U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number
September 30, 1996 1-12337
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QC OPTICS, INC.
(Name of Small Business
Issuer As Specified In Its Charter)
Delaware 04-2916548
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
154 Middlesex Turnpike, Burlington, Massachusetts 01803
-------------------------------------------------------
(Address of Principal Executive Offices, Zip Code)
(617) 272-4949
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
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As of December 5, 1996, the Company had outstanding 3,242,500 shares of
Common Stock, $.01 par value per share.
Traditional Small Business Disclosure Format: Yes No X
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<CAPTION>
QC OPTICS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
Balance Sheets at September 30, 1996
and December 31, 1995 1
Statements of Operations for the three
months and nine months ended September 30,
1996 and 1995 2
Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of 10
Security Holders
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
QC OPTICS, INC.
BALANCE SHEETS
September 30, December 31,
1996 1995
--------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 507,358 $ 1,430,964
Accounts receivable , less allowance of $75,000 at
September 30, 1996 and December 31, 1995 3,475,149 3,236,706
Inventory (Note 3) 3,050,944 2,893,122
Prepaid expenses 51,224 18,003
--------------- ---------------
Total current assets 7,084,675 7,578,795
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 104,438 99,686
Machinery and equipment 299,822 296,193
Leasehold improvements 57,085 57,085
Motor vehicles 23,458 23,458
--------------- ---------------
484,803 476,422
Less - Accumulated depreciation and amortization 396,943 358,243
--------------- ---------------
Property and equipment, net 87,860 118,179
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OTHER ASSETS 87,846 24,936
--------------- ---------------
Total assets $ 7,260,381 $ 7,721,910
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable to affiliate $ -- $ 4,250,000
Kobe term loan 750,000 --
Accounts payable 849,248 487,774
Accrued payroll and related expenses 379,546 332,829
Accrued expenses 1,172,572 411,552
Customer deposits 413,802 35,917
--------------- ---------------
Total current liabilities 3,565,168 5,518,072
--------------- ---------------
REVOLVING LINE OF CREDIT, NET OF CURRENT MATURITIES 1,089,917 --
--------------- ---------------
Total liabilities 4,655,085 5,518,072
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Authorized -- 1,000,000 shares
Issued and outstanding -- no shares at September 30 ,1996
and December 31, 1995 -- --
Common stock, $.01 par value -
Authorized -- 10,000,000 shares
Issued and outstanding -- 2,150,000 shares 21,500 21,500
Additional paid-in capital 4,839,500 3,888,500
Accumulated deficit (2,255,704) (1,706,162)
--------------- ---------------
Total stockholders' equity 2,605,296 2,203,838
--------------- ---------------
Total liabilities and stockholders' equity $ 7,260,381 $ 7,721,910
=============== ===============
The accompanying notes are an integral part of these financial statements.
1
</TABLE>
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<CAPTION>
QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES $3,813,069 $1,659,505 $10,595,591 $6,589,782
COST OF SALES 1,713,574 925,012 4,775,881 3,380,789
---------- ---------- ----------- ----------
Gross profit 2,099,495 734,493 5,819,710 3,208,993
OPERATING EXPENSES:
Selling, general and administrative expenses 976,998 635,447 2,899,026 2,179,568
Engineering expenses 323,088 391,810 1,016,530 1,198,918
Management buyout charge (Note 4) -- -- 1,701,000 --
---------- ---------- ----------- ----------
Total operating expenses 1,300,086 1,027,257 5,616,556 3,378,486
---------- ---------- ----------- ----------
Operating income (loss) 799,409 (292,764) 203,154 (169,493)
INTEREST EXPENSE, NET 28,836 30,181 119,953 117,269
---------- ---------- ----------- ----------
Income (loss) before provision for income taxes 770,573 (322,945) 83,201 (286,762)
PROVISION FOR INCOME TAXES 311,749 -- 632,743 13,320
---------- ---------- ----------- ----------
Net income (loss) $458,824 ($322,945) ($549,542) ($300,082)
========== ========== =========== ==========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) $0.21 ($0.15) ($0.25) ($0.14)
========== ========== =========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 2,172,793 2,173,174 2,173,047 2,173,174
========== ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
2
</TABLE>
<TABLE>
<CAPTION>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------
September 30,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($549,542) ($300,082)
Adjustments to reconcile net loss to net
cash provided by operating activities -
Management buyout charge (Note 4) 1,701,000 --
Depreciation and amortization 38,700 39,150
Changes in operating assets and liabilities -
Accounts receivable (238,443) 1,001,908
Inventory (157,822) (590,924)
Prepaid expenses and other assets (96,131) 4,792
Accounts payable 361,474 (1,615)
Accrued payroll and related expenses and
accrued expenses 807,737 129,193
Customer deposits 377,885 (85,363)
-------------- --------------
Total adjustments 2,794,400 497,141
-------------- --------------
Net cash provided by operating activities 2,244,858 197,059
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,381) (27,151)
Proceeds on sale of property and equipment -- 6,438
-------------- --------------
Net cash used in investing activities (8,381) (20,713)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Recapitalization and management buyout -
Capital contribution from Kobe Steel 4,250,000 --
Payment on loan payable to affiliate (4,250,000) --
Borrowings from revolving line of credit 3,250,000 --
Redemption of common stock from Kobe Steel
(cash portion) (4,250,000) --
Borrowings from revolving line of credit for
working capital 4,309,926 --
Payments on revolving line of credit (6,470,009) --
-------------- --------------
Net cash used in financing activities (3,160,083) --
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (923,606) 176,346
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,430,964 2,570,798
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 507,358 $ 2,747,144
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $ 109,314 $ 225,998
============== ==============
Income taxes $ 405,308 $ 30,021
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES
Repurchase of common stock from Kobe Steel
through the issuance of Kobe term loan (Note 4) $ 750,000 $ --
============== ==============
Issuance of Common Stock (Note 4) $ 1,701,000 $ --
============== ==============
The accompanying notes are an integral part of these financial statements.
