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, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From __________________ to __________________
Commission file number 0-21504
QUAD SYSTEMS CORPORATION
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DELAWARE 23-2180139
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 MARYLAND ROAD, WILLOW GROVE, PA 19090
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(Address of principal executive offices)
(215) 657-6202
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
At February 5, 1999, 4,414,091 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, 1998 (Unaudited)
and September 30, 1998...................................................3
Condensed Consolidated Statements of Income (Unaudited)
for the three months ended December 31, 1998 and 1997...................4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended December 31, 1998 and 1997...................5
Notes to Condensed Consolidated Financial Statements.................... ...6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................8
PART II. OTHER INFORMATION
- --------------------------
ITEM 6. Exhibits and Reports on Form 8-K....................................12
Signature....................................................................13
2
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 5,892 $ 2,116
Accounts receivable, net 12,950 15,003
Inventory 17,568 20,518
Deferred income taxes 3,442 3,886
Other 928 2,343
-------- --------
Total current assets 40,780 43,866
Equipment and leasehold improvements
at cost, less accumulated depreciation of $4,272
at December 31, 1998 and $4,960 at September 30, 1998 2,556 3,498
Deferred income taxes 653 653
Goodwill, net 411 2,594
Other assets 710 365
-------- --------
$ 45,110 $ 50,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 8,795
Accounts payable 2,332 4,937
Accrued expenses 6,303 6,908
Customer deposits 305 509
Current portion of long-term debt 635 634
Deferred service revenue 1,262 1,220
Income taxes payable 1,896 --
-------- --------
Total current liabilities 12,733 23,003
Long-term debt, less current portion 1,602 1,761
-------- --------
Total liabilities 14,335 24,764
Stockholders' equity:
Preferred Stock, par value $.01 per share; authorized shares:
1,000,000; no shares issued at December 31, 1998 and September 30, 1998 -- --
Common Stock, par value $.03 per share; authorized shares:
15,000,000; shares issued: 4,427,999 at December 31, 1998
and 4,398,706 at September 30, 1998 133 132
Additional paid-in-capital 24,784 24,719
Retained earnings 6,037 1,395
Accumulated other comprehensive income (loss) (3) 142
Less treasury stock, at cost, 13,908 shares at December 31, 1998
and September 30, 1998 (176) (176)
-------- --------
Total stockholders' equity 30,775 26,212
-------- --------
$ 45,110 $ 50,976
======== ========
See accompanying notes.
3
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
DECEMBER 31,
1998 1997
----------- -----------
Net sales $ 13,742 $ 19,649
Cost of products sold 10,013 12,605
----------- -----------
Gross profit 3,729 7,044
Operating expenses:
Engineering, research and development 1,081 1,892
Selling and marketing 2,606 3,530
Administrative and general 840 1,332
----------- -----------
4,527 6,754
----------- -----------
Income (loss) from operations (798) 290
Gain on sale of SMTech, Ltd. (8,269) --
Interest expense (income), net (15) 153
----------- -----------
Income before income taxes 7,486 137
Income tax expense 2,844 52
----------- -----------
Net income $ 4,642 $ 85
=========== ===========
Net income per share:
Basic $ 1.06 $ 0.02
Diluted $ 1.05 $ 0.02
Weighted average number of shares outstanding:
Basic 4,393,489 4,333,726
Diluted 4,414,923 4,388,825
See accompanying notes.
