectively, but decreased as a
percentage of net sales from 27.5% to 19.8% of sales for the three-month period
and from 28.9% to 21.9% for the nine-month period. This decrease is primarily
due to pricing actions taken on the 8-1/2 x 11 color hardware products in
relation to competitive market pressure.
Operating expenses and goodwill amortization increased approximately $11.4
million and $15.5 million for the three-month and nine-month comparisons,
respectively. As a percentage of net sales, operating expenses and goodwill
amortization increased from 25.5% to 32.5% for the three-month comparison and
from 27.2% to 28.0% for the nine-month comparison. The increase in operating
expenses 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.
Total other income and expense for the three months ended October 1, 1999, was a
net expense of $2.1 million. This net expense includes a $387,000 gain on the
sale of QMS Circuits, Inc.'s ("QCI") land and building. Excluding the gain on
the QCI property, other income and expense would have been a net expense of $2.5
million for the three months ending October 1, 1999, compared to a net expense
of
16
$189,000 for the three months ended October 2, 1998. The increase is the result
of higher debt levels in the United States, additional financing from Minolta
and the seller for the acquisition of QMS B.V., and the impact of foreign
currency exchange related to the QMS B.V. operations. In the nine-month
comparison, net other expense in fiscal 1999 was $2.4 million, an increase of
$2.0 million over the prior year. This increase reflects greater interest
expense due to higher debt levels.
Income taxes reflect estimated foreign income taxes of QMS foreign subsidiaries,
U.S. tax liabilities for foreign commissions earned, and provisional income tax
charges from certain income tax assessments.
Financial Condition
- -------------------
The revolving credit balance with Foothill Capital Corporation ("Foothill") was
paid in full during the third quarter of 1999. On August 19, 1999, the Company
entered into a new financing arrangement with Harris Trust and Savings Bank
("Harris") which allowed the Company to retire the existing secured revolving
credit agreement. This new credit facility provides for a three-year revolving
line of credit with maximum availability of $20.0 million, secured by the
Company's domestic and Canadian accounts receivable, inventory, and machinery
and equipment. The stated rate of interest for any borrowings under the
agreement is one-quarter of one percent (0.25) over prime (8.5% at October 1,
1999) or London Interbank Offered Rate ("LIBOR") plus three percent. The Harris
credit facility includes limit requirements for unamortized capital software
development costs and capital expenditures, and minimum levels of tangible net
worth and fixed charge coverage.
Accounts receivable, accounts payable and inventory grew by $25.8 million, $21.9
million and $22.7 million, respectively, due to the addition of QMS B.V. on June
7, 1999. 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
- -------------------------------
During the three months ended October 1, 1999, the Company's working capital and
capital expenditure requirements came principally from operations. The
Company's net working capital as of October 1, 1999, was $3.2 million compared
to $14.4 million at January 1, 1999.
At October 1, 1999, the Company had cash on hand of $5.2 million and borrowings
of $13.7 million and $20.9 million under the revolving credit facilities with
Harris Trust and Savings Bank ("Harris") and Heller National Bank ("HNB"),
respectively. Total borrowing capacity under the credit facilities is a
function of eligible accounts receivable and inventory. At October 1, 1999,
total availability was $40.0 million, consisting of $19.1 million with Harris
and $20.9 million with HNB. The Company believes its current working capital
availability, including the effect of the acquisition, is adequate for its
operating needs.
At October 1, 1999, the Company was in compliance with the Harris financial
covenants; however, the Company's non-compliance under the sale-leaseback
agreement would constitute a default of the Harris credit facility if such non-
compliance is not remedied during the six-month cure period provided for in the
sale-leaseback agreement. At October 1, 1999, the Company was out of compliance
with the HNB required minimum stockholders' equity covenant. Management has
obtained an informal waiver from HNB for this non-compliance. If necessary, the
Company is prepared to provide additional capital investment to QMS B.V. to
remedy the non-compliance.
On November 10, 1999, the Company received a $15 million loan from Minolta.
This loan is payable over four years. The stated interest rate is LIBOR plus
2.5% payable monthly in arrears. Proceeds of this loan will be used to repay the
$5.0 million unsecured advance from Minolta, to fund a loan to QMS B.V. for its
working capital purposes, and the remainder will be used for corporate working
capital purposes.
17
Sale-Leaseback 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 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 October 1, 1999, the Company was not in compliance with several of the sale-
leaseback agreement covenants; however, the agreement provides for a six-month
cure period. The Company does not expect to achieve compliance with the current
covenants during the cure period. Among the remedies available to the landlord
are the acceleration of all rent for the initial lease term (approximately $21.1
million), cancellation of the lease, or all other remedies available at law.
Management believes waivers or permanent revisions of the covenants may be
obtained through further negotiations over the next several months.
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 may attempt to mitigate some
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 is also offset in part by yen-
based Japanese sales. Roughly 15% of all Company sales are in Japanese yen,
which causes sales and profit margins to increase when yen values increase.
Year 2000 Compliance
- --------------------
State of Readiness - In March 1997, the Company developed and began implementing
- ------------------
plans to review its purchased and developed software for Year 2000 compliance.
The plan addresses the major areas listed below.
1. IT Systems and Applications
The Company has identified 218 internal systems and applications
components; of these, 52 were identified as critical. As of October 1,
1999, all critical systems have been verified as Year 2000 compliant.
