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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, 1999 1-12337
- --------------------- ----------------------
QC OPTICS, INC.
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(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 November 1, 1999, 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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<PAGE>
QC OPTICS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
NUMBER
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Item 1. Financial Statements
Balance Sheets at September 30, 1999 and
December 31, 1998 1
Statements of Operations for the three and nine months
ended September 30, 1999 and 1998 2
Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 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. Other Information 8
Item 5. Exhibits and Reports on Form 8-K 8
Signatures 9
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
QC OPTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,962,018 $3,313,889
Accounts receivable, less allowance of $50,000 1,348,191 1,897,564
Inventory (Note 3) 3,019,668 3,732,134
Refundable income taxes - -
Prepaid expenses 33,025 68,001
---------- ----------
Total current assets 8,362,902 9,011,588
PROPERTY AND EQUIPMENT, net 119,790 176,125
DEFERRED TAX ASSETS 201,494 243,500
OTHER ASSETS 4,939 35,656
---------- ----------
Total assets $8,689,125 $9,466,869
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $111,752 $119,414
Accrued payroll and related expenses 275,673 271,244
Accrued income taxes 4,963 0
Accrued expenses 469,726 465,106
Customer deposits 103,442 132,432
---------- ----------
Total current liabilities 965,556 988,196
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 (2,211,742) (1,456,638)
---------- ----------
Total stockholders' equity 7,723,569 8,478,673
---------- ----------
Total liabilities and stockholders' equity $8,689,125 $9,466,869
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-----------------------------------------------------------
September 30, September 30,
1999 1998 1999 1998
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $1,857,386 $2,683,529 $4,348,616 $8,860,319
COST OF SALES 811,614 1,260,223 2,232,907 4,598,088
---------- ---------- --------- ----------
Gross profit 1,045,772 1,423,306 2,115,709 4,262,231
OPERATING EXPENSES:
Selling, general and administrative expenses 659,745 720,559 2,194,231 2,567,441
Engineering expenses 253,557 296,175 792,928 969,119
---------- ---------- --------- ----------
Total operating expenses 913,302 1,016,734 2,987,159 3,536,560
---------- ---------- --------- ----------
Operating income (loss) 132,470 406,572 (871,450) 725,671
INTEREST INCOME (NET) 44,997 34,370 131,345 150,067
---------- ---------- --------- ----------
Income (loss) before provision (benefit) for income taxes 177,467 440,942 (740,105) 875,738
PROVISION (BENEFIT) FOR INCOME TAXES 145,500 162,200 15,000 319,700
---------- ---------- --------- ----------
Net Income (Loss) $31,967 $278,742 ($755,105) $556,038
========== ========= ========= =========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $0.01 $0.09 ($0.23) $0.17
========= ========= ========= =========
DILUTED WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,242,500 3,242,500 3,242,500 3,251,500
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30,
1999 1998
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($755,105) $556,038
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 67,410 70,110
Changes in operating assets and liabilities -
Accounts receivable 549,373 (1,067,277)
Inventory 712,466 11,167
Prepaid expenses and other assets 65,693 65,864
Accounts payable (7,662) (537,456)
Accrued expenses and income taxes 56,019 (203,836)
Customer deposits (28,990) (539,662)
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Total adjustments 1,414,309 (2,201,090)
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Net cash provided (used) by operating activities 659,204 (1,645,052)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,075) (31,392)
---------- ----------
Net cash used in investing activities (11,075) (31,392)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES: - -
Net cash used in financing activities ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 648,129 (1,676,444)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,313,889 3,766,534
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,962,018 $2,090,090
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (refunded) for -
Interest $5,708 $7,697
======= =======
Income taxes ($42,151) $241,385
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<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-QSB and do not include all of the
information and footnote disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1998 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, 1998, 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 1999 period are not
necessarily indicative of the results to be achieved for any future period or
for the entire year ended December 31, 1999.
2. EARNINGS PER SHARE CALCULATION
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. Shares used to calculate EPS were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basis weighted average shares outstanding 3,242,500 3,242,500 3,242,500 3,242,500
Incremental stock option shares 0 0 0 9,000
--------- --------- --------- ---------
Diluted weighted average shares outstanding 3,242,500 3,242,500 3,242,500 3,251,500
========= ========= ========= =========
</TABLE>
Basic and diluted EPS were equal for the three months and nine months ended
September 30, 1999 and 1998; 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:
September 30, December 31,
1999 1998
------------ ------------
Raw materials and finished parts $1,304,427 $1,815,183
Work-in-process 1,122,013 1,189,882
Finished goods 593,228 727,069
---------- ----------
$3,019,668 $3,732,134
========== ==========
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<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.
