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, 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)
46 Jonspin Road, Wilmington, Massachusetts 01887
------------------------------------------------
(Address of Principal Executive Offices, Zip Code)
(978) 657-7007
--------------
(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 X No
----- -----
As of November 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
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements
Balance Sheets at September 30, 1997 and December 31, 1996 1
Statements of Operations for the three months and nine months
ended September 30, 1997 and 1996 2
Statements of Cash Flows for the nine months ended
September 30, 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
</TABLE>
PART 1 - Financial Information
Item 1 - Financial Statements
QC OPTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $4,549,908 $5,022,772
Accounts receivable, less allowance of $100,000 at December 31, 1996
and $50,000 at September 30, 1997 1,446,057 1,884,694
Inventory (Note 3) 4,496,043 3,383,060
Refundable income taxes 485,310 --
Prepaid expenses 52,927 69,597
--------------- ---------------
Total current assets 11,030,245 10,360,123
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 177,068 148,391
Machinery and equipment 319,770 299,822
Leasehold improvements 74,359 57,085
Motor vehicles 21,574 23,458
--------------- ---------------
592,771 528,756
Less - Accumulated depreciation and amortization 381,009 408,902
--------------- ---------------
Property and equipment, net 211,762 119,854
--------------- ---------------
DEFERRED TAX ASSETS 208,000 208,000
--------------- ---------------
OTHER ASSETS 36,265 24,943
--------------- ---------------
Total assets $11,486,272 $10,712,920
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,260,271 $683,847
Accrued payroll and related expenses 332,825 427,897
Accrued commissions 590,731 538,061
Accrued income taxes -- 469,200
Accrued expenses 426,051 414,059
Customer deposits 1,495,854 157,562
--------------- ---------------
Total current liabilities 4,105,732 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 (2,554,771) (1,913,017)
--------------- ---------------
Total stockholders' equity 7,380,540 8,022,294
--------------- ---------------
Total liabilities and stockholders' equity $11,486,272 $10,712,920
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- --------------------------
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $1,451,295 $3,813,069 $4,974,814 $10,595,591
COST OF SALES 634,777 1,713,574 2,355,837 4,775,881
----------- ----------- ----------- -----------
Gross profit 816,518 2,099,495 2,618,977 5,819,710
OPERATING EXPENSES:
Selling, general and administrative expenses 836,787 976,998 2,843,327 2,899,026
Engineering expenses 308,131 323,088 981,844 1,016,530
Management buyout charge (Note 4) -- -- -- 1,701,000
----------- ----------- ----------- -----------
Total operating expenses 1,144,918 1,300,086 3,825,171 5,616,556
----------- ----------- ----------- -----------
Operating income (loss) (328,400) 799,409 (1,206,194) 203,154
INTEREST INCOME 54,293 20 153,603 17,067
INTEREST EXPENSE (2,556) (28,856) (7,863) (137,020)
----------- ----------- ----------- -----------
Income (loss) before benefit (provision) for income taxes (276,663) 770,573 (1,060,454) 83,201
BENEFIT (PROVISION) FOR INCOME TAXES 110,600 (311,749) 418,700 (632,743)
----------- ----------- ----------- -----------
Net income (loss) ($166,063) $458,824 ($641,754) ($549,542)
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) ($0.05) $0.21 ($0.20) ($0.25)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,242,500 2,172,793 3,242,500 2,173,047
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
September 30,
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($641,754) ($549,542)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities -
Management buyout charge (Note 4) -- 1,701,000
Depreciation and amortization 52,650 38,700
Changes in operating assets and liabilities -
Accounts receivable 438,637 (238,443)
Inventory (1,112,983) (157,822)
Prepaid expenses and other assets 5,348 (96,131)
Accounts payable 576,424 361,474
Accrued expenses and refundable income taxes (984,920) 807,737
Customer deposits 1,338,292 377,885
-------------- --------------
Total adjustments 313,448 2,794,400
-------------- --------------
Net cash provided (used) by operating activities (328,306) 2,244,858
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (144,558) (8,381)
-------------- --------------
Net cash used in investing activities (144,558) (8,381)
-------------- --------------
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 IN CASH AND CASH EQUIVALENTS (472,864) (923,606)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,022,772 1,430,964
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,549,908 $507,358
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $7,891 $109,314
============== ==============
Income taxes $535,814 $405,308
============== ==============
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 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:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials and finished parts $1,768,033 $1,149,376
Work-in-process 2,728,010 2,233,684
---------- ----------
$4,496,043 $3,383,060
========== ==========
</TABLE>
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 nine month
period ended September 30, 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 SEPTEMBER 30, 1997 AND 1996
Net sales for the three months ended September 30, 1997 ("Interim 1997")
were $1,451,295 compared to $3,813,069 for the three months ended September 30,
1996 ("Interim 1996"). This decrease of 61.9% resulted from decreased sales of
the Company's semiconductor and computer hard disk inspection equipment.
