UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended DECEMBER 31, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From __________________ to __________________
Commission file number 0-21504
QUAD SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2180139
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 MARYLAND ROAD, WILLOW GROVE, PA 19090
----------------------------------------------------
(Address of principal executive offices)
(215) 657-6202
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
At February 4, 2000, 4,474,062 of the registrant's Common Stock $.03 par value
were outstanding.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ----------------------------- -----------
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999 (Unaudited)
and September 30, 1999..............................................3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended December 31, 1999 and 1998...............4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended December 31, 1999 and 1998...............5
Notes to Condensed Consolidated Financial Statements.......................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................8
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk.............13
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................14
Signature...................................................................15
2
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1999 1999
---- ----
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 2,172 $ 2,890
Accounts receivable, net 8,308 9,695
Inventory 16,309 16,446
Other 2,438 2,252
-------- --------
Total current assets 29,227 31,283
Property and equipment
at cost, less accumulated depreciation of $4,064
at December 31, 1999 and $3,801 at September 30, 1999 2,308 2,497
-------- --------
$ 31,535 $ 33,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 500 $ 1,318
Accounts payable 5,074 3,887
Accrued expenses 4,992 5,790
Customer deposits 385 271
Current portion of long-term debt 635 636
Deferred service revenue 1,357 986
-------- --------
Total current liabilities 12,943 12,888
Long-term debt, less current portion 967 1,126
-------- --------
Total liabilities 13,910 14,014
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at December 31, 1999 and September 30, 1999 -- --
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,474,062 at December 31, 1999
and 4,444,072 at September 30, 1999 134 133
Additional paid-in-capital 24,691 24,657
Retained earnings (6,981) (4,906)
Accumulated other comprehensive loss (219) (118)
-------- --------
Total stockholders' equity 17,625 19,766
-------- --------
$ 31,535 $ 33,780
======== ========
See accompanying notes.
3
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------
DECEMBER 31,
1999 1998
---- ----
Net sales $ 10,600 $ 13,742
Cost of products sold 7,296 10,013
----------- -----------
Gross profit 3,304 3,729
Operating expenses:
Engineering, research and development 1,314 1,081
Selling and marketing 2,761 2,606
Administrative and general 1,301 840
----------- -----------
5,376 4,527
----------- -----------
Loss from operations (2,072) (798)
Gain on sale of SMTech, Ltd. -- (8,269)
Interest expense (income), net 3 (15)
----------- -----------
Income (loss) before income taxes (2,075) 7,486
Income tax expense -- 2,844
----------- -----------
Net income (loss) $ (2,075) $ 4,642
=========== ===========
Net income (loss) per share:
Basic $ (0.47) $ 1.06
Diluted $ (0.47) $ 1.05
Weighted average number of shares outstanding:
Basic 4,452,735 4,393,489
Diluted 4,452,735 4,414,923
See accompanying notes.
4
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
DECEMBER 31,
1999 1998
---- ----
OPERATING ACTIVITIES
Net (loss) income $ (2,075) $ 4,642
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 263 281
Provision for (recovery from) for losses on accounts receivable 109 (90)
Provision for deferred income taxes -- 444
Gain on sale of SMTech, Ltd. -- (5,127)
Changes in operating assets and liabilities, net:
Accounts receivable 1,278 471
Inventory 137 705
Other assets (287) 876
Accounts payable 1,187 (1,598)
Accrued expenses (798) (1,180)
Customer deposits 114 (204)
Deferred service revenue 371 42
Income taxes payable -- (1,353)
-------- --------
Net cash provided by (used in) operating activities 299 (2,091)
INVESTING ACTIVITIES
Proceeds from the sale of SMTech, Ltd. -- 14,762
Proceeds from the sale of equipment -- 69
Purchases of property and equipment (74) (77)
-------- --------
Net cash provided by (used in) investing activities (74) 14,754
FINANCING ACTIVITIES
Proceeds from line of credit (818) (8,795)
Common Stock issued under employee benefit plans 35 66
Principal payments on long-term debt (160) (158)
-------- --------
Net cash used in financing activities (943) (8,887)
-------- --------
Net (decrease) increase in cash and cash equivalents (718) 3,776
Cash and cash equivalents at beginning of period 2,890 2,116
-------- --------
Cash and cash equivalents at end of period $ 2,172 $ 5,892
======== ========
See accompanying notes.
