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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
March 31, 1998 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)
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
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As of April 30, 1998, the Company had outstanding 3,242,500 shares of
Common Stock, $.01 par value per share.
Transitional Small Business Disclosure Format: Yes No X
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QC OPTICS, INC.
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
<S> <C>
Balance Sheets at March 31, 1998 and December 31, 1997 1
Statements of Operations for the three months
ended March 31, 1998 and 1997 2
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Default Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
</TABLE>
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PART 1 - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
QC OPTICS, INC.
BALANCE SHEETS
March 31, December 31,
1998 1997
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ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $5,029,204 $3,766,534
Accounts receivable, less allowance of $50,000 1,384,302 2,509,002
Inventory (Note 3) 4,270,491 4,025,428
Prepaid expenses 56,620 76,974
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Total current assets 10,740,617 10,377,938
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PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 210,518 189,350
Machinery and equipment 342,609 342,609
Leasehold improvements 76,714 76,714
Motor vehicles 21,574 21,574
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651,415 630,247
Less - Accumulated depreciation 425,898 402,528
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Property and equipment, net 225,517 227,719
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DEFERRED TAX ASSETS 349,500 349,500
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OTHER ASSETS 36,004 82,924
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Total assets $11,351,638 $11,038,081
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $997,828 $742,563
Accrued payroll and related expenses 402,440 457,505
Accrued income taxes 27,558 221,789
Accrued expenses 558,103 702,817
Customer deposits 1,034,877 645,817
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Total current liabilities 3,020,806 2,770,491
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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 (1,604,479) (1,667,721)
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Total stockholders' equity 8,330,832 8,267,590
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Total liabilities and stockholders' equity $11,351,638 $11,038,081
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
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March 31,
1998 1997
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<S> <C> <C>
NET SALES $3,138,424 $1,790,692
COST OF SALES 1,792,155 865,643
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Gross profit 1,346,269 925,049
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OPERATING EXPENSES:
Selling, general and administrative expenses 999,044 1,118,845
Engineering expenses 310,946 355,024
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Total operating expenses 1,309,990 1,473,869
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Operating income (loss) 36,279 (548,820)
INTEREST INCOME (NET) 62,663 53,520
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Income (loss) before benefit (provision) for income taxes 98,942 (495,300)
BENEFIT (PROVISION) FOR INCOME TAXES (35,700) 193,400
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Net Income (Loss) $63,242 ($301,900)
=============== ===============
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $0.02 ($0.09)
=============== ===============
DILUTED WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,264,161 3,242,500
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-------------------------------------
March 31,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $63,242 ($301,900)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 23,370 16,500
Changes in operating assets and liabilities -
Accounts receivable 1,124,700 (166,867)
Inventory (245,063) (229,581)
Prepaid expenses and other assets 67,274 9,177
Accounts payable 255,265 (248,497)
Accrued expenses (394,010) (642,596)
Customer deposits 389,060 (48,425)
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Total adjustments 1,220,596 (1,310,289)
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Net cash provided (used) by operating activities 1,283,838 (1,612,189)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (21,168) (8,465)
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Net cash used in investing activities (21,168) (8,465)
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CASH FLOWS FROM FINANCING ACTIVITIES: -- --
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,262,670 (1,620,654)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,766,534 5,022,772
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CASH AND CASH EQUIVALENTS, END OF PERIOD $5,029,204 $3,402,118
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $2,628 $2,780
============== ==============
Income taxes $243,950 $503,950
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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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
In 1997, the Company adopted SFAS No. 128, Earnings per Share ("EPS").
Basic 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 March 31, 1998 and 1997, there were 284,720
and 245,900 options outstanding, respectively. Of these potentially dilutive
securities, 157,992 qualified for inclusion in the diluted EPS calculation for
the three months ended March 31, 1998. These options yielded 21,661 incremental
shares for the period and as a result, the period-end weighted average shares
outstanding were 3,264,161 and 3,242,500 as of March 31, 1998 and 1997,
respectively. The implementation of this standard did not have an effect on EPS
in the period ended March 31, 1997 and, therefore, did not require restatement.
Basic and diluted EPS were equal for the three months ended March 31, 1998 and
1997; therefore, no reconciliation between basic and diluted EPS is required.
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,
1998 1997
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Raw materials and finished parts $2,469,127 $1,931,130
Work-in-process 1,801,364 2,094,298
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$4,270,491 $4,025,428
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4. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which
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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.
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 THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Net sales for the three months ended March 31, 1998 ("Interim 1998") were
$3,138,424 compared to $1,790,692 for the three months ended March 31, 1997
("Interim 1997"). This increase of 75.3% 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.