4
QUAD SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------------
DECEMBER 31,
1998 1997
-------- ---------
OPERATING ACTIVITIES
Net income $ 4,642 $ 85
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 281 405
Provision (recovery) for losses on accounts receivable (90) 73
Provision for deferred income taxes 444 --
Gain on sale of SMTech, Ltd. (5,127) --
Loss on sale of equipment 14 --
Changes in operating assets and liabilities, net:
Accounts receivable 471 (1,676)
Inventory 705 (4,299)
Other assets 876 (155)
Accounts payable (1,598) 2,431
Accrued expenses (1,180) 496
Customer deposits (204) (195)
Deferred service revenue 42 34
Income taxes payable (1,353) (17)
-------- --------
Net cash used in operating activities (2,077) (2,818)
INVESTING ACTIVITIES
Proceeds from the sale of SMTech, Ltd. 14,762 --
Proceeds from the sale of equipment 55 --
Purchases of equipment and leasehold improvements (77) (480)
-------- --------
Net cash provided by (used in) investing activities 14,740 (480)
FINANCING ACTIVITIES
Repayments on line of credit (8,795) --
Proceeds from line of credit -- 2,310
Common Stock issued under employee benefit plans 66 165
Principal payments on long-term debt (158) (155)
-------- --------
Net cash provided by (used in) financing activities (8,887) 2,320
-------- --------
Net increase (decrease) in cash and cash equivalents 3,776 (978)
Cash and cash equivalents at beginning of period 2,116 1,981
-------- --------
Cash and cash equivalents at end of period $ 5,892 $ 1,003
======== ========
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,
1998 are not necessarily indicative of the results that may be expected for the
year ended September 30, 1999.
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, 1998, together with notes thereto.
NOTE 2 INVENTORY
The components of inventory consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1998 1998
------- -------
Raw materials
$ 8,888 $ 9,429
Work in process 2,915 2,917
Finished products 5,765 8,172
------- -------
$17,568 $20,518
======= =======
NOTE 3 COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. The adoption
of SFAS No. 130 had no impact on the Company's results of operations, financial
position or cash flows. SFAS No. 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year statements have
been reclassified to conform to the requirements of SFAS No. 130. The components
of comprehensive income consist of the following (in thousands):
THREE MONTHS ENDED
-----------------------
DECEMBER 31,
1998 1997
------- -------
Net income
$ 4,642 $ 85
Foreign currency translation adjustment (145) 346
------- -------
Comprehensive income $ 4,497 $ 431
======= =======
6
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,
1998 1997
---------- ----------
Numerator:
Net income $ 4,642 $ 85
========== ==========
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,393,489 4,333,726
Effect of dilutive securities:
Employee stock options 21,434 53,752
Employee stock purchase plan -- 1,347
---------- ----------
Dilutive potential Common Stock 21,434 55,099
---------- ----------
Denominator for diluted earnings per
share-weighted average shares 4,414,923 4,388,825
========== ==========
Basic earnings per share $ 1.06 $ 0.02
========== ==========
Diluted earnings per share $ 1.05 $ 0.02
========== ==========
Weighted average options to purchase 635,357 and 740,891 shares of Common Stock
for the three-month periods ended December 31, 1998 and 1997, respectively, 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.
NOTE 5 SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the statements of cash flows (in
thousands):
DECEMBER 31,
------------------------
1998 1997
------- ------
Cash paid during the period for:
Interest $ 95 $150
======= ====
Income taxes $ -- $ 87
======= ====
7
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,
-------------------------
1997 1996
---- ----
Net sales 100.0% 100.0%
Gross margin 27.1 35.8
Engineering, research and development 7.9 9.6
Selling and marketing 19.0 18.0
Administrative and general 6.1 6.8
Income (loss) from operations (5.8) 1.5
Gain on sale of SMTech, Ltd. 60.2 --
Income before income taxes 54.5 0.7
Net income 33.8 0.4
Net sales for the first quarter of fiscal 1999 decreased by $5,907,000, a
decrease of 30.1% as compared to the same quarter of the prior year. The
following table sets forth certain product lines sales for the periods indicated
(in thousands):
THREE MONTHS ENDED
December 31,
-------------------------
1998 1997
------- -------
Assemblers $ 8,258 $11,521
Screen printers 1,466 3,285
Reflow ovens 772 1,324
The Company believes that the decrease in sales reflects continued worldwide
industry softness. Demand for the Company's SMT and APT assembly equipment has
decreased as a result of the severe market downturns in the electronics and
semiconductor industries, resulting in increased price competition and decreased
margins. The sale of SMTech Limited ("SMTech") at the beginning of fiscal 1999
has also had a significant impact on sales of screen printers.
