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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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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, 1998 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
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(Address of Principal Executive Offices, Zip Code)
(978) 657-7007
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(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), (2) and
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
As of October 31, 1998, 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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<PAGE>
QC OPTICS, INC.
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
<S> <C>
Balance Sheets at September 30, 1998 and December 31, 1997 1
Statements of Operations for the three months and nine months
ended September 30, 1998 and 1997 2
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 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. Default Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
QC OPTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ---------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,090,090 $ 3,766,534
Accounts receivable, less allowance of $50,000 3,576,279 2,509,002
Inventory (Note 3) 4,014,261 4,025,428
Refundable income taxes -- --
Prepaid expenses 58,029 76,974
--------------- ---------------
Total current assets 9,738,659 10,377,938
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 214,805 189,350
Machinery and equipment 348,547 342,609
Leasehold improvements 76,713 76,714
Motor vehicles 21,574 21,574
--------------- ---------------
661,639 630,247
Less - Accumulated depreciation and amortization 472,638 402,528
--------------- ---------------
Property and equipment, net 189,001 227,719
--------------- ---------------
DEFERRED TAX ASSETS 349,500 349,500
--------------- ---------------
OTHER ASSETS 36,006 82,924
--------------- ---------------
Total assets $ 10,313,166 $ 11,038,081
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 205,107 $ 742,563
Accrued payroll and related expenses 402,477 457,505
Accrued income taxes 299,425 221,789
Accrued expenses 476,374 702,817
Customer deposits 106,155 645,817
--------------- ---------------
Total current liabilities 1,489,538 2,770,491
--------------- ---------------
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 (1,111,683) (1,667,721)
--------------- ---------------
Total stockholders' equity 8,823,628 8,267,590
--------------- ---------------
Total liabilities and stockholders' equity $ 10,313,166 $ 11,038,081
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES 2,683,529 $1,451,295 $8,860,319 $4,974,814
COST OF SALES 1,260,223 634,777 4,598,088 2,355,837
---------- ---------- ---------- ----------
Gross profit 1,423,306 816,518 4,262,231 2,618,977
OPERATING EXPENSES:
Selling, general and administrative expenses 720,559 836,787 2,567,441 2,843,327
Engineering expenses 296,175 308,131 969,119 981,844
---------- ---------- ---------- ----------
Total operating expenses 1,016,734 1,144,918 3,536,560 3,825,171
---------- ---------- ---------- ----------
Operating income (loss) 406,572 (328,400) 725,671 (1,206,194)
INTEREST INCOME (NET) 34,370 51,737 150,067 145,740
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for 440,942 (276,663) 875,738 (1,060,454)
PROVISION (BENEFIT) FOR INCOME TAXES 162,200 (110,600) 319,700 (418,700)
---------- ---------- ---------- ----------
Net Income (Loss) $ 278,742 ($166,063) $ 556,038 ($641,754)
========== ========== ========== ==========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE (Note 2) $ 0.09 ($0.05) $ 0.17 ($0.20)
========== ========== ========== ==========
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,242,500 3,242,500 3,251,500 3,242,500
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial stateme
2
<PAGE>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 556,038 ($641,754)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 70,110 52,650
Changes in operating assets and liabilities -
Accounts receivable (1,067,277) 438,637
Inventory 11,167 (1,112,983)
Prepaid expenses and other assets 65,864 5,348
Accounts payable (537,456) 576,424
Accrued expenses and income taxes (203,836) (984,920)
Customer deposits (539,662) 1,338,292
-------------- --------------
Total adjustments (2,201,090) 313,448
-------------- --------------
Net cash provided (used) by operating activities (1,645,052) (328,306)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (31,392) (144,558)
-------------- --------------
Net cash used in investing activities (31,392) (144,558)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES: -- --
Net cash used in financing activities -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,676,444) (472,864)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,766,534 5,022,772
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,090,090 $ 4,549,908
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $ 7,697 $ 7,891
============== ==============
Income taxes $ 241,385 $ 535,814
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
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, 1997 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, 1997, 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 1998 period are not necessarily
indicative of the results to be achieved for any future period or for the entire
year ended December 31, 1998.
2. EARNINGS PER SHARE CALCULATION
Basic Earnings per Share ("EPS") is calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding for the
period. Diluted EPS is calculated the same as basic except, if not antidultive,
stock options are included using the treasury stock method to the extent that
the average share trading price exceeds the exercise price. As of September 30,
1998 and 1997, there were 276,656 and 250,496 options outstanding, respectively.
Shares used to calculate EPS were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 3,242,500 3,242,500 3,242,500 3,242,500
Incremental stock option shares 0 0 9,000 0
--------- --------- --------- ---------
Diluted weighted average shares outstanding 3,242,500 3,242,500 3,251,500 3,242,500
========= ========= ========= =========
</TABLE>
Basic and diluted EPS were equal for the three months and nine months ended
September 30, 1998 and 1997; therefore, no reconciliation between basic and
diluted EPS is required.