Cost of sales for Interim 1998 was $1,792,155 compared to $865,643 for
Interim 1997. Primarily as a result of the decrease in margins on certain newly
introduced products during the period, gross profit as a percent of net sales
for Interim 1998 decreased to 42.9% ($1,346,269) from 51.7% ($925,049) for
Interim 1997.
Selling, general and administrative expenses decreased to $999,044 for
Interim 1998 from $1,118,845 for Interim 1997. The decrease of $119,801 (10.7%)
was due primarily to a decrease in commissions which offset increases in field
service expenses.
Engineering expenses for Interim 1998 of $310,946 decreased from $355,024
for Interim 1997. The decrease of $44,078 (12.4%) was due primarily to a
decrease in staffing costs.
Interest income (net) was $62,663 for Interim 1998 compared to $53,520 for
Interim 1997. This was due to the increase in average investable funds during
Interim 1998 as compared to Interim 1997.
Primarily as a result of increased net sales, income before provision for
income taxes was $98,942 (3.2% of net sales) for Interim 1998, as compared to
the loss before benefit for income taxes of $495,300 (27.7% of net sales) for
Interim 1997.
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In Interim 1998, the provision for income taxes amounted to $35,700, an
effective tax rate of approximately 36%. Due to the ability of the Company to
carryback losses incurred in Interim 1997, the Company has benefited the losses
for Interim 1997 by $193,400 using an effective tax rate of approximately 39%.
With the over 75% increase in net sales, the Company had net income of
$63,242 (2% of net sales) for Interim 1998 compared to a net loss of $301,900
(16.9% of net sales) during Interim 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $5,029,204,
an increase of $1,262,670 from $3,766,534 at December 31, 1997. Working capital
was $7,719,811 at March 31, 1998 as compared to $7,607,447 at December 31, 1997,
an increase of $112,364. Cash provided by operating activities was $1,283,838
during the three months ended March 31, 1998 compared to $1,612,189 of cash used
by operating activities for the same period in 1997 due to the improvement in
operating results and the timing of accounts receivable collections, payments of
accounts payable and accrued expenses and receipt of customer advances.
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, 1998) plus .5%. 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 March 31, 1998 the Company was
in default of the minimum earnings test covenant, but has obtained a waiver of
compliance from its bank for the quarter ended March 31, 1998. 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 March 31, 1998, the Company had no borrowings outstanding under
the revolving credit agreement and availability of approximately $1,434,000. The
Company is currently discussing with its bank establishment of a new line of
credit to replace the current revolving line of credit upon its expiration in
June 1998. No assurance can be given that the Company will be able to obtain a
new line of credit, or, if obtained, that it would be on terms favorable to the
Company.
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 as it relates to the Company's internal information
systems. It is the Company's opinion that, having considered the systems that
the Company presently utilizes, the year 2000 should not present material
problems with respect to its own internal information systems. To date, the
Company is unaware of any situations of
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noncompliance that would materially adversely affect its operations or financial
condition. There can be no assurance, however, that instances of noncompliance
which could have a material adverse effect on the Company's operations or
financial condition will not be identified; that the systems of other companies
with which the Company transacts business will be corrected on a timely basis;
or that a failure by such entities to correct a Year 2000 problem or a
correction which is incompatible with the Company's information systems would
not have a material adverse effect on the Company's operations or financial
condition.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements regarding
anticipated results of operations, liquidity 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; 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; 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.
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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 March 31, 1998 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 10-KSB filed on March 30, 1998):
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 $684,154
Sales and marketing $359,890
Working capital $680,267
Temporary investments in money market fund $2,600,000
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
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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.
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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 8, 1998 By:/s/ Eric T. Chase
--------------------
Eric T. Chase
Chief Executive Officer and President
Date: May 8, 1998 By:/s/ John R. Freeman
----------------------
John R. Freeman
Vice President of Finance
9
<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, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 5,029,204
<SECURITIES> 0
<RECEIVABLES> 1,434,302
<ALLOWANCES> 50,000
<INVENTORY> 4,270,491
<CURRENT-ASSETS> 10,740,617
<PP&E> 651,415
<DEPRECIATION> 425,898
<TOTAL-ASSETS> 11,351,638
<CURRENT-LIABILITIES> 3,020,806
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 8,298,407
<TOTAL-LIABILITY-AND-EQUITY> 11,351,638
<SALES> 3,138,424
<TOTAL-REVENUES> 3,138,424
<CGS> 1,792,155
<TOTAL-COSTS> 1,792,155
<OTHER-EXPENSES> 1,309,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (62,663)
<INCOME-PRETAX> 98,942
<INCOME-TAX> 35,700
<INCOME-CONTINUING> 63,242
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,242
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