International sales represented approximately 42.0% and 36.5% of net sales for
the first quarter of fiscal 1999 and 1998, respectively. International sales to
Asia and South America have significantly decreased. The Company believes that
the Asian crisis is continuing to cause severe global SMT printed wiring boards
("PWB") assembly plant over-capacity. Used assembly equipment is currently
depressing demand for new SMT assemblers sold by the Company. The Company
believes that after the existing PWB assembly plant capacity is absorbed, demand
for new SMT assembly equipment may strengthen. However, the Company cannot
accurately predict when and if this will occur.
Gross margin for the first quarter of 1999 decreased to 27.1% from 35.8% as
compared to the same quarter of the prior year and increased from 24.4% in the
fourth quarter of fiscal 1998. On a comparative basis, however, gross margin in
the first quarter was 29.7%, as adjusted for inventory write-downs and reserves
compared to gross margin of 31.2% last quarter, also as adjusted for prior year
inventory reserve charges. The Company believes that gross margin continues to
be adversely impacted by the weakness in the electronic and semiconductor
industries and from additional inventory reserve provisions. The
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Company believes that gross margin could approach the 30% range in the
near-term, although there can be no assurance that gross margins will increase.
Engineering, research and development expenses decreased $811,000 or 42.9% for
the first quarter of fiscal 1999 over the first quarter of the prior year. The
decrease is the result of a combination of workforce reductions, and deferral of
certain development efforts as well as the absence of engineering, research and
development expenses from SMTech, which the Company sold in the beginning of
fiscal 1999. The Company expects that engineering, research and development
expenses will increase in the second quarter of fiscal 1999 as the Company funds
the development of key products.
Selling and marketing expenses decreased $924,000 or 26.2% for the first quarter
of fiscal 1999 over the first quarter of last year primarily as a result of a
sales volume decrease of 30.1%. The Company expects that for the second quarter
of fiscal 1999 overall selling and marketing expenses as a percentage of sales
will remain relatively constant.
Administrative and general expenses decreased $492,000 or 36.9% for the first
quarter of fiscal 1999 as compared to the same quarter last year. The decrease
is mostly the result of the absence of administrative and general expenses from
SMTech, which was sold at the beginning of fiscal 1999 and certain one-time cost
savings. The Company expects that administrative and general expenses will
increase, as certain one-time cost savings in the first quarter of fiscal 1999
are not expected to repeat in the second quarter.
Based on the above, the Company believes that total operating expenses for the
second quarter of fiscal 1999 will increase approximately 15% to 17% from the
first quarter expense level, although there can be no assurance that total
operating expenses will not increase beyond these levels.
Income taxes of $2,844,000 amounted to an effective tax rate of 38.0% for the
first quarter of fiscal 1999 as compared to an effective tax rate of 38.0% in
the same quarter of the prior year. 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 expects the effective tax
rate to remain in the 38% range for the remainder of the fiscal year.
BACKLOG
As of December 31, 1998, the Company's backlog of orders was $6.9 million,
compared to $8.8 million as of September 30, 1998 and $13.4 million as of
December 31, 1997. Bookings for the first quarter of fiscal 1999 were $11.8
million as compared to bookings of $21.8 million in the first quarter of fiscal
1998. The following table sets forth certain backlog information by product line
for the periods indicated (in millions):
December 31,
1998 1997
------ ------
Assemblers $ 4.2 $ 7.3
Screen printers .4 1.9
Reflow ovens .4 .6
The sale of SMTech at the beginning of fiscal 1999 has had a significant impact
on booking and backlog of screen printers. 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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of December 31, 1998 was approximately $28.0
million, including cash and cash equivalent balances of $5.9 million. At
September 30, 1998, the Company had working capital of $20.9 million, including
cash and cash equivalent balances of $2.1 million. During the first quarter of
fiscal 1999, net cash used in operations amounted to $2.1 million. The cash used
in operations was mostly financed by the proceeds from the sale of SMTech.
Proceeds from the sale resulted in $14.8 million in cash. The Company used part
of these proceeds to repay the outstanding line of credit, which totaled $8.8
million at the end of September 1998.