5
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Quad Systems Corporation and
its wholly-owned subsidiaries (the "Company") as of the dates and for the
periods indicated. All material intercompany accounts and transactions have been
eliminated in consolidation.
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above indicated reporting dates.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month periods ended December 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending September 30, 2000.
This quarterly report should be read in conjunction with the Company's Annual
Report on Form 10-K containing Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial statements for the fiscal
year ended September 30, 1999, together with notes thereto.
NOTE 2 INVENTORY
The components of inventory consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1999 1999
----------- ----------
Raw materials $ 5,799 $ 6,597
Work in process 2,762 1,926
Finished products 7,748 7,923
------- -------
$16,309 $16,446
======= =======
NOTE 3 COMPREHENSIVE INCOME
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components. SFAS No. 130 requires foreign currency translation
adjustments to be included in other comprehensive income. The components of
comprehensive income consist of the following (in thousands):
THREE MONTHS ENDED
---------------------
DECEMBER 31,
1999 1998
---- ----
Net (loss) income $(2,075) $ 4,642
Foreign currency translation adjustment (101) (145)
======= =======
Comprehensive (loss) income $(2,176) $ 4,497
======= =======
6
QUAD SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
NOTE 4 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
-------------------------------
DECEMBER 31,
1999 1998
---- ----
Numerator:
Net income (loss) $ (2,075) $ 4,642
=========== ===========
Denominator:
Denominator for basic
earnings(loss)
Per share-weighted
average shares 4,452,735 4,393,489
Effect of dilutive
securities:
Employee stock options
-- 21,434
----------- -----------
Dilutive potential Common
Stock -- 21,434
----------- -----------
Denominator for diluted
earnings(loss)
Per share-weighted
average shares 4,452,735 4,414,923
=========== ===========
Basic earnings (loss) per
share $ (.47) $ 1.06
=========== ===========
Diluted earnings (loss)
per share $ (.47) $ 1.05
=========== ===========
Weighted average options to purchase 635,357 shares of Common Stock for the
three-month period ended December 31, 1998, were not included in the computation
of diluted earnings per share because the options' exercise prices were greater
than the average market price of the Common Stock and, therefore, the effect
would be antidilutive. For the three month period ended December 31, 1999, the
Company reported a net loss, therefore, the effect of stock options and the
Company's employee stock purchase plan have been excluded from the share base
used to compute diluted loss per share, as the effect would be antidilutive.
NOTE 5 SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the statements of cash flows (in
thousands):
DECEMBER 31,
1999 1998
---- ----
Cash paid during the period for:
Interest
$ 54 $ 95
======== =======
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For ease of presentation, the Company has indicated its quarterly financial
reporting periods as ending on the last day of December, March, June and
September; whereas, in fact, the Company reports on a 52-53 week fiscal year
ending on the last Sunday in September, with quarterly period ends that may be
different than the above indicated reporting dates. The following table sets
forth certain financial data as a percentage of net sales for the periods
indicated:
THREE MONTHS ENDED
---------------------
December 31,
1999 1998
---- ----
Net sales 100.0% 100.0%
Gross margin 31.2 27.1
Engineering, research and development 12.4 7.9
Selling and marketing 26.0 19.0
Administrative and general 12.3 6.1
Loss from operations (19.5) (5.8)
Gain on sale of SMTech, Ltd. -- 60.2
Income (loss) before income taxes (19.6) 54.5
Net income (loss) (19.6) 33.8
Net sales for the first quarter of fiscal 2000 decreased by $3,100,000, a
decrease of 22.8% as compared to the first quarter of fiscal 1999. The following
table sets forth certain product lines sales for the periods indicated (in
thousands):
THREE MONTHS ENDED
---------------------
December 31,
1999 1998
---- ----
Assemblers $4,588 $8,258
Screen printers 705 1,466
Reflow ovens 462 772
The Company believes that demand for the Company's SMT assembly equipment
decreased as a result of the continuing impact of the severe market downturns in
the electronics and semiconductor industries that commenced in fiscal year 1998
coupled with limited assembler product offerings capable of servicing medium to
high volume manufacturing environments where low cost throughput (i.e. cost per
placement sensitivity) is a primary concern. The Company's recently discontinued
QSA-30 assembler addressed a small portion of this cost per placement sensitive
sector. To meet this sector's requirements and to address competitive product
offerings, the Company entered into a distribution agreement with Mirae
Corporation that resulted in the Meridian Series of products. The Company has
received significant purchase orders for its Meridian Series of products which
have not been included in order bookings or backlog for the first quarter.