Cost of sales for Interim 1997 was $634,777 compared to $1,713,574 for
Interim 1996. Primarily as a result of the increase in service revenues as a
percentage of total sales during the period, gross profit as a percent of net
sales for Interim 1997 increased slightly to 56.3% ($816,518) from 55.1%
($2,099,495) for Interim 1996.
Selling, general and administrative expenses decreased to $836,787 for
Interim 1997 from $976,998 for Interim 1996. The decrease of $140,211 (14.4%)
was due primarily to a decrease in commissions.
Engineering expenses for Interim 1997 of $308,131 remained relatively
constant compared with the $323,088 for Interim 1996.
Interest income was $54,293 for Interim 1997 compared to $20 for Interim
1996. This was due to the investment during Interim 1997 of part of the proceeds
from the initial public offering in October 1996 (the "IPO").
Interest expense was $2,556 for Interim 1997, down from $28,856 for Interim
1996 due to the repayment of the loan payable to an affiliate as part of the
Company's recapitization in March of 1996 and repayment of amounts under the
Company's revolving line of credit.
Primarily as a result of decreased net sales, the loss before benefit for
income taxes was $276,663 (19.1% of net sales) for Interim 1997, as compared to
the income before provision for income taxes of $770,573 (20.2% of net sales)
for Interim 1996.
Due to the ability of the Company to carryback losses incurred in Interim
1997, the Company has benefited the losses for Interim 1997 by $110,600 using an
effective tax rate of approximately 40%. In Interim 1996, the provision for
income taxes amounted to $311,749, an effective tax rate of approximately 40%.
6
With the over 60% decrease in net sales, the Company had a net loss of
$166,063 (11.4% of net sales) for Interim 1997 compared to net income of
$458,824 (12% of net sales) during Interim 1996.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales for the nine months ended September 30, 1997 were $4,974,814, as
compared to $10,595,591 for the same period in 1996, a decrease of 53%. The
decrease resulted primarily from decreased sales of the Company's semiconductor
related equipment.
Cost of sales for the first nine months of 1997 was $2,355,837 (47.4% of
net sales) compared to $4,775,881 (45.1% of net sales) for the same period in
1996. The decrease in gross profit as a percentage of sales from 54.9% in the
first nine months of 1996 to 52.6% for the nine months ended September 30, 1997,
was due primarily to the decreased sales covering less of certain fixed
manufacturing costs.
Selling, general and administrative expenses decreased by $55,699 to
$2,843,327 for the nine months ended September 30, 1997 from $2,899,026 for the
first nine months of 1996. Decreased commissions were offset primarily by
increases in staffing, investor relation expenses and expenses related to the
moving of the Company's headquarters.
Engineering expenses for the first nine months of 1997 of $981,844 remained
relatively constant compared with the $1,016,530 for the same period in 1996.
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 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 $153,603 for the nine months ended September 30, 1997
as compared to $17,067 for the same period in 1996. This was due to the
investment of part of the proceeds from the Company's IPO during the first nine
months of 1997.
Interest expense was $7,863 for the first nine months of 1997, down from
$137,020 for the first nine months of 1996 due to the repayment of all loans
payable to an affiliate and repayment of the Company's borrowings under its
revolving line of credit during 1996.