3
</TABLE>
QC Optics, Inc.
Notes to Financial Statements
1. BASIS OF PRESENTATION
The financial statements of QC Optics, Inc. (the "Company") included
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-QSB and do not include all of the
information and footnote disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1995 included in
the Company's Registration Statement on Form SB-2 (333-07683), declared
effective by the Securities and Exchange Commission on October 24, 1996.
The financial statements and notes herein are unaudited (except for the
balance sheet as of December 31, 1995), but, in the opinion of management,
include all adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows of the Company.
The results of operations for the reported 1996 periods are not
necessarily indicative of the results to be achieved for any future period or
for the entire year ended December 31, 1996.
2. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based upon the weighted
average number of common shares and common equivalent shares outstanding. In
accordance with the Securities and Exchange Commission Staff Accounting Bulletin
No. 83 ("SAB No. 83") all common and common equivalent shares and other
potentially dilutive instruments, including stock options, issued during the
twelve month period prior to the public offering date have been included in the
calculation as if they were outstanding for all periods prior to the date of the
Company's initial public offering.
3. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market and consist of the following:
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<CAPTION>
September 30, December 31,
1996 1995
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<S> <C> <C>
Raw materials and finished parts $1,366,601 $1,390,362
Work-in-process 1,684,343 1,502,760
---------- ----------
$3,050,944 $2,893,122
========== ==========
</TABLE>
Work-in-process and finished parts inventories include materials, labor
and manufacturing overhead.
4
4. MANAGEMENT BUYOUT CHARGE
In March, 1996, certain management employees acquired 62.2% of the
Company from Kobe Steel USA Holdings, Inc. (which prior to this transaction
owned 99.5% of the Company) through a series of related agreements designed to
restructure the capital of the Company. The transaction has been accounted for
as a recapitalization and management buyout. The Company recorded a $1,701,000
non-recurring, non-cash charge in the accompanying statement of operations for
the nine month period ended September 30, 1996 with a corresponding increase in
additional paid-in capital in the accompanying balance sheet as of September 30,
1996. This charge is not deductible for income tax purposes.
5. SUBSEQUENT EVENTS
On October 24, 1996, the Company's Registration Statement on Form SB-2
was declared effective by the Securities and Exchange Commission, and the
Company completed its initial public offering of 950,000 shares of common stock
at $6.00 per share and 950,000 redeemable warrants at $.10 per warrant. The
Company estimates it will receive net proceeds of approximately $4,300,000 after
deducting underwriters' discounts, commissions and other expenses relating to
the offering. Further, on November 15, 1996, the underwriters exercised their
over-allotment option granted under the terms of the underwriting agreement and
purchased an additional 142,500 shares of the common stock at $6.00 per share
and 142,500 redeemable warrants at $.10 per warrant. Net proceeds to the Company
are estimated to be approximately $700,000. The effect of these transactions
will be reflected in the Company's financial statements for the period ended
December 31, 1996.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
QC Optics, Inc. (the "Company" or "QCO") designs, manufactures and
markets laser based defect detection systems for the semiconductor, flat panel
display and computer hard disk markets. QCO uses its patented and other
proprietary technology in lasers and optical systems that scan a computer hard
disk, photomask or flat panel display for defects or contamination. The
Company's systems combine automatic handling, clean room capability and computer
control with reliable laser based technology.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for the third quarter ended September 30, 1996 ("Interim
1996") were $3,813,069 compared to $1,659,505 for the third quarter ended
September 30, 1995 ("Interim 1995"), an increase of 129.8%. The increase
resulted primarily from increased sales of semiconductor related equipment,
including the sale of the Company's second RSO (Reticle Storage One) system and
from increased sales of equipment to the computer hard disk industry.