These purchase orders will be included in order bookings once the Company's
recognition policies for new products are met. The Company anticipates revenue
recognition on Meridian products in the second quarter of fiscal 2000, however
there can be no assurance that the Company's revenue recognition policies will
be met with respect to the Meridian Products.
Regarding decreased sales of screen printers, the sale of SMTech Limited
("SMTech") at the beginning of fiscal year 1999 has had a significant adverse
impact on sales of screen printers, as the Company no longer manufactured and
sold screen printers, although the Company realized a substantial gain on the
sale.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
International sales represented approximately 36.6% and 42.0% of net sales for
the first quarter of fiscal 2000 and 1999, respectively. The Company derives
international sales from one wholly-owned U.K. foreign subsidiary that both
manufactures and sells product, as well as from international sales shipped from
its U.S. operation. The Company also derives a small level of sales from certain
non-U.K. wholly-owned foreign subsidiaries.
With respect to the Company's product offerings, other than tapefeeders and
screen printers, the Company attempts to maintain more than one qualified vendor
for the manufacture of each fabricated part used in production of the Company's
products. Certain parts, however currently are available from or have been
subcontracted out to only one source. The Company has identified a possible
delay in obtaining certain parts from one such sole source. Although the Company
believes that it will be able to obtain alternate components from one or more
alternate sources. Should the Company be unable to do so, causing interruptions
in any of these supplies, or increases in costs of essential components,
production delays or cost increases could result, which would have a materially
adverse effect on the Company's business.
For the first quarter of fiscal 2000, gross margins improved to 31.2% from 27.1%
in the first quarter of fiscal 1999. This improvement in the first quarter of
fiscal 2000 resulted from a reduction in warranty costs and inventory reserve
provisions. The Company believes this reduction in warranty costs is the result
of the Company's ongoing efforts to improve product quality as discussed in
previous public filings.
Engineering, research and development expenses increased $233,000 or 21.5% for
the first quarter of fiscal 2000 over the first quarter of the prior year. This
increase was the result of increased personnel and research and development
expense related to key product development. The Company expects that
engineering, research and development expenses will increase in the second
quarter of fiscal 2000 as the Company funds the development of key products.
Selling and marketing expenses increased $155,000 or 5.9% for the first quarter
of fiscal 2000 over the first quarter of fiscal 1999, as the Company continues
to anticipate a market recovery. The Company expects that for the second quarter
of fiscal 2000 overall selling and marketing expenses as a percentage of sales
will increase due to higher commission expense associated with the Company's
anticipated sales growth.
Administrative and general expenses increased $461,000 or 54.9% for the first
quarter of fiscal 2000 as compared to the same quarter last year. This increase
is due to additional provisions made for bad debt reserves and the absence of
certain one-time cost savings that benefited the first quarter of fiscal 1999.
The Company believes that administrative and general expenses in the second
quarter will generally be in line with first quarter actual spending.