4
<PAGE>
3. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Raw materials and finished parts $1,726,480 $1,931,130
Work-in-process 2,287,781 2,094,298
---------- ----------
$4,014,261 $4,025,428
========== ==========
4. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distribution to owners, in a financial statement for the period in which they
are recognized ("Comprehensive Income"). The Company has no items of
Comprehensive Income requiring disclosure in the accompanying financial
statements for all periods presented.
5
<PAGE>
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 computer hard disk, semiconductor
and flat panel display 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, 1998 AND 1997
Net sales for the three months ended September 30, 1998 ("Interim 1998")
were $2,683,529 compared to $1,451,295 for the three months ended September 30,
1997 ("Interim 1997"). This increase of 84.9% resulted from increased sales of
the Company's computer hard disk inspection equipment. Historically the Company
has experienced significant quarterly fluctuations in operating results due to
the relatively small number of high priced sales in any quarter. Management
expects these fluctuations to continue. As a result of the steep declines in
capital expenditures in the semiconductor and computer hard disk industries, the
Company expects that (i) it will have lower revenue levels for the fourth
quarter of 1998 as compared to the preceding quarters of 1998, and (ii) it will
not achieve break-even results for such quarter.
Cost of sales for Interim 1998 was $1,260,223 compared to $634,777 for
Interim 1997. Gross profit as a percent of net sales for Interim 1998 decreased
to 53.0% ($1,423,306) from 56.3% ($816,518) for Interim 1997 primarily as a
result of the decrease in margins on certain newly introduced products during
the period,.
Selling, general and administrative expenses decreased to $720,559 for
Interim 1998 from $836,787 for Interim 1997. The decrease of $116,228 (13.9%)
was due primarily to decreases in professional fees and sales commissions.
Engineering expenses for Interim 1998 of $296,175 decreased marginally
(3.9%) from $308,131 for Interim 1997.
Interest income (net) was $34,370 for Interim 1998 compared to $51,737 for
Interim 1997. The decrease resulted from a decrease in average invested funds
during Interim 1998 as compared to Interim 1997.
Primarily as a result of increased net sales, income before provision for
income taxes was $440,942 (16.4% of net sales) for Interim 1998, as compared to
the loss before benefit for income taxes of $276,663 (19.1% of net sales) for
Interim 1997.
In Interim 1998, the provision for income taxes amounted to $162,200, an
effective tax rate of approximately 37%. Due to the ability of the Company to
carryback losses incurred in Interim
6
<PAGE>
1997, the Company has benefited the losses for Interim 1997 by $110,600 using an
effective tax rate of approximately 40%.
With the 84.9% increase in net sales, the Company had net income of
$278,742 (10% of net sales) for Interim 1998 compared to a net loss of $166,063
(11% of net sales) during Interim 1997.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales for the nine months ended September 30, 1998 were $8,860,319, as
compared to $4,974,814 for the same period in 1997, an increase of 78.1%. The
increase resulted from increased sales of the Company's computer hard disk
inspection products.
Cost of sales for the first nine months of 1998 was $4,598,088 (51.9% of
net sales) compared to $2,355,837 (47.4% of net sales) for the same period in
1997. The gross profit as a percentage of net sales decreased to 48.1% in the
first nine months of 1998 from 52.6% for the nine months ended September 30,
1997. This was due primarily to the decreased margins on certain newly
introduced products during the period offset partially by the higher sales
covering certain fixed manufacturing costs.
Selling, general and administrative expenses decreased $275,886 to
$2,567,441 for the nine months ended September 30, 1998 from $2,843,327 for the
first nine months of 1997. This decrease of 9.7% was due primarily to decreased
professional fees and commissions, offset somewhat by increases in staffing
costs and certain field service expenses.
Engineering expenses for the first nine months of 1998 of $969,119 remained
relatively constant compared with the $981,844 for the same period in 1997.
Interest income (net) was $150,067 for the first nine months of 1998, up
somewhat from $145,740 for the first nine months of 1997.
Primarily as a result of increased net sales, the income before provision
for income taxes was $875,738 (9.9% of net sales) for the nine months ended
September 30, 1998, as compared to the loss before benefit for income taxes of
$1,060,454 (21.3% of net sales) for the same period in 1997.
In the first nine months of 1998, the provision for income taxes amounted
to $319,700, an effective tax rate of approximately 37%. Due to the ability of
the Company to carryback losses incurred in the first nine months of 1997, the
Company benefited the losses for the period by $418,700 using an effective tax
rate of approximately 39%.
With the 78.1% increase in net sales, the Company had net income of
$556,038 (6.3% of net sales) for the first nine months of 1998 compared to a net
loss of $641,754 (12.9% of net sales) during the nine months ended September 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of
$2,090,090, a decrease of $1,676,444 from $3,766,534 at December 31, 1997.
Working capital was
7
<PAGE>
$8,249,121 at September 30, 1998 as compared to $7,607,447 at December 31, 1997,
an increase of $641,674. Cash used by operating activities was $1,645,051 during
the nine months ended September 30, 1998 compared to $328,306 for the same
period in 1997.