The Company has contacted all critical IT (information technology) systems
and applications vendors and has received letters of compliance from them
and system upgrades as required. The Year 2000 review for IT systems and
applications was completed in November 1998. The last of the upgrades was
completed by September 1999. The Company has performed basic component
testing following the guidelines defined by the BSI Year 2000 compliance
definition. Because of the testing results to date, the Company does not
currently foresee the need for additional contingency plans for these IT
components.
18
2. Critical Non-IT Suppliers and Vendors
The Company has sent Year 2000 compliance questionnaires to all critical
non-IT suppliers and vendors. The Company is not aware of any anticipated
Year 2000 non-compliance issues by its vendors or customers that could
materially affect its business operations; however, the Company does not
control the systems of other companies and cannot assure that such systems
will be converted in a timely fashion and, if not converted, would not have
an adverse effect on the Company's business operations.
The Company is dependent upon a variety of local suppliers and vendors for
such items as electrical power, telephone service, water, banking services
and other necessary commodities. The Company is not currently aware of any
non-compliance by these vendors that will materially affect its business
operations; however, the Company does not control these systems and cannot
assure that they will be converted in a timely fashion and, if not
converted, would not have an adverse effect on the Company's business
operations.
3. QMS Products
The design of the Company's products precludes the possibility of Year 2000
errors. Date and time information is passed to the QMS printer by the host
computer in real time. The real-time clock used to apply the time stamp to
the accounting files stores the year as four digits and is designed to
correctly handle leap year calculations, including the Year 2000. All QMS
hardware and software are designed to function properly at the turn of the
century and beyond without any interruption in business.
Costs - The Company has concluded all necessary purchases and has spent
- -----
approximately $150,000 to date. No additional external expenditures are
anticipated in connection with the Year 2000 remediation.
Risks and Reasonably Likely Worst Case Scenarios - Although the Company has not
- ------------------------------------------------
identified any specific areas of risk, general market Year 2000 problems outside
of the Company's control could have an adverse effect on the Company's operating
results.
Contingency and Business Continuation Plan - The Company will evaluate the need
- ------------------------------------------
for a formal Year 2000 contingency plan by December 1999.
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which will be effective for the Company's annual 1999 financial statements.
Management is presently evaluating the effect of SFAS No. 131 on its financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective, as amended by SFAS
No. 137, "Deferral of the Effective Date of FASB Statement No. 133," for the
Company in fiscal 2001. Management has not yet determined the effect of SFAS
No. 131 on its financial statements.
19
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 the risks and demonstrates that, in general, such market risk is
not material to the Company.
Foreign Currency Exchange Risk
- ------------------------------
At October 2, 1998, the Company had sales in over 28 countries worldwide. These
sales outside the United States accounted for approximately 25 percent of
worldwide sales. In 1999, the Company expects this percentage to increase due
to foreign acquisitions, primarily in Europe and Japan. Over ninety-five
percent of foreign sales are 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. Because the Company's foreign subsidiaries
purchase significant quantities of inventory payable in U.S. dollars, managing
the level of inventory and related payables and the rate of inventory turnover
provides a level of protection against adverse changes 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. For the most part, however,
these gains or losses arise from translation and, as such, do not significantly
affect net income.
Prior to 1998, the Company on occasion has used derivatives to hedge specific
risk situations involving foreign currency exposures. No such derivatives were
held at October 1, 1999.
Interest Rate Risk
- ------------------
The financial liabilities of the Company that are exposed to changes in interest
rates are limited to short-term borrowings. The stated rate of interest for
borrowings under the Harris revolving credit agreement is one-quarter of one
percent (0.25) over prime or London Interbank Offered Rate ("LIBOR") plus three
percent, and the stated rate of interest for borrowings under the HNB revolving
credit agreement is one and one-quarter percent (1.25) over prime. Management
believes interest rate risk for the Company is not significant because a one
percent annual increase in prime or LIBOR would result in only approximately
$341,000 additional annual interest expense.
20
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
------ -----------
10(f) Executive Services Agreement dated August 1, 1999, between
QMS, Inc. and Edward E. Lucente
10(f)(i) Amendment to the Executive Services Agreement between QMS,
Inc. and Edward E. Lucente dated October 25, 1999
10(f)(ii) Agreement between QMS, Inc. and Edward E. Lucente dated
October 25, 1999, in which QMS, Inc. adopts a nonqualified
compensation agreement
10(f)(iii) Amendment to Trust Agreement between QMS, Inc. and South
Alabama Trust Company, Inc. dated October 25, 1999
10(j) Credit Agreement dated August 19, 1999, by and between
QMS, Inc. and Harris Trust and Savings Bank
10(t)(iv) Waiver Agreement and Lease Amendment dated June 7, 1999,
between INK (AL) QRS 12-21, INC., and QMS, Inc
10(x)(v) Promissory Note between QMS, Inc. and Minolta Co., Ltd. for
$15,000,000 dated November 10, 1999
10(x)(vi) Promissory Note between QMS, Inc. and QMS Europe B.V. for
$4,000,000 dated November 10, 1999
27 Financial Data Schedule
(b) Reports:
* Form 8-K dated October 8, 1999, reporting the change in fiscal year end.
21
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.
QMS, INC.
(Registrant)
Date: November 12, 1999 /s/ Edward E. Lucente
---------------------- --------------------------------------
Edward E. Lucente
President and Chief Executive Officer
Date: November 12, 1999 /s/ Albert A. Butler
---------------------- --------------------------------------
Albert A. Butler
Chief Financial Officer
22