Cost of sales for Interim 1996 was $1,713,574 compared to $925,012 for
Interim 1995. As a result of increased sales, gross profit for Interim 1996 was
$2,099,495 (55.1% of net sales) versus $734,493 (44.3% of net sales) for Interim
1995. This improvement in gross profit as a percentage of net sales was due to
the spreading of fixed overhead costs over a larger revenue base.
Selling, general and administrative expenses increased to $976,998 for
Interim 1996 from $635,447 for Interim 1995. The increase was due to increased
commissions as well as increases in administrative staff and expenses. Selling,
general and administrative expenses as a percentage of sales were 25.6% in
Interim 1996 as compared to 38.3% in Interim 1995, as certain fixed expenses did
not increase with the growth in sales.
Engineering expenses for Interim 1996 decreased to $323,088 from
$391,810 for Interim 1995. The decrease is attributable to higher expenses
during the Interim 1995 for development of the Company's new QCO-4000 inspection
system.
Net interest expense remained relatively constant at $28,836 during
Interim 1996 from $30,181 for Interim 1995.
As a result of increased sales and improved gross profit , income
before provision for income taxes was $770,573 (20.2% of net sales) for Interim
1996, as compared to a loss before provision for income taxes of $322,945 for
Interim 1995.
6
Due to limitations on the utilization of the Company's net operating
loss carryforwards ("NOLs"), there was a provision for income taxes of $311,749
in Interim 1996. With the utilization of NOLs in Interim 1995, there was no
provision for income taxes.
The Company had net income of $458,824 (12% of net sales) for Interim
1996 compared to a net loss of $322,945 in Interim 1995.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for the nine months ended September 30, 1996 were
$10,595,591, as compared to $6,589,782 for the same period in 1995, an increase
of 60.8%. The increase was due to increased sales in both semiconductor related
equipment and increased demand for the Company's products for the inspection of
computer hard disks.
Cost of sales for the first nine months of 1996 was $4,775,881 (45.1%
of net sales) compared to $3,380,789 (51.3% of net sales) for the same period in
1995. This improvement in the gross profit as a percentage of net sales from
48.7% for the first nine months of 1995 to 54.9% in the first nine months of
1996 was due primarily to increased sales covering certain fixed manufacturing
costs.
Selling, general and administrative expenses increased to $2,899,026
for the first nine months of 1996 (27.4% of net sales) from $2,179,568 (33.1% of
net sales) for the same period in 1995. The increase was due to increased
commissions and increases in field service staffing along with related travel
expenses. Selling, general and administrative expenses increased by 33% from the
first nine months of 1995 to the same period in 1996 as compared to an increase
in sales of 60.8% over the same periods.
Engineering expenses for the first nine months of 1996 decreased to
$1,016,530 from $1,198,918 for the same period in 1995. The decrease is
attributable to higher materials and consulting expenses during the 1995 period
for development of the Company's new QCO-4000 inspection system.
The Company recorded a management buyout charge of $1,701,000 during
the first nine months of 1996 which represents a non-cash, non-recurring charge
associated with the acquisition of a 62.2% equity interest in the Company by
management. This charge (16.1% of net sales) is not deductible for either
federal or state income tax purposes and as a result of this charge additional
paid-in capital was increased by a like amount.
Net interest expense increased to $119,953 during the first nine months
of 1996 from $117,269 for the same period in 1995 due to lower borrowing levels,
but at higher interest rates.
As a result of increased sales and improved margins, income before
provision for income taxes was $83,201 (.8% of net sales) for the first nine
months of 1996, compared to a loss before provision for income taxes of $286,762
for the same nine months in 1995. Without the management
7
buyout charge, income before provision for income taxes would have been
$1,784,201 (16.8% of net sales).
Due to limitations on the utilization of the Company's NOLs and the
inability to deduct for taxes of the management buyout charge, there was a
provision for income taxes of $632,743 for the first nine months of 1996. With
the utilization of NOLs during the same period in 1995, the provision for income
taxes amounted to $13,320 for state income taxes only.
As a result of the increase in sales and improved gross profit offset
by the non-recurring management buyout charge and the inability to fully utilize
NOLs, the Company had a net loss of $549,542 (5.2% of net sales) for the first
nine months of 1996 compared to a net loss of $300,082 (4.6% of net sales) for
the same period of 1995. Excluding the non-cash, non-recurring management buyout
charge, the Company would have had net income of $1,151,458 (10.9% of net sales)
in the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash and cash equivalents of
$507,358, a decrease of $923,606 from $1,430,964 at December 31, 1995. Working
capital was $3,519,507 at September 30, 1996 as compared to $2,060,723 at
December 31, 1995, an increase of $1,458,784. Cash provided by operating
activities was $2,244,858 during the first nine months of 1996 compared to
$197,059 of cash provided for the same period in 1995.