The Company has a revolving line of credit agreement which permits borrowings up
to a maximum of $10,000,000 and bears interest at the bank's base rate of
interest or, at the Company's option, the bank's prime rate or LIBOR plus 1.30%,
when the outstanding balance is greater than $500,000. This line of credit is
secured by a pledge by the Company's English holding company, Quad Systems
Holdings Limited, of 65% of the outstanding shares of its two wholly-owned
English operating subsidiaries. The Company pays a fee on the unused portion of
the line of credit. This credit agreement expires in April 2000. This line of
credit also contains various customary operating and reporting covenants and
requires maintenance of certain financial ratios. As of December 31, 1998 there
were no borrowings under this line of credit.
SALE OF SMTECH LIMITED
During the first quarter of fiscal 1999, the Company sold substantially all of
the assets and liabilities of one of its European subsidiaries, SMTech Limited
("SMTech") to Speedline Technologies, Inc. ("Speedline") for $14,800,000 in cash
paid at closing, subject to a holdback of $750,000. The Company is liable for
various representations and warranties provided to Speedline under this
agreement. The Company recorded an after-tax net gain of $5,127,000. In
connection with the sale, the Company and Speedline's MPM Corporation division
("MPM") entered into an agreement whereby MPM will supply the Company on an OEM
basis with the former SMTech screen printer product line. This agreement
provides, among other things, that the Company will purchase a minimum of
$7,400,000 of AVX 500 screen printers by December 31, 2000. This agreement,
however, is subject to certain provisions that could reduce the minimum
commitment required.
YEAR 2000
The Company has developed plans to address the possible exposures related to the
impact on its computer systems of the Year 2000. Key financial, information and
operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and detailed plans are in place for the required
systems modifications or replacements. Progress against these plans is monitored
and reported to management and to the Audit Committee of the Board of Directors
on a periodic basis.
The Company is in the process of replacing its existing business and accounting
system 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
is being expensed as incurred. In January 1999, the Company successfully
converted to the new enterprise resource planning system in the Willow Grove
manufacturing facility. Additional Year 2000 expenditures for business and
accounting systems replacement are not expected to exceed $150,000. Required
Year 2000 readiness changes to business and accounting systems are anticipated
to be completed by June 1999.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's key suppliers are being queried as to their Year 2000
preparedness. Approximately 90% of key suppliers have answered affirmatively as
to Year 2000 readiness. Risk assessment for each of the remaining suppliers is
ongoing.
In addition, the Company has conducted an evaluation of the operating software
used in the Company's products for possible Year 2000 issues. In the single case
where this evaluation discovered a Year 2000 deficiency, a project was started
to address this deficiency. The cost of this project is not expected to 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 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 will be expanded to include specific procedures for potential
Year 2000 issues. Contingency plans to protect the business from Year
2000-related interruptions are being developed. These plans are anticipated to
be completed by June 1999 and will 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, Year 2000 compliance and the
outlook for the SMT and APT industries 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, the continuing effects of the Asian
and South American economic crisis, the ability to achieve cost reductions in an
effort to bring spending in-line with current levels of business activity,
product development delays or performance problems 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, the
timely resolution of the Year 2000 issue by the Company and its customers and
suppliers, failure to successfully defend itself against the patent infringement
litigation, foreign exchange rate fluctuations, conversion to the single
European currency, risks of nonpayment of accounts receivable or changes in
forecasted costs, including unexpected required additional engineering costs.
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K
1. Report on Form 8-K was filed on October 14, 1998 reporting as to Item
2., Disposition of Assets. The report announced the sale of
substantially all of the assets and liabilities of SMTech Limited.
2. Report on Form 8-K/A was filed on December 10, 1998 reporting as to
Item 7., Pro Forma Financial Statements. The report incorporated the
pro forma consolidated financial statements reflecting the sale as
originally filed on October 14, 1998.
12
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 10, 1999 By: /s/ ANTHONY R. DRURY
--------------------------
Anthony R. Drury
Senior Vice President, Finance
and Chief Financial Officer
13