U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 02549
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
March 31, 1997 1-12337
--------------------- ----------------------
QC OPTICS, INC.
(Name of Small Business
Issuer As Specified In Its Charter)
Delaware 04-2916548
------------------------------- ---------------------
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification Number
154 Middlesex Turnpike, Burlington, MA 01803
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(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 has
been subject to such filing requirements for the past 90 days.
Yes _____ No __X__
As of May 12, 1997, the Company had outstanding 3,242,500 shares of Common
Stock, $.01 par value per share.
Traditional Small Business Disclosure Format: Yes_____ No__X__
QC OPTICS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Balance Sheets at March 31, 1997 and December 31, 1996 1
Statements of Operations for the three months
ended March 31, 1997 and 1996 2
Statements of Cash Flows for the three months ended
ended March 31, 1997 and 1996 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 9
Item 2. Changes in Securities 9
Item 3. Default Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
QC OPTICS, INC.
BALANCE SHEETS
<S> <C> <C>
March 31, December 31,
1997 1996
--------------- ---------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $3,402,118 $5,022,772
Accounts receivable, less allowance of $100,000 2,051,561 1,884,694
Inventory (Note 3) 3,612,641 3,383,060
Refundable income taxes 232,866 --
Prepaid expenses 58,238 69,597
--------------- ---------------
Total current assets 9,357,424 10,360,123
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 156,356 148,391
Machinery and equipment 299,822 299,822
Leasehold improvements 57,085 57,085
Motor vehicles 23,958 23,458
--------------- ---------------
537,221 528,756
Less - Accumulated depreciation 425,402 408,902
--------------- ---------------
Property and equipment, net 111,819 119,854
--------------- ---------------
DEFERRED TAX ASSETS 208,000 208,000
--------------- ---------------
OTHER ASSETS 27,125 24,943
--------------- ---------------
Total assets $9,704,368 $10,712,920
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $435,350 $683,847
Accrued payroll and related expenses 362,935 427,897
Accrued commissions 706,511 538,061
Accrued income taxes -- 469,200
Accrued expenses 370,041 414,059
Customer deposits 109,137 157,562
--------------- ---------------
Total current liabilities 1,983,974 2,690,626
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Authorized -- 1,000,000 shares
Issued and outstanding -- no shares -- --
Common stock, $.01 par value -
Authorized -- 10,000,000 shares
Issued and outstanding -- 3,242,500 shares 32,425 32,425
Additional paid-in capital 9,902,886 9,902,886
Accumulated deficit (2,214,917) (1,913,017)
--------------- ---------------
Total stockholders' equity 7,720,394 8,022,294
--------------- ---------------
Total liabilities and stockholders' equity $9,704,368 $10,712,920
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<TABLE>
<CAPTION>
QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------
March 31,
1997 1996
--------------- ---------------
<S> <C> <C>
NET SALES $1,790,692 $3,212,008
COST OF SALES 865,643 1,521,052
--------------- ---------------
Gross profit 925,049 1,690,956
--------------- ---------------
OPERATING EXPENSES:
Selling, general and administrative expenses 1,118,845 964,994
Engineering expenses 355,024 365,113
Management buyout charge (Note 4) -- 1,701,000
--------------- ---------------
Total operating expenses 1,473,869 3,031,107
--------------- ---------------
Operating loss (548,820) (1,340,151)
INTEREST INCOME 56,300 15,217
INTEREST EXPENSE (2,780) (54,055)
--------------- ---------------
Loss before benefit (provision) for income taxes (495,300) (1,378,989)
BENEFIT (PROVISION) FOR INCOME TAXES 193,400 (21,870)
--------------- ---------------
Net loss ($301,900) ($1,400,859)
========= =========
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARES (Note 2) ($0.09) ($0.64)
===== =====
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,242,500 2,173,174
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<TABLE>
<CAPTION>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
------------------------
March 31,
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($301,900) ($1,400,859)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities -
Management buyout charge (Note 4) -- 1,701,000
Depreciation and amortization 16,500 12,900
Changes in operating assets and liabilities -
Accounts receivable (166,867) (649,478)
Inventory (229,581) 59,436
Prepaid expenses and other assets 9,177 (174)
Accounts payable (248,497) 338,494
Accrued expenses and refundable income taxes (642,596) 145,481
Customer deposits (48,425) 197,618
-------------- --------------
Total adjustments (1,310,289) 1,805,277
-------------- --------------
Net cash provided (used) by operating activities (1,612,189) 404,418
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,465) --
-------------- --------------
Net cash used in investing activities (8,465) --
-------------- --------------
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 -- 65,525
-------------- --------------
Net cash used in financing activities -- (934,475)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,620,654) (530,057)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,022,772 1,430,964
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,402,118 $900,907
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $2,780 $61,781
======= =======
Income taxes $503,950 $56,581
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES
Repurchase of common stock from Kobe Steel
through the issuance of Kobe term loan -- $750,000
========= =========
Issuance of shares (Note 4) -- $1,701,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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-Q 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, 1996 included in
the Company's Form 10-KSB filed with the Securities and Exchange Commission.
The financial statements and notes herein are unaudited, except for the
balance sheet as of December 31, 1996, but in the opinion of management, include
all the 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 1997 period are not necessarily
indicative of the results to be achieved for any future period or for the entire
year ended December 31, 1997.
2. EARNINGS PER SHARE CALCULATION
Net income (loss) per share is computed based upon the weighted average
number of 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.
In March, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings per Share
("EPS"), which supersedes Accounting Principles Board Opinion No. 15, the
existing authoritative guidance. SFAS No. 128 is designed to simplify the
standards for computing EPS and make them comparable to international EPS
standards. SFAS No. 128 is effective for financial statements for both annual
and interim periods ending after December 15, 1997 and requires restatement of
all prior period EPS data presented. The statement replaces the calculations of
primary and fully diluted EPS with basic and diluted EPS. Basic EPS includes no
dilution and is calculated by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock, similar to fully diluted EPS. EPS in these financial statements would not
be affected under this new pronouncement.
4
3. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
March 31, December 31,
1997 1996
---------- ----------
Raw materials and finished parts $1,385,554 $1,149,376
Work-in-process 2,227,087 2,233,684
---------- ----------
$3,612,641 $3,383,060
========= =========
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 Company recorded a $1,701,000 non-recurring,
non-cash charge in the accompanying statement of operations for the three-month
period ended March 31, 1996 with a corresponding increase in additional paid-in
capital in the accompanying balance sheet as of December 31, 1996. This charge
is not deductible for income tax purposes. See Note 9 to the financial
statements for the year ended December 31, 1996 as referenced in note 1 above.
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 THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
Net sales for the three months ended March 31, 1997 ("Interim 1997") were
$1,790,692 compared to $3,212,008 for the three months ended March 31, 1996
("Interim 1996"). This decrease of 44.3% resulted primarily from decreased sales
of the Company's semiconductor related equipment.
Cost of sales for Interim 1997 was $865,643 compared to $1,521,052 for
Interim 1996. As a result of decreased sales, gross profit for Interim 1997 was
$925,049 (51.7% of net sales) versus $1,690,956 (52.6% of net sales) for Interim
1996.
Selling, general and administrative expenses increased to $1,118,845 for
Interim 1997 from $964,994 for Interim 1996. The increase of $153,851 (15.9%)
was due primarily to increases in staffing and related expenses.
Engineering expenses for Interim 1997 of $355,024 remained relatively
constant compared with the $365,113 for Interim 1996.
The Company recorded a management buyout charge of $1,701,000 during
Interim 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 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.
Interest income was $56,300 for Interim 1997 compared to $15,217 for
Interim 1996. This was due to the investment of part of the proceeds from the
initial public offering in October 1996 (the "IPO") during the first three
months of 1997.