Primarily as a result of decreased net sales, the loss before benefit for
income taxes was $1,060,454 (21.3% of net sales) for the nine months ended
September 30, 1997, as compared to the income before provision for income taxes,
including the management buyout charge discussed above, of $83,201 (.8% of net
sales) for the same period in 1996.
Due to the ability of the Company to carryback losses incurred in the first
nine months of 1997, the Company has benefited the losses for the period by
$418,700 using an effective tax rate of approximately 40%. Due to the
non-deductibility of the management buyout charge and the utilization of net
operating loss carryforwards in the nine months ended September 30, 1996, the
provision for income taxes amounted to $632,743.
With the decrease in net sales, the Company had a net loss of $641,754
(12.9% of net sales) for the first
7
nine months of 1997 compared to a net loss, including the non-recurring
management buyout charge, of $549,542 (5.2% of net sales) during the nine months
ended September 30, 1996. 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, 1997, the Company had cash and cash equivalents of
$4,549,908, a decrease of $472,864 from $5,022,772 at December 31, 1996. Working
capital was $6,924,513 at September 30, 1997 as compared to $7,669,497 at
December 31, 1996, a decrease of $744,984. Cash used by operating activities was
$328,306 during the nine months ended September 30, 1997 compared to $2,244,858
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 September 30, 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 September 30, 1997 the Company was in default of the
quick ratio, minimum earnings test, and losses covenants, but has obtained a
waiver of compliance with these covenants from its bank for the quarter ended
September 30, 1997. The Company is not in default of any other covenants or
provisions of the credit agreement. Borrowings under the agreement are secured
by substantially all the assets of the Company. At September 30, 1997, the
Company had no borrowings outstanding under the revolving credit agreement and
availability of approximately $1,300,000.
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.
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.
FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements. These statements,
in addition to statements made in conjunction with the words "anticipate",
"expect", "believe", "intend", "seek" and similiar expressions, are
forward-looking statements. These statements involve a number of risks and
uncertainties, including, but not limited to, the impact of competitive products
and pricing, product demand and market acceptance, new product development,
availability of raw materials, fluctuations in operating results and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES.
Use of Proceeds
Pursuant to Rule 463 of the Securities Act, the Company filed its initial
Form SR with the Securities and Exchange Commission on January 31, 1997
reporting for the period from October 24, 1996 (the effective date of the
Company's registration statement for its initial public offering) through
January 24, 1997. On August 12, 1997 the Company filed its first amendment to
its Form SR covering the period from January 24, 1997 through July 24, 1997. The
following reflects as of September 30, 1997 an estimate of the amount of net
offering proceeds received by the Company from its initial public offering used
for each of the purposes set forth below (and reflects only the changes to the
information provided by the Company in the Form SR amendment filed on August 12,
1997):
Direct or indirect payments to directors, officers, persons owning ten
percent or more of any class of equity securities of the Company, and affiliates
of the Company:
Repayment of debt $750,000
Direct or indirect payments to others:
Research and development $405,673
Sales and marketing $236,493
Working capital $702,145
Temporary investments in money market fund $2,980,000
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: November 14, 1997 By:/s/ Eric T. Chase
--------------------
Eric T. Chase
Chief Executive Officer and President
Date: November 14, 1997 By:/s/ John R. Freeman
----------------------
John R. Freeman
Vice President of Finance
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 4,549,908
<SECURITIES> 0
<RECEIVABLES> 1,496,057
<ALLOWANCES> 50,000
<INVENTORY> 4,496,043
<CURRENT-ASSETS> 11,030,245
<PP&E> 592,771
<DEPRECIATION> 381,009
<TOTAL-ASSETS> 11,486,272
<CURRENT-LIABILITIES> 4,105,732
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 7,348,115
<TOTAL-LIABILITY-AND-EQUITY> 11,486,272
<SALES> 4,974,814
<TOTAL-REVENUES> 4,974,814
<CGS> 2,355,837
<TOTAL-COSTS> 2,355,837
<OTHER-EXPENSES> 3,875,171
<LOSS-PROVISION> (50,000)
<INTEREST-EXPENSE> (145,740)
<INCOME-PRETAX> (1,060,454)
<INCOME-TAX> (418,700)
<INCOME-CONTINUING> (641,754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (641,754)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