The Company has a revolving line of credit with State Street Bank and Trust
Company. The revolving line of credit agreement was amended on June 29, 1998 and
allows for maximum borrowings of $2,000,000 and requires monthly payment of
interest on the outstanding balance to maturity on June 30, 2000. Borrowings
under the revolving line of credit agreement are limited to 80% of qualifying
accounts receivable. Borrowings under the agreement bear interest at the bank's
prime rate. The terms of the loan agreement provide for the maintenance of
certain specified financial ratios including the quick ratio and debt to equity,
minimum earnings tests and other negative and affirmative covenants and
restricts certain transactions without the bank's prior written consent. As of
September 30, 1998 the Company was not in default of any covenants or provisions
of the credit agreement. At September 30, 1998, the Company had no borrowings
outstanding under the revolving credit agreement and availability of
approximately $1,507,000.
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.
YEAR 2000 DISCLOSURE
The Company has considered the potential problems that may
arise because of the Year 2000 ("Y2K") as it relates to the Company's internal
financial and information systems. The current internal systems used by the
Company are not Y2K compliant. The Company intends to purchase upgrades that are
represented as being Y2K compliant and expects to implement them during 1999.
The Company is currently reviewing its products in operation at various
customer locations. The Company expects to complete this review by the first
quarter of 1999. The Company estimates that the costs incurred to remediate Y2K
problems related to noncompliant products will not materially adversely affect
its operations or financial condition.
The Company has also contacted certain critical suppliers to determine
if such suppliers are, or will be, Y2K compliant. The Company expects to
complete its assessment during 1999, and seek new suppliers where necessary.
To date, the Company is unaware of any situations of noncompliance that
would have a material adverse effect on the Company's operations or financial
condition. However, because its reviews are not completed, the Company is not
able to estimate the total cost associated with Y2K issues, nor what its
liabilities to third parties may be as a result of Y2K issues.
At this time, the Company cannot give any assurance that it will be
successful in completing its planned actions to become Y2K compliant on or
before the Year 2000. Additionally, no assurance can be given that instances of
noncompliance which could have a material adverse effect on the Company's
operations or financial condition will be identified;
8
<PAGE>
that the systems of other companies with which the Company transacts business
will be corrected on a timely basis; that a failure by such entities to correct
a Y2K problem or a conversion which is incompatible with the Company's systems
would not have a material adverse effect on the Company's operations or
financial condition; or that even if all planned actions are completed, the
Company will not experience some adverse effects from Y2K related issues.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements regarding
anticipated results of operations, liquidity downturns in the semiconductor and
computer hard disk industries, Y2K compliance issues and other matters. These
statements, in addition to statements made in conjunction with the words
"anticipate", "expect", "believe", "intend", "seek," "estimate" and similar
expressions, are forward-looking statements that involve a number of risks and
uncertainties. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to the
following: business conditions and growth in certain market segments and general
economy; the cyclical nature of the semiconductor and computer hard disk
industries; the uncertainties concerning the Asian markets; an increase in
competition; increased or continued market acceptance of the Company's products
and proposed products; the loss of the services of one or more of the Company's
key employees, which could have a material adverse effect on the Company; the
Company's ability to effectively address Y2K issues; dependence on few
customers; the availability of additional capital to fund expansion on
acceptable terms, if at all; and other risks and uncertainties indicated from
time to time in the Company's filings with the Securities and Exchange
Commission.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. On August 6, 1998, K. Andrew Bernal, a beneficial
owner of approximately 9.7% of the issued and outstanding Common Stock of the
Company, filed a civil lawsuit against the Company and Eric T. Chase,
individually, as a director of the Company and as the trustee of the QC Optics
Voting Trust (the "Voting Trust"). The suit alleges violations of federal and
state securities laws, breach of contract, fraud and other claims relating to
Mr. Bernal's shares of Common Stock held in the Voting Trust. Mr. Bernal is
seeking the release of his shares from the Voting Trust as well as monetary and
punitive damages. The Company believes that Mr. Bernal's claims are without
merit and intends to vigorously defend the suit.
ITEM 2. CHANGES IN SECURITIES. Not applicable
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
period for which this report is filed.
10
<PAGE>
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 12, 1998 By:/s/ Eric T. Chase
----------------------------
Eric T. Chase
Chief Executive Officer and
President
Date: November 12, 1998 By:/s/ Richard C. Allard
----------------------------
Richard C. Allard
Vice President of Finance
(Principal Financial and
Accounting Officer)
11
<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 NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 2,090,090
<SECURITIES> 0
<RECEIVABLES> 3,626,279
<ALLOWANCES> 50,000
<INVENTORY> 4,014,261
<CURRENT-ASSETS> 9,738,659
<PP&E> 661,639
<DEPRECIATION> 472,638
<TOTAL-ASSETS> 10,313,166
<CURRENT-LIABILITIES> 1,489,538
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 8,791,203
<TOTAL-LIABILITY-AND-EQUITY> 10,313,166
<SALES> 8,860,319
<TOTAL-REVENUES> 8,860,319
<CGS> 4,598,088
<TOTAL-COSTS> 4,598,088
<OTHER-EXPENSES> 3,536,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (150,067)
<INCOME-PRETAX> 875,738
<INCOME-TAX> 319,700
<INCOME-CONTINUING> 556,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556,038
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