Interest expense was $2,780 for Interim 1997, down from $54,055 for Interim
1996 due to the repayment of the loan payable to an affiliate as part of the
Company's recapitalization in March of 1996.
6
Primarily as a result of decreased net sales, the loss before benefit for
income taxes was $495,300 (27.7% of net sales) for Interim 1997, as compared to
the loss before provision for income taxes, including the management buyout
charge discussed above, of $1,378,989 (42.9% of net sales) for Interim 1996.
Due to the ability of the Company to carry back losses incurred in Interim
1997, the Company has benefited the losses for Interim 1997 by $193,400 using
its effective tax rate of approximately 39%. Due to the non-deductibility of
the management buyout charge and the utilization of net operating loss carry
forwards ("NOLs") in Interim 1996, the provision for income taxes amounted to
$21,870 for state income taxes only.
With the decrease in net sales, the Company had a net loss of $301,900
(16.9% of net sales) for Interim 1997 compared to a net loss, including the
non-recurring management buyout charge, of $1,400,859 (43.6% of net sales)
during Interim 1996. Excluding the non-cash, non-recurring management buyout
charge, the Company would have had net income of $300,141 (9.3% of net sales) in
Interim 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and cash equivalents of $3,402,118,
a decrease of $1,620,654 from $5,022,772 at December 31, 1996. Working capital
was $7,373,450 at March 31, 1997 as compared to $7,669,497 at December 31, 1996,
a decrease of $296,047. Cash used by operating activities was $1,612,189 during
the three months ended March 31, 1997 compared to $404,418 of cash provided by
operating activities for the same period in 1996.
The Company has a revolving line of credit with State Street Bank and 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
agreement are limited to 80% of qualifying accounts receivable and 10% (not to
exceed $350,000) of qualifying inventory. Borrowings under the agreement bear
interest at the bank's prime rate (8.5% at March 31, 1997) plus .5%. 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. As of March 31, 1997, the Company was not in default of any of the
covenants and provisions of the credit agreement. Borrowings under the agreement
are secured by substantially all the assets of the Company. At March 31, 1997,
the Company had no borrowings outstanding under the revolving credit agreement
and availability of approximately $1,650,000.
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. Further, on
November 15, 1996, the underwriters exercised their over-allotment option and
purchased an additional 142,500 shares of common stock at $6.00 per share and
142,500 warrants at $.10 per warrant. The Company received total net proceeds of
$5,074,311 after deducting underwriters' discounts, commissions and other
offering expenses.
7
Based on its current cash balances, current bank credit facilities and
anticipated results of operations, management believes that the Company has
sufficient funds to meet its working capital requirements for the next twelve
months. Thereafter, the Company anticipates that it could 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, be on terms favorable to the Company.
8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULT 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. The following exhibit is filed herewith:
Exhibit
-------
No. Title
--- -----
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.
9
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: May 14, 1997 By:/s/ Eric T. Chase
------------------
Eric T. Chase
Chief Executive Officer and President
Date: May 14, 1997 By:/s/ John R. Freeman
--------------------
John R. Freeman
Vice President of Finance
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of the issuer as of and for the three month period ended
March 31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 3,402,118
<SECURITIES> 0
<RECEIVABLES> 2,151,561
<ALLOWANCES> 100,000
<INVENTORY> 3,612,641
<CURRENT-ASSETS> 9,357,424
<PP&E> 537,221
<DEPRECIATION> 425,402
<TOTAL-ASSETS> 9,704,368
<CURRENT-LIABILITIES> 1,983,974
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 7,687,969
<TOTAL-LIABILITY-AND-EQUITY> 9,704,368
<SALES> 1,790,692
<TOTAL-REVENUES> 1,790,692
<CGS> 865,643
<TOTAL-COSTS> 865,643
<OTHER-EXPENSES> 1,473,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (53,520)
<INCOME-PRETAX> (495,300)
<INCOME-TAX> (193,400)
<INCOME-CONTINUING> (310,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (301,900)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