The Company did not record an income tax benefit in the first quarter of fiscal
2000 since the deferred tax asset from the current period net operating loss was
offset by a one hundred percent valuation allowance, as the Company believes
that the realization of the deferred tax asset is uncertain. Income taxes of
$2,844,000 amounted to an effective tax rate of 38.0% for the first quarter of
fiscal 1999 primarily related to the sale of the Company's printer subsidiary
SMTech Limited. Income tax expense for the first quarter of fiscal 1999 differs
from the amount that would result from applying the Federal statutory tax rate
to pretax income primarily due to permanent differences in taxable income versus
book income, partially offset by benefits realized from the Company's foreign
sales corporation. The Company does not expect to incur any tax expense or
benefit for the remainder of the fiscal year.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
BACKLOG
As of December 31, 1999, the Company's backlog of orders was $7.1 million,
compared to $4.3 million as of September 30, 1999 and $6.9 million as of
December 31, 1998. Bookings for the first quarter of fiscal 2000 were $13.5
million as compared to bookings of $11.8 million in the first quarter of fiscal
1999. The following table sets forth certain backlog information by product line
for the periods indicated (in millions):
December 31,
1999 1998
---- ----
Assemblers $ 3.4 $ 4.2
Screen printers 0.6 0.4
Reflow ovens 0.3 0.4
The remainder of backlog consists of other products such as assembler options,
spare parts and QuadCare, a service and support program covering all of the
Company's products. It has been the Company's experience that purchasers of
capital equipment have not issued purchase orders calling for delivery of
products over an extended period. Backlog therefore may not necessarily be
indicative of future sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of December 31, 1999 was approximately $16.3
million, including cash and cash equivalent balances of $2.2 million. At
September 30, 1999, the Company had working capital of $18.4 million, including
cash and cash equivalent balances of $2.9 million. During the first quarter of
fiscal 2000, net cash provided by operations amounted to $299,000. The cash
provided by operations was largely due to better management of accounts
receivable and accounts payable.
The Company had an unsecured revolving line of credit agreement which permitted
borrowings up to a maximum of $10,000,000 and bore interest at the bank's base
rate of interest or, at the Company's option, the bank's prime rate or LIBOR
plus 1.30%, when the outstanding balance was greater than $500,000. This credit
agreement was to expire in April 2000. This line of credit also contained
various customary operating and reporting covenants and requires maintenance of
certain financial ratios.
On October 27, 1999, the revolving line of credit agreement was replaced with a
new secured revolving line of credit agreement. This new agreement permitted
maximum borrowings up to $8,000,000 and was to expire on February 29, 2000. The
maximum borrowings under this line of credit were based on a percentage of
eligible accounts receivable and inventory. Interest was payable at LIBOR plus
2.50%. The agreement also contained various operating and reporting covenants
and required the maintenance of certain financial ratios. Borrowings on this
revolving line of credit agreement were $500,000 as of December 31, 1999.
On January 7, 2000, the Company entered into a revolving asset based line of
credit agreement which permits borrowings up to a maximum of $12,000,000, based
on a percentage of eligible accounts receivable and inventory. This revolving
asset based line of credit expires on January 6, 2003. This agreement replaced
the October 27, 1999 revolving line of credit agreement. The Company's
obligations under the new line of credit are secured by a lien on all of the
assets of the Company and its wholly-owned subsidiaries. The Company also
pledged the outstanding shares of stock of and guarantees of the Company's
wholly-owned subsidiaries. Interest costs are payable at either 0.25% above the
bank's published prime rate or under selected circumstances LIBOR plus 2.75%.
The interest rate will be reduced 0.25% provided no event of default has
occurred and the Company meets a certain net income level for fiscal 2000. The
agreement also contains various operating and reporting covenants and requires
maintenance of a net tangible worth financial ratio. Borrowings as of February
8, 2000 were approximately $836,000.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company believes that its existing cash balances, cash flow from operations
and its borrowing capacity from the new secured asset based line of credit will
be sufficient for the Company to meet its working capital needs over the next
twelve months.
DISTRIBUTION AGREEMENTS
Under a long-term supply agreement with the Company executed in June 1996,
Samsung is the Company's sole supplier of electronic component tape feeders,
which are used in conjunction with the Company's SMT assembler products and are
sold on a stand-alone basis. The supply agreement carries a six-year term with
minimum purchase requirements and revised product pricing established every two
years during the term of the agreement. Deliveries under the agreement commenced
in fiscal year 1997, with the first two years of the six year supply period
ending in June 2000. The Company's electronic tape feeders are available in 8mm,
12mm, 16mm, 24mm, 32mm, 44mm and other special formats and are compatible with
all Quad assembly systems, although certain of the Meridian Series of products
work at their optimal performance level in conjunction with a modified tape
feeder product currently manufactured and supplied by Samsung. In addition, the
Company offers docking feeder carts that can be loaded with tape feeders
off-line and rapidly rolled into place to prepare the assembler to populate a
new PWB. This feature can greatly reduce the time involved in changing over the
assembler from assembling one PWB to another.