During the first nine months of 1996, Kobe Steel USA Holdings, Inc.
made a capital infusion of $4,250,000 to repay a loan of $4,250,000 previously
made to the Company by Kobe Steel USA International, Inc. In addition, the
Company repurchased 62.2% of the Company's Common Stock (99.5% of the Company
was previously held by Kobe Steel USA Holdings, Inc.) for $5,000,000. Payment
for the shares was made with $3,250,000 from a revolving line of credit from the
Company's bank, a $750,000 loan from Kobe Steel USA Holdings, Inc. due and
payable on December 31, 1996 and $1,000,000 of cash from the Company's cash
accounts. Subsequent to the repurchase, the Company utilized cash provided from
operations to reduce borrowings under the revolving line of credit from the
Company's bank by $2,160,083.
In connection with the stock repurchase from Kobe Steel USA Holdings,
Inc., the Company entered into a revolving line of credit with State Street Bank
& Trust Company. The revolving line of credit agreement allows for maximum
borrowings of $4,000,000 and requires monthly payment of interest on the
outstanding balance to maturity on June 30, 1998. Borrowings under the revolving
line of credit are limited to 80% of qualifying accounts receivable and 10% (not
to exceed $350,000) of qualifying inventory. Borrowings under the revolving line
of credit agreement bear interest at the bank's prime rate (8.25% at September
30, 1996) plus 1.0%. The terms of the loan agreement provide for the maintenance
of certain specified financial ratios including, but not limited to, quick
ratio, debt to equity and net worth ratios, and restrict certain transactions
without the bank's prior written consent. Borrowings under the agreement are
secured by substantially all the assets of the
8
Company. At September 30, 1996, the Company had borrowings outstanding under the
revolving line of credit agreement of $1,089,917 and additional availability of
approximately $2,165,000.
On October 24, 1996, the Company completed it's initial public offering
("IPO") of it's common stock. The net proceeds to the Company, including the net
proceeds received as a result of the overallotment option being exercised by the
underwriter on November 15, 1996, are estimated to be $5,000,000. The Company
intends to use the net proceeds of the IPO primarily for working capital and
other general corporate purposes and also for the reduction of certain debt, the
expansion of sales and marketing activities and research and development
activities.
The Company believes that the net proceeds from its IPO together with
its current cash balances, current bank credit lines and cash provided by future
operations will be adequate to meet its working capital requirements for the
next twelve months. Thereafter, the Company anticipates that it may need
additional financing to meet its current plans for expansion. No assurance can
be given that additional financing will be successfully completed or that such
financing will be available or, if available, will be on terms favorable to the
Company.
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
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. On October 24, 1996, the Company's Registration
Statement on Form SB-2 was declared effective by the Securities and Exchange
Commission, and the Company completed its initial public offering of 950,000
shares of common stock at $6.00 per share and 950,000 redeemable warrants at
$.10 per warrant. The Company estimates it will receive net proceeds of
approximately $4,300,000 after deducting underwriters' discounts, commissions
and other expenses relating to the offering. Further, on November 15, 1996, the
underwriters exercised their over-allotment option granted under the terms of
the underwriting agreement and purchased an additional 142,500 shares of the
common stock at $6.00 per share and 142,500 redeemable warrants at $.10 per
warrant. Net proceeds to the Company are estimated to be approximately $700,
000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibit is filed herewith:
Exhibit
No. Title
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27 Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter for which this report is filed.
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QC OPTICS, INC.
Date: December 6, 1996 By:/s/ Eric T. Chase
-----------------
Eric T. Chase
Chief Executive Officer and President
Date: December 6, 1996 By:/s/ John R. Freeman
-------------------
John R. Freeman
Vice President of Finance
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 507,358
<SECURITIES> 0
<RECEIVABLES> 3,550,149
<ALLOWANCES> 75,000
<INVENTORY> 3,050,944
<CURRENT-ASSETS> 7,084,675
<PP&E> 484,803
<DEPRECIATION> 396,943
<TOTAL-ASSETS> 7,260,381
<CURRENT-LIABILITIES> 3,565,168
<BONDS> 1,089,917
0
0
<COMMON> 21,500
<OTHER-SE> 2,583,796
<TOTAL-LIABILITY-AND-EQUITY> 7,260,381
<SALES> 10,595,591
<TOTAL-REVENUES> 10,595,591
<CGS> 4,775,881
<TOTAL-COSTS> 4,775,881
<OTHER-EXPENSES> 5,616,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,953
<INCOME-PRETAX> 83,201
<INCOME-TAX> 632,743
<INCOME-CONTINUING> (549,542)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (549,542)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