The Company has received an order from a leading factory automation
supplier to manufacture an MTS, an automated mask transfer system, on an OEM
basis. The photomask transfer system allows semiconductor manufacturers to
standardize production in a single photomask cassette, and eliminates the damage
often caused by manual handling of photomasks.
The Company recently introduced its DISKAN(TM)-FA/ST disk inspection
system. This system substantially extends the capabilities of the DISKAN family
by offering higher sensitivity (0.16 microns) defect detection and increased
discrimination features for nickel and glass substrates as well as finished
media. This tool incorporates all of QCO's production- proven software features,
including defect discrimination, edge delete, scratch recognition and
autoscribe.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales for the three months ended September 30, 1999 ("Interim
1999") was $1,857,386 compared to $2,683,529 for the three months ended
September 30, 1998 ("Interim 1998"). The decrease resulted from lower system
sales during Interim 1999. Historically, the Company has experienced significant
quarterly fluctuations in operating results due to the relatively small number
of high dollar volume sales in any quarter. Management expects these
fluctuations to continue. As a result of the steep declines in capital
expenditures in the computer hard disk industry, the Company expects that it
will not achieve break-even results for the fourth quarter of 1999.
Cost of sales for Interim 1999 was $811,614 compared to $1,260,223 for
Interim 1998. Gross profit on sales for Interim 1999 was $1,045,772 (56% of
sales) compared to $1,423,306 (53% of sales) for Interim 1998. The increase in
gross profit percentage reflects improved manufacturing efficiencies.
Selling, general and administrative expenses decreased to $659,745 for
Interim 1999 from $720,559 for Interim 1998. The decrease of $60,814 (8%) was
due primarily to reductions in personnel levels and travel costs as a result of
our geographically distributed personnel.
Engineering expenses for Interim 1999 of $253,557 decreased from
$296,175 for Interim 1998. The decrease was due primarily to reductions in
personnel levels.
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<PAGE>
Interest income (net) was $44,997 for Interim 1999 compared to $34,370
for Interim 1998. This was due to the increase in average invested funds during
Interim 1999 as compared to Interim 1998.
As of September 30, 1999, the Company had completely reversed the tax
benefit of $429,200 taken in the first quarter of 1999 based on management's
current expectation of market conditions and an adjustment of the expected
annual effective tax rate. The adjustment resulted in a $145,500 tax provision
for Interim 1999 and an effective third quarter 1999 tax rate of 82%. In Interim
1998, the provision for income taxes amounted to $162,200, an effective tax rate
of 37%.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales for the nine months ended September 30, 1999 was $4,348,616
compared to $8,860,319 for the nine months ended September 30, 1998. The
decrease resulted from lower system sales during 1999.
Cost of sales for the nine months ended September 30, 1999 was
$2,232,907 compared to $4,598,088 for the nine months ended September 30, 1998.
Gross profit on sales for the nine months ended September 30, 1999 was
$2,115,709 (49% of sales) compared to $4,262,231 (48% of sales) for the nine
months ended September 30, 1998.
Selling, general and administrative expenses decreased to $2,194,231
for the first nine months of 1999 from $2,567,441 for the first nine months of
1998. The decrease of $373,210 (15%) was due to reductions in personnel levels
and travel expenses.
Engineering expenses for the first nine months of 1999 of $792,928
decreased from $969,119 the first nine months of 1998. The decrease was due to a
decrease in personnel levels.
Interest income (net) was $131,345 for the first nine months of 1999
compared to $150,067 for the first nine months of 1998. The decrease reflected a
decrease in average invested funds during 1999.
The Company has provided no tax benefit on its operating loss for the
first nine months of 1999. The $15,000 tax provision is for state excise taxes.