During the spring of 1999, the Company notified Samsung of Samsung's
non-compliance with certain quantity and quality requirements in its supply of
tape feeders under the Feeder Supply Agreement. As required under the terms of
the supply agreement, the Company supplied Samsung in late summer 1999 with its
good faith requirements of the tape feeders for years three and four of the six
year supply term. In late November, 1999 and on January 7, 2000, Samsung
notified the Company of Samsung's disagreement with the Company's good faith
purchase requirements and threatened to terminate the agreement and declare the
Company in breach. The Company disputes Samsung's claims of non-compliance with
the Feeder Supply Agreement and believes it has adequate defenses to such
claims.
A disruption of the supply of component tape feeders, whether through a
termination of the Feeder Supply Agreement or otherwise, could adversely affect
the ability of the Company to meet its customers' needs and therefore, could
adversely affect the Company's revenues and earnings. If Samsung were to stop
supplying Quad with component tape feeders, Quad has the right under the tape
feeder supply agreement to resume manufacturing or use alternative suppliers.
The Company believes it has sufficient access to alternative sources of
component tape feeders to meet its needs should any disruption in supply from
Samsung occur, although there can be no assurance that such alternate sources
will be available or will be sufficient to meet the Company's requirements.
In addition to the component feeder supply agreement, the Company and Samsung
have been involved in other product development programs, including a Joint
Development and Distribution Agreement dated September 22, 1997 for the joint
development and subsequent distribution of a high speed, high volume SMT
assembler, designated as the QSA-60 (the "Development Agreement"). Pursuant to
the Development Agreement, the Company and Samsung jointly participated in the
development of a new SMT assembler, based in part on the QSA-30 assembler
previously distributed by the Company. The Development Agreement also provided
for the subsequent distribution of the developed product. The parties are
currently in disagreement with respect to several issues relating to the
Development Agreement, including the parties' respective liability for funding
of the development project and their respective obligations relating to the
future distribution of the developed product. Each of the parties
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
have claimed that the other has breached its obligations under the Development
Agreement, and Samsung back in late November 1999 and on January 7, 2000 has
threatened litigation with respect thereto claiming substantial damages. While
the Company believes it has defenses to these claims asserted by Samsung, the
resolution to the claims remains uncertain.
In conjunction with the sale of substantially all of the assets and business of
its U.K. subsidiary SMTech to Speedline, Company entered into a supply agreement
dated September 30, 1998 with Speedline for the purchase and resale of the
former SMTech line of screen printers (the "Printer Supply Agreement"). The
terms of the Printer Supply Agreement includes minimum purchase requirements for
one specific printer, the AVX 500, and fixed pricing for all products, subject
to periodic renegotiations by the parties.
Within the first six months of commencement of the Printer Supply Agreement,
Speedline adjusted its selling prices on the Speedline equivalent of the AVX 500
to its customers to levels approximately equal to the fixed pricing paid for the
printer by the Company under the Printer Supply Agreement. This action forced
the Company to lower its selling prices of the AVX 500 to levels that resulted
in marginal income and occasional losses to the Company in order to compete with
Speedline. As a result, during the first supply term ending November 1999, the
Company had purchased only 17 units of the minimum purchase requirement of 40
units.
Approximately 10% of the Company's fiscal year 1999 net sales were attributable
to sales of screen printers. Consequently, a disruption of the supply of screen
printers from Speedline could adversely affect the ability of the Company to
meet its customers' needs and could adversely affect the sale of the Company's
other products. If Speedline were to stop supplying Quad with screen printers,
the Company has the right to use alternative suppliers. The Company believes
that there are other suitable screen printer products that can be obtained from
other screen printer manufacturers.