The tax provision for the first nine months of 1998 was $319,700, an effective
tax rate of 37%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of
$3,962,018 an increase of $648,129 from $3,313,889 at December 31, 1998. Working
capital was $7,397,346 at September 30, 1999 as compared to $8,023,392 at
December 31, 1998, a decrease of $626,046. Cash provided by operating activities
was $659,204 during the nine months ended September 30, 1999 compared to
$1,645,052 of cash used by operating activities for the same period in 1998 due
to operating results, 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 Citizens Bank of
Massachusetts (formerly, State Street Bank and Trust Company), which allows for
maximum borrowings of $2,000,000 and requires monthly payment of interest on the
outstanding balance to maturity on
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<PAGE>
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 (8.25% at September 30, 1999). The terms
of the loan agreement provide for: (i) the maintenance of certain specified
financial ratios including a quick ratio and debt to equity ratio; (ii) a
minimum earnings test; and (iii) other negative and affirmative covenants. This
loan agreement also restricts certain transactions without the bank's prior
written consent. At September 30, 1999, the Company had no borrowings
outstanding under the revolving credit agreement and borrowing availability of
approximately $1,058,000.
Based on its current cash balances and anticipated results of
operations, management believes that the Company has sufficient funds to meet
its working capital requirements for the next 12 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 Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of the Company's computer
programs or hardware or other equipment that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
The Company uses computer software programs in its internal operations,
such as for performing administrative and financial functions. The Company has
tested its key internal systems and implemented remedial measures where
necessary. The Company has also contacted its significant suppliers to determine
those whose failure to be Year 2000 compliant could seriously disrupt the
Company's business operations. As a result of its assessments, the Company does
not expect that a material Year 2000 issue will arise in these areas.
Based on the Company's on-going review of its equipment in operation at
customer sites, the Company believes that a number of its older systems that are
no longer subject to the Company's warranty are not fully Year 2000 compliant.
The Company has been and will continue to contact its customers and offer
modifications to make such out-of-warranty systems Year 2000 compliant. The
Company estimates that the costs incurred to remediate Year 2000 problems
related to noncompliant products will not materially adversely affect its
operations or financial condition.
The Company is continuing to develop a contingency plan to address
problems that may arise as a result of Year 2000 noncompliance. In addition,
some risks of the Year 2000 matter are beyond the control of the Company, it
suppliers and customers. For example, no preparation or contingency plan will
protect the Company from a downturn in the economy caused by the possible ripple
effect of Year 2000 issues.
To date, the Company is unaware of any situations of noncompliance that
would materially adversely affect its operations or financial condition.
However, 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; that the systems of other
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<PAGE>
companies with which the Company transacts business will be corrected on a
timely basis; that a failure by such entities to correct a Year 2000 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; that
the Company's contingency plan, if completely developed, will prevent the
occurrence of Year 2000 problems; or that even if all planned actions are
completed, the Company will not experience some adverse effects from Year 2000
related issues.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements regarding
anticipated results of operations, the cyclical nature of the computer hard disk
industry, 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 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
risks and uncertainties include, but are not limited to the following: business
conditions and growth in certain market segments and the general economy;
fluctuating operating results; new product development; the cyclical nature of
the semiconductor and computer hard disk industries; the uncertainties
concerning the Asian markets and currencies; the impact of competitive products
and pricing; increased or continued market acceptance of the Company's products
and proposed products; availability of raw materials; the loss of the services
of one or more of the Company's key employees, 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.
PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS. Not applicable
ITEM 2. CHANGES IN SECURITIES. Not applicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES. None
ITEM 4. OTHER INFORMATION. None
ITEM 5. 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.
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<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 11, 1999 By:/s/ Eric T. Chase
-------------------------------------
Eric T. Chase
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 11, 1999 By:/s/ Richard C. Allard
-------------------------------------
Richard C. Allard
Vice President of Finance
(Principal Financial Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
Financial Data Schedule
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, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 3,962,018
<SECURITIES> 0
<RECEIVABLES> 1,398,191
<ALLOWANCES> 50,000
<INVENTORY> 3,019,668
<CURRENT-ASSETS> 8,362,902
<PP&E> 672,174
<DEPRECIATION> 552,384
<TOTAL-ASSETS> 8,689,125
<CURRENT-LIABILITIES> 965,556
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 7,691,144
<TOTAL-LIABILITY-AND-EQUITY> 8,689,125
<SALES> 4,348,616
<TOTAL-REVENUES> 4,348,616
<CGS> 2,232,907
<TOTAL-COSTS> 2,232,907
<OTHER-EXPENSES> 2,987,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (131,345)
<INCOME-PRETAX> (740,105)
<INCOME-TAX> 15,000
<INCOME-CONTINUING> (755,105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (755,105)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