Market and Other Risks
Quad's primary development and manufacturing activities are located in the
United States. Sales of its products into international markets make Quad
vulnerable to such factors as foreign currency exchange rates or weak economic
conditions in such markets. Quad's operating results are exposed to changes in
exchange rates between the U.S. dollar and U.K. pound sterling, and to a lessor
extent other currencies in Western Europe, South America and Asia-Pacific. To a
certain extent, foreign currency exchange rate movements affect Quad's
competitive position, as exchange rate changes may influence business practices
and/or pricing strategies of non-U.S. based competitors. In addition,
transactions between the U.S. parent company and its international subsidiaries,
which are generally denominated in U.S. dollars, are subject to gains or losses
in the consolidated financial statements. Quad does not typically hedge these
transactions but attempts to limit exposure to these situations by timely
settlement of the U.S. dollar liabilities in the subsidiary locations.
YEAR 2000
The Company developed plans to address the possible exposures related to the
impact on its computer systems of the Year 2000. Key financial, informational,
and operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and detailed plans for the required systems
modifications or replacements have been completed. Progress against these plans
were monitored and reported to management and to the Audit Committee of the
Board of Directors on a periodic basis.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In January 1999, the Company successfully replaced its existing business and
accounting system in the Willow Grove manufacturing facility with an
enterprise-wide business system that is certified by the supplier to be Year
2000 compliant. Year-to-date spending on this management information system
upgrade has totaled approximately $145,000. Internal staffing costs and
re-engineering costs, if any, associated with this system implementation project
are being expensed as incurred. Required Year 2000 readiness changes to the
business and accounting systems at the Willow Grove headquarters were completed
in June 1999. The Company believes that this business unit is now fully Y2K
compliant.
The Company's key suppliers have been queried as to their Year 2000
preparedness. All of the Company's key suppliers have answered affirmatively as
to Year 2000 readiness. In addition, the Company has conducted an evaluation of
the operating software used in the Company's products for possible Year 2000
issues. The Company has addressed the single deficiency identified during this
evaluation. The cost of this project did not exceed $5,000. The Company does not
believe that the operation of recently manufactured equipment sold to customers
will be affected by the transition to the Year 2000. Accordingly, the Company
has not and does not currently anticipate any material disruption in its
business operations as a consequence of the Year 2000 issue.
The Company's risk management program includes emergency backup and recovery
procedures to be followed in the event of failure of a business-critical system.
These procedures were expanded to include specific procedures for potential Year
2000 issues. Contingency plans to protect the business from Year 2000-related
interruptions have been developed. These plans have been completed and include,
for example, development of backup procedures, identification of alternate
suppliers and possible increases in safety inventory levels.
FORWARD-LOOKING STATEMENTS
The discussions above regarding the Company's expectations of future sales and
bookings, gross margins, operating expenses, success of the distribution
arrangement with Mirae for the Meridian Series, Year 2000 compliance, the
outlook for the SMT industry and sufficiency of working capital needs include
certain forward-looking statements on these subjects. As such, actual results
may vary materially from such expectations. Among the meaningful factors that
may affect the realization of such expectations are variations in the level of
order bookings, which can be affected by general economic conditions and growth
rates for the SMT and APT industries and the intensity of competition,
marketplace acceptance of and response to the Meridian Series, product
development delays or performance problems from the Meridian Series, failure to
comply with the requirements of the Loan and Security Agreement, product
development delays or performance problems or difficulties in penetrating the
APT market, difficulties or delays in software functionality and performance,
the timing of future software releases, failure to respond adequately either to
changes in technology or to customer preferences, foreign exchange rate
fluctuations, risks of nonpayment of accounts receivable or changes in
forecasted costs, including unexpected required additional engineering costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Disclosure about market risk is contained under "Market and Other Risks" in Item
2 above.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following Exhibits are furnished pursuant to Item 601 of Regulation
S-K:
Exhibit No. (27) Financial Data Schedule for Quarter Ended December 31,
1999.
(b) The Company did not file any reports on Form 8-K during the period covered
by this report.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAD SYSTEMS CORPORATION
Date: February 9, 2000 By: \s\ ANTHONY R. DRURY
---------------------------------
Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer
